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As filed with the Securities and Exchange Commission on January 28, 1997
REGISTRATION NO. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________________________
IRATA, INC.
(Name of Small Business Issuer in its charter)
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<S> <C> <C>
TEXAS 7993 76-0366015
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
________________________________
8554 KATY FREEWAY, SUITE 100
HOUSTON, TEXAS 77024
(713) 467-4300
(Address and telephone number of principal executive offices)
________________________________
8554 KATY FREEWAY, SUITE 100
HOUSTON, TEXAS 77024
(Address of principal place of business or intended principal place of business)
________________________________
LANCE P. WIMMER, CHAIRMAN OF THE BOARD AND PRESIDENT
IRATA, INC.
8554 KATY FREEWAY, SUITE 100
HOUSTON, TEXAS 77024
(713) 467-4300
(Name, address and telephone number of agent for service)
________________________________
with copies to:
ANDREW J. CLARK, III
1000 LOUISIANA, SUITE 3640
HOUSTON, TEXAS 77002
(713) 652-6630
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT, AS DETERMINED BY THE SELLING
SHAREHOLDERS NAMED HEREIN.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]....................
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]....................
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
[X] If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the foregoing box.
CALCULATION OF REGISTRATION FEE
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<CAPTION>
- --------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED BE MAXIMUM MAXIMUM REGISTRATION
REGISTERED OFFERING AGGREGATE FEE
PRICE OFFERING
PER PRICE(1)
SHARE(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.10 3,630,000 $0.875 $3,176,250 $ 962.50
par value shares
- --------------------------------------------------------------------------------
Class A Common Stock, $.10 486,750 $0.875 $ 425,906 $ 129.06
par value(2) shares
- --------------------------------------------------------------------------------
Class A Common Stock, $.10 3,630,000 $ 1.00 $3,630,000 $1,100.00
par value(3) shares
- --------------------------------------------------------------------------------
Class A Common Stock, $.10 486,750 $ 1.00 $ 486,750 $ 147.50
par value(4) shares
- --------------------------------------------------------------------------------
TOTAL $7,718,906 $2,339.06
- --------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 of the Securities Act of 1933.
(2) Issuable upon exercise of unit purchase options at $.50 per share which is
less than the current market price.
(3) Issuable upon exercise of the common stock purchase warrants at $1.00 per
share.
(4) Issuable upon exercise of the unit purchase option warrants at $1.00 per
share.
Pursuant to Rule 416, there are also registered such additional common stock
shares as may become issuable pursuant to the anti-dilution provisions of the
common stock purchase warrants and the Unit Purchase Options.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
IRATA, INC.
CROSS REFERENCE SHEET
FORM SB-2 ITEM
NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------ ----------------------
PART I INFORMATION REQUIRED IN PROSPECTUS
1. Front of Registration Statement Front of Registration Statement
and Outside Front Cover Page of and Outside Front Cover Page
Prospectus
2. Inside Front and Outside Inside Front and Outside Back
Back Cover Pages of Prospectus Cover Pages.
3. Summary Information and Prospectus Summary, Risk Factors,
Risk Factors Capitalization and Business
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Principal and Selling
Shareholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal and Selling
Beneficial Owners and Management. Shareholders
12. Description of Securities Description of Securities
13. Interest of Named Legal Matters, Experts, Executive
Experts and Counsel Compensation-Certain
Relationships and Related
Transactions
14. Disclosure of Commission Description of Securities
Position on Indemnification for
Securities Act Liabilities
15. Organization Within Last Business
Five Years
16. Description of Business Business
17. Management's Discussion and Management's Discussion and
Analysis or Plan of Operations Analysis of Financial Condition
and Results of Operations
18. Description of Poperty Business
19. Certain Relationships and Executive Compensation
Related Transactions
20. Market for Common Equity Description of Securities
and Related Stockholder Matters
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements Experts
With Accountants on Accounting
and Financial Disclosure
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
24. Indemnification of Directors and Officers
25. Other Expenses of Issuance and Distribution
26. Recent Sales of Unregistered Securities
27. Exhibits
28. Undertakings
SIGNATURES
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Subject to completion, dated January 28, 1997
PROSPECTUS
IRATA, INC.
8,233,500 SHARES OF CLASS A COMMON STOCK ($.10 PAR VALUE)
This Prospectus relates to the offering from time to time of up to
8,233,500 shares (the "Shares") of Class A Common Stock, par value $.10 per
share (the "Class A Common Stock") of Irata, Inc. (the "Company") by the holders
thereof (the "Selling Shareholders") consisting of (1) an aggregate of 3,630,000
shares of Class A Common Stock owned directly by the Selling Shareholders, (2)
an aggregate of 486,750 shares of Class A Common Stock which may be issued to
certain Selling Shareholders upon the exercise of certain Unit Purchase Options,
(3) an aggregate of 3,630,000 shares of Class A Common Stock which may be issued
to the Selling Shareholders upon the exercise of certain Common Stock Purchase
Warrants (the "Private Placement Warrants") owned by the Selling Shareholders
and (4) an aggregate of 486,750 shares of Class A Common Stock which may be
issued to certain Selling Shareholders upon the exercise of certain Special
Private Placement Warrants which may be issued to such persons upon exercise of
the Unit Purchase Options. See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of the Shares by the Selling
Shareholders. See "Use of Proceeds." The Company is paying the expense of
registration of the Shares.
It is anticipated that sales of the Shares will be made in one of four
ways: (i) a block trade in which the broker or dealer so engaged will attempt to
sell the Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (ii) a purchase by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (iii) an ordinary brokerage transaction; or (iv) a transaction
in which the broker solicits purchasers. The period of distribution of the
Shares may occur over an extended period of time. See "Plan of Distribution."
The Company's Class A Common Stock is traded on the Boston Stock Exchange
and the Nasdaq SmallCap Market under the symbol "IRATA". On January 24, 1997 the
closing price of the Class A Common Stock on the Nasdaq SmallCap System was
$ .875. See "Description of Securities-Market for Common Equity and Related
Stockholder Matters."
THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January , 1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in the Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, the information in this
Prospectus gives retroactive effect to reverse stock splits effected in October
and December 1993 and assumes that none of the warrants issued in the Private
Placement or any other warrants or options of the Company as are discussed
herein are exercised.
THE COMPANY
Irata, Inc. (the "Company") has developed and operates a computerized
version of the traditional self-service photo booth. The Company's photo booth
is marketed under the name Video Foto. Video Foto booths combine traditional
photo options with a variety of souvenir, novelty, and amusement options,
utilizing computer imaging technology, a laser printing device, and other
computer hardware and software. Booths provide customers a variety of black and
white photo product options, including traditional prints ranging in size up to
8" x 10", and novelty items such as "wanted" posters, newspaper front pages,
photo greeting cards, and photo calendars.
The Company's strategy is to grow the Company by placing on location a
steadily increasing number of additional Video Foto booths. The Company is also
attempting to maximize average revenue per booth by placing them in locations
that meet the Company's criteria. At September 30, 1996, the Company had 699
Video Foto booths in operation. Booths are generally placed on a revenue-sharing
basis, with the Company retaining responsibility for operational, service, and
product costs. The Company now intends to begin producing and operating color
video photo booths. The Company's continued growth and capacity for production
and operation of photo booths will depend on its ability to obtain additional
financing, through operations or outside funding. There can be no assurance that
additional financing will be available.
The Company was incorporated under the laws of the State of Texas on March
22, 1992. The principal office of the Company is located at 8554 Katy Freeway,
Suite 100, Houston, Texas 77024 and its telephone number at that office is (713)
467-4300.
RECENT DEVELOPMENTS
In July 1996, the Company began the final phase of its color Video Foto
booth development project, a next generation product design. This development
effort included booth size and shape configuration, hardware component
selection, and software systems design. Out of this effort, the Company
successfully completed its first prototype color photo booth and displayed it at
the International Arcade & Amusement Parks Association annual convention in
November 1996. Initial field testing of ten booths is scheduled to begin during
the quarter ending March 31, 1997 with market roll out thereafter. See
"Business-Color Video Foto Booth."
On January 8, 1997, the Company completed a private placement of 3,245,000
shares of Class A Common Stock and 3,245,000 Private Placement Warrants. Net
proceeds to the Company are approximately $1,275,000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
2
<PAGE>
THE OFFERING
Securities Offered by the 3,630,000 shares of Class A Common Stock;
Selling Shareholders 3,630,000 shares of Class A Common Stock
issuable upon exercise of the Private
Placement Warrants; 486,750 shares of
Class A Common Stock which may be issued
upon the exercise of certain Unit Purchase
Options; an aggregate of 486,750 shares of
Class A Common Stock which may be issued
upon the exercise of certain Special
Private Placement Warrants issuable upon
exercise of the Unit Purchase Options.
See "Principal and Selling Shareholders"
and "Description of Securities."
Number of Shares Capital Stock
Outstanding:
Class A Common Stock ........ 6,400,136/1/
Class B Common Stock ........ 1,500,000/2/
Use of Proceeds The Company will receive none of the
proceeds from the sale of the Shares.
Any proceeds received by the Company
upon exercise of the Private Placement
Warrants, the Unit Purchase Options and
the Special Private Placement Warrants
will be used for working capital and
general corporate purposes. See "Use of
Proceeds."
Nasdaq Symbol Class A Common Stock-IRATA
__________
(1) Excludes shares issuable upon exercise of options and warrants described in
footnote (2) to the Capitalization table.
(2) The Class B Common Stock is non-voting and does not participate with the
Class A Common Stock in dividends and distributions until the Company has
achieved $1,000,000 in earned surplus, after which it is limited in the amount
of dividends and distributions it may receive to an amount that cannot exceed
$1,000,000 in the aggregate. See "Description of Securities."
RISK FACTORS
THE SHARES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION
PRESENTED UNDER THE CAPTION "RISK FACTORS" IN THIS PROSPECTUS, INCLUDING RISKS
RELATED TO THE COMPANY'S LIMITED OPERATING HISTORY AND LOSSES TO DATE, AND
POSSIBLE NEED FOR ADDITIONAL FINANCING, AMONG OTHERS.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996 SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------- ------------------- -------------------
1995 1996
---- ----
<S> <C> <C> <C> <C>
Statement of Operations Date:
Revenue $5,520,452 $ 7,451,098 $ 2,118,558 $ 1,827,651
Net loss $ (595,800) $(2,114,557) $ (127,649) $ (365,125)
Net loss per share $(0.24) $(0.83) $ (0.05) $ (0.14)
Weighted average number of common or
equivalent shares outstanding 2,534,711 2,545,409 2,542,611 2,550,072
JUNE 30, 1996 SEPTEMBER 30, 1996
------------- ------------------
Selected Balance Sheet Data:
Working Capital (Deficit) $(3,496,537) $(1,345,588)
Property and Equipment, net $ 5,405,787 5,089,608
Total Assets $ 6,865,045 $ 6,343,443
Stockholders' Equity $ 2,429,435 $ 2,074,310
</TABLE>
4
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. THEREFORE, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS IN
EVALUATING THE COMPANY AND ITS BUSINESS.
LIMITED OPERATING HISTORY. The Company began operations in June 1992 and has
incurred annual losses to date. The Company's Product is a relatively new
concept and, as is typical in the case of a new product or concept, the ultimate
level of demand for and market acceptance of the Company's product is uncertain.
The Company's operations are subject to many of the risks inherent in the
establishment of a new business enterprise. The likelihood of success of the
Company must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. See "Business-Formation History."
CONTINUING LOSSES. For the period from inception through June 30, 1996 the
Company incurred losses of $(4,335,563). For the three month period ended
September 30, 1996 the Company incurred losses of $(365,125), and losses are
continuing. At September 30, 1996 the Company had an accumulated deficit of
$(4,700,688). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements."
AUDITORS REPORT CONTAINING GOING CONCERN QUALIFICATION. The reports of the
Company's independent auditors for the fiscal years ended June 30, 1995 and June
30, 1996 contain an explanatory paragraph as to the Company's ability to
continue as a going concern. Among the factors cited by the auditors as raising
substantial doubt as to the Company's ability to continue as a going concern are
that the Company has incurred net losses, negative cash flows from operations
and negative working capital. See "Report of Independent Auditors in the
Financial Statements" and "Experts."
POSSIBLE REQUIREMENT FOR ADDITIONAL FINANCING TO MEET CAPITAL NEEDS; NO
ASSURANCE OF AVAILABLE FINANCING. The Company's capital requirements have been
and will continue to be significant as the Company intends to build and install
up to 100 booths within the next 12 months. The Company anticipates using the
proceeds of a recently completed private placement and from additional
borrowings to satisfy its contemplated cash requirements for the next 12 month
period. In the event that the Company's plans change, its assumptions change or
prove to be inaccurate or if the proceeds of the aforementioned private
placement otherwise prove to be insufficient to fund operations (due to
unanticipated expenses or difficulties or otherwise), the Company could be
required to seek additional financing sooner than currently anticipated or may
be required to curtail its activities. Except for funds available from its
senior lender to construct new booths, the Company has no current arrangements
with respect to, or sources of, additional financing and there can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all. Any additional financing may involve dilution to
the interests of the Company's then existing shareholders. See "Business."
ABILITY TO MAINTAIN AND MANAGE CONTINUED RAPID GROWTH. The Company is pursuing
a rapid growth strategy that will involve the construction of additional booths
and the relocation of up to 30 existing booths per month. Accomplishing the
continued growth planned for the Company will depend upon a number a factors,
including the Company's ability to locate and obtain acceptable sites, to
contract with and train competent service contractors and to integrate new
technologies into its existing equipment. The Company's continued growth may be
constrained by inadequate cash flow. There can be no assurance that the Company
will be able to relocate low performing booths, open additional favorable
locations in the future, or that the Company's strategy of increasing revenues
at existing locations will be successful. See "Business", "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
"Financial Statements."
5
<PAGE>
REVENUES DEPENDENT UPON LOCATION OF BOOTHS; POSSIBLE FLUCTUATION IN OPERATING
RESULTS DUE TO SEASONALITY. As is typical in the vending industry, the
Company's revenues are generated from free standing, non-attended units. Much of
the Company's success will depend upon the traffic patterns of the individual
locations and the ability to attract site locations in sufficient proximity to
each other so as to facilitate efficient service routes. To date, the Company
has experienced certain lower performing units which it has sought and is
seeking to relocate. There can be no assurance that the Company will continue to
be successful in placing its products in locations that will have high levels of
customer use or that the Company will place booths in locations that will enable
it to organize efficient routes. Certain locations may be subject to seasonal
customer traffic patterns and there can be no assurance the the Company will not
experience significant fluctuations in operating results in the future. See
"Business-Geographic and Demographic Location of Booths", "Business-
Seasonality", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Financial Statements."
LACK OF LONG-TERM CONTRACTS FOR LOCATIONS. The agreements pursuant to which the
Company's products are located at sites are generally terminable by the site
owner for any reason upon short-term notice. A significant number of contract
terminations, in the absence of the Company being able to relocate booths, would
have a material adverse affect the Company's business. See "Business."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends largely upon the
continuing contributions of its executive officers, particularly Lance P.
Wimmer, the Company's Chairman, President and Chief Executive Officer, and
Robert A. Searles, Jr., Executive Vice President and John Stuecheli, Chief
Financial Officer. Although the Company has entered into employment agreements
with Messrs. Wimmer, Searles, and Stuecheli, the loss of the services of these
executives or certain other key personnel, could materially adversely affect the
business of the Company. See "Management."
LACK OF PATENT PROTECTION FOR THE COMPANY'S TECHNOLOGY; POSSIBLE TECHNOLOGICAL
OBSOLESCENCE. The Company's business is subject to technological developments
and new product introductions. The Company's Video Foto booth products could be
rendered obsolete by technological advances by one or more of the Company's
present competitors or by future entrants into the industry. While the Company
considers the technology embodied in its Video Foto booths to be proprietary,
none of such know-how has been protected by patent or copyright. Therefore
there can be no assurance that others will not attempt to develop and use
comparable or superior technology. Although the Company is not aware of any
patents or other proprietary rights that its technology may violate, there can
be no assurance that such rights do not exist. Should the Company learn that
its technology does violate any existing patents, the Company may be required to
modify its technology to avoid such infringement or obtain licenses from others
to be able to operate its business as planned. The failure to obtain such
licenses on favorable terms, or at all, could have a material adverse effect on
the Company. See "Business-Patents and Proprietary Rights."
COMPETITION IN THE PHOTO BOOTH BUSINESS. The market for the Company's products
and services is highly competitive. The Company faces competition for leased
space from two established competitors, Photp-Me International, PLC and Polaroid
Corporation, as well as numerous independent and lesser known regional
organizations in the photo booth business. Many of these firms have far greater
financial resources, experience or industry relationships than the Company. In
addition, such organizations have proven operating histories, which may afford
these firms significant advantages in negotiating and obtaining future retail
leases or merchandise licenses, arranging financing, attracting skilled
personnel and developing technology and products. The Company also competes
with a number of firms which create traditional photographic products within
shopping malls, theme parks, and retail stores selling at
6
<PAGE>
significantly higher prices. The Company attempts to compete on the basis of
product quality, selection, location, and competitive pricing. There can be
assurnace that it will be able to do so. See "Business-Competition."
DEPENDENCE ON SUPPLIERS TO SUPPLY BOOTHS. The Company has been and will
continue to be dependent on outside suppliers for the supply of components and
fabrication of the Video Foto booths. Although the Company believes that
additional alternative sources are available, failure by its manufacturer to
supply the Company with high quality finished products at commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would have a material adverse effect on the Company. The software
embodied in the Company's products was developed by an independent software
developer. The Company does not have the capability internally to perform this
work and there can be no assurnace that required enhancements can be
successfully developed, that required modifications to existing software wil be
supported or that the improved software will be available on a tmely basis. See
"Business-Manufacturing and Suppliers."
POSSIBLE INFLUENCE BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS. Current officers,
directors and shareholders owning 5% or more of the Class A Common Stock of the
Company own, of record or beneficially, an aggregate of approximately 11% of the
issued and outstanding shares (excluding outstanding options and warrants).
Accordingly, they will be in a position to influence the outcome of matters
requiring a vote of shareholders. See "Principal and Selling Shareholders."
NO DIVIDENDS LIKELY IN THE FORESEEABLE FUTURE. The Company has not paid any
cash dividends to date and does not expect to declare or pay any cash dividends
in the foreseeable future. See "Financial Statements."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DISCRETIONARY ISSUANCE OF PREFERRED STOCK.
The Company's Articles of Incorporation authorizes the issuance of up to 100,000
shares of preferred stock, par value $1.00 per share ("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 shareholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Class A Common
Stock. In the event of issuance, the Preferred Stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company, which could have the effect of discouraging
bids for the Company and, thereby, prevent shareholders from receiving the
maximum value for their shares. Although the Company has no present intention
of issuing any shares of preferred stock, there can be no assurance that the
Company will not do so in the future. See "Description of Securities-Preferred
Stock."
7
<PAGE>
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET; DISCLOSURE
RELATING TO LOW-PRICED STOCKS. While the Company's Class A Common Stock is
quoted in The NASDAQ SmallCap Market ("Nasdaq"), there can be no assurance that
the Company will meet the criteria for continued listing of securities on
Nasdaq. To continue to be included in Nasdaq, a company must currently maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In November 1996, the board of
dirctors of Nasdaq proposed changes to these quantitative standards, which if
approved as proposed, would require company to maintain a $1,000,000 market
value of the public float rather $200,000 and to have net tangible assets of
$2,000,000 or net income of $500,000 in two of the last three years or a market
capitalization of at least $35,000,000 as well as to follow certain corporate
governance standards. In addition, continued inclusion currently requires two
market-makers and a minimum bide price of $1.00 per share; provided, however,
that if a company falls below such minimum bid price, it will currently remain
eligible for continued inclusion in Nasdaq if the market value of the public
float is at least $1,000,000 and the Company has $2,000,000 in capital and
surplus. In November 1996, Nasdaq proposed that this alternative be eliminated.
The failure to meet these existing or amended maintenance criteria in the future
may result in the discontinuance of the inclusion of the Class A Common Stock in
Nasdaq. In such event, trading, if any, in the Class A Common Stock may then
continue to be conducted in the non-Nasdaq over-the-counter market in what is
commonly referred to as the "pink sheets," or, if then available, the "OTC
Bulletin Board Service." As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations, for the Company's securities. In
addition, the Company would be subject to a rule promulgated by the Securities
and Exchange Commission (the "Commission") that, if the Company fails to meet
certain criteria set forth in such rule, imposes additional sales practice
requirements on broker-dealers who sell securities governed by the rule to
persons other than established customers and accredited investors (generally
institutions) with assets in excess of $5,000,000 or individuals with a net
worth of $1,000,000 or annual income exceeding $200,000 (or $300,000 jointly
with spouse). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
rule may have an adverse effect on the ability of broker-dealers to sell the
Company's securities, and also may affect the ability of purchasers in this
offering to sell the Company's securities in the secondary market.
The Commission has adopted regulations which generally define a "penny stock" to
be any non-exchange listed or non-Nasdaq equity security that has a market price
(as therein defined) less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction by
broker-dealers involving a penny stock, unless exempt, the rules require
delivery, prior to a transaction in a penny stock, of a risk disclosure document
relating to the penny stock market. Disclosure is also required to be made
about compensation payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks. The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on any exchange or Nasdaq,
are otherwise listed in Nasdaq and have certain price and volume information
provided on a current and continuing basis or if the Company meets certain
minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, they would remain subject to Section 15(b)(6) of the
Securities Exchange Act of 1934, which gives the Commission the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were subject to the rules on penny stocks, the market liquidity for the
Company's securities could be severely adversely affected. See "Description of
Securities-Market for Common Equity and Related Stockholder Matters."
