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Filed pursuant to Rule 424(b)(3)
Registration Number 333-28367
PROSPECTUS
135,114 SHARES
MULTIMEDIA GAMES, INC.
COMMON STOCK, $.01 PAR VALUE
This Prospectus relates to 135,114 shares (the "Shares") of Common Stock,
par value $.01 per share (the "Common Stock"), of Multimedia Games, Inc. (the
"Company") which may be offered and sold from time to time by the Selling
Stockholders named herein (the "Selling Stockholders"). The Shares may be
offered and sold from time to time by the Selling Stockholders, or by pledgees,
donees, transferees or other successors in interest to the Selling Stockholders,
directly or through broker-dealers or underwriters who may act solely as agents,
or who may acquire the Shares as principals. The distribution of the Shares may
be effected in one or more transactions that may take place through the Nasdaq
Small Cap Market or through privately negotiated transactions, or through
underwritten public offerings, or through a combination of any such methods of
sale, 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
specially negotiated brokerage fees or commissions may be paid by the Selling
Stockholders in connection with such sales. The Selling Stockholders and any
agents, broker-dealers or underwriters that participate in the distribution of
the Shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commission
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting discounts or commissions under the Securities
Act. See "Plan of Distribution".
The Common Stock is traded on the Nasdaq Small Cap Market under the symbol
"MGAM". On June 12, 1997, the last reported sale price of the Common Stock was
$9.00 per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE
5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Company will not receive any of the proceeds from the sale of Shares by
the Selling Stockholders. The Company will bear all costs relating to the
registration of the Shares (including filing fees under the Securities Act)
which are estimated to be approximately $15,000.00.
THE DATE OF THIS PROSPECTUS IS JUNE 17, 1997.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE SHARES TO WHICH IT RELATES
OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files proxy statements, reports and other information with the
Securities and Exchange Commission (the "Commission"). Such proxy statements,
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices in
Chicago, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
in New York, Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
In addition, the Commission maintains a Web site that contains proxy statements,
reports and other information filed electronically by the Company with the
Commission which can be accessed over the Internet at http://www.sec.gov. The
Common Stock is quoted on the Nasdaq Small Cap Market. Reports and information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed on June 3, 1997, as amended, by the Company
with the Commission under the Securities Act. This Prospectus omits certain of
the information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and to the exhibits relating thereto for
further information with respect to the Company and the Shares offered hereby.
Statements contained herein concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to a copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent accounting
firm.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission by the Company
(Commission File No. 0-28318) for purposes of the information reporting
requirements of the Exchange Act, are incorporated herein by reference:
1. the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1996;
2. the Company's Quarterly Reports on Form 10-QSB for the quarters
ended December 31, 1996 and March 31, 1997 (two reports), including Form
10-QSB/A for the quarter ended December 31, 1996;
3. the Company's definitive Proxy Materials for the Annual Meeting of
Shareholders held on March 29, 1997 as filed with the Commission on March
6, 1997; and
4. the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A dated April 22, 1996 including
any amendments or reports filed for the purpose of updating such
description.
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All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Shares shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated herein by reference will be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated herein by reference modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered, upon
written or oral request of such person, a copy of any and all of the information
incorporated herein by reference, other than the exhibits to such information
(unless such exhibits are specifically incorporated by reference into such
information). Requests should be directed to Multimedia Games, Inc. at its
principal executive offices, 7335 South Lewis Avenue, Suite 204, Tulsa, Oklahoma
74136 Attention: Corporate Secretary (918) 494-0576.
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THE COMPANY
The Company provides satellite linked, high stakes bingo games and
interactive high speed bingo games played on interconnected electronic player
stations to participating bingo halls owned primarily by American Indian tribes
located throughout the United States. The Company also provides proxy play
services to bingo players located off Indian lands through its 49% interest in
American Gaming Network, L.L.C.
Prior to August 1995, the Company's principal business was to conduct high
stakes bingo games under the names MegaBingo, MegaCash and MegaBingo Lite.
