<PAGE>
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-15005
PROSPECTUS
INTERNATIONAL SPORTS WAGERING INC.
1,500,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE WARRANT TO PURCHASE ONE SHARE OF COMMON STOCK
---------------------
International Sports Wagering Inc. (the "Company") hereby offers 1,500,000
units (each, a "Unit" and collectively, the "Units"), each Unit consisting of
one share of common stock, par value $.001 per share, of the Company (the
"Common Stock") and one redeemable warrant to purchase one share of Common Stock
at an exercise price per share equal to 120% of the initial Unit offering price,
subject to certain adjustments (each, a "Warrant" and collectively, the
"Warrants"). The Common Stock and Warrants will not be detachable or separately
transferable, and may be traded only as Units, until two years from the date
hereof or such earlier date as Barington Capital Group, L.P. ("Barington") may
determine or as the Company may determine after one year based on certain
circumstances (the "Separation Date"). The Warrants are not exercisable until
the Separation Date, expire five years from the date of this Prospectus, and are
redeemable at $.05 per Warrant under certain circumstances. See "Description of
Securities."
Prior to the Offering (the "Offering"), there has been no public market for
the Units, Common Stock or Warrants. The Units, Common Stock and Warrants have
been approved for quotation on the Nasdaq SmallCap Market ("NASDAQ") under the
proposed symbols "ISWIU," "ISWI" and "ISWIW," respectively. The initial public
offering price has been determined by negotiations among the Company and
Barington and GKN Securities Corp. (together with Barington, the
"Representatives") who are serving as the representatives of the several
underwriters named herein (collectively, the "Underwriters"). See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price.
--------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 AND "DILUTION" ON
PAGE 19.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
NEITHER THE NEVADA STATE GAMING CONTROL BOARD NOR THE NEVADA GAMING
COMMISSION HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES
OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit........................................ $6.00 $.60 $5.40
Total(3)........................................ $9,000,000 $900,000 $8,100,000
</TABLE>
(1) Does not reflect additional compensation to be received by the
Representatives including (i) a non-accountable expense allowance of
$270,000 or $.18 per Unit (of which $35,000 has been paid) and (ii) options
entitling the Representatives to purchase from the Company, for a period of
five years from the date of this Prospectus, up to 150,000 Units at an
exercise price equal to 160% of the initial Unit offering price (the
"Representatives' Options"). The Company has also agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company (including the
Representatives' non-accountable expense allowance) estimated at $860,000
($900,500, if the Over-Allotment Option (as defined below) is exercised in
full).
(3) The Company has granted an option to the Underwriters, exercisable within 45
days after the date of this Prospectus, to purchase up to an additional
225,000 Units, on the same terms and conditions set forth above, solely to
cover over-allotments (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $10,350,000, $1,035,000, and
$9,315,000, respectively. See "Underwriting."
--------------------------
The Units offered hereby are offered, subject to prior sale, when, as and if
delivered to and accepted by the several Underwriters and subject to approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify the Offering and to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the securities comprising the Units will be made at
the offices of Barington Capital Group, L.P., 888 Seventh Avenue, New York, New
York 10019 on or about December 17, 1996.
--------------------------
BARINGTON CAPITAL GROUP, L.P. GKN SECURITIES
THE DATE OF THIS PROSPECTUS IS DECEMBER 11, 1996.
<PAGE>
GAP SHEET
PHOTOS
Panorama of individuals using Player Betting Stations
Player using the System
Player Betting Station Screens illustrating
(a) betting propositions
(b) Player account
(c) SportXction-TM- logo
Panaorama of individuals using Player Betting Stations
SportXction-TM-logo
The Company's SportXction-TM- sports wagering system during its live
trial at the Excalibur Hotel & Casino in Las Vegas, Nevada. The
Company's sports wagering system has not been approved for use in
Nevada or elsewhere. See "Risk Factors--Governmental Regulation."
--------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, IN
THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
Prior to the Offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company intends to furnish to its stockholders annual reports containing
financial statements audited by independent accountants and such other periodic
reports as the Company may deem appropriate or as may be required by law.
2
<PAGE>
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO THE "COMPANY"
CONTAINED IN THIS PROSPECTUS REFER TO INTERNATIONAL SPORTS WAGERING INC., A
DELAWARE CORPORATION, AND ITS PREDECESSOR. UNLESS OTHERWISE STATED, ALL
INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES THAT THE OVER-ALLOTMENT
OPTION HAS NOT BEEN EXERCISED, AND (II) REFLECTS A 3.0230479-FOR-1 STOCK SPLIT
(THE "STOCK SPLIT") EFFECTED ON OCTOBER 24, 1996. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." THE UNITS OFFERED
HEREBY INVOLVE A HIGH DEGREE OF RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS."
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS AND, ACCORDINGLY, SHOULD BE READ IN
CONJUNCTION WITH SUCH INFORMATION, FINANCIAL STATEMENTS AND NOTES. EACH
PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE COMPANY
International Sports Wagering Inc. (the "Company") has designed and
developed an interactive, proprietary, PC-based computer system that enables
users to wager during the course of a sporting event. The Company's
SportXction-TM- sports wagering system (the "System") accepts bets not only on
the outcome of a sporting event, but also on discrete parts of the event and on
specific game situations, such as will a team get a first down, will a batter
get on base, or will a player make two foul shots. The System is unique in that
it permits betting while these game situations are in progress, such as between
downs or pitches, permitting more frequent placing and cashing of wagers. The
Company believes that the System will generate additional patrons, wagering and
higher commissions for gaming establishments than more traditional forms of
sports wagering.
SPORTXCTION-TM- SPORTS WAGERING SYSTEM
The interactive element of the System is a Player Betting Station ("PBS")
that is a personal computer with a touch screen, operating a "windowing" system
which displays a television picture of a live sporting event in the upper left
quadrant of the PC monitor. A list of available bets, together with the terms of
those bets (including the amount of the wager necessary to receive a particular
payout and the contestants upon whom the wager is being placed) and other
details relating to the event being watched and the bets previously placed are
displayed on the remainder of the monitor. By touching the screen, a bettor can
place a variety of bets within seconds on the sporting event then being viewed.
The System is capable of permitting bettors to select from multiple sporting
events being televised simultaneously, thereby allowing the bettor to bet on
numerous games while using the System.
The System's proprietary software permits fixed price betting during the
course of a sporting event by continuously balancing the betting pool on each
betting proposition to within a pre-set level. In general, a balanced pool is
achieved when the money bet on one side of a betting proposition is sufficient
to pay off the winners on the other side of that proposition, should the other
side win. The System operator begins by setting up a number of pools or wagering
propositions (for example, the winner of a game, the team leading at the end of
a particular period of play, over or under scoring on the game or period, and
wagers on specific events or games situations). Once the sporting event begins,
the System sets the initial odds on each betting proposition. As wagering
continues, if the pool becomes unbalanced, the System automatically adjusts the
odds on both sides of the betting proposition to induce a betting pattern which
returns the pool to balance. The System maintains a record of all wagers placed
by each bettor and keeps an account for each bettor, adding winnings and
subtracting losses.
3
<PAGE>
In sports wagering currently, bets are taken only before a sporting event or
segment thereof begins. Since most sporting events take several hours to
complete, bettors can place bets, and cash in winning bets to use in subsequent
wagers, only a few times each day, thereby limiting the number of wagers bettors
may be inclined to make each day. As a result, sports betting facilities are
frequently under-utilized. In addition, sports books currently are rarely
perfectly balanced. To the extent that the book is not balanced, the sports book
takes risk on the outcome of the game or event.
On October 24, 1996, the Company completed a pre-trial of the System (with
play money) and, on November 25, 1996, the Company completed a live trial (with
real money) at the Excalibur Hotel & Casino in Las Vegas, Nevada ("Excalibur").
Completion of the trial is one of the conditions for obtaining approval by
Nevada gaming authorities for the use of the System. Regulations of the Nevada
State Gaming Control Board (the "Nevada Board") and the Nevada Gaming Commission
(the "Nevada Commission") do not set forth any criteria by which approval of the
System is to be determined. The Company believes that proper technical
functioning of the System, proper processing of wagers and generation of
accurate audit records are among the factors to be considered in any such
approval. No assurance can be given that the System will be approved in Nevada
or elsewhere. The approval process is expected to be completed by mid-January
1997. The Company believes that the System functioned properly during the course
of the trial. See"Risk Factors--Single Product; No Contracts; Uncertain Market
Acceptance." If use of the System is approved, the Company will be able to sell
or lease the System to casinos and other sports wagering establishments in the
State of Nevada. See "Risk Factors--Governmental Regulation." Pending a decision
on approval by the Nevada Gaming Authorities (as hereinafter defined) for use of
the System, the Company has made arrangements with Excalibur (with the
permission of the Nevada Gaming Authorities) for continued operation of the
System through January 5, 1997.
The Company has filed two United States patent applications relating to its
proprietary wagering methods and its related computer processing system with the
United States Patent and Trademark Office (the "PTO"). The initial United States
patent application, as amended, was approved and a patent issued in November
1996. The second application is still pending. Corresponding applications have
been filed in numerous foreign countries. See "Risk Factors--Uncertainties
Regarding Intellectual Property."
STRATEGY
Sports wagering is currently legal only in the State of Nevada and in
numerous foreign countries. In Nevada, sports wagering currently takes place at
large modern casinos and at dedicated sports wagering facilities ("sports
books"). Sports wagering at Nevada's gaming establishments increased from
approximately $294 million in 1980 to approximately $2.4 billion in 1995. In
1995, there were approximately 115 gaming establishments in Nevada that offered
sports wagering.
The Company believes that the market for sports wagering in Nevada could
accommodate between 12,000 and 15,000 of the Company's Player Betting Stations,
with some of the larger casinos utilizing between 300 and 400 PBSs. If the
System is approved for use in Nevada, the Company intends to utilize its own
sales personnel and focus its initial marketing efforts on the larger more
modern casinos that could accommodate a larger number of PBSs. The Company
initially intends to lease the System to casinos and other gaming establishments
and provide training services to their personnel so they can operate and
maintain the System. Thereafter, the Company intends to provide the System to
sports wagering establishments in consideration for either a portion of the
revenue received by the establishment or on a transaction fee basis. However,
prior to entering into any such compensation arrangement, the Company may be
required to obtain a gaming license from Nevada Gaming Authorities, a process
which is expected to take between nine and 12 months from the date all required
applications are filed and the investigation commences. There can be no
assurance that the Company would be licensed. If any of the Company's officers,
directors, key employees or stockholders were found unsuitable by the Nevada
Gaming Authorities, the Company would have to sever its relationship with such
persons. If the Company is licensed, no person will be permitted to acquire
control of the Company without the prior approval of the Nevada
4
<PAGE>
Commission upon the recommendation of the Nevada Board. See "Risk
Factors--Governmental Regulation."
The Company may also seek to operate the System through a single or several
central hubs which control all terminals located in a group of casinos owned by
one or more entities, a group of unrelated casinos, or gaming establishments
located within a given city or in the state, subject to obtaining an appropriate
license. By linking smaller casinos or other gaming establishments that have
insufficient sports wagering on their own to accommodate the System, the Company
believes that the market for the System can be expanded. See "Risk
Factors--Governmental Regulation."
In the future, the Company also intends to market the System in foreign
countries in which sports wagering is legal. The Company has no contracts with
any gaming establishment, domestic or foreign, and has not yet attempted to
market the System to any casinos or other gaming establishments. The Company
also may, in the future, explore alternative applications of its proprietary
technology, including adaptation of the System for use in non-wagering
activities such as interactive games in bars, and games and other activities
conducted over the Internet, cable television and other communications media.
See "Use of Proceeds" and "Business--Marketing and Sales Strategy."
HISTORY
The Company was founded by Mr. Barry Mindes, who currently serves as its
Chairman of the Board. Since 1962, Mr. Mindes has been involved in the design,
development and implementation of large computer and telecommunications systems,
including systems used by the Midwest Stock Exchange, the initial off-track
betting system used by the City of New York and the system originally used by
the New Jersey Lottery. See "Management."
The Company is a development stage company which was incorporated under the
laws of the State of Delaware on May 22, 1995, and is the successor by merger to
Systems Enterprises Inc., an S-corporation incorporated in the State of New
Jersey on December 17, 1992. The Company's corporate offices are located at 201
Lower Notch Road, Suite 2B, Little Falls, New Jersey 07424. The Company's
telephone number is (201) 256-8181.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
The Units.................................... 1,500,000 Units, each Unit consisting of one
share of Common Stock and one Warrant. The
securities comprising the Units will not be
detachable or separately transferable, and
may be traded only as Units, until two
years from the date hereof or such earlier
date as Barington may determine or as the
Company may determine after one year based
on certain circumstances. See "Description
of Securities."
Common Stock................................. 1,500,000 shares of Common Stock included in
the Units.
Warrants..................................... 1,500,000 Warrants included in the Units.
Each Warrant entitles the holder to purchase
one share of Common Stock commencing on the
Separation Date and continuing until
December 11, 2001 at an exercise price of
$7.20 (120% of the initial Unit offering
price). The Warrants are redeemable after
the Separation Date by the Company at a
price of $.05 per Warrant if the trading
price of the Common Stock is at least
$12.00 (200% of the initial Unit offering
price) for a period of 15 consecutive
trading days ending within 15 days of the
date upon which the Warrants are called for
redemption. See "Description of
Securities--Warrants."
Common Stock Outstanding Immediately Prior to
the Offering(1)............................ 6,024,269 shares
Common Stock to be Outstanding Following the
Offering(1)(2)............................. 7,524,269 shares
Risk Factors................................. The Units offered hereby involve a high
degree of risk and substantial dilution and
should be purchased only by persons who can
afford to sustain the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Use of Proceeds.............................. The net proceeds of the Offering will be used
(i) to purchase equipment to be used in the
System, (ii) to fund the Company's sales
and marketing efforts, (iii) to fund
further product enhancement and
development, (iv) to repay the Bridge
Notes, and (v) for general corporate and
working capital purposes.
</TABLE>
<TABLE>
<S> <C> <C>
NASDAQ Trading Symbols(3).................... Units............................ ISWIU
Common Stock..................... ISWI
Warrants......................... ISWIW
</TABLE>
- ------------------------
(1) Does not include (i) 195,000 shares of Common Stock issuable upon exercise
of warrants (the "Bridge Warrants") to purchase Common Stock, at an exercise
price equal to the lesser of $3.60 or 60% of the initial Unit offering
price, issued by the Company to purchasers of its 10% Senior Promissory
Notes
6
<PAGE>
(the "Bridge Notes") in connection with a debt financing consummated prior
to the Offering (the "Bridge Financing"), and (ii) an aggregate of 1,467,390
shares of Common Stock reserved for issuance pursuant to options under the
Company's existing stock option plans, of which options to purchase 700,390
shares have been granted and remain outstanding as of the date hereof. See
"Management-- Stock Option Plans," "Description of Securities--Bridge
Units," and "Underwriting."
(2) Does not include (i) up to 1,500,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby, (ii) up to
450,000 shares of Common Stock issuable upon exercise of the Over-Allotment
Option and the Warrants underlying the same, and (iii) up to 300,000 shares
of Common Stock issuable upon exercise of the Representatives' Options and
the Warrants underlying the same (the "Representatives' Unit Warrants"). See
"Underwriting."
(3) There is currently no market for the Units, Common Stock or Warrants and
there can be no assurance that a market for any of such securities will
develop after the Offering. The Units, Common Stock and Warrants have been
approved for quotation on NASDAQ. There can be no assurance, however, that
such quotation will be maintained. See "Risk Factors--Absence of Trading
Market; Negotiated Offering Price" and "Risk Factors--NASDAQ Delisting; Low
Stock Price."
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary historical financial data for the
Company for the period from inception of the Company, May 22, 1995, through
September 30, 1996. The historical financial data are derived from the audited
Financial Statements included elsewhere in this Prospectus. The summary
historical financial data should be read in conjunction with the "Plan of
Operation" and Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MAY 22, 1995)
THROUGH SEPTEMBER 30,
1996
-------------------------
<S> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Research and development............................................................... $ 791
General and administrative............................................................. 226
Total operating expenses............................................................... 1,017
Loss from operations................................................................... (1,017)
Interest income........................................................................ 40
Net loss............................................................................... (977)
Net loss per share(1).................................................................. $ (0.15)
Shares used in computing net loss per share(1)......................................... 6,477,410
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
--------- ------------- --------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $ 361 $ 911 $ 7,490
Total assets................................................................. 902 1,517 7,985
Total current liabilities.................................................... 186 186 186
Long-term obligations........................................................ -- 425 --
Deficit accumulated during the development stage............................. (977) (977) (1,278)
Total stockholders' equity................................................... 716 906 7,845
</TABLE>
- ------------------------
(1) Net loss per share is computed based upon the weighted average number of
shares of Common Stock outstanding during the periods and gives effect to
certain adjustments described below. The net loss calculations give
retroactive recognition to the Stock Split for all periods presented. Also,
pursuant to the requirements of the Securities and Exchange Commission (the
"Commission"), all shares issued and stock options and warrants granted
within the 12 months immediately preceding the initial filing of the
Registration Statement for the Offering at a price below the Offering price,
totaling 1,504,804 shares of Common Stock, have been included in the
calculation for all periods presented utilizing the "treasury stock method."
(2) Pro forma to give effect to the issuance of $650,000 aggregate principal
amount of Bridge Notes in the Bridge Financing (with related expenses of
$100,000) and the application of the net proceeds therefrom. Long-term
obligations are stated net of debt discount of $225,000 ascribed to the
Bridge Warrants issued as part of the Bridge Financing. This discount amount
will be amortized to interest expense over the period the debt is
outstanding. See Note 8 of Notes to Financial Statements.
(3) Adjusted to give effect to (i) the sale of 1,500,000 Units offered hereby
and the application of the net proceeds therefrom, and (ii) interest expense
of $301,000 (including non-recurring interest expense of $290,000 resulting
from the repayment of the Bridge Notes and $11,000 of cash interest expense,
based on an assumed repayment in December 1996). See "Use of Proceeds" and
Note 8 to Notes to Financial Statements.
8
<PAGE>
RISK FACTORS
THE UNITS OFFERED HEREBY INVOLVE SUBSTANTIAL RISKS AND SHOULD BE PURCHASED
ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR ENTIRE INVESTMENT.
THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL
DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING THE COMPANY AND ITS BUSINESS BEFORE MAKING AN INVESTMENT IN THE
UNITS. THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS ARE NOT
INTENDED TO BE AN EXHAUSTIVE LIST OF THE GENERAL OR SPECIFIC RISKS INVOLVED, BUT
MERELY IDENTIFY CERTAIN RISKS THAT ARE NOW FORESEEN BY THE COMPANY. IT MUST BE
RECOGNIZED THAT OTHER RISKS, NOT NOW FORESEEN, MIGHT BECOME SIGNIFICANT IN THE
FUTURE AND THAT THE RISKS WHICH ARE NOW FORESEEN MIGHT AFFECT THE COMPANY TO A
GREATER EXTENT THAN IS NOW FORESEEN OR IN A MANNER NOT NOW CONTEMPLATED. EACH
PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER ALL INFORMATION CONTAINED IN THIS
PROSPECTUS AND SHOULD GIVE PARTICULAR CONSIDERATION TO THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO PURCHASE THE UNITS OFFERED HEREBY.
SINGLE PRODUCT; NO CONTRACTS; UNCERTAIN MARKET ACCEPTANCE. The Company's
success will depend on the success of a single product, the System. The Company
conducted a pre-trial of the System at a Las Vegas casino which consisted of
five events utilizing play money. A live trial utilizing real money began on
October 27, 1996 and ended on November 25, 1996. Completion of the trial is one
of the conditions for obtaining approval by the Nevada Gaming Authorities for
use of the System. Regulations of the Nevada Gaming Authorities do not set forth
any criteria by which approval of the System is to be determined. Such approval
is left to the discretion of the Chairman of the Nevada Board. The Company
believes that proper technical functioning of the System, proper processing of
wagers and generation of accurate audit records are among the factors to be
considered in any such approval. No assurance can be given that the System will
be approved for use in Nevada or elsewhere. The approval process is expected to
be completed by mid-January 1997. There can be no assurance that the System will
operate successfully in a live wagering environment. The Company has not been
licensed to manufacture, distribute, sell or lease the System nor has it sold or
leased it to any casino or other gaming establishment. To achieve commercial
success, the System must be approved for use in Nevada, and accepted both by
casino and sports book operators and by gaming patrons. The Company believes
that acceptance by casino and sports book operators will ultimately depend upon
player acceptance. The Company has not performed market studies to support its
belief that the System will be perceived by patrons as a preferred alternative
to current sports wagering practices or other wagering alternatives, and there
can be no assurance that the System will be accepted by its intended market. If
the System does not perform well in its initial evaluations or does not achieve
sufficient market acceptance, the Company's business, financial condition and
results of operations would be materially and adversely affected, and investors
would be exposed to the loss of their entire investment. There can be no
assurance that the System will perform its intended function, meet applicable
regulatory standards, be capable of production at reasonable costs and on a
timely basis, be successfully marketed or prove to be commercially viable.
DEVELOPMENT STAGE COMPANY; EXPECTATION OF LOSSES. The Company is in the
development stage and, as such, has not generated revenues from the sale of the
System. As of September 30, 1996, the Company had cumulative net losses since
inception of approximately $1,000,000, and the Company expects to continue to
incur substantial losses and negative cash flow at least through calendar 1997.
