As filed with the Securities and Exchange Commission on April 7, 1997.
Registration No. 33-22443
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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ILLUMINATED MEDIA INC.
(Name of Small Business Issuer in its Charter)
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Minnesota 7319 41-1744582
- -------------- ---------------------------- -------------------
(State of (Primary Standard Industrial (I.R.S. Employer
Incorporation) lassification Code Number) Identification No.)
15 South Fifth Street, Suite 715, Minneapolis, Minnesota 55402
Telephone 612/338-3554 FAX 612/370-0381
(Address and telephone number of principal executive offices,
and of intended principal place of business)
Robert H. Blank, Chief Executive Officer
Illuminated Media, Inc.
15 South Fifth Street, Suite 715, Minneapolis, Minnesota 55402
Telephone 612/338-3554 FAX 612/370-0381
(Name, address and telephone number of agent for service)
-----------------------
Copies to:
Richard P. Keller, Esq. Michael L. Berde, Esq./Kevin S. Spreng, Esq.
Keller & Lokken, P.A. Furber Timmer Zahn, PLLP
175 E. 5th Street, Suite 763 333 South Seventh St., Suite 2100
St. Paul, Minnesota 55101 Minneapolis, MN 55402
(612) 292-1001 (612) 338-3965
(612) 292-8912 (FAX) (612) 330-0959 (FAX)
-----------------------
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities to be Registered To Be Price Per Offering Registration
Registered Unit Price Fee
- ----------------------------------------------------------------------------------------------------------
Units (consisting of Common 1,500,000 $1.00 $ 1,500,000 $ 517.24
Stock and Warrants)
Common Stock 1,500,000 -- -- --
Warrants to Purchase
Common Stock 1,500,000 -- -- --
Common Stock (Underlying
Warrants) 3,000,000 2.75 8,250,000 2,844.83
Common Stock (Underlying
Underwriter's Warrant) 150,000 1.20 180,000 62.07
Warrants to Purchase Common
Stock (Underlying Underwriter's
Warrant) 150,000 -- -- --
Common Stock (Underlying
Warrants within Underwriter's
Warrant) 300,000 2.75 825,000 284.48
--------- ----- ----------- ---------
TOTAL: $10,755,000 $3,708.62
=========== =========
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ILLUMINATED MEDIA, INC.
Registration Statement on Form SB-2
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Cross Reference Sheet Between Items of Form SB-2
and Prospectus as to 1,500,000 Units
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Item in Form SB-2 Caption or Location in Prospectus
----------------- ---------------------------------
1. Front of Registration Statement and Outside Front Cover of Prospectus Front of Registration Statement; front cover page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and outside back Cover Page
3. Summary Information and Risk Factors Summary of Offering; High Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factor No. 13; Description of Securities
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Persons Management
11. Security Ownership of Certain Beneficial Owners and Management Principal Shareholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Not applicable
14. Disclosure of Commission Position on Indemnification for Securities Act Management-Limitation of Directors' Liability;
Liabilities Item 28.c. of Registration Statement
15. Organization Within Last Five Years Certain Transactions
16. Description of Business Business
17. Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis
18. Description of Property Business-Property
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Cover Page of Prospectus; Description of Securities
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on Accounting and Not Applicable
Financial Disclosure
Legend Required by Item 501(a)(8) of Regulation S-B:
Information contained herein is subject to completion or
amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange
Commission. These securities may not be sold nor may offers to
buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall
there by any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any
such State.
For the sake of clarity and because of the limitations inherent in the
type of binding used for the registration statement, the legend required by Item
1 of Form SB-2 and Item 501(a)(8) of Regulation S-B is set forth above. No
copies of any of the Preliminary Prospectuses contained herein will be delivered
to any person without such legend appearing on the cover page thereof in
compliance with Item 501(a)(8) of Regulation S-B.
Should any copy of the Preliminary Prospectus be delivered to any
person, it will include on its cover the above legend and the following words:
Preliminary Prospectus, dated April 7, 1997
Subject to Completion
ILLUMINATED MEDIA INC.
PRELIMINARY PROSPECTUS
DATED APRIL 7, 1997, SUBJECT TO COMPLETION
MAXIMUM OFFERING: 1,500,000 UNITS--MINIMUM OFFERING: 550,000 UNITS
EACH UNIT CONSISTS OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE WARRANT FOR THE PURCHASE OF TWO SHARES OF COMMON STOCK
Each warrant entitles the holder to purchase at any time for a period
of five years following the date of this Prospectus two shares of Common Stock
at an exercise price of $2.75 per share. The warrants are subject to redemption
by the Company for $.01 per warrant, on 30 days written notice, if the closing
bid price of the Common Stock exceeds $3.25 per share, for any 20 consecutive
trading days prior thereto. See "Description of Securities". Prior to this
offering, there has been no market for the Company's securities. The Company
will seek to have the Units listed on the NASDAQ Bulletin Board system. The
Warrants may not be exercised unless a current registration statement is in
effect with respect to the underlying shares of Common Stock. A portion of the
proceeds of this offering will be used to repay debt which, in part, is owed to
or personally guaranteed by affiliates of the Company.
