<PAGE>
PROSPECTUS
INFOSAFE SYSTEMS, INC.
2,319,420 Units, each consisting of one share of Class A Common Stock,
1.11721 Redeemable Class A Warrants
and 1.11721 Redeemable Class B Warrants
18,472,626 Shares of Class A Common Stock
2,897,979 Redeemable Class A Warrants
8,315,039 Redeemable Class B Warrants
This Prospectus relates to the resale, from time to time, by
certain securityholders of the following securities of Infosafe
Systems, Inc. (the "Company") which the Company issued in a private
placement (the "1997 Private Placement") on March 31, 1997:
(i) 1,603,274 Units, each Unit consisting of one share
of Class A Common Stock, par value $.01 per share (the "Class A Common
Stock"), approximately 1.11721 Redeemable Class A Warrants and
approximately 1.11721 Redeemable Class B Warrants, issued in connection
with the 1997 Private Placement; (ii) up to 1,603,274 shares of Class A
Common Stock contained in such Units; (iii) up to 1,791,186 redeemable
Class A Warrants (the "Class A Warrants") contained in such Units
(including 187,912 Class A Warrants issuable pursuant to anti-dilution
provisions contained in the Class A Warrants contained in the Units) such
Class A Warrants exercisable to purchase up to 1,791,186 shares of Class A
Common Stock and 1,791,186 Class B Warrants; (iv) up to 1,791,186
redeemable Class B Warrants (the "Class B Warrants," and together
with the Class A Warrants the "Warrants") contained in such Units
(including 187,912 Class B Warrants issuable pursuant to anti-dilution
provisions contained in the Class A Warrants contained in the Units)
such Class B Warrants exercisable to purchase up to 1,791,186 shares
of Class A Common Stock; (v) up to 1,791,186 Class B Warrants underlying
the 1,791,186 Class A Warrants (such Class B Warrants exercisable
to purchase up to 1,791,186 shares of Class A Common Stock including up to
187,912 shares of Class A Common Stock issuable as a result of anti-dilution
provisions contained in such Class A Warrants); (vi) an aggregate of
5,373,558 shares of Class A Common Stock issuable on exercise of such
Class A Warrants and Class B Warrants; (vii) 561,146 Units issuable on
exercise of a Unit Purchase Option issued to D.H. Blair Investment
Banking Corp. (the placement agent in the 1997 Private Placement) or its
designees ("Blair"); (viii) 561,146 shares of Class A Common Stock,
626,915 Class A Warrants and 626,915 Class B Warrants underlying such
Unit Purchase Option (including 65,769 Class A Warrants and 65,769
Class B Warrants issuable pursuant to anti-dilution provisions contained
in such Warrants); (ix) 626,915 Class B Warrants underlying the
626,915 Class A Warrants and; (x) an aggregate of 1,880,745 shares of
Class A Common Stock issuable on exercise of such Class A Warrants and
Class B Warrants. The shares of Class A Common Stock, the Class A
Warrants and the Class B Warrants issued in the 1997 Private Placement
are sometimes hereinafter referred to as the "Private Placement Class A
Common Stock," the "1997 Private Placement Class A Warrants,"
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Page 2
and the "Private Placement Class B Warrants," respectively, and collectively
as the "Private Placement Securities." The Selling Securityholders
have agreed not to sell certain percentages of the 1997 Private
Placement Securities for periods ranging from June 18, 1997 to
October 18, 1997.
This Prospectus also relates to: (i) 208,918 Class A Warrants issuable
pursuant to anti-dilution provisions contained in 1,782,500 Class A Warrants
issued in connection with the IPO which provide for the issuance of
approximately 1.11721 Class A Warrants for every outstanding Class A Warrant,
(ii) 1,991,418 shares of Class A Common Stock and 1,991,418 Class B
Warrants issuable on exercise of 1,991,418 Class A Warrants issued in
connection with the IPO (includes 208,918 shares of Class A Common Stock
and 208,918 Class B Warrants issuable pursuant to anti-dilution provisions
contained in such Class A Warrants); (iii) 208,918 Class B Warrants
issuable pursuant to anti-dilution provisions contained in 1,782,500
Class B Warrants issued in connection with the IPO, which provide for
the issuance of approximately 1.11721 Class B Warrants for every outstanding
Class B Warrant; (iv) an aggregate of 3,982,836 shares of Class A Common
Stock issuable on exercise of the 1,991,418 Class B Warrants issued in
connection with the IPO and the 1,991,418 Class B Warrants issuable on
exercise of 1,991,418 Class A Warrants, above (includes 417,836 shares
of Class A Common Stock issuable pursuant to anti-dilution provisions
contained in such Class B Warrants); (v) 155,000 Units issuable to
D.H. Blair Investment Banking Corp. ("Blair"), the Company's underwriter
in its IPO, pursuant to a unit purchase option issued in connection with
the IPO (the "IPO Unit Purchase Option"); (vi) 155,000 shares of Class A
Common Stock, 173,167 Class A Warrants and 173,167 Class B Warrants issuable
on exercise of the IPO Unit Purchase Option and an aggregate of
519,501 shares of Class A Common Stock issuable on exercise of
such Warrants (includes 18,167 Class A Warrants and 18,167 Class B
Warrants and an aggregate of 54,501 shares of Class A Common
Stock issuable pursuant to anti-dilution provisions contained in such
Warrants); (vii) 87,904 Class A Warrants issuable pursuant to anti-dilution
provisions contained in the 750,000 Class A Warrants issued to Selling
Securityholders in the IPO (the "IPO Selling Securityholders");
(viii) 837,904 shares of Class A Common Stock and 837,904 Class B Warrants
issuable on exercise of the 837,904 Class A Warrants issued
to the IPO Selling Securityholders (includes 87,904 shares of
Class A Common Stock and 87,904 Class B Warrants issuable pursuant
to anti-dilution provisions contained such Class A Warrants) and;
(ix) 837,904 shares of Class A Common Stock issuable on exercise of the
837,904 Class B Warrants underlying the 837,904 Class A Warrants (includes
87,904 shares of Class A Common Stock issuable pursuant to anti-dilution
provisions contained in such Class B Warrants).
This Prospectus also relates to: (i) 9,889 Class A Warrants issuable
pursuant to anti-dilution provisions contained in 84,375 Class A Warrants
issued as a settlement in an arbitration; (ii) 94,264 shares of Class A
Common Stock and 94,264 Class B Warrants issuable on exercise of the 94,264
Class A Warrants (including 9,889 shares of Class A Common Stock and
9,889 Class B Warrants issuable pursuant to anti-dilution provisions
contained in such Class A Warrants); (iii) 94,264 shares of Class A
Common Stock issuable on exercise of the 94,264 Class B Warrants
(including 9,889 shares of Class A Common Stock issuable pursuant to
anti-dilution provisions contained in such Class B Warrants) and;
(iv) 540,814 shares of Class A Common Stock issued or issuable
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Page 3
on exercise of certain warrants to purchase Class A Common Stock
received in connection with certain private placements in 1992
(including 22,064 shares of Class A Common Stock issuable pursuant to
anti-dilution provisions contained in such warrants).
Each Class A Warrant entitles the holder to purchase, at an
exercise price of $5.82, subject to adjustment, one share of Class A
Common Stock and one Class B Warrant. Each Class B Warrant entitles
the holder to purchase, at an exercise price of $7.83, subject to
adjustment, one share of Class A Common Stock. The Class A Warrants
and the Class B Warrants are exercisable at any time after issuance
until February 18, 2002. The Class A Warrants, and the Class B
Warrants are subject to redemption by the Company at $.05 per Class A
Warrant or $.05 per Class B Warrant, on 30 days' written notice, if
the average closing bid price of the Company's Class A Common Stock
has equalled or exceeded $9.10 per share with respect to the Class A
Warrants or $12.25 per share with respect to the Class B Warrants
(subject to adjustment in each case) for 30 consecutive trading days
ending within 15 days of the date the Warrants are called for
redemption. See "Description of Securities."
______________________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.
______________________________
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.
______________________________
Certain securityholders offering securities under this
Prospectus and the securities offered by such securityholders are
sometimes hereinafter referred to as the "Selling Securityholders"
and the "Selling Securityholder Securities," respectively. The
Selling Securityholder Securities offered by this Prospectus may be
sold from time to time by the Selling Securityholder or by their
transferees. The distribution of the Selling Securityholder
Securities offered hereby by the Selling Securityholders may be
effected in one or more transactions that may take place on the
Nasdaq Stock Market or other exchanges or markets on which the
Company's securities may be traded, in the over-the-counter market,
including ordinary brokers' transactions, privately negotiated
transactions or through sales to one or more dealers for resale of
such securities as principals at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling
Securityholders. Certain Selling Securityholders have agreed not to
exercise the Private Placement Class A Warrants and the Private
Placement Class B Warrants for certain periods relating to each
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Page 4
Selling Securityholder ending from February 18, 1998 to March 31, 1998,
provided, however, that purchasers of such Warrants from Selling
Securityholders are not subject to such restrictions on
exercisability. The Company has agreed to pay a solicitation fee
(the "Solicitation Fee") equal to 5% of the exercise price in
connection with the exercise of Warrants under certain conditions.
See "Plan of Distribution."
The Selling Securityholders, and intermediaries through whom
such securities are sold, may be deemed underwriters within the
meaning of the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered, and any profits
realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities
under the Securities Act.
The Company will not receive any of the proceeds from the sale
of securities offered herein. In the event all the outstanding Class
A Warrants, Class B Warrants and other warrants are exercised, the
Company will receive gross proceeds of approximately $94 million.
The Company's Units, Class A Common Stock, Class A Warrants and
Class B Warrants are traded on the Nasdaq SmallCap Market under the
symbols "ISFEU," "ISFEA," "ISFEW," and "ISFEZ," respectively, and the
closing bid prices of these securities on June 13, 1997, as reported
by Nasdaq were $5 3/4, $2 7/8, $1 5/8 and $1 1/4, respectively. The
exercise prices and other terms of the Class A Warrants and Class B
Warrants were determined by negotiation between the Company and Blair
at the time of the IPO and were adjusted pursuant to anti-dilution
provisions contained in the Warrant Agreements covering the Warrants,
and do not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth or any other recognized
criteria of value. Blair is subject to an investigation by the
Securities and Exchange Commission (the "Commission"). See "Risk
Factors."
INFOSAFE, PROTECTED BY INFOSAFE, and DESIGN PALETTE are trademarks
of the Company. All other brand names or trademarks appearing in this
Prospectus are the property of the respective holders.
The Company is currently a reporting company under the Exchange
Act, and as such, furnishes its securityholders with annual reports
containing audited financial statements and such interim unaudited
reports as it deems appropriate.
The date of this Prospectus is June 16, 1997.
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Page 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration
Statement on Form S-3 under the Securities Act with respect to the
Securities offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information
set forth therein and in the exhibits thereto, certain portions of
which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company
and the Class A Common Stock offered hereby, reference is hereby make
to such Registration Statement and exhibits. Statements contained in
this Prospectus as to the contents of any document are not necessarily
complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate documents filed with the
Commission.
The Registration Statement and the reports and other information
to be filed by the Company following the offering in accordance with
the Exchange Act can be inspected and copied at the principal office
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices
of the Commission: 7 World Trade Center, New York, NY 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60601. Copies of such materials may be obtained from the Public
Reference Section of the Commission at its principal office at 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees
prescribed by the Commission. In addition, the Commission maintains
a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by
the Company are incorporated in this Prospectus by reference and made
a part hereof:
(1) The Company's Annual Report on Form 10-KSB for the year
ended July 31, 1996.