MegaBingo and MegaCash games are played simultaneously at multiple bingo halls
using a closed-circuit television satellite link, thereby allowing a greater
number of players to compete against one another for prizes generally larger
than could be offered by a bingo hall acting alone. The participating bingo
halls are owned and operated on behalf of American Indian tribes and are located
in the States of Arizona, California, Kansas, Minnesota, New Mexico, Oklahoma
and South Dakota, among others. MegaBingo Lite provides smaller prizes to
similarly linked Indian bingo halls and is presently delivered to bingo halls
located in the State of Oklahoma.
In August 1995, the Company introduced MegaMania, a high-speed bingo game
developed by the Company that allows customers to purchase bingo cards and to
play bingo on an interactive electronic player station that requires rapid
decisions and presents game results in a fast-action color video format
featuring graphics and animation accompanied by sound. The stations are
interconnected with other stations at participating bingo halls through the
Company's computer network, thus allowing players to compete against one another
to win a common pooled prize.
The Company's revenues emanate from the proceeds of bingo card sales, with
profits derived from revenues remaining after payment of prizes, bingo hall
commissions and operating expenses. The Company believes that its MegaBingo,
MegaCash and MegaBingo Lite games are the only regularly scheduled multi-hall,
high stakes bingo games in the United States.
American Gaming Network, L.L.C., accepts orders and purchases bingo cards
at Indian bingo halls and plays those cards at the bingo halls on behalf of
proxy play participants who are located off the Indian lands. To date, revenues
from proxy play bingo have been insignificant.
MegaBingo(R), MegaCash(R), MegaBingo Lite(TM) and MegaMania(TM) are
registered trademarks and tradenames of the Company, and all references thereto
in this Prospectus shall be deemed to include the applicable tradename or
trademark designation.
Multimedia Games, Inc. was incorporated under the laws of the State of
Texas on August 30, 1991. Unless the context otherwise requires, the term
"Company" includes Multimedia Games, Inc., and its subsidiaries -- TV Games,
Inc., MegaBingo, Inc., and Multimedia Creative Services, Inc., as well as the
activities conducted by the Company through its 49% interest in American Gaming
Network, L.L.C. ("AGN"). The Company's executive offices are located at 7335
South Lewis Avenue, Suite 204, Tulsa, Oklahoma 74136, and its telephone number
is (918) 494-0576.
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RISK FACTORS
Prospective Purchasers of the shares should carefully consider the
following Risk Factors as well as the other information contained in this
Prospectus before making an investment in the shares.
GOVERNMENT REGULATION; POSSIBLE ILLEGALITY OF COMPANY ACTIVITIES
In doing business with Indian tribes and participating in tribal gaming
activities, the Company is subject to various Federal regulations and laws
regarding the manner in which business can be transacted. The operation of
gaming on Indian lands is subject to the Indian Gaming Regulatory Act of 1988
(the "Gaming Act"), which also established the National Indian Gaming Commission
("NIGC") with the authority to promulgate rules and regulations to enforce
certain aspects of the Gaming Act and to protect tribal interests involved in
gaming activities. The NIGC has previously given favorable rulings regarding the
Company's Integrated Gaming Service Agreements with the tribes and has
determined them to be service contracts rather than management contracts,
thereby allowing the Company to obtain more favorable terms than would have been
permitted had the agreements been determined to be management contracts. See
"Risk Factors -- Dependance Upon Tribal Contracts."
On July 10, 1996, the NIGC issued its opinion that the Company's MegaMania
game is a Class II rather than a Class III gaming activity. This opinion was of
significance because, generally speaking, Class II gaming may be conducted on
Indian lands if the state in which the Indian land is located permits such
gaming for any purpose by any person. Class III gaming, on the other hand, which
includes gaming such as video casino games, slot machines, most table games
(e.g., blackjack and craps) and keno, may only be conducted pursuant to a
compact reached between the Indian tribe and the state in which the tribe is
located. MegaMania was designed and is operated by the Company as a Class II
game within the definition of bingo set forth in the Gaming Act, and the Company
has relied upon the opinion of the NIGC in operating its MegaMania game.