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN MAY
BE DEPENDENT UPON THE SUCCESSFUL COMPLETION OF THIS OFFERING. SEE "RISK
FACTORS", PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
------ -------------- -------------
Per Unit $1.00 $.10 $.90
Total Minimum (3) $550,000 $55,000 $495,000
Total Maximum (3) $1,500,000 $150,000 $1,350,000
(1) In addition, the Company has agreed to (a) pay the Underwriter a
non-accountable expense allowance equal to 3% of the total offering price of
Units sold in this offering (of which $5,000 has already been advanced); (b)
sell to the Underwriter, for nominal consideration, a five-year Warrant to
purchase up to 10% of the number of Units sold in this offering at $1.20 per
Unit; and (c) indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933. See "Underwriting".
(2) Before deducting expenses of the offering, payable by the Company, estimated
at $70,000, not including the underwriter's non-accountable expense allowance.
Footnote (3) is on the next page.
The Units are offered by the Company through its agent, the Underwriter, subject
to prior sale, to withdrawal, cancellation or modification of the offer without
notice, and to certain other conditions.
TUSCHNER & COMPANY, INC.
The date of this Prospectus is April ____, 1997.
(3) The Units are being offered on a "best-efforts, minimum-maximum" basis
through the Underwriter and possibly a group of selected dealers. There is no
minimum investment requirement. All proceeds of this offering will be deposited
in an escrow/impoundment account with BankWindsor, Minneapolis, Minnesota
pending sale of a minimum of 550,000 Units on or before June ___, 1997 [60 days
from the date of this Prospectus] (which period may be extended an additional 30
days, until July ___, 1997, upon mutual consent of the Company and Underwriter),
and if not sold within such period, will be returned promptly to purchasers
without interest or deduction. Subscribers have no right to demand return of
their subscription payments during the escrow period. See "Underwriting".
[Photos of Skyway Ad platforms as installed and used in different locations-to
be added]
SUMMARY OF OFFERING
THIS SUMMARY, WHICH IS INTENDED FOR QUICK REFERENCE ONLY AND DOES NOT
CONTAIN ALL INFORMATION NEEDED FOR AN INVESTMENT DECISION, IS QUALIFIED IN ITS
ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING
NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY: Illuminated Media Inc. (the "Company") is an advertising media
company that sells a form of indoor, out-of-home, advertising called "SKYWAY
ADS", which is pictured on the inside front and rear covers of this Prospectus.
See "BUSINESS". The Company's principal executive offices are located at 15
South 5th Street, Suite 715, Minneapolis, Minnesota 55402 and its telephone
number is (612) 338-3554, FAX (612) 370-0381.
RECENT DEVELOPMENTS: The Company's unaudited internal financial results
for its fourth fiscal quarter ended February 28, 1997, (for which financial
statements are not included in this Prospectus) show that operating revenues
were approximately $35,000, operating expenses were approximately $80,000
(excluding approximately $35,000 of offering expenses), resulting in an
operating loss of approximately $45,000, and when combined with other expenses,
resulted in a net loss. Revenues for the quarter were less than expected because
sales efforts by management were interrupted by the public offering, and the
efforts by two new sales employees did not begin to show results until after the
end of the fiscal period.
THE OFFERING: A minimum of 550,000 and a maximum of 1,500,000 Units at $1.00 per
Unit will be offered for 60 days, subject to an extension of 30 days. Each Unit
consists of one share of Common Stock and one redeemable warrant for the
purchase of two shares of Common Stock, exercisable for five years at $2.75 per
share. The warrant is immediately exercisable and, 30 days after the date of
this Prospectus, is transferable separately from the Common Stock. The warrants
are subject to redemption by the Company for $.01 per warrant, on 30 days
written notice, if the closing bid price of the Common Stock exceeds $3.25 per
share for any 20 consecutive trading days prior thereto. See "DESCRIPTION OF
SECURITIES."
Subscribers may not withdraw their investments, unless the offering is
terminated. At the latest, funds can be held in the escrow/impoundment account
until June __, 1997, which can be extended for 30 days to July __, 1997. At that
time, if the minimum amount has not been sold, the offering will be terminated
and funds promptly returned to investors without either interest or deduction.
See "UNDERWRITING".