8
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the
Company at September 30, 1996 and giving pro forma effect to the completion of
the Private Placement of 3,245,000 shares of Class A Common Stock at $0.50 per
share, application of the proceeds thereof, the reinstatement of the Company's
senior debt and the conversion of $182,500 in interim loans and consulting fees
into 365,000 additional shares of Class A Common Stock:
September 30, 1996
------------------
Actual Pro Forma
------ ---------
Short-term Debt:
Senior Debt (in default) $ 2,150,000 -0-
Interim Loans and Consulting Fees (1) 182,500 -0-
Long-term Debt:
Senior Debt -0- $ 2,150,000
Stockholders' Equity:
Preferred Stock, $1.00 par value; -0- -0-
100,000 authorized, none issued and
outstanding
Class A Common Stock, $.10 par 255,007 616,007
value; 20,000,000 authorized;
2,550,072 shares issued and
outstanding; 6,160,072 shares
issued and outstanding pro forma
(2) and (3).
Class B Common Stock, $.01 par 15,000 15,000
value; 1,500,000 authorized, issued
and outstanding
Additional Paid-in Capital 6,504,991 7,601,491
Accumulated Deficit (4,700,688) (4,700,688)
Total Stockholders' Equity 2,074,310 3,531,810
Total Capitalization $ 4,406,810 $ 5,681,810
_______
1. Dominion Investment Corporation, an affiliate of J. T. Trotter, a
principal shareholder, C. W. Moody, Jr., also a principal shareholder,
and George V. Kane, Jr. loaned the Company $160,000 in December 1995 and
were issued notes in the principal amount of $160,000 and warrants to
purchase 22,733 shares of Class A Common Stock at an exercise price of
$2.81 On November 1, 1996, the notes and the warrants were exchanged for
320,000 shares of Class A Common Stock and 320,000 Private Placement
Warrants. In November 1996, Robert R. Salyard, a director of the
Company, exchanged $22,500 in unpaid consulting fees for 45,000 shares
of Class A Common Stock and 45,000 Private Placement Warrants.
9
<PAGE>
2. Excludes (i)148,920 shares of Class A Common Stock issuable under
unsurrendered stock options exercisable at $5.00 per share granted under
the Company's 1993 Stock Option Plan; (ii) 686,250 shares of Class A
Common Stock issuable under stock options exercisable at $.50 per share
granted under the Company's 1996 Stock Option Plan; (iii) 1,797,436
shares of Class A Common Stock issuable under redeemable warrants
evidencing the right to purchase one share of Class A Common Stock per
warrant at an exercise price of $4.93 per share at any time prior to the
close of business on May 11, 1997 issued as a part of the units offered
in the Company's initial public offering in May 1994; (iv) 20,681 shares
of Class A Common Stock issuable pursuant to the exercise of warrants
expiring March 31,1997 that were granted in connection with formation of
the Company having an exercise price of $1.50 per share; (v) up to
312,596 additional shares of Class A Common Stock that would be issued
upon exercise of the unit purchase option, exercisable at any time prior
to the close of business on May 11, 1999 at $4.93 per unit, granted to
Royce Investment Group, Inc. to purchase 156,298 units with each unit
consisting of one share of Class A Common Stock and one redeemable
warrant exercisable at $4.93 per share; (vi) 52,988 shares of Class A
Common Stock exercisable under warrants granted to Hill Branscomb and
Venlease Associates exercisable at any time prior to June 1, 2000 at
$1.98 per share issued pursuant to the placement of the Company's senior
indebtedness; (vii) an aggregate of 510,000 shares of Class A Common
Stock issuable to the Company's senior lender at an exercise price of
$6.63 per share issued in connection with the Company's credit facility
with its senior lender; (viii) 63,881 shares of Class A Common Stock
upon exercise of warrants exercisable at any time prior to March 28,
2000 at $1.98 per share issued to J. T. Trotter in consideration for his
guarantee of bank debt; (ix) 3,630,000 shares of Class A Common Stock
issuable upon exercise of the Private Placement Warrants; (x) 486,750
shares of Class A Common Stock issuable upon exercise of 486,750 Unit
Purchase Options granted to the Placement Agents in connection with the
Company's private placement completed in January 1997; and (xi) 486,750
shares of Class A Common Stock issuable upon exercise of the Special
Private Placement Warrants. The number of shares of Class A Common Stock
and the exercise price as set forth above have been adjusted in
accordance with the antidilution provisions of the underlying
instruments.
3. Excludes 20,000 shares of Class A Common Stock issued in January 1997
to John D. Higgins, a director of the Company, as consideration for
$10,000 in unpaid 1996 director fees.
USE OF PROCEEDS
The Company will receive none of the proceeds from the sale of shares by
the Selling Shareholders.
Any proceeds received by the Company upon exercise of the Private Placement
Warrants, the Unit Purchase Options and the Special Private Placement Warrants
will be added to working capital. Proceeds not immediately required for the
purposes described above will be invested in United States government
securities, short-term certificates of deposit, money market funds or similar
short-term interest bearing investments.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere herein (See
"Financial Statements"), and is qualified in its entirety by the foregoing and
by other more detailed financial information appearing elsewhere herein. See
also the information under "Risk Factors."
The Company's principal business is the placement and operation of Video
Foto booths throughout the United States. Booth manufacturing is subcontracted
with the Company providing limited assembly and extensive testing and quality
control. The Company seeks what it considers to be desirable locations (sites)
and then contracts with the site owner to place the booths in operation.
Typically the contracts are from month-to-month with rents based on a percentage
of the revenue collected. In most cases there is a minimum guarantee and
occasionally a simple monthly rate, or some combination.
The Company's levels of monthly sales revenues are affected by seasonal
increases and decreases in customer traffic. The Company's experience shows that
June, July, August, and December generate the highest levels of traffic through
its booths, with peak revenues experienced during school breaks and holiday
shopping periods. Additionally, revenues of the Company are generally affected
by adverse weather conditions or any economic downturn having a material affect
on traffic patterns of retail customers or tourists. The Company's financial
results are dependent on (i) number of booths in operation (operating days), and
(ii) revenue per booth. The historical results for the Company for the years
ending June 30, 1995 and 1996 and for the three months ended September 30, 1995
and 1996 are shown in the table below:
<TABLE>
<CAPTION>
September 30 June 30
------------ -------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $2,118,558 $1,827,651 $5,520,452 $ 7,451,098
Net Loss ($127,649) ($365,125) ($595,800) $(2,114,557)
Booths in Operation at End of Period 756 699 706 738
Average Monthly Revenue per Booth $ 969 $ 810 $ 866 $ 842
</TABLE>
(Average monthly revenue per booth is calculated by dividing the monthly
revenues by the number of booths in operation at month end.)
As of June 30,1996 the Company recognized a net loss of ($2,114,557).See
"Risk Factors-Continuing Losses." A significant portion of this loss is
attributable to the costs associated with certain non-recurring events. During
fiscal year 1996, the Company permanently removed approximately 120 booths from
operations. These early prototype booths, which were acquired in 1992, contained
older components, which had high failure rates and, in some cases, replacement
parts were no longer available to supply them. Also, the cabinet construction
was not designed for high traffic, unattended locations, resulting in security
problems. These booths were replaced with the current booth, which has a
sturdier
11
<PAGE>
cabinet and more reliable up-to-date components. As a result of this decision,
the Company incurred a charge of approximately $300,000, representing the
undepreciated book value of these older booths. In addition, the Company reduced
the carrying value of hardware and components by approximately $470,000, to
account for obsolescence and to value used parts at the lower of cost or
realizable value. The removal and replacement of these booths accounted for a
significant part of the installation costs.
During the three months ended September 30, 1996 the Company's number
of booths on location decreased by an additional 39 booths. The decrease was
primarily attributable to the removal of 41 booths from locations of one
national arcade at the request of the customer. Approximately 20 of the booths
removed were generating less than the average revenue.
During May 1996, the State of Texas conducted a sales and use tax audit for
the period March 1992 to March 1996. In connection with the auditor's review of
sales records, the Company was unable to provide documentation to show that
certain third party operators, who collect cash from the photo booths, had paid
the appropriate sales tax or that they had obtained sales tax exemption
certificates from the appropriate state tax authority. As a result of this
review, the Company was issued a preliminary delinquent sales tax assessment of
approximately $150,000. Management is pursuing collection of taxes or submission
of certificates from third party operators to mitigate the sales tax liability.
Additionally, the Company has been assessed use tax of approximately $150,000 on
booth components acquired from out of state vendors. The use tax obligation was
capitalized and is being depreciated over the life of the related components.
Accordingly, the sales and use tax has been charged to operations or capitalized
in the accompanying financial statements for 1996. The provision did not have a
material effect on the Company's financial position or results of operations
for 1996.
On November 1, 1996 the Company had an initial closing on $1,200,000 of a
$1,500,000 private offering to accredited investors of units (the "Private
Placement"), each unit consisting of 50,000 shares of Class A Common Stock and
50,000 Common Stock Purchase Warrants. The Offering Price was $25,000 per Unit.
On November 1, 1996 the Company received net proceeds of $1,044,000 from the
initial $1,200,000 closing of the Private Placement. Two subsequent closings on
December 6, 1996 and January 8, 1997, respectively, resulted in total gross
proceeds of $1,622,500 and net proceeds of approximately $1,275,000 after
commissions and related expenses. The Company intends to apply these net
proceeds over the twelve-month period ending December 31, 1997 as follows:
APPLICATION OF PROCEEDS APPROXIMATE DOLLAR APPROXIMATE PERCENTAGE
AMOUNT OF PROCEEDS
Fabrication of Video Foto booths $ 737,000.00 58%
Partial settlement of trade claims $ 128,000.00 10%
Working Capital $ 411,000.00 32%
TOTAL: $1,275,000.00 100%
The Company had been in default on its loan covenants with its senior
lender since July 1995. In August 1996, the Company negotiated an agreement to
revise certain covenants to bring the Company into compliance. Among other
provisions, the negotiated terms provide for extensive revisions to all
financial ratio covenants consistent with a revised detailed financial plan
developed by management. In addition, the Company was required to satisfy
certain conditions including raising $1,500,000 through a private placement with
net proceeds of at least $1,250,000. By November 1996 the Company had raised
the requisite proceeds and all loan covenant defaults were eliminated.
12
<PAGE>
The level of past due trade payables had increased significantly from
March 1996 through June 1996. To resolve this situation, the Company
successfully concluded a restructuring of certain trade payables totaling
$734,000. The trade creditors holding these payables agreed to exchange the
amounts owed for a combination of 15% cash, 18% cash payable in 15 equal monthly
installments and 67% stock (the "Trade Payable Agreement"). The restructuring
was subject to completion of the Private Placement. The price of the stock to be
issued to the trade creditors was to be the greater of $2.25 per share or the
lower of: (a) 80% of the average closing price at which the Class A Common Stock
of the Company trades during the 30 calendar day period following the date of
the initial closing of the Private Placement or (b) the lowest closing price at
which the Class A Common Stock trades during such 30-day period. The Company is
obligated to register the shares of Class A Common Stock issued to the trade
creditors prior to December 31, 1997.
RESULTS OF OPERATIONS
Twelve Months Ended June 30, 1995 Compared to Twelve Months Ended
June 30, 1996
Revenues. Revenues increased 35% from $5,520,452 for the twelve month
period ended June 30, 1995 to $7,451,098 for the twelve month period ended June
30, 1996. The growth in revenues was primarily attributable to the 38% increase
in operating days from 180,108 in 1995 to 249,175 in 1996. However, average
monthly revenue per booth dropped from $932 to $910. This decrease was due to
attrition in revenue at booths installed for more than one year
Cost of Services. Cost of services increased from 73% to 91% of gross
revenues or $4,014,428 and $6,746,601 for the twelve months ended June 30, 1995
and 1996, respectively. The dollar increase is primarily due to losses on
disposal of property and equipment and site rent expense. The $770,000 loss on
disposal of property and equipment expense in 1996 is attributable to the
removal of older version booths and the writedown of hardware and components.
Management believes that these are one time occurrences. Site rent expense as a
percentage of revenue increased to 37% in 1996 for two reasons. First, the
number of theme park locations, which have a 50% site rent percentage, increased
at a greater rate than locations with lower rent factors. Second, revenues at
certain mall locations with fixed monthly rents decreased causing the site rent
expense to increase as a percentage of revenue. Management believes that a
combination of lower fixed rent at mall locations and relocation of booths to
sites with higher revenue will reduce the site rent percentages in the future.
Selling, General, and Administrative Expense. Selling, general, and
administrative expenses increased 7% from $2,057,789 for the twelve months ended
June 30, 1995 to $2,209,285 for the twelve months ended June 30, 1996. This
expense category decreased as percentage of revenue from 37% in 1995 to 30% in
1996. Management believes that this positive trend will continue in the future.
Other Income and Expense. Interest expense and financing costs
increased from a total of $57,885 for the twelve moths ended June 30, 1995 to a
total of $613,531 for the twelve months ended June 30, 1996. This increase is
attributable to the $3,500,000 line of credit loan entered into in June 1995.
LIQUIDITY AND CAPITAL RESOURCES
Twelve Months Ended June 30, 1995 Compared to Twelve Months Ended
June 30, 1996
For the year ended June 30, 1996 net cash provided by operating
activities was $1,053,482 as compared to $479,317 for the twelve months ended
June 30, 1995. The net cash provided in 1996 was due
13
<PAGE>
to continued utilization of vendor credit lines and increases in other
categories of current liabilities, primarily sales and use tax payable. The net
cash provided in 1995 was due primarily to the utilization of vendor credit
lines.
The Company's revenues and booths in operation have increased in each of
the first four years in business; however, the Company has yet to achieve an
operating profit. Management's plan for fiscal 1997 is to relocate approximately
200 existing booths, with below average revenue, to new locations and utilize
approximately $750,000 of the Private Placement proceeds to build approximately
100 booths. Other than the purchase of new booths, the Company does not expect
to have any significant capital expenditures for the foreseeable future.
The Company had a working capital deficit of $3,496,537 as of
June 30, 1996. After receiving the Private Placement proceeds, finalizing the
Lender Agreement and completing the Trade Payable Agreement, the Company will
have working capital of approximately $500,000. In addition to building new
booths, Management intends to use the proceeds of the Private Placement for the
initial payments under the Trade Payable Agreement, payment of delinquent sales
and use taxes and other working capital purposes.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 30, 1996
Revenues. Revenues decreased 14% from $2,118,558 for the three month period
ended September 30, 1995 to $1,827,651 for the three month period ended
September 30, 1996. The decrease in revenues was primarily attributable to the
lower number of booths on location and attrition in revenue at booths installed
for more than one year.
Cost of Services. Cost of services, as a percent of revenue, increased from
75% to 81% for the three months ended September 30, 1995 and 1996, respectively.
The increase is primarily attributable to site rent expense as a percentage of
revenue increasing to 38% in 1996 from 35% in 1995 for two reasons. First, the
number of theme park locations, which have a 50% site rent percentage, increased
at a greater rate than locations with lower rent factors. Second, revenues at
certain mall locations with fixed monthly rents decreased causing the site rent
expense to increase as a percentage of revenue. Management believes that its
efforts to lower fixed rents at mall locations and its booth relocation program
of moving to sites with higher revenue will reduce the site rent percentages in
the future.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses, as a percent of revenues, were 29% and 40% for the
quarters ending September 30, 1995 and 1996, respectively. This increase was
primarily attributable to a $115,000 increase in professional fees related to
restructuring activities.
Other Expense. Interest expense and financing costs were $136,373 and
$130,766 for the three months ended September 30, 1995 and 1996, respectively.
These expenses are attributable to the $3,500,000 line of credit loan.
Net Operating Results. For the three months ended September 30, 1996 the
Company realized a net loss of $365,125 versus a net loss of $127,649 for the
three months ended September 30, 1995. This difference is attributable primarily
to the lower revenues and reduced gross profit in 1996.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended September 30, 1995 Compared to Three Months Ended
September 30, 1996
For the three months ended September 30, 1996 net cash used in operating
activities was $103,154 as compared to $411,641 cash provided by operating
activities for the three months ended September 30, 1995. Net cash used in 1996
is primarily due to a decrease in site rents payable to mall locations. The net
cash provided in 1995 is primarily attributable to depreciation and other non-
cash expense items of $430,000.
BUSINESS
GENERAL
Irata, Inc., a Texas corporation, (the "Company") was incorporated on
March 22, 1992. The Company has developed and operates a computerized version
of the traditional self-service photo booth known as Video Foto. Video Foto
booths combine traditional photo options with a variety of souvenir, novelty,
and amusement options, utilizing computer imaging technology, a laser printing
device, and other computer hardware and software. Booths provide customers a
variety of photo product options, including traditional prints ranging in size
up to 8"x10", and novelty items such as "wanted" posters, newspaper front page,
photo greeting cards, and photo calendars. At September 30, 1996 the Company had
699 Video Foto booths in operation.
Video Foto is a free standing, self service, vending machine which accepts
paper currency and coins. The current consumer price is $1.00 per transaction.
An external black & white TV monitor advertises the booth's products and
services utilizing a computerized advertising loop which plays continually while
the booth is not in use. Customers wishing to purchase products begin the
transaction by entering the booth and depositing the appropriate amount in bills
or coins. Following a simple series of computer prompts on the booth's internal
TV monitor, the customer's image is captured four different times at five second
intervals. Customers are then directed to step outside the booth to conclude
their transaction on the external TV monitor, thereby freeing the booth to
accept another customer. Outside the booth, the customer is shown a preview of
the four captured images and are directed to select their favorite pose by
activating the corresponding button. Following pose selection, customers see a
preview of four different product options, and are directed to make their
selection. Following product selection, the finished black & white laser printed
photo is delivered through a corresponding slot on the exterior of the booth
within 30-60 seconds.
The Company believes that by replacing the chemical photographic
development process or instant film process used by others with its own
technology, the Company is not subject to the handicaps of chemical waste or
high consumable costs incurred by others. Product stability is increased using
the Company's process. The Company believes that its ability to offer multiple
product selections gives it an advantage over most of its competitors, who
typically offer only one customer option per transaction. The combination of
environmental, economic, and technological benefits are believed by the Company
to appeal to site owners.
The Company's strategy is to grow the Company by placing on location a
steadily increasing number of additional Video Foto booths. The Company also is
attempting to maximize average revenue
15
<PAGE>
per booth by placing them in locations that meet the Company's criteria. This
involves locating booths primarily in the larger Metropolitan Statistical Areas
("MSAs") and further developing its route structure. The primary focus will be
to place the new booths in these areas, but in addition any booths determined to
be operating in sites that are below standard will be moved and placed in more
profitable locations. See "Risk Factors-Ability to Maintain and Manage Continued
Rapid Growth."
PRODUCTS
Booths occupy 18 square feet of merchandising space and require a standard
110 volt outlet provided by the landlord. Much of the computer and imaging
equipment used to construct booths involves off-the-shelf components from major
equipment manufacturers. Booths have the capability of providing a wide range of
black & white traditional portrait products in a variety of sizes (postage stamp
through 8"x10") as well as different seasonal, amusement, or custom souvenirs,
combining the customer's photo with entertaining boarders and print formats.
Products are produced in black & white using plain paper and toner through the
use of laser printers. The Company offers competitively priced, consumer
attractive products at prices significantly less than similar services. The
Company believes its ability to offer multiple product choices (four per
transaction) and rotate selections seasonally (through software) give it a
retailing advantage over most of its competitors.
Composite photographic products. The Company believes that the concept of
inserting an image of an individual or group of individuals into a scene or
product through a self service kiosk will appeal to children, teenagers, single
adults, groups, and families. The Company believes that the majority of users
are females between the ages of 6 and 25 years of age. The Company expects to
serve its customers by permitting them to be photographed on seasonal photo
greeting cards, local themes and fun products, as well as traditional photo
settings, all offered within 30-60 seconds for $1.00 per product.
Traditional photography. The Company believes that traditional style photo
products constitute its core business in most locations. It anticipates that its
composite products will generate higher than average customer traffic, and will
assist in acquiring customers for its core business. These services will be
directed toward children, adults, groups, and families.
Similar to photographic studios and competitive products, the Company
anticipates that its business will be stimulated largely due to the increased
customer traffic near its booths by time-specific events such as major holidays
and promotions by the landlords.
COLOR VIDEO FOTO BOOTH
In July 1996, the Company began the final phase of its color Video Foto
booth development project, a next generation product design. This development
effort included booth size and shape configuration, hardware component selection
and software systems design. The hardware and software configuration and their
synchronous interaction are proprietary and the exclusive property of the
Company. In addition, consumer market research was undertaken concurrently to
help focus the design effort to meet specific consumer needs.
In November 1996, the Company's first prototype color Video Foto booth was
displayed at the International Arcade & Amusement Parks Association (IAAPA)
annual convention. The IAAPA convention is the largest entertainment and
amusement vending program of the year. Additional market research was gathered
at the convention from a wide range of industry personnel for the purposes of
identifying further improvements for the Company's new color booth.
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<PAGE>
Production of the new color booth is expected to commence in January 1997
with an initial field testing of ten booths and a market roll out by March 31,
1997. Management anticipates that such a product should have a favorable impact
on both sales and net revenues. There can be no assurance that the Company will
be successful in its efforts to develop and market such a product.
GEOGRAPHIC AND DEMOGRAPHIC LOCATION OF BOOTHS
The Company locates booths throughout the United States, predominantly in
shopping malls, discount stores, amusement arcades, theme parks, and tourist
attractions. The Company believes that an MSA having a population base of
250,000 is the minimum population density required for the establishment and
operation of profitable service routes. The Company is focusing its efforts on
the top 50 MSAs, all of which support a population base in excess of 1,000,000
potential customers. The Company believes there are in excess of 14,000
potential locations which meet its criteria within the top 50 MSAs. These
potential locations consist of super regional/regional malls, discount stores,
arcades and family entertainment centers, theme parks, and other high traffic
outlets. While the Company plans to create new route operations in other MSA's,
its main focus will be the increase in the number of booths within its existing
service areas. Although it is the Company's intention to focus expansion on the
top 50 MSAs, it recognizes that it will be required to expand within smaller
markets to accommodate commitments made to existing or future national accounts.