There can be no assurance that the Company will become profitable or that cash
flow will become positive at any time in the future. The likelihood of the
Company's success must be considered in light of the problems, delays, expenses
and difficulties encountered by an enterprise in the Company's stage of
development, many of which may be beyond the Company's control. These include,
but are not limited to, unanticipated problems relating to further product
enhancement and development; software design, development and enhancement;
testing; gaming regulations and taxes; System assembly; the competitive and
regulatory environment in which the Company plans to operate; marketing
problems; and additional costs and expenses that may exceed current estimates.
9
<PAGE>
CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING. The Company
anticipates that the net proceeds of the Offering, together with existing
resources, will be adequate to fund its capital and operating requirements
through the next 18 to 24 months based upon the Company's current business plan.
See "Use of Proceeds" and "Plan of Operation." The Company's capital
requirements may vary materially from those now planned due to a number of
factors, including the rate at which the Company can introduce the System, the
market acceptance and competitive position of the System, the response of
competitors to the System and the ability of the Company and its management to
satisfy applicable licensing requirements. The Company may need to raise
additional capital to fund its future operations. There can be no assurance that
additional financing will be available when needed on terms acceptable to the
Company, or at all. If additional funds are raised by issuing equity securities,
further dilution to existing stockholders will result and future investors may
be granted rights superior to those of existing stockholders. Insufficient funds
may prevent the Company from implementing its business strategy or may require
the Company to limit its operations significantly. See "Use of Proceeds" and
"Plan of Operation."
GOVERNMENTAL REGULATION. The System qualifies as "associated equipment" as
that term is defined in the Nevada Gaming Control Act (the "Nevada Act").
Associated equipment is generally defined as any equipment or mechanical,
electromechanical or electronic contrivance, component or machine used remotely
or directly in connection with gaming, any game, race book or sports pool that
would not otherwise be classified as a gaming device. All associated equipment
that is manufactured, sold, transferred, offered or distributed for use or play
in Nevada must first be administratively approved by the Chairman of the Nevada
Gaming Control Board (the "Nevada Board"). The administrative approval process
for associated equipment includes an evaluation by the Nevada Board's audit
division (the "Audit Division") and, in some cases, by the Nevada Board's
electronic services laboratory, followed by a field trial. The System has been
cleared by the Audit Division to undergo a trial period at a casino, subject to
terms and conditions imposed by the Chairman of the Nevada Board. The pre-trial
phase of the trial (with play money) and the live phase of the trial (with real
money) were conducted at the Excalibur Hotel & Casino in Las Vegas, Nevada and
were completed on November 25, 1996. Completion of the trial is one of the
conditions for obtaining approval by the Nevada Gaming Authorities for use of
the System. Regulations of the Nevada Gaming Authorities do not set forth any
criteria by which approval of the System is to be determined. Such approval is
left to the discretion of the Chairman of the Nevada Board. No assurance can be
given that the System will be approved for use in Nevada or elsewhere. The
approval process is expected to be completed by mid-January 1997. The Nevada Act
provides that no licensee shall install or use associated equipment without the
prior approval of the Chairman of the Nevada Board. If the System is not
approved, the Company will be unable to sell or distribute it for use or play
within the State of Nevada.
In order for the Company to be compensated for use of the System on the
basis of a percentage of revenue received by a licensed gaming establishment or
on a transaction fee basis, the Company may be required to obtain a Nevada
Gaming License (as hereinafter defined), a process which is expected to take
between nine and 12 months from the date all required applications are filed and
the investigation commences. The Company intends to apply for a Nevada Gaming
License as soon as reasonably practicable after the Offering. No assurance can
be given that the investigation will commence on a timely basis or will not take
longer than 12 months. In addition, the Nevada Commission has the discretion to
require that the Company apply for a finding of suitability to be a manufacturer
and distributor of associated equipment. The Company may seek to operate the
System through a central hub. There can be no assurance that the Nevada Act
would permit such operation and, even if permitted, the Company may be required
to obtain a license to do so. The operation of licensed gaming in general, and
the operation of race books and sports pools in particular, is subject to strict
licensing and regulatory control by the Nevada Board, the Nevada Commission and
various local, city and county regulatory agencies. No applicant for a
registration, license, finding of suitability or approval (individually, a
"Gaming License" and collectively, "Gaming Licenses") has any right to the
Gaming License sought. Any Gaming License issued or granted is a revocable
privilege, and no holder acquires any vested rights therein or thereunder. The
Company has not yet applied for or received any Gaming Licenses. There can be no
assurance that such Gaming Licenses will be granted or maintained, or that no
burdensome conditions, limitations or restrictions will be imposed upon the
Company. In connection with the Company's application for Gaming Licenses, the
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<PAGE>
Nevada Commission will have the authority to require that any beneficial owner
of the Company's voting securities, including the Units, be investigated and
found suitable, although the Nevada Act does not require a finding of
suitability unless a person is the beneficial owner of more than 10% of the
outstanding voting securities. In addition, if any of the Company's officers,
directors, key employees or stockholders are denied a license or finding of
suitability, or are found unsuitable to continue having a relationship with the
Company, the Company would have to sever its relationship with such persons.
Furthermore, if the Company's application for Gaming Licenses is denied, any
existing approval for the System could be revoked and the Nevada Commission
could order the termination of any existing contracts for the System. Moreover,
the Company would be prevented from selling or distributing the System for use
or play in Nevada after the date of such denial.
If the Company is licensed, no person will be permitted to acquire control
of the Company without the prior approval of the Nevada Commission upon the
recommendation of the Nevada Board. The Nevada Commission may require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to an acquisition of control. The applicant is required to pay all
costs of investigation.
The United States Congress has recently passed legislation which creates a
national gaming study commission (the "National Gaming Commission"). The
National Gaming Commission will generally have the duty to conduct a
comprehensive legal and factual study of gambling in the United States and
existing Federal, state and local policies and practices with respect to the
legalization or prohibition of gambling activities, to formulate and propose
changes in such policies and practices and to recommend legislation and
administrative actions for such changes. It is not possible to predict the
future impact of these proposals on the Company and its operations. Any such
proposals could have a material adverse affect on the Company's business. See
"Business--Governmental Regulation."
COMPETITION AND RAPID TECHNOLOGICAL CHANGE. The Company's operations will
compete with other forms of gambling, both within and outside of Nevada,
including, but not limited to, sports wagering as currently conducted in Nevada,
casino games (such as traditional slot machines, video slot, poker and blackjack
machines, roulette, card games, keno and craps), bingo, state-sponsored
lotteries, on-and off-track betting on horses and dogs, jai alai, offshore
cruise ships, riverboats and Native American gaming operations. The gaming
industry is also subject to shifting consumer preferences and perceptions. A
shift in consumer acceptance or interest in gaming could adversely affect the
Company. Moreover, competition is intense and increasing among providers of
wagering and gaming equipment, both hardware and software, and the Company
believes that new competitors will emerge in the future. Many of the Company's
competitors or potential competitors may have products that may compete directly
with the System and such competitors may have significantly greater financial,
technological, manufacturing, marketing, operating and other resources than the
Company. In addition, certain of the Company's potential competitors, including
large providers of wagering, gaming and computer equipment, may have
technological capabilities that would allow them to develop new or alternative
systems. The wagering and gaming equipment industry is subject to rapid change
and is characterized by constant technological innovation. There can be no
assurance that future technological advances will not result in improved
products or services that could adversely affect the Company's business or that
the Company will be able to develop and introduce competitive uses for its
products and to bring such uses to market in a timely manner. Increased
competition is likely to result in price reductions, reduced operating margins
and loss of market share, any of which could materially and adversely affect the
Company's business, operating results or financial condition. Furthermore, any
success the Company might have may induce new competitors to enter the market.
There can be no assurance that the Company will be a successful competitor in
the wagering and gaming equipment and service industry. See "--Possible
Exclusive Relationships Between Casinos and Third Parties" and
"Business--Competition."
UNCERTAINTIES REGARDING INTELLECTUAL PROPERTY. The Company regards the
System and related technology as proprietary and relies primarily on a
combination of patent, trademark, copyright and trade secret laws and employee
and third-party non-disclosure agreements to protect its proprietary rights. The
Company has filed two United States patent applications relating to its
proprietary wagering methods and
11
<PAGE>
its related computer processing system. The initial United States patent
application, as amended, was approved and a patent issued on November 12, 1996.
The second application is still pending. Corresponding patent applications have
been filed in numerous foreign countries. No assurance can be given that any of
the Company's other patent applications will issue as patents, that any issued
patents will provide the Company with significant competitive advantages, or
that challenges will not be instituted against the validity or enforceability of
any patent owned by the Company or, if instituted, that such challenges will not
be successful. Defense of intellectual property rights can be difficult and
costly, and there can be no assurance that the Company will be able effectively
to protect its technology from misappropriation by competitors. Additionally,
third party infringement claims may result in the Company being required to
enter into royalty arrangements or pay damages, any of which could materially
and adversely affect the Company's business, financial condition and results of
operations. It is the Company's policy that all employees and consultants
involved in research and development activities sign non-disclosure agreements;
however, this may not afford the Company sufficient protection for its know-how
and its proprietary information and products. Other parties may independently
develop similar or more advanced technologies or design around aspects of the
Company's technology which may be patented or duplicate the Company's trade
secrets.
As the number of software products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to infringement claims. Although the
Company has not received any claim that it is infringing any patent or other
proprietary right and is not currently aware of any claim that it is infringing
any intellectual property rights of others, there can be no assurance that the
Company will not face such claims, with or without merit, in the future. Any
such claims or litigation could be costly and could result in a diversion of
management's attention, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Any
settlement of such claims or adverse determinations in such litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Intellectual Property."
MANAGEMENT OF GROWTH. Execution and implementation of the Company's plan of
operation will require significant growth. The Company's current plans for
growth will place a significant strain on the Company's financial, managerial
and other resources. The Company's ability to manage its growth effectively will
require it to continue to improve its operational, financial and management
information systems and to attract, motivate and train key employees. If the
Company's executives are unable to manage growth effectively, the Company's
business, operating results and financial condition would be materially and
adversely affected. See "Plan of Operation."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the continued
efforts and abilities of its executive officers and other key personnel such as
Barry Mindes, the Company's founder and Chairman of the Board, and Bernard
Albanese, a director of the Company and the Company's President and Treasurer.
The loss or unavailability of Messrs. Mindes or Albanese for any significant
period could have a material and adverse effect on the Company's business,
financial condition and results of operations. Messrs. Mindes and Albanese have
entered into employment agreements with the Company which terminate on May 22,
1998 and June 1, 1998, respectively. See "Management--Employment Agreements."
The Company does not maintain and does not intend to obtain key person life
insurance on the life of either Messrs. Mindes or Albanese. The Company's
operations will also depend to a great extent on the Company's ability to
attract new key personnel and retain existing key personnel in the future.
Competition is intense for highly skilled employees and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel, or that it can avoid increased costs in order to do so. The Company's
failure to attract additional qualified employees or to retain the services of
key personnel could have a material adverse effect on the Company's operating
results and financial condition. See "Business--Personnel" and "Management."
LIMITED MARKETING EXPERIENCE; NEED FOR ADDITIONAL PERSONNEL. The Company
has very limited marketing resources and limited experience in marketing and
selling the System. The Company intends to rely on its own personnel in
marketing and selling the System. Presently, only the Chairman of the Board and
the Vice President--Marketing are expected to devote attention to marketing and
sales, and the Company
12
<PAGE>
will need to hire additional personnel to market and sell the System if it is
approved by the Nevada Board. There can be no assurance that the Company will be
able to establish adequate marketing and sales capabilities. Achieving market
penetration will require significant efforts by the Company to create awareness
of, and demand for, the System. The failure by the Company to successfully
develop its marketing capabilities would have a material adverse effect on the
Company's business, financial condition and results of operations. Further,
there can be no assurance that the development of such marketing capabilities
will lead to sales or leases of the System. See "Business--Marketing and Sales
Strategy."
LIMITED MARKET SIZE. Presently, the market for the System in the United
States is limited to casinos and sports book operations in the State of Nevada.
No assurance can be given that new markets will develop or that legislation
permitting sports wagering in other states within the United States will be
adopted. In addition, while sports wagering exists outside of the United States,
no assurance can be given that the System would be accepted in such foreign
markets or that compliance with any regulatory conditions imposed by foreign
jurisdictions will be achieved.
SEASONALITY OF SPORTING EVENTS. The Company's operations are substantially
dependent on a continuous supply of broadcast sporting events on which bettors
can wager. The Company believes that certain sports or certain sporting events
(such as the World Series in baseball and the Superbowl in football) may
generate more wagering revenue than others. A concentration in any calendar
period of sports or sporting events which induce higher wagering, will, to the
extent the Company's revenue is derived based on wagering revenue, result in
higher revenue for such periods. The Company is aware of one company whose
revenue from sports book operations has been seasonal, with more than half of
the wagers received being placed between September and January, and with wagers
on professional and college football games historically comprising approximately
40% of the bets placed. In addition, strikes in professional sports may result
in a significant loss of revenue and adversely affect the Company's results of
operations for the periods in which they occur.
POSSIBLE EXCLUSIVE RELATIONSHIPS BETWEEN CASINOS AND THIRD PARTIES. The
Company will initially focus its marketing efforts on casinos and sports book
operations in Nevada. The Company believes that sports wagering facilities in
casinos are currently operated either by the casino itself or pursuant to
contractual relationships with licensed sports book operators. The Company is
aware of one entity which owns and operates sports book facilities in
approximately 35 casinos and other gaming establishments. Such entity or any
other entity which operates sports books in casinos may have exclusive
relationships with casinos which could limit the ability of casinos to contract
directly with the Company. As a result, the Company might be required to pay
substantial sums to such third parties for the privilege of supplying the System
to any such casino, which could have a material and adverse effect on the
Company's financial condition and results of operations.
POSSIBLE OBJECTIONS BY LEAGUES AND BROADCASTERS. The System operates in
conjunction with live broadcasts of sporting events shown in casinos or other
gaming establishments. The broadcast of sporting events by television stations
is typically covered by agreements with players' leagues such as the National
Football League or the National Basketball Association. In addition, display by
casinos within their sports betting parlors of sporting events is typically
subject to agreement with broadcasters of sporting events. Players' leagues
could attempt to enjoin use of the System in conjunction with broadcasts of such
sporting events and sue the Company for damages, whether or not such claims have
merit. In the event either leagues or sporting event broadcasters object to
wagering on sporting events in general, or use of the System in particular, and
in the event that the Company could not eliminate such objections by
modification of the System or otherwise, the Company's financial condition and
results of operations could be materially and adversely affected.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS. Upon the completion of the
Offering, the Company's stockholders prior to the Offering will beneficially own
approximately 80% of the outstanding shares of Common Stock (78% if the
Over-Allotment Option is exercised in full). Barry Mindes, the Company's founder
and Chairman of the Board, Mindes Family Limited Partnership, of which Mr.
Mindes is general partner, Bernard Albanese, a director and executive officer of
the Company, and the Marie Albanese Trust, a trust for the benefit of Mr.
Albanese's wife, together will beneficially own approximately
13
<PAGE>
46% of the outstanding shares of Common Stock immediately after the Offering
(45% if the Over-Allotment Option is exercised in full). As a result of such
ownership, the existing stockholders of the Company will have the ability to
control the election of the directors of the Company and the outcome of issues
submitted to a vote of the stockholders of the Company. See "Principal
Stockholders."
BROAD DISCRETION AS TO USE OF PROCEEDS. Approximately 16% of the net
proceeds of the Offering has been allocated to general corporate and working
capital purposes and will be used for such specific purposes as management may
determine. Accordingly, management will have broad discretion with respect to
the expenditure of that portion of the net proceeds of the Offering. In
addition, the Company's estimate of its allocation of the use of proceeds of the
Offering is subject to a reapportionment of proceeds among the categories set
forth herein or to new categories. The amount and timing of expenditures will
vary depending upon a number of factors, including the progress of the Company's
product development and marketing efforts, changing competitive conditions and
general economic conditions. See "Use of Proceeds."
ABSENCE OF TRADING MARKET; NEGOTIATED OFFERING PRICE. Prior to the
Offering, there has been no public market for the Units, Common Stock or
Warrants. There can be no assurance that any trading market for the Units,
Common Stock or Warrants will develop or, if any such market develops, that it
will be sustained. The initial Unit offering price, and the exercise price of
the Warrants, have been established by negotiation between the Company and the
Representatives and do not bear any relationship to the Company's book value,
assets, past operating results, financial condition or other established
criteria of value. See "Underwriting."
POSSIBLE VOLATILITY OF MARKET PRICE OF UNITS, COMMON STOCK AND
WARRANTS. The market price of securities of development stage companies and
many emerging companies has been highly volatile, experiencing wide fluctuations
not necessarily related to the operating performance of such companies. Factors
such as the Company's operating results, announcements by the Company or its
competitors concerning technological innovations, new products or systems may
have a significant impact on the market price of the Company's securities.
Accordingly, purchasers of the Units may experience difficulty selling or
otherwise disposing of their Units or the securities comprising the same.
NASDAQ DELISTING; LOW STOCK PRICE. The trading of the Company's Units,
Common Stock and Warrants on NASDAQ will be conditioned upon the Company meeting
certain asset, capital and surplus earnings and stock price tests set forth by
NASDAQ. To maintain eligibility for trading on NASDAQ, the Company will be
required to maintain total assets in excess of $2,000,000, capital and surplus
in excess of $1,000,000 and (subject to certain exceptions) a bid price of $1.00
per share. Upon completion of the Offering and the receipt of the net proceeds
therefrom, the Company believes that it will meet the respective asset, capital
and surplus earnings tests set forth by NASDAQ. If the Company fails any of the
tests, the Units, Common Stock or Warrants may be delisted from trading on
NASDAQ. The effects of delisting include the limited release of the market
prices of the Company's securities and limited news coverage of the Company.
Delisting may restrict investors' interest in the Company's securities and
materially adversely affect the trading market and prices for such securities
and the Company's ability to issue additional securities or to secure additional
financing. In addition to the risk of volatile stock prices and possible
delisting, low price stocks are subject to the additional risks of federal and
state regulatory requirements and the potential loss of effective trading
markets. In particular, if the Units, Common Stock or Warrants were delisted
from trading on NASDAQ and the trading price of the Units was less than $5.00
per Unit or the trading price of the Common Stock was less than $5.00 per share,
the Units, Common Stock or Warrants could be subject to Rule 15g-9 under the
Exchange Act which, among other things, requires that broker/dealers satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving purchasers' written consent, prior to
any transaction. If the Company's securities could also be deemed penny stocks
under the Securities Enforcement and Penny Stock Reform Act of 1990, this would
require additional disclosure in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market.
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<PAGE>
FUTURE SALES OF RESTRICTED SECURITIES; REGISTRATION RIGHTS. Upon the
completion of the Offering, the Company will have 7,524,269 shares of Common
Stock outstanding (7,749,269 shares if the Over-Allotment Option is exercised in
full). Of these shares, all of the 1,500,000 shares of Common Stock included in
the Units sold in the Offering (1,725,000, if the Over-Allotment Option is
exercised in full) generally will be freely tradable by persons other than
affiliates of the Company, without restriction or further registration under the
Securities Act. Upon the Separation Date, the 1,500,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Units (1,725,000, if the
Over-Allotment Option is exercised in full) will, when such Warrants are
exercised, be eligible for immediate sale to the public without restriction. The
remaining 6,024,269 shares of Common Stock (the "Restricted Shares") outstanding
were sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" as defined in
Rule 144 promulgated under the Securities Act and may not be sold in the absence
of registration under the Securities Act unless an exemption therefrom,
including an exemption afforded by Rule 144, is available. Under Rule 144 (and
subject to the conditions thereof), 3,023,046 of the Restricted Shares owned by
Barry Mindes, the Company's Chairman of the Board, and Mindes Family Limited
Partnership, will become eligible for sale beginning 90 days after the date of
this Prospectus; and substantially all of the remaining 3,001,223 Restricted
Shares will become eligible for sale at various times from May 1997 through June
1998. The Company's officers, directors and existing stockholders have entered
into agreements which prohibit them from selling stock in the Company without
the prior written consent of Barington for a period of 12 months following the
effective date of the Offering. The Company's existing stockholders and the
holders of the Bridge Warrants and the Representatives' Options are also
entitled to certain rights with respect to the registration under the Securities
Act of the securities held by them. The sale of a substantial number of shares
of Common Stock or the availability of Common Stock for sale could adversely
affect the market price of the Units, Common Stock and Warrants prevailing from
time to time. See "Description of Securities--Registration Rights," "Shares
Eligible for Future Sale," and "Underwriting."
FEDERAL AND STATE REGISTRATION REQUIREMENTS; POSSIBLE INABILITY TO EXERCISE
WARRANTS; POSSIBLE REDEMPTION OF WARRANTS. Holders of Warrants will have the
right to exercise them after the Separation Date and only if there is a current
registration statement in effect with the Securities and Exchange Commission
(the "Commission") and such shares are qualified with or approved for sale by
various state securities agencies, or if in the opinion of counsel for the
Company, there is an effective exemption from registration. There can be no
assurance that the Company will be able to keep a registration statement
covering the shares underlying the Warrants current. If a registration statement
covering such shares of Common Stock is not kept current for any reason, or if
the shares underlying the Warrants are not registered in the state in which a
holder resides, the Warrants will not be exercisable and may be deprived of any
value. The Warrants are redeemable after the Separation Date by the Company at a
price of $.05 per Warrant if the trading price of the Common Stock is at least
$12.00 (200% of the initial Unit offering price) for a period of 15 consecutive
trading days ending within 15 days of the date upon which the Warrants are
called for redemption. If the Company elects to redeem the Warrants, such
redemption could force the holders to exercise the Warrants and pay the exercise
price at a time when the holders might not otherwise wish to do so or at a time
when the holders might not be financially able to do so; to sell the Warrants at
their then current market price when they might otherwise wish to hold the
Warrants; or to accept the redemption price of $.05 per Warrant which, at the
time the Warrants are called for redemption, is likely to be substantially less
than the market value of the Warrants. See "Description of Securities--
Warrants."
EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND REPRESENTATIVES' OPTIONS
ON SECURITIES' PRICES. The Company has reserved from the authorized, but
unissued, Common Stock 1,467,390 shares of Common Stock for issuance to key
employees, officers, directors, and consultants pursuant to options granted or
available for grant under the existing stock option plans and has reserved
195,000 shares of Common Stock for issuance upon exercise of the Bridge
Warrants. In connection with the Offering, the Company is issuing the Warrants
to purchase 1,500,000 shares of Common Stock (1,725,000, if the Over-Allotment
Option is exercised in full). In addition, as of the closing of the Offering,
the Company will sell to the Representatives, for nominal consideration, the
Representatives' Options to purchase an aggregate
15
<PAGE>
of 150,000 Units at a price per Unit equal to 160% of the initial Unit offering
price, subject to adjustment as provided therein. The existence of the Bridge
Warrants, the Warrants, the Representatives' Options, any outstanding options
issued under the Company's stock option plans, and other options or warrants may
prove to be a hindrance to future financings, since the holders of such warrants
and options may be expected to exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. In addition, the holders of the Bridge Warrants and the
Representatives' Options (as well as holders of shares issued prior to the
Offering) have certain registration rights, and the sale of the shares issuable
upon exercise of such securities or the availability of such shares for sale
could adversely affect the market price of the Units, Common Stock and Warrants.
Additionally, if the holders of the Representatives' Options were to exercise
their registration rights to effect a distribution of the Representatives'
Options or underlying securities, the Representatives, prior to and during such
distribution, may be unable to make a market in the Company's securities and
would be required to comply with other limitations on trading set forth in Rules
10b-2, 10b-6 and 10b-7 promulgated under the Exchange Act. Such rules restrict
the solicitation of purchasers of a security when a person is interested in the
distribution of such security and also limit market making activities by an
interested person until the completion of the distribution. If the
Representatives were required to cease making a market, the market and market
price for such securities may be adversely affected and holders of such
securities may be unable to sell such securities. See "Description of
Securities" and "Underwriting."
DILUTION. The initial public offering price per Unit exceeds the book value
per share of the Common Stock. Investors in the Offering will therefore incur
immediate and substantial dilution of $4.96 or 82.7% per share. The Company has
granted to officers, directors, certain principal stockholders and others,
options and warrants to purchase Common Stock at prices below the Offering
price. Investors who purchase shares of Common Stock in the Offering will incur
additional dilution to the extent outstanding options and warrants are
exercised. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has not paid any dividends on its
outstanding Common Stock since its inception and does not intend to pay any
dividends to its stockholders in the foreseeable future. The Company currently
intends to reinvest earnings, if any, in the development and expansion of its
business.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION
AND DELAWARE LAW. The Company's Certificate of Incorporation authorizes the
issuance of 2,000,000 shares of Preferred Stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without obtaining
stockholder approval, to issue such Preferred Stock with dividend, liquidation,
conversion, voting or other rights that 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 the control of the Company.
Certain provisions of Delaware law may also discourage third party attempts to
acquire control of the Company.
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<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Units offered hereby, after deducting
underwriting discounts and commissions and other expenses of the Offering, will
be $7,240,000 ($8,414,500, if the Over-Allotment Option is exercised in full).
The Company intends to use the net proceeds of the Offering (i) to purchase
equipment to be used in the System, (ii) to fund the Company's sales and
marketing efforts, (iii) to fund the Company's further product enhancement and
development activities, (iv) to repay the Bridge Notes, and (v) for general
corporate and working capital purposes, approximately as follows:
<TABLE>
<CAPTION>
PERCENTAGE
APPROXIMATE OF
USE AMOUNT NET PROCEEDS
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
System equipment purchases........................................ $ 4,000,000 55.2%
Sales and marketing............................................... 750,000 10.4%
Further product enhancement and development....................... 700,000 9.7%
Repayment of Bridge Notes......................................... 661,000 9.1%
General corporate and working capital purposes.................... 1,129,000 15.6%
------------ ------------
$ 7,240,000 100%
------------ ------------
------------ ------------
</TABLE>
The Company intends to use approximately $4,000,000 of the net proceeds of
the Offering to purchase equipment to be used in the System, including personal
computers, monitors, touch screens, network equipment and control computer
equipment. The amount allocated to purchasing such equipment will vary
significantly depending on the rate at which the System is introduced and its
acceptance in the market, and on the availability and terms of suitable
equipment financing. See "Risk Factors--Single Product; No Contracts; Uncertain
Market Acceptance" and "Risk Factors--Governmental Regulation."
The Company intends to use approximately $750,000 of the net proceeds of the
Offering to fund expansion of its sales and marketing activities, including
hiring a sales and marketing executive and other sales and marketing personnel.
See "Business--Marketing and Sales Strategy."
The Company intends to use approximately $700,000 of the net proceeds of the
Offering to fund further product enhancement and development activities
including modifications required, if any, by the Nevada Gaming Authorities or
otherwise. A small portion of the net proceeds allocated to product development
is anticipated to be devoted to exploring alternative applications of the
Company's proprietary technology, including adaptation of the System for use in
non-wagering activities. See "Business--The Company" and "Business--Marketing
and Sales Strategy."
Approximately $661,000 of the net proceeds will be used to repay the
principal amount of the Bridge Notes, along with estimated accrued interest
thereon through the estimated closing date of the Offering. The Bridge Notes
bear interest at a rate of 10% per annum, compounded annually, and are due upon
the closing of the Offering. The Bridge Notes were sold as units along with the
Bridge Warrants in the Bridge Financing. The net proceeds received by the
Company from the Bridge Financing were approximately $550,000 and are being used
to finance the Company's short-term working capital needs and to fund expenses
of the Company in connection with the Offering. See "Description of
Securities--Bridge Units."
The balance of the net proceeds of the Offering is intended to be used for
general corporate and working capital purposes. This includes $300,000 to
$400,000 for the estimated cost of the application process with the Nevada Board
and for a Nevada Gaming License. These amounts are largely dependent on the
extent of the investigation conducted by the Nevada Gaming Authorities and, as
such, may vary significantly. Any net proceeds received by the Company from the
exercise of the Over-Allotment Option, the Warrants or the Representatives'
Options will be added to working capital. See "Risk Factors--Broad Discretion as
to Use of Proceeds." The Company anticipates that the net proceeds of the
Offering,
17
<PAGE>
together with existing resources, will be adequate to fund its capital and
operating requirements through the next 18 to 24 months based upon the Company's
current business plan. See "Risk Factors--Capital Requirements; Need for
Additional Financing" and "Plan of Operation."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering and is subject to a reapportionment of proceeds
among the categories listed above or to new categories in response to, among
other things, changes in its plans, regulations, industry conditions, and future
revenue and expenditures. The amount and timing of expenditures will vary
depending on a number of factors, including changes in the Company's
contemplated operations or business plan and changes in economic and industry
conditions. In the event the System is not approved by the Nevada Gaming
Authorities on a timely basis, or at all, or, if approved, the System is not
accepted in the marketplace, the Company will initially attempt to modify the
System in order to obtain approval or market acceptance and, thereafter, will
focus its efforts on marketing the System in foreign countries and exploring
alternative applications of its proprietary technology for use in non-wagering
activities. This would result in a significant shift in the allocation of the
net proceeds of the Offering to such activities. See "Risk Factors-- Single
Product; No Contracts; Uncertain Market Acceptance."
Until used, the Company intends to invest the net proceeds of the Offering
in short-term, interest-bearing, investment grade, debt securities, money market
accounts, certificates of deposit or direct or guaranteed obligations of the
United States government.
DIVIDEND POLICY
The Company expects that it will retain all earnings, if any, generated by
its operations for the development and growth of its business and does not
anticipate paying any cash dividends to its stockholders in the foreseeable
future. Any future determination as to dividend policy will be made by the Board
of Directors of the Company in its discretion, and will depend on a number of
factors, including the future earnings, if any, capital requirements, financial
condition and business prospects of the Company and such other factors as the
Board of Directors may deem relevant. See "Risk Factors--Absence of Dividends."
18
<PAGE>
DILUTION
As of September 30, 1996, the Company had a pro forma net tangible book
value of approximately $790,000, or $0.13 per share of Common Stock. Without
taking into account any other changes in the pro forma net tangible book value
of the Company after September 30, 1996, other than to give effect to the sale
by the Company of the Units offered hereby and the receipt and application of
the net proceeds therefrom (including repayment of the Bridge Notes and accrued
cash interest thereon), the pro forma net tangible book value would have been
approximately $7,841,000, or $1.04 per share, which represents an immediate
increase in the pro forma net tangible book value of $0.91 per share to present
stockholders and an immediate dilution of $4.96 per share to new investors. The
following table illustrates this dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON STOCK
-------------
<S> <C> <C>
Initial public offering price per Unit(1)............................................. $ 6.00
Pro forma net tangible book value before the Offering............................... $ 0.13
Increase attributable to purchase of Units by new investors......................... $ 0.91
-----
Pro forma net tangible book value after the Offering.................................. 1.04
-----
Dilution of net tangible book value to investors in the Offering...................... $ 4.96
-----
-----
</TABLE>
- ------------------------
(1) Represents the initial public offering price per Unit, before deducting
underwriting discounts and offering expenses payable by the Company. For
purposes of the above discussion and table, no value has been allocated to
the Warrants included in the Units.
The following table summarizes, on a pro forma basis as of September 30,
1996, the differences between existing stockholders and investors in the
Offering with respect to the number and percentage of shares of Common Stock
purchased from the Company, the amount and percentage of consideration paid and
the average price paid per share, before deduction of underwriting discounts and
offering expenses:
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............................. 6,024,269 80.1% $ 1,693,000 15.8% $ 0.28
New Investors..................................... 1,500,000 19.9% $ 9,000,000 84.2% $ 6.00
---------- ----------- ------------- -----------
Total............................................. 7,524,269 100.0% $ 10,693,000 100.0%
---------- ----------- ------------- -----------
---------- ----------- ------------- -----------
</TABLE>
The foregoing table does not include (i) 195,000 shares of Common Stock
issuable upon exercise of Bridge Warrants, (ii) an aggregate of 1,467,390 shares
of Common Stock reserved for issuance pursuant to options under the Company's
existing stock option plans, of which options to purchase 700,390 shares have
been granted and remain outstanding as of the date hereof, (iii) up to 1,500,000
shares of Common Stock issuable upon exercise of the Warrants included in the
Units offered hereby, (iv) up to 450,000 shares of Common Stock issuable upon
exercise of the Over-Allotment Option and the Warrants underlying the same, and
(v) up to 300,000 shares of Common Stock issuable upon exercise of the
Representatives' Options and the Representatives' Unit Warrants. See
"Management--Stock Option Plans" and "Description of Securities."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) as of September 30, 1996 on a pro forma basis assuming
the issuance of $650,000 aggregate principal amount of Bridge Notes, and (iii)
on a pro forma as adjusted basis to reflect the sale of 1,500,000 Units offered
hereby and the application of the net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with the Financial Statements of the
Company and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------------ ------------- -------------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
10% Senior promissory notes $ -- $ 425,000 $ --
Stockholders' equity:
Preferred stock, par value $.001 per share, 2,000,000 shares
authorized, no shares issued and outstanding, actual, and pro
forma as adjusted................................................. -- -- --
Common stock, par value $.001 per share, 20,000,000 shares
authorized, 6,024,269 shares issued and outstanding, actual and
pro forma; 7,524,269 shares issued and outstanding, as
adjusted(3)....................................................... 6,024 6,024 7,524
Additional paid-in capital.......................................... 1,687,089 1,877,089 9,115,589
Deficit accumulated during the development stage.................... (977,199) (977,199) (1,278,199)
------------ ------------- -------------
Total stockholders' equity...................................... 715,914 905,914 7,844,914
------------ ------------- -------------
Total capitalization............................................ $ 715,914 $ 1,330,914 $ 7,844,914
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- ------------------------
(1) Pro forma to give effect to the issuance of $650,000 aggregate principal
amount of Bridge Notes (with related expenses of approximately $100,000) and
the application of the net proceeds therefrom. Senior promissory notes are
stated net of debt discount of $225,000 ascribed to the Bridge Warrants
issued as part of the Bridge Financing. This discount amount will be
amortized to interest expense over the period the debt is outstanding. See
Note 8 to Notes to Financial Statements.
(2) Adjusted to give effect to (i) the sale by the Company of the 1,500,000
Units offered hereby and the application of the net proceeds therefrom and
(ii) interest expense of $301,000 (including non-recurring interest expense
of $290,000 resulting from the repayment of the Bridge Notes and $11,000 of
cash interest expense, based on an assumed repayment in December 1996). See
"Use of Proceeds" and Note 8 to Notes to Financial Statements.
(3) Does not include (i) 195,000 shares of Common Stock issuable upon exercise
of Bridge Warrants, (ii) an aggregate of 1,467,390 shares of Common Stock
reserved for issuance pursuant to options under the Company's existing stock
option plans, of which options to purchase 642,390 shares and 58,000 shares
have been granted and remain outstanding as of the date hereof at an
exercise price $0.70 per share and $3.60 per share, respectively, (iii) up
to 1,500,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Units offered hereby, (iv) up to 450,000 shares of Common
Stock issuable upon exercise of the Over-Allotment Option and the Warrants
underlying the same, and (v) up to 300,000 shares of Common Stock issuable
upon exercise of the Representatives' Options and the Representatives' Unit
Warrants. See "Management--Stock Option Plans" and "Description of
Securities."
20
<PAGE>
PLAN OF OPERATION
HISTORY
The Company commenced operations in May 1995 and is the successor by merger
to Systems Enterprises, Inc., which was organized in December 1992. The System
was conceived by the Company's founder, Mr. Barry Mindes, who together with Mr.
Bernard Albanese, developed a simulation of the System for use in determining
whether casinos had interest in the System. Additionally, patent applications
covering the System were prepared and filed with the PTO and corresponding
foreign patent applications were also filed. Commencing in May 1995 and
continuing to date, the Company raised approximately $1,700,000 in equity
capital and net proceeds of $550,000 through the Bridge Financing. After the
initial equity capital was raised, the current personnel, consisting primarily
of software engineers and programmers, were recruited and hired and the Company
engaged in research and development and testing of the System. These activities
included writing the software, developing required mathematical algorithms,
performing statistical modeling, selecting and configuring the hardware needed
for the System and determining the initial betting propositions to be offered.
The Company tested the System in a non-wagering environment and then conducted
its own live trial in a wagering environment using play money. Thereafter, the
Company sought approval for use of the System from the Nevada Gaming
Authorities. The System was evaluated by the audit division of the Nevada Board
after which it was found suitable for installation in a casino environment for a
pre-trial (with play money) and a trial (with real money) of at least 30 days
including a minimum of 10 events. The pre-trial and trial were conducted at
Excalibur and concluded on November 25, 1996. The approval process is expected
to be completed by mid-January 1997. The System has not been approved for use in
Nevada or elsewhere. No assurance can be given that the Company will receive any
such approval or that the System will be accepted in the marketplace. See "Risk
Factors--Single Product; No Contracts; Uncertain Market Acceptance." Pending a
decision on approval by the Nevada Gaming Authorities for use of the System, the
Company has made arrangements with Excalibur Hotel & Casino (with the permission
of the Nevada Gaming Authorities) for continued operation of the System for the
period through January 5, 1997. To date, the Company has not generated any
revenue.
PLAN OF OPERATION
The Company's plan of operation over the 12 months following consummation of
the Offering focuses primarily on (i) having the System approved for use in the
State of Nevada by the Chairman of the Nevada Board, (ii) sales and marketing to
casinos and other sports book operators in Nevada, (iii) the hiring of
additional personnel in the areas of sales and marketing, equipment
installation, maintenance and training, (iv) continued research and further
product enhancement and development, including adapting the System for new
betting propositions, (v) obtaining any required Nevada Gaming Licenses, (vi)
securing further intellectual property protection, including additional patent,
trademark and copyright protections, and (vii) exploring opportunities in
foreign markets and alternative applications of the Company's proprietary
technology, including adaptation of the System for use in non-wagering
activities. See "Use of Proceeds." The Company expects to purchase from others
all of the hardware used in the System. The Company believes that all of such
hardware is available from numerous sources.
Based upon its current proposed plans and assumptions relating to its
operations, the Company anticipates that the net proceeds of the Offering,
together with existing resources, will be sufficient to satisfy the contemplated
cash requirements of the Company for 18 to 24 months following consummation of
the Offering. During the first 12 month period, the Company expects to begin
generating revenue from the leasing of Systems to casinos and other gaming
establishments in Nevada. See "Risk Factors--Capital Requirements; Need for
Additional Financing." The Company also plans to seek a gaming license which
21
<PAGE>
will enable it to provide the System to sports wagering establishments in
exchange for a portion of the revenue received by the establishment or on the
basis of a transaction fee. See "Risk Factors--Governmental Regulation."
In the event that the Company's plans change or its assumptions prove
inaccurate or the net proceeds of the Offering are insufficient to fund
operations due to unanticipated delays, problems, expenses or otherwise, the
Company would be required to seek additional funding sooner than anticipated.
Depending upon the Company's progress in marketing the System, its acceptance by
casinos, sports book operators and their patrons and the state of the capital
markets, the Company may determine that it is advisable to raise additional
equity capital. The Company has no current arrangements with respect to, or
specific sources of, any such capital and there can be no assurance that such
additional capital will be available to the Company when needed on commercially
reasonable terms or at all. The inability of the Company to obtain additional
capital would have a material adverse effect on the Company and could cause it
to be unable to implement its business strategy. Additional equity financing may
involve substantial dilution to the interests of the Company's then existing
stockholders.
RESEARCH AND DEVELOPMENT
The Company has incurred approximately $703,000 and $791,000 in research and
development expenses for the fiscal year ended September 30, 1996 and for the
period from inception through September 30, 1996, respectively. The Company
expects to continue to incur substantial research and development expenses for
further product enhancement and development activities including adapting the
System for use in sporting events in addition to football, basketball, baseball
and hockey; developing new betting propositions; adapting the System for use in
foreign countries; and exploring alternative applications of the Company's
proprietary technology, including adaptation of the System for use in
non-wagering activities. See "Use of Proceeds" and "Business--Marketing and
Sales Strategy."
22
<PAGE>
BUSINESS
THE COMPANY
International Sports Wagering Inc., a development stage company, has
designed and developed an interactive, proprietary, PC-based computer system
that enables users to wager during the course of a sporting event, such as
football, baseball, basketball and hockey. The System accepts bets not only on
the outcome of a sporting event but also on discrete parts of the event and on
specific game situations, such as will a team get a first down, will a batter
get on base, or will a player make two foul shots. The System is unique in that
it permits betting while these game situations are in progress, such as between
downs or pitches, permitting more frequent placing and cashing of wagers. The
Company believes that the System will generate additional patrons, wagering and
higher commissions for gaming establishments than more traditional forms of
sports wagering.
The interactive element of the System is a Player Betting Station that is a
personal computer with a touch screen, operating a "windowing" system which
displays a television picture of a live sporting event in the upper left-hand
quadrant of the PC monitor. A list of available bets together with the terms of
those bets (including the amount of the wager necessary to receive a particular
payout and the contestants upon whom the wager is being placed) and other
details relating to the event being watched and the bets previously placed are
displayed on the remainder of the monitor. By touching the screen, a bettor can
place a variety of bets within seconds on the sporting event then being viewed.
The System is capable of permitting bettors to select from multiple sporting
events being televised simultaneously, thereby allowing the bettor to bet on
numerous games while using the System.
The System's proprietary software permits fixed price betting during the
course of a sporting event by continuously balancing the betting pool on each
betting proposition to within a pre-set level. In general, a balanced pool is
achieved when the money bet on one side of a betting proposition is sufficient
to pay off the winners on the other side of that proposition, should the other
side win. Wagers may be placed simultaneously on multiple computer terminals in
a casino or other sports wagering facility. The System maintains a record of all
wagers placed by each bettor and keeps an account for each bettor, adding
winnings and subtracting losses.
On October 24, 1996, the Company completed a pre-trial of the System (with
play money) and, on November 25, 1996, the Company completed a live trial (with
real money) at the Excalibur Hotel & Casino in Las Vegas, Nevada. Completion of
the trial is one of the conditions for obtaining approval by Nevada Gaming
Authorities for the use of the System. Regulations of the Nevada Board and the
Nevada Commission do not set forth any criteria by which approval of the System
is to be determined. Such approval is left to the discretion of the Chairman of
the Nevada Board. The Company believes that proper technical functioning of the
System, proper processing of wagers and generation of accurate audit records are
among the factors to be considered in any such approval. No assurance can be
given that the System will be approved. The approval process is expected to be
completed by mid-January 1997. The Company believes that the System functioned
properly during the course of the trial. There can be no assurance that the
System will achieve market acceptance. See "Risk Factors--Single Product; No
Contracts; Uncertain Market Acceptance" and "--Governmental Regulation."