COMMON STOCK OUTSTANDING AND TO BE OUTSTANDING: 220,000 shares of Common Stock,
and 204,999 shares of Convertible Preferred Stock (which automatically convert
to Common Stock in connection with this offering), are outstanding as of January
31, 1997 (70,000 shares of Common Stock were outstanding as of November 30,
1996); 770,000 shares and 1,720,000 shares (or 974,999 shares and 1,924,999
shares after automatic conversion of preferred stock) will be outstanding,
respectively, if the minimum or the maximum number of Units offered is sold,
exclusive of the possible exercise of outstanding warrants for the purchase of
161,660 shares (145,667 shares as of November 30, 1996), and the possible
conversion of convertible notes held by two former shareholders and one current
shareholder to acquire up to 435,210 and 19,345 shares (443,485 and 19,345
shares as of November 30, 1996), and the possible exercise of any warrants
included as part of the Units or the Underwriter's Unit Purchase Option. See
"CAPITALIZATION".
USE OF PROCEEDS: Net proceeds of $408,500, if the minimum number of Units
offered is sold, and $1,235,000, if the maximum number of Units offered is sold.
Of the net proceeds, $306,149, if the minimum is sold, and $503,052, if the
maximum is sold, will be used to repay indebtedness (of which, some has been
personally guaranteed by the Company's CEO and some is payable to affiliates).
The remaining proceeds will be used to develop products, and expand into new
geographic areas. See "USE OF PROCEEDS" and "CERTAIN TRANSACTIONS".
RISK FACTORS: This investment is highly speculative and very risky. See "HIGH
RISK FACTORS".
SELECTED FINANCIAL INFORMATION:
Nine Months Ended 11/30/96(Unaudited) As of 11/30/96 (Unaudited)
- ------------------------------------- --------------------------
Revenues $ 181,012 Current Assets $ 51,606
=========
Operating Expenses 274,152 Current Liabilities $ 478,638
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Operating Loss ( 93,140) Shareholders Deficit $(631,589)
=========
Other Expense 27,160 Working Capital $(427,032)
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Net Loss $(120,300)
=========
HIGH RISK FACTORS
The proposed operations and business of the Company will be subject to
a high degree of risk, thereby making the securities offered hereby a highly
speculative investment. Stated below are, in the Company's view, the principal
risk factors affecting this offering, which must be considered carefully by
prospective investors prior to making an investment decision. Prospective
investors should be able to afford, without causing personal financial
difficulty, the entire loss of their investment in the Units.
1. Prior Operating Losses. The Company had operating losses of $157,238
and $77,332, and net losses of $174,843 and $78,662, for its fiscal years ended
February 29, 1996, and February 28, 1995, respectively, and operating losses of
$93,140 and $40,365, and net losses of $120,300 and $46,576, for its nine month
fiscal periods ended November 30, 1996, and November 30, 1995, respectively.
Whether the Company can, even with the proceeds of this offering, reverse these
losses, cannot be known with certainty at this time. See "BUSINESS- Corporate
History" and "FINANCIAL STATEMENTS".
2. Negative Net Worth and Negative Working Capital. At November 30,
1996, the Company had a negative net worth of $631,589 and a negative working
capital position of $427,032. As such, unless this offering or some other type
of financing is completed in the near future, the Company may be unable to
continue in business. See "FINANCIAL STATEMENTS" and "BUSINESS".
3. Auditor's Opinion Reflects Uncertainty as to Going Concern Status.
The report of the Company's independent auditor on the Company's financial
statements as of February 29, 1996, states that, "the Company's recurring
losses, negative cash flows from operations and net working capital deficiency
raise substantial doubt as to its ability to continue as a going concern." The
Company has an urgent need for additional capital in order to continue its
operations. See "FINANCIAL STATEMENTS".
4. No Public Market; Possible Lack of Liquidity. Prior to this
offering, there has been no public market for the securities of the Company. No
assurance can be given that the Units, or their constituent securities, the
Common Stock and the Warrants, can be resold at the offering price, that a
public market will develop for any of the afore-mentioned securities following
this offering, or that such a market, if developed, will continue. Accordingly,
purchasers of the Units may not be able to readily liquidate their investment or
to pledge their shares as collateral for loans. Tuschner & Company, Inc., the
Underwriter in this offering, has advised the Company that it intends to make a
market in the Units following the offering, so long as the trading activity,
including price and volume characteristics, justifies such an undertaking.
However, it has the right to discontinue such market making at any time. The
Company will apply to have its securities listed on the NASDAQ Bulletin Board
system.
5. Dependence Upon Key Person. The Company will be dependent upon the
services of its Chief Executive Officer, Robert H. Blank. The loss of Mr.
Blank's services would have a material adverse effect upon the Company's
operations. The Company does not have a key person life insurance policy on the
life of Mr. Blank, nor does it have an Employment and Non-Compete Agreement with
Mr. Blank. However, the Company expects to purchase a key person life insurance
policy on the life of Mr. Blank upon the completion of this offering. See
"MANAGEMENT".