The Company believes that locations that meet its criteria will afford its
booths with a relatively consistent flow of customers, and widespread exposure
to potential patrons whose demographic profile constitute the primary market for
its products and service. See "Risk Factors-Revenues Dependent Upon Location of
Booths; Possible Fluctuation In Operating Results Due to Seasonality."
MARKETING
From the Company's inception, its primary marketing focus was on
establishing relationships with multi-outlet national discount store chains and
amusement arcades. As the Company has matured it has shifted its marketing
emphasis to malls and theme parks. The average monthly revenue per booth has
proven to be higher in malls and theme parks and there is an adequate market for
its booths in these locations. Malls and theme parks currently account for over
50% of the Company's revenues.
Booths are placed on a fixed rental, revenue sharing, or a revenue sharing
with a minimum rental payment, in each case at no cost to the landlord except
the insignificant cost of power. The Company is responsible for all other
operational, service, and product costs including commissions to independent
service contractors. Individual booth sales performance is assessed monthly by
the Company against minimum performance standards. Booths producing
unsatisfactory sales results are identified monthly for removal and re-siting in
new locations. The Company continues to seek sites for additional booths in
high profile, high traffic locations through its own personnel as well as
through the use of third party locator services and outside operating companies.
The Company anticipates it will own the equipment operated in these locations,
although it may enter into joint ventures, licensing, or similar collaborative
arrangements with others to operate such locations in the future in both the
U.S. and elsewhere. See "Risk Factors-Lack of Long-Term Contracts for
Locations."
SERVICE
The Company's operating strategy calls for the establishment of service
routes and hubs for the conduct of its daily business. Each route is maintained
by an independent contractor service person. The independent service
contractors are responsible for maintaining the overall appearance of the
booths, keeping them supplied with paper and toner and making minor adjustments
and repairs where necessary. It
17
<PAGE>
is anticipated that service will continue to be performed by independent
contractors who will be recruited locally. Independent service contractors
typically visit booths a minimum of twice weekly. Account/customer initiated
service calls are routinely responded to within 24 hours. Independent service
contractors also collect the money from the coin and bill collectors on a
frequent basis and are responsible for maintaining local contact with the site
operators. Typically, the independent service contractor is paid a percentage
based upon the net receipts from the booths serviced by him.
MANUFACTURING AND SUPPLIERS
The Company purchases hardware and consumables such as paper and toner from
several suppliers. Although the Company does not maintain formal agreements
with any of its manufacturers or suppliers of hardware or consumables, the
Company believes that its current manufacturing and supply arrangements will
satisfy the Company's present and anticipated production requirements, and that
the Company has suitable alternative manufacturing and supply sources available
to it in the event that its current arrangements are terminated or that current
manufacturers and suppliers are otherwise unable to fulfill its needs. As of
September 30, 1996, the Company estimated that current booths manufactured for
use by the Company have a unit production cost of approximately $7,500. See
"Risk Factors-Dependence on Suppliers to Supply Booths."
SEASONALITY
June, July, August, and December generate the highest levels of traffic
through the Company's booths, with peak revenues experienced during school break
and holiday shopping periods. Additionally, revenues of the Company are
generally affected by adverse weather conditions or any economic downturn having
a material affect on retail traffic patterns or the tourist industry. See "Risk
Factors-Revenues Dependent Upon Location of Booths; Possible Fluctuation In
Operating Results Due to Seasonality."
TECHNOLOGY AND PRODUCT DEVELOPMENT
The Company has developed hardware and software that, when used in
conjunction with a variety of off-the-shelf computer and imaging equipment,
delivers a high quality, black & white laser printed image to its customers.
The Company has worked closely with several manufacturers to develop and
integrate equipment to meet its specifications. Certain of these manufacturers
have supplied the Company on a test basis with key components for its current
and future systems. Booths operated by the company as of September 30, 1996
function with either 300 or 600 dots per inch ("dpi") resolution depending on
printer model.
The Company has introduced a series of new customer products with themes
for specific holidays, events, and circumstances such as Christmas and future
seasonal products will incorporate such holiday periods as Valentine's Day,
Mother's Day, Father's Day, and Thanksgiving. The Company believes that by
rotating product selections periodically, it will maintain a higher level of
sales per booth.
The Company continues to develop new exterior cabinets for its booths,
designed with interchangeable advertising and cosmetic panels. The Company
believes this has enhanced its ability to procure high profile, high traffic
locations, without having to customize exteriors for limited production runs.
These enhancements allow the Company to periodically remerchandize existing
booths on locations in conjunction with promotional or seasonal events, for
advertising purposes, or in the event an existing booth is moved to a new
location requiring a specific cosmetic appearance.
18
<PAGE>
COMPETITION
The Company competes with two major companies, Photo-Me International, PLC
("PMI") and Polaroid Corporation, as well as various independent and regional
operators of self service photographic booths. Many of the firms with which the
Company competes have far greater financial resources, experience, or industry
relationships than the Company. In addition, such organizations have proven
operating histories, which may afford these firms significant advantages in
negotiating and obtaining future merchandise licenses and retail leases,
arranging financing, attracting skilled personnel and developing technology and
products. The Company attempts to compete based upon product quality,
selection, location and competitive pricing. See "Risk Factors-Competition in
the Photo Booth Business."
Wet Process Photo Booths. Wet process photo booths are self service,
paper currency or coin operated booths which produce a photograph (black & white
or color) through the use of photographic paper and photographic chemicals.
Typical products are a strip of three or four black & white or color photos (1"x
2" in size), four passport/visa size photos, or one 4" x 5" photo. Retail
prices typically range from $1.00-$10.00, with most selling in the $2.00-$3.00
range.
PMI is a publicly traded company on the London Stock Exchange. Through
subsidiaries, PMI operates in approximately 100 countries including the United
States through Auto Photo Systems. In addition to its photo booth operations,
PMI operates a variety of other coin/bill operated equipment, including,
business card machines, scales, kiddie rides, etc. PMI operates approximately
20,000 photo booths and an unknown number of other vending pieces throughout the
world.
Instant Process Photo Booths. The Company defines instant process photo
booths in two ways: those using Polaroid instant film, and units which produce
products through digital computer signals on thermal paper. Polaroid
Corporation has for approximately the past fifteen years attempted to produce an
instant process photo booth for sale to outside operators. Customers receive a
one pose photograph on Polaroid instant film for between $3.00-$5.00 per photo.
The Company is unaware of any large territorial operators of these units.
During the past five years, a number of individuals and small companies
have developed different approaches to electronic or digital photo booths.
Technology is similar to that used by the Company, but is generally directed
toward the production of small format (4"x5") color thermal prints, in either
postcard or souvenir form. The Company believes that the cost of the technology
is expensive ($15,000-$40,000 per booth) and the cost of consumables is high
($.60-$1.00 per image). Typical retail prices for products of this nature are
$3.00-$5.00 per photo.
The Company is aware of several entities that are exploring the concept of
composite photography through attended operations. There are a number of
independent and company owned vendors currently utilizing technology similar to
the Company's to produce coffee mugs, T-shirts, photo buttons, etc. These
products are currently being sold at prices that are generally higher than those
the Company charges.
19
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
Although certain of the technology currently utilized in the Company's
booths has been treated by the Company as proprietary, none of it is protected
by patents or copyrights. The Company has no outstanding license agreements.
Although the Company is not aware of any patents or proprietary rights of others
that its technology may violate, there can be no assurance that such rights do
not exist. The Company anticipates the possibility of entering into licensing
agreements involving well known persons or characters which will grant the
Company the right to manufacture, distribute and sell, in defined geographic
areas, computer generated personalized photographs incorporating a customer's
photograph into a still image. Such license agreements may include the rights to
characters, designs, and visual representations as they appear on television,
motion pictures, or print media. Such licensing agreements typically require an
advance, non-refundable payment against royalties, as well as a stipulated
guarantee of minimum annual royalty payments to be made to the licensors during
the term of the agreement. See "Risk Factors-Lack of Patent Protection for the
Company's Technology; Possible Technological Obsolescence."
EMPLOYEES
As of September 30, 1996 the Company had 27 full-time employees and 216
independent contractors to service booths on location. None of the Company's
employees or independent contractors are represented by labor organizations. The
Company considers its relationships with its employees and independent
contractors to be excellent.
PROPERTY
The Company has a sixty-five month lease agreement for approximately
11,000 square feet in an office and warehouse complex at 8554 Katy Freeway,
Suite 100, Houston, Texas 77024 and 8560 Katy Freeway, Suite 172, Houston, Texas
77024. The lease provides for minimum monthly rent obligations of approximately
$7,800. The Company uses the space for its administrative offices and warehouse.
To facilitate the lease, the Company entered into a twelve month letter of
credit in the amount of $50,000 with a financial institution as temporary
collateral for the lease. The financial institution is entitled to a 2% fee. At
the present time, no monies have been drawn down.
FORMATION HISTORY
The Company was formed with the intention of acquiring or developing the
right to manufacture and operate photo booths. Commercial development of a
similar in concept to that initially operated by the Company was attempted by
Names 'N Faces, a California corporation. Names 'N Faces transferred the
concept and related technology owned by it to Data East USA, Inc. ("Data East").
Data East later alleged that Names 'N Faces failed to transfer technology that
would permit them to manufacture a functional photo booth. Lone Star Photo
Video, Inc., a Texas corporation beneficially owned by C. W. Moody, Jr., who was
a director of the Company and who may be regarded as a promoter of the Company
("LSV"), acquired from Names 'N Faces two photo booths which were found by LSV
not to be commercially operable. Names 'N Faces had also delivered ten photo
booths to Aladdin's Castle locations which did not operate. Accordingly, on
May 31, 1991, LSV, Aladdin's, and Names 'N Faces entered into a mutual release
pursuant to which LSV agreed to take possession of the ten photo booths, and
each party released the other parties. LSV and the Moody Family Trust, the
principal shareholder of LSV, then funded the development cost to produce the
software and proprietary hardware necessary to make the photo booths function
commercially. See "Risk Factors-Limited Operating History."
20
<PAGE>
The Company was incorporated under the laws of Texas on March 20, 1992 and
upon its incorporation, Nolan Bushnell, Inno Co. (a company beneficially owned
by Kevin Kimberlin), Randall Glash, Robert R. Salyard, John Steinmetz, and J. T.
Trotter, persons who may be regarded as promoters of the Company, acquired an
aggregate of 289,255 shares of Class A Common Stock of the Company for aggregate
consideration of $42,375 as follows:
NAME SHARES CONSIDERATION
---- ------ -------------
J. T. Trotter........................ 51,196 $ 7,500
Robert R. Salyard.................... 51,196 7,500
Nolan Bushnell....................... 51,194 7,500
Inno Co.............................. 74,235 10,875
John Steinmetz....................... 30,717 4,500
Randall Glash........................ 30,717 4,500
------ -------
Total........................... 289,255 $42,375
Upon its incorporation, the Company acquired from LSV, the photo booths
then operated by it and its related assets for 165,809 shares of Class A Common
Stock and from the Moody Family Trust, the engineering enhancements, for 62,016
shares of Class A Stock. LSV and the Moody Family Trust had invested $77,462 in
the assets acquired by the Company. The Board of Directors of the Company valued
these assets at $33,375.00. Additionally, the Company acquired from Data East up
to 130 booths and the basic design, specification and technology for cash and a
note, from Names 'N Faces any residual rights or claims based upon the
technology valued by the Board of Directors of the Company at $15,000 in
exchange for 1,500,000 shares of Class B Common Stock and from certain of the
former shareholders of the parent of Names 'N Faces, releases of the Company and
others in exchange for an aggregate of 97,519 shares of Class A Common Stock.
21
<PAGE>
MANAGEMENT
The following persons are the current executive officers, directors and key
employees of the Company.
Name Age Position
---- --- --------
Lance P. Wimmer 52 Chairman of the Board, President, Chief
Executive Officer and Director
Robert A. Searles, Jr. 40 Executive Vice President and Director
John C. Stuecheli 49 Vice President-Finance and Chief
Financial Officer
Andrew J. Clark, III 58 Director
John D. Higgins 63 Director
Robert R. Salyard 70 Director
Andrew J. Clark, III, 58, is an attorney and has been engaged in the
full-time practice of law since June 1, 1994. For more than five years prior to
becoming a sole practitioner, he was a partner in the law firm of Butler &
Binion, L.L.P., Houston, Texas. Mr. Clark was first elected a director at the
annual meeting of shareholders in September 1993.
John D. Higgins, 63, has been involved in corporate finance as Senior
Vice President of Royce Investment Group Inc. ("Royce") for more than the past
five years. Royce was the manager of the Company's Private Placement completed
in January 1997. Mr. Higgins is also a director of Iatros Health Network, Inc.,
an operator of nursing homes. Mr. Higgins was appointed to fill the vacancy
created by the resignation of Mr. Morgan as a director on November 28, 1995 and
was first elected at the annual meeting of shareholders in January 1996.
Pursuant to the Agency Agreement, dated September 9, 1996, between the Company
and Royce and Spencer Trask Securities Incorporated ("Spencer Trask"), executed
in connection with the Private Placement, the Company agreed until January 2002,
at Royce's option, to nominate a designee of Royce to the Company's Board of
Directors. Mr. Higgins is currently serving as Royce's designee.
Robert R. Salyard, 70, was appointed to the Board of Directors
effective November 3, 1996 to fill the vacancy created by the resignation of
Richard W. Fairchild, Jr. For more than the past five years Mr. Salyard has been
a private investor and engaged in the management consulting business. He serves
as a Director and Corporate Secretary of Spencer Trask, a member firm of the
National Association of Securities Dealers, and co-manager of the Private
Placement.
Robert A. Searles, Jr., 40, assumed the responsibilities of Executive
Vice President on November 3, 1996 and continues to serve on the Company's Board
of Directors. Mr. Searles first assumed the responsibilities of director,
President and Chief Executive Officer of the Company on June 23, 1992. From
1988 until joining the Company, Mr. Searles served as Vice President of Sales
and Marketing of Auto Photo Systems, Inc., the U. S. subsidiary of Photo-Me-
International PLC, the worldwide manufacturer and operator of approximately
20,000 wet process photo booths and a competitor of the Company.
22
<PAGE>
John C. Stuecheli, 49, was elected Vice President-Finance and Chief
Financial Officer effective as of November 3, 1996. Mr. Stuecheli had served as
a consultant to the Company from April 1996 until his appointment as chief
financial officer of the Company. From October 1993 until March of 1996, Mr.
Stuecheli engaged in the practice of accounting. Prior to October 1993, Mr.
Stuecheli was in the employ of Buccino & Associates, Inc., a leading operations
restructuring consulting firm.
Lance P. Wimmer, 52, was appointed to the Board of Directors effective
November 3, 1996 to fill the vacancy created by the death of C.W. Moody, Jr.
Additionally, he was elected Chairman of the Board, President and Chief
Executive Officer of the Company effective as of the same date. Mr. Wimmer had
served as a consultant to the Company from April 1996 until his appointment as
an officer and director of the Company. Mr. Wimmer formed Wimmer Associates,
Inc., a professional consulting and management firm, in 1992 and has been its
Managing Director since its organization. Prior to organization of Wimmer
Associates, Inc., Mr. Wimmer managed the Southwest region for Buccino &
Associates, Inc., a leading operations restructuring consulting firm.
The Company currently has an Audit Committee and a Compensation Committee.
The Audit Committee is authorized to review, with the Company's independent
accountants, the annual financial statements of the Company prior to
publication; to review the work of, and approve non-audit services performed by
such independent accountants; and to review the effectiveness of the financial
and accounting functions, organization, operations and management of the
Company. The Audit Committee consists of Messrs. Clark and Higgins. The
Compensation Committee reviews and recommends the compensation and benefits of
all officers and administers the issuance and grants of options under the
Company's stock option plans. The Compensation Committee consists of Messrs.
Clark and Salyard.
OTHER KEY MANAGEMENT
The following persons are key employees of the Company:
NAME AGE POSITION
---- --- --------
Sue Camp 63 Corporate Secretary and Logistics Manager
Rodger Osgood 42 Vice President, Manufacturing and Engineering
Richard W. Bell 61 Director of Marketing
RODGER OSGOOD joined the Company the Company in December, 1992 as
Manufacturing Manager and assumed his current position in December of 1996.
Prior to joining the Company on a full time basis, Mr. Osgood served as
technical consultant to the Company from the Company's inception in April 1992.
Previously, he was employed as a technical engineer for Data Eact, Inc., a
manufacturer of photo booths in San Jose, California.
SUE CAMP joined the Company in September 1992 as Administrative Manager and
Corporate Secretary. Ms. Camp assumed her current position in September 1996.
Prior to joining the Company, she worked with Century 21 Real Estate in a
variety of sales and administrative capacities for more than five years.
RICHARD W. BELL joined the Company in April 1994 as a marketing
representative and assumed his current position in September 1996. Prior to
joining the Company, Mr. Bell spent more than the past five years as Marketing
Manager-South Central Region for Auto Photo Systems.
There is no family relationship between any present executive officers and
directors.
23
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all cash compensation paid or accrued
by the Company to the Company's President and Chief Executive Officer, former
Chairman of the Board and former Vice-President, Chief Financial Officer for
services rendered in all capacities to the Company for the years ended June 30,
1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS SECURITIES UNDERLYING
----------------------- --------------------------------
NAME AND PRINCIPAL POSITION ALL OTHER
YEAR SALARY BONUS OPTIONS/SARS(1) COMPENSATION
---- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Richard W. Fairchild, Jr. (Resigned 1996 $ 61,167 $ -0- -0- N/A
June 1996) 1995 16,667 -0- 57,410 N/A
Chairman of the Board 1994 N/A N/A N/A N/A
Robert A. Searles, Jr. 1996 $115,000 $ -0- -0- $12,502(3)
President and Chief Executive Officer 1995 120,000 -0- -0- 15,555(2)
1994 120,000 37,500 52,770 15,555(2)
M. G. Morgan (Resigned November 1995) 1996 $ 76,250 $ -0- 50,000 $ 2,400(4)
Vice President-Finance and Chief 1995 120,000 -0- 52,770 7,200(4)
Financial Officer 1994 110,000 15,000 N/A -0-
</TABLE>
(1) Includes 52,770 options to Mr. Searles, 102,770 options to Mr. Morgan
and 57,410 options to Mr. Fairchild, all exercisable at $5.00 per
share.
(2) Represents employer contributions for insurance ($6,233) and a car
allowance ($7,198).
(3) Represents employer contributions for insurance ($8,355) and a car
allowance ($7,200).
(4) Represents employer contributions for a car allowance.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND YEAR-END VALUE
The following table sets forth information with respect to the named
executive officers with respect to the exercise of stock options during the year
ended June 30, 1996 and unexercised stock options held as of June 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
ACQUIRED ON VALUE OPTIONS HELD AT THE MONEY OPTIONS AT
EXERCISE (#) REALIZED ($)(1) JUNE 30, 1996 JUNE 30, 1996(2)
------------ --------------- ---------------------- -----------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Richard W. Fairchild, Jr. -0- $ N/A 75,000/-0- N/A/N/A
Robert A. Searles, Jr. -0- N/A 52,770/-0- N/A/N/A
M. G. Morgan -0- N/A 73,920/-0- N/A/N/A
</TABLE>
(1) Represents the difference between the market price of the underlying
shares of Class A Common Stock at the exercise date and the exercise
price.
(2) Based on the closing price of the Company's Class A Common
Stock in the Nasdaq SmallCap Market on that date.
24
<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement on June 15, 1993 with Mr.
Searles providing for a base salary of $10,000 per month and a primary term of
three years. The Employment Agreement extended to Mr. Searles the opportunity
to subscribe for and purchase up to 51,196 shares of Class A Stock at the
purchase price of $7,500. Any such stock purchased by him was subject to
restrictions on transfer which would lapse with respect to 17,066 shares at the
end of the first year of employment and with respect to an additional increment
of 17,065 shares after each of the second and third years of employment had been
completed. On July 7, 1993 Mr. Searles borrowed $7,500 from the Company and
exercised his right to purchase these shares. On September 1, 1993, the
employment agreement between the Company and Mr. Searles was amended to extend
the term until June 30, 1997, to terminate the restrictions on transfer of the
shares of capital stock purchased by Mr. Searles, to restrict Mr. Searles from
competing with the Company for a two-year period upon termination of the
employment relationship, to provide for a $30,000 bonus to be paid to him on
January 15, 1994 to assist him with federal tax liability with respect to the
exercise of the stock options and to obligate the Company to forgive the $7,500
liability of Mr. Searles under the note executed to borrow the $7,500 if Mr.
Searles remained in the employ of the Company on June 30, 1994. The $30,000
bonus was paid to Mr. Searles and the $7,500 note was forgiven. Under the terms
of the employment relationship with Mr. Searles, he has been provided with a car
allowance, medical insurance and other customary employee benefits.
The Company entered into employment agreements with Messrs. Wimmer and
Stuecheli which became effective as of November 3, 1996. The agreement with Mr.
Wimmer has a term of twenty-four months and from month to month thereafter and
provides for a base salary of $135,000 per annum and the opportunity to earn up
to $40,000 in bonus compensation upon achieving goals established by the Board
of Directors in the Company's business plan. The agreement obligated the
Company to grant to Mr. Wimmer options to purchase an aggregate of 300,000
shares of Class A Common Stock at $0.50 per share, to fund up to $3,000 per
month in commuting expenses between Dallas, Texas and the Company's office and
to provide minimum levels of officers' and directors' liability insurance. The
agreement with Mr. Stuecheli is for a term of twelve months and from month to
month thereafter and provides for a base salary of $80,000 per annum and the
opportunity to earn up to $24,000 in bonus compensation upon achieving goals
established by the Board of Directors in the Company's business plan. The
agreement obligates the Company to grant to Mr. Stuecheli options to purchase an
aggregate of 60,000 shares of Class A Common Stock at $0.50 per share, to fund
up to $2,000 per month in commuting expenses between Dallas, Texas and the
Company' office and to provide minimum levels of officers' and directors'
liability insurance.