If use of the System is approved, the Company initially intends to lease the
System to casinos and other gaming establishments in Nevada. Thereafter, the
Company intends to provide the System to sports wagering establishments in
consideration for either a portion of the revenue received by the establishment
or on a transaction fee basis. However, prior to entering into any such
compensation arrangement, the Company may be required to obtain a Gaming License
from Nevada Gaming Authorities, a process which is expected to take between nine
and 12 months from the date all required applications are filed and the
investigation commences. The Company intends to apply for a Gaming License as
soon as reasonably practicable after the Offering. No assurance can be given
that the Company will receive the necessary
23
<PAGE>
Gaming License, that casinos or other gaming establishments will install the
System, or that they will agree to the form of compensation requested by the
Company. See "--Governmental Regulation."
In the future, the Company also intends to market the System in foreign
countries in which sports wagering is legal. The Company has no contracts with
any gaming establishment, domestic or foreign, and has not yet attempted to
market the System to any casinos or other gaming establishments. In the future,
the Company also may explore alternative applications of its proprietary
technology, including adaptation of the System for use in non-wagering
activities such as interactive games in bars, and games and activities conducted
over the Internet, cable television and other communications media.
INDUSTRY OVERVIEW
In Nevada, sports wagering currently takes place at large modern casinos and
at dedicated sports wagering facilities ("sports books"). Some casinos manage
their own sports book and some contract with sports book operators to operate a
sports book in the casino. Casinos currently conducting sports wagering
typically have a room in which large projection screens and television monitors
display various sporting events while manual or electronic displays show the
wagering odds. Wagers are placed and cashed at clerk-operated betting terminals
located in the room.
Wagers at these facilities are principally placed on the outcome of a game
or event. Wagers also may be accepted on segments of a game, such as points
scored in a quarter; however, the wager is accepted only before the segment
begins. Since most sporting events take several hours to complete, bettors can
place bets and cash winning bets to use on subsequent wagers, only a few times
each day, thereby limiting the number of wagers bettors may be inclined to make
each day. As a result, sports wagering facilities are frequently under-utilized.
In sports wagering, the gaming establishment, or "house," generally seeks to
maintain a "balanced book." A balanced book is achieved when the money bet on
one side of a betting proposition is sufficient to pay off the winners on the
other side of that proposition, should the other side win. To accomplish this,
the house gives either a handicap (the point spread or margin by which the
favorite must win) or odds (a greater than equal payout on winning to the
underdog or a lesser one to the favorite) on the outcome of the event, or a
combination of both. The house's goal in general is to have the funds paid to
the winners equal the amount received from the losers, less the commissions that
the house charges for brokering the transactions and the use of its facilities.
Sports bettors want to know the odds or point spread (the "line") of the
wager at the time the bet is placed. While the odds may change as the house
attempts to balance its book, the terms for a previously placed bet remain the
same. Thus, bettors who place several bets on the same team or contestant over a
period of time could have different odds or point spreads on each wager
depending upon when the bet was placed.
The sports book's profit depends upon the reliability of the odds and its
adjustment of the odds when necessary. On occasion, the house's initial handicap
or odds will not result in a balanced book because the players do not agree with
the house's assessment of the outcome of the event. The house will attempt to
attract bets on one side of the proposition in order to achieve equalization by
changing or moving the line up or down to induce betting patterns in order to
balance the book. If this is not possible, the house may also refuse to accept
wagers on one of the contestants or limit the maximum amount of money that will
be accepted on a line to attempt to avoid the risk of taking an unacceptable
number of bets on one side of a betting proposition. When the limit is reached,
the line is moved. Currently, sports wagering establishments do not change odds
or handicaps frequently in order to balance pools. The odds or handicaps are
changed usually only after the book gets substantially out of balance, if at
all. Sports books currently are rarely perfectly balanced. To the extent that
the book is not balanced, the sports book takes risk on the outcome of the game
or event.
24
<PAGE>
MARKETING AND SALES STRATEGY
Sports wagering is currently legal only in the State of Nevada, and in
several foreign countries, including England, Austria, Australia, Mexico and
South Africa. Sports wagering in Nevada's gaming establishments increased from
approximately $294 million in 1980 to $2.4 billion in 1995. In 1995, there were
approximately 115 licensed gaming establishments in Nevada that offered sports
wagering.
The Company believes that the market for sports wagering in Nevada could
accommodate between 12,000 and 15,000 PBSs, with some of the larger casinos able
to accommodate between 300 and 400 PBSs. Licensed gaming establishments in
Nevada include casinos of varying sizes, which offer a variety of gaming
activities in addition to sports wagering, as well as gaming establishments
which offer primarily wagering on sports and horse races. In some instances, the
sports wagering activities of casinos or other gaming establishments are
operated by licensed sports book operators, some of whom may also own sports
wagering establishments. Most casinos and sports book operators are potential
customers for the System, although sports book operators may also be
competitors. See "--Competition." If the System is approved for use in Nevada,
the Company intends to utilize its own sales personnel and focus its initial
marketing efforts on the larger more modern casinos that could accommodate a
larger number of PBSs. See "Risk Factors--Limited Marketing Experience; Need for
Additional Personnel."
The System can be operated as a stand-alone system in an individual casino
or sports book, provided an adequate number of bettors are wagering through that
System to generate sufficient interest and large enough betting pools. Systems
located in individual casinos or other gaming establishments, can also be linked
by telecommunications lines resulting in larger combined wagering pools. By
linking smaller casinos or other gaming establishments that have insufficient
sports wagering on their own, the market for the System can be expanded. The
Company may seek to operate the System through a single or several central hubs
which control all terminals located in a group of casinos owned by one entity, a
group of unrelated casinos, or casinos or gaming establishments located within a
given city or in the state, subject to obtaining an appropriate license. See
"--Government Regulation." Under this arrangement, all pools would be combined
to produce fewer odds changes and more betting volume for arcane wagers.
Controller personnel would only be required at the hub, with one controller team
for each sporting event instead of one controller team for each event at each
casino. This would greatly reduce operating costs for the casinos and ensure
uniformity of rules for all users of the System. Individual casinos or groups of
casinos could still offer special betting propositions.
The Company initially intends to lease the System to casinos and other
gaming establishments; provide training services to casino personnel so they can
operate the System; and service and maintain the System through its personnel,
independent maintenance organizations or the manufacturers of the terminals. The
Company also intends to seek a Gaming License in order to be in a position to
provide the System to sports wagering establishments in exchange for either a
portion of the revenue received by the establishment or on a transaction fee
basis. Such a license may also allow the Company to operate one or more central
hubs with casinos and other gaming establishments having only PBSs and cashier
terminals that would be controlled at the hubs. See "--Governmental Regulation."
There can be no assurance that the Company will receive the licenses necessary
to permit it to be compensated on the basis of a portion of the revenue received
by the casino or gaming establishment or on a transaction fee basis or to
operate a central hub; nor is there any assurance that if such licenses are
obtained, casinos and sports book operators will agree to the form of
compensation requested by the Company or to participate in the Company's hub
system. See "Risk Factors--Governmental Regulation."
In the future, the Company also intends to market the System in foreign
countries in which sports wagering is legal. The Company has no contracts with
any betting establishment, domestic or foreign, and has not yet attempted to
market the System to any casinos or other betting establishments. In the future,
the Company also may explore alternative applications of its proprietary
technology, including adaptation
25
<PAGE>
of the System for use in non-wagering activities such as interactive games in
bars, and games and activities conducted over the Internet, cable television and
other communications media.
THE SPORTXCTION-TM- SPORTS WAGERING SYSTEM
OVERVIEW OF THE SYSTEM
The SportXction-TM- sports wagering system permits continuous fixed price
betting during the course of a sporting event by continuously balancing the
betting pool on each betting proposition to within a pre-set level. It allows
bettors to view a live sporting event and wager throughout that event as it is
underway. The period during which wagers may be placed is thereby extended.
The System accepts bets on the outcome of the sporting event, on discrete
parts of the event, and on specific game situations, such as will a team get a
first down, will a batter get on base, or will a player make two foul shots. The
System also permits betting while these game situations are in progress, such as
between downs, pitches or foul shots. Wagers may also be cashed-out before the
outcome of the event is determined, at the then current value (the initial price
modified by any change in odds). Betting is therefore nearly continuous,
somewhat analogous to the situation which exists at a craps table, with each
play being potentially a "new game." The Company believes that the System should
increase betting volume and thus revenue from sports wagering for those casinos
and other sports wagering facilities which use the System.
Furthermore, the System operates under continuous computer-controlled pool
balancing, which can virtually assure the house of a known minimum return on any
betting volume.
OPERATION OF THE SYSTEM
The System operator begins by setting up a number of pools or wagering
propositions (for example, the winner of a game or the team leading at the end
of a particular period of play, over or under scoring on the game or period, and
wagers on specific events or games situations). Prior to commencement of the
sporting event, the System operator also sets the odds or handicap (point
spread) with greater odds given to the less capable contestant. Once the
sporting event begins, the System sets the initial odds on each betting
proposition. The System changes the odds automatically as bets are made in order
to induce a betting pattern which would lead to a balanced pool. The bettor may
therefore make multiple wagers on the same betting proposition as the odds
change. As wagering continues, a pool may become underfunded, that is, players
have bet less money on one side of a particular betting proposition (the
underfunded side) than players have bet on the opposite side of such betting
proposition (the overfunded side). If this occurs, and if the overfunded side of
the betting proposition wins, the house would have to pay out more money to the
winning bettors on the overfunded side than the house would have received from
the bettors on the underfunded side. To limit the house's exposure, the System
is designed to automatically adjust the odds to induce bettors to wager on the
underfunded side of the betting proposition and thereby balance the pool to
within a pre-set level. Since the System is designed for a fixed payout, the
changing odds are reflected in the amount that the bettor must bet to receive
the fixed amount (including return of his wager). For example, the odds of Team
A winning a game may be set initially so that, in order to receive a $20 payout
(including the return of his wager), the bettor must bet $12. If, during the
game, Team A is ahead by 10 points, the System would automatically change the
odds so that in order to receive $20, the bettor might, at that point in the
game, be required to bet $16. If a pool can no longer be kept to within a
pre-set level of balance, it will be closed and another pool opened with a
handicap or odds designed to lead to balance. This would happen dynamically
during the entire event. There could be many different betting propositions
available during the course of a sporting event; however, prior to establishing
a new betting proposition, the house must believe that there will be sufficient
player interest so that a balanced pool could be maintained.
26
<PAGE>
The System permits, and the sports wagering operator is likely to have, both
long- and short-term propositions on a sporting event. Long-term propositions
may be based upon the outcome of an entire game or discrete segments of a game.
Wagering continues on the long-term propositions even as game conditions change,
causing the odds on the outcome to change during the course of the event.
Examples of typical short-term propositions are, in football, will the
offensive team make a first down on a specific possession; and in basketball,
which team will be the next to score 10 points. Betting is almost continuous
until the specific event occurs or the specific game situation is completed.
Since short-term pools open and close rapidly, sometimes in several minutes or
less, there are new propositions constantly available during the entire contest.
The System works on a "bet against deposited funds" basis. When a bettor
desires to begin wagering, he deposits a sum of money (above a minimum set by
the house) with a cashier and receives an account number and a personal
identification ("PIN") number. The bettor places wagers using his funds on
deposit. The System automatically adds the bettor's winnings and subtracts
losses from his account. When the player wishes to commence play, he signs on to
a Player Betting Station using his account number and PIN number. The PBS will
show credits equal to his deposit. As wagers are placed, the credit balance in
the PBS is reduced by the amounts wagered. Each wager is also printed on a
continuous receipt that is printed contemporaneously at the PBS. When the bettor
wins, the monitor on the PBS shows that the bettor has won and his credit
balance in the PBS is automatically increased by his winnings.
When the player signs off a PBS, he removes the printed receipt which shows
his bets and balance and a bar code summary for accelerated cashing at the
sports wagering cashier station. The funds can also be kept on deposit for
future betting.
A player may also suspend wagering on a PBS. To do so, he touches the
appropriate button on the PBS and is prompted for his PIN number. When he enters
his PIN number, operation of the PBS is suspended for a limited period of time.
Upon the player's return, he reactivates his PBS by entering his PIN number. All
bets which are open or undecided continue to be paid off as they are decided.
Bettors may cash-out their wagers before the winner is determined or the
betting proposition is complete. Cashed-out wagers are paid at their then
current value. The System determines the then current value by placing a hedging
bet on the other contestant at the odds in effect when the bet is being cashed.
The player being cashed-out early would therefore not win as much as he might if
his team is ultimately victorious; nor would that player lose as much as he
might if his team ultimately lost.
The System is a continuous action pool-balancing system. As such, it reacts
by changing the odds on open or undecided betting propositions to reflect
current bettor sentiment as expressed by their bets. This can result in rapid
changes in odds, particularly if game conditions alter abruptly as in the case
of a sudden score, injury, or player ejection. Odds can even change while the
bettor is in the process of entering a wager into the System. As betting is
continuous, bets may be entered while game conditions are changing. At times,
bets will be delayed until a play is completed and the results of the play are
entered by those controlling the System to prevent past posting. Consequently,
all bet entries are treated as "requests" to make a bet at the odds which were
displayed when the bet entry process started. If the amount that must be wagered
to win a fixed payout has changed after the request is made and before the bet
is accepted, the player will be shown the new amount, asked to reconfirm his bet
request and be given a short period of time to respond. If the bet is not
reconfirmed within this time period, the bet is automatically cancelled. It is
even possible that the amount may change again before the bettor's decision on
the new price is made, in which event the process will be repeated. The player
will either reconfirm his request at the new price if he finds it acceptable, or
the bet will automatically be cancelled. If the player finds an acceptable
price, and the System accepts the bet, the price on the bet stays fixed
regardless of future changes in odds on that bet, the game or betting patterns.
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As game conditions change, for example, the score changes or the time clock
advances, the odds will usually change as a result of the betting pattern. This
may result in existing pools closing if they can no longer be held to a desired
level of balance. Such pools may then be replaced with new pools covering the
same proposition. This is generally done automatically, although the house can
override the System with manual pool opening and closing capability.
For ease of player use, the System shows odds by displaying fixed payouts
with corresponding bet sizes which must be placed to receive the fixed payout.
The sum of the bet sizes on each side of a proposition will equal the fixed
payout plus the house commission. For example, in a fixed payout of $20 with a
hypothetical house commission of $2, if the amount that a bettor had to wager on
the favorite was $16 in order to receive $20, the amount that the bettor would
have to wager on the underdog to receive $20 would be $6.
It is not necessary that the book be perfectly balanced, but only that the
imbalance be less than some percentage of the pool or dollar amount set by the
house. Under these circumstances, the house can ensure that its exposure is no
more than a fixed percentage or dollar amount, which is an acceptable portion of
the profit from its commissions. The System automatically prevents the house
exposure from exceeding a specified maximum amount by changing the betting terms
in the pool to induce bettors to wager on the side which is underfunded, thereby
inducing balancing of the pool. In extreme cases, the house or the System may
automatically stop accepting bets on the underfunded side when the exposure
limit is reached while continuing to accept bets on the other side. Under these
circumstances, the pool will presumably tend to return to balance after which
the house can resume taking bets on the contestant or proposition for which
betting was suspended.
The System is computerized, with complete, time-stamped records, providing
regulatory authorities as well as gaming establishments with the ability to
audit, analyze and control a game.
SYSTEM COMPONENTS
The proprietary software and state-of-the-art, commonly available hardware,
is configured in an arrangement designed specifically for the System. The
innovative software continuously balances wagering pools to within pre-set
levels, thereby permitting wagers to be made continuously during the course of a
sporting event while assuring the gaming establishment of a pre-determined
minimum commission. The software permits the operator to make available a wide
variety of betting propositions to players. By using statistical data and
modeling within the System, the System automatically sets and adjusts odds on
the betting propositions.
The major elements of the System include the Transaction Processor, Pool
Processor, plus numerous input and control computer terminals, including the
Player Betting Station, Game Controller Terminal, Game Supervisor Terminal,
Shift Manager Terminal, Administrative Terminal, and Cashier's Terminal, all of
which are controlled by proprietary software. There are also a variety of
printers for printing receipts and reports. The System processes secure messages
exchanged between the various elements in real time and employs sophisticated
mathematical algorithms in their functioning. These are used with event
statistics and statistical modeling. The television display is independent of
the System, being merely a standard television signal which is picked up and
shown for the convenience of the bettor. The System can operate without a
television signal. A player could, for example, view any television or display
while betting, or even bet without viewing the game, such as before the game
begins. The System uses redundant hardware and re-start and recovery software to
maximize System up time upon component failure.
All terminals are connected to the central processing unit via a
client/server network. The central processing unit is a computer that maintains
all pools, calculates odds, opens and closes all wagering on all pools, controls
all input and output devices (such as betting terminals, printers and management
terminals) produces all management and regulatory reports and is the repository
of all current and historical data on
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the wagering system. The proprietary software permits continuous, rapid
recalculation of odds, based upon changing betting patterns and an evaluation of
bets that have been placed.
The Player Betting Station employs a personal computer with a touch screen,
through which bettors are able to enter bets into the System. Utilizing a
windowing system, the PBS shows a television picture of a live sporting event in
the upper left quadrant of the monitor. Shown in the lower left quadrant is
status information appropriate to the sporting event being displayed, such as
the score, inning or which team has ball possession, and a player's financial
summary. On the right half of the display all of the betting propositions which
are available are shown vertically. Wagers are entered by touching sequentially
the payout size button on the terminal screen (initially to select a given
payout amount, and subsequently if the bettor changes the payout amount
desired), the appropriate bet button and the bet confirmation button. Also on
the screen are a series of housekeeping buttons for use in signing on, signing
off, and tuning to the desired sporting event. An alternative display screen
shows a list of the bettor's won, lost and open bets, his deposits, and his
available betting balance. Shown on another selectable screen are the current
value of bets previously placed. This screen is used to immediately cash-out
previously placed bets while the event on which the wager has been placed is
still in process. The System prints contemporaneously a continuous record of
bets and immediate payouts on a small printer at the PBS.
Data relating to all substantive events during the course of a sporting
event that affect the betting odds are entered into the System through the Game
Controller Terminal by the game controller for each event. These events include,
points or runs scored, period, inning, outs, downs, team having possession of
the ball, and the like, depending upon the sport. The System sends this
information to the pool processor to open and close betting propositions,
declare unofficial winners and set opening lines, among other things. Because
the game controller is entering data during a live sporting event, bets are
delayed briefly to enable the game controller to enter the data.
The Game Supervisor Terminal is utilized by the game supervisor of each
sporting event to manage the wagering on that sporting event. The Game
Supervisor Terminal is used to open betting lines, maintain the desired level of
house commission as pool balances change, close or suspend one or both sides of
a betting proposition, and declare official pool winners. This terminal is also
utilized by the game supervisor to oversee the accuracy of the information input
by the game controller.
The Shift Manager Terminal is used by the shift manager to oversee the
entire operation of the System at one time. This terminal allows the shift
manager to monitor the overall house commission for each event, to view any
event on which wagers are being taken and to observe in parallel the inputs by
the operators and the operation of virtually any terminal in the System.
The Administrative Terminal is the main management terminal in the System.
It is used to authorize personnel to operate the System, keep the chart of
future events upon which wagers will be accepted, together with when betting can
commence and when the game (day, date and time) actually begins. It also keeps
the pools to be allowed in an event and the sizes of the bets which will be
accepted in each pool in each event. This terminal is also used to start and
shut the System and to restart the System if it does not recover automatically
after a failure. It is through this terminal that most reports are accessed.
Reports produced by this terminal are used by the casino or sports book operator
and regulatory authorities.
The Cashier's Terminal can access the status of every player account which
is open. When a player wishes to receive cash, he goes to the cashier and gives
his account number and enters his PIN number on a keypad. The Cashier's Terminal
verifies that the PIN number is correct, as well as certain other information
for security purposes.
When an account no longer has any undecided bets and there no longer is a
balance to be paid out, the account will automatically close, with a journal
being recorded for the historical record. The account will also be closed and an
uncollected payout record written for any account which has uncollected funds
after a certain period of time, which is set as a System parameter.
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INTELLECTUAL PROPERTY
The Company regards the System, including the software contained therein as
proprietary.
The Company filed two patent applications with the PTO relating to its
proprietary wagering methods and its related computer processing system. The
initial United States patent application, as amended, was approved and a patent
issued on November 12, 1996. The second application is still pending.
Corresponding applications have been filed in numerous foreign countries. See
"Risk Factors--Uncertainties Regarding Intellectual Property."
It is the Company's policy that all employees and outside consultants
involved in research or development activities sign proprietary information,
non-disclosure and patent assignment agreements. This may not afford adequate
protection for the Company's know-how and proprietary products. Other parties
may develop products similar to the System or otherwise attempt to duplicate the
System in ways which circumvent the Company's technology and existing or future
patents.
The Company has not received any claim that it is infringing any patent or
other proprietary right and is not currently aware of any claim that it is
infringing any intellectual property rights of others. However, there can be no
assurance that third parties may not assert infringement claims against the
Company, which claims the Company would be required to defend at considerable
expense or enter into arrangements requiring the Company to pay royalties or
other damages, any of which could materially and adversely affect the Company's
business. See "Risk Factors--Uncertainties Regarding Intellectual Property."
The Company has applied for Federal trademark registration with the PTO and
for State of Nevada servicemark registration for the name SportXction-TM-. There
can be no assurance that the Company will obtain registered Federal or state
trademark or servicemark protection for the name SportXction-TM-. If the Company
fails to obtain such protection, the Company may be required to select a new
name for the System and incur additional marketing and other expenses to promote
its name.