(2) The Company's Quarterly Reports on Form 10-QSB for the
quarters ended October 31, 1996, January 31, 1997 and
April 30, 1997.
(3) The Company's Current Reports on Form 8-K dated November 26, 1996,
February 26, 1997, March 5, 1997 and June 11, 1997.
Each document or report subsequently filed by the Company with
the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date hereof and prior to the termination of
the offering of the securities under this Prospectus shall be deemed
to be incorporated by reference into this Prospectus from the date of
filing of such document. Any statement contained herein, or in the
document all or a portion of which is incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of the Registration Statement and this
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Page 6
Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of
the Registration Statement or this Prospectus.
The Corporation will provide, without charge, to any person to
whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the foregoing documents
incorporated by reference, other than certain exhibits to such
documents. Written requests should be directed to Infosafe Systems,
Inc., 342 Madison Avenue, Suite 622, New York, New York 10173.
Attention: Investor Relations (telephone: (212) 867-7200).
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Page 7
THE COMPANY
The following summary is qualified in its entirety by the more
detailed information and financial statements (including the notes
thereto) incorporated herein by reference. Unless otherwise
indicated, the information in this Prospectus does not give effect to
the exercise of: (i) the Warrants; (ii) Blair's Private Placement
Unit Purchase Option; (iii) Blair's IPO Unit Purchase Option; or (iv)
options granted or available for grant under the Company's 1992 Stock
Option Plan (the "1992 Plan") or the Company's 1994 Stock Option
Plan, as amended (the "1994 Plan") or other outstanding options or
warrants. This Prospectus contains certain forward-looking
statements within the meaning of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 including statements
concerning applications of the Company's technologies, the Company's
proposed products and future prospects, the Company's strategy and
the Company's future cash flow requirements that involve risks and
uncertainties, including the possibility that the Company: (i) will
not be successful in commercializing the Infosafe copyright metering
system; (ii) will be unable to identify other suitable product
opportunities based on its technology or successfully commercialize
other technology and (iii) that it will never achieve profitable
operations, as detailed in "Risk Factors." Such statements are based
on management's current expectations and are subject to a number of
factors and uncertainties which could cause actual results to differ
materially from those described in the forward-looking statements.
Infosafe Systems, Inc. (the "Company") is a development stage
company engaged in the design, development and marketing of systems
for securing, controlling, delivering, metering and auditing
electronic products, documents and programs, for use in stand-alone
applications, corporate networks and open networks such as the
Internet. The Company believes its technology (the "Infosafe
System"), as well as the technology recently licensed from Visus
Technologies, Inc. (VTI), and technology and methods being developed
by a new subsidiary of the Company, Internet Commerce Corporation
(ICC), address critical areas of electronic commerce such as
security, delivery, verification and metering of information. The
Infosafe System meters the usage of information and can release
information on a "pay per use" basis. The Company initially
developed a hardware-based distribution system and is currently
developing software-based distribution systems utilizing this
technology. The Company is seeking, inter alia, to position itself
as an independent third party to authenticate, certify, validate,
authorize and facilitate secure transactions for electronic
information. The Company believes that its technology is flexible
and suitable for a wide range of electronic commerce and information
security applications.
The Company recently commenced marketing the Infosafe copyright
metering system, a software based electronic copyright permission
vending system to be made available through photocopy shops (quick
printers) which allows customers to immediately obtain copyright
licenses necessary to legally reproduce copyrighted materials. In
December 1996, the Company entered into a two-year agreement with the
Copyright Clearance Center ("CCC"), the largest licensor of
photocopy reproduction rights in the United States which is currently
responsible for licensing 1.75 million titles of books and
periodicals from 9,200 publishers and which regularly acquires
additional titles. Under the agreement, the Company has agreed to
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operate at commercial printers the first electronic copyright
permission vending system for CCC-licensed material. Quick printers
can then access the CCC copyright authorization database for
customers who wish to reproduce copyrighted materials. All
transactions are tabulated and recorded by Company. The Company is
currently in the process of marketing this system to quick print
chains and other venues. CCC is expected to participate in marketing
the Infosafe copyright metering system jointly with the Company. The
Company is currently in the process of developing a "software only"
version of this system. Because it is expected that most users will
prefer a software only solution, the Company is writing off
substantially all of its equipment held for lease and the related
software, which the Company had anticipated using in connection with
its copyright metering system. In order to provide Infosafe
copyright metering services until such development is complete, the
Company expects to launch an interim system which will allow quick
printers and their customers to call an "800" number, request
permission to reproduce material from a publication and rapidly
receive a faxed authorization.
The Company's first commercial product, the Design Palette, was
introduced in July 1995. The Design Palette is a point-of-sales
hardware/software device incorporating the Company's patented
technology which provides "pay-per-use" access to an encrypted CD-ROM
library of graphic design products. To date, the Company's revenues
from marketing the Design Palette have been minimal and the system
has not achieved the sales results anticipated by the Company.
Additionally, PhotoDisc, the largest supplier of images sold through
the Design Palette, terminated its participation in the Design
Palette program effective November 30, 1996. The Company is
currently evaluating the extent, if any, to which it will continue to
support and market the Design Palette system.
The Company had recently been involved in creating a product,
AudiNet, to monitor "hits" on a user's Internet or "Web" site which
would make use of the Company's existing technology. Management has
terminated development and marketing activities related to the
AudiNet product due to a proliferation of competitive products that
would preclude the Company from gaining a significant market presence
and acceptance in this arena and from achieving satisfactory profit
margins.
Due to the development of sophisticated new mass delivery media
such as closed corporate intranets and open networks such as the
Internet, the Company believes that there may be other new, broad-
based opportunities for securing and metering digital content for
large-scale information providers to offer to their existing and
prospective customer base. The Company has targeted several of such
opportunities for commercialization.
First, the Company believes that there is a potential market for
a software-only digital image and information sale and distribution
system which will allow for the sale of information and images
through catalogues on the Internet or on CD-ROM. The Company is
currently developing such a system and believes that its expertise in
connection with its hardware and proprietary search-engine software
technology will enable it to develop a software only distribution
system using catalogues on the Internet, CD-ROM or other media. The
system being developed by the Company would permit an individual user
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Page 9
to select information or an image through the Company's catalogue and
payment system and the information or image would be delivered either
on-line, including the Internet, or on disc through the mail. The
Company is considering initially targeting this potential application
of its technology to two sectors of the imaging industry: the Royalty
Free ("RF") market, where images can be purchased, for unlimited use,
and the high-quality stock photo market where the terms, use,
exclusivity and price of a photograph are negotiated. The Company
believes that these are markets where the Company's technology could
provide better search tools and timely, cost-effective delivery of
the image.
Second, the Company believes that there are opportunities to
acquire technology complementary to the Company's technology and the
Company intends to pursue, under appropriate circumstances, license
agreements or strategic acquisitions to acquire rights to technology.
The Company is currently pursing opportunities for: (i) development
of an Internet software application for on-line delivery of original
documents pursuant to an exclusive license which was recently entered
into; and (ii) has agreed in principle to acquire a majority interest
in a company which intends to develop a system which, the Company
believes, will provide a competitively priced system for validating
purchase orders and other business documents transmitted via
electronic media, such as the Internet. See "Recent Developments"
below.
In March 1997, the Company completed a private placement of an
aggregate of 1,603,274 units, each unit consisting of one share of
Class A Common Stock, 1.11721 Class A Warrants and 1.11721 Class B Warrants,
which units are identical to the units issued in the Company's IPO,
though D.H. Blair Investment Banking Corp. and Joseph Stevens & Co.,
Inc. as placement agents. As a result of the 1997 Private Placement,
the Company received net proceeds of approximately $4.2 million
after placement agent fees and expenses and other offering expenses.
The Company commenced operations in January 1992 and is in the
development stage. The Company was incorporated under the laws of
the State of Delaware on November 18, 1991. The Company's executive
offices are located at 342 Madison Avenue, New York, New York 10173
and its telephone number is (212) 867-7200.
Recent Developments
In March, 1997, the Company entered into an exclusive licensing
agreement with Visus Technologies, Inc. (VTI) for the resale of its
Scan2Web software. Scan2Web enables users to browse an on-line
document archive and view content on a computer while preventing the
printing of a "business quality" document. To receive an original
document or a "business" quality copy, the user must pay the system
provider (i.e. the Company, or the archive manager). The Company
intends to use VTI's technology in combination with its own
proprietary metering and encryption technologies to create secure
sales delivery channels for documents and images over private and
public networks. The Company has paid an advance royalty fee
to VTI. The exclusivity of this license is terminable if
the Company fails to generate certain revenues from the sale of the
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Page 10
Scan2Web technology and VTI retains the exclusive right to use this
technology in certain circumstances. In addition, the Company has
an outstanding letter of intent with VTI which provides the Company
with an option to acquire 100% of VTI for Class A Common Stock of the
Company. The Company is currently conducting discussions with VTI to
change the terms of acquisition to terms more favorable to the
Company.
The Company has agreed in principal to purchase a majority
interest in Internet Commerce Corporation (ICC), a new company which
is developing Internet-based products and services for the electronic
commerce marketplace. ICC currently intends to develop a system
which, the Company believes, will provide a competitively priced
system for facilitating and validating purchase orders and other
business documents transmitted via electronic media, such as the
Internet. The co-founders of ICC have been developing a technical
and commercial plan for such a system and will contribute all their
rights pursuant thereto to ICC. The Company believes that the
synergy between the Company's proprietary security and encryption
technology and ICC's electronic commerce services may enable both
companies to broaden the appeal and usability of their products.
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Page 11
RISK FACTORS
The discussion in this "Risk Factors" section contains certain
forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995
including statements concerning applications of the Company's
technologies, the Company's proposed products and future prospects,
the Company's strategy and the Company's future cash flow
requirements that involve risks and uncertainties, including the
possibility that the Company: (i) will not be successful in
commercializing the Infosafe copyright metering system; (ii) will be
unable to identify other suitable product opportunities based on its
technology or successfully commercialize other technology; and
(iii) that it will never achieve profitable operations, as detailed
in this "Risk Factors" section and elsewhere herein. Such statements
are based on management's current expectations and are subject to a
number of factors and uncertainties which could cause actual results
to differ materially from those described in the forward-looking
statements.
Limited Operating History; Limited Revenues from Operations;
Independent Auditors' Report. The Company commenced operations in
January 1992, is a development stage company and has a very
limited operating history. From inception on November 18, 1991 to
January 31, 1997 (unaudited), the Company recognized revenues of
approximately $609,000 and had an accumulated deficit of
approximately $9.3 million. Approximately $455,000 of such revenues
were license fees relating to the Design Palette and revenue
recognized on the purchase in April 1995 of the interest in the
Design Palette not already owned by the Company. The Company has
continued to operate at a deficit since January 31, 1997, and it
expects to continue to operate at a deficit until such time, if ever,
as operations generate sufficient revenues to cover its costs. The
Company's ability to generate revenues and operate profitably is
dependent on its success in marketing its Infosafe copyright metering
system and in identifying other opportunities for its technology and
commercializing its technologies. In addition, to the extent that
the Company acquires companies or technologies, its ability to
operate profitably will also be dependent on the success of the
companies or technologies acquired. The likelihood of the success of
the Company must be considered in light of the difficulties and risks
inherent in a new business. There can be no assurance that revenues
will increase significantly in the future or that the Company will
ever achieve profitable operations.
The report of the Company's independent auditors on the
Company's financial statements for the fiscal year ended July 31,
1996 contains a paragraph which expresses substantial doubt about the
Company's ability to continue as a going concern. The Company has
incurred substantial losses since inception and, although shipments
of its first product commenced in late July 1995, this product has
not achieved commercial success and the Company anticipates losses to
continue at a substantial rate in the future until such time, if
ever, as there is a substantial increase in product sales as it
markets its products and develops new applications for its
technology.