The Company entered into a consulting agreement with Robert R. Salyard
which became effective on November 3, 1996. The agreement with Mr. Salyard has
a term of twenty-four months and provides for consulting compensation of
$1,500 per month. The agreement obligated the Company to grant to Mr. Salyard
options to purchase an aggregate of 125,000 shares of Class A Common Stock at
$.50 per share, and to provide minimum levels of officers' and directors'
liability insurance.
Under the terms of the agreements between the Company and each of Messrs.
Wimmer, Stuecheli and Salyard, the Company is obligated to register the Class A
Common Stock underlying the options granted to these persons.
25
<PAGE>
STOCK OPTION PLANS
In September 1993, the Company adopted a stock option plan (the "1993
Plan") pursuant to which 250,000 shares of Class A Common Stock were reserved
for issuance upon exercise of options designated as (i) options intended to
constitute incentive stock options ("ISOs") under the Internal Revenue Code of
1986, as amended (the "Code"), or (ii) non-qualified options. In January 1997,
the shareholders of the Company approved the 1996 stock option plan (the "1996
Plan") pursuant to which 950,000 shares of Class A Common Stock have been
reserved for issuance upon the exercise of options designated either as ISOs or
non-qualified options. ISOs may be granted under the 1993 or the 1996 Plan to
employees and officers of the Company. Non-qualified options may be granted
under either the 1993 or the 1996 Plan to consultants, directors (whether or not
such director is an employee), employees or officers of the Company ("Eligible
Participants"). Additionally, the 1996 Plan permits the Plan Administrator to
make stock grants to Eligible Participants.
The purpose of both of the option plans is to attract and retain the best
available talent and encourage the highest level of performance to serve the
best interests of the Company and its shareholders. The option plans are
administered by the Board of Directors, or, at their discretion, by a committee
which is appointed by the Board to perform such function. The administering
party is referred to herein as the "Plan Administrator." As of the date of this
Prospectus, the Compensation Committee of the Board of Directors is serving as
the Plan Administrator. The Plan Administrator, within the limitations of the
plans, determines, among other things, when to grant options, the persons to
whom options will be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISOs or non-qualified options,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, and whether restrictions such as repurchase
rights in the Company are to be imposed upon the shares subject to options. In
determining the employees, officers, consultants and directors to whom options
should be granted and the number of shares to be covered by such options, the
Plan Administrator is to take into account the nature of their duties, their
present and potential contributions to the success of the Company and such other
factors as they shall deem relevant.
ISOs granted pursuant to the option plans may not be granted at a price
less than the fair market value of the Class A Common Stock on the date of grant
(or 110% of the fair market value in the case of persons holding 10% more of the
voting stock of the Company). The aggregate fair market value of shares for
which ISOs granted to any employee are exercisable for the first time by such
employee during any calendar year (pursuant to all stock option plans of the
Company and any related corporation) may not exceed $100,000. Non-qualified
options may be granted at a price determined by the Plan Administrator, but not
less than the par value of the Class A Common Stock. Options granted pursuant to
the option plans will expire no more than ten years from the date of grant (five
years in the case of ISOs granted to persons holding 10% or more of the voting
stock of the Company).
Options granted pursuant to the option plans are not transferable during
the optionee's lifetime, but are transferable at death by will or by the laws of
descent and distribution.
26
<PAGE>
Prior to the approval of the 1996 Plan, the following options, all
exercisable at $5.00 per share, were outstanding:
NAME NUMBER OF OPTIONS
Richard W. Fairchild, Jr. 75,000
M. G. Morgan 73,920
Robert A. Searles, Jr. 52,770
Deborah Schmied 30,000
Andrew J. Clark, III 25,000
Effective December 6, 1996, the Plan Administrator granted the following
options under the 1996 Plan, all of which are exercisable at $.50 per share and
all of which expire on November 1, 2002:
NUMBER OF
NAME POSITION OPTIONS
Lance P. Wimmer(1)(2) Chairman of the Board, 300,000
President and CEO
Robert R. Salyard(1)(3) Director 125,000
Robert A. Searles, Jr.(2) Executive Vice President and 67,500
Director
John C. Stuecheli(2) Vice President-Finance and Chief 60,000
Financial Officer
Andrew J. Clark, III(3) Director 50,000
Rodger Osgood(2) Vice President-Manufacturing and 28,750
Engineering
John D. Higgins(3) Director 25,000
Sue Camp(2) Corporate Secretary and 15,000
Logistics Manager
Richard W. Bell(2) Director of Marketing 15,000
- -----------
(1) The Employment Agreements and Consulting Agreement, respectively, pursuant
to which Messrs. Wimmer, Stuecheli and Salyard were engaged by the Company
obligated the Company to grant to Messrs. Wimmer, Stuecheli and Salyard the
stock options granted to them by the Plan Administrator.
(2) Incentive Stock Option
(3) Non-incentive Stock Option
The options granted to Messrs. Searles and Clark were conditioned upon them
surrendering for cancellation the 52,770 share option and the 25,000 share
option, respectively, held by them, exercisable at $5.00 per share.
27
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Clark has acted as counsel to the Company since its inception. During
the fiscal year ended June 30, 1996, he was paid an aggregate of $23,497.50 in
fees and expenses, all of which was for work performed prior to the beginning of
the fiscal year. During the year ended June 30, 1996, Mr. Clark billed the
Company an additional $55,585.52 in fees and expenses, none of which were paid.
Mr. Clark, along with twelve other trade creditors of the Company who held in
the aggregate $734,309.84 in debt of the Company, entered into a Settlement
Agreement pursuant to which on November 1, 1996 his claim for $55,585.50 was
settled in exchange for a cash payment of $8,337.83, an aggregate of 16,466
shares of Class A Common Stock and the agreement to pay $680.00 a month for
fifteen months.
Mr. Salyard has served as a consultant to the Company. In November 1996, he
exchanged $22,500 in unpaid consulting fees for an aggregate of 45,000 shares of
Class A Common Stock and 45,000 Private Placement Warrants.
In December 1995, the Company received an interim loan of $160,000 from
C.W. Moody, Jr. ($59,000), Dominion Investment Corporation, an affiliate of J.T.
Trotter ($57,000) and George V. Kane ($44,000) at prime plus 1% with maturity in
June of 1996. These lenders were granted warrants to purchase 16,000 shares of
Class A Common Stock at $4.00 per share. On November 15, 1996 these notes and
warrants were exchanged by the Moody Estate for 118,000 shares of Class A Common
Stock and 118,000 Private Placement Warrants, by Dominion Investment Corporation
for 114,000 shares of Class A Common Stock and 114,000 Private Placement
Warrants and by George V. Kane for 88,000 shares of Class A Common Stock and
88,000 Private Placement Warrants.
In January 1997, John D. Higgins, exchanged $10,000 in unpaid director
fees for an aggregate of 20,000 shares of Class A Common Stock of the Company
and 20,000 Private Placement Warrants.
28
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
PRINCIPAL SHAREHOLDERS
All 1,500,000 shares of Class B Common Stock were issued to and remain
owned of record by Names 'N Faces, Inc. The following table sets forth certain
information as of December 31, 1996, with respect to the beneficial ownership
of shares Class A Common Stock held by (i) each person known by the Company to
be the owner of more than 5% of the outstanding shares Class A Common Stock,
(ii) each director, (iii) each of the executive officers named under "Executive
Compensation", and (iv) all officers and directors as a group.
PERCENTAGE OF OUTSTANDING
SHARES OWNED (2)
-----------------------------------
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) OF CLASS
------------------------ -----------------------------------
Royce Investment Group, Inc.(5) 1,204,994 16.10%
199 Crossways Park Drive
Woodbury, N.Y. 11797
The Estate of C. W. Moody, Jr.(3)....... 463,825 7.25%
P. O. Box 573117
Houston, TX 77257-3117
Petrus Fund, L.P.(4).................... 470,000 6.96%
1700 Lakeside Square
12377 Merit Drive
Dallas, TX 75251
J.T.Trotter (6)......................... 453,452 7.02%
1000 Louisiana, Suite 3600
Houston, TX 77002
John D. Higgins (7). 200,000 3.13%
199 Crossways Park Drive
Woodbury, N.Y. 11797
Robert R. Salyard(8).................... 90,000 1.42%
530 Mulberry Lane
Haverford, PA 19041
Robert A. Searles, Jr.(9)............... 84,946 1.35%
8554 Katy Freeway, Suite 100
Houston, TX 77024
M. G. Morgan(10)........................ 73,920 1.16%
1819 Augusta
Houston, TX 77057
Richard W. Fairchild, Jr.(11)........... 75,000 1.18%
4545 Post Oak Place, Suite 130
Houston, TX 72027
Andrew J. Clark, III................... 16,466 *
1000 Louisiana, Suite 3640
Houston, TX 77002
John C. Stuecheli 10,000 *
8554 Katy Freeway, Suite 100
Houston, TX 77024
Lance P. Wimmer 0 *
8554 Katy Freeway, Suite 100
Houston, TX 77024
All officers and directors as a 418,287 6.46%
group(12) (8 persons)
* Less than 1%
29
<PAGE>
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to shares of Class
A Common Stock beneficially owned by them.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such persons and which are exercisable within 60 days from
the date of this Prospectus have been exercised. In the case of shares
underlying warrants, the number of shares reflected and the exercise price
have been adjusted to give effect to the antidilution adjustment required
resulting from the Company's issuance of 3,245,000 shares in the Private
Placement completed in January 1997.
(3) Includes 165,809 shares owned of record by Lone Star Photo Video, Inc., a
company beneficially owned by the estate of Mr. Moody, 62,016 shares owned
of record by the C. W. Moody Family Trust, of which Mr. Moody was the
beneficiary, 118,000 shares issuable upon exercise of Private Placement
Warrants issued on November 15, 1996 to the Estate of Mr. Moody in exchange
for the surrender of a note of the Company in the amount of $59,000.00 and
warrants to purchase 5,900 shares at $4.00 granted to Mr. Moody in
December 1995 in consideration for loaning the Company $59,000.
(4) Includes 470,000 shares issuable under Warrants granted under a Loan
Agreement and Loan Commitment to Petrus Fund, L.P. that are currently
exercisable. Petrus Fund, L.P. was granted an additional 40,000 warrants
that are not currently exercisable.
(5) Includes 133,747 shares issuable under the unit purchase option granted May
1994, exercisable at $5.96 per unit (consisting of one share and one common
stock warrant) and 133,747 shares of Class A Common Stock issuable upon
exercise of the 133,747 Warrants upon exercise at $5.75 per share. Also
includes 468,750 shares issuable under the unit purchase option granted
Royce Investment Group, Inc. and Spencer Trask Securities, Inc. in December
1996, exercisable at $.50 per unit (consisting of one share and one common
stock purchase warrant) and 468,750 shares issuable upon exercise of the
warrants at $1.00 per share until November 12, 1998 and thereafter until
November 1, 1999 at $1.50 per share.
(6) Includes 63,081 shares issuable under warrants granted in March 1995 to Mr.
Trotter in exchange for his guarantee of the $500,000 loan of the Company,
114,000 shares issuable upon exercise of Private Placement Warrants issued
to Mr. Trotter on November 15, 1996 in exchange for surrender of other
warrants and $57,000 in debt.
(7) Includes 100,000 Private Placement Warrants. The Private Placement Warrants
were acquired on November 1, 1996 along with 100,000 shares of Class A
Common Stock for an aggregate consideration of $50,000 as part of the
Private Placement.
(8) Includes 45,000 Private Placement Warrants. The Private Placement Warrants
and 45,000 shares of Class A Common Stock were acquired on November 15,
1996 upon conversion of $22,500 in debt of the Company to Mr. Salyard for
consulting services.
(9) Includes 33,750 shares issuable upon exercise of currently exercisable
options granted under the Company's 1996 Stock Option Plan.
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(10) Represents 52,770 shares issuable upon exercise of currently exercisable
options granted in February 1994 under the Company's 1993 Stock Option Plan
and 21,150 shares that were exercisable as of November 30, 1995 with
respect to a grant on January 17, 1995 of options to purchase 50,000 shares
under the Company's 1993 Stock Option Plan.
(11) Represents shares issuable upon exercise of currently exercisable options
granted under the Company's 1993 Stock Option Plan.
(12) Includes 195,625 shares issuable upon exercise of warrants and currently
exercisable stock options granted under the Company's 1996 Stock Option
Plan.
SELLING SHAREHOLDERS-PRIVATE PLACEMENT
Pursuant to a Agency Agreement dated September 9, 1996, between the Company
and Royce Investment Group, Inc. and Spencer Trask Securities Incorporated, on
January 8, 1997, the Company completed the Private Placement under which persons
representing that they were Accredited Investors (as defined in Rule 501 of
Regulation D under the Securities Act) acquired an aggregate of 3,245,000 shares
of Class A Common Stock and Private Placement Warrants to purchase 3,245,000
shares of Class A Common Stock. The shares of Class A Common Stock and Private
Placement Warrants were sold in $25,000 Units ("Units") each unit consisting of
50,000 shares of Class A Common Stock and 50,000 Private Placement Warrants.
Neither the Units nor the components of the Units are transferable prior to
March 31, 1997 without the prior written consent of Royce Investment Group, Inc.
Except for John D. Higgins, a director of the Company and an officer of
Royce Investment Group, Inc., one of the placement agents in the Private
Placement, and Lance P. Wimmer, Chairman, President & Chief Executive Officer,
none of the purchasers in the Private Placement was an officer or director or
had a material relationship with the Company within the past three years. The
following table sets forth the names and addresses of each of the persons who
purchased Units in the Private Placement and the number of shares of Class A
Common Stock including shares underlying Warrants to purchase shares of Class A
Common Stock known by the Company to be beneficially owned by such Selling
Shareholders:
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Peter Horrigan 50,000
223 Baker Avenue
Westfield, NJ 07090
Scott Page 50,000
8 Bridle Path Court
Muttontown, NY 11545
Gordon Edelheit and Jami Edelheit JTWROS 50,000
2124 Broadway, Suite 269
New York, NY 10023
Alexander Masucci 100,000
344 West 72nd Street
New York, NY
Nicholas Sitnycky 100,000
35-20 Leverich St., Apt. 622
Jackson Heights, NY 11372
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NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Joseph Mure, Jr. 100,000
327 Beach 145 Street
Neponsit Beach, NY 11694
Neil Axelrod and Deena Axelrod JTWROS 100,000
22 Twillingate Avenue
Easthampton, NY 11937
Myron Weiner 100,000
315 East 86th Street
New York, NY 10028
Fred Nicotra 50,000
260 Main Street
East Rockaway, NY 11563
Deborah A. Lanava 100,000
One Tinker Lane
Greenwich, CT 06830
Peter Montalbano 50,000
264-24 60th Road
Little Neck, NY 11361
Andrew Levey 50,000
2141 Atlantic Blvd.
Atlantic Beach, NY 11509
Michael Mandel 100,000
53 New England Drive
Lake Hiawatha, NJ 07034
Charles R. Buckridge 100,000
6719 S.E. South Marina Way
Stuart, FL 34996
Susan Adelman 50,000
7 Golf View Drive
Northfield, NJ 08225
Arthur L. Filion and Grace M. Filion 50,000
JTWROS
40 Kestrel Drive
Voorhees, NJ 08043
Gary Persichetti 50,000
11 Granada Place
Massapequa, NY 11758
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NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Harry MacDougall Jr. Revocable Trust 50,000
DTD 9/3/94
2204 Dogleg Drive
Sebring, FL 33872
Kenneth B. Milyard, Jr. 100,000
528 Park Ridge Court
Grand Junction, CO 81503
Norman F. Barnes 50,000
217 Konci Terrace
Lake George, NY 12845
Robert P. Miller and Leddy M. Miller 50,000
JTWROS
901 First Street
Ocean City, NJ 08826
Sanjay Kamiani and Kevin A. Broussel TIC 50,000
201 West 70th Street, Apt. 17A
New York, NY 10023
Mark L. Rachleff 50,000
135 East 71st Street, Apt. 17A
New York, NY 10021
Ross Asset Management Limited 200,000
Morrison Kent House 14th
Floor 105 The Terrace
Wellington, New Zealand
Delaware Charter Guarantee and Trust 50,000
Co. C/F Matthew Saltzman IRA
P. O. Box 478
Avon, CT 06001
Lawrence A. Cook 100,000
36 Renee Court
Cheshire, CT 06410
Sagax Find II Ltd. 100,000
c/o International Fund Administration
Ltd.
48 Parla Villa Road, Suite 464
Hamilton, Bermuda HM11
Robert J. Mahon 50,000
26 Garfield Avenue
Avon by the Sea, NJ 07717
Resources Trust Co. FBO William B. 75,000
Dioguardi IRA dated 4/4/83
28 Garfield Avenue
Avon by the Sea, NJ 07717
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NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Delaware Charter Guarantee and Trust 50,000
Co. C/F Victor Melnichuk M/P
575 Burritt Place
Franklin Lakes, NJ 07601
Henry Kolpan 50,000
245 Prospect Ave., Apt. 12B
Hackensack, NJ 07601
William Parisi 50,000
347 Edstan Way
Paramus, NJ 07652
Steve Nicoletti 50,000
682 Clark Avenue
Ridgefield, NJ 07071
Robert F. Koehler Securities Def. Emp. 50,000
Pen. Plan DTD 10/31/87
Robert & Helke Koehler, TTEES
229 Princeton Road
Rochelle Center, NY 11570
Jewel Hirsch 50,000
5 Ramapock Court
Mahwah, NJ 07430
DeCharter Guarantee and Trust Co. C/F 50,000
Vincent Tonne IRA
45 Corte Cayuga
Greenbrae, CA 94904
Bruce Wigo 50,000
1935 SE 25th Avenue
Ft. Lauderdale, FL 33316
Berlin Engineering Assoc. Inc. Profit 50,000
Sharing Plan
Calisto Bernham TTEE
65 Harristown Road
Glen Rock, NJ 07542
Lawrence J. Corneck 100,000
211 West 56th Street, Apt. 27M
New York, NY 10019
Richard M. Hoffman 100,000
60 Brite Avenue
Scarsdale, NY 10583
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<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
David L. Schlotterback 100,000
1410 Suntree Court
Naperville, IL 60564
Equity First Limited Partnership 200,000
222 Kennedy Memorial Drive
Waterville, ME 04901
Independent Trust Corp. FBO Prime 100,000
Discount Securities, Tr. #1205235
15255 South 94th Avenue, Suite 303
Orlando Park, IL 60462
Irvin G. Vincent 50,000
P. O. Box 480
Luxemburg, WI 54217
Delaware Charter Guarantee & Trust Co. 50,000
C/F Robert Cottone IRA
9 Nye Court
Piscataway, NJ 08854
Delaware Charter Guarantee & Trust Co. 50,000
C/F Walter Krzanowski
69 Alfred Street
Clifton, NY 07013
Newton Y. Robinson 50,000
34 Sayles Street
Alfred, NY 14802-0824
OK Associates Pension Trust, Edmund 200,000
O'Connell, Trustee
150 Motor Parkway, Suite 311
Hauppague, NY 11788
Grigsby Bradford Retirement Trust 60,000
101 California Street #2000
San Francisco, CA 94111
Allan Notowitz 50,000
2710 Victoria Manor
San Carlos, CA 94070
Girish K. Bhargava 50,000
5 Amelia Court
Mendham, NJ 07945
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NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
M. Janet DiGuilio 40,000
78 Lakewood Avenue
HoHo Kus, NJ 07423
Christopher Porter 50,000
310 Washington Blvd.
Long Beach, NY 11561
Delaware Charter Guarantee & Trust Co. 50,000
C/F Richard Incontro IRA
31 Pine Street
Ridgefield, NJ 07660
John D Higgins 200,000
105 High Farms Road
Glen Head, NY 11545
Elaine Cotaling 50,000
19 Sylvester Court
East Norwalk, CT 06855
Howard Weiss 200,000
14747 Sutton Street
Sherman Oaks, CA 91403
Travis Green 250,000
10A Mechanic Street
Glen Cove, NY 11542
Neil Bellet 250,000
387 E. Main Street
Bayshore, NY 11706
Raourf Radi 100,000
223 Rice Lake Square
Wheaton, IL 60187
Conrad J. Isoldi 100,000
21 Columbia Avenue
Staten Island, NY 10305
Arthur Inden 100,000
730 Taunton Road
Wilmington, DE 19803
Couch Family Intervivo Trust 1991 50,000
7074 Sepuleda Blvd.
Van Nuyes, CA 91405
Gerald Masucci 100,000
130 East 67th Street
New York, NY 10021
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<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Jack W. Murray & Marion K. Murray JTWROS 100,000
Three Laurent Place
Dallas, TX 75225
Rocco Comis 25,000
1487 East 58th Street
Brooklyn, NY 11234
Stephen A. Lasher Trust 100,000
3638 Meadow Lake
Houston, TX 77027
Steven Prince IRA 100,000
Smith Barney Inc. Rollover Cust.