On October 16, 1996, the Office of the U.S. Attorney in Tulsa, Oklahoma
(the "U.S. Attorney"), orally informed the Company that the U.S. Attorney was
conducting an independent investigation to determine whether, in the opinion of
the U.S. Attorney, the Company's MegaMania bingo game constituted Class III or
Class II gaming as defined in the Gaming Act, and was therefore in violation of
the law or not. The Company believes that its MegaMania game meets all of the
requirements of a Class II game of bingo and that the NIGC has the regulatory
authority to make final and binding determinations on the classification of
games. However, in order to resolve any differences between the NIGC and the
U.S. Attorney, on April 8, 1997, the Company entered into a Memorandum of
Understanding with the NIGC to implement certain changes to its MegaMania game.
These changes generally require the bingo card holder to take certain actions in
order to daub the card and to indicate a bingo win, and also require the drawing
of bingo numbers using a physical ball blower or as a result of some other human
activity rather than the use of electronically randomly generated numbers.
The Memorandum of Understanding allowed the Company until July 15, 1997, to
make the agreed changes but indicated the willingness of the NIGC to grant
appropriate extensions if the Company was unable to institute the changes for
technical reasons or for reasons beyond the control of the Company. In addition
to the Memorandum of Understanding, the NIGC issued a letter to the Company
dated April 9, 1997, concluding that the modified MegaMania game conformed to
the definition of bingo in the Gaming Act and thus was a Class II game.
On May 12, 1997, the Company received a letter from the Acting Chair of the
NIGC declaring that the NIGC would not necessarily be bound by the Memorandum of
Understanding by declaring it "null and void", that the NIGC would not in the
future pre-approve proposed changes to the Company's games, and that the NIGC
would make its determination on the Class II status of the modified MegaMania
game only after the Company had completed its changes and submitted the modified
version of the game to the NIGC. The May 12, 1997 letter still gave the Company
until July 15, 1997, to make the agreed changes but also stated that the Company
was expected to cease operation of the current MegaMania game by July 15, 1997,
unless the NIGC had specifically approved the modified version of the game by
that time.
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The Company has modified its MegaMania game to meet the terms of the
Memorandum of Understanding and on June 9, 1997, submitted the modified version
to the NIGC for its review and evaluation. No assurances can be given that the
NIGC will honor the determination made in its April 9, 1997, letter and accept
the modified version of the game as a Class II game. If the NIGC does not honor
the determination made in its April 9, 1997 letter, the Company intends to
vigorously defend its position that MegaMania is a Class II game; however, if
the Company is not successful in these efforts, it may be necessary to
discontinue the operation of MegaMania.
In entering into the Memorandum of Understanding and agreeing to a
timetable for the implementation of changes to its current MegaMania game, the
Company believed that any remaining interpretive disagreements with the U.S.
Attorney over the Class II status of MegaMania would be resolved. However, the
Company has not been advised of this resolution by the U.S. Attorney. On the
other hand, the Company has also never received written confirmation from the
U.S. Attorney that the Company was, in fact, the subject of an investigation.
The inquiry and on-site inspection that, at the Company's invitation, was
conducted by the U.S. Attorney several months ago has not appeared to have
developed into any other action on the part of the U.S. Attorney, at least of
which the Company has notice. However, on May 6, 1997, in response to an inquiry
by the Absentee Shawnee tribe of Oklahoma, and with no knowledge of the NIGC
opinions issued to the Company or of the Memorandum of Understanding between the
Company and the NIGC, the First Assistant U.S. Attorney for the Office of the
U.S. Attorney in the Western District of Oklahoma issued a letter to the tribe
stating that the Company's current MegaMania bingo game was considered by that
Office to be an illegal Class III gaming activity. As a result of this letter,
the Absentee Shawnee tribe has suspended the play of MegaMania on its
reservation. The First Assistant U.S. Attorney has now been provided with the
NIGC opinions and the Memorandum of Understanding, but there is no assurance
that the First Assistant U.S. Attorney will reverse his previous position.
Revenues from the play of Megamania at the Absentee Shawnee Tribe accounted for
approximately 3% of the Company's total Megamania revenues for the quarter ended
March 31, 1997.