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Page 12
Need for Additional Financing. The Company has significant cash
requirements in connection with its business, including expenditures
for research and development of new applications of its existing and
new technology, marketing, acquisitions and general corporate
purposes. The Company anticipates losses to continue through at
least the fiscal year to end July 31, 1998. The Company may be
required to seek additional financing in the event of delays, cost
overruns or unanticipated expenses, or in the event the Company is
unable to realize increases in its revenues. The Company's ability
to increase its revenues and reduce or eliminate losses will be
dependent on its success in marketing the Infosafe copyright metering
system and its ability to identify and successfully develop and
market other products utilizing its capabilities. In the event such
necessary financing is not obtained, the Company's operations will be
materially adversely affected and the Company will have to cease or
substantially reduce operations. Any additional equity financings
may be dilutive to stockholders, and debt financings, if available,
may involve restrictive covenants.
Uncertainty of Commercialization of the Infosafe System. The
Infosafe System has not yet achieved commercial acceptance and its
viability has not been determined under large scale commercial
operations. To date, the Design Palette is the only product of the
Company which has been commercialized. Although the Company has
historically devoted much of its efforts to developing and marketing
the Design Palette, this product has failed to achieve the desired
results or penetrate its intended markets. Additionally, PhotoDisc,
the largest supplier of images for the Design Palette, terminated its
participation in the Design Palette program as of November 30, 1996
and access to PhotoDisc images is no longer available through the
Design Palette. There can be no assurance that existing users will
not limit or stop using the Design Palette due to the unavailability
of PhotoDisc images or that such actions by customers would not
adversely effect future sales of the product. The Company is
currently evaluating the extent, if any, to which it will continue
developing and marketing Design Palette and it expects to focus the
majority of future development, production and commercialization
efforts on its Infosafe copyright metering system, as well as on
other Infosafe products.
Need to Successfully Commercialize the Infosafe Copyright
Metering System and Other New Infosafe Products. The Company's
principal focus in the near term will be on marketing the Infosafe
copyright metering system. In December 1996, the Company signed a
two year agreement with CCC with respect to the Company's offering of
the Infosafe copyright metering system to commercial locations which
will provide users access to CCC's licensing facilities and database.
While CCC is the largest vendor of copyright permissions in the
United States, there are a substantial number of publishers which do
not license their material through CCC. The success of the Infosafe
copyright metering system will depend in part on the ability of the
Company to successfully complete development of a software only
version to install at quick print locations as well as its ability to
effectively market this product to quick print chains and other
vendors as a profitable addition to their services. These vendors
must educate their personnel to use the system and market this
service to the public. Copyright licensing fees are paid when
reprints of published materials are purchased from the publisher.
There can be no assurances that the Company's marketing efforts will
be successful or that, the Infosafe copyright metering system will
ever become widely used or generate significant revenues for the
Company.
<PAGE>
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The CCC Agreement requires the Company to provide services to
the vendor at the Company's expense. The agreement with CCC does not
include a specific commitment that CCC will provide the Company with
full access to its database and licensing facilities during the term
of the agreement nor does it restrict CCC's right to grant such
access to other companies. Accordingly, there can be no assurance
that CCC will continue to provide access to its database and
licensing facilities to the Company or that CCC will not grant access
to its database and licensing facilities to competitors of the
Company. Furthermore, there can be no assurance that the agreement
with CCC will be renewed after the expiration of its term. The
Company does not believe that there exists a viable alternative
licensing database to CCC's.
The Company's success will be dependent on its ability to
commercialize other new products and identify new opportunities using
the Company's technology or to make licensing arrangements with or
acquire companies having technologies which create new product
opportunities. There can be no assurance that the Company will
successfully develop these products, that the Company will be
successful in completing any licensing agreements or fulfilling its
obligations under its existing license agreement with VTI or that any
products developed, licensed or acquired by the Company will attain
significant market acceptance, result in significant sales or
generate sufficient revenues.
Limited Marketing Capabilities; Inability of Design Palette to
Penetrate Target Markets. The Company's operating results will
depend to a large extent on its ability to successfully market
Infosafe products while creating market acceptance for its digital
information management and verification system. The Company
currently has limited marketing capabilities and experience and needs
to hire additional sales and marketing personnel, as well as
concentrate its limited resources and personnel on defined, active
commercial purchasers of information. The Company's Design Palette
product has not successfully penetrated its target market and there
can be no assurance that any future marketing efforts undertaken by
the Company will be successful or will result in any significant
sales of products utilizing the Infosafe System.
Possible Delisting of Securities from the Nasdaq Stock Market.
While the Company's Units, Class A Common Stock, Class A Warrants and
Class B Warrants are currently listed on the Nasdaq SmallCap market,
there can be no assurance that the Company will meet the criteria for
continued listing. Continued inclusion on Nasdaq generally requires
that: (i) the Company maintain at least $2,000,000 in total assets
and $1,000,000 in capital and surplus; (ii) the minimum bid price of
the Class A Common Stock be $1.00 per share; (iii) there be at least
100,000 shares in the public float valued at $1,000,000 or more;
(iv) the Class A Common Stock have at least two active market makers;
and (v) the Common Stock be held by at least 300 holders. Nasdaq has
proposed more stringent requirements for continued inclusion on the
Nasdaq SmallCap Market, which, if approved without modification,
would require that a company, among other things, have at least
$2,000,000 in "net tangible assets" ("net tangible assets" equals
total assets less total liabilities and goodwill) or at least
$35,000,000 in total market value or at least $500,000 in net income
<PAGE>
Page 14
in two out of its last three fiscal years, as well as at least
500,000 shares in the public float, at least $1,000,000 in market
value of the public float, and a bid price of not less than $1.00 per
share.
If the Company is unable in the future to satisfy Nasdaq's
maintenance requirements, its securities may be delisted from Nasdaq.
In such event, trading, if any, in the Units, Class A Common Stock
and Warrants would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's
securities could be severely adversely affected, not only in the
number of securities which could be bought and sold, but also through
delays in the timing of transactions, reduction in security analysts'
and media coverage of the Company and lower prices for the Company's
securities than might otherwise be attained.
Risk of Low-Priced Stock. If the Company's securities were
delisted from Nasdaq (See "- Possible Delisting of Securities from
the Nasdaq Stock Market"), they could become subject to Rule 15g-9
under the 1934 Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons
other than established customers and "accredited investors"
(generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their
spouses). For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and
have received the purchaser's written consent to the transaction
prior to sale. Consequently, such rule may adversely affect the
ability of broker-dealers to sell the Company's securities and may
adversely affect the ability of purchasers of the Company's
securities to sell any of the securities acquired in the secondary
market.
Securities and Exchange Commission (the "Commission")
regulations generally define a "penny stock" to be any non-Nasdaq
equity security that has a market price (as therein defined) of 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 involving
a penny stock, unless exempt, the rules require delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared
by the Commission relating to the penny stock market. Disclosure is
also required to be made about commissions 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 continue to be listed
on Nasdaq and have certain price and volume information provided on a
current and continuing basis or meet certain minimum net tangible
assets or average revenue criteria. There can be no assurance that
the Company's securities will continue to qualify for exemption from
these or modified restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain
subject to Section 15(b)(6) of the Exchange Act, 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.
<PAGE>
Page 15
If the Company's securities were subject to the existing or
proposed rules on penny stocks, the market liquidity for the
Company's securities could be severely adversely affected.
Dependence on Key Personnel; Change in President and Chief
Executive Officer. The Company's success depends upon the continued
contributions of its executive officers, sales and marketing
personnel and technical personnel, particularly Arthur R. Medici, who
recently joined the Company as its President and Chief Executive
Officer. Thomas Lipscomb, who served as the Company's President and
Chief Executive Officer until recently, has resigned from these
positions, but continues to serve as the Company's non-executive
Chairman of the Board. Although the Company has entered into an
employment agreement with Mr. Medici and has obtained "key-man" life
insurance on his life, competition for qualified personnel is
intense, and the loss of services of Mr. Medici or other key
personnel could adversely affect the business of the Company. There
can be no assurance that the Company will be able to retain existing
personnel or attract additional qualified personnel.
Uncertain Patent Protection. In February 1995, the U.S.
Patent and Trademark Office granted the Company U.S. Patent No.
5,394,469 entitled "Method and Apparatus for Retrieving Secure
Information from Mass Storage Media" for its system to retrieve and
monitor the use of protected information from digital media. This
patent covers the Company's system for protecting, retrieving, and
monitoring the use of information from media, delivered via CD-ROM,
Internet or local area (intranet) networks. In December 1995, the
Company was granted a second patent, U.S. Patent No. 5,473,687,
entitled "Method for Retrieving Secure Information from a Database"
covering its technology for providing a secure method for the
commercial distribution and use of digital information on a rental
basis using a technique to discourage long term use without
endangering the computer or the operating system. In January 1997,
the Company was granted a third patent, U.S. Patent No. 5,592,549,
entitled "Method and Apparatus for Retrieving Selected Information
From a Secure Information Source" relating to a system for
integrating document "branding" with decryption so that the buyer,
time and place of sale of information are identified. The Company
has a pending U.S. patent application entitled "Apparatus and Storage
Medium for Decrypting Information," as to which it has received a
notice of allowance, relating to a secure electronic information
distribution system for information stored in an encrypted form on a
CD-ROM or other medium. This allows different decryption keys to be
used for various stored data and eliminates the need to transmit an
entire decryption code to a user. The patents and patent
applications seek to protect the basic Company technology whether it
is used for Design Palette, the Infosafe copyright metering system,
or in RF or other image product sales.
Although the Company has obtained certain patent rights, the
Company believes that the protection of its rights will depend
primarily on its proprietary algorithms and encryption techniques
which constitute "trade secrets." The Company has made no
determination as to the patentability of these trade secrets. The
Company will continue to evaluate, on a case-by-case basis, whether
<PAGE>
Page 16
applying for additional patents in the future is in the best
interests of the Company. There can be no assurance that the
Company's technology will remain a secret or that others will not
develop similar technology and use such technology to compete with
the Company.
Additionally, there can be no assurance that any issued patents
owned by the Company will afford adequate protection to the Company
or not be challenged, invalidated, infringed or circumvented, or that
patent applications relating to the Company's products or
technologies that it may license in the future or file itself,
including any patent as to which a notice of allowance has issued,
will result in patents being issued, or that any rights granted
thereunder will provide competitive advantages to the Company.
Although the Company believes that its technology does not infringe
upon the proprietary hardware or software of others, it is possible
that others may have or be granted patents claiming products or
processes that are necessary for or useful to the development of the
Infosafe System and that legal actions could be brought against the
Company claiming infringement. In the event that the Company is
unsuccessful against such a claim, it may be required to obtain
licenses to such patents or to other patents or proprietary
technology in order to develop, manufacture or market its products.
There can be no assurance that the Company will be able to obtain
such licenses on commercially reasonable terms, if at all. If the
Company is required to and does not obtain such licenses, it would
encounter delays in the development and manufacturing of its products
and technologies while it attempted to design around such patents or
other rights and there can be no assurance that such attempts would
be successful. Failure to obtain such licenses or to design around
such patents or other rights would have a material adverse effect on
the Company.
In November 1992, the Company received notice of a possible
infringement from a patent holder but believes that such claim is
without merit.