24 Suncrest Drive
Dix Hills, NY 11746
Frisian Holdings Ltd. 200,000
John V. Broadbent, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
Waal Investments Ltd. 200,000
Robert Oosterwyk, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
Ashdown Holdings Limited 200,000
Simon K. Hearn, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
Lance P. Wimmer 100,000
SEP/IRA
c/o Fidelity Investments
Livingston, Barger, Brandt & Schroeder 40,000
Self Emp. Ret. Plan DTD 9/30/94,
William C. Wetzel, TTEE FBO
Richard E. Stites
115 W. Jefferson Street, Suite 400
Bloomington, IL 61701
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<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Donald F. Frazee 50,000
9 Albright Road
Kingwood, WV 26537
John Mickowski 50,000
127 Main Street
Franklin, NJ 07416
_____________
* Includes shares issuable upon exercise of Common Stock Purchase Warrants
SELLING SHAREHOLDERS-UNIT PURCHASE OPTION
Pursuant to a Agency Agreement dated September 9, 1996, between the
Company and Royce Investment Group, Inc. and Spencer Trask Securities
Incorporated, the Company issued Unit Purchase Options consisting of 486,750
shares of Class A Common Stock and 486,750 Special Private Placement Warrants to
the placement agents (the "Agency Placement"). The 973,500 shares of Class A
Common Stock are to be offered herein.
SELLING SHAREHOLDERS-OTHER
In December 1995, C. W. Moody, Jr., a director and principal shareholder,
Dominion Investment Corporation, an affiliate of J. T. Trotter, a principal
shareholder, and George V. Kane, Jr. loaned the Company $59,000, $57,000 and
$44,000, respectively, in exchange for the Company's notes ("Interim Notes") and
warrants to purchase an aggregate of 37,830 shares of Class A Common Stock (the
"Interim Warrants"). In satisfaction of a condition of closing the Private
Placement, the Interim Notes and the Interim Warrants were surrendered upon the
first closing of the Private Placement in exchange for an aggregate of 320,000
shares of Class A Common Stock and 320,000 Private Placement Warrants. In
January 1997, 67,816 shares of Class A Common Stock and 67,816 Private Placement
Warrants were sold by the Estate of C. W. Moody, Jr. to John F. Higgins whose
father is a director of the Company.
Robert R. Salyard, a director of the Company, upon the first closing of the
Private Placement exchanged $22,500 in consulting fees receivable from the
Company for 45,000 shares of Class A Common Stock and 45,000 Private Placement
Warrants.
In January 1997, John D. Higgins a director of the Company, exchanged
$10,000 in unpaid director fees for an aggregate of 20,000 shares of Class A
Common Stock of the Company and 20,000 Private Placement Warrants.
These six shareholders (the Estate of C.W. Moody, Jr., Dominion Investment
Corporation, George V. Kane, Jr., Robert R. Salyard, John D. Higgins and John F.
Higgins) have agreed not to sell publicly any securities of the
Company prior to November 1, 1997 without the prior written consent of Royce
Investment Group, Inc. The 385,000 shares of Class A Common Stock and
385,000 shares of Class A Common Stock issuable upon exercise of 385,000 Private
Placement Warrants are to be offered herein.
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PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby may be sold from time to time by
the Selling Shareholders, or by the Selling Shareholders' pledgees, donees,
transferees or other successors in interest, either directly by the Selling
Shareholder owning such shares or such Selling Shareholder's successors in
interest or through agents, underwriters or dealers. Such sales may be effected
in transactions in the Nasdaq SmallCap Market, on any exchange on which the
Common Stock may from time to time be traded, in independent, negotiated
transactions or otherwise. The shares of Common Stock offered hereby may be sold
at market prices prevailing at the time of sale or at negotiated prices. The
shares may be sold in the following manner: (i) a block trade in which the
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (ii) a purchase by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (iii) an
ordinary brokerage transaction; or (iv) a transaction in which the broker
solicits purchasers.
Any broker, dealer or underwriter to be utilized by a Selling Shareholder
will be selected by such Selling Shareholder. Any compensation payable to such
persons by a Selling Shareholder will be negotiated in the future. The Selling
Shareholders and any underwriters, dealers or agents that participate in
distribution of the shares offered hereby may be deemed to be underwriters, and
any profit on sale of the shares by the Selling Shareholders and any discounts,
commissions or concessions received by any underwriter, dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933 (the "Securities Act").
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 of Class
A Common Stock, $.10 par value per share, of which 6,400,136 shares were
outstanding as of the date of this Prospectus; 1,500,000 of Class B Common
Stock, $.01 par value per share, all of which are held by Names 'N Faces; and
100,000 of Preferred Stock, $1.00 par value per share, none of which are
presently outstanding. All outstanding shares of Class A Common Stock and all
shares of capital stock of the Company to be outstanding upon completion of this
offering will be, when issued, fully paid and non-assessable.
COMMON STOCK - CLASS A AND CLASS B
The holders of shares of Class B Common Stock shall not be entitled to
receive and the Company shall not pay any dividends to the holders of shares of
Class B Common Stock until such time as the Company has accumulated earned
surplus equal to at least $1,000,000 in the aggregate. After the Company has
accumulated earned surplus equal to at least $1,000,000 in the aggregate, the
holders of shares of Class B stock shall be entitled to receive the same
dividends as are declared and paid on each share of Class A Common Stock;
provided, however, that the total amount of dividends paid to the holders of
Class B Common Stock shall not exceed the "distribution amount" (as defined
herein), and all dividends to holders of shares of Class A Common Stock and
shares of Class B Common Stock are subject to the prior and superior rights in
any resolution or resolutions providing for the issue of a series of Preferred
Stock. In the event of any liquidation, dissolution or winding up of the affairs
of the Company, after payment to the holders of Preferred Stock of the amounts
to which they are entitled pursuant to the resolution or resolutions of the
Board of Directors providing for the issue of a series of Preferred Stock, the
holders of Class A Common Stock and Class B Common Stock shall be entitled to
share ratably in all assets then remaining subject to the condition that holders
of shares of Class B Common Stock shall not be entitled to share ratably in
assets of the Company until the holders of Class A Common Stock have received,
as a group, in
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distributions in liquidation or in dividends prior to dissolution, or in both,
an amount equal to $1,000,000 and the total amount of distributions in
liquidation plus all prior dividends paid to the holders of shares of Class B
Common Stock as a group shall not exceed the distribution amount. The
distribution amount shall equal the lesser of $1,000,000 or the aggregate of
$750,000 plus interest at the rate of 3% per annum compounded yearly, computed
on the amount by which $750,000 plus any accrued interest hereunder exceeds the
amount of distributions as are made to the holders of Class B Common Stock. Once
holders of Class B Common Stock have received the distribution amount, they
shall be entitled to no further payments or distributions from the Company and
the shares of Class B Common Stock outstanding shall be returned and canceled.
VOTING RIGHTS
Except as otherwise provided by law or in the resolution or resolutions by
the Board of Directors provided for the issue of any series of Preferred Stock,
the holders of Class A Common Stock shall have the exclusive right to vote for
the election of directors and for all other purposes. The holders of shares of
Class A Common Stock are entitled to one vote per share on all matters submitted
to a vote of shareholders. Shares of Class A Common Stock do not have cumulative
voting rights which means that the holders of a majority of the shares voting
for the election of the Board of Directors elect all of the directors and, in
such event, the holders of the remaining shares will not be able to elect any
directors.
PREFERRED STOCK
The Preferred Stock may be issued in series and shares of each series shall
have such rights and preferences as shall be fixed by the Board of Directors in
the resolution or resolutions authorizing the issuance of that particular
series. In designating any series of Preferred Stock, the Board of Directors has
authority, without further action by the shareholders, to fix the number of
shares constituting that series and to fix the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including any
sinking fund provision) and the liquidation preferences of that series of
Preferred Stock. It is anticipated that the holders of any series of any
Preferred Stock, when and if issued, will have priority claims to dividends and
to any distribution upon liquidation of the Company, and may have other
preferences over the common stock, including the preferential right to elect
directors in the event preferred dividends are not paid for a specified period.
No Preferred Stock has been issued and the Company has no present plans to do
so. See "Risk Factors-Potential Anti-Takeover Effects of Discretionary Issuance
of Preferred Stock."
PREEMPTIVE RIGHTS
Shareholders of the Company do not have preemptive rights to subscribe for
or purchase any stock, obligations, warrants or any securities of the Company.
WARRANTS
Redeemable Warrants. There are outstanding in stock purchase warrants (the
"Redeemable Warrants") to purchase 1,666,615 shares of Class A Common Stock that
were issued by the Company in May 1994 as a part of the Company's initial public
offering. Each Redeemable Warrant entitles the registered holder to purchase one
share of Class A Common Stock, at an exercise price of $5.31 at any time prior
to the close of business on May 11, 1997, providing that at such time a current
prospectus relating to the Class A Common Stock is in effect and the Class A
Common Stock is qualified for sale or exempt from qualification under applicable
states securities laws.
The Redeemable Warrants are redeemable by the Company on 30 days' prior
written notice at a redemption price of $.01 per Redeemable Warrant, provided
the average closing bid price of the Company's
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Class A Common Stock in the over-the-counter market as reported by Nasdaq for
any 20 consecutive business days ending within five days of the notice of
redemption exceeds $9.00 per share (subject to adjustment by the Company as
described below, in the event of any reverse stock split or similar events)
provided no closing bid price during such period was less than $8.25. The notice
of redemption will be sent to the registered address of the registered holder of
the Redeemable Warrant. All Redeemable Warrants must be redeemed if any are
redeemed.
Private Placement Warrants. As a part of the Company's private placement
that was concluded on January 8, 1997, the Company issued Private Placement
Warrants to purchase an aggregate of 3,610,000 shares of Class A Common Stock.
Each Private Placement Warrant entitles the registered holder to purchase one
share of Class A Common Stock, at an exercise price of $1.00 per share (subject
to adjustment) at any time prior to the close of business on november 1, 1998,
and at $1.50 per share (subject to adjustment) at any time prior to expiration
of the Warrant on November 1, 1999. Each of the holders of shares of Class A
Common Stock and Warrants acquired in the private placement are subject to a
lock-up agreement not to sell any of such securities until March 31, 1997; 75%
of such securities until June 30, 1997; 50% of such securities until
September 30, 1997; and 25% of such securities until December 31, 1997.
Special Private Placement Warrants. Pursuant to the Agency Placement, the
Company issued Unit Purchase Options consisting of 486,750 shares of Class A
Common Stock and 486,750 Special Private Placement Warrants to the placement
agents. Each Special Private Placement Warrant entitles the registered holder
to purchase one share of Class A Common Stock, at an exercise price of $1.00 per
share (subject to adjustment) at any time prior to the close of business on
November 1, 1998, and at $1.50 per share (subject to adjustment) at any time
prior to expiration of the Warrant on November 1, 2001.
The exercise price of the warrants was in each case determined by
negotiations between the Company and its investment bankers and should not be
construed to predict, or to imply that, any price increases will occur in the
Company's securities. The exercise price of the warrants and the number and kind
of shares of Class A Common Stock or other securities and property to be
obtained upon exercise of the warrants are subject to adjustment in certain
circumstances, including a stock split of, or stock dividend on, or subdivision,
combination of recapitalization of, the Common Stock or the issuance of shares
of Common Stock at less than the market price of the Common Stock. Additionally,
an adjustment would be made upon the sale of all or substantially all of the
assets of the Company for less than the market value, a merger or other unusual
events (other than share issuances pursuant to employee benefit and stock
incentive plans for directors, officers and employees of the Company) so as to
enable warrant holders to purchase the kind and number of shares or other
securities or property (including cash) receivable in such event by a holder of
the kind and number of shares of Class A Common Stock that might otherwise have
been purchased upon exercise of such warrant. No adjustment for previously paid
cash dividends, if any, will be made upon exercise of the warrants. The Company
is not required to issue fractional shares of its Class A Common Stock and in
lieu thereof will make a cash payment based upon the current market value of
such fractional shares.
The warrants do not confer upon the warrant holder any voting or other
rights as a shareholder of the Company. Upon notice to the warrant holders, the
Company has the right to reduce the exercise price or extend the expiration date
of the warrants. All other right is intended to benefit the warrant holders, to
the extent the Company exercises this right when the warrants would otherwise be
exercisable at a price higher than the prevailing market price for Class A
Common Stock, the likelihood of exercise and the result and increase in the
number of shares outstanding, may result in making more costly, or impeding, a
change in control of the Company.
LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS
In accordance with the Texas Business Corporation Act, the Company has
included a provision in its Articles of Incorporation to limit the personal
liability of its directors for violations of their fiduciary duty. The provision
eliminates directors liability to the Company or its stockholders for monetary
damages, except (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit.
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Additionally, in accordance with the Texas Business Corporation Act, the
Company's Articles of Incorporation and Bylaws indemnifies its directors against
liability which they may incur in their capacity as a director against
judgments, penalties, fines, settlements and reasonable expenses incurred in
connection with threatened, pending or completed civil, criminal,
administrative, or investigative proceedings by reason of the fact that he is or
was a director, officer, employee, fiduciary or agent of the Company if such
director acted in good faith and in a manner reasonably believed to be in the
best interests of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling or persons controlling
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's Class B Common Stock,
all of which is held of record by one securityholder.
On May 11, 1994 the Company commenced an initial public offering pursuant
to which an aggregate of 1,265,000 shares of the Class A Common Stock were
issued and sold as part of 1,265,000 units, with each unit consisting of one
share of Class A Common Stock and one Redeemable Warrant to purchase one share
of Class A Common Stock at an exercise price of $7.00 per share at any time for
three years after issuance. The Redeemable Warrants are subject to redemption by
the Company commencing six months following the date of the offering for $.01
per warrant in the event the Class A Common Stock trades in excess of $9.00 per
share for 20 consecutive business days.
The Class A Common Stock did not separately trade until August 9, 1994. The
Class A Common Stock and the Redeemable Warrants are listed on the Boston Stock
Exchange and are also traded in the Nasdaq SmallCap Market under the Symbol
"IRATAW". See "Risk Factors-Possible Delisting of Securities from The Nasdaq
Stock Market; Disclosure Relating to Low-Priced Stocks.". For the year ended
June 30, 1996, the high bid and low bid price for Class A Common Stock as
reported by Nasdaq was $5.625 and $3.125, respectively. Based upon information
provided by the Company's transfer agent the Company has approximately 80
holders of record of its equity securities who are believed by the Company to
hold for the benefit of approximately 1,100 shareholders.
DIVIDENDS
To date, the Company has not declared or paid any dividends on its capital
stock. The payments of dividends, if any, is within the discretion of the Board
of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Board does
not intend to declare any dividends in the foreseeable future, but instead
intends to retain all future earnings, if any, for use in the Company's business
operations. See "Risk Factors-No Dividends Likely in the Foreseeable Future."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock and the Warrant Agent
is Continental Stock Transfer & Trust Company, New York, New York.
42
<PAGE>
REPORTS TO SHAREHOLDERS
The Company furnishes its shareholders with annual reports containing
audited financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Andrew J. Clark, III, Houston, Texas.
EXPERTS
The financial statements of the Company for the year ended June 30, 1995,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their respective report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report given upon authority of such firm as
experts in accounting and auditing. The financial statements of the Company for
the year ended June 30, 1996 were audited by Lane Gorman Trubitt, L.L.P., as set
forth in their respective report thereon appearing elsewhere herein and in the
Registration Statement and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The Company's financial statements were previously audited by Ernst &
Young LLP, whose resignation, effective June 11, 1996, was accepted by the
Board of Directors. The Company subsequently engaged Lane Gorman Trubitt, L.L.P.
to perform audit services for the year ended June 30, 1996. Ernst & Young's
report on the Company's financial statements for the two years ended June 30,
1995 contained an unqualified opinion. However, the audit report included an
explanatory paragraph that raised substantial doubt about the Company's ability
to continue as a going concern. At no time was there any disagreement between
the Company and Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. See
"Auditors Report Containing Going Concern Qualification."
43
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form SB-2, (together with any amendments thereto, the
"Registration Statement") under the
Securities Act with respect to the shares of Class A Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which are omitted in accordance with the rules and regulations of the Commission
and certain items of which may be contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission and to which reference is hereby made for further information with
respect to the Company and the Class A Common Stock. Items of information
omitted from this Prospectus but contained in the Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, New
York, NY10048, and Citicorp Center, 500 West Madison, Suite 1400, Chicago, IL
60661. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. The address
of the Web site is http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission referred to above. In addition, copies of such reports, proxy
statements and other information concerning the Company may also be inspected
and copied at the offices of The Nasdaq Stock Market at 175 K Street, N.W.,
Washington, D.C. 20006-1506 on which the Class A Common Stock is traded.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Financial Statements
Statements of Operations for Three Months Ended September 30, 1995 and 1996.................. 46
Balance Sheet as of September 30, 1996....................................................... 47
Statements of Cash Flows for Three Months Ended September 30, 1995 and 1996.................. 48
Notes to Financial Statements............................................................. 49-51
Reports of Independent Auditors................................................................ 52-53
Financial Statements
Balance Sheet as of June 30, 1996............................................................ 54
Statements of Operations for Years Ended June 30, 1995 and 1996.............................. 55
Statements of Stockholders' Equity for Years Ended June 30, 1995 and 1996.................... 56
Statements of Cash Flows for Years Ended June 30, 1995 and 1996.............................. 57
Notes to Financial Statements............................................................. 58-67
</TABLE>
45
<PAGE>
IRATA, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
1995 1996
----------------------------
<S> <C> <C>
Revenues........................................................ $2,118,558 $1,827,651
Cost of Services:
Site rent..................................................... 739,630 691,768
Route labor................................................... 225,987 180,170
Equipment depreciation........................................ 239,349 247,295
Consumables................................................... 166,437 189,085
Freight and installation costs................................ 57,830 73,268
Loss on disposal of property & equipment...................... 115,936 57,903
Other costs of service........................................ 37,229 41,778
------------ ------------
Total cost of services.......................................... 1,582,398 1,481,267
------------ ------------
Gross profit.................................................... 536,160 346,384
Selling, general and administrative expenses:
Salaries and wages............................................ 292,279 238,092
Professional fees............................................. 81,485 196,012
Insurance..................................................... 33,542 20,133
Marketing..................................................... 34,167 9,606
Travel and entertainment...................................... 3,409 6,627
Depreciation and amortization................................. 8,094 11,384
Personal property and francise taxes.......................... 0 29,877
Office expense................................................ 71,221 70,348
Bad debt...................................................... 4,824 0
------------ ------------
Total selling, general and administrative expenses.............. 529,021 582,079
------------ ------------
Operating income (loss)......................................... 7,139 (235,695)
Other income (expense):
Interest expense.............................................. (67,874) (62,924)
Financing costs............................................... (68,499) (67,842)
Interest income............................................... 166 0
Other, net.................................................... 1,419 1,336
------------ ------------
Total other income (expense).................................... (134,788) (129,430)
------------ ------------
Net loss........................................................ (127,649) (365,125)
============ ============
Net loss per share.............................................. $ (0.05) $ (0.14)
============ ============
Weighted average number of common or equivalent shares outstanding. 2,542,611 2,550,071
============ ============
</TABLE>
See accompanying notes.
46
<PAGE>
IRATA, INC.
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1996
- ------ ----
<S> <C>
Current assets:
Cash.......................................................... $ 16,359
Accounts receivable-trade, net of $10,000 allowance........... 411,425
Accounts receivalbe-other..................................... 21,014
Consumable inventory.......................................... 230,205
Prepaids and other current assets............................. 94,542
--------------
Total current assets.................................... 773,545
Property and equipment, at cost:
Equipment-Booths.............................................. 6,145,202
Components and hardware....................................... 527,084
Furniture, fixtures and equipment............................. 232,393
--------------
6,904,679
Accumulated depreciation...................................... (1,815,071)
--------------
Total property and equipment, net....................... 5,089,608
Other assets:
Deferred loan costs, net...................................... 414,722
Other, net.................................................... 65,568
--------------
480,290
--------------
Total assets............................................ $ 6,343,443
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Trade accounts payable........................................ $ 1,192,228
Sales and use tax payable..................................... 563,453
Short-term notes-stockholders................................. 160,000
Site rents payable............................................ 14,467
Other accrued liabilities..................................... 188,985
--------------
Total current liabilities............................... 2,119,133
Long-term debt.................................................. 2,150,000
Commitments
Stockholders' equity:
Preferred stock, $1 par value:
100,000 shares authorized, zero issued.................. --
Class A common stock, $.10 par value:
20,000,000 shares authorized, 2,550,071 issued and
outstanding........................................... 255,007
Class B common stock, $.01 par value:
1,500,000 shares authorized, issued and outstanding..... 15,000
Additional paid-in-capital.................................... 6,504,991
Accumulated deficit........................................... (4,700,688)
--------------
Total stockholders' equity.............................. 2,074,310
--------------
Total liabilities and stockholders' equity.............. $ 6,343,443
==============
</TABLE>
See accompanying notes.
47
<PAGE>
IRATA, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1995 1996
------------------------------
<S> <C> <C>
Operating activities
Net loss...................................................... $ (127,647) $ (365,125)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization................................. 247,443 258,681
Financing costs............................................... 68,499 70,758
Loss on disposal of property and equipment.................... 115,936 57,903
Changes in operating assets and liabilities:
Accounts receivable - trade................................... 20,177 61,162
Accounts receivable - other................................... (4,246) (10,829)
Other current assets.......................................... (31,796) (64,465)
Other assets.................................................. (17,665) (10,476)
Accounts payable.............................................. 78,859 (990)
Sales and use tax payable..................................... 95,624 (1,493)
Site rents payable............................................ 17,853 (120,551)
Other accrued liabilities..................................... (51,396) 22,271
------------------------------
Net cash provided (used) by operating activities................ 411,641 (103,154)
Investing activities
Purchase of property and equipment............................ (689,886) (54,839)
------------ --------------
Net cash used in investing activities........................... (689,886) (54,839)
Financing activities
Proceeds from Loan Agreement, net............................. 315,000 --
Principal payments on short-term notes........................ (70,021) --
------------ --------------
Net cash provided by financing activities....................... 244,979 --
------------ --------------
Net (decrease) increase in cash and cash equivalents............ (33,266) (157,993)
Cash and cash equivalents at beginning of year.................. 186,052 174,352
------------ --------------
Cash and cash equivalents at end of period...................... $ 152,786 $ 16,359
============ ==============
</TABLE>
See accompanying notes.