6. Applicability of "Penny Stock Rules;" Impact on Liquidity. The
Company's securities are considered "penny stock" under a Securities and
Exchange Commission rule that imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and institutional accredited investors (generally institutions with
assets in excess of $5,000,000). For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written agreement to the transaction prior to
the sale. Such broker-dealers must also, prior to the purchase, provide the
customer with a risk disclosure document which identifies risks associated with
investing in "penny stocks" and which describes the market therefor as well as a
brief description of the broker-dealer's obligations under certain "Penny Stock
Rules" and rights and remedies available to customers under federal and state
securities laws. The broker-dealer must obtain a signed and dated
acknowledgement from its customer demonstrating that the customer has actually
received the required risk disclosure document before the first transaction in a
penny stock. Consequently, such rules will affect the ability of broker-dealers
to sell the Company's securities and will affect the ability of purchasers in
this offering to sell their securities in the secondary market, if any. See
"DESCRIPTION OF SECURITIES".
7. Competition. In essence, the Company sells an advertising medium,
and, as such, competes for advertiser's dollars with all other advertising
media, whether broadcast and print media or "out-of-home." Although the
percentage of dollars received by out-of-home media (the smallest of all
advertising categories) has increased recently, this trend could easily change.
There are no significant barriers to competition by other
companies in the Company's advertising category. Competitors who enter this
market are likely to be larger, more strongly capitalized, and have stronger
relationships with building managers and national advertisers than the Company.
It will be difficult, expensive, and time consuming for the Company to develop
and expand its position in the marketplace. See "BUSINESS-Marketing" and
"BUSINESS-Competition".
8. Need to Create Sales Organization. In order to obtain advertising
from national accounts, the Company believes it will have to expand into other
markets and market venues. To do that, the Company will need to expand its sales
organization, and there can be no assurance that the Company will be able to
recruit, train, motivate, and retain effective sales people to accomplish this
goal.
9. Capital Requirements for Planned Expansion. The Company intends to
expand its advertising concept to other cities. The Company also expects to
spend a significant amount of capital on developing and implementing new
technologies (such as interactive touchscreen) for use in conjunction with its
SKYWAY ADS displays. Each of these proposed activities will require the
expenditure of substantial funds by the Company. Accordingly, additional equity
or debt financing may be required in the future. There can be no assurance that
additional capital from any source will be available in the future, if and when
needed by the Company, or that such capital will be available on terms
acceptable to the Company. In addition, the Company is in immediate need of
capital to meet its operating expenses and to undertake its plans for expansion
in the foreseeable future. See "USE OF PROCEEDS" and "BUSINESS".
10. Sufficiency of Offering Proceeds/Need for Additional Financing. It
is anticipated that the proceeds of this offering will last approximately 12
months if the minimum of $550,000 is raised and 24 months if the maximum of
$1,500,000 is raised. Thereafter, the Company might require additional capital
to meet its needs either through borrowing or through additional sales of the
Company's securities. No assurances can be given that such sources of capital
will be available at all, or on terms acceptable to the Company . See "USE OF
PROCEEDS" and "BUSINESS-Competition".
11. Entry Into New Geographic Markets. Until recently, the Company
marketed its SKYWAY ADS displays almost exclusively in the Twin Cities area,
particularly downtown Minneapolis, downtown St. Paul, and at the Mall of America
in Bloomington, Minnesota. The Company intends to market in other states and
cities, which may not be as receptive to the SKYWAY ADS concept. This will
require familiarity with new markets and the development of new techniques and
tools, not previously used by the Company, for managing distant locations.
12. Potential Inability to Manage Growth Effectively. The Company hopes
to significantly expand its business, in part with the proceeds of this
offering. Such anticipated expansion will likely place further demands on the
Company's existing management and operations. The Company's future growth and
profitability will depend, in part, on its ability to successfully manage a
growing sales force and implement management and operating systems which react
efficiently and timely to short and long-term trends or changes in its business.
There can be no assurance that the Company will be able to effectively manage
any expansion of its business. See "USE OF PROCEEDS" and "MANAGEMENT."
13. Potential Inability of Holders to Exercise Warrants if Current
Registration Statement is Not in Effect. Purchasers of Units will be able to
exercise the Warrants only if a current Registration Statement relating to the
shares of Common Stock underlying the Warrants is then in effect and only if
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. The Warrants have no value without a current, effective
Registration Statement. Although the Company will use its best efforts to
maintain the effectiveness of a current Registration Statement covering the
shares of Common Stock underlying the Warrants, there can be no assurance that
the Company will be able to do so. The Company will be unable to issue shares of
Common Stock to those persons desiring to exercise their Warrants if a current
Registration Statement covering the securities issuable upon the exercise of the
Warrants is not kept effective or if such securities are not qualified or exempt
from qualification in the states in which the holders of the Warrants reside.
The Company intends to qualify the Units for sale only in Minnesota and
Wisconsin.