Competition. The business of distributing textual material and
other forms of digital information through CD-ROMs is intensely
competitive and fragmented and is characterized by rapidly evolving
technology. Numerous companies, substantially all of which have
greater financial and other resources than the Company, are currently
engaged in the provision of this service. Although the Company is
unaware of any company actually engaged in the commercial
implementation of a hardware-based encryption/metering system for the
distribution of digital information and software, the Company, as
well as, other companies are attempting to develop functionally
similar metering and encryption systems, on a software only basis.
The Company anticipates it will also face competition as publishers
and repackagers of information attempt to develop encrypted digital
distribution technology in-house or in conjunction with others.
Although the Company believes it will compete on the basis of the
services it offers, there can be no assurance that the Company will
be able to compete successfully.
The Company further believes that it is possible to provide some
of the benefits of Infosafe products by other means and that
competitors may provide other solutions to problems involving the
distribution of digital information in particular market segments.
In the market for business and professional information, the Company
believes that it will continue to experience competition from
<PAGE>
Page 17
paper-based systems such as loose-leaf information services,
newsletters and books, from conventional on-line services that
connect directly to PCs or through LANs. Alternative methods for the
delivery of CD-ROMs such as unlimited usage CD-ROM products and
CD-ROM products delivered in closed-end systems with usage monitoring
capability will also compete with the Infosafe System. Other methods
of protecting software, such as dongles, may be considered as
alternatives to the Infosafe digital information distribution system.
A dongle is a device that attaches to an I/O port of a computer.
Dongle designs vary, but they typically contain a number of security
locks, general purpose registers, and an access counter.
The graphic and photo image industry already offers online and
Internet-based distribution systems. Many of the large Royalty Free
("RF") image banks have created their own online search and
distribution channels, among the most prominent of which are
PhotoDisc and Publishers Depot ("PNI"), both of which sell large
image collections online which can be downloaded by the purchaser.
Other RF image vendors such as Comstock and Index Stock are engaged
in online marketing and support online distribution of low-resolution
images. While the Company believes that it has a high quality
search engine which could allow it to be competitive with these
companies and that the market for this service remains largely
undeveloped, the Company does not have any agreements with suppliers
of images to support such a product and there can be no assurance
that such image suppliers or other competitors will not provide
alternative services or systems, superior to what the Company could
provide, at a more cost-effective price.
There are other companies, including those listed in the markets
above, that have developed or are in the process of developing
technologies that are, or in the future may be, the basis for
competitive products in the field of electronic information and
software distribution or other applications the Company intends to
develop for its technology. Most of such companies have
substantially greater resources than the Company. Some of those
technologies may have an entirely different approach or means of
accomplishing the desired effects of the products being developed by
the Company. There can be no assurance that the Company's
competitors will not succeed in developing technologies and products
that are more effective or more cost-efficient than those being
developed by the Company.
Rapid Technological Change; Need for New Products; Introduction
of Competitive Products. The market for the Company's technology is
characterized by rapidly changing technology and frequent new product
introductions. Even if the Company's technology gains initial
acceptance, the Company's success will depend, among other things, on
its ability to enhance its products and to develop and introduce new
products and services that keep pace with technological developments,
respond to evolving customer requirements and achieve continued
market acceptance. There can be no assurance that the Company will be
able to identify, develop, manufacture, market, support or acquire
new products or deploy new services successfully, that such new
products or services will gain market acceptance, or that the Company
will be able to respond effectively to technological changes or
product announcements by competitors. Any failure by the Company to
anticipate or respond adequately to technological developments and
customer requirements or any significant delays in product
<PAGE>
Page 18
development or introductions could result in a loss of market share
or revenues. The Company has devoted a substantial amount of its
efforts to adapting its technology to the CD-ROM medium. There can
be no assurance that CD-ROM technology will not be replaced by other
distribution and access technologies including distribution over the
Internet or that any such replacement will not involve substantial
time and expense by the Company to adopt its technology, if at all
possible, or that the technology being developed by the Company for
application to information and images being delivered over the
Internet will be successful.
Uncertainties Relating to Commercial Use of the Internet. One
of the Company's strategies is to apply its technology to the
development of products for use in connection with the Internet. The
success of these products is dependent on the continued development
and acceptance of the Internet as a medium for delivery of published
materials and distribution of commercial products and business-to-
business purchase transactions. The failure of the Internet to be an
effective distribution channel could have a material adverse effect
on the Company's business and prospects. There can be no assurance
that commerce over the Internet will become widespread and it is not
known whether this market will develop to the extent necessary for
demand for the Company's products to emerge and become sustainable.
The Internet may not prove to be a viable commercial marketplace for
a number of reasons, including inadequate communications bandwidth
and a lack of secure payment mechanisms. Critical issues concerning
the commercial use of the Internet (including security, reliability,
cost, ease of use and access and speed) remain unresolved and may
affect the use of the Internet as a commercial medium. To the extent
that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the
Internet infrastructure will continue to be able to support the
demands placed upon it. Moreover, the Internet could lose its
viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of
Internet activity or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications
services to support the Internet also could result in slower response
times which might adversely affect customers' ability or willingness
to use the Internet as a commercial marketplace. In addition the
security and privacy concerns of existing and potential customers, as
well as concerns related to computer viruses, may inhibit the growth
of the Internet marketplace.
If use of the Internet does not continue to grow or if the
Internet infrastructure does not effectively support customer demand,
the Company's business, results of operations and financial condition
could be materially adversely affected.
Charge to Income in the Event of Release of Escrow Shares or
Conversion of Class B or Class E Shares. In the event any shares of
Class B Common Stock held in escrow (the "Escrow Shares") or Class E
shares (the "Class E Shares") held by the stockholders of the Company
who are officers, directors, employees or consultants of the Company
are released from escrow or converted, compensation expense will be
recorded for financial reporting purposes. Therefore, in the event
the Company attains any of the earnings thresholds or the Company's
Class A Common Stock meets certain minimum bid prices required for
the release of the Escrow Shares or conversion of the Class E Shares,
such release or conversion will be deemed additional compensation
<PAGE>
Page 19
expense of the Company. Such charge is not deductible for income tax
purposes. Accordingly, the Company will, in the event of the release
of the Escrow Shares or conversion of the Class E Shares, recognize
during the period in which the reportable earnings thresholds are met
or such minimum bid prices obtained, what could be a substantial
charge which would have the effect of substantially increasing the
Company's reportable loss or reducing or eliminating reportable
earnings, if any, at such time. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a depressive effect on the market
price of the Company's securities.
Control by Insiders; Possible Depressive Effect on the Company's
Securities. As of the date of this prospectus, the executive
officers and directors of the Company beneficially owned
approximately 30% of the outstanding Class A, Class B (including the
Escrow Shares) and Class E Common Stock of the Company, representing
approximately 50.5% of the voting power of the Company. Thomas H.
Lipscomb, who is Chairman of the Board and was formerly President and
Chief Executive Officer of the Company, and Alan N. Alpern, Chief
Financial Officer of the Company, have deposited substantially all of
the approximately 2.2 million shares of Common Stock beneficially
owned by them and other members of their families, which includes
Class B Common Stock and Class E Common Stock of the Company and
which represents approximately 49.4% voting power of the Company, in
a voting trust until February 18, 2000. The shares of Common Stock
held in the voting trust will be voted at the direction of a majority
of the non-management directors of the Company and Arthur R. Medici,
the President and Chief Executive Officer of the Company, and will
effectively enable them to elect all the Company's directors and
thereby direct the policies of the Company. Furthermore, the voting
trust and the disproportionate vote afforded the Class B Common Stock
could serve to impede or prevent a change of control of the Company.
As a result, potential acquirors may be discouraged from seeking to
acquire control of the Company through the purchase of Class A Common
Stock, which could have a depressive effect on the price of the
Company's securities.
Future Sales of Common Stock. All of the Company's 1,372,566
shares of Class B Common Stock (including 70,000 shares to be issued
to Arthur R. Medici pursuant to his employment agreement) are
restricted securities, 781,244 shares of which are subject to escrow
and are not transferable except upon the Company's meeting certain
earnings levels or market price targets. See "Description of
Securities -- Escrow Shares." Additionally, all of the Company's
1,478,637 shares of Class E-1 Common Stock and 1,478,637 shares of
Class E-2 Common Stock (including the aggregate of 270,000 shares of
Class E Common Stock to be issued to Arthur R. Medici pursuant to his
employment agreement) are "restricted securities." These shares are
also not transferable except upon the Company's meeting certain
earnings levels or market price targets. See "Description of
Securities -- Class E-1 and Class E-2 Common Stock."
The Company is unable to predict the effect that sales made
under Rule 144, or otherwise, may have on the then prevailing market
price of the Company's securities although any future sales of
substantial amounts of securities pursuant to Rule 144 could
adversely affect prevailing market prices.
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Page 20
Arbitrary Determination of Exercise Prices; Possible Volatility
of Stock Price. The exercise prices of the Warrants (which have been
adjusted for dilution) have been determined by negotiation between
the Company and Blair and are not necessarily related to the
Company's asset value, net worth or other established criteria of
value. Market prices for the securities are influenced by a number
of factors, including quarterly variations in the financial results
of the Company and any competitors, changes in earnings, estimates by
analysts, conditions in the digital information market, the overall
economy and the financial markets. Such volatility can distort
market value and can be particularly severe in the case of small
capitalization stocks and immediately before or after an important
corporate event such as a public offering. In recent years, the
stock markets in general, and the securities of technology companies
in particular, have experienced extreme price fluctuations in
response to such occurrences as quarterly variations in operating
results, changes in earnings estimates by analysts, announcements
concerning new products, strategic relationships or technological
innovations, general conditions in the technology industries and
other events or facts. This pattern of extreme volatility in the
stock market, which in many cases was unrelated to the operating
performance of, or announcements concerning, the issuers of the
affected stock may adversely affect the market price of the Class A
Common Stock.
Dividends Unlikely. The Company has not paid any cash dividends
on its Common Stock and does not intend to declare or pay cash
dividends in the foreseeable future. The Company expects that it
will retain all available earnings, if any, to finance and expand its
business. See "Dividend Policy."
Current Prospectus and State Registration Requirements for the
Exercise of Warrants; Resale of Warrants. Holders of Warrants will
be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the securities underlying the
Warrants is then in effect and (ii) such securities are qualified for
sale or exempt from qualification under the applicable securities
laws of the states in which the various holders of Warrants reside.
Although the Company has undertaken to maintain a current prospectus
covering the securities underlying the Warrants to the extent
required by Federal securities laws, there can be no assurance that
the Company will be able to do so. The value of the Warrants may be
greatly reduced if a prospectus covering the securities issuable upon
the exercise of the Warrants is not kept current or if the securities
are not qualified, or exempt from qualification, in the states in
which the holders of Warrants reside. Persons holding Warrants who
reside in jurisdictions in which such securities are not qualified
and in which there is no exemption will be unable to exercise their
Warrants and would either have to sell their Warrants pursuant to an
exemption from registration or allow them to expire unexercised. If
and when the Warrants become redeemable by the terms thereof, the
Company may exercise its redemption right even if it is unable to
qualify the underlying securities for sale under all applicable state
securities laws. See "Description of Securities -- Redeemable
Warrants."
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Page 21
Potential Adverse Effect of Redemption of Warrants. The
Warrants may be redeemed by the Company at any time after March 31,
1998 at a redemption price of $.05 per Warrant upon 30 days' notice
provided the average closing Bid Price of the Class A Common Stock
for any 30 consecutive trading days ending within 15 days of the
notice of redemption exceeds $9.10, in the case of the Class A
Warrants, or $12.25, in the case of the Class B Warrants (subject to
adjustment in each case). Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the
Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which
will be substantially less than the market value of the Warrants at
the time of redemption. See "Description of Securities -- Redeemable
Warrants."
Effect of Outstanding Options and Warrants; Registration Rights.