48
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
IRATA, Inc. (the "Company") was incorporated March 20, 1992 under the laws
of the State of Texas, for the purpose of acquiring and operating VIDEO FOTO
booths ("Booths") throughout the United States at shopping malls, theme parks,
discount stores and other areas of high traffic. The Booths produce a black &
white computer generated, laser printed image superimposed on a variety of
background options.
The accompanying unaudited interim financial statements of the Company have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations. The accompanying unaudited interim financial statements reflect all
adjustments which the Company considers necessary for a fair presentation of the
results of operations for the interim periods covered and for the financial
condition of the Company at the date of the interim balance sheet. All such
adjustments (except as otherwise disclosed herein) are of a normal recurring
nature. Results for the interim periods are not necessarily indicative of
results for the year.
Revenue Recognition
The Company recognizes revenue as products and services are provided. Location
owners where booths are sited are paid a fixed rental, percentage of net
revenues or a combination thereof, which is recorded as site rent. The
independent service contractor is also paid a fixed commission, a percentage
based upon the net revenues generated by the Booths serviced by him, or a
combination thereof, which is recorded as route labor.
Statement of Cash Flows
Supplemental disclosures of cash flow information are as follows:
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
---- ----
Interest paid $59,310 $65,210
Taxes paid --- ---
Reduction of Sales and Use Taxes Payable --- 55,000
49
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions
and improvements are capitalized while minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are expensed as
incurred. Depreciation is provided using the straight line method over the
estimated useful lives of the various classes of assets, as follows:
ESTIMATED
---------
USEFUL LIFE
-----------
Booths............................... 5 to 7 Years
Furniture, Fixtures and Equipment.... 3 to 7 Years
Components and hardware consist of parts used to construct and repair Booths.
No depreciation is provided on new parts until they are installed into a Booth
and that Booth is placed into service.
2. SUBSEQUENT EVENTS
Private Placement
On November 1, 1996 the Company had an initial closing on $1,200,000 of a
$1,500,000 Private Offering to Accredited Investors of Units (the "Private
Placement"), each Unit consisting of 50,000 shares of Class A Common Stock and
50,000 Common Stock Purchase Warrants. The Offering Price is $25,000 per Unit.
The maximum offering is 69 Units ($1,725,000). On November 1, 1996 the Company
received proceeds of $1,044,000 from the initial $1,200,000 closing of the
Private Placement.
Each warrant will be exercisable for a period of three years after the initial
closing date into one share of common stock at an exercise price equal to $1.00
per share during the first two years and $1.50 per share thereafter. The
Warrants will be protected against dilution upon the occurrence of certain
events, including, but not limited to, sales of shares of common stock for less
than fair market value, certain dividends, split-ups, reclassifications, and
asset sales. The Company has agreed to register for resale the shares issued at
closing and the shares issued or issuable upon exercise of the Warrants under
the Securities Act of 1933, on or prior to December 31, 1996, subject to certain
lock-up provisions. If the registration is not declared effective by March 1,
1997, then the Company will issue to each investor 5,000 shares for each unit.
If the registration statement is not declared effective by April 1, 1997, then
the Company will issue an additional 5,000 shares for each unit.
Approximately $128,000 of the proceeds was used for the initial payment to
creditors under the Trade Payable Agreement. An additional $371,000 was used to
pay a State of Texas Sales and Use Tax Audit assessment. The remainder of the
proceeds will be used to assemble new booths and for working capital purposes.
50
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS -(CONTINUED)
(UNAUDITED)
Lender Agreement
On October 31, 1996 the Company executed an Amended and Restated Loan
Agreement (the "Lender Agreement"). The Lender agreed to reinstate the Original
Agreement of June 5, 1995 and waive the existing defaults. The Company had been
in default on its loan covenants with its Lender since July 1995.
The Lender Agreement provides for payments of interest only at an annual rate
of 12% commencing November 1, 1996, and the first day of each month thereafter
until maturity on June 2, 1998 at which time all outstanding principal is due
and payable. The facility fee of $35,000 due on June 1, 1996, and certain legal
fees and consulting expenses of $97,639 incurred by the Lender were added to the
principal resulting in a total principal outstanding of $2,247,639 as of October
31,1996. Among other provisions, the negotiated terms provide for extensive
revisions to all financial ratio covenants consistent with a revised detailed
financial plan developed by Management.
Trade Payable Agreement
The level of past due trade payables had increased significantly since March
1996. To resolve this situation, effective November 1, 1996, the Company
successfully concluded a restructuring of certain trade payables totaling
$734,000 (the "Trade Payable Agreement"). The trade creditors holding these
payables agreed to exchange the amounts owed for a combination of 15% cash, 18%
cash payable in 15 equal monthly installments and 67% stock. The price of the
stock to be issued to the trade creditors is to be the greater of $2.25 per
share or the lower of: (a) 80% of the average closing price at which the Class A
Common Stock of the Company trades during the 30 calendar day period following
the date of closing of this offering or (b) the lowest closing price at which
the Class A Common Stock trades during such 30-day period. On November 1, 1996,
the Company issued checks totaling $128,000 to the trade creditors for the 15%
initial payment and the first two monthly installments.
51
<PAGE>
IRATA, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Irata, Inc.
We have audited the accompanying balance sheet of Irata, Inc. as of June 30,
1996, and the related statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Irata, Inc. at June 30, 1996,
and the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements as of and for the year ended June 30,
1996 have been prepared assuming that Irata, Inc. will continue as a going
concern. As more fully described in Note 2, the Company has incurred recurring
losses and has a working capital deficiency. In addition, the Company has not
complied with certain covenants of a loan agreement with a Lender. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Lane Gorman Trubitt, L.L.P.
Dallas, Texas
August 29, 1996
52
<PAGE>
IRATA, INC.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Irata, Inc.
We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of Irata, Inc. for the year ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Irata, Inc.
for the year ended June 30, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Irata,
Inc. will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring losses and has a working capital deficiency. In
addition, the Company has not complied with certain covenants of a loan
agreement with a Lender. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Houston, Texas
September 22, 1995
53
<PAGE>
IRATA, INC.
BALANCE SHEET
JUNE 30, 1996
ASSETS
------
Current assets:
Cash.......................................................... $ 174,352
Accounts receivable-trade, net of $10,000 allowance........... 472,587
Accounts receivable-other..................................... 10,185
Consumable inventory.......................................... 200,581
Prepaids and other current assets............................. 71,368
-----------
Total current assets.................................... 929,073
Property and equipment, at cost:
Equipment-Booths.............................................. 6,318,711
Components and hardware....................................... 507,499
Furniture, fixtures and equipment............................. 203,931
-----------
7,030,141
Accumulated depreciation...................................... (1,624,354)
-----------
Total property and equipment, net....................... 5,405,787
Other assets:
Deferred loan costs, net...................................... 463,838
Other, net.................................................... 66,347
-----------
530,185
-----------
Total assets............................................ $ 6,865,045
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable........................................ $ 1,129,829
Long-term debt in default..................................... 2,150,000
Sales and use tax payable..................................... 620,660
Short-term notes-stockholders................................. 160,000
Short-term note-vender........................................ 63,389
Site rents payable............................................ 135,018
Other accrued liabilities..................................... 166,714
-----------
Total current liabilities............................... 4,425,610
Commitments
Stockholders' equity:
Preferred stock, $1 par value:
100,000 shares authorized, zero issued.................. --
Class A common stock, $.10 par value:
20,000,000 shares authorized, 2,550,071 issued and
outstanding........................................... 255,007
Class B common stock, $.01 par value:
1,500,000 shares authorized, issued and outstanding..... 15,000
Additional paid-in-capital.................................... 6,504,991
Accumulated deficit........................................... (4,335,563)
-----------
Total stockholders' equity.............................. 2,439,435
-----------
Total liabilities and stockholders' equity.............. $ 6,865,045
===========
See accompanying notes.
54
<PAGE>
IRATA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
---------------------
1995 1996
---------------------
<S> <C> <C>
Revenues......................................................... $5,520,452 $7,451,098
Cost of services:
Site rent...................................................... 1,724,559 2,778,502
Route labor.................................................... 622,723 780,431
Equipment depreciation......................................... 650,822 1,111,191
Consumables.................................................... 528,771 760,530
Freight and installation costs................................. 174,063 329,976
Loss on disposal of property & equipment....................... 188,925 771,363
Other costs of service......................................... 124,565 214,608
----------- ----------
Total cost of services........................................... 4,014,428 6,746,601
----------- ----------
Gross profit..................................................... 1,506,024 704,497
Selling, general and administrative expenses:
Salaries and wages............................................. 982,356 1,101,870
Professional fees.............................................. 480,745 405,042
Insurance...................................................... 101,218 154,212
Marketing...................................................... 99,447 117,251
Travel and entertainment....................................... 41,647 52,818
Depreciation and amortization.................................. 37,865 42,834
Personal property and franchise taxes.......................... 19,941 51,465
Office expense................................................. 230,111 267,167
Bad debt....................................................... 64,459 16,626
----------- ----------
Total selling, general and administration expenses............... 2,057,789 2,209,285
----------- ----------
Operating loss................................................... (551,765) (1,504,788)
Other income (expense):
Interest expense............................................... (43,778) (342,166)
Financing costs................................................ (14,107) (271,365)
Interest income................................................ 29,128 284
Other, net..................................................... (15,278) 3,478
----------- ----------
Total other income (expense)..................................... (44,035) (609,769)
----------- ----------
Net loss......................................................... (595,800) (2,114,557)
=========== ==========
Net loss per share............................................... $ (0.24) $ (0.83)
=========== ==========
Weighted average number of common or equivalent shares outstanding. 2,534,711 2,545,409
=========== ==========
</TABLE>
See accompanying notes.
55
<PAGE>
IRATA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Common Stock Class B Common
----------------------- --------------------- Additional Total
Number of Nunber of Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- ----------- ----------- -------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994............... 2,367,992 $ 236,799 1,500,000 $ 15,000 $ 5,471,004 $ (1,625,206) $ 4,097,597
Exercise of overallotment,
net of costs.......................... 165,000 16,500 -- -- 676,193 -- 692,693
Stock awards........................... 9,619 962 -- -- 28,983 -- 29,945
Value of warrants issued in connection
with Loan Agreement.................. -- -- -- -- 313,200 -- 313,200
Net loss............................... -- -- -- -- -- (595,800) (595,800)
---------- ----------- ----------- -------- ------------- -------------- -------------
Balance at June 30, 1995............... 2,542,611 254,261 1,500,000 15,000 6,489,380 (2,221,006) 4,537,635
Stock awards........................... 7,460 746 -- -- 13,311 -- 14,057
Value of warrants issued in connection
with Loan Agreement.................. -- -- -- -- 2,300 -- 2,300
Net loss............................... -- -- -- -- -- (2,114,557) (2,114,557)
---------- ----------- ----------- -------- ------------- -------------- -------------
Balance at June 30, 1996............... 2,550,071 $ 255,007 1,500,000 $ 15,000 $ 6,504,991 $ (4,335,563) $ 2,439,435
========== =========== =========== ======== ============= ============== =============
</TABLE>
See accompanying notes.
56
<PAGE>
IRATA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1995 1996
---------------------------------
<S> <C> <C>
Operating activities
Net loss...................................................... $ (595,800) $ (2,114,557)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................. 688,687 1,154,025
Financing costs............................................... 14,107 271,365
Loss on disposal of property and equipment.................... 188,925 771,363
Stock awards.................................................. 29,945 14,057
Changes in operating assets and liabilities:
Accounts receivable-trade..................................... (277,681) (51,724)
Accounts receivable-other..................................... (20,921) 16,445
Other current assets.......................................... (221,112) 21,200
Other assets.................................................. (10,615) (33,976)
Accounts payable.............................................. 690,058 301,544
Sales and use tax payable..................................... 62,628 518,541
Site rents payable............................................ (30,312) 121,518
Other accrued liabilities..................................... (38,592) 63,681
---------------------------------
Net cash provided by operating activities....................... 479,317 1,053,482
Investing activities
Purchases of property and equipment........................... (4,762,891) (1,447,646)
Maturity of short-term investments............................ 1,016,765 --
Proceeds from insurance claim for damaged property............ 25,294 --
------------- --------------
Net cash used in investing activities........................... (3,720,832) (1,447,646)
Financing activities
Proceeds from bank notes...................................... 600,000 --
Principal payments on bank notes.............................. (600,000) --
Proceeds from short-term notes................................ -- 160,000
Proceeds from exercise of overallotment, net.................. 692,693 --
Proceeds from Loan Agreement, net............................. 1,404,107 315,000
Principal payments on short-term notes........................ (67,459) (92,536)
------------- --------------
Net cash provided by financing activities....................... 2,029,341 382,464
------------- --------------
Net (decrease) increase in cash and cash equivalents............ (1,212,174) (11,700)
Cash and cash equivalents at beginning of year.................. 1,398,226 186,052
------------- --------------
Cash and cash equivalents at end of year........................ $ 186,052 $ 174,352
============= ==============
</TABLE>
See accompanying notes.
57
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
IRATA, Inc. (the "Company") was incorporated March 20, 1992 under the laws of
the State of Texas, for the purpose of acquiring and operating VIDEO FOTO
("Booths") throughout the United States at shopping malls, theme parks, retail
stores and other areas of high pedestrian traffic. The Booths produce a computer
generated laser printed image with various background options.
Revenue Recognition
The Company recognizes revenue as products and services are provided.
Landlords are paid a fixed rental, percentage of net revenues or a combination
thereof, which is recorded as site rent. The independent service contractor is
also paid a fixed commission, a percentage based upon the net revenues generated
by the Booths serviced by him, or a combination thereof, which is recorded as
route labor.
Statement of Cash Flows
Supplemental disclosures of cash flow information are as follows:
1995 1996
---- ----
Interest paid...................................... $ 22,140 $264,162
Taxes paid......................................... --- ---
Conversion of vendor payable to note............... 223,384 35,000
Warrant value associated with the Loan Agreement... 313,200 2,300
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions
and improvements are capitalized while minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Depreciation is provided using the straight line method
over the estimated useful lives of the various classes of assets, as follows:
ESTIMATED
USEFUL LIFE
-----------
Equipment-Booths 5 to 7 Years
Furniture, Fixtures and Equipment 3 to 7 Years
Components and hardware consist of parts used to construct and repair Booths. No
depreciation is provided for these parts until they are installed into a Booth
and that Booth is placed into service. Used parts are recorded at the lower of
cost or net realizable value.
Other Assets
Organization costs are amortized using the straight-line method over five
years. Deferred loan costs are amortized over the life of the loan (see Note 4).
Certain technology currently utilized in the Company's Booths has been treated
by the Company as proprietary. The Company has determined that seven years is an
appropriate life for proprietary process.
58
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
Expenditures related to printer software upgrades are capitalized and
amortized over three years which the Company has determined to be the estimated
useful life.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted marginal tax rates and laws that will be in effect when the
differences reverse.
Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Loss Per Share
Loss per share has been computed based upon the weighted average number of
common and common equivalent shares outstanding. The Class B Common Stock has
not been considered in the loss per share computation because it is not
considered a Senior security or a common stock equivalent based on rights
associated with the Class B Common Stock. Options and warrants have not been
included in the computation as they have an antidilutive effect.
Reclassifications
Certain reclassifications have been made to conform to the 1996 presentation
Inventory
Consumable inventory is stated at the lower of cost or market. Cost is
determined principally by the first-in, first-out method.
Newly Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which is
effective for the Company's 1997 fiscal year end. The adoption of SFAS No. 121
is not expected to have a material impact on the Company's financial position,
liquidity, cash flow or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which requires companies to measure employee stock compensation
plans based on the fair value method of accounting or to continue to apply APB
No. 25, "Accounting for Stock Issued to Employees" and provide pro forma
footnote disclosures under the fair value method in SFAS No. 123. The Company
has decided to
59
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
adopt SFAS No. 123 through disclosure only, and accordingly, pro forma fair
value disclosures will be made in the 1997 financial statements.
Fair Value of Financial Instruments
Fair value of financial instruments are estimated to approximate the related
book values, unless otherwise indicated, based on market information available
to the Company.
2. LIQUIDITY AND WORKING CAPITAL DEFICIT
As of June 30,1996 the Company recognized a net loss of $2,114,557. A
significant portion of this loss is attributable to the costs associated with
certain non-recurring events. During the current fiscal year, the Company
permanently removed approximately 120 booths from operations. These early
prototype booths, which were acquired in 1992, contained older components, which
had high failure rates and, in some cases, replacement parts were no longer
available to supply them. Also, the cabinet construction was not designed for
high traffic, unattended locations, resulting in security problems. These booths
were replaced with the current booth, which has a sturdier cabinet and more
reliable up-to-date components. As a result of this decision, the Company
incurred a charge of approximately $300,000, representing the undepreciated book
value of these older booths. In addition, the Company reduced the carrying value
of hardware and components by approximately $470,000, to account for
obsolescence and to value used parts at the lower of cost or realizable value.
The removal and replacement of these booths accounted for a significant part of
the installation costs.
During May 1996, the State of Texas conducted a sales and use tax audit for
the period March 1992 to March 1996. In connection with the auditor's review of
sales records, the Company was unable to provide documentation to show that
certain third party operators, who collect cash from the photo booths, had paid
the appropriate sales tax or that they had obtained sales tax exemption
certificates from the appropriate state tax authority. As a result of this
review , the Company was issued a preliminary delinquent sales tax assessment of
approximately $150,000. Management is pursuing collection of taxes or submission
of certificates from third party operators to mitigate the sales tax liability.
Additionally, the Company has been assessed use tax of approximately $150,000 on
booth components acquired from out of state vendors. The use tax obligation was
capitalized and is being depreciated over the life of the related components.
Accordingly, the sales and use tax has been charged to operations or capitalized
in the accompanying financial statements for 1996. The provision did not have a
material effect on the Company's financial position or results of operations for
1996.
The Company has been in default on its loan covenants with its Lender since
July 1995. In August 1996, the Company negotiated an agreement with its Lender
to revise certain covenants to bring the Company into compliance. Among other
provisions, the negotiated terms provide for extensive revisions to all
financial ratio covenants consistent with a revised detailed financial plan
developed by Management. In addition, the Company must satisfy certain
conditions including raising $1,500,000 through a Private Placement with net
proceeds of at least $1,250,000.
The level of past due trade payables has increased significantly since March
1996. To resolve this situation, the Company successfully concluded a
restructuring of certain trade payables totaling $734,000. The trade creditors
holding these payables agreed to exchange the amounts owed for a combination of
15% cash, 18% cash payable in 15 equal monthly installments and 67% stock. The
restructuring is subject to completion of the Private Placement. The price of
the stock to be issued to the trade creditors is to be the
60
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
greater of $2.25 per share or the lower of: (a) 80% of the average closing price
at which the Class A Common Stock of the Company trades during the 30 calendar
day period following the date of closing of this offering or (b) the lowest
closing price at which the Class A Common Stock trades during such 30-day
period.
If the Company is unsuccessful in completing the Private Placement, the
Lender Agreement or the Trade Payable Agreement, the Company's ability to
continue as a going concern will be in doubt.
The Company had a working capital deficit of $3,496,537 as of June 30, 1996.
If the Company receives the Private Placement proceeds, finalizes the Lender
Agreement and completes the Trade Payable Agreement, it will have working
capital of approximately $500,000. Management intends to use the proceeds for
the initial payments under the Trade Payable Agreement, payment of delinquent
sales and use taxes, building of approximately 100 new booths and other working
capital purposes.
3. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 100,000 shares of preferred stock,
none of which are outstanding. The Company's Board of Directors is authorized to
provide for the issuance of the preferred stock in series, to establish the
number of shares to be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, rights, conversion privileges, dividend rates, redemption
rights, sinking fund provisions and liquidation rights which shall be superior
to the common stock.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Class A Common
Stock with a par value of $.10 per share and 1,500,000 shares of Class B Common
Stock with a par value of $.01 per share. Class B Common Stock shareholders are
entitled to receive the same distribution as Class A Common Stock shareholders,
up to the Distribution Amount after the Company has accumulated retained
earnings equal to $1,000,000. The Distribution Amount is the lessor of
$1,000,000 or the aggregate of $750,000 plus interest at a rate of 3% per annum
compounded yearly, computed on the amount by which $750,000 plus any accrued
interest exceeds the amount distributed to the holders of Class B Common Stock.
The accrual started with the filing of the Articles of Incorporation (March 12,
1992). On September 29, 1993 the shareholders approved an amendment to the
Company's Articles of Incorporation providing for the cancellation and
retirement of the Class B Common Stock once the holders receive the Distribution
Amount.
The holders of Class A Common Stock are each entitled to one vote for every
share held and have the exclusive right to vote for the election of directors,
unless the Board of Directors includes the right to vote for directors in any
series of preferred stock issued. Holders of Class B Common Stock have no voting
privileges, except as provided by law. Holders of Class B Common Stock will not
share in dissolution until $1,000,000 is received by holders of Class A Common
Stock and their share is limited to the Distribution Amount.
During the years ended June 30, 1995 and 1996, the Company awarded 9,619 and
3,413 shares, respectively, of Class A Common Stock to employees. Compensation
expense was recognized for the stock
61
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
awards totaling $29,945 and $13,652, respectively, based on the fair value of
the common stock awarded. In March 1996 the Company issued 4,047 shares of Class
A Common Stock to a stockholder in connection with a 1993 agreement. The shares
were valued at $405.
Options
In October 1994, the Board of Directors of the Company increased the number of
Class A Common Stock shares available to the stock option plan from 175,900 to
350,000. Stock options granted may be either qualified incentive stock options
or non qualified options. The exercise price must be at least 100% of the fair
market value per share of the stock on the date of grant, except that such price
must be at least 110% of the fair market value per share for any grantee who
owns more than 10% of the outstanding shares of Class A Common Stock. The
options are exercisable over a period of ten years with the initial right to
exercise starting on the date of grant.