GOVERNMENTAL REGULATION
The ownership and operation of casino gaming facilities, in Nevada,
including sports pools, the manufacture, sale and distribution of gaming devices
for use or play in Nevada or for distribution outside of Nevada, and the
manufacture, sale and distribution of associated equipment for use or play in
Nevada is subject to The Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, the "Nevada Act") and various local
ordinances and regulations. Such activities are subject to the licensing and
regulatory control of the Nevada Gaming Commission (the "Nevada Commission"),
the Nevada State Gaming Control Board (the "Nevada Board"), and various local,
city and county regulatory agencies (collectively with the Nevada Commission and
the Nevada Board referred to as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming, or manufacturing or
distribution of gaming devices at any time or in any capacity; (ii) the strict
regulation of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the manufacture
or distribution of gaming devices and equipment; (iii) the establishment and
maintenance of responsible accounting practices and procedures; (iv) the
maintenance of effective controls over the financial practices of licensees,
including the establishment of minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record keeping
and requiring the filing of periodic reports with the Nevada Gaming Authorities;
(v) the prevention of cheating and fraudulent practices; and (vi) providing a
source of state and local revenues through taxation and licensing fees. Change
in such laws, regulations and procedures could have a material adverse effect on
the Company's operations.
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Sports wagering is legal in Nevada and numerous foreign jurisdictions,
including Canada and Mexico. Pursuant to the Professional and Amateur Sports
Protection Act, 28 U.S.C. Section 3701, et. seq. (hereinafter referred to as the
"Sports Act"), which was effective January 1, 1993, the proliferation of
legalized sports books was significantly curtailed. Although the Sports Act
generally prohibits sports wagering in every jurisdiction in the United States,
including those jurisdictions subject to the Indian Gaming Regulatory Act (25
U.S.C. Section 2701 et. seq.), the Sports Act permits such wagering in those
jurisdictions that authorized sports wagering prior to the effective date of the
Act. 28 U.S.C. Section 3704. Thus, sports books and wagering are permitted to
continue to operate in Nevada. Moreover, the Interstate Wire Act, 18 U.S.C.
Section 1084, also prohibits those in the business of betting and wagering from
utilizing a wire communication facility for the transmission in interstate or
foreign commerce of any bets, wagers or information assisting in the placing of
such bets and wagers on any sporting event or contest unless such betting or
wagering activity is specifically authorized in each jurisdiction involved.
A licensed race book or sports pool in Nevada may not accept bets received
by use of wire communications facilities, including telephones and computers,
unless such bets originated in a jurisdiction wherein such betting or wagering
is legal. On July 1, 1995, the State of Nevada amended Charter 464 of the Nevada
Revised Statutes to allow persons licensed to accept, pursuant to regulations
adopted by the Nevada Commission, wagers from other jurisdictions in which
pari-mutuel wagering is legal. However, the regulations of the Nevada Commission
issued prior to July 1995 currently prohibit any licensed race books and sports
pools in the State of Nevada from accepting any telephone wagers from interstate
locations. In order for persons licensed to accept off-track pari-mutuel wagers
to be able to take advantage of the business opportunity provided by the new
law, and for the Company to benefit therefrom, the Nevada Commission must amend
its regulatory restrictions. There can be no assurances that the Nevada
Commission will amend or remove such regulatory restrictions or that any such
amendment would not be burdensome to the Company.
The Company's SportXction-TM- sports wagering system qualifies as
"associated equipment" as that term is defined in the Nevada Act. Associated
equipment is generally defined in the Nevada Act as any equipment or mechanical,
electromechanical or electronic contrivance, component or machine used remotely
or directly in connection with gaming, any game, race book or sports pool that
would not otherwise be classified as a gaming device. A "gaming device" is
generally defined as any equipment or mechanical electromechanical or electronic
contrivance, component or machine used remotely or directly in connection with
gaming, any game, race book or sports pool which affects the result of a
wagering by determining win or loss. All associated equipment that is
manufactured, sold or distributed for use or play in Nevada must first be
administratively approved by the Chairman of the Nevada Board. The
administrative approval process for associated equipment includes an evaluation
by the Nevada Board's audit division (the "Audit Division") and, in some cases,
by the Board's electronic services laboratory, followed by a field trial. The
System has been evaluated by the Audit Division and, on September 27, 1996, the
Company was advised by the Audit Division that it found the System suitable for
installation in a casino environment for a pre-trial (with the use of play
money) of five events and a trial period (with real money) of at least 30 days
including a minimum of 10 events. The Company has arranged with the Excalibur
Hotel & Casino in Las Vegas, Nevada to conduct the pre-trial and trial, subject
to such terms and conditions imposed by the Chairman of the Nevada Board. The
pre-trial began October 6, 1996, and concluded on October 24, 1996, at which
time the Audit Division authorized commencement of the trial. The trial period
began on October 27, 1996 and concluded on November 25, 1996. Regulations of the
Nevada Board and the Nevada Commission do not set forth any criteria by which
approval of the System is to be determined. Such approval is left to the
discretion of the Chairman of the Nevada Board. The Company believes that proper
technical functioning of the System, proper processing of wagers and generation
of accurate audit records are among the factors to be considered in any such
approval. No assurance can be given that the System will be approved. The
approval process is expected to be completed by mid-January 1997. The Nevada Act
provides that no licensee shall install or use associated equipment without the
prior approval of the Chairman of the Nevada Board.
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Manufacturers and distributors of associated equipment are not subject to
the mandatory licensing requirements of the Nevada Act imposed upon
manufacturers and distributors of gaming devices, but may be required by the
Nevada Commission, upon the recommendation of the Nevada Board, to file an
application for a finding of suitability to be a manufacturer and distributor of
associated equipment. It is unknown whether the Nevada Board and Nevada
Commission will require the Company to file an application for a finding of
suitability if the System is approved by the Chairman of the Nevada Board.
In order for the Company to be compensated for use of the System on the
basis of a percentage of the revenue received by a licensed gaming establishment
or on a transaction fee basis, the Company may be required to obtain a Nevada
Gaming License and to be registered by the Nevada Commission as a publicly
traded corporation (a "Registered Corporation"). In addition, because the
Company will qualify as a Registered Corporation after the Offering, it will be
required to receive an exemption from provisions of the Nevada Act that render a
Registered Corporation ineligible to hold a gaming license. The Company intends
to file an application for such exemption in connection with its application for
registration and licensing. If a public company applies for and is approved for
a Nevada Gaming License, the exemption is routinely granted as part of the
approval process. Although there can be no assurances that the Company will be
registered and licensed, the Company is unaware of any reason that it should not
receive such exemption in the event that the Nevada Board and Nevada Commission
determine that it is suitable to be registered and licensed. The Nevada Gaming
Authorities may deny an application for any cause which they deem reasonable. A
finding of suitability is comparable to licensing, and both require submission
of detailed personal and financial information followed by a thorough
investigation. The applicant for licensing or a finding of suitability must pay
all costs of the investigation. Determination of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada. If the
Company applies for and obtains such registration and a gaming license, the
following regulatory requirements will apply to it.
As a Registered Corporation and gaming licensee, the Company will be
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information which the Nevada Commission
may require.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
and gaming licensee in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company would be required to file
applications with the Nevada Gaming Authorities and may also be required to be
licensed or found suitable by the Nevada Gaming Authorities. Officers, directors
and key employees of the Company who are actively and directly involved in
gaming activities in respect of the operation of the System may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Determination of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and in addition to their authority to deny an application for
a finding of suitability of licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, it would have to sever all relationships with
such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determination of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
Upon becoming a Registered Corporation and gaming licensee, the Company will
be required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all material loans,
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leases, sales of securities and similar financing transactions would be required
to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Company, the
registration and licenses it held could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act at the
discretion of the Nevada Commission. Furthermore, the Nevada Commission could
revoke the approval of the System and could order the termination of existing
contracts for the System. Limitation, conditioning or suspension of the
registration and licenses held by the Company could (and revocation of any
registration and license would) materially adversely affect the Company's
manufacturing and distribution operations.
Any beneficial holder of the Company's voting securities, including a holder
of the Units, regardless of the number or shares owned, may be required to file
an application, be investigated, and have his suitability determined as a
beneficial holder of the Company's voting securities if the Nevada Commission
has reason to believe that such ownership would otherwise be inconsistent with
the declared policies of the State of Nevada. The applicant must pay all costs
of investigation incurred by the Nevada Gaming Authorities in conducting any
such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of the
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
shall not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts of informational purposes and not to cause a change in its
management policies or operations; and (iii) such other activities as the Nevada
Commission may determine to be consistent with such investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company will be subject to disciplinary action
if, after it receives notice that a person is unsuitable to be a stockholder or
to have any other relationship with the Company, it (i) pays that person any
dividend or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to
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pursue all lawful efforts to require such unsuitable person to relinquish his
voting securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that his acquisition of such debt
security would otherwise be inconsistent with the declared policy of the State
of Nevada. If the Nevada Commission determines that a person is unsuitable to
own such security, then pursuant to the Nevada Act, the Registered Corporation
can be sanctioned, including the loss of its approvals, if without the prior
approval of the Nevada Commission, it (i) pays to the unsuitable person any
dividend, interest, or any distribution whatsoever, (ii) recognizes any voting
right by such unsuitable person in connection with such securities, (iii) pays
the unsuitable person remuneration in any form, or (iv) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
After registration and licensing, the Company will be required to maintain a
current stock ledger in Nevada which may be examined by the Nevada Gaming
Authorities at any time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the identity of the
beneficial owner to the Nevada Gaming Authorities. A failure to make such
disclosure may be ground for finding the record holder unsuitable. The Company
will also be required to render maximum assistance in determining the identity
of the beneficial owner. The Nevada Commission has the power to require the
stock certificates of the Company to bear a legend indicating that the
securities are subject to the Nevada Act. It is unknown whether the Commission
would impose such a requirement on the Company.
A Registered Corporation may not make a public offering of its securities
without the prior approval of the Nevada Commission if the securities or
proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. Such approval, if given, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful. The
regulations of the Nevada Board and Nevada Commission also provide that any
entity which is not an "affiliated company," as such term is defined in the
Nevada Act, or which is not otherwise subject to the provisions of the Nevada
Act or such regulations, such as the Company, which plans to make a public
offering of securities intending to use such securities, or the proceeds from
the sale thereof for the construction or operation of gaming facilities in
Nevada, to finance the operation of gaming facilities in Nevada, or to retire or
extend obligations incurred for such purposes, may apply to the Nevada
Commission for prior approval of such offering. The Nevada Commission may find
an applicant unsuitable based solely on the fact that it did not submit such an
application of approval, unless upon a written request for a ruling, the Nevada
Board Chairman has ruled that it is not necessary to submit an application.
Because the Company intends to file an application for registration and for a
Gaming License, the Company filed a written request for a ruling (the "Ruling
Request") that it is not necessary to submit the Offering for prior approval. On
November 25, 1996, the Nevada Board Chairman responded to the Ruling Request by
issuing a written ruling (the "Ruling") that the Company is not required to
submit the Offering for prior appoval. The Ruling does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. The Ruling also does not constitute a finding that the
Company has been or will be found qualified to be involved with gaming
activities in Nevada for which a separate Nevada Commission approval will be
required. Any representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and the Nevada
Commission in a
34
<PAGE>
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchase of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan or recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which gaming operations are to be conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable either
monthly, quarterly or annually and are based upon either (i) a percentage of the
gross revenues received; or (ii) the number of gaming devices operated. Annual
fees are also payable to the State of Nevada for renewal of licenses as a
manufacturer and distributor.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A Licensee is also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the state of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
The Company may also be required to make annual filings with the Attorney
General of the United States in connection with the operation of the System.
The United States Congress has recently passed legislation which creates the
National Gaming Commission. The National Gaming Commission will generally have
the duty to conduct a comprehensive legal and factual study of gambling in the
United States and existing Federal, state and local policies and practices with
respect to the legalization or prohibition of gambling activities, to formulate
and propose changes in such policies and practices and to recommend legislation
and administrative actions for such changes. It is not possible to predict the
future impact of these proposals on the Company and its operations. Any such
proposals could have a material adverse affect on the Company's business.
35
<PAGE>
COMPETITION
Sports wagering competes with other forms of gambling available to the
general public both within and outside of the State of Nevada, including, but
not limited to, casino games (such as traditional slot machines, video slot,
poker and blackjack machines, roulette, card games, keno and craps), bingo,
state-sponsored lotteries, on-and-off track betting on horses and dogs, jai
alai, offshore cruise ships, riverboats and Native American gaming operations.
In addition, the System will compete with sports wagering as it currently exists
in Nevada. The Company is not aware of any system currently in operation or
under development that is similar to the System. No assurance can be given that
such a system does not exist or is not under development.
The Company believes that sports wagering facilities in casinos are
currently operated either by the casino itself or pursuant to contractual
relationships with licensed sports book operators. Such entities which operate
sports books in casinos may have exclusive relationships with casinos which
could limit the ability of casinos to contract directly with the Company. As a
result, the Company might be required to pay substantial sums to such third
parties for the privilege of supplying the System to any such casino, which
could have a material and adverse effect on the Company's financial condition
and results of operations. See "Risk Factors--Possible Exclusive Relationships
Between Casinos and Third Parties."
American Wagering, Inc., through its subsidiary Leroy's Horse and Sports
Place ("Leroy's"), is a licensed bookmaker with 35 sports books, the largest
number of sports book locations in the State of Nevada. Leroy's sports books are
operated primarily in casinos in major metropolitan areas in Nevada and in its
own facilities. Leroy's offers casinos a turnkey sports betting operation that
allows casinos to offer sports wagering to its patrons without bearing the risk
and overhead associated with conducting the operation themselves. In October
1996, American Wagering, Inc. acquired the subsidiary of Autotote Corporation
which sold sports wagering equipment and terminals to casinos and sports book
operators in Nevada. The Company believes that the subsidiary involved sold such
equipment, which was largely record keeping equipment, to 100 of the 115 casinos
and sports book operators in Nevada. On December 5, 1996, American Wagering,
Inc. announced a joint venture with International Game Technology, the largest
supplier of slot machines, to market and operate new pari-mutuel sports wagering
products. According to the announcement, wagers will be accepted in pari-mutuel
format on the outcomes of sports contests, events that occur within or during
those contests and the outcomes of a group of sports contests. The introduction
of the new wagering products is subject to receipt of regulatory approval. The
Company believes that these sports wagering products will only accept wagers
prior to commencement of sporting events and, since they are in pari-mutuel
format, they will not include fixed price bets as is customary in sports
wagering. See "Risk Factors--Competition and Rapid Technological Change."
In addition, the Company may compete with suppliers of other forms of gaming
equipment and services most of whom are substantially larger with greater
technological, financial and other resources than the Company. Among the
companies currently producing gaming equipment are International Game
Technology; GTECH Corporation, the largest supplier of equipment and systems to
state sponsored lotteries; AmTote International, Inc., a supplier of equipment,
systems and devices for pari-mutuel wagering on horses, dogs and in jai alai;
Video Lottery Technologies, Inc., which operates video lottery systems and,
through its subsidiary, United Wagering System, Inc., operates in the
pari-mutuel wagering business; WMS Industries Inc., which designs, manufactures
and sells coin-operated pinball and video games, home video games, casino gaming
devices and video lottery terminals; Bally Gaming Industry International, Inc.
which designs, manufactures and distributes electronic slot machines, video
gaming machines, video lottery terminals and computer gaming management systems;
and several smaller companies. See "Risk Factors--Competition and Rapid
Technological Change."
36
<PAGE>
PERSONNEL
The Company has eight full-time employees, consisting of Messrs. Mindes,
Albanese, Harbison and Jacobs and four software engineers and programmers; and
one part-time employee, Ms. Norman, the Company's Chief Financial Officer. The
Company considers its relations with its employees to be good.
The Company also has used, and may from time to time in the future use,
outside consultants on specific assignments or projects.
If the System is approved for use in the State of Nevada, the Company will
seek to hire marketing and sales personnel to market the System to casinos and
sports book operators. If it is successful in contracting with customers to
install the System, it will also hire training personnel and technicians to
install and maintain the System as well as additional engineers and
administrative personnel. See "Risk Factors-- Management of Growth" and "Risk
Factors--Dependence on Key Personnel."
FACILITIES
The Company's only facility is located at 201 Lower Notch Road, Suite 2B,
Little Falls, New Jersey 07424. The Company leases approximately 1,000 square
feet of office space at this location. Annual lease payments at this facility at
which all development and administrative activities are currently conducted are
expected to be approximately $13,000 in the fiscal year ending September 30,
1997. If the Company's System is approved for use in Nevada, the Company expects
to lease additional space at its current location or a substitute location in
New Jersey and will require space in Nevada for sales and marketing personnel,
maintenance of equipment, storage of equipment and the like.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL OF THE COMPANY
The Company's directors, executive officers and key personnel are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------------- --- ----------------------------------------------
<S> <C> <C>
Barry Mindes........................... 64 Chairman of the Board of Directors
Bernard Albanese....................... 48 President, Treasurer and Director
Jeneene M. Norman...................... 43 Chief Financial Officer
Andrew Harbison........................ 38 Vice President--Software Development
Scott J. Jacobs........................ 37 Vice President--Marketing
Fredric Kupersmith(2).................. 62 Director
Janet B. Mindes(1)..................... 29 Director
Harold Rapaport(1)(2).................. 74 Director
</TABLE>
- ------------------------
(1) Member of the Stock Option Committee.
(2) Member of the Audit Committee.
BARRY MINDES is the founder of the Company and has served as Chairman of the
Board of Directors of the Company since inception. From inception through August
1996, he also served as Chief Executive Officer, President and Secretary of the
Company, and from inception to July 1995, he also served as Treasurer of the
Company. Mr. Mindes founded Systems Enterprises Inc., the predecessor of the
Company, in December 1992, and from its inception until its merger with the
Company in May 1995, served as its only officer, director and stockholder. Prior
to founding the Company, from 1986 to 1992, Mr. Mindes co-founded and was Chief
Executive Officer of Script Systems Inc., a public company which was
subsequently merged into Infomed Holdings Inc. and which developed and sold
computer systems to large medical practices, hospitals and pharmacies. From 1979
to 1986, Mr. Mindes served as President of Information Industries, Inc., a
private company which developed and sold turnkey computer systems, including
systems developed for the Midwest Stock Exchange. From 1969 to 1971, Mr. Mindes
served as Vice President--Engineering of New York City Off-Track Betting
Corporation ("NY-OTB") where he was responsible for implementing its computer
system. From 1964 to 1969, Mr. Mindes served as general manager of an
independent profit center of Computer Sciences Corp. which planned, designed and
developed computer and communications systems and software. During that time, he
was responsible for the design and selling of the initial off-track betting
system to the City of New York and the creation of the original design of the
New Jersey Lottery. Mr. Mindes also served as project manager for the Aircraft
Control and Warning System for the Republic of Korea in 1963, and in 1968 he
directed the design of the long distance telephone system in the Republic of
Bolivia. Mr. Mindes has been granted ten United States patents and has written
more than 12 technical papers which have been published in professional
journals. In 1958, Mr. Mindes received the Contributions Award for
Communications Systems from the Institute for Electronic and Electrical
Engineers.
BERNARD ALBANESE has served as President of the Company since September
1996, as Treasurer since July 1995 and as Vice President--Systems from July 1995
until August 1996. From 1993 to 1995, Mr. Albanese was Vice
President--Operations of Automated Data Services Inc., a provider of medical-
related computer systems, in which position he was responsible for all
installation, training and telephone support for an installed base of over 1,000
customers. Mr. Albanese was a co-founder with Mr. Mindes of Script Systems Inc.
and was its Executive Vice President until 1993. From 1980 to 1986, Mr. Albanese
served as Vice President of Information Industries, Inc., in which position he
was responsible for, among other things, software development for the Midwest
Stock Exchange and other large projects. From 1971 to 1977, Mr. Albanese was
employed by STC Systems, Inc., which developed, sold and supported mini-computer
business systems, where he was responsible for development and implementation of
over 20
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large computer projects. From 1969 to 1971, Mr. Albanese served as a member of
the technical staff at Bell Telephone Laboratories.
JENEENE M. NORMAN has served on a part-time basis as Chief Financial Officer
of the Company since October 1996. From 1989 to 1995, Ms. Norman was employed on
a part-time basis by First Fidelity Bank where she was responsible, at various
periods, for management of the international operations of a subsidiary bank and
developed new business with importers and exporters. From 1974 to 1988, Ms.
Norman was employed by Midlantic National Bank/North in varying capacities
including Vice President and Manager of the International Department from 1979
to 1986, in which capacity she was responsible for organization, policy,
financial planning, budgeting and profitability of that Department.
ANDREW HARBISON has served as Vice President--Software Development of the
Company since October 1996. From June 1995 to October 1996, Mr. Harbison served
as Manager of Software Development of the Company. From 1993 to 1995, Mr.
Harbison served as Vice President of Programming of Infomed Holdings Inc., in
which position he was in charge of the programming and data conversion
department consisting of 25 individuals involved in developing computer systems
for medical billing, clinical records and managed care systems. From 1987 to
1993, he was Vice President--Programming and Support of Script Systems Inc., and
from 1985 to 1987, he was Vice President--Programming of Healthcare Computer
Associates, Inc., a private company which developed, sold and supported computer
systems for physicians.
SCOTT J. JACOBS has served as Vice President--Marketing of the Company since
November 1996. From August 1995 until November 1996, Mr. Jacobs served as
President of GameWay Technologies, a sole proprietorship involved in the
development, sales and marketing of transactional gaming solutions for the
sports wagering, casino and lottery markets. From January 1992 until August
1995, he was Executive Vice President of FutureTel, a private company, in which
he was responsible for the sales and marketing of interactive television, home
and hotel-room gaming applications. From February 1989 through December 1991, he
was Vice President--Interactive Development of Video Jukebox Network, Inc., a
public company, in which position he was responsible for the development and
marketing of new interactive cable television programming services. From
December 1985 to January 1989, he was a principal of Laser Arts Interactive, a
private company involved in multimedia development and publishing. From 1981 to
1985, he held various positions with the Visual Technology Center, Center for
the Media Arts, CBS Television Network and MTV: Music Television.