As of the date of this Prospectus, after giving effect to the
issuance of the securities issued in the 1997 Private Placement and
the anti-dilution adjustments in the exercise price of the Class A
Warrants and Class B Warrants issued and outstanding or issuable upon
the exercise of certain options the Company had outstanding: (i) an
aggregate of 4,714,772 Class A Warrants (including 494,623 Class A
Warrants issuable pursuant to anti-dilution provisions contained
in such Class A Warrants) exercisable for 4,714,772 shares of
Class A Common Stock and 4,714,772 Class B Warrants; (ii) an aggregate
of 8,497,376 Class B Warrants (including the 4,714,722 Class B Warrants
issued on the exercise of Class A Warrants, and including 891,453 Class
B Warrants issuable pursuant to anti-dilution provisions contained in such
Class B Warrants), exercisable for 8,497,376 shares of Class A Common Stock;
(iii) the Unit Purchase Options issued to Blair and its designees in
connection with the Company's IPO and the Company's 1997 Private Placement
to purchase an aggregate of 716,146 Units indentical to the Units sold in
the IPO and the 1997 Private Placement, such Units containing an aggregate
of 716,146 shares of Class A Common Stock, 800,082 Class A Warrants and
an aggregate of 1,600,164 Class B Warrants (including 800,082 Class B
Warrants underlying the Class A Warrants), such Class A Warrants and
Class B Warrants exercisable for an aggregate of 2,400,246 shares of
Class A Common Stock (including 251,808 shares of Class A Common Stock
issuable pursuant to anti-dilution provisions contained in such Warrants);
(iv) options to purchase 966,999 shares of Class A Common Stock under the
1994 Plan; (v) options to purchase 57,500 shares of Class A Common Stock,
28,750 shares of Class E-1 Common Stock and 28,750 shares of Class E-2
Common Stock under the 1992 Plan and (vi) 210,314 other warrants (the
"Private Placement Warrants") (including 22,064 warrants issuable
pursuant to anti-dilution provisions contained in such warrants)
to purchase 210,314 shares of Class A Common Stock, 94,125
shares of Class E-1 Common Stock and 94,125 shares of Class E-2
Common Stock. For the respective terms of such securities, the
holders thereof are given an opportunity to profit from a
rise in the market price of the Company's Class A Common Stock
with a resulting dilution in the interests of the other stockholders.
The existence of the IPO Unit Purchase Options, outstanding options
and warrants, Class A Warrants, Class B Warrants, and other options
that may be issued by the Company may hinder future financing by the
Company. Further, the holders of such options and warrants may
exercise them at a time when the Company would otherwise be able to
obtain additional equity capital on terms more favorable to the
Company. No prediction can be made as to the effect, if any, that
sale of these securities or the availability of such securities for
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Page 22
sale without restriction will have on the market prices of the
Company's securities prevailing from time to time. Nevertheless, the
possibility that substantial amounts of securities may be sold in the
public market may adversely affect prevailing market prices for the
Company's securities and could impair the Company's ability to raise
capital through the sale of its securities.
In addition, holders of the IPO Unit Purchase Option and the
Private Placement Unit Purchase Option have registration rights with
respect to such option and the underlying securities. Exercise of
the registration rights may involve substantial expense to the
Company. Additionally, as of the date of this Prospectus, the
Company's other warrants were exercisable through September 10, 2002
at exercise prices of $.50 to $2.50 per share, and contain anti-
dilution provisions, demand and "piggy-back" registration rights.
All the executive officers and directors of the Company and 5%
of shareholders holding in the aggregate approximately 2,640,000
shares of Class B and Class E Common Stock have agreed that they will
not sell any of the Company's securities owned by them prior to 13
months from the effective date of the Registration Statement relating
to this Prospectus, without the consent of Blair, subject to certain
immaterial exceptions.
The shares of Class A Common Stock issuable upon exercise of the
Company's Class A and Class B Warrants issued or issuable principally
in connection with the Company's IPO may be resold without
restriction provided there is a current prospectus under the Act
relating thereto and applicable state securities laws are complied
with.
Possible Adverse Effects of Authorization of Preferred Stock;
Anti-Takeover Provisions. The Company's Certificate of Incorporation
authorizes the issuance of 4,950,000 shares of "blank check"
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 stockholder
approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common
Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although
the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not
do so in the future. See "Description of Securities."
Limitation of Liability of Directors and Officers. The
Company's Certificate of Incorporation limits the liabilities of the
directors of the Company for monetary damages for breach of fiduciary
duty as a director to the maximum extent permitted by Delaware law.
Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or
rescission, the presence of these provisions in the Certificate of
Incorporation could prevent the recovery of monetary damages against
directors of the Company.
<PAGE>
Page 22
Possible Restrictions on Market-Making Activities in the
Company's Securities. Blair & Co. is currently, and the Company
believes that it intends in the future to continue to be, a
market-maker in the Company's securities. Regulation M, which was
recently adopted to replace Rule 10b-6 and certain other rules under
the Exchange Act, prohibits Blair & Co. from engaging in any market-
making activities with regard to the Company's securities for the
period from up to five business days (or such other applicable period
as Regulation M may provide) prior to (i) any solicitation by Blair
or Blair & Co. of the exercise of Warrants until the later of the
termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that Blair or Blair & Co. may have
to receive a fee for the exercise of such Warrants following such
solicitation and (ii) any period during which Blair & Co. or any
affiliated parties participate in a distribution of any securities of
the Company owned for their own account. As a result, Blair & Co.
may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable. Any temporary
cessation of such market-making activities could have an adverse
effect on the market prices of the Company's securities. An
unfavorable resolution of the investigation by the Securities and
Exchange Commission (described below) could have the effect of
limiting such firm's ability to make a market in the securities. Any
temporary cessation of such market-making activities could have a
material adverse affect on the market prices of the Company's
securities.
Possible Adverse Effect on Liquidity of the Company's Securities
Due to the Investigation of D.H. Blair Investment Banking Corp. and
D.H. Blair & Co., Inc. by the Securities and Exchange Commission.
The Commission is conducting an investigation concerning various
business activities of Blair and Blair & Co., a selling group member
which will distribute substantially all of the Units offered hereby.
The investigation appears to be broad in scope, involving numerous
aspects of Blair's and Blair & Co.'s compliance with the Federal
securities laws and compliance with the Federal securities laws by
issuers whose securities were underwritten by Blair or Blair & Co.,
or in which Blair or Blair & Co. made over-the-counter markets,
persons associated with Blair or Blair & Co., such issuers and other
persons. The Company has been advised by Blair that the
investigation has been ongoing since at least 1989 and that it is
cooperating with the investigation. Blair has advised the Company
that it cannot predict whether this investigation will ever result in
any type of formal enforcement action against Blair or Blair & Co.,
or, if so, whether any such action might have an adverse effect on
Blair or Blair & Co. or the securities offered hereby. The Company
has been advised that Blair & Co. currently makes a market in the
Company's securities. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability
to make a market in the Company's securities, which could adversely
affect the liquidity or price of such securities.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale
of securities by the Selling Securityholders. In the event all of
the outstanding Class A Warrants, Class B Warrants, and other
warrants are exercised, the Company will receive gross proceeds of
approximately $94 million.
<PAGE>
Page 24
DIVIDEND POLICY
The Company has never paid a cash dividend on its Common Stock
and intends to continue to follow a policy of retaining earnings to
finance future growth. Accordingly, the Company does not anticipate
the payment of cash dividends to holders of Common Stock in the
foreseeable future.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation, as amended, as
permitted by the Delaware General Corporation Law, limits the
liability of the Company's directors to the Company or its
stockholders for monetary damages arising from a breach of their
fiduciary duties as directors in certain circumstances. This
provision presently limits a directors' liability except where a
director (i) breaches his or her duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or
engages in intentional misconduct or a knowing violation of law,
(iii) for any transaction from which a director obtains an improper
personal benefit, or (iv) under Section 174 of the Delaware General
Corporation Law which imposes liability for willful or negligent
payment of unlawful dividends, distributions or redemptions. This
provision does not prevent the Company or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission.
If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence
or gross negligence.
The Bylaws of the Company authorize the Company to indemnify its
directors, officers or other persons serving at the request of the
Company against liabilities and losses arising from their services in
such capacities to the fullest extent permitted by law, including
payment in advance of a final disposition of a director's or
officer's expenses or attorneys' fees reasonably incurred in
defending any action, suit or proceeding, other than in the case of
an action, suit or proceeding brought by the Company on its own
behalf against such person.
The Company has been advised that it is the position of the
Commission that insofar as the foregoing provisions may be invoked to
disclaim liability for damages arising under the Securities Act, such
provision is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company believes that these charter provisions are
consistent with certain provisions of the Delaware General
Corporation Law, which are designed, among other thinks, to encourage
qualified individuals to serve as directors and officers of Delaware
corporations. The Company also believes these provisions will assist
it in maintaining and securing the services of qualified directors
and officers.
<PAGE>
Page 25
SELLING SECURITYHOLDERS
This Prospectus relates to an offering by the Selling
Securityholders of (i) 1,603,274 Units, each Unit consisting of one
share of Class A Common Stock, approximately 1.11721 Class A Warrants
and approximately 1.11721 Class B Warrants and (ii) 540,814 shares of
Class A Common Stock issued or issuable on exercise of certain warrants to
purchase Class A Common Stock issued in connection with certain private
placements in 1992 (including 22,064 shares of Class A Common Stock
issuable pursuant to anti-dilution provisions contained in such warrants).
The Selling Securityholder Securities are being registered to permit public
secondary trading of the Units, the Class A Common Stock and/or the
Warrants, and the Selling Securityholders may offer such Units,
shares of Class A Common Stock and Warrants for resale from time to
time. See "Plan of Distribution." For a description of the
Company's Common Stock, Class A Warrants, Class B Warrants, see
"Description of Securities."
The following table sets forth the names of each Selling
Securityholder and for each, the number of shares of Class A Common
Stock beneficially owned at the commencement of the offering and the
number of Shares or Units (and/or shares of Class A Common Stock,
Class A Warrants and Class B Warrants contained therein) offered for
sale, based on information provided to the Company by such Selling
Securityholders. The shares of Class A Common Stock, the Units and
the underlying securities are being registered to permit public
secondary trading of such securities and the Selling Securityholders
may offer such securities for resale from time to time. See "Plan of
Distribution."
The Company has filed with the Commission under the Securities
Act a Registration Statement on Form S-3, of which this Prospectus
forms a part, with respect to the resale of the Selling
Securityholder Securities. The Company has agreed, among other
things, to bear certain expenses in connection with the registration
and sale of the shares of Class A Common Stock and Warrants being
offered by the Selling Securityholders. See "Plan of Distribution."
Set forth below is certain information with respect to each
Selling Securityholder as of the date of this Prospectus. Except as
indicated below, to the best of the Company's knowledge, there have
been no material relationships between any of the Selling
Securityholders and the Company within the past three years. Except
as noted below, none of the Selling Securityholders hold any other
securities of the Company. None of the Selling Securityholders are
officers or directors of the Company.