Over time, the Company does not believe that the planned changes to its
MegaMania game will materially and adversely affect consumer interest and
acceptance of MegaMania, although no assurances in that regard can be given.
There is evidence to suggest that existing players of the current game will
reduce the level of their play until the requirements of the new version become
familiar.
There can be no assurance that the NIGC, either on its own initiative or as
the result of pressure from or cooperation with other agencies such as the
Department of Justice, will adhere to the terms of the Memorandum of
Understanding. There also can be no assurances that the U.S. Attorney, the First
Assistant U.S. Attorney or the Department of Justice will accept any of the
opinions or actions of the NIGC regarding the Company's activities, and not seek
to challenge the legality of the Company's activities.
If adverse determinations or actions are taken by the NIGC, the U.S.
Attorney, the First Assistant U.S. Attorney or the Department of Justice, the
Company intends to vigorously defend its position that MegaMania is a Class II
game. No assurances can be given that the Company will be successful on the
merits. If MegaMania is ultimately determined to be Class III gaming, the loss
of the MegaMania business would have a material adverse effect upon the
Company's financial condition and results of operation.
There can be no assurance that the NIGC, either on its own initiative or as
the result of pressure from or cooperation with other agencies such as the
Department of Justice, will not enact additional regulations or reinterpret
existing regulations in a manner that would have a material and adverse effect
upon the Company, including requiring the Company to restructure its existing
arrangements with Indian tribes or requiring changes in the way the Company's
games are conducted so that such games are classified as Class II. Any such
restructuring of the Company's games has the additional risk that such games
will no longer appeal to consumers or be acceptable to the Tribes. There can
also be no assurance that the Gaming Act or other Federal laws will not be
amended in response to pressure from state and local sources in such a manner so
as to limit the authority of tribes to self-regulate Class II gaming or to
change the definition of Class II gaming.
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DEVELOPING OPERATING ENVIRONMENT
The environment in which the Company conducts its business is relatively
new and presents significant operating challenges and uncertainties. The Gaming
Act was adopted in 1988 and the development of the Federal, State and tribal
infrastructure to regulate the proliferation of Indian gaming activities has
occurred only since that time. Fundamental issues concerning the scope and
intent of the Gaming Act remain unresolved, as do issues relating to the
jurisdiction and authority of different Federal, State, local and tribal
governments and agencies. The NIGC was not fully operational until February
1993, and prior to that the Bureau of Indian Affairs was responsible for certain
functions now performed by the NIGC. As a result, the adoption and
implementation of regulations in furtherance of the Gaming Act have moved
cautiously and there is a comparative lack of case law or interpretation of such
regulations or of the Gaming Act. Moreover, the Company is on the leading edge
of the rapid advancement of technological innovation in gaming, and issues
relating, for example, to the use of technological aids for the playing of games
and gaming on the Internet are either novel or lack historical precedent
sufficient to enable the Company to predict with certainty the outcome of
planned actions or the response of regulatory authorities.
TRIBAL REGULATION
Each Federally recognized Indian tribe has the standing of a sovereign
nation. As such, without approval from the tribes, the tribes cannot be sued or
otherwise held accountable under any but tribal laws. Each tribe which is a
party to the Company's integrated service agreements has waived its sovereign
immunity to the Company as it relates to equipment used in the conduct of games
or to the revenues of the gaming facility. Although the Company has never
experienced any difficulties in this regard, there can be no assurance that a
particular tribe will not invoke its sovereign immunities with respect to
obligations and/or contracts with the Company which could have the effect of
rendering the Company's contracts unenforceable.
In addition, gaming on Indian lands is generally closely administered by
tribal officials. Most tribes have established a regulatory framework to
administer the conduct of gaming on Indian lands. These regulations generally
include licensing and approval procedures and reporting and audit requirements.
Not all constituencies within each Indian tribe view gaming favorably, and
changes in officials have in the past, and could in the future, result in a more
difficult environment in which to conduct the Company's business at a particular
Tribe. Moreover, perceptions and attitudes concerning the integrity and morality
of gaming are highly sensitive matters with most Tribes and seemingly minor or
irrelevant matters, including rumor and innuendo about practices or personnel
employed by the Company, can and have been used by competing tribal
constituencies as a basis for changing or attempting to change existing
relationships between tribes and their vendors. The Company expects this
environment to continue in the future but believes that its sensitivity to these
matters, and the personnel and policies it has in place, will enable it to
effectively manage the issues that will inevitably arise.