14. Possible Redemption of Warrants. The Warrants are subject to
redemption at any time by the Company at $.01 per Warrant on 30 days prior
written notice if the closing bid price of the Common Stock exceeds $3.25 per
share for each of 20 consecutive trading days, at any time prior to such notice.
If the Warrants are redeemed, Warrant holders will lose their right to exercise
the Warrants during the balance of their five-year term except during such 30
day redemption period. If the Company redeems the Warrants, it would force the
holders to exercise the Warrants at a time when it may not be advantageous for
them to do so, or to sell the Warrants at the then market price, or to accept
the nominal redemption price. See "DESCRIPTION OF SECURITIES- Warrants".
15. Minnesota Anti-Takeover Law. The Company is subject to the
provisions of the Minnesota Business Corporation Act, which includes provisions
relating to "control share acquisitions" and restricting "business combinations"
with "interested shareholders". Such provisions could have the effect of
discouraging an attempt to acquire control of the Company. See "DESCRIPTION OF
SECURITIES-Minnesota Anti-Takeover Law".
16. Limitations of Liability. The Company's Articles of Incorporation
provide, as permitted by Minnesota law, that a director of the Company shall not
be personally liable to its shareholders for monetary damages for breach of his
or her fiduciary duty of care as a director, with certain exceptions. In
addition, the Company's bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Minnesota law. See
"DESCRIPTION OF SECURITIES--Indemnification."
17. Determination of Offering Price. The offering price per Unit and
the exercise price of the Warrants was determined arbitrarily by the Company and
the Underwriter, and is not based upon net worth, earnings, or other established
investment criteria of value. Accordingly, there can be no assurance that the
Units can be resold at the offering price, if at all. See "DESCRIPTION OF
SECURITIES".
18. Outstanding Options and Warrants; Dilution. As of February 28,
1997, the Company had outstanding warrants, exercisable at $.50 per share, to
purchase a total of 161,660 shares of Common Stock, and convertible notes held
by two former shareholders and one current shareholder which would allow them to
acquire up to 443,485 and 19,345 shares, respectively, of Common Stock at $.40
per share and $.75 per share, respectively, and upon successful completion of
this offering the Company will have an Underwriter's Unit Purchase Option
outstanding. In addition, the Company's 204,999 shares of Preferred Stock
automatically convert to Common Stock in connection with this offering. The
Company anticipates that many of the warrants may be exercised in the near
future. In addition, there are currently outstanding 220,000 shares of Common
Stock, for which the owners paid substantially less than the offering price for
the Units. Purchasers of the Units will incur immediate substantial dilution
from the offering price. The price which the Company will receive for its Common
Stock upon exercise of such options and warrants will be significantly less than
the market price for the Company's Common Stock at the time such options and
warrants are exercised. While such options and warrants are outstanding, the
holders thereof are given, at little or no cost, the opportunity to profit from
any rise in the market price of the Company's Common Stock without assuming the
risk of ownership. To the extent that any such options or warrants are
exercised, the book value and voting interests of the Company's shareholders
will be diluted proportionately. See "DILUTION", "MANAGEMENT" and "DESCRIPTION
OF SECURITIES - Stock Options and Warrants".
19. Underwriter's Unit Purchase Option. The Company has agreed to sell
to the Underwriter, for nominal consideration, a Unit Purchase Option to
purchase up to 10% of the Units sold in this offering at an exercise price of
$1.20 per Unit (the "Unit Purchase Option"). The Company has agreed to register
at its expense under the Securities Act of 1933, as amended, and applicable
state securities acts, the Units and the shares of Common Stock purchasable upon
exercise of the warrants included in the Units. Both the warrants and any
profits realized by the Underwriter on the sale of the shares underlying the
warrants could be considered additional underwriting compensation. For the life
of the warrants, the holders thereof are given, at nominal cost, the opportunity
to profit from the difference, if any, between the exercise price of the
warrants and the market price for the Common Stock with a resulting dilution in
the interest of existing shareholders. The terms on which the Company could
obtain additional capital during the exercise period of the Underwriter's Unit
Purchase Option may be adversely affected, as the holders of the Underwriter's
Unit Purchase Option may be expected to exercise them when, in all likelihood
the Company would be able to obtain any needed capital by a new placement of
securities on terms more favorable than those provided by the Underwriter's
warrants. See "UNDERWRITING".
20. Limited Experience of the Underwriter. The Underwriter commenced
business in May, 1994 and has completed two public offerings to date. The
Underwriter's relative inexperience in conducting public offerings could have an
adverse effect on the "due diligence" investigation of the Company which the
Underwriter has conducted, although the Underwriter believes that such
investigation has been thorough on its part. Moreover, although the Underwriter
believes it has exercised care in establishing the Price to Public of the Units
offered hereby, the Underwriter's inexperience in establishing the price of the
Units in this offering, and possibly in acting as a market-maker after the
effective date of this offering, could have an adverse effect on the market
value of the Units offered hereby following the completion of this offering.