<PAGE>
PAGE 26
<TABLE>
1997 Private Placement Securities
<CAPTION>
Number of Shares of
Class A Common Stock
Number of Beneficially Owned by Percentage
Units(1) offered by the Selling Securityholder at Beneficially Owned at
Selling Securityholder Selling Securityholder Commencement of Offering(2) Commencement of Offering
<S> <C> <C> <C>
Edith Abramowitz 7,937 74,757 1.61
Robert Paul Albrecht 3,968 25,535 *
Allenstown Partners 15,874 69,077 1.49
Jacob M. Alpert 3,968 17,817 *
Bruce Ampolsky 23,811 103,616 2.22
John D. Balk 7,937 82,131 1.77
David & Louis Beakley, JTWROS 3,968 24,618 *
Philip S. & Carolyn Lofton Benner, JTWROS 3,968 17,267 *
Charles M. Berger 15,874 69,077 1.49
B. F. Industries, Inc. 7,937 34,538 *
Edwin R. Bindseil 31,748 232,500 4.87
John E. Bishop 7,937 34,538 *
Owen W. Blum 15,874 104,052 2.24
John C. Botdorf 7,937 79,114 1.17
Marialby Caceres 19,048 75,984 1.64
Buford Campbell Revocable Trust 7,937 80,242 1.74
Charles W. & Roberta S. Chambers, JTWROS 15,874 69,077 1.49
D. Clein 15,874 124,620 2.67
Jack B. Cook 7,937 34,538 *
Charles J. & Ilga A. Cooper, JTWROS 15,874 86,600 1.87
Keith H. Cooper 7,937 77,997 1.68
Rox Barnes Covert 15,874 69,077 1.49
Raymond A. Dearchs 15,874 70,077 1.51
Thomas A. Diliberto 7,937 34,538 *
Joseph DiMauro 15,874 154,812 3.29
Mitchell C. & Patricia G. Elman, JTWROS 7,937 34,538 *
Benjamin & Sylvia Fader, JTWROS 7,937 62,116 1.35
Edward J. Farrell 15,874 69,077 1.49
Holly Freyre 7,937 46,089 1.00
Stephen J. Garchik 15,874 69,077 1.49
Jerry W. Grace 7,937 34,538 *
Graves Oil Company, Inc. 3,968 17,267 *
Lloyd A & Alemene C. Greene, JTWROS 3,968 17,267 *
John T. & Carol A. Haran, JTWROS 7,937 82,011 1.77
Delaware Charter Guaratee & Trust Co.
F/B/O Laurence S. Heller IRA-RO
(Retirement Plan) 15,874 69,077 1.49
HT Partners 7,937 34,538 *
G.C. Jewell 15,874 70,077 1.51
Lowell N. Kairys 15,874 85,835 1.85
Ralph K. Kato 15,874 69,077 1.49
Steve & Rebecca Sue Katz, JTWROS 7,937 36,538 *
Edward J. Kfoury 3,968 17,267 *
Robert R.B. Kidd 3,968 23,345 *
P. Elliott Kirven 15,874 73,077 1.58
Gary & Tatyana Komsky, JTWROS 7,937 45,710 *
Israel Krakowski 23,811 107,302 2.30
Lawrence R. Jackqueline L. Kuhnert, JTWROS 15,874 77,780 1.68
George Kupfrian IRA 31,748 138,155 2.94
Landmark Associates 12,699 55,621 1.20
Daniel R. Lee 31,748 164,327 3.94
James Lees 7,937 34,538 *
A.F. Lehmkuhl 7,937 162,183 3.49
Charles Leithauser 7,937 34,538 *
Julie A. Lerner 3,968 39,025 *
Stanley F. Lincoln 7,937 34,538 *
Barry J. Lind 3,968 17,267 *
Barry J. Lind Revocable Trust 35,716 155,422 3.30
Barry J. Lind & Neil G. Bluhm, TIC 31,748 138,155 2.94
Christian Ludwigsen 15,874 69,077 1.49
Peter & Patricia A. Maher, JTWROS 23,811 154,408 3.29
Gary Marano 7,937 94,050 2.03
John Marks 15,874 95,921 2.06
Bruce P. Martin 7,937 69,691 1.51
Donald P. Martin 7,937 47,592 1.03
Herbert Maxwell 7,937 68,968 1.49
David H. McAlpin, Jr. 23,811 155,205 3.30
William H. McCartney 7,937 87,812 1.89
Jane & Thomas McLendon, JTWROS 7,937 34,538 *
James J. & Judy A. McQuade, TIC 7,937 34,538 *
Paul Medici 3,968 17,267 *
Danny L. & Janet E. Messick, JTWROS 3,968 19,267 *
Mid Plains Construction 3,968 60,779 1.32
Abraham Mizrahi 3,968 17,267 *
Philip Montagno 7,937 34,538 *
Charles Morgan 7,937 34,538 *
Peter Muserlian 47,622 207,233 4.35
David P. Norum Trust 7,937 49,333 1.07
F/B/O David W. Oliver IRA Rollover 15,874 85,177 1.84
Steven N. Ostrovsky 7,937 196,853 4.17
Anthony Pace 3,968 26,763 *
William A. Pair 15,874 111,057 2.38
Anthony J. Palma 7,937 34,538 *
Augusto Panzini 7,937 34,538 *
Geoffrey M. Parrillo 3,968 17,267 *
Eugene L. Pearce, III 7,937 70,288 1.52
Craig A. & Barbara Peterson, JTWROS 7,937 34,538 *
John S. Pirretti 7,937 74,171 1.60
August Pisto 7,937 56,491 1.22
Michael Pizitz 7,937 34,538 *
Richard Pizitz 7,937 34,538 *
Herbert B. & Marilyn Platzner, JTROS 7,937 34,538 *
James M. & Nell W. Potter, TIC 15,874 107,509 2.30
Jack Price 7,937 119,429 2.56
Michael & Irene Reingold JTWROS 3,968 21,618 *
Dennis B. Richards 31,748 138,155 2.94
M. Jerome Rieger IRA Rollover 15,874 69,077 1.49
Dawn Roccaro 7,937 34,538 *
Lawrence J. Rodler 3,968 33,790 *
Nancy A. Roehl 31,748 152,580 3.25
Gene Rosenberg 7,937 34,538 *
Leonard & Nancy Rossicone, JTWROS 7,937 45,710 *
Lawrence Rothberg 3,968 21,618 *
Alan J. Rubin 15,874 69,077 1.49
Rodney Ruebsahm 7,937 34,538 *
Robert A. Scappa 7,937 39,006 *
Richard B. Schechter 7,937 34,538 *
Adolph R. Shiver 7,937 34,538 *
Richard S. & Cynthia D. Simms, JTWROS 7,937 35,655 *
Robert B. Speed Retirement Plan 15,874 97,865 2.10
Eugene L. Smith 3,968 23,970 *
Richard Staelin 15,874 69,077 1.49
Faye Stilley 7,937 66,581 1.44
Joel A. Stone 47,622 207,233 4.35
Stephen J. Stoute 31,748 164,178 3.49
Harriet Sussman 7,937 34,538 *
Roger Tallman 3,968 17,267 *
Samuel J. Talucci 3,968 47,728 1.04
Richard Tauber 7,937 34,538 *
Elizabeth Taylor 7,937 45,519 *
Stewart Taylor 7,937 34,538 *
Douglas M. Trabilcy 39,685 225,538 4.72
Perry Trebatch 7,937 34,538 *
Triad Petroleum Defined Benefit
Pension Plan 7,937 34,538 *
James & Li-Mei Tzeng, JTWROS 3,968 36,873 *
Lee Van Lenten 3,968 17,267 *
Francine Urdang 15,874 99,956 2.56
Andrew Weissman 7,937 34,538 *
William Wesley 7,937 34,538 *
Wilner Enterprises 31,748 185,918 3.92
C.W. Witte 7,937 153,712 3.27
The David C. Wohl Trust u/a/d 6/18/91 7,937 51,497 1.12
Randall L. Wood Trust u/t/a dated
6/17/96 7,937 34,538 *
Woodland Construction Corp. 31,748 138,155 2.94
Greg Alan Yolowitz 3,968 17,817 *
<FN>
<F1>
(1) Each Unit consisting of one share of Class A Common Stock,
approximately 1.11721 Class A Warrants and approximately
1.11721 Class B Warrants.
<F2>
(2) Includes shares of Class A Common Stock underlying the Units, the
Class A Warrants and the Class B Warrants purchased in the 1997
Private Placement and offered by the Selling Securityholder as well
as any Class A Common Stock held by such Selling Securityholder or
underlying any Units, Class A Warrants or Class B Warrants held by
such Selling Securityholder in addition to the securities purchased
in the 1997 Private Placement.
</FN>
</TABLE>
The above Selling Securityholders have agreed not to sell the Class A
Common Stock, the Class A Warrants and the Class B Warrants comprising
such Units except after the time periods and in the percentage amounts
set forth below and not to exercise the Class A Warrants and the Class B
Warrants for a period of one year following the Closing relating to the
issuance thereof.
Percentage
Lock Up Period Eligible for Resale
_______________________________________________ ___________________
Prior to June 18, 1997 None
Period from June 18, 1997 to October 18, 1997 50%
After October 18, 1997 100%
<PAGE>
Page 30
1992 Private Placement Securities
Each of the Selling Securityholders listed below with a reference to
footnote (2) is either an officer, director or employee of either D.H.
Blair Investment Banking Corp. ("Blair"), an investment banking firm
which acted as underwriter of the Company's IPO in January 1995 and
placement agent for private placements of securities by the Company in
1992, 1994 and 1997, or D.H. Blair & Co., Inc. ("Blair & Co."), which was
a selected dealer in these offerings.
In connection with the Company's 1997 Private Placement, Blair received
a placement agent fee of $300,000, a non-accountable expense allowance
of $90,000 and a Unit Purchase Option to purchase 561,146 Units. In
connection with the Company's IPO in January and February 1995, Blair
received an aggregate of $891,250 in underwriting discounts and
commissions and a non-accountable expense allowance of $267,375, and
Blair and its designees were issued Unit Purchase Options to purchase up
to 155,000 Units (which options and their underlying securities are not
transferable until January 18, 1998). In connection with a private
placement in September 1994, Blair served as placement agent and
received an aggregate of $195,000 from the Company as commissions
(including a non-accounting expense allowance).
<TABLE>
Number of Number of Shares of
Shares of Class A Class A Common Stock Percentage
Common Stock Offered Beneficially Owned by Beneficially Owned
by the Selling Selling Securityholder at at Commencement
Selling Securityholder Securityholder Commencement of Offering(1) of Offering
<S> <C> <C> <C>
Kenton Wood(2) 4,500 4,500 *
Rivki Rosenwald(2) 44,100(3) 44,100(3) *
Ruki Renov(2) 75,600(4) 75,600(4) 1.65
Esther Stahler(2) 69,300(5) 69,300(5) 1.52
Laya Perlysky(2) 31,500 31,500 *
Martin A. Bell(2) 50,000 50,000 1.10
Evan Novak(2) 18,500 18,500 *
Dominic Cavagnulo(2) 18,500 18,500 *
Darren Orlando(2) 18,500 18,500 *
David Lerner(2) 63,681(6) 63,681(6) 1.40
Al Palagonia(2) 125,686(6) 125,686(6) 2.76
William L. Cameron 3,491(6) 3,491(6) *
Donald Softness Family Trust 3,491(6) 3,491(6) *
Fred Kassner 13,965(6) 13,965(6) *
________________________________________________________________________________
TOTAL 540,814 540,814
<FN>
<F1>
(1) Does not include shares of Class E-1 Common Stock and Class E-2
Common Stock held or shares of Class A Common Stock and warrants
underlying Unit Purchase Options not exercisable within 60 days
of the date hereof.
<F2>
(2) Each individual is an officer, director or employee of Blair or
Blair & Co.
<PAGE>
Page 31
<F3>
(3) Includes 6,300 shares of Class A Common Stock owned by each of
Rivki Rosenwald C/F Doni Rosenwald and Rivki Rosenwald C/F Joshy
Rosenwald.