In October 1993, the Company granted 52,770 options each to an officer and
former officer of the Company and 17,590 options each to a director and former
director of the Company to purchase Class A Common Stock at $5.00 per share. The
options have a five year term and are immediately exercisable. In January 1995
the Company amended options granted to the director and former director of the
Company from 17,590 to 25,000 options.
In May 1994, the Company granted 45,000 options to a former officer of the
Company to purchase Class A Common Stock at $5.00 per share. The options are
exercisable in increments of 15,000 over a three year period commencing May 1995
subject to the officer being in the employ of the Company on the anniversary
dates. The officer resigned in June 1996, therefore, 15,000 shares were canceled
and 30,000 shares remain exercisable.
In connection with the registration statement, the underwriters received an
option to purchase up to 110,000 Equity Units at $7.25 per Equity Unit
exercisable over a four year period commencing one year from the effective date
of the registration statement.
In January 1995, the Company granted up to 50,000 options to a former officer of
the Company to purchase Class A Common Stock exercisable at $5.00 per share. The
options vest in increments of one share for each $100 in financing achieved by
the Company prior to December 31, 1995. In June 1995, the Company entered into
the Loan Agreement for a $3,500,000 line of credit. The Lender advanced
$2,115,000 prior to this date. Therefore, 21,150 options were exercisable as of
June 30, 1996. The options have a five year term.
In May 1995, the Company granted 50,000 options to purchase Class A Common
Stock at $5.00 per share in connection with an employment agreement entered into
between the Company and a former officer. The options have a five year term and
are immediately exercisable.
62
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
The following schedule summarizes the changes in employee and other stock
options:
Option Price
-----------------------------------
Number of Per Share Total Option Price
Shares
-------------------------- ------------------
Outstanding at June 30, 1994 295,720 $5.00 - $7.25 $ 1,726,100
(250,720 exercisable)
For the year ended
June 30,1995:
Granted 99,820 $5.00 499,100
Canceled --- ---
-------- ------------------
Outstanding at June 30, 1995 395,540 2,225,200
(348,540 exercisable)
For the year ended
June 30, 1996:
Granted --- ---
Canceled (28,850) $5.00 (144,250)
-------- ------------------
Outstanding at June 30,
1996 366,690 2,080,950
(366,690 exercisable)
======== ==================
Warrants
In connection with a private placement in fiscal year 1993, the Company
issued warrants to soliciting brokers to purchase 8,464 shares of Class A Common
Stock at $3.66 per share through March 31, 1997.
In connection with the Bridge Financing completed in January 1994 , the
Company issued 300,000 warrants to purchase Class A Common Stock at an exercise
price of $2.50 per share through December 20, 1996.
The 1,100,000 redeemable stock warrants included in the Equity Units from the
public offering and the 165,000 redeemable stock warrants from the exercise of
the overallotment are exercisable for $7.00 at any time for three years after
issuance. The stock warrants are subject to redemption by the Company six months
following the date of the offering for $.01 per warrant in the event the Class A
Common Stock trades in excess of $9.00 per share for 20 consecutive business
days.
In connection with the short-term financing in March 1995 , the Company issued
25,000 warrants to purchase Class A Common Stock at an exercise price of $5.00
per share. The warrants have a 5 year term.
In connection with the Loan Agreement (see Note 4), the Company issued
warrants to purchase Class A Common Stock at an exercise price of $6.63 per
share of Class A Common Stock subject to anti-dilution provisions. As of June
30, 1996 470,000 warrants were exercisable through June 1, 2000. An additional
21,000 warrants to purchase Class A Common Stock was issued to a third party in
connection with the private placement at an exercise price of $5.00. These
warrants are all exercisable and expire on June 1, 2000.
63
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
In connection with the short-term financing in December 1995 (see Note 4), the
Company issued 16,000 warrants to purchase Class A Common Stock at an exercise
price of $4.00 per share through December 21, 2000.
4. DEBT
In June 1995, the Company entered into a Loan Agreement with a Lender for a
$3,500,000 line of credit, evidenced by a Note and Security Agreement granting
to the Lender a first lien security interest in the assets of the Company. The
terms of the Loan Agreement provided an initial draw of $1,800,000 on June 5,
1995 which was used to pay an existing bank loan of $500,000, pay fees and costs
associated with obtaining this line of credit, and provide working capital
needs. Subsequent loan draws are to provide the Company with amounts equal to
$5,000 for each new VIDEO FOTO booth placed in service during the term of the
loan agreement. The Loan Agreement provides for payments of interest only at an
annual rate of 12% due on July 1, 1995, and the first day of each month
thereafter until maturity on June 2, 1998 at which time all outstanding
principal is due and payable. The Company may pay off the loan at an earlier
date incurring a penalty not to exceed 2% of the total available borrowing limit
available during the preceding year. The Company also will pay the Lender an
annual commitment fee of $35,000. as part of the Loan Agreement the company also
entered into a Warrant Purchase Agreement whereby the Lender may receive
warrants to purchase up to 260,000 shares of the Company's Class A Common Stock.
The warrants must be exercised within 5 years from the closing date of the loan
agreement and the exercise price is $6.63 per share of Class A Common Stock
subject to anti-dilution provisions. The warrants are exercisable as follows:
100,000 exercisable from June 2, 1995 to June 1, 2000
120,000 exercisable from June 2, 1996 to June 1, 2000
40,000 exercisable from June 2, 1997 to June 1, 2000
--------
260,000
========
The 120,000 and 40,000 warrants are only exercisable if the Company has not
paid off the remaining balance of the line of credit prior to the exercisable
dates noted in the table above.
Additionally, in June 1995, the Company and the Lender entered into a Loan
Commitment Agreement whereby the Lender agreed to enter into an additional
$2,000,000 Loan Agreement upon satisfaction of certain conditions including the
full funding of the $3,500,000 line of credit. The terms of the $2,000,000 line
of credit are to be similar to the terms of the $3,500,000 line of credit and
the funds are for the construction of new VIDEO FOTO booths. As a result of this
Loan Commitment, the Lender and the Company entered into a Warrant Purchase
Agreement whereby the Lender may receive warrants to purchase up to 250,000
shares of the Company's Class A Common Stock. The warrants must be exercised
within 5 years from June 2, 1995. The exercise price is $6.63 per share of Class
A Common Stock subject to anti-dilution provisions. The warrants are exercisable
as follows:
140,000 exercisable from June 2, 1995 to June 1, 2000
110,000 exercisable from January 10, 1996 to June 1, 2000
--------
250,000
========
The Company also issued 21,000 warrants to purchase Class A Common Stock with
an exercise price of $5.00 to a third party in connection with the Loan
Agreement. These warrants are all exercisable and expire in the year 2000.
64
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
The Company capitalized the costs of obtaining the financing totaling
$709,093, which includes the 240,000 warrants exercisable by the Lender as of
June 30, 1995 and the 21,000 issued to the third party all at a value of $1.20,
as deferred loan costs, to be amortized over the life of the Loan Agreement. The
warrants were determined to have a fair value, by independent appraisal, of
$1.20 for each share of Class A Common Stock the warrant holder is entitled to
purchase. The remaining 270,000 warrants will be capitalized as deferred loan
costs at their fair value if and when they become exercisable as noted above.
In June 1996 an additional 230,000 warrants became exercisable. These warrants
were determined to have a fair value of $.01 for each share of Class A Common
Stock the warrant holder is entitled to purchase. The Company capitalized the
costs of the warrants as deferred loan costs, to be amortized over the life of
the Loan Agreement.
Subsequent to June 5, 1995, the Lender provided the Company with $315,000 in
additional draws for booths placed in service. In connection with the Lender
Agreement negotiated in August 1996, the annual commitment fee due June 1996 was
added to the outstanding principal.
The Loan Agreement contains various loan covenants and the Company is in
default.(see note 2)
In February 1995, the Company issued an unsecured promissory note to a vendor
for $223,384. The note bore interest at 15% with a maturity date of January 3,
1996. The unpaid principal balance of $63,389 is included in the Trade Payable
Agreement. (See note 2)
In February 1995, the Company borrowed $100,000 from a financial institution
to be utilized as short-term working capital. The note bore interest at 11% and
was due in November 1995. However, the Company paid the principal and interest
due in March 1995.
In March 1995, the Company borrowed $500,000 from a financial institution to
be utilized as short-term working capital. The note bore interest at 11% and was
due in September 1995. However, the Company paid the principal and interest due
in June 1995.
In December 1995, the Company borrowed $160,000 from related parties, issuing
unsecured promissory notes. The notes bear interest at prime plus 1% with a
maturity date of June 5, 1996. In connection with the borrowing, the Company
issued warrants to purchase 16,000 shares of Class A Common Stock at $4.00 per
share. Interest expense on these loans for 1996 was $5,415.
5. COMMITMENTS
Leases
The Company leases its office and warehouse facilities under noncancelable
operating leases expiring at various dates through April 30, 2001. In May 1995
the Company entered into a noncancelable operating lease for its marketing
office space expiring May 31, 1998. The Company closed this office in May 1996
and entered into a sub-lease for approximately 70% of base rent. Rental expense
for the leases were $48,593 and $111,636 for the years ended June 30, 1995 and
1996, respectively.
65
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
Future minimum lease payments, by year and in the aggregate, excluding
sublease income, under these leases consisted of the following at June 30,1996:
1997................................ $ 97,183
1998................................ 92,374
1999................................ 84,085
2000................................ 84,085
2001................................ 74,770
--------
$432,497
========
In addition to the noncancelable operating leases, the Company leases space
for each Booth operating under cancelable lease agreements. The lease terms for
each Booth location are generally less than three months and the agreements are
renewable on a month-to-month basis.
In connection with certain Booth leases, the Company recognized revenue of
approximately $630,000 and $780,000 for the years ended June 30, 1995 and 1996,
respectively from Booths located in various stores owned by one national
discount store chain. The Company also recognized revenue of approximately
$416,000 and $507,000 for the years ended June 30, 1995 and 1996, respectively
from Booths located in various stores owned by one national arcade.
License Agreements
The Company has an agreement to use software and pays a monthly maintenance
fee of $2.50 for each booth in operation up to a cap of $3,000 per month. In
addition, the Company pays an initial $100 fee for each new 600 dpi printer
software installed in a booth up to 500 copies. Additional copies may be
purchased at $75 each. The Company incurred obligations of $9,535 and $34,837
in 1995 and 1996,respectively. The maintenance fee is charged to cost of sales
when incurred and the initial fee is amortized over three years.
Litigation
The Company, in the normal course of business, is a party to a number of
lawsuits and other proceedings. The company's Management does not expect that
the results of these lawsuits and proceedings will have a material impact on the
Company's financial position or results of operations.
6. INCOME TAXES
At June 30, 1996, the Company has net operating loss carryforwards of
approximately $4,980,000, subject to limitations as described below and will
expire in 2009 through 2011.
In May 1994, the Company successfully filed a registration statement
experiencing an ownership change and consequently is subject to limitation on
the utilization of $1,385,000 of its net operating loss under the Internal
Revenue Code of 1986. The annual limitation for utilizing the net operating
losses prior to the ownership change is $240,000. To the extent the annual
limitation exceeds the Company's taxable income for a given year, the excess may
be added to a subsequent year's limitation.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
66
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
Significant components of the Company's deferred tax liabilities and assets are
as follows:
1995 1996
---- ----
Deferred tax liabilities:
Tax over book depreciation $ 309,852 $ 363,266
---------- -----------
Total deferred tax liabilities 309,852 363,266
Deferred tax assets:
Net operating loss carryforwards 1,008,298 1,693,082
Other 36,968 60,041
---------- -----------
Total deferred tax assets 1,045,266 1,753,123
---------- -----------
Net deferred tax asset 735,414 1,389,857
Valuation allowance for deferred tax (735,414) (1,389,857)
assets ---------- -----------
Net deferred taxes $ -- $ --
========== ===========
7. RELATED PARTY TRANSACTIONS
The Company expensed $120,000 and $59,700 during the year ended June 30,1995
and 1996, respectively, in exchange for consulting and legal services from a
stockholder and a director. At June 30, 1996, the Company owed related parties
$59,000 which is included in accounts payable.
67
<PAGE>
======================================= =============================
No dealer, salesman or other person has
been authorized to give any information
or to make representations, other than IRATA, INC.
those contained in this Prospectus,
and, if given or made, such information
or representations must not be relied 8,233,500 SHARES OF
upon as having been authorized by the CLASS A COMMON STOCK
Company or by the Underwriter. This
Prospectus does not constitute an offer
to seek, or a solicitation of an offer
to buy any securities offered hereby by
anyone in any jurisdiction in which
such offer to solicitation is not
qualified and to do so or to anyone to
whom it is unlawful to make such offer
or solicitation.
______________
TABLE OF CONTENTS
Page
______________
Prospectus Summary.................... 2
Risk Factors.......................... 5 PROSPECTUS
Capitalization........................ 9 ______________
Use of Proceeds....................... 10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 11
Business.............................. 15 ____________________
Management............................ 22
Executive Compensation................ 24
Principal and Selling Shareholders.... 29
Plan of Distribution.................. 39
Description of Securities............. 39
Legal Matters......................... 43
Experts............................... 43
Additional Information................ 44
Index to Financial Statements......... 45
_____________
JANUARY , 1997
======================================== =============================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Articles of Incorporation of the Company, as amended, provide that to
the fullest extent permitted by law, directors shall not be liable to the
Company for monetary damages for breach of fiduciary duty as a director and to
the fullest extent permitted by law, the Company shall indemnify the directors
from any liability resulting from acting as directors. The Bylaws of the Company
provide that a director shall not be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its shareholders, including any transaction from which the director
derived an improper personal benefit, (ii) for acts of omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law
or (iii) under Article 2.41 of the Texas Business Corporation Act ("TCBA") which
relates to the unlawful payment of dividends or other distributions beyond that
permitted under Article 2.38 of the TBCA.
Article 2.02-1(B) of the TBCA sets forth the standard that a director must
meet to be entitled to indemnification. The director must have conducted himself
in good faith and must have reasonably believed, in the case of conduct in his
official capacity as a director, that his conduct was in the Company's best
interest and in all other cases, that his conduct was not opposed to the best
interest of the Company and, in the case of a criminal proceeding, that he had
no reasonable cause to believe that his conduct was unlawful. Article 2.02-1(C)
provides that with certain limits and exceptions, a director may not be
indemnified when he is found liable to the Company or if he is found liable on
the basis that personal benefit was improperly received by him.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of expenses incurred by the Company in
connection with the issuance and distribution of the securities being registered
hereunder. All amounts are estimated except the Commission filing fee.
Securities and Exchange Commission registration fee...... $ 2,339
Printing and engraving expenses.......................... 4,000
Legal fees and expenses.................................. 25,000
Accounting fees and expenses............................. 5,000
Miscellaneous............................................ 2,000
Total..................................... $38,339
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth on a pro forma basis, giving effecting to
adjustments under the anti-dilution provisions of the applicable securities
resulting from subsequent issuance of capital stock, certain information with
respect to sales of securities of the Company during the past three years:
A. In February 1995, the Company issued an unsecured promissory note to
Microage Technologies for $223,384. The note bore interest at 15% per annum
with a maturity date of January 3, 1996. The unpaid principal balance of
$63,389 was extinguished as a part of the trade payable agreement (see paragraph
J. below).
B. In February 1995, the Company borrowed $100,000 from a financial
institution to be utilized as short-term working capital. The note bore
interest at 11% and was due in November 1995. However, the Company paid the
principal and interest due in March 1995.
C. In March 1995, the Company borrowed $500,000 from a financial
institution to be utilized as short-term working capital. The note bore
interest at 11% and was due in September 1995. However, the Company paid the
principal and interest in June 1995.
D. In June 1995, the Company entered into a loan agreement with Petrus
Fund, L.P. for a $3,500,000 line of credit evidenced by note and security
agreement granting to the lender a first lien security interest in the assets of
the Company. The loan agreement provides for the payment of interest at an
annual rate of 12% with interest being payable monthly until June 2, 1998, at
which all outstanding principal is due and payable. As a part of the loan
agreement, the Company entered into a warrant purchase agreement whereby the
lender received warrants to purchase 260,000 shares of the Company's Class A
Common Stock at $6.63 per share expiring June 1, 2000. Additionally, the
Company and Petrus Fund, L.P. entered into a loan commitment agreement pursuant
to which the lender agreed to enter into an additional $2,000,000 loan agreement
upon satisfaction of certain conditions, including the full funding of the
$3,500,000 line of credit. As a result of this loan commitment, the lender and
the Company entered into a warrant purchase agreement pursuant to which the
lender received warrants to purchase up to 250,000 shares of the Company's Class
A Common Stock exercisable at $6.63 per share.
E. In connection with the Petrus Fund, L.P. loan agreement, the Company
issued warrants to purchase 52,988 shares of Class A Common Stock exercisable at
$1.98 per share at any time prior to June 1, 2000. These securities were issued
to Hill Branscomb and Venlease Associates in consideration for their acting as
finders in connection with the transaction.
F. In December 1995, the Company borrowed $160,000 from C. W. Moody, Jr., a
director of the Company, Dominion Investment Corporation, an affiliate of J. T.
Trotter, a principal shareholder of the Company, and George V. Kane, Jr.,
issuing the Company's unsecured promissory notes bearing interest at prime plus
1% with a maturity date of June 5, 1996. In connection with this borrowing, the
Company issued warrants to purchase an aggregate of 37,830 shares of Class A
Common Stock exercisable at an exercise price of $1.59 per share.
G. Pursuant to an agency agreement with Royce Investment Group, Inc. and
Spencer Trask Securities Incorporated, the Company issued an aggregate of
3,245,000 shares of Class A Common Stock
II-2
<PAGE>
and warrants to purchase 3,245,000 shares of Class A Common Stock exercisable at
$1.00 per share until November 1, 1998 and $1.50 per share at any time prior to
expiration on November 1, 1999. The shares were issued to persons who
represented that they were accredited investors in a Reg D transaction.
H. As additional compensation to the placement agents for the issuance and
sale of the shares of Class A Common Stock and Private Placement Warrants in the
Private placement set forth in paragraph G. above, the Company issued a unit
purchase option to the placement agents to purchase 486,750 shares of Class A
Common Stock and warrants to purchase 486,750 shares of Class A Common Stock
exercisable at $.50 per unit, with each unit consisting of one share of Class A
Common Stock and one private placement warrant.
I. On November 15, 1996, in satisfaction of a condition of the Private
Placement, the Company issued an aggregate of 320,000 shares of Class A Common
Stock and warrants to purchase an aggregate of 320,000 shares of Class A Common
Stock to the Estate of C. W. Moody, Jr., Dominion Investment Corporation and
George V. Kane, Jr. in exchange for the interim notes and warrants described in
paragraph F. above.
J. Upon the first closing of the private placement on November 1, 1996,
the following trade creditors, including Andrew J. Clark, III, a director of the
Company, holding an aggregate of $734,000 in trade payables of the Company
extinguished their debt in consideration for 15% cash, 18% cash payable in 15
equal monthly installments and 217,545 shares of Class A Common Stock of the
Company valued at $2.25 per share:
All Points Moving & Storage Co., Inc. Handmade Software Incorporated
AllStar Systems, Inc. Mark Hamilton Construction, Inc.
Andrew J. Clark III MicroAge Technologies
CNC Industries, In Technical Cables, Inc.
Dell Computer Corporation Tekbuilt, Inc.
Elliott & Associates Twin Industries, Inc.
Fish Construction, Inc.
K. On November 1, 1996, Robert R. Salyard, a director and consultant to
the Company, surrendered a trade payable for $22,500 in exchange for the
issuance of 45,000 shares of Class A Common Stock of the Company and 45,000
private placement warrants.
L. On November 18, 1996, Corporate Laser Charge, Inc. d/b/a Toner
Cartridge Express, an unsecured creditor holding $118,686 in trade payables of
the Company, extinguished its debt in consideration for $30,000 in cash payments
and 50,678 shares of Class A Common Stock of the Company valued at $1.75 per
share.
M. In January 1997, John D. Higgins, a director to the Company, exchanged
$10,000 in unpaid director fees for an aggregate of 20,000 shares of Class A
Common Stock of the Company and 20,000 Private Placement Warrants.
Each of the transactions was exempt from registration under the Securities
Act of 1933 ("33 Act") under the provisions of Section 4.2. The private
placement described in paragraph G. above was exempt under the provisions of
Regulation D of the 33 Act.
II-3
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
1.1** -- Agency Agreement between the Company and Royce Investment
Group, Inc. and Spencer Trask Securities Incorporated
1.2** -- Unit Purchase Option between the Company and Royce Investment
Group, Inc. and Spencer Trask Securities Incorporated
2.1* -- Formation and Settlement Agreement dated effective as of
March 23, 1992 by and among the Company, Buffalo Incorporated,
Names 'N Faces, Inc., Lone Star Photo Video, Inc. and the
C. W. Moody Family Trust.
3.1* -- Articles of Incorporation of the Company.
3.2* -- Articles of Amendment to the Articles of Incorporation of the
Company filed October 8, 1993.
3.3* -- Articles of Amendment to the Articles of Incorporation of the
Company filed December 22, 1993.
3.4* -- Bylaws of the Company
4.1** -- Form of Common Stock Purchase Warrant to purchase shares of
Class A Common Stock issued to the Selling Shareholders
pursuant to the Agency Agreement and issued to the Estate of
C. W. Moody, Jr., Dominion Investment Corporation,
George V. Kane, John D. Higgins and Robert R. Salyard
5.1 -- Opinion of Andrew J. Clark, III, Counsel to Registrant re:
Legality.
10.1* -- Release and Exchange Agreement dated effective as of
March 23, 1992 between the Company and Hill Branscomb.