John Tuschner, President of the Underwriter, has personally guaranteed $25,000
of the Company's bank loans, and holds a warrant to purchase 8,333 shares of
Common Stock. See "UNDERWRITING".
21. Absence of Dividends. The Company has never declared or paid a cash
dividend on its common stock. The Company intends to retain any earnings for use
in the operation and expansion of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future, including on the
shares of Common Stock offered as part of the Units. See "DIVIDEND POLICY."
22. No Stabilization. In connection with this offering, the Underwriter
will not over allot or effect transactions which are intended to stabilize or
maintain the market price of the Common Stock, the Warrants, and/or the Units at
a level above that which might otherwise prevail in the open market. See
"UNDERWRITING".
23. Limited Manufacturing Experience. To date, the Company's SKYWAY ADS
platforms have only been manufactured in limited quantities and have not been
manufactured on a commercial scale, and platforms with DISCOVERSCREEN
enhancements have never been manufactured. As a result, there can be no
assurance that the Company will not encounter difficulties in obtaining reliable
and affordable contract manufacturing assistance and/or in scaling up its
manufacturing capabilities, including problems involving production yields,
per-unit manufacturing costs, quality control, component supply, and shortages
of qualified manufacturing personnel. Any such difficulties could also result in
the inability of the Company to satisfy any customer demand for its products in
a cost-effective manner and would likely have a material adverse effect on the
Company.
24. Potential Inability to Adapt to Changes in Technology. The
Company's market is subject to rapid technological change and intense
competition. There can be no assurance that the Company will be able to keep
pace with this change. The Company's products could become subject to
technological obsolescence and there can be no assurance that the Company will
be able to adapt to rapidly changing technology. If the Company is unable for
technological or other reasons to develop products on a timely basis in response
to technological changes, or if the Company's products or product enhancements
do not achieve market acceptance, the Company's business would be materially and
adversely affected.
25. Limited Sources of Supply. The Company has only limited agreements
with vendors to supply components and subassemblies on a continuing basis.
Should production requirements increase, the need for additional components and
subassemblies will increase. In the future, the Company will attempt to (i)
consummate formal supply agreement relationships, although there can be no
assurance that it will be able to do so, and (ii) obtain multiple sources of
supply for most of its components, although it may be necessary to have limited
sources of supply for certain components. Should a key supplier be unwilling or
unable to supply any such components or subassemblies in a timely manner, the
Company would be materially adversely affected. At present, although the Company
may only use one supplier for some products which it purchases, it does not have
any sole source suppliers, and expects that it could locate and use alternate
sources of supply, if needed. See "BUSINESS--The Skyway Ads Platform and Related
Products."
26. Technology. The Company intends, with some of the proceeds of this
offering, to build from existing computer products and technologies, a certain
number of units of a proposed new product called DiscoverScreen. The Company
does not own this technology, does not control its development or improvement,
and does not have the ability to prevent others from using the technology in
same or similar products. A prototype of the DiscoverScreen product has not yet
been built. The Company estimates that the costs to produce the first two
prototypes will be a total of approximately $45,000. Thereafter, additional
production DISCOVERSCREENS are expected to cost in the range of $3,000 to $5,000
each. Technological difficulties in developing, installing and maintaining new
products are common, and may occur.
27. Effect on Market Price of Shares Eligible for Future Sale. Sales of
significant amounts of Common Stock in the public market or the perception that
such sales will occur could adversely affect the market price of the Common
Stock or the future ability of the Company to raise capital through an offering
of its equity securities. Of the 1,924,999 shares of Common Stock to be
outstanding upon completion of a maximum offering, only the 1,500,000 shares
offered as part of the Units will be eligible for immediate sale in the public
market without restriction (unless some of such shares are held by "affiliates"
of the Company within the meaning of Rule 144 under the Securities Act). The
remaining 424,999 shares of Common Stock held by existing stockholders upon
completion of this offering will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Of these shares, 274,999 are
currently eligible for resale in the open market pursuant to Rule 144 under the
Securities Act beginning 90 days after the date of this Prospectus. An
additional 150,000 shares will become eligible for resale under Rule 144 on or
prior to December 31, 1997. The 161,660 shares of Common Stock underlying
warrants issued in conjunction with bridge financing will be eligible for sale
under Rule 144 one year after exercise of the warrants. The Company and certain
of its stockholders have agreed that they will not sell, directly or indirectly,
any Common Stock, without the prior written consent of the Underwriter (which
will not be unreasonably withheld), for a period of one year from the date of
this Prospectus. In additon, certain warrant holders have the right, subject to
certain conditions, to participate in future Company registrations and to cause
the Company to register certain shares of Common Stock owned by them upon
exercise of currently outstanding warrants. See "DESCRIPTION OF
SECURITIES-Shares Eligible for Future Sale."