FREDRIC KUPERSMITH has served as a director of the Company since October
1996. Since 1977, Mr. Kupersmith has been President of Polsim Consultants Inc.,
a private company that provides consulting services to the communications,
computer and television distribution industries. From 1971 to 1992, Mr.
Kupersmith served in varying executive capacities at NY-OTB, including Vice
President--Computers and Communications Systems from 1981 to 1992, and Executive
Director of Technical Services from 1971 to 1981. In such capacities, he was
responsible for NY-OTB's computer, communications, television distribution and
display and betting office systems. From 1968 to 1971, Mr. Kupersmith served as
a Vice President and corporate officer of Frequency Electronics Inc., a public
company engaged in the design and development of electronic equipment such as
time, frequency and space communications equipment. From 1966 to 1968, Mr.
Kupersmith was director of research at Computer Sciences Corp.'s New York
Operations Center where he was responsible for numerous satellite communications
research projects.
JANET B. MINDES has served as a director of the Company since July 1995.
Since 1992, Ms. Mindes has served as Assistant Managing Director of KuwAm
Corporation, a private investment firm. From 1991 to 1992, Ms. Mindes was a
sales consultant with Nordstrom, a department store chain. Ms. Mindes received
an MBA in finance and investments from The George Washington University in 1991.
Ms. Mindes is the daughter of Barry Mindes.
HAROLD RAPAPORT has served as a director of the Company since July 1995. Mr.
Rapaport is an electronics, communications and computer executive with over 40
years experience in management,
39
<PAGE>
technology and marketing. He is President of Rapaport Associates, management
consultants to high technology businesses. From 1982 until 1996, he was Chairman
of Control Transaction Corporation, a manufacturer of computer-based point of
sale systems. From 1971 to 1990, he was a member of the Board of Directors of
General Instrument Corporation ("GIC"). From 1965 to 1974, Mr. Rapaport was
employed by GIC in various executive capacities, including Executive Vice
President, Systems and Services (with responsibility for GIC's subsidiaries,
American Totalisator Co., Inc., a supplier of totalisator equipment for
on-and-off track wagering and, later, lottery systems and Jerrold Electronics
Corporation, the largest supplier of equipment to cable television operators);
Director and member of the Office of Chief Executive from 1971 to 1974; Senior
Vice President, Planning and Development from 1970 to 1971; and Group Vice
President, Defense and Engineering Products from 1965 to 1970. From 1960 to
1965, he held various executive positions with ITT Corporation, including
Executive Vice President, ITT Kellogg and Vice President, Communications
Division, ITT Federal Labs from 1963 to 1965; Director of Marketing, ITT Defense
and Engineering Products Group from 1962 to 1963; and Executive Vice President,
International Electric Corporation from 1960 to 1962. Mr. Rapaport served as
Chairman of the Board and Chief Executive Officer of Digital Computer Controls
from 1974 to 1976; and Chairman of the Board of RE Harrington Inc. from 1987 to
1996, when it was acquired by Health Plan Services Inc. He currently serves on
the Board of Directors of Cybernetic Services Inc.
All directors hold their offices until the next annual meeting of
stockholders of the Company and until their successors are elected and
qualified. Mr. Harold Rapaport and Ms. Janet Mindes were elected directors as
the designees of Mr. Barry Mindes under a Voting Agreement with certain
investors entered into in connection with a financing in June 1995, which
Agreement terminates upon the effective date of the Offering.
All officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company, except that Mr. Barry Mindes is the father of
Ms. Janet Mindes.
COMMITTEES
The Board of Directors has two committees, a Stock Option Committee and an
Audit Committee. The Stock Option Committee has authority to administer the
Company's 1996 Stock Option Plan. The Audit Committee has authority to recommend
annually to the Board of Directors the engagement of the Company's independent
accountants and to review the independence of the accounting firm, the audit and
non-audit fees of the independent accountants and the adequacy of the Company's
internal control procedures.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for their out-of-pocket
expenses incurred in attending Board of Directors and Committee meetings. The
Company intends to compensate non-employee directors by means of annual option
grants exercisable at fair market value on the date of grant. In April 1996, Mr.
Rapaport and Ms. Mindes were each granted options to purchase 12,092 shares of
Common Stock pursuant to the Company's 1995 Stock Option Plan, of which options
for 3,023 shares vested immediately. The remaining options for 9,069 shares were
to vest at the rate of 1,511 for each Board of Directors meeting attended. As a
result of attendance at meetings of the Board of Directors subsequent to April
15, 1996, (i) an additional 4,534 of Mr. Rapaport's options vested, and in
September 1996, Mr. Rapaport exercised all 7,557 options that were vested, and
(ii) an additional 3,023 of Ms. Mindes' options vested. Ms. Mindes has not
exercised any of such options. On August 30, 1996 each of Mr. Rapaport and Ms.
Mindes were granted options to purchase an additional 9,069 shares, all of which
vested on November 1, 1996. In October 1995, Mr. Albanese, who at the time was
an officer but not a director of the Company, was granted an option to purchase
90,691 shares of Common Stock and, in June 1996, Mr. Albanese was
40
<PAGE>
granted an option to purchase 75,576 shares of Common Stock, each of which
options is exercisable at $0.70 per share and vests in four equal annual
installments on the anniversary date of such grant.
ADVISORY COMMITTEE
The Company has established an Advisory Committee, consisting of Stephen
Katz, Eli Oxenhorn and Barry Rubenstein, for the purpose of providing industry,
financial and other advice to the Company's Board of Directors. The backgrounds
of Messrs. Katz, Oxenhorn and Rubenstein are described below. None of the
members of the Advisory Committee will be compensated for their services on such
Committee although they will be reimbursed for any expenses incurred in
attending meetings. Messrs. Oxenhorn and Rubenstein have previously served as
directors of the Company. Each of Messrs. Katz, Oxenhorn and Rubenstein are
record or beneficial holders of Common Stock.
STEPHEN KATZ has served since 1996 as Chairman of the Board and Chief
Executive Officer of Coin Bill Validator, Inc., a publicly-held manufacturer and
marketer of paper currency validation systems used to automate payment in the
gaming and vending industries worldwide. Mr. Katz is also founder and Chairman
of the Board and Chief Executive Officer of Cellular Technical Services Company,
Inc., a public software company which provides real-time data management
software products and services for the wireless communications industry. Mr.
Katz was also one of the founders and, from 1986 to 1995, served as Chairman of
the Board and Chief Executive Officer, of Nationwide Cellular Service, Inc., a
former publicly-traded company which was acquired by MCI Communications
Corporation in 1995. Mr. Katz is a partner in DISS Partners, the record holder
of 483,686 shares of Common Stock. See "Principal Stockholders."
ELI OXENHORN, a private investor, served as a director of the Company from
June 1995 to October 1996. Mr. Oxenhorn was Chairman of the Board of Cheyenne
Software, Inc. ("Cheyenne") from October 1986 to May 1994, and served as
President and Chief Executive Officer of Cheyenne from October 1986 to October
1993. Mr. Oxenhorn is the record and beneficial holder of 284,516 shares of
Common Stock.
BARRY RUBENSTEIN, a private investor, served as a director of the Company
from June 1995 to October 1996. Since February 1995, Mr. Rubenstein has served
as an officer of InfoMedia Associates, Ltd., a New York corporation which is a
general partner of 21st Century Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications Foreign
Partners, L.P. In addition, Mr. Rubenstein has served as a general partner of
several investment partnerships, including Wheatley Partners, L.P. (since June
1996), Applewood Associates, L.P. (since 1992), Seneca Ventures (since 1979),
Woodland Partners (since 1985) and Woodland Venture Fund (since 1976). Since
September 1994, Mr. Rubenstein has served as a director of Infonautics, Inc., a
public company. Seneca Ventures, Woodland Partners, Woodland Venture Fund and
Mr. Rubenstein's wife are record owners of a total of 995,806 shares of Common
Stock. See "Principal Stockholders."
DIRECTORS' LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Certificate of Incorporation includes provisions which (a) eliminate the
personal liability of directors for monetary damages resulting from breaches of
their fiduciary duty (except for liability for breaches of the duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, violations under Section 174 of the DGCL, or for any
transaction from which the director derived an improper personal benefit), and
(b) indemnify the directors and officers to the fullest extent permitted by the
DGCL, including under circumstances under which indemnification is otherwise
discretionary. Such limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
obligation to indemnify each of its directors and officers applies with respect
to all liability and loss suffered and expenses incurred by such person in any
action, suit or proceeding in which such person was or is made or threatened to
be made a party or is otherwise involved by reason of the fact that such person
41
<PAGE>
is or was a director or officer of the Company. The Company is also obligated to
pay the expenses of the directors and officers incurred in defending such
proceedings, subject to reimbursement if it is subsequently determined that such
person is not entitled to indemnification. The Certificate of Incorporation
further provides that if the DGCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Company shall be eliminated or limited to the
fullest extent permitted by the DGCL as amended or supplemented.
The Company intends to obtain directors' and officers' liability insurance
by the closing date of the Offering, and expects to continue to carry such
insurance following the Offering. In addition, the Company will enter into an
indemnification agreement with each of its directors and executive officers
under which the Company will agree to indemnify each of them against expenses
and losses incurred for claims brought against them by reason of being a
director or officer of the Company.
The Company believes that the limitation of liability and indemnification
provisions in its Certificate of Incorporation, the liability insurance and the
indemnification agreements will enhance the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers.
There is no pending litigation or proceeding involving a director, officer or
employee of the Company to which the indemnification provisions would apply, and
the Company is not aware of any threatened litigation or proceeding that may
result in a claim for indemnification.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation paid or accrued by
the Company for services rendered in all capacities to the Company during each
fiscal year since inception by Mr. Mindes, its Chairman of the Board, and by Mr.
Albanese, the only other executive officer of the Company during its fiscal year
ended September 30, 1996. Information given for Mr. Mindes for dates prior to
May 22, 1995 represents amounts paid or accrued by the Company's predecessor.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
NUMBER OF SHARES
-------------------- OF COMMON STOCK ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- -------------------------------------------- ------------- --------- --------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Mr. Barry Mindes,........................... 1996 $ 43,347 $ -- -- $ 804(1)
Chairman of the Board 1995 $ -- $ -- -- --
Mr. Bernard Albanese,....................... 1996 $ 70,646 $ -- 166,267 --
President and Treasurer (2) 1995 $15,000 $ -- -- --
</TABLE>
- ------------------------
(1) Represents income attributable to the Company's payments for lease of a car.
(2) Mr. Albanese became an officer of the Company in July 1995.
The following table sets forth certain information on grants of stock
options made during the fiscal year ended September 30, 1996 to the executive
officers named in the Summary Compensation Table and certain information
concerning all options exercised and held by such persons.
42
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE
SHARES OF GRANTED TO VALUE AT
COMMON EMPLOYEES IN ASSUMED ANNUAL RATES OF
STOCK FISCAL YEAR STOCK PRICE APPRECIATION
UNDERLYING ENDED PER SHARE FOR OPTION TERM(1)
OPTIONS SEPTEMBER 30, EXERCISE EXPIRATION ------------------------
NAME GRANTED 1996 PRICE DATE 5% 10%
- ------------------------------ --------------- ----------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Bernard Albanese.......... 90,691 19.2 $ 0.70 2,005 $ 822,873 $ 1,347,891
75,576 16.0 $ 0.70 2,006 $ 685,729 $ 1,123,245
</TABLE>
- ------------------------
(1) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the term of the options. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the options were granted to their expiration date and are not
intended to forecast possible future appreciation, if any, in the price of
the Common Stock. The gains shown are net of the option exercise price, but
do not include deductions for taxes or other expenses associated with the
exercise of the options or sale of the underlying shares. The actual gains,
if any, on the option exercises will depend on the future performance of the
Common Stock, the holder's continued employment through applicable vesting
periods and the date on which the options are exercised. The potential
realizable value of the foregoing options is calculated by assuming that the
fair market value of the Common Stock on the date of grant of such options
equalled the exercise price of such options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES SEPTEMBER 30, 1996 SEPTEMBER 30, 1996(1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harold Rapaport.................. 7,557 $ 40,052 -- 13,603 -- $ 72,096
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock on September 30,
1996. Accordingly, solely for the purpose of this table, the values have
been calculated on the basis of an initial public offering price of the
Common Stock included in the Units of $6.00 per share (with no value being
attributed to the Warrants included in the Units) minus the exercise price
of $.70 per share, multiplied by the number of Shares underlying the option.
See "--Stock Options Plans" for a discussion of stock option grants to
management and others.
EMPLOYMENT AGREEMENTS
The Company entered into three-year employment agreements with each of Barry
Mindes and Bernard Albanese as of May 22, 1995 and June 1, 1995, respectively,
pursuant to which (i) Mr. Mindes received no salary during the first year and
will receive a base salary of not less than $115,000 during each of the second
and third years of the agreement (unless otherwise approved by 80% of the Board
of Directors), and Mr. Albanese received a base salary of $52,000 during the
first year and will receive a base salary of not less than $108,000 during each
of the second and third years of the agreement; (ii) they are entitled to such
salary increases, bonuses or other incentive compensation as may be approved by
the Board of Directors (the approval of 80% of the directors is required in the
case of Mr. Mindes' agreement); (iii) they are entitled to such health and life
insurance as may be provided to other executives of the Company; and (iv) they
will be entitled to severance equal to six months' base salary in the event, (a)
the Company requests that the executive relocate and, as a consequence, the
executive voluntarily
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terminates his employment, or (b) the Company terminates such executive's
employment other than for cause (as defined in the agreement) or due to death or
disability after the term of the agreement but before July 1, 2000 without
having renewed or replaced the agreement. In addition, in the event of a "change
of control" (as defined in the agreement) of the Company followed by termination
of the executive's employment either (i) by the Company other than as a result
of death or disability or for cause, or (ii) by the executive for "good reason"
(as defined in the agreement), the executive is entitled to (a) if termination
occurs during the term, continued payment of base compensation and benefits
until the end of the term but not for less than six months, or (b) if
termination occurs after the term but prior to July 1, 2000, payment of six
months' base salary. Mr. Mindes is also entitled, at the Company's expense, to
use of a leased automobile, including all operating, maintenance and insurance
expenses. Each of Messrs. Mindes and Albanese have entered into agreements
restricting competitive activities for 12 months following termination of
employment and prohibiting disclosure of confidential information. For a
discussion of certain rights granted to these individuals to cause the Company
to register their shares of Common Stock under the Securities Act, see
"Description of Securities--Registration Rights."
STOCK OPTION PLANS
1995 STOCK OPTION PLAN. In May 1995, the Board of Directors adopted and the
stockholders approved the 1995 Stock Option Plan (the "1995 Plan"). The purpose
of the 1995 Plan is to attract and retain exemplary employees, agents,
consultants and directors. Options covering all of the 649,955 shares of Common
Stock authorized for issuance under the 1995 Plan have been granted, of which
options for 7,557 shares have been exercised. The shares subject to and
available under the 1995 Plan may consist, in whole or in part, of authorized
but unissued stock or treasury stock not reserved for any other purpose. Any
shares subject to an option that terminates, expires or lapses for any reason,
and any shares purchased pursuant to an option and subsequently repurchased by
the Company pursuant to the terms of the option, shall again be available for
grant under the 1995 Plan.
The 1995 Plan provides for the grant of incentive stock options ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and non-qualified stock options ("NQSOs") at the
discretion of the Board of Directors of the 1995 Plan. The Board of Directors
administers the 1995 Plan. Subject to the terms of the 1995 Plan, the Board of
Directors determines the terms and conditions of options granted under the 1995
Plan. Options granted under the 1995 Plan are evidenced by written agreements
which contain such terms, conditions, limitations and restrictions as the Board
of Directors deems advisable and which are not inconsistent with the 1995 Plan.
ISOs may be granted to individuals, who, at the time of grant, are employees of
the Company. NQSOs may be granted to directors, officers, agents and consultants
of the Company whether or not employees of the Company. The 1995 Plan provides
that the Board of Directors must establish an exercise price for ISOs that is no
less than the fair market value per share of the Common Stock at the date of
grant. The exercise price for NQSOs shall be determined by the Board of
Directors.
Options under the 1995 Plan may provide for the payment of the exercise
price by (i) delivery of cash or a check payable to the order of the Company,
(ii) "cashless exercises" (delivery of such shares of stock of the Company
having a fair market value equal to the exercise price), or (iii) any
combination of (i) or (ii).
To the extent that the aggregate fair market value, as of the date of grant,
of the shares to which ISOs become exercisable for the first time by an optionee
during a calendar year exceeds $100,000, the ISO will be treated as a NQSO. In
addition, if an optionee owns more than 10% of the Company's stock at the time
the individual is granted an ISO, the option price per share cannot be less than
110% of the fair market value per share and the term of the option cannot exceed
five years. Options granted under the 1995 Plan may not have a term in excess of
10 years from the date of grant. In addition, no options may be granted under
the 1995 Plan later than 10 years after the 1995 Plan's effective date.
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Options granted under the 1995 Plan to officers, directors, employees or
consultants of the Company may be exercised only while the optionee is employed
or retained by the Company or within one year after termination of the
optionee's employment or consulting relationship by reason of death or permanent
disability, and three months after termination for any other reason except
termination for cause (unless such options expire sooner by their terms).
Options are nontransferable, except by will or the laws of descent and
distribution. The Board of Directors has certain rights to amend or terminate
the 1995 Plan provided any necessary stockholder approval is obtained.
1996 STOCK OPTION PLAN. In October 1996, the Board of Directors adopted and
the stockholders approved the 1996 Stock Option Plan (the "1996 Plan"). The 1996
Plan is substantially similar to the 1995 Plan, except that there are 825,000
shares of Common Stock authorized for issuance pursuant to options which may be
granted thereunder, of which options to purchase a total of 58,000 shares have
been granted. The 1996 Plan is administered by the Stock Option Committee.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information regarding the beneficial ownership of the Company's outstanding
Common Stock by (i) each of the Company's directors, (ii) each of the executive
officers named in the Summary Compensation Table under "Management-- Executive
Compensation," (iii) all directors and executive officers of the Company as a
group, and (iv) each other person known by the Company to beneficially own more
than five percent of the outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED --------------------------------------
IMMEDIATELY BEFORE BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) THE OFFERING(2) OFFERING OFFERING(3)
- ------------------------------------------------------- ------------------ ----------------- -------------------
<S> <C> <C> <C>
Mr. Barry Mindes(4).................................... 3,023,952 50.2% 40.2%
Mindes Family Limited Partnership...................... 1,511,523 25.1% 20.0%
Mr. Bernard Albanese(5)................................ 173,824 2.9% 2.3%
The Marie Albanese Trust, Marie Albanese and Christine
Marie Albanese, trustees(6).......................... 302,304 5.0% 4.0%
Mr. Fredric Kupersmith................................. 19,196 * *
Ms. Janet Mindes(7).................................... 15,115 * *
Mr. Harold Rapaport(8)................................. 37,787 * *
Mr. Barry Rubenstein(9)................................ 995,806 16.4% 13.2%
DISS Partners(10)...................................... 483,686 8.0% 6.4%
All executive officers and directors as a group (7
persons)(11)......................................... 3,269,874 53.9% 43.2%
</TABLE>
- ------------------------
* Denotes less than 1%
(1) The address of each individual or entity is c/o International Sports
Wagering Inc., 201 Lower Notch Road, Little Falls, NJ 07424.
(2) Percentage of ownership before the Offering is based on 6,024,269 shares of
Common Stock outstanding as of the date of this Prospectus. For each
beneficial owner, shares of Common Stock underlying derivative securities
exercisable or convertible within 60 days of the date of this Prospectus are
deemed outstanding only for computing the percentage of such beneficial
owner. Unless otherwise noted, all shares are beneficially owned and sole
voting and investment power is held by the persons named, subject to
community property laws where applicable. See "Description of Securities--
Common Stock."
(3) Does not include as outstanding (i) up to 1,500,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Units offered hereby,
(ii) up to 450,000 shares of Common Stock issuable upon exercise of the
Over-Allotment Option and the Warrants underlying the same, and (iii) up to
300,000 shares of Common Stock issuable upon exercise of the
Representatives' Options and the Representatives' Unit Warrants.
(4) Includes 1,511,523 shares held by Mindes Family Limited Partnership, of
which Mr. Mindes is general partner. Mr. Mindes disclaims beneficial
ownership of the shares owned by Mindes Family Limited Partnership to the
extent such shares exceed his proportionate interest therein. Does not
include shares beneficially owned by Mr. Mindes' daughter, Ms. Janet Mindes,
as to which Mr. Mindes disclaims beneficial ownership.
(5) Includes 22,672 shares underlying options held by Mr. Albanese.
(6) Marie Albanese and Christine Marie Albanese are the wife and daughter,
respectively, of Mr. Bernard Albanese. Mr. Albanese disclaims beneficial
ownership of the shares of Common Stock held in such trust.
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(7) Represents shares underlying options held by Ms. Mindes.
(8) Includes (i) 9,069 shares underlying options held by Mr. Rapaport, and (ii)
21,161 shares owned by Rapaport Family Limited Partnership, of which Mr.
Rapaport is the General Partner. Mr. Rapaport disclaims beneficial ownership
of the shares owned by Rapaport Family Limited Partnership to the extent
such shares exceed his proportionate interest therein.