<F4>
(4) Includes 6,300 shares of Class A Common Stock beneficially owned
by each of Ruki Renov C/F Ari Renov, Ruki Renov C/F Yarel Renov,
Ruki Renov C/F Yoni Renov, Ruki Renov C/F Tova Renov, Ruki Renov
C/F Tani Renov, Ruki Renov C/F Eli Renov and Ruki Renov C/F
Emily Renov.
<F5>
(5) Includes 6,300 shares of Class A Common Stock beneficially owned
by each of Esther Stahler C/F Jamie Stahler, Esther Stahler C/F
Daniel Stahler, Esther Stahler C/F David Stahler, Esther Stahler
C/F Lisa Stahler, Esther Stahler C/F Avi Stahler and Esther
Stahler C/F Eli Stahler.
<F6>
(6) Consists of Class A Common Stock issuable upon exercise of the
1992 Private Placement Warrants.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
The Selling Securityholder Securities may be sold from time to
time to purchasers directly by any of the Selling Securityholders,
or, alternatively, any of the Selling Securityholders may from time
to time offer the Selling Securityholder Securities through dealers
or agents, who may receive compensation in the form of underwriting
discounts, concessions or commissions from the Selling
Securityholders and/or purchasers of the Selling Securityholder
Securities for whom they may act as agent. Sales will be made at
prices and on terms then prevailing or at prices related to the
current market price, or in negotiated transactions. A Selling
Securityholder that sells such Selling Securityholder Securities
pursuant to the Registration Statement of which this Prospectus is a
part will be required to deliver such Prospectus to purchasers and
will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales. There can be no
assurance that any of the Selling Securityholder Securities will be
sold by the Selling Securityholders.
Under applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Selling Securityholder
Warrants may not simultaneously engage in market-making activities
with respect to any securities of the Company during the applicable
"cooling off" period (currently a period of up to five business days)
prior to the commencement of such distribution. Accordingly, in the
event Blair or Blair & Co. is engaged in a distribution of the
Selling Securityholder Warrants, neither of such firms will be able
to make a market in the Company's securities during the applicable
restrictive period. However, neither Blair nor Blair & Co. have
agreed to nor is either of them obligated to act as a broker-dealer.
In addition, each Selling Securityholder desiring to sell Warrants
will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, which provisions may limit the
timing of the purchases and sales of shares of the Company's
securities by such Selling Securityholders.
<PAGE>
Page 32
Holders of outstanding Warrants can exercise their Warrants for
their applicable underlying securities upon payment of the exercise
prices therefor to the Company. The Company has agreed not to
solicit Warrant exercises other than through Blair unless Blair
declines or is unable to make such solicitation. Except for any
Warrants held by Blair at the time of exercise, upon any exercise of
the Class A and Class B Warrants, the Company will pay a fee to Blair
(the "Solicitation Fee") of 5% of the aggregate exercise price if
(i) the market price of the Company's Class A Common Stock on the
date the Warrants are exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrants was
solicited by a member of the National Association of Securities
Dealers, Inc. designated in writing by the warrantholder as having
solicited the exercise; (iii) the Warrants are not held in a
discretionary account; (iv) disclosure of compensation arrangements
is made both at the time of the offering and at the time of exercise
of the Warrants; and (v) the solicitation of exercise of the Warrants
was not in violation of Regulation M promulgated under the Exchange
Act. Blair may reallow a portion of the Solicitation Fee to members
of the National Association of Securities Dealers, Inc. The costs of
Blair's solicitation will be borne by the Company.
The Selling Securityholders and broker-dealers, if any, acting
in connection with such sale might be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act and any
commission received by them and any profit on the resale of the
securities might be deemed to be underwriting discounts and
commissions under the Securities Act.
The Company has agreed to pay substantially all of the expenses
incident to the registration of all of the securities covered under
this Prospectus, other than transfer taxes, if any, and commissions
and discounts of dealers and agents.
DESCRIPTION OF SECURITIES
Units
Each Unit consists of one share of Class A Common Stock,
approximately 1.11721 redeemable Class A Warrants and approximately
1.11721 redeemable Class B Warrants. Each Class A Warrant entitles
the holder to purchase one share of Class A Common Stock and
one redeemable Class B Warrant. Each Class B Warrant entitles the
holder to purchase one share of Class A Common Stock. The Class A
Common Stock and Warrants comprising the Units are transferable
separately immediately upon issuance.
Common Stock
Class A Common Stock. The Company is authorized to issue
20,000,000 shares of Class A Common Stock. The Company currently has
2,954,260 shares of Class A Common Stock outstanding and an
additional 4,329,840 shares of Class A Common Stock reserved for
issuance on conversion of outstanding Class B Common Stock and Class
E Common Stock and exercise of Class A Warrants, Class B Warrants
(including the Class B Warrants underlying the Class A Warrants) and
options. Due to the number of Units sold in the 1997 Private
Placement, there is not sufficient authorized Class A Common Stock
for issuance in, or reservation for issuance on exercise of the
Warrants issued in the 1997 Private Placement. Accordingly,
officers, directors and employees of the Company and others
(including certain officers of Blair and Blair & Co.) holding an
<PAGE>
Page 33
aggregate of 1,328,399 shares of Class B Common Stock, 2,092,144
shares of Class E Common Stock issued and to be issued and options
and warrants to purchase 2,166,000 shares of Class A Common Stock,
which are convertible into or exercisable, under certain
circumstances, into an aggregate of 5,586,543 shares of Class A
Common Stock, have agreed that they will not convert shares of Class
B and Class E Common Stock or exercise certain options into Class A
Common Stock to the extent required until a sufficient number of
additional shares of Class A Common Stock are authorized by the
Stockholders of the Company. The Company's Board of Directors has
approved an increase in the authorized Class A Common Stock to
40,000,000 shares, subject to approval by the Company's shareholders.
Holders of Class A Common Stock have the right to cast one vote
for each share held of record on all matters submitted to a vote of
holders of Class A Common Stock, including the election of directors.
The Class A, Class B, Class E-1 and Class E-2 Common Stock vote
together as a single class on all matters on which stockholders may
vote, except when class voting is required by applicable law. The
Class A Common Stock shareholders will vote as a class for the
increase in the authorized Class A Common Stock.
Holders of Class A Common Stock are entitled to receive such
dividends, together with the holders of Class B, Class E-1 and
Class E-2 Common Stock, pro rata based on the number of shares held,
when, as and if declared by the Board of Directors, from funds
legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the case of dividends or other
distributions payable in stock of the Company, including
distributions pursuant to stock splits or division of stock of the
Company, only shares of Class A Common Stock will be distributed with
respect to Class A Common Stock. In the event of the liquidation,
dissolution or winding up of the affairs of the Company, all assets
and funds of the Company remaining after the payment of all debts and
other liabilities, subject to the rights of the holders of any
outstanding preferred stock, shall be distributed, pro rata, among
the holders of the Class A, Class B, Class E-1 and Class E-2 Common
Stock. Holders of Class A Common Stock are not entitled to
preemptive, subscription, cumulative voting or conversion rights, and
there are no redemption or sinking fund provisions applicable to the
Class A Common Stock. All outstanding shares of Class A Common Stock
are, and the shares of Class A Common Stock offered hereby will be
when issued, fully paid and non-assessable.
Class B Common Stock. The Company is authorized to issue
2,000,000 shares of Class B Common Stock, $.01 par value, 1,372,566
of which are issued and outstanding as of January 31, 1997 and held
by 23 holders of record, including 781,244 shares held in escrow.
Each share of Class B Common Stock is entitled to six votes on
all matters on which stockholders may vote, including the election of
directors. The Class A, Class B, Class E-1 and Class E-2 Common
Stock vote together as a single class on all matters on which
stockholders may vote, except when class voting is required by
applicable law.
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Holders of Class B Common Stock are entitled to participate
together with the holders of Class A, Class E-1 and Class E-2 Common
Stock, pro rata based on the number of shares held, in the payment of
cash dividends and in the liquidation, dissolution and winding up of
the Company, subject to the rights of holders of any outstanding
preferred stock. In the case of dividends, or other distributions
payable in stock of the Company, including distributions pursuant to
stock splits or divisions of stock of the Company, only shares of
Class A Common Stock shall be distributed with respect to Class B
Common Stock.
Shares of Class B Common Stock are automatically convertible
into an equivalent number of fully paid and non-assessable shares of
Class A Common Stock upon the sale or transfer of such shares by the
original record holder thereof except to another holder of Class B
Common Stock. Each share of Class B Common Stock also is convertible
at any time upon the option of the holder into one share of Class A
Common Stock. There are no preemptive, subscription, redemption,
conversion or cumulative voting rights applicable to the Class B
Common Stock.
Class E-1 and E-2 Common Stock. The Company is authorized to
issue 2,000,000 shares of Class E-1 Common Stock, $.01 par value,
1,478,637 of which are issued, outstanding and to be issued and held
by approximately 100 holders of record and is authorized to issue
2,000,000 shares of Class E-2 Common Stock, $.01 par value, 1,478,637
of which are issued, outstanding and to be issued and held by
approximately 100 holders of record. Each share of Class E-1 and E-2
Common Stock is entitled to one vote on all matters on which
stockholders may vote, including the election of directors. The
Class A, Class B, Class E-1 and Class E-2 Common Stock vote together
as a single class on all matters on which stockholders may vote,
except when class voting is required by applicable law.
Holders of Class E-1 and E-2 Common Stock are entitled to
participate together with the holders of Class A and Class B Common
Stock, pro rata based on the number of shares held, in the payment of
cash dividends and in the liquidation, dissolution and winding up of
the Company, subject to the rights of holders of any outstanding
preferred stock. In the case of dividends, or other distributions
payable in stock of the Company, including distributions pursuant to
stock splits or divisions of stock of the Company, only shares of
Class A Common Stock shall be distributed with respect to Class E-1
and E-2 Common Stock.
The Class E-1 shares will be automatically converted into Class
A Common Stock, if, and only if, one or more of the following
conditions is met: (i) the Company's net income before provision for
income taxes and exclusive of any extraordinary earnings (as audited
by the Company's independent public accountants) (the "Minimum Pre-tax
Income") amounts to at least $8.9 million for the fiscal year ending
July 31, 1997; (ii) the Minimum Pre-tax Income amounts to at least
$11.9 million for the fiscal year ending July 31, 1998; (iii) the Bid
Price of the Company's Class A Common Stock averages in excess of
$22.33 per share for 30 consecutive business days through January 18,
1998; (iv) the Company is acquired by or merged into another entity
for which stockholders of the Company receive per share consideration
equal to or greater than the levels set forth in (ii) and (iii)
above.
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The Class E-2 Shares will be automatically converted into Class
A Common Stock if, and only if, one or more of the following
conditions is met: (i) the Minimum Pre-tax Income amounts to at least
$10.9 million for the fiscal year ending July 31, 1997; (ii) the
Minimum Pre-tax Income amounts to at least approximately $14.6 for the
fiscal year ending July 31, 1998; (iii) the Bid Price of the
Company's Class A Common Stock averages in excess of $29.70 per share
for 30 consecutive business days through January 18, 1998; (iv) the
Company is acquired by or merged into another entity for which
stockholders of the Company receive per share consideration equal to
or greater than the levels set forth in (iii) above.
Any Class E Shares not previously converted will be redeemed by
the Company for nominal consideration if such earnings levels or
market price targets are not attained.