10.2* -- Form of Investor Release and Exchange Agreement dated
effective as of March 31, 1992 between the Company and an
investor in Buffalo Incorporated.
10.3* -- Assignment dated June 22, 1992 from the C. W. Moody, Jr.Family
Trust to the Company.
10.4* -- General Conveyance, Assignment and Transfer dated effective
as of June 22, 1992 from Lone Star Photo Video, Inc. to the
Company.
10.5* -- Letter Agreement dated April 8, 1992 between Data East U.S.A.,
Inc. and the Company.
10.6* -- Settlement and Release Agreement dated effective as of
August 11, 1993 between Data East U.S.A., Inc. and the Company.
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.7* -- Employment Agreement dated June 15, 1992 between the Company
and Robert A. Searles, Jr.
10.8* -- First Amendment to Employment Agreement between the Company and
Robert A. Searles, Jr. dated September 1, 1993.
10.9* -- Employment Agreement dated September 1, 1993 between the
Company and M. G. Morgan.
10.10* -- First Amendment to the Employment Agreement between the
Company and M. G. Morgan dated effective as of
January 19, 1994.
10.11* -- 1993 Stock Option Plan of the Company.
10.12* -- Stock Option Agreement dated February 8, 1994 between the
Company and Robert A. Searles, Jr.
10.13* -- Stock Option Agreement dated February 8, 1994 between the
Company and M. G. Morgan.
10.14* -- Stock Option Agreement dated February 8, 1994 between the
Company and Andrew J. Clark, III.
10.15* -- Stock Option Agreement dated February 8, 1994 between the
Company and Richard W. Fairchild, Jr.
10.16* -- Memorandum of Agreement dated effective February 1994 between
the Company, J. T. Trotter and George V. Kane, Jr.
10.17* -- Form of Consulting Agreement to be dated the Effective Date
of the Registration Statement between the Company and Royce
Investment Group, Inc.
10.18** -- 1996 Stock Option Plan of the Company
10.19** -- Form of Stock Option Agreement used by the Company to grant
incentive stock options under the 1996 Plan
10.20** -- Form of Stock Option Agreement used by the Company to grant
non-qualified stock options under the 1996 Plan
10.21** -- Consulting Agreement dated as of November 1, 1996 between the
Company and Robert R, Salyard
10.22** -- Executive Employment Agreement dated effective
November 1, 1996 between the Company and Lance P. Wimmer
10.23** -- Executive Employment Agreement dated effective
November 5, 1996 between the Company and John C. Stuecheli
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.24** -- Subscription Agreement dated effective as of September 9, 1996
between the Company and Robert R. Salyard
10.25** -- Subscription Agreement dated effective as of September 9, 1996
between the Company and Dominion Investment Corporation,
George V. Kane, Jr. and the Estate of C. W. Moody, Jr.
10.26** -- Settlement Agreement and Release dated effective as of
November 18, 1996 between the Company and Corporate Laser
Charge, Inc.
10.27** -- Form of Supplement Letter to Supplement Agreement with trade
creditors
10.28** -- Form of First Amendment to settlement and Release between the
Company and trade creditors
10.29** -- Form of First Amendment to settlement and Release between the
Company and trade creditors
10.30** -- Amended and Restated Loan agreement dated as of
October 31, 1996 between Petrus fund, L.P. and the Company
10.31** -- Subscription Agreement dated January 22, 1997 between the
Company and John D. Higgins
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Lane Gorman Trubitt, L.L.P.
23.3 -- Consent of Andrew J. Clark, III, Counsel to Registrant, is
included in his opinion filed as Exhibit 5.1 to this
Registration Statement
- --------------
* Filed as exhibits to the Company's Form SB-2 Registration Statement
(File No. 33-75216) effective May 11, 1994
** To be filed as an Amendment to this Registration Statement
II-6
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) include any additional or changed material information on
the plan of distribution.
(2) That, for determining liability under the Securities Act, it will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Houston,
State of Texas, on the 28th day of January, 1997.
IRATA, INC.
By: /s/ Lance P. Wimmer
_______________________________
Lance P. Wimmer
Chairman of the Board,
President and CEO
KNOW ALL MEN BY THEIR PRESENCE, that each person whose signature appears
below constitutes and appoints Robert A. Searles, Jr. and Lance P. Wimmer, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments to this Registration Statement), and to file the same, with all
exhibits hereto, and other documents in connection herewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitutes or
substitutes, may lawfully do or cause to be done by virtue hereof. In accordance
with the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities stated on
January 28, 1997.
SIGNATURE TITLE
/s/ Lance P. Wimmer Chairman of the Board, President and Chief
- --------------------------- Executive Officer and Director (Principal
Lance P. Wimmer Executive Officer)
/s/ John C. Stuecheli Vice President-Finance and Chief
- --------------------------- Financial Officer (Principal Financial
John C. Stuecheli and Accounting Officer)
/s/ Andrew J. Clark, III
- --------------------------- Director
Andrew J. Clark, III
/s/ Robert A. Searles, Jr.
- --------------------------- Director
Robert A. Searles, Jr.
/s/ John D. Higgins
- --------------------------- Director
John D. Higgins
/s/ Robert R. Salyard
- --------------------------- Director
Robert R. Salyard
II-8
<PAGE>
EXHIBIT 5.1
ANDREW J. CLARK, III
ATTORNEY AT LAW
1000 LOUISIANA, SUITE 3640
HOUSTON, TEXAS 77002
(713) 652-6630
FAX (713) 652-6629
January 24, 1997
Irata, Inc.
8554 Katy Freeway, Suite 100
Houston, Texas 77024
The Selling Shareholders
c\o Mr. Lance P. Wimmer
8554 Katy Freeway, Suite 100
Houston, Texas 77024
Gentlemen:
I have acted as counsel for Irata, Inc. (the "Company") in connection with
(A) the proposed issue and sale by the Company of (i) an aggregate of 3,245,000
shares of Class A Common Stock, $.10 par value ("Class A Common Stock") issuable
pursuant to the exercise of certain Private Placement Warrants issued by the
Company pursuant to an Agency Agreement (the "Agency Agreement") dated September
9, 1996 between the Company and Royce Investment Group, Inc. and Spencer Trask
Securities, Incorporated (the "Placement Agents"), to the selling shareholders
named in Schedule I hereto ("Private Placement Selling Shareholders") (ii)
385,000 shares of Class A Common Stock issuable pursuant to the exercise of
certain Private Placement Warrants issued by the Company under certain
subscription agreements (the "Subscription Agreements") to the selling
shareholders named in Schedule II hereto (the "Affiliated Selling
Shareholders")(the "Private Placement Selling Shareholders and the Affiliated
Selling Shareholders are herein collectively referred to as the "Selling
Shareholders") (iii) 486,500 shares of Class A Common Stock and 486,500 Special
Private Placement Warrants to the Placement Agents upon exercise of a unit
purchase option ("Unit Purchase Option") granted to the Placement Agents as
additional consideration under the Agency Agreement, and (iv) 486,500 shares of
Class A Common Stock issuable pursuant to the exercise of the Special Private
Placement Warrants; (B) the proposed sale by the Selling Shareholders of
3,245,000 shares of Class A Common Stock issued and sold by the Company to the
Selling Shareholders pursuant to the Agency Agreement; and (C) the proposed sale
by the Affiliated Selling Shareholders of 385,000 shares of Class A Common Stock
acquired by the Affiliated Selling Shareholders from the Company in exchange for
debt of the Company pursuant to the Subscription Agreements.
In connection therewith, I have examined the corporate records of the
Company, including its Articles of Incorporation, as amended, its bylaws and the
minutes of its directors' and shareholders'
<PAGE>
January 24, 1997
Page 2
meetings. I have also examined the registration statement (the "Registration
Statement") on Form SB-2 prepared by the Company and to be filed with the
Securities and Exchange Commission as promptly as practical, for the
registration of the shares of Class A Common Stock being offered by the Selling
Shareholders, and for the registration of the shares to be issued to the Selling
Shareholders and the Placement Agents upon exercise of the Unit Purchase Option,
the Private Placement Warrants and the Special Private Placement Warrants; I
have examined the Agency Agreement; and I have examined the Subscriptions
Agreements (the Agency Agreement and the Subscription Agreements are herein
collectively referred to as the "Offering Documents").
In stating the opinions herein set forth, I have assumed (i) the due
authorization, execution and delivery of each Offering Document by all parties
to such document other than the Company and that each such document is valid,
binding and enforceable against the parties thereto other than the Company, (ii)
the legal capacity of natural persons, (iii) the genuineness of all signatures
of, and the authority of, persons signing the Offering Documents on behalf of
the parties thereto other than the Company, (iv) the authenticity and
completeness of all documents, certificates and records submitted to me as
originals, (v) the conformity to authentic original documents of all documents,
certificates and records submitted to me as certified, conformed or photostatic
copies, and (vi) the accuracy of the representations and warranties of the
Company and all other parties as to factual matters contained in or made
pursuant to the Offering Documents. As to any questions of fact material to my
opinions herein set forth I have, when relevant facts were not independently
established, relied upon the representations made in the Offering Documents and
upon certificates and other written confirmations of corporate personnel and
officers of the Company, and certificates and telegrams of public officials,
including, but not limited to, certificates of the Secretary of State of Texas
as to the good standing of the Company in the State of Texas, and I have made no
independent investigation of such factual matters; however, nothing has come to
my attention that would require me to further limit my opinion with respect to
such matters.
Based upon the foregoing, I am of the opinion that:
(1) The Company is a corporation duly organized and validly existing under
the laws of the State of Texas.
(2) The authorized capital stock of the Company is as described in the
Registration Statement.
(3) The 3,245,000 shares of Class A Common Stock issued and sold by the
Company pursuant to the Agency Agreement and proposed to be issued and
sold by the Selling Shareholders under the Registration Statement have
been duly authorized and validly issued, and are fully paid and non-
assessable shares of the capital stock of the Company.
<PAGE>
January 24, 1997
Page 3
(4) The 385,000 shares of Class A Common Stock issued and sold by the
Company pursuant to the Subscription Agreements and proposed to be
issued and sold by the Selling Shareholders under the Registration
Statement have been duly authorized and validly issued, and are fully
paid and non-assessable shares of the capital stock of the Company.
(5) The 486,500 shares of Class A Common Stock issuable upon exercise of
the Unit Purchase Option have been duly authorized and when issued and
sold in accordance with the Unit Purchase Option will be validly
issued, fully paid and non-assessable shares of the capital stock of
the Company.
(6) The 486,500 Special Private Placement Warrants issuable upon exercise
of the Unit Purchase Option have been duly authorized and when issued
and sold in accordance with the Unit Purchase Option will be validly
issued.
(7) The 3,630,000 Private Placement Warrants issued and sold by the
Company to the Selling Shareholders were duly authorized and are
validly issued warrants.
(8) The 3,630,000 shares of Class A Common Stock issuable upon exercise of
the Private Placement Warrants have been duly authorized and when
issued and sold in accordance with the Private Placement Warrants will
be validly issued, fully paid and non-assessable shares of the capital
stock of the Company.
(9) The 486,500 shares of Class A Common Stock issuable upon exercise of
the Special Private Placement Warrants have been duly authorized and
when issued and sold in accordance with the Special Private Placement
Warrants will be validly issued, fully paid and non-assessable shares
of the capital stock of the Company.
My opinion is subject in all respects to the following limitations,
qualifications, assumptions and exceptions:
(a) This opinion is limited to the matters stated herein and no
opinion is implied or may be inferred beyond the matters expressly stated.
(b) I am qualified to practice law in Texas only, and in giving this
opinion, insofar as such opinion involves matters of the law of any other state
or jurisdiction, I have assumed that such law is the same as, and would be
interpreted in the same manner as, the internal law of the State of Texas, and
that a court of competent jurisdiction would so apply such law, and I am not
expert in, and express no opinion herein as to, matters governed by the laws of
any jurisdiction other than the internal laws of the State of Texas and the
federal law of the United States of America. In that
<PAGE>
January 24, 1997
Page 4
regard, I express no opinion as to the effectiveness or enforceability of the
choice of law provisions of the Agency Agreement.
(c) This opinion may not be used or relied upon by any other person
or entity without my prior written consent. This opinion speaks as of the date
hereof, is subject to future changes in applicable laws, and I disclaim any
obligation to update this letter or to advise you or any other person of any
changes in any of the opinions or other matters set forth herein.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statements made regarding me and to the use of my name under the heading "legal
opinions" in the Prospectus constituting a part of the Registration Statement.
Very truly yours,
Andrew J. Clark, III
C:\WP60\IRATA\REG-OP.LTR1/27/97
<PAGE>
SCHEDULE I
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Peter Horrigan 50,000
223 Baker Avenue
Westfield, NJ 07090
Scott Page 50,000
8 Bridle Path Court
Muttontown, NY 11545
Gordon Edelheit and Jami Edelheit JTWROS 50,000
2124 Broadway, Suite 269
New York, NY 10023
Alexander Masucci 100,000
344 West 72nd Street
New York, NY
Nicholas Sitnycky 100,000
35-20 Leverich St., Apt. 622
Jackson Heights, NY 11372
Joseph Mure, Jr. 100,000
327 Beach 145 Street
Neponsit Beach, NY 11694
Neil Axelrod and Deena Axelrod JTWROS 100,000
22 Twillingate Avenue
Easthampton, NY 11937
Myron Weiner 100,000
315 East 86th Street
New York, NY 10028
Fred Nicotra 50,000
260 Main Street
East Rockaway, NY 11563
1
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Deborah A. Lanava 100,000
One Tinker Lane
Greenwich, CT 06830
Peter Montalbano 50,000
264-24 60th Road
Little Neck, NY 11361
Andrew Levey 50,000
2141 Atlantic Blvd.
Atlantic Beach, NY 11509
Michael Mandel 100,000
53 New England Drive
Lake Hiawatha, NJ 07034
Charles R. Buckridge 100,000
6719 S.E. South Marina Way
Stuart, FL 34996
Susan Adelman 50,000
7 Golf View Drive
Northfield, NJ 08225
Arthur L. Filion and Grace M. Filion JTWROS 50,000
40 Kestrel Drive
Voorhees, NJ 08043
Gary Persichetti 50,000
11 Granada Place
Massapequa, NY 11758
Harry MacDougall Jr. Revocable Trust DTD 50,000
9/3/94
2204 Dogleg Drive
Sebring, FL 33872
2
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Kenneth B. Milyard, Jr. 100,000
528 Park Ridge Court
Grand Junction, CO 81503
Norman F. Barnes 50,000
217 Konci Terrace
Lake George, NY 12845
Robert P. Miller and Leddy M. Miller 50,000
JTWROS
901 First Street
Ocean City, NJ 08826
Sanjay Kamiani and Kevin A. Broussel TIC 50,000
201 West 70th Street, Apt. 17A
New York, NY 10023
Mark L. Rachleff 50,000
135 East 71st Street, Apt. 17A
New York, NY 10021
Ross Asset Management Limited 200,000
Morrison Kent House 14/th/
Floor 105 The Terrace
Wellington, New Zealand
Delaware Charter Guarantee and Trust Co. C/F 50,000
Matthew Saltzman IRA
P. O. Box 478
Avon, CT 06001
Lawrence A. Cook 100,000
36 Renee Court
Cheshire, CT 06410
Sagax Find II Ltd. 100,000
c/o International Fund Administration Ltd.
48 Parla Villa Road, Suite 464
Hamilton, Bermuda HM11
3
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Robert J. Mahon 50,000
26 Garfield Avenue
Avon by the Sea, NJ 07717
Resources Trust Co. FBO William B. 75,000
Dioguardi IRA dated 4/4/83
28 Garfield Avenue
Avon by the Sea, NJ 07717
Delaware Charter Guarantee and Trust Co. C/F 50,000
Victor Melnichuk M/P
575 Burritt Place
Franklin Lakes, NJ 07601
Henry Kolpan 50,000
245 Prospect Ave., Apt. 12B
Hackensack, NJ 07601
William Parisi 50,000
347 Edstan Way
Paramus, NJ 07652
Steve Nicoletti 50,000
682 Clark Avenue
Ridgefield, NJ 07071
Robert F. Koehler Securities Def. Emp. Pen. 50,000
Plan DTD 10/31/87
Robert & Helke Koehler, TTEES
229 Princeton Road
Rochelle Center, NY 11570
Jewel Hirsch 50,000
5 Ramapock Court
Mahwah, NJ 07430
4
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Delaware Charter Guarantee and Trust Co. C/F 50,000
Vincent Tonne IRA
45 Corte Cayuga
Greenbrae, CA 94904
Bruce Wigo 50,000
1935 SE 25th Avenue
Ft. Lauderdale, FL 33316
Berlin Engineering Assoc. Inc. Profit Sharing 50,000
Plan
Calisto Bernham TTEE
65 Harristown Road
Glen Rock, NJ 07542
Lawrence J. Corneck 100,000
211 West 56th Street, Apt. 27M
New York, NY 10019
Richard M. Hoffman 100,000
60 Brite Avenue
Scarsdale, NY 10583
David L. Schlotterback 100,000
1410 Suntree Court
Naperville, IL 60564
Equity First Limited Partnership 200,000
222 Kennedy Memorial Drive
Waterville, ME 04901
Independent Trust Corp. FBO Prime Discount 100,000
Securities, Tr. #1205235
15255 South 94th Avenue, Suite 303
Orlando Park, IL 60462
Irvin G. Vincent 50,000
P. O. Box 480
Luxemburg, WI 54217
5
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Delaware Charter Guarantee & Trust Co. C/F 50,000
Robert Cottone IRA
9 Nye Court
Piscataway, NJ 08854
Delaware Charter Guarantee & Trust Co. C/F 50,000
Walter Krzanowski
69 Alfred Street
Clifton, NY 07013
Newton Y. Robinson 50,000
34 Sayles Street
Alfred, NY 14802-0824
OK Associates Pension Trust, Edmund 200,000
O'Connell, Trustee
150 Motor Parkway, Suite 311
Hauppague, NY 11788
Grigsby Bradford Retirement Trust 60,000
101 California Street #2000
San Francisco, CA 94111
Allan Notowitz 50,000
2710 Victoria Manor
San Carlos, CA 94070
Girish K. Bhargava 50,000
5 Amelia Court
Mendham, NJ 07945
M. Janet DiGuilio 40,000
78 Lakewood Avenue
HoHo Kus, NJ 07423
Christopher Porter 50,000
310 Washington Blvd.
Long Beach, NY 11561
6
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Delaware Charter Guarantee & Trust Co. C/F 50,000
Richard Incontro IRA
31 Pine Street
Ridgefield, NJ 07660
John D Higgins 200,000
105 High Farms Road
Glen Head, NY 11545
Elaine Cotaling 50,000
19 Sylvester Court
East Norwalk, CT 06855
Howard Weiss 200,000
14747 Sutton Street
Sherman Oaks, CA 91403
Travis Green 250,000
10A Mechanic Street
Glen Cove, NY 11542
Neil Bellet 250,000
387 E. Main Street
Bayshore, NY 11706
Raourf Radi 100,000
223 Rice Lake Square
Wheaton, IL 60187
Conrad J. Isoldi 100,000
21 Columbia Avenue
Staten Island, NY 10305
Arthur Inden 100,000
730 Taunton Road
Wilmington, DE 19803
7
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Couch Family Intervivo Trust 1991 50,000
7074 Sepuleda Blvd.
Van Nuyes, CA 91405
Gerald Masucci 100,000
130 East 67th Street
New York, NY 10021
Jack W. Murray & Marion K. Murray 100,000
JTWROS
Three Laurent Place
Dallas, TX 75225
Rocco Comis 25,000
1487 East 58th Street
Brooklyn, NY 11234
Stephen A. Lasher Trust 100,000
3638 Meadow Lake
Houston, TX 77027
Steven Prince IRA 100,000
Smith Barney Inc. Rollover Cust.
24 Suncrest Drive
Dix Hills, NY 11746
Frisian Holdings Ltd. 200,000
John V. Broadbent, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
8
<PAGE>
NAME AND ADDRESS SHARES BENEFICIALLY OWNED*
Waal Investments Ltd. 200,000
Robert Oosterwyk, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
Ashdown Holdings Limited 200,000
Simon K. Hearn, Director
4th Floor, Bank of Nova Scotia Bldg.
George Town, Grand Cayman
Cayman Islands, British West Indies
Lance P. Wimmer 100,000
SEP/IRA
c/o Fidelity Investments
Livingston, Barger, Brandt & Schroeder Self 40,000
Emp. Ret. Plan DTD 9/30/94, William C.
Wetzel, TTEE FBO
Richard E. Stites
115 W. Jefferson Street, Suite 400
Bloomington, IL 61701
Donald F. Frazee 50,000
9 Albright Road
Kingwood, WV 26537
John Mickowski 50,000
127 Main Street
Franklin, NJ 07416
- -----------
* Includes shares issuable upon exercise of Common Stock Purchase Warrants
C:\WP60\IRATA\REG-OP.LTR1/27/97
9
<PAGE>
SCHEDULE II
Dominion Investment Corporation
The Estate of Charles W. Moody, Jr.
George V. Kane, Jr.
John F. Higgins
Robert R. Salyard
C:\WP60\IRATA\REG-OP.LTR1/27/97
1
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
use of our report dated September 22, 1995 with respect to the financial
statements of Irata, Inc., included in this Registration Statement (Form SB-2
No. 333-____) and related Prospectus of Irata, Inc. for the registration of
8,233,500 shares of Class A Common Stock.
ERNST & YOUNG LLP
Houston, Texas
January 28, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
use of our report dated August 29, 1996 with respect to the financial statements
of Irata, Inc., included in this Registration Statement (Form SB-2 No. 333-____)
and related Prospectus of Irata, Inc. for the registration of 8,233,500 shares
of Class A Common Stock.
LANE GORMAN TRUBITT, L.L.P.
Dallas, Texas
January 28, 1997