(9) Represents 284,516 shares held by each of Seneca Ventures, Woodland
Partners, and Woodland Venture Fund, each a partnership as to which Mr.
Rubenstein serves as a general partner, and 142,258 shares held by Mr.
Rubenstein's wife.
(10) DISS Partners is a general partnership, the partners of which include Mr.
Stephen Katz, a member of the Company's Advisory Committee, Mr. Don
Chaifetz, and their respective wives. Each of Messrs. Katz, Chaifetz and
their respective wives disclaims beneficial ownership of the shares of
Common Stock owned by DISS Partners to the extent such shares exceed their
proportionate ownership interests in DISS Partners.
(11) Includes (i) 1,511,523 shares held by Mindes Family Limited Partnership
(see note 4 above) and (ii) an aggregate of 46,857 shares underlying options
held by all executive officers and directors as a group. Does not include
302,304 shares held by the Marie Albanese Trust, Marie Albanese and
Christine Marie Albanese, trustees (see note 6 above).
CERTAIN TRANSACTIONS
On May 22, 1995, Barry Mindes, the Company's Chairman of the Board,
purchased 906 shares of Common Stock for an aggregate purchase price of $3.00.
On May 25, 1995, Systems Enterprises Inc., the Company's predecessor, was merged
into the Company. Effective upon the merger, the outstanding shares of common
stock of the predecessor, all of which were held by Barry Mindes, were converted
into 3,023,048 shares of Common Stock. At the time of the merger, Mr. Mindes was
reimbursed approximately $9,000 for actual expenses paid by him in connection
with a patent application, which application was assigned to the Company.
In May 1995, the Company sold, at a purchase price of $.0003 per share, an
aggregate of 558,356 shares of Common Stock to six individuals, including
453,456 shares to Bernard Albanese, the Company's President and Treasurer and a
director of the Company, 19,196 shares to Fredric Kupersmith, a director of the
Company, and 30,230 shares to Andrew Harbison, the Company's Vice
President--Software Development. None of Messrs. Albanese, Kupersmith and
Harbison were directors or officers of the Company at the time of such
purchases. In connection with Mr. Albanese's purchase of stock he gave a proxy
to Mr. Mindes with respect to 302,305 shares, which proxy expires upon the
Offering.
In June and July 1995, the Company sold a total of 399,997 units, each
consisting of 3.0230479 shares of Common Stock and one Warrant (the "Investor
Warrants") to purchase 3.0230479 shares of Common Stock, to a group of
approximately 18 accredited investors, for an aggregate of approximately
$850,000, or $0.70 per unit. Between February and April 1996, Investor Warrants
to purchase an aggregate of 1,164,753 shares of Common Stock were exercised at a
total purchase price of approximately $818,750, or $0.70 per share. Investment
partnerships of which Mr. Barry Rubenstein is the general partner and Mr.
Rubenstein's wife purchased 164,705 units at an aggregate purchase price of
$350,000. Subsequently, such entities and individual exercised an aggregate of
164,705 Investor Warrants at an aggregate exercise price of $350,000.
In June 1996, the Company sold 60,460 shares of Common Stock to seven
individuals (including Andrew Harbison, currently the Company's Vice
President--Software Development, and Harold Rapaport, a director of the
Company), for a total purchase price of $42,500, or $0.70 per share.
For a discussion of certain management compensation, including option grants
and employment agreements entered into with Messrs. Mindes and Albanese, see
"Management."
Except as set forth above, the Company does not presently intend to enter
into any other business transactions with affiliated parties. In the event,
however, that any such business transaction is entered into, it will be on terms
no less favorable to the Company than those it could obtain through arms-length
negotiation.
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<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the securities of the Company is
qualified in its entirety by reference to the Certificate of Incorporation, the
Warrant Agreement (as defined below), the Bridge Notes and the Bridge Warrants,
forms of which have been filed as exhibits to the Registration Statement on Form
SB-2 of which this Prospectus forms a part.
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.001 per share, of which 6,024,269 shares are
outstanding as of the date hereof; and, 2,000,000 shares of preferred stock, par
value $.001 per share, of which no shares are outstanding as of the date hereof.
UNITS
Each Unit offered hereby consists of one share of Common Stock and one
Warrant entitling the holder to purchase one share of Common Stock. The shares
of Common Stock and the Warrants will be transferable only as part of a Unit
until the Separation Date.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, holders of
Common Stock are entitled to receive ratably, dividends when, as, and if
declared by the Board of Directors out of funds legally available therefor and,
upon the liquidation, dissolution, or winding up of the Company, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on any preferred stock. See
"Risk Factors--Absence of Dividends" and "Dividend Policy." Holders of Common
Stock have no preemptive rights and have no rights to convert their Common Stock
into any other securities. All of the outstanding shares of Common Stock are,
and all of the shares of Common Stock included in the Units and issuable upon
exercise of the Warrants will be, validly authorized and issued, fully paid, and
nonassessable.
PREFERRED STOCK
The preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion rights, redemption rights, and sinking fund
provisions. The issuance of any such preferred stock could adversely affect the
rights of the holders of Common Stock and, therefore, reduce the value of the
Common Stock. The ability of the Board of Directors to issue preferred stock
could discourage, delay, or prevent a takeover of the Company. See "Risk
Factors--Anti-Takeover Effects of Certain Provisions of Certificate of
Incorporation and Delaware Law."
WARRANTS
The Warrants will be issued pursuant to an agreement, dated as of the date
of this Prospectus (the "Warrant Agreement"), between the Company and American
Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). None of
the Warrants have been issued prior to the Offering.
The Warrants will not be detachable or separately transferable from the
shares of Common Stock included in the Units until two years from the date
hereof or (i) such earlier date as Barington may determine or (ii) 30 days after
the Company may determine at any time after one year from the date
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<PAGE>
hereof, provided that the Units have traded at 200% of the initial Unit offering
price for a period of 15 consecutive trading days ending within 15 days from the
date of determination (the "Separation Date"). The circumstances, under which
Barington or the Company may accelerate the Separation Date include market
conditions, the market price for the Units, and the Company's capital
requirements, among others. Neither Barington nor the Company currently
contemplates accelerating the Separation Date to a date earlier than two years
from the date hereof. Each Warrant will entitle the holder to purchase,
commencing on the Separation Date and at any time until the fifth anniversary of
the date of this Prospectus, one share of Common Stock at an exercise price
equal to 120% of the initial Unit offering price, subject to certain
adjustments. The Warrants may be exercised in whole or in part. Unless
exercised, the Warrants will automatically expire on the fifth anniversary of
the date of this Prospectus.
The Company may redeem the Warrants after the Separation Date, in whole but
not in part, at the option of the Company, upon not less than 15 days' notice,
at a price of $.05 per Warrant, provided the Current Market Price (as defined in
the Warrant Agreement) of the Common Stock has been at least 200% of the initial
Unit offering price for 15 consecutive trading days ending within 15 days of the
date of the notice of redemption. In the event the Company exercises its right
to redeem the Warrants, such Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such time, it will cease to be exercisable
and the holder thereof will be entitled only to the redemption price.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Commission and qualification with or approval from
various state securities agencies with respect to the shares or other securities
underlying the Warrants, or an opinion of counsel for the Company that there is
an effective exemption from registration. As long as the Warrants remain
outstanding and exercisable, the Company may be required to file a registration
statement with the Commission and have such registration statement declared
effective. There can be no assurance, however, that such registration statement
can be kept current. If a registration statement covering such shares of Common
Stock is not kept current, or if the shares underlying the Warrants are not
registered in the state in which a holder resides, the Warrants may not be
exercisable and may be deprived of any value. See "Underwriting" and "Risk
Factors--Federal and State Registration Requirements; Possible Inability to
Exercise Warrants; Possible Redemption of Warrants."
BRIDGE UNITS
The Bridge Units consist of the Bridge Notes and the Bridge Warrants. Each
Bridge Unit consists of a Bridge Note issued by the Company in the principal
amount of $100,000 and a Bridge Warrant to purchase up to 30,000 shares of
Common Stock at an exercise price equal to the lesser of $3.60 per share or 60%
of the initial Unit offering price. The Bridge Notes and the Bridge Warrants are
separately transferable, subject to certain restrictions upon transferability.
BRIDGE NOTES
The Bridge Notes bear interest at the rate of 10% per annum with interest to
accrue from the date of issuance and payable in four quarterly installments on
the first day of each February, May, August and November commencing on February
1, 1997 and at maturity. Principal of, and any accrued and unpaid interest on
the Bridge Notes will be due and payable in full on the earlier of (i) the
closing of the Offering, (ii) one year from the date on which the Bridge Notes
were issued, subject to extension as set forth below, and (iii) the date of the
closing of a sale (or the closing of the last of a series of sales) of
securities by the Company or any subsidiary or affiliate thereof (other than the
Bridge Notes and Bridge Warrants), the net proceeds of which, in the aggregate,
equal or exceed $650,000. The principal balance of the Bridge Notes, and accrued
interest thereon, will be repaid with the net proceeds of the Offering. See "Use
of Proceeds."
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<PAGE>
The Company has the right, at its option, to extend the maturity date of the
Bridge Notes for up to six months. In the event that the Company elects to
extend such maturity date then (i) the number of shares issuable upon the
exercise of each Bridge Warrant shall automatically increase by an additional 5%
for each month that the Bridge Notes continue to remain outstanding during such
extension period; and (ii) the exercise price per share of each Bridge Warrant
shall be reduced to the lesser of $3.50 per share or 50% of the initial Unit
offering price.
The Bridge Notes rank senior in right of payment to all Junior Debt of the
Company, which is defined as all existing and future indebtedness other than (i)
the indebtedness represented by the Bridge Notes; (ii) capital lease
obligations; and (iii) certain other indebtedness permitted by the Bridge Notes.
BRIDGE WARRANTS
The Bridge Warrants entitle the holders thereof to purchase, in the
aggregate, up to 195,000 shares of Common Stock at an exercise price equal to
the lesser of $3.60 per share or 60% of the initial Unit offering price, subject
to adjustment. The Bridge Warrants may be exercised at any time after issuance
and expire on October 28, 2001. The shares underlying the Bridge Warrants are
being registered concurrently with the Offering, and are subject to a two-year
lock-up with Barington who served as placement agent in connection with the
Bridge Financing.
The number of shares issuable upon exercise of the Bridge Warrants and the
exercise price thereof may be adjusted in the event of the occurrence of certain
events, including stock dividends, stock splits, combinations or
reclassifications involving or in respect of the Common Stock, or an extension
by the Company of the maturity date of the Bridge Notes. If the Company extends
the maturity date of the Bridge Notes for a period of six months, (i) the number
of shares issuable upon exercise of each Bridge Warrant shall automatically
increase by an additional 5% for each month that the Bridge Notes continue to
remain outstanding during such extension period, and (ii) the exercise price per
share shall be reduced to the lesser of $3.50 per share or 50% of the initial
Unit offering price.
REGISTRATION RIGHTS
In the event the Company proposes to register any of its securities under
the Securities Act, holders (including Barry Mindes) of approximately 5,129,825
shares of Common Stock are entitled to notice of such registration and to
include their shares of Common Stock in such registration, subject to marketing
and other limitations ("Piggyback Registration Rights"). Moreover, holders of
approximately 4,503,449 shares of Common Stock may be entitled, in addition to
Piggyback Registration Rights, (i) to require the Company at any time from and
after the earlier of (a) May 31, 1998 or (b) 180 days after the closing of the
Offering, to effect two demand registrations at its own expense upon the written
request from the holders of a majority of registered securities then
outstanding, and (ii) to require the Company, subject to certain limitations, to
file a Registration Statement on Form S-3 covering the resale of such shares, at
any time when the Company is entitled to use such form, provided that the
Company shall not be required to file a Registration Statement on Form S-3 if
the aggregate offering price (net of any voluntary discounts and commissions) of
the shares to be included therein (including shares held by other holders
entitled to registration) is less than $500,000. The rights referred to in the
immediately preceding sentence will expire on the third anniversary of
consummation of the Offering. Holders of all of the foregoing rights have agreed
not to exercise any of such rights without Barington's prior consent. The
holders of the Bridge Warrants are entitled to certain "piggyback" and demand
registration rights, as well.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The Company has appointed American Stock Transfer & Trust Company as
transfer agent and registrar for the Units, Common Stock and Warrants, and
warrant agent for the Warrants.
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DELAWARE ANTI-TAKEOVER LAW
The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions and limitations, prohibits a Delaware corporation
from engaging in any "business combination" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (for the purposes of determining the number of shares outstanding
under the DGCL, those shares owned (x) by persons who are directors and also
officers, and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, are excluded from the
calculation); or (iii) on or subsequent to such date, the business combination
is approved by the Board of Directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
For purposes of Section 203, "a business combination" includes (i) any
merger or consolidation involving the corporation and the interested
stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested stockholder; (iii)
subject to certain exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the effect
of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or (v) the receipt
by the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
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CERTAIN TAX CONSIDERATIONS
The following discussion sets forth what the Company believes are the
material tax consequences of a purchase of the Units. However, the Company has
not requested a ruling from the Internal Revenue Service or a tax opinion from
its counsel. PROSPECTIVE PURCHASERS OF THE UNITS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE CONSEQUENCES TO THEM OF THE PURCHASE AND HOLDING OF
SUCH SECURITIES, INCLUDING THE COMMON STOCK AND THE WARRANTS INCLUDED IN THE
UNITS, AND THE APPLICABILITY AND EFFECT OF FEDERAL, STATE AND OTHER TAX LAWS AND
REGULATIONS.
The sale of a Unit or a share of Common Stock or the sale of a Warrant will
result in the recognition of gain or loss to the holder in an amount equal to
the difference between the amount realized and his adjusted basis therein. In
order to determine adjusted basis, a holder must allocate the consideration paid
for each Unit between the underlying share of Common Stock and the Warrant in
accordance with their relative fair market values.
The sale of a share of Common Stock will result in a capital gain or loss,
provided the Common Stock is a capital asset in the hands of the holder. The
sale of a Warrant will likewise result in a capital gain or loss provided the
Warrant is a capital asset in the hands of the holder, and the Common Stock
underlying the Warrant would be a capital asset to the holder if acquired by
him. Such capital gain or loss will be long-term capital gain or loss if the
Common Stock or Warrant being sold has been held for more than one year by the
holder at the time of such sale or exchange.
Under Section 305 of the Internal Revenue Code of 1986, as amended (the
"Code"), certain actual or constructive distributions of stock to a stockholder,
including warrants to purchase stock, with respect to the stock or warrants held
by a stockholder may be taxable to a stockholder of the Company. Adjustments in
the exercise price of the Warrants, or the number of shares purchasable upon
exercise of the Warrants, in each case made pursuant to the antidilution
provisions of the Warrants, may result in a distribution which is taxable as a
dividend under the Code to the holders of Warrants.
No gain or loss will be recognized by a holder of a Warrant on his purchase
of Common Stock for cash upon the exercise of the Warrant. The adjusted basis of
the Common Stock so acquired would be equal to the adjusted basis of the Warrant
plus the exercise price. The holding period of the Common Stock acquired upon
the exercise of a Warrant will begin on the day after the date of exercise.
If a Warrant is not exercised and is allowed to expire, the Warrant is
deemed to have been sold or exchanged on the expiration date. Any loss to the
holder of a Warrant will be a capital loss if the Warrant was held as a capital
asset and if the Common Stock underlying the Warrant would have been a capital
asset in the Warrant holder's hands had such Warrant been exercised. The capital
loss will be a long-term capital loss if the Warrant has been held for more than
one year and a short-term capital loss if the Warrant has been held for one year
or less.
No gain or loss will be recognized by the Company upon the sale of the
Units, or the acquisition, exercise or expiration of any Warrants.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,524,269 shares of
Common Stock outstanding (7,749,269 shares of Common Stock outstanding if the
Over-Allotment Option is exercised in full). Of these shares, the 1,500,000
shares of Common Stock included in the Units offered hereby (1,725,000 shares if
the Over-Allotment Option is exercised in full) will be freely tradeable without
further registration under the Securities Act. Upon the Separation Date, the
1,500,000 shares of Common Stock issuable upon exercise of the Warrants included
in the Units (1,725,000, if the Over-Allotment Option is exercised in full)
will, when such Warrants are exercised, be eligible for immediate sale to the
public without restriction. With respect to the remainder of the outstanding
shares, all officers and directors and current stockholders of the Company have
agreed not to publicly sell, or otherwise dispose of any securities of the
Company for a period of 12 months from the date of this Prospectus without
Barington's prior written consent except under certain circumstances. See
"Underwriting."
All of the presently outstanding 6,024,269 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 and, if held for at least
two years, would be eligible for sale in the public market in reliance upon, and
in accordance with, the provisions of Rule 144 following the expiration of such
two-year period. In general, under Rule 144 as currently in effect, a person or
persons whose shares are aggregated, including a person who may be deemed to be
an "affiliate" of the Company as that term is defined under the Securities Act,
would be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person and who has beneficially owned shares of Common Stock for at least
three years may sell such shares without regard to the volume, manner of sale,
or notice requirements of Rule 144. Beginning 90 days after the date of this
Prospectus and subject to the 12 month lock-up restriction described above,
approximately 3,023,046 shares owned by Barry Mindes and Mindes Family Limited
Partnership will be available for sale in reliance upon Rule 144. Subject to
such 12-month restriction, substantially all of the remaining 3,001,223
Restricted Shares will become eligible for sale at various times from May 1997
through June 1998.
Pursuant to the Representatives' Options, the Representatives have the right
to purchase up to 150,000 Units during the period commencing on the date of the
closing of the Offering and terminating on the fifth anniversary of such date.
The Holders of the Representatives' Options have certain demand and "piggyback"
registration rights as to such options and the underlying shares of Common
Stock. Such options and any and all shares of Common Stock purchased upon the
exercise of the Representatives' Options may be freely tradeable, provided that
the Company satisfies certain securities registration and qualification
requirements in accordance with the terms of the Representatives' Options. See
"Underwriting."
The Company cannot predict the effect, if any, that sales of shares of
Common Stock pursuant to Rule 144 or otherwise, or the availability of such
shares for sale, will have on the market price prevailing from time to time.
Sales by the current stockholders of a substantial number of shares of Common
Stock in the public market could materially adversely affect prevailing market
prices for the Units, Common Stock and Warrants. The availability for sale of a
substantial number of shares of Common Stock acquired through the exercise of
the Representatives' Options, the Bridge Warrants or any options under the
Company's existing stock option plans could also materially adversely affect
prevailing market prices for the Units, Common Stock and Warrants. See "Risk
Factors--Future Sales of Restricted Securities; Registration Rights."
53
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement (the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part), to
purchase from the Company the respective number of Units set forth opposite
their names in the table below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters shall be obligated to purchase all of the Units if any are
purchased. The Underwriters have advised the Company that they do not intend to
confirm sales of the Units to any account over which they exercise any
discretionary authority.
<TABLE>
<CAPTION>
NUMBER OF UNITS
NAME TO BE PURCHASED
- --------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Barington Capital Group, L.P....................................................................... 1,050,000
GKN Securities Corp................................................................................ 450,000
---------------
Total........................................................................................ 1,500,000
---------------
---------------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Units offered hereby to the public at the offering price set forth
on the cover page of this Prospectus and that the Underwriters may allow to
certain dealers, who are members of the National Association of Securities
Dealers (the "NASD"), concessions of not in excess of $.30 per Unit, of which
not in excess of $.10 may be reallowed to other dealers who are members of the
NASD. After the commencement of the Offering, the public offering price, the
concessions and the reallowance may be changed.
The Company has granted an option to the Underwriters exercisable during the
45-day period after the effective date of this Prospectus, to purchase up to an
aggregate of 225,000 additional Units at the public offering price, less the
underwriting discounts and commissions. The Underwriters may exercise such
option only for the purpose of covering Over-Allotments made in connection with
the sale of the Units offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities in connection with the Registration Statement of which this
Prospectus forms a part, including liabilities under the Securities Act.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 3% of the aggregate offering price of the Units offered hereby
(including any Units purchased pursuant to the Over-Allotment Option), of which
$35,000 has been paid to date.
The Company has agreed to pay the Representatives a fee of 5% of the
aggregate exercise price of each Warrant exercised after the first anniversary
of the effective date of the Offering, if such exercise was solicited by the
Representatives in accordance with applicable NASD rules and regulations. The
Representatives shall not receive compensation as a result of any of the
following transactions: (1) the exercise of the Warrants where the market price
of the Common Stock is lower than the exercise price; (2) the exercise of
Warrants held in any discretionary account; (3) the exercise of Warrants where
disclosure of compensation arrangements has not been made in documents provided
to customers both as part of the original offering and at the time of exercise;
and (4) the exercise of Warrants in unsolicited transactions. The
Representatives shall only be entitled to such solicitation fee if the Warrant
holder indicates in writing that the exercise of such Warrant was solicited by
the Representatives. The Company has agreed not to solicit the exercise of any
Warrants other than through the Representatives unless the Representatives are
legally unable to solicit such exercise, in which event the Company may solicit
such exercise, either itself or with the assistance of a third party.