Escrow Shares. In connection with a private placement completed
in September 1993, the present holders of the Company's Class B
Common Stock (other than Mr. Medici, who acquired his shares of Class
B Common Stock subsequent to September 1993) placed into escrow on a
pro rata basis, an aggregate of 781,244 of their shares. Such
stockholders will continue to vote the Escrow Shares; however, the
Escrow Shares are not assignable or transferable. The following sets
forth the number of Escrow Shares owned by the executive officers,
directors and principal stockholders of the Company:
Name Number of Shares
_____________________ __________________
Thomas H. Lipscomb 427,409
Alan N. Alpern 94,591
The Escrow Shares will be released to the stockholders in the
event that: (i) the Minimum Pre-tax Income amounts to at least
approximately $10 million for the twelve months ending December 31,
1997; (ii) the Bid Price of the Company's Class A Common Stock shall
average in excess of $18.00 for 30 consecutive days through January
18, 1998.
The Minimum Pre-tax Income amounts set forth above are subject to
increase proportionately, with certain limitations, for issuance of
the additional shares of Class A Common Stock and securities
convertible into, exchangeable for Class A Common Stock and will be
subject to increase on the occurrence of certain events. The Bid
Price amounts set forth above are subject to adjustment in the event
of any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect
of the Escrow Shares or the Class E Shares, including any property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution, or total or partial liquidation of the
Company, shall be held in escrow until release of the Escrow Shares
or conversion of the Class E Shares. If none of the applicable
earnings or market price levels set forth above have been met by May
1, 1998, the Escrow Shares, as well as any dividends or other
distributions made with respect thereto, will be contributed to the
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Page 36
capital of the Company and the Class E Shares, as well as any
dividends or other disbursements made with respect thereto, will be
redeemed by the Company for nominal consideration and cancelled. The
Company expects that the release of the Escrow Shares to, or
conversion of Class E Shares held by, officers, directors, employees
and consultants of the Company will be deemed compensatory and,
accordingly, will result in a substantial charge to reportable
earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the
loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period(s) during which such shares are, or
become probable of being, released from escrow or converted to Class
A Common Stock. Although the amount of compensation expense
recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market
price of the Company's securities.
The earnings and market price levels set forth above were
determined by negotiation between the Company and Blair and should
not be construed to imply or predict any future earnings by the
Company or any increase in the market price of its securities.
Voting Trust. Substantially all of the Class A Common Stock,
Class B Common Stock and Class E Common Stock beneficially owned by
Thomas H. Lipscomb and Alan N. Alpern constituting 40.3% and 9.1% of
the percentage of the vote of all classes of common stock of the
Company, respectively, have been deposited in a voting trust or are
subject to an irrevocable proxy until February 18, 2000. Pursuant to
the voting trust or irrevocable proxy, the shares will be voted at
the direction of a majority of the Company's non-management directors
and Mr. Medici, subject to certain exceptions, including certain
mergers and sale of all or substantially all of the Company's assets.
The shares deposited in the voting trust or irrevocable proxy will
be released from the voting trust or irrevocable proxy on the sale of
the shares.
Redeemable Warrants
Class A Warrants. At the date of this Prospectus the Company
had 4,714,772 Class A Warrants outstanding including 494,623 Class A
Warrants issued pursuant to anti-dilution provisions contained in the
Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Class A Common Stock and one Class B Warrant at an
exercise price which is currently equal to $5.82 at any time until 5:00 P.M.,
New York City time, on February 18, 2002. The number of shares of Class A
Warrants held be the holders thereof is exercisable and the exercise
price of such Warrants have been adjusted as a result of the issuance
of securities in the 1997 Private Placement pursuant to anti-dilution
provisions contained in such Warrants. The Class A Warrants will be
redeemable by the Company commencing after March 31, 1998, on 30
days' written notice at a redemption price of $.05 per Class A
Warrant if the "closing price" of the Company's Class A Common Stock
for any 30 consecutive trading days ending within 15 days of the
notice of redemption averages in excess of $9.10 per share. "Closing
price" shall mean the closing bid price if listed in the
over-the-counter market on Nasdaq or otherwise or the closing sale
price if listed on the Nasdaq National Market or a national
securities exchange. All Class A Warrants must be redeemed if any
are redeemed.
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Class B Warrants. At the date of this Prospectus, the Company
had 3,782,604 Class B Warrants outstanding, including 396,830 Class B
Warrants issued pursuant to anti-dilution provision contained in the
Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Class A Common Stock at an exercise price which is
currently equal to $7.83 at any time after issuance until 5:00 P.M.
New York City time, on February 18, 2002. The number of Class A
Warrants held by the holders thereof and the exercise price of
such Warrants have been adjusted as a result of the issuance of
securities in the 1997 Private Placement pursuant to anti-dilution
provisions contained in such Warrants. The Class B Warrants will be
redeemable by the Company on 30 days' written notice at a redemption
price of $.05 per Class B Warrant if the closing price of the Company's
Class A Common Stock for any 30 consecutive trading days ending within
15 days of the notice of redemption averages in excess of $12.25 per share.
All Class B Warrants must be redeemed if any are redeemed.
General. The Class A Warrants and Class B Warrants were issued
pursuant to the Warrant Agreement and are evidenced by warrant
certificates in registered form. The Warrants provide for adjustment
of the exercise price and for a change in the number of shares
issuable upon exercise to protect holders against dilution in the
event of a stock dividend, stock split, combination or
reclassification of the Common Stock or upon certain issuances of
shares of Common Stock at prices lower than the market value other
than certain excluded issuances, including issuances upon exercise of
options granted to employees, directors and consultants to the
Company, or options to be granted under the Company's stock option
plans and upon the sale of common stock or convertible securities in
a firm commitment public offering including shares sold upon exercise
of an underwriter's over-allotment option.
The exercise prices of the Warrants were determined by
negotiation between the Company and Blair in connection with the IPO
and should not be construed to be predictive of or to imply that any
price increases in the Company's securities will occur.
A Warrant may be exercised upon surrender of the Warrant
certificate on or prior to its expiration date (or earlier redemption
date) at the offices of American Stock Transfer & Trust Company, New
York, New York, the warrant agent, with the form of "Election to
Purchase" on the reverse side of the Warrant certificate completed
and executed as indicated, accompanied by payment of the full
exercise price (by certified or bank check payable to the order of
the Company) for the number of shares with respect to which the
Warrant is being exercised. Shares issued upon exercise of Warrants
and payment in accordance with the terms of the Warrants will be
fully paid and non-assessable.
Investors in the 1997 Private Placement agreed not to (i) sell
any of the Securities until June 18, 1997 and thereafter, not to sell
more than 50% of the Securities until the October 18, 1997 and
(ii) not to exercise the Warrants until one year after the closing
relating to the issuance thereof.
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The Warrants do not confer upon the Warrantholder any voting or
other rights of a stockholder of the Company. Upon notice to the
holders of Warrants, the Company has the right to reduce the exercise
price or extend the expiration date of the Warrants.
Other Warrants. At January 31, 1997, the Company had other
outstanding warrants to purchase an aggregate of 210,324 shares of
Class A Common Stock, which are exercisable through September 10,
2002 at an exercise price of $.50 to $2.50 per share and which
contain anti-dilution provisions and demand and "piggy-back"
registration rights.
IPO Unit Purchase Option
The Company has outstanding IPO Unit Purchase Option to purchase
155,000 Units, such Units consisting of an aggregate of 155,000 shares of
Class A Common Stock, 173,167 Class A Warrants and, 173,167 Class B
Warrants (including 18,167 Class A Warrants and 18,167 Class B
Warrants issuable pursuant to anti-dilution provisions contained in
such Warrants) and 173,167 shares of Class A Common Stock and 173,167
Class B Warrants underlying the 173,167 Class A Warrants. The Class A
Warrants and the Class B Warrants are exercisable until January 18, 2000
at an exercise price of $6.60 per share of Class A Common Stock,
$.05 per Class A Warrant and $.10 per Class B Warrant, subject to
adjustment in certain limited events to protect against dilution.
The Class A Warrants and Class B Warrants underlying the IPO Unit
Purchase Options are exercisable on the same terms and conditions
as the Class A and Class B Warrants except that they are not subject to
redemption by the Company unless, on the redemption date, the IPO Unit
Purchase Option has been exercised and the underlying Warrants are
outstanding. The holders of the IPO Unit Purchase Options have
demand and piggy-back registration rights with respect to the
securities underlying the IPO Unit Purchase Options.
Private Placement Unit Purchase Option
The Company has granted to Blair the Private Placement Unit
Purchase Option to purchase up to 561,146 Units consisting of an aggregate
of 561,146 shares of Class A Common Stock, 626,917 Class A Warrants and
626,917 Class B Warrants. The Units issuable upon exercise of the
Private Offering Unit Purchase Option will, when so issued,
be identical to the Units offered in the 1997 Private Placement.
The Private Placement Unit Purchase Option is exercisable until
February 18, 2002. The holders of the Private Placement Unit
Purchase Option have certain demand and piggyback registration
rights. The Class A Warrants and Class B Warrants underlying the
Private Placement Unit Purchase Option are exercisable on the same
terms and conditions as the Class A and Class B Warrants except that
they are not subject to redemption by the Company unless, on the
redemption date, the Private Placement Unit Purchase Option has been
exercised and the underlying Warrants are outstanding. The holders
of the Private Placement Unit Purchase Options have demand and piggy-
back registration rights with respect to the securities underlying
the Private Placement Unit Purchase Options.
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Preferred Stock
General. The Certificate of Incorporation of the Company
authorizes the issuance of up to 4,950,000 shares of preferred stock,
none of which are currently outstanding. The Board of Directors,
within the limitations and restrictions contained in the Certificate
of Incorporation and without further action by the Company's
stockholders, has the authority to issue shares of preferred stock
from time to time in one or more series and to fix the number of
shares and the relative rights, conversion rights, voting rights, and
terms of redemption, liquidation preferences and any other
preferences, special rights and qualifications of any such series.
Any issuance of preferred stock could, under certain circumstances,
have the effect of delaying or preventing a change in control of the
Company and may adversely affect the rights of holders of Common
Stock. The Company has no present plans to issue any shares of
preferred stock.
Business Combination Provisions
The Company is subject to a Delaware statute regulating
"business combinations," defined to include a broad range of
transactions, between Delaware corporations and "interested
shareholders," defined as persons who have acquired at least 15% of a
corporation's stock. Under the law, a corporation may not engage in
any business combination with any interested shareholder for a period
of three years from the date such person became an interested
shareholder unless certain conditions are satisfied. The statute
contains provisions enabling a corporation to avoid the statute's
restrictions. The Company has not sought to "elect out" of the Delaware
statute and, therefore, the restrictions imposed by such statute will
apply to the Company.
Transfer Agent and Warrant Agent
American Stock Transfer & Trust Company, New York, New York
serves as transfer agent for the Class A Common Stock and warrant
agent for the Warrants.
LEGAL MATTERS
The validity of the securities offered hereby will be passed
upon for the Company by Bachner, Tally, Polevoy & Misher LLP, New
York, New York. Bachner, Tally, Polevoy & Misher represents Blair in
other matters.
EXPERTS
The balance sheet as of July 31, 1996, and the related
statements of operations, cash flows and stockholders' equity for the
year ended July 31, 1996 and for the period from November 18, 1991
(inception) to July 31, 1996 included in the Company's Form 10-KSB
dated July 31, 1996 and incorporated herein by reference, have been
included therein in reliance on the report of Richard A. Eisner &
Company, LLP independent auditors, given on the authority of that firm
as experts in accounting and auditing. Their report includes a
modification relating to an uncertainty regarding the Company's ability
to continue as a going concern.
____________________________
TABLE OF CONTENTS
Page
____
Available Information 5
Incorporation of Certain Documents by Reference 5
The Company 7
Risk Factors 11
Use of Proceeds 23
Dividend Policy 24
Limitation of Liability and Indemnification 24
Selling Securityholders 25
Plan of Distribution 31
Description of Securities 32
Legal Matters 39
Experts 39