DEPENDANCE UPON TRIBAL CONTRACTS
Virtually all of the Company's revenues are derived from contracts with
Indian tribes. The Company has written agreements with approximately 45 Indian
tribes that provide the Company with the exclusive right to conduct bingo
operations in their respective Indian lands, of which approximately 15 contracts
are on a month-to-month basis. No assurances can be given that any of such
contracts will be renewed upon the expiration of their term or that, if renewed,
the terms and conditions thereof will be favorable to the Company, nor can any
assurances be given that a tribe or tribes will not cancel any of such
agreements prior to the expiration of their stated term. A failure to renew such
contracts upon terms favorable to the Company or the cancellation of a
significant number of such contracts would have a material adverse effect upon
the Company's business and results of operations.
CUSTOMER DEMAND; COMPETITION
The Company's product development and marketing activities are based upon
the Company's assessment of customer demand for gaming services in
establishments in which the Company provides services.
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Significant changes in customer demand or preference for gaming products in a
given geography, including competing gaming and other leisure activities, could
have an adverse impact on the Company's business and results of operations.
Significant competition to the Company's MegaMania game should be expected based
upon the initial popularity of that game.
FUTURE FINANCING
The Company's future business plans are dependent upon its ability to find
financing on a timely basis with which to fund the Company's activities,
including the placement of additional MegaMania player stations and related
equipment and the development of new products. Any inability to obtain
additional financing when needed could have a material adverse effect on the
Company's ability to achieve its long-term objectives. Moreover, any additional
financing may involve substantial dilution to the Company's then existing
shareholders.
TECHNOLOGICAL INNOVATION
The Company believes that an important factor to its future success will
include its continued development of new products that appeal to the tastes of
consumers and the introduction of such products in a timely manner. Successful
product development and introduction depends upon a number of factors, including
the identification of products expected to appeal to consumer preferences and
the timely completion of design and testing. Importantly, any new or modified
gaming products will be designed and operated to meet the requirements of Class
II gaming. The Company expects to continue to solicit the approval of the NIGC
that any new or modified gaming products meet the requirements of Class II
gaming so the interpretations and policies of the NIGC with respect to the
requirements for Class II gaming will also affect the timing and nature of any
new products; however, the Company does not always expect to be able to obtain
such approval prior to the introduction of new products. As a result of these
and other factors, there can be no assurance that the Company will continue to
develop and introduce new products in a timely manner that will achieve
commercial success.
ACCUMULATED DEFICIT; UNCERTAIN PROFITABILITY
Although the Company achieved net income of $40,000 in the fiscal year
ended September 30, 1996 (as compared to $505,000 in the prior fiscal year), and
net income of $37,000 for the six months ended March 31, 1997, the Company has
incurred an accumulated deficit of $2,574,000 since its inception in August 1991
through September 30, 1996. No assurances can be given that the Company will be
able to maintain profitable operations in the future. In addition, such profits,
if any, are not expected to be commensurate or proportional with any increases
in revenues as the Company expects to continue to experience significant general
and administrative expenses associated with addressing the regulatory and other
operating uncertainties facing the Company in the developing operating
environment in which the Company conducts its business.
PRIZE FULFILLMENT
The prizes awarded under the Company's bingo games are based upon attaining
an assumed level of gross game receipts and statistical assumptions as to the
frequency of winners. To date, the Company has not experienced a "game deficit"
where prize allocations have exceeded game revenues; however, no assurances can
be given that the Company will not experience abnormally high rates of jackpot
prize wins in the future.
SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS
As of March 31, 1997, there were outstanding immediately exercisable stock
options to purchase an aggregate of 145,000 shares of Common Stock at exercise
prices ranging from $1.50 to $4.00 per share, immediately exercisable warrants
to purchase an aggregate of 380,536 shares of Common Stock at exercise prices
ranging from $2.00 to $6.60 per share, and shares of the Company's Series A
Preferred Stock that are immediately convertible into 652,840 shares of Common
Stock. In addition, there were outstanding additional warrants to purchase
2,042,143 shares of Common Stock at an exercise price of $8.00 per share which
become
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exercisable on November 7, 1997, options to purchase 528,000 shares of Common
Stock at exercise prices ranging from $1.50 to $5.50 per share, that are
generally exercisable in equal annual increments over the next four years
commencing in July 1997, and an option to exchange interests in AGN for up to
412,000 shares of Common Stock at the equivalent of $3.00 per share that becomes
exercisable on August 14, 1997. To the extent that such options, warrants and
Series A Preferred Stock are exercised or converted, dilution to the Company's
shareholders will occur. Moreover, the terms upon which the Company will be able
to obtain additional equity capital may be adversely affected, since the holders
of such options, warrants and Series A Preferred Stock can be expected to
exercise or convert them at a time when the Company would, in all likelihood, be
able to obtain any needed capital on terms more favorable to the Company than
the exercise terms provided in such securities.
CONTINUED NASDAQ QUOTATION
The Company's Common Stock is quoted on the Nasdaq Small Cap Market;
however, there can be no assurance that the Company will meet the criteria for
continued quotation on Nasdaq. The minimum continued quotation criteria include,
among other things, that the Company have total assets of at least $2,000,000
and capital and surplus of at least $1,000,000; that the minimum bid price for
the Common Stock be $1.00 per share; and that the minimum market value of the
"public float" (i.e. the shares held by non-insiders) of the Common Stock be at
least $1,000,000. If the Company's Common Stock were excluded from Nasdaq, it
would adversely affect the price of the Common Stock and the ability of holders
to sell shares of Common Stock.
In the event that the Company is unable to satisfy Nasdaq's continued
quotation criteria, trading, if any, in the Common Stock would thereafter be
conducted in the "pink sheets" or the NASD's Electronic Bulletin Board. In the
absence of the Common Stock being quoted on Nasdaq, or the Company having
$2,000,000 in net tangible assets, trading in the Common Stock would be covered
by Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange
listed securities. Under such rule, broker dealers who recommend such securities
to persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.
The Commission has adopted regulations that generally define a penny stock
to be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on Nasdaq and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three (3) years, (ii) net tangible assets of at least $5,000,000, if such
issuer has been in continuous operation for less than three (3) years, or (iii)
average revenue of at least $6,000,000 for the preceding three (3) years. Unless
an exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock was subject to the regulations on penny
stocks, the market liquidity for the Common Stock would be severely and
adversely affected by limiting the ability of broker-dealers to sell the Common
Stock in the public market. There is no assurance that trading in the Company's
securities will not be subject to these or other regulations that would
adversely affect the market for such securities.
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain its earnings, if any, to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future.
SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES
Of the 4,040,307 shares of Common Stock outstanding at March 31, 1997,
3,024,124 shares are either held by non-affiliates and are freely traded in the
public market or are currently registered under the Securities Act for sale to
the public by the holders thereof. The remaining 1,016,183 shares may be deemed
"restricted
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securities" as that term is defined under the Securities Act, and in the future
may be sold pursuant to a registration under the Securities Act, in compliance
with Rule 144 under the Securities Act, or pursuant to another exemption
therefrom. Rule 144 provides that, in general, a person holding restricted
securities for a period of one year may, every three months thereafter, sell in
brokerage transactions an amount of shares which does not exceed the greater of
one percent (1%) of the Company's then outstanding Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks prior
to such sale. Rule 144 also permits, under certain circumstances, the sale of
shares without any quantity limitations by a person who is not an affiliate of
the Company and was not an affiliate at any time during the 90 day period prior
to sale and who has satisfied a two year holding period. Virtually all of such
1,016,183 restricted shares have been held for more than one year and are,
therefore, eligible for immediate sale under Rule 144, subject to the volume
limitations described above.