The Company has also agreed to sell to the Representatives, or their
respective designees, Representatives' Options to purchase 150,000 Units at a
price of $.001 per option. The Representatives' Options will
54
<PAGE>
be exercisable for a period of five years, commencing on the date of closing of
the Offering, at an initial per Unit exercise price equal to 160% of the initial
Unit offering price. The Warrants underlying the Representatives' Options are
identical in all respects to the Warrants to be issued to the public, except
that the exercise price of the Warrants is $11.88 (165% of the public Warrant
exercise price). The Representatives' Options cannot be transferred, assigned or
hypothecated for one year from the date of their issuance, except that they may
be assigned, in whole or in part, to any successor, officer or partner of the
Representatives or their respective partners or members of the underwriting
group. The Representatives' Options may be exercised as to all or a lesser
number of Units and will contain certain registration rights and anti-dilution
provisions providing for appropriate adjustment of the exercise price and number
of Units which may be purchased upon exercise, upon the occurrence of certain
events.
The holder of the Representatives' Options has the right, in lieu of payment
in cash of the exercise price, to surrender all or part of the Representatives'
Options in exchange for a number of Units equal to the value of the
Representatives' Options being surrendered (determined by subtracting the
aggregate exercise price of the Representatives' Options being surrendered from
the Current Market Price (as defined) of the Units issuable upon exercise of the
Representatives' Options being surrendered) divided by the Current Market Price
of one Unit.
The Company has agreed that it will, on any two occasions, register the
securities underlying the Representatives' Options, the first time at the
Company's expense. The Company has also agreed, during the seven year period
commencing on the date of the closing of the Offering, to register on a
"piggyback" basis, on an unlimited number of occasions, the securities
underlying the Representatives' Options whenever the Company files a
registration statement. Notwithstanding these registration rights, the Company
will not be required to register the securities underlying the Representatives'
Options if it delivers to the holders of the Representatives' Options an opinion
of counsel from counsel reasonably acceptable to such holders in form and
substance reasonably acceptable to such holders that such securities are freely
transferable without registration.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement and the Representatives' Option
Agreement, the forms of which have been filed as exhibits to the Registration
Statement on Form SB-2, of which this Prospectus forms a part.
Barington acted as placement agent in connection with the Bridge Financing.
In connection therewith, Barington received sales commissions of $65,000 in the
aggregate, was reimbursed a total of $30,000 for certain expenses (including
attorneys' fees) and was issued a total of 19,500 warrants which are identical
to the Bridge Warrants (the "Placement Agent's Warrants"). Barington has agreed
to relinquish the Placement Agent's Warrants upon the consummation of the
Offering.
The Company's directors, officers and the holders of all of the Company's
outstanding Common Stock have agreed with the Representatives not to sell,
contract to sell or otherwise dispose of any of the Company's securities held by
them for a period of 12 months following the date of this Prospectus without the
prior written consent of Barington, under certain circumstances. Barington has
no present intention to shorten such periods. See "Shares Eligible For Future
Sale."
Prior to the Offering, there has been no public market for the Units, Common
Stock or Warrants. Consequently, the public offering price of the Units, and the
exercise price of the Warrants, have been determined by arms-length negotiation
between the Company and the Representatives and do not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition, or other established criteria of value. Factors considered
in determining such prices included an assessment of the Company's future
prospects, the qualifications of the Company's management, and other relevant
factors.
55
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby and certain other legal
matters will be passed upon for the Company by Rubin Baum Levin Constant &
Friedman, New York, New York. Richard M. Hoffman, who is of counsel to Rubin
Baum Levin Constant & Friedman, owns 24,184 shares and has options to purchase
39,299 shares of Common Stock. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Squadron, Ellenoff, Plesent
and Sheinfeld, LLP, New York, New York.
EXPERTS
The financial statements of the Company as of September 30, 1996, and for
the year ended September 30, 1996 and for the periods from inception through
September 30, 1995 and September 30, 1996 have been included herein and in the
Registration Statement of which this Prospectus forms a part in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington D.C. 20549, a registration
statement on Form SB-2 (the "Registration Statement") under the Securities Act
with respect to the securities offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
thereto, as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and to the
exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document which has been filed as an exhibit to
the Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits thereto may be inspected without charge
at the offices of the Commission and copies of all or any part thereof may be
obtained from the Commission's Public Reference Section at 450 Fifth Street,
N.W., Washington D.C. 20549 or at certain of the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment
of the fees prescribed by the Commission. The Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, following approval of the
Common Stock for quotation on NASDAQ, reports and other information concerning
the Company may be inspected at the offices of the NASD, 1735 K Street, N.W,
Washington D.C. 20006.
56
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
INDEPENDENT AUDITORS' REPORT.............................................................................. F-2
FINANCIAL STATEMENTS
Balance Sheet as of September 30, 1996.................................................................. F-3
Statements of Operations for the year ended September 30, 1996 and the period from
May 22, 1995 (date of inception) to September 30, 1995 and the period from
May 22, 1995 (date of inception) to September 30, 1996................................................ F-4
Statements of Stockholders' Equity for the period from
May 22, 1995 (date of inception) to September 30, 1996................................................ F-5
Statements of Cash Flows for the year ended September 30, 1996 and the period from
May 22, 1995 (date of inception) to September 30, 1995 and the period from
May 22, 1995 (date of inception) to September 30, 1996................................................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
International Sports Wagering Inc.:
We have audited the accompanying balance sheet of International Sports
Wagering Inc. (a development stage company) as of September 30, 1996, and the
related statements of operations, stockholders' equity and cash flows for the
year ended September 30, 1996, for the period from May 22, 1995 (date of
inception) to September 30, 1995 and for the period from May 22, 1995 (date of
inception) to September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Sports
Wagering Inc. (a development stage company) as of September 30, 1996, and the
results of its operations and its cash flows for the year then ended, for the
period from May 22, 1995 (date of inception) to September 30, 1995 and for the
period from May 22, 1995 (date of inception) to September 30, 1996, in
conformity with generally accepted accounting principles.
Short Hills, New Jersey KPMG Peat Marwick LLP
October 28, 1996
F-2
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 537,546
Prepaid expenses and other current assets....... 8,885
-------------
Total current assets........................ 546,431
-------------
Property and equipment, net....................... 304,466
Other assets...................................... 4,258
Deferred financing costs.......................... 46,406
-------------
Total assets................................ $ 901,561
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 42,382
Accrued expenses................................ 143,265
-------------
Total current liabilities................... 185,647
-------------
Stockholders' equity:
Preferred stock, par value $.001 per share;
2,000,000 shares authorized, none issued or
outstanding................................... --
Common stock, par value $.001 per share;
20,000,000 shares authorized, 6,024,294 shares
issued and outstanding........................ 6,024
Additional paid-in capital...................... 1,687,089
Deficit accumulated during the development
stage......................................... (977,199)
-------------
Total stockholders' equity.................. 715,914
Commitments and contingencies
-------------
Total liabilities and stockholders'
equity.................................... $ 901,561
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 AND THE PERIOD
FROM MAY 22, 1995 (DATE OF INCEPTION) TO
SEPTEMBER 30, 1995 AND THE PERIOD FROM MAY 22, 1995
(DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MAY 22, 1995 MAY 22, 1995
(DATE OF (DATE OF
YEAR ENDED INCEPTION) TO INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Costs and expense:
Research and development expense.................................. $ 702,952 88,343 791,295
General and administrative expense................................ 196,256 29,651 225,907
------------- ------------- -------------
Operating loss................................................ (899,208) (117,994) (1,017,202)
Interest income..................................................... 31,020 8,983 40,003
------------- ------------- -------------
Net loss...................................................... $ (868,188) (109,011) (977,199)
------------- ------------- -------------
------------- ------------- -------------
Net loss per share.................................................. $ (.13) (.02) (.15)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares and equivalents outstanding.......... 6,477,410 6,477,410 6,477,410
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 22, 1995
(DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
--------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of shares of common stock upon incorporation
(May 22, 1995)..................................... 907 $ 1 2 -- 3
Issuance of common stock upon merger................. 3,023,048 3,023 (2,023) -- 1,000
Issuance of common stock............................. 1,767,567 1,768 813,843 -- 815,611
Net loss............................................. -- -- -- (109,011) (109,011)
---------- --------- ---------- ----------- ----------
Balance, September 30, 1995.......................... 4,791,522 4,792 811,822 (109,011) 707,603
Issuance of common stock............................. 60,461 60 42,440 -- 42,500
Issuance of common stock through exercise of
warrants........................................... 1,164,753 1,165 813,021 -- 814,186
Issuance of common stock through exercise of
options............................................ 7,558 7 5,306 -- 5,313
Issuance of options to consultants................... -- -- 14,500 -- 14,500
Net loss............................................. -- -- -- (868,188) (868,188)
---------- --------- ---------- ----------- ----------
Balance, September 30, 1996.......................... 6,024,294 $ 6,024 1,687,089 (977,199) 715,914
---------- --------- ---------- ----------- ----------
---------- --------- ---------- ----------- ----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1996 AND THE PERIOD
FROM MAY 22, 1995 (DATE OF INCEPTION) TO
SEPTEMBER 30, 1995 AND THE PERIOD FROM MAY 22, 1995
(DATE OF INCEPTION) TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MAY 22, 1995 MAY 22, 1995
(DATE OF (DATE OF
YEAR ENDED INCEPTION) TO INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (868,188) (109,011) (977,199)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization................................... 69,443 2,460 71,903
Issuance of options to consultants.............................. 14,500 -- 14,500
Changes in assets and liabilities:
Prepaid expenses and other current assets..................... 978 (9,863) (8,885)
Other assets.................................................. -- (5,305) (5,305)
Accounts payable.............................................. 13,974 28,408 42,382
Accrued expenses.............................................. 129,900 13,365 143,265
------------- ------------- -------------
Net cash used in operating activities........................... (639,393) (79,946) (719,339)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property and equipment................................ (333,464) (41,858) (375,322)
------------- ------------- -------------
Net cash used in investing activities........................... (333,464) (41,858) (375,322)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 861,999 816,614 1,678,613
Deferred financing costs.......................................... (46,406) -- (46,406)
------------- ------------- -------------
Net cash provided by financing activities....................... 815,593 816,614 1,632,207
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................ (157,264) 694,810 537,546
Cash and cash equivalents, beginning of period...................... 694,810 -- --
------------- ------------- -------------
Cash and cash equivalents, end of period............................ $ 537,546 694,810 537,546
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) DESCRIPTION OF BUSINESS
International Sports Wagering Inc. (the Company) was incorporated in the
State of Delaware on May 22, 1995 to develop and market an interactive,
client/server based computer system for purposes of wagering on sporting events.
The Company is the successor by merger to Systems Enterprises, Inc. (SEI), an
S-corporation incorporated in the State of New Jersey on December 17, 1992, 100%
owned by the Company's founding shareholder, that had nominal operating
activities during its existence. Subsequent to the merger, the Company
reimbursed the founding shareholder for certain legal fees incurred by SEI that
were specific to the Company's planned business activities.
The Company is a development stage company which has not commenced
generating revenue from its planned primary business activities. Since the
Company's inception, it has been primarily engaged in product research and
development, market testing its intended product, recruitment of key personnel,
and raising capital. As a consequence, there are no operating revenues and there
have been no product sales from inception of the Company through September 30,
1996. The Company plans to finance its operations through private placements of
debt and equity securities and a planned initial public offering (the "IPO")
(note 8). There can be no assurance that the Company will be able to manufacture
or market its product in the future, that future revenues will be significant,
that any sales will be profitable, or that the Company will have sufficient
funds available to manufacture or market its product. Further, the Company's
future operations are dependent on the success of the Company's
commercialization efforts, market acceptance, and regulatory approval of its
product.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of funds held on deposit with banking
institutions with original maturities of less than 90 days.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets, generally three to seven years, using the straight-line method.
Expenditures for repairs and maintenance are charged to expense as incurred.
DEFERRED FINANCING COSTS:
Costs paid to the Company's attorneys associated with the Company's private
placement and IPO (note 8) are deferred and will be recorded as a reduction of
the proceeds received upon consummation of the private placement and IPO.
RESEARCH AND DEVELOPMENT:
All research and development, patent application and patent maintenance
costs are charged to expense as incurred.
F-7
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. Cash and cash equivalents and accounts payable as
reflected in the financial statements approximate fair value because of the
short-term maturity of these instruments.
INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred income taxes are
measured using the enacted tax rates and laws that are anticipated to be in
effect when the differences are expected to reverse.
STOCK SPLIT:
On October 24, 1996, the Company effected a stock split related to its
common stock, whereby each common share outstanding was converted by a factor of
3.0230479, thus increasing the number of common shares outstanding from a
pre-split amount of 1,992,788 at September 30, 1996 to 6,024,294. The Board of
Directors voted to increase the total number of shares of common stock
authorized at September 30, 1996 to 20,000,000 in connection with this stock
split. All share and per share information contained in the accompanying
financial statements has been retroactively adjusted to reflect the stock split.
LOSS PER SHARE:
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
Topic 4:D, stock issued and stock options and warrants granted during the
12-month period preceding the date of the planned IPO have been included in the
calculation of weighted average common shares outstanding for the periods prior
to the IPO, even when the impact of such incremental shares is antidilutive. The
computation of weighted average common shares and equivalents outstanding as
follows:
<TABLE>
<S> <C>
Weighted average common shares outstanding, exclusive of issuances within 12
months prior to the IPO....................................................... 4,791,522
Shares, options and warrants issued in periods prior to and within 12 months
prior to the IPO assumed to be outstanding for the entire period.............. 1,685,888
-----------
Weighted average common shares and equivalents outstanding...................... 6,477,410
-----------
-----------
</TABLE>
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation", which must be
adopted by the Company in fiscal 1997. The Company has elected not to implement
the fair value based accounting method for employee stock options, but has
elected to disclose, commencing in fiscal 1997, the pro-forma net income and
earnings per share as if such method has been used to account for stock-based
compensation cost as described in the Statement.
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which must also be adopted by the Company in fiscal 1997. The effect of adopting
this standard will be insignificant.
(3) PREFERRED AND COMMON STOCK
In May 1995, the Company's Chairman of the Board and principal shareholder
established the Company by purchasing shares and exchanging the shares of SEI
for additional shares of Company stock. Also in May 1995, the Company issued
shares to certain other founding shareholders.
In June and July 1995, the Company sold a total of 399,997 units, each
consisting of 3.0230479 shares of common stock and one warrant to purchase
3.0230479 additional shares of common stock for an aggregate of approximately
$850,000 or approximately $.70 per unit to an investor group. Such amounts were
reduced by certain costs of issuance. Between February and April 1996 warrants
to purchase an aggregate of 1,164,753 shares were exercised and proceeds of
approximately $814,000 ($.70 per share) were received by the Company. All
unexercised warrants issued in June and July 1995 expired by their own terms.
In June 1996, the Company sold 60,461 shares to seven individuals including
employees, directors and investors resulting in proceeds of $42,500 ($.70 per
share) to the Company.
In May 1995, the Board of Directors adopted and the stockholders approved
the 1995 Stock Option Plan (the 1995 Plan). The 1995 Plan provides for the grant
of incentive stock options (ISOs) and nonqualified stock options (NQSOs). The
total number of shares of common stock with respect to which options may be
granted under the 1995 Plan is 649,955 of which all have been granted. ISOs and
NQSOs may be granted to individuals, who, at the time of grant, are directors,
officers, employees or consultants of the Company. Additionally, NQSOs may be
granted to directors, agents and consultants of the Company, whether or not the
individual is an employee of the Company. The 1995 Plan provides that the
administrator must establish an exercise price for ISOs that is no less than the
fair market value per share of the common stock at the date of grant. The
exercise price of NQSOs shall be determined by the Board of Directors. Options
granted under the 1995 Plan may not be exercisable for terms in excess of ten
years from the date of grant, with vesting periods varying for option grants.
F-9
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(3) PREFERRED AND COMMON STOCK (CONTINUED)
Activity related to the Plan is as follows:
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Outstanding, May 22, 1995............................................................... --
Granted ($.70 per share)............................................................ 75,576
Exercised........................................................................... --
Outstanding, September 30, 1995......................................................... 75,576
Granted ($.70 per share)............................................................ 574,379
Exercised ($.70 per share).......................................................... (7,558)
----------
Outstanding, September 30, 1996 (exercisable 68,774 shares)............................. 642,397
----------
----------
</TABLE>
During fiscal 1996, the Company granted options to purchase common stock to
consultants for services. The estimated fair value of such options of $14,500
has been recorded as expense and credited to capital.
In October 1996, the Board of Directors adopted and the stockholders
approved the 1996 Stock Option Plan (the 1996 Plan). The 1996 Plan is
substantially similar to the 1995 Plan, except that there are 825,000 shares of
Common Stock authorized and available for issuance pursuant to options which may
be granted thereunder. The 1996 Plan is administered by the Stock Option
Committee. No options have been granted under the 1996 Plan.
The designations, rights, and preferences of the preferred stock are to be
determined by the Board of Directors at the time of issuance.
See note 2 with respect to the October 1996 stock split effected by the
Company.
See note 8 with respect to the Company's October 1996 private placement and
planned initial public offering.
(4) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1996 consist of the following:
<TABLE>
<S> <C>
Furniture and fixtures............................................ $ 5,133
Computer equipment................................................ 370,189
---------
375,322
Less accumulated depreciation..................................... (70,856)
---------
$ 304,466
---------
---------
</TABLE>
F-10
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(5) ACCRUED EXPENSES
Accrued expenses at September 30, 1996 consist of the following:
<TABLE>
<S> <C>
Professional fees................................................. $ 60,749
Payroll and related costs......................................... 82,116
Other............................................................. 400
---------
$ 143,265
---------
---------
</TABLE>
Included in the accrued professional fees is $58,610 due to the Company's
attorney who is also a stockholder of the Company. The Company recognized
$19,339 and $8,212 in expense related to this stockholder in 1996 and 1995,
respectively.
(6) COMMITMENTS
LEASES:
The Company leases office facilities and equipment under operating leases.
Minimum rental commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
---------------
<S> <C>
1997............................................................................. $ 20,190
1998............................................................................ 21,462
1999............................................................................ 15,597
2000............................................................................ 12,420
2001............................................................................ --
---------
$ 69,669
---------
---------
</TABLE>
Rent expense under operating leases during 1996 and 1995 was $19,342 and
$4,861, respectively.
EMPLOYMENT AGREEMENTS:
The Company entered into employment agreements with two executive employees
of the Company expiring in June 1998 which provide for an aggregate minimum
compensation of $223,000 and $158,000 in fiscal 1997 and fiscal 1998,
respectively. Compensation expense recognized under these agreements for the
period from May 22, 1995 (date of inception) to September 30, 1995 and for the
year ended September 30, 1996 was $15,000 and $110,000, respectively. The
agreements also provide for severance payments upon certain events, as defined.
F-11
<PAGE>
INTERNATIONAL SPORTS WAGERING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
(7) INCOME TAXES
Income tax benefit for the year ended September 30, 1996 and the period from
May 22, 1995 (date of inception) to September 30, 1995 differed from the amounts
computed by applying the U.S. Federal income tax rate of 34% to pretax loss as a
result of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Computed tax benefit at 34%........................................... $ (295,184) (37,064)
Increase in valuation allowance for Federal deferred tax assets....... 295,184 37,064
----------- ---------
Income tax expense.................................................... $ -- --
----------- ---------
----------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1996 are presented below:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Deferred tax assets:
Federal and state net operating loss carryforward............................... $ 348,798
Book vs. tax basis accumulated depreciation..................................... 10,882
Book vs. tax basis patent amortization.......................................... 27,875
Book vs. tax basis software amortization........................................ 2,739
----------
Total gross deferred tax assets........................................... 390,294
Less valuation allowance........................................................ (390,294)
----------
Net deferred tax assets................................................... $ --
----------
----------
</TABLE>
As of September 30, 1996, the Company had a net operating loss carryforward
of approximately $870,000 for Federal and state income tax reporting purposes
available to offset future taxable income through the year 2011. The Company has
provided a valuation allowance of $390,294 and $43,539 at September 30, 1996 and
1995, respectively, against its deferred tax assets since it is more likely than
not that the Company will not realize such assets due to the Company's
development stage nature of operations and the pre-tax loss since inception.
(8) PRIVATE PLACEMENT AND PLANNED INITIAL PUBLIC OFFERING
On October 28, 1996, the Company raised approximately $550,000, net of
expenses, from the sale of 6 1/2 units in a private placement for $100,000 per
unit, each unit consisting of a 10% senior promissory note in the principal
amount of $100,000 and warrants to purchase 30,000 shares of the Company's
common stock at an exercise price equal to the lesser of $3.60 per share or 60%
of the IPO price per share in its planned IPO. The senior promissory notes are
due on the earlier of the consummation of the Company's planned IPO or October
28, 1997 subject to extension for up to six additional months at the option of
the Company. In September 1996, the Company entered into a letter of intent with
an underwriter to offer 1.5 million shares of common stock to the public.
Subsequently, the parties agreed to offer 1.5 million units in lieu of the 1.5
million shares, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock. There can be no
assurance that the Company will be able to successfully complete its IPO.
F-12
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING MADE
HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAD BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH
INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 9
Use of Proceeds................................. 17
Dividend Policy................................. 18
Dilution........................................ 19
Capitalization.................................. 20
Plan of Operation............................... 21
Business........................................ 23
Management...................................... 38
Principal Stockholders.......................... 46
Certain Transactions............................ 47
Description of Securities....................... 48
Certain Tax Considerations...................... 52
Shares Eligible for Future Sale................. 53
Underwriting.................................... 54
Legal Matters................................... 56
Experts......................................... 56
Available Information........................... 56
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL JANUARY 5, 1997 (25 DAYS FROM THE DATE HEREOF) ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,500,000 UNITS
INTERNATIONAL SPORTS WAGERING INC.
---------------------
PROSPECTUS
---------------------
BARINGTON CAPITAL
GROUP, L.P.
GKN SECURITIES
DECEMBER 11, 1996
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