28. No Intellectual Property Protection/Possible Unavailability of
Licenses. The Company holds no patents and has not made any patent applications.
The Company believes that its use of the technology described in the
DISCOVERSCREEN, IM3-D and LASERTAINMENT do not infringe upon patents or rights
held by others, but the Company cannot give any assurances that such
infringements do not exist.
While the Company believes it will not be necessary to acquire
additional technologies in order to market its current planned products, there
is no assurance that the person or organization owning any additionally required
technologies will grant licenses to the Company at all, or, if licenses are
available, that the terms and conditions of such licenses will be acceptable to
the Company.
SELECTED FINANCIAL DATA
The following selected financial data of the Company at and for each of
the fiscal years ended February 29, 1996 and February 28, 1995 have been derived
from audited financial statements of the Company. The selected financial data is
qualified by reference to, and should be read in conjunction with, the financial
statements for such periods and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
included elsewhere in this Prospectus. All adjustments for the unaudited interim
period were of a normal, recurring nature.
Nine Month Periods Ended
------------------------
Year Ended Year Ended November 30, November 30,
February 29, February 28, 1996 1995
1996(1) 1995(1) (Unaudited) (Unaudited)
------------ ------------ ----------- -----------
Revenues $ 236,932 $ 134,411 $ 181,012 $ 174,808
--------- --------- --------- ---------
Operating expenses:
General and administrative -
related party 33,660 48,520 -- 33,660
General and administrative 360,510 163,223 274,152 181,513
--------- --------- --------- ---------
Total operating expenses 394,170 211,743 274,152 215,173
--------- --------- --------- ---------
Loss from operations ( 157,238) ( 77,332) ( 93,140) ( 40,365)
Other Income (expense):
Interest expense ( 17,239) ( 3,813) ( 33,485) ( 6,964)
Miscellaneous income 2,442 2,483 6,325 753
Loss on disposal of property
and equipment ( 2,808) - - -
--------- --------- --------- ---------
Total other income (expense) ( 17,605) ( 1,330) ( 27,160) ( 6,211)
--------- --------- --------- ---------
Net loss $(174,843) $( 78,662) $(120,300) $( 46,576)
Net loss per share $( .31) $( .12) $( .52)(2) $( .07)
========= ========= ========= =========
Weighted average number of
shares outstanding 561,929 672,833 232,833 (2) 670,422
========= ========= ========= =========
Notes:
1. These columns are not covered by the Independent Auditor's Report.
2. The figures shown are as of November 30, 1996. As of the date of this
Prospectus, there were 220,000 shares outstanding, and if such number
of shares had been outstanding at November 30, 1996, the net loss would
have been $(.48) per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
THIS DISCUSSION OF THE FINANCIAL CONDITION AND THE RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE WITHIN THE PROSPECTUS, AND THE MATERIAL CONTAINED IN THE "RISK
FACTORS" AND " BUSINESS" SECTIONS OF THE PROSPECTUS.
OVERVIEW
The Company is an advertising media company that started operations in
1993. It leases space for its advertising platforms from buildings, to which it
pays concessions, typically, 20% of advertising revenue. Each platform has three
panels, of which two are available for rent to advertisers and the third is used
for public service purposes, such as a map, or an ad for a non-
profit/charitable organization.
The Company intends, with the proceeds of the offering to expand its
operations to several other metropolitan markets, to add enhanced features to
its platforms, and to increase the percentage of panels rented to advertisers.
At November 30, 1996, the Company had 52 advertising platforms in place in the
Minneapolis-St. Paul Metropolitan area.
A single market is less attractive to national advertisers than if the
Company could offer its medium in several markets. Accordingly, the Company has
explored and will attempt to expand into other cities with connecting skyway or
underground concourse links ("networked cities") such as Des Moines, Dallas,
Houston, Cincinnati, Rochester (NY and MN) and Duluth. In addition, the Company
plans to expand into three shopping malls managed by the same firm that manages
the Mall of America.
The Company plans to add features to its platforms, such as its
computer touchscreen product, DISCOVERSCREEN, which can be used to find
directions or information about retail and service providers, entertainment,
traffic information and the like. The Company's goal is to create a national
network of DISCOVERSCREEN services for use by national as well as local
advertisers.
The Company has formed a joint marketing venture with Skyway
Publications Inc.("SPI"), a Minneapolis-based publishing company, that sells
advertising to businesses trying to reach individuals who use the skyway
systems. SPI would assist with DISCOVERSCREEN sales.
RESULTS OF OPERATIONS
COMPARISON OF THE FISCAL YEAR ENDED FEBRUARY 29, 1996
WITH THE FISCAL YEAR ENDED FEBRUARY 28, 1995
Revenues
Revenues for fiscal 1996 increased by 76% to $236,932 as compared to
$134,411 for fiscal 1995. The increase resulted from the additional advertising
sold due in part to the Company's installation of approximately 22 additional
standard platforms. During these periods, per panel fees charged by the Company
did not change. As of February 28, 1995 the Company had approximately 27
platforms and 50% of available ad panels were leased. As of February 29, 1996
the Company had approximately 49 plaforms and 48% of available ad panels were
leased.