In addition, 652,840 shares of Common Stock are issuable upon conversion of
the Series A Preferred Stock and are eligible for resale under Rule 144 without
regard to such volume limitations, except as to 416,755 of such shares that are
held by affiliates of the Company. The Company has also granted registration
rights to the holders of 412,000 shares of Common Stock issuable upon the
exercise of a put and call agreement with the majority owners of AGN (the "Put
and Call Agreement"). The Company has also currently registered 313,250 shares
under the Securities Act for sale to the public that are issuable upon the
exercise of outstanding stock options.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designation, rights and preferences as
may be determined from time to time by the Board of Directors. The Company has
designated a class of shares of preferred stock as Series A Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock"). As of March 31,
1997, there were 134,318 shares of Series A Preferred Stock outstanding, of
which 80,175 shares are owned by Gordon T. Graves, the Chairman and Chief
Executive Officer of the Company, and his affiliated company, and an aggregate
of 3,176 shares are owned by four other officers or directors of the Company.
The Series A Preferred Stock has a liquidation preference of $10 per share plus
accrued and unpaid dividends and is currently convertible, at the option of the
holder, at a rate of five shares of Common Stock for each one share of Series A
Preferred Stock. The holders of the Series A Preferred Stock have the right to
elect a majority of the Board of Directors in the event the Company is in
arrears in the payment of two consecutive quarterly dividend payments. Although
the Company has never been in arrears in the payment of two consecutive
quarterly dividends, it has historically remained in arrears as to one quarterly
dividend payment. The Board of Directors is empowered, without shareholder
approval, to make additional issuances of 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 additional issuances, 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 additional shares of its preferred stock, there can be no assurance
that the Company will not do so in the future.
FORWARD LOOKING STATEMENTS
This Prospectus and the information incorporated herein by reference
contains various "forward-looking statements" within the meaning of Federal and
state securities laws, including those identified or predicated by the words
"believes," "anticipates," "expects" or similar expressions. Such statements are
subject to a number of uncertainties that could cause the actual results to
differ materially from those projected. Such factors include, but are not
limited to, those described under "Risk Factors". Given these uncertainties,
prospective purchasers are cautioned not to place undue reliance upon such
statements.
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<PAGE> 11
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of any of
the Shares by the Selling Stockholders.
SELLING STOCKHOLDERS
The following table sets forth for each Selling Stockholder, as of March
31, 1997, the number of shares of Common Stock beneficially owned by such
Selling Stockholder prior to this offering, the maximum number of Shares to be
offered and sold from time to time by such Selling Stockholder and the number of
shares of Common Stock to be beneficially owned by such Selling Stockholder
after this offering. Except as otherwise indicated, the number of shares to be
offered and sold constitute all of the shares of Common Stock beneficially owned
by the Selling Stockholder.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED SHARES OWNED
PRIOR BEING AFTER
NAME TO OFFERING OFFERED OFFERING(1)
---- ------------ ------- ------------
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
Harold Atkinson............................................ 2,187 2,187 --
Bear Stearns International Limited......................... 10,000 10,000 --
Martin L. Dehan............................................ 1,400 1,400 --
Ronald W. Eldred........................................... 10,000 9,000 1,000
Brenda Eades Hammond....................................... 5,000 5,000 --
Tom Heinzen................................................ 817 817 --
Lyle Rick Johnson.......................................... 9,073 9,073 --
Robert R. Lanier........................................... 1,506 839 667
Thomas J. Larson........................................... 1,050 1,050 --
Henry F. Legas............................................. 530 530 --
Gerald L. Michand.......................................... 45,000 45,000 --
Thomas J. McIntyre......................................... 160 160 --
Phil Nofi.................................................. 1,259 1,259 --
Frank T. Nickell........................................... 108,497 45,682 62,815
John H. Parks.............................................. 1,360 1,360 --
James Reznick.............................................. 1,090 1,090 --
Richard Rosenberg.......................................... 667 667 --
------- ------- ------
Total............................................ 199,596 135,114 64,482
======= ======= ======
</TABLE>
- ---------------
(1) Assumes the sale of all Shares offered hereby. Does not include shares of
Common Stock that are subject to rights to purchase that are not exercisable
within the next 60 days. Based upon 4,040,307 shares of Common Stock
outstanding on March 31, 1997. All of the Shares were issued and became
outstanding subsequent to March 31, 1997, pursuant to the exercise of
warrants at exercise prices ranging from $2.00 to $6.00 per share.
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<PAGE> 12
PLAN OF DISTRIBUTION
The Company will not receive any proceeds from the sale of the Shares by a
Selling Stockholder. Each of the Selling Stockholders may sell his, her or its
Shares directly or through broker-dealers or underwriters who may act solely as
agents, or who may acquire shares as principals. The Shares may be sold from
time to time by the Selling Stockholders, or by pledgees, donees, transferees or
other successors in interest to the Selling Stockholders. The distribution of
the Shares may be effected in one or more transactions that may take place
through the Nasdaq Small Cap Market, including block trades or ordinary broker's
transactions, or through privately negotiated transactions, or through an
underwritten public offering, or through a combination of any such methods of
sale, 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
Stockholders in connection with such sales.
The aggregate proceeds to the Selling Stockholders from the sale of the
Shares will be the purchase price of the Shares sold less the aggregate agents'
commissions and underwriters' discounts, if any, and other expenses of issuance
and distribution not borne by the Company. The Selling Stockholders and any
dealers or agents that participate in the distribution of the Shares may be
deemed to be "underwriters" within the meaning of the Securities Act, and any
profit on the sale of the Shares by them and any commissions received by any
such dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act.
The Selling Stockholders may effect transactions by selling the Shares
directly or through broker-dealers acting either as principal or as agent, and
such broker-dealers may receive compensation in the form of usual and customary
or specifically negotiated underwriting discounts, concessions or commissions
from the Selling Stockholders.
The Company will bear all of the expenses of registration of the Common
Stock under the Federal and state securities laws, including filing fees. Such
expenses payable by the Company are currently estimated to be $15,000.
The Company has advised the Selling Stockholders that the anti-manipulative
provisions of Regulation M under the Exchange Act may apply to their sales in
the market, has furnished each Selling Stockholder with a copy of Regulation M
and has informed them of the need for delivery of copies of this Prospectus.
There can be no assurance that any of the Selling Shareholders will sell any of
the shares of Common Stock offered by them hereunder.
EXPERTS
The consolidated balance sheet of the Company as of September 30, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period ended September
30, 1996, incorporated by reference in this Prospectus and in the Registration
Statement of which this Prospectus forms a part, have been incorporated herein
in reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information as of and for
the periods ended December 31, 1996 and March 31, 1997, incorporated by
reference in this Prospectus, the independent accountants have reported that
they have applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report included in the
Company's quarterly reports on Form 10-QSB for the quarters ended December 31,
1996 and March 31, 1997, and incorporated by reference herein, states that they
did not audit and they do not express an opinion on that interim financial
information. Accordingly, the degree of reliance on their reports on such
information should be restricted in light of the limited nature of the review
procedures applied. The accountants are not subject to the liability provisions
of Section 11 of the Securities Act of 1933 for their report on the unaudited
interim financial information because that report is not a "report" or a "part"
of the registration statement prepared or certified by the accountants within
the meaning of Sections 7 and 11 of the Act.
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<PAGE> 13
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Hall, Estill, Hardwick, Gable, Golden & Nelson, PC,
Tulsa, Oklahoma. Attorneys who are shareholders or employed by Hall, Estill,
Hardwick, Gable, Golden & Nelson, PC who have provided advice with respect to
this offering in the aggregate own less than $50,000 in value of the Company's
securities.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Company's By-Laws authorize the Company to indemnify any present or
former director, officer, employee, or agent of the Company, or a person serving
in a similar post in another organization at the request of the Company, against
expenses, judgments, fines, and amounts paid in settlement incurred by him in
connection with any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, to the
fullest extent not prohibited by the Texas Business Corporation Act, public
policy or other applicable law. Article 202 of the Texas Business Corporation
Act authorizes a corporation to indemnify its directors, officers, employees, or
agents in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including provisions permitting advances for
expenses incurred) arising under the Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
13