Loss from Operations
The loss from operations for fiscal 1996 increased by 103% to
($157,238) as compared to a loss of ($77,332) for fiscal 1995. The increased
loss from operations resulted from an increase of $182,427, or 86% in operating
expenses, from $211,743 for fiscal 1995 to $394,170 for fiscal 1996. The
increase in operating expenses related primarily to a one-time stock grant to an
officer valued at $60,000, increased and minimum concession fees of $38,116 paid
to buildings, (subsequently, the Company has negotiated some reduced minimum
concession fees) increased uncollectible accounts receivable of $25,178,
promotional costs of $20,499, and legal fees related to the Stock Redemption
Agreement.
Other Income and Expenses
Other income (expense) for fiscal 1996 increased by $16,275, to
($17,605) as compared to ($1,330) for fiscal 1995. The increased expense
resulted primarily from increased interest expense of ($17,239) in fiscal 1996
as compared to ($3,813) in fiscal 1995, which arose from debt of approximately
$350,000, most of which was incurred in connection with the re-purchase of
shares of Common Stock owned by the previous majority shareholders and the
settlement of certain accounts payable owed to them and, secondarily, to fund
operations pending a proposed public offering.
COMPARISON OF THE NINE MONTH FISCAL PERIOD ENDED NOVEMBER 30, 1996
WITH THE NINE MONTH FISCAL PERIOD ENDED NOVEMBER 30, 1995 (UNAUDITED)
Revenues
Revenues for the nine month period ended November 30, 1996, increased
by 3.5% to $181,012 as compared to $178,808 for the nine month period ended
November 30, 1995. All revenue was generated by the sale of ad space for the
SKYWAY ADS platforms. The number of platforms, and the per panel fees, remained
relatively constant during these periods.
Loss from Operations
The loss from operations for the nine month period ended November 30,
1996, increased by 131% to ($93,140) as compared to a loss of ($40,365) for the
nine month period ended November 30, 1995. The increased loss resulted from an
increase of $58,979, or 27% in operating expenses, from $215,173 for the 1995
period to $274,152 for the 1996 period. The increase in operating expenses
resulted primarily from an increase of approximately $65,000 in uncollectible
accounts. There were three accounts: a) $43,000 for a client referred by a
property manager, in good standing with the Company, b) $18,000 for a client
that appeared to have used deceptive information for credit, and c) $4,000 for a
client in good standing for an extended period of time that then defaulted on
its contract. Clients a and c have since been liquidated.
The increase in operating expenses resulted secondarily from increased
concession fees paid to buildings; increased costs (primarily, audit and
professional) associated with the proposed public offering, and travel costs
incurred in anticipation of a possible expansion of the Company's market.
Management does not, in the future, expect to have problems of a
similar magnitude with respect to uncollectible accounts, because of a new
credit policy, which requires that the Company receive at least 2 good credit
references or up front fees from a potential new account and that a client be
carried no more than 60 days on credit. Had the policy been in place with these
3 clients, the potential for loss might have been greatly reduced.
Other Income and Expense
Other income (expense) for the nine months ended November 30, 1996,
increased by $20,949, or 337%, to ($27,160) as compared to ($6,211) for the nine
months ended November 30, 1995. The increased expense resulted primarily from
increased interest expense of ($33,485) for the period ended November 30, 1996,
as compared to ($6,964) for the period ended November 30, 1995. The interest
expense increase resulted from debt of approximately $335,000, most of which was
incurred in connection with the re-purchase of shares of Common Stock owned by
the previous majority shareholders and the settlement of certain accounts
payable owed to them and, secondarily, to fund operations pending a proposed
public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current capital resources have been derived from the
private sale of debentures (which were accompanied by warrants for the purchase
of Common Stock) and from loans provided by financial institutions. As of
November 30, 1996, the Company had approximately $15,000 in cash.
Since inception the Company incurred net losses because of start-up
expenses, fixed costs and financing costs. The Company is currently experiencing
negative cash flow from operations (see "Statement of Cash Flow") and expects
that such situation will continue until its debt is reduced and until a
combination of expanded marketing efforts and product enhancements, all of which
will be financed from the proposed public offering, lead to positive cash flow.
As of November 30, 1996 the approximate break-even point for sales was $23,000
per month less one time expenses and less debt maintenance.
The Company's future capital requirements relate to two major goals,
each of which is reflected in the structure of the proposed public offering. If
the minimum offering is sold, the Company will be able to pay off much of its
debt, and commence modest additional marketing efforts. The Company expects that
as a result of a minimum offering the Company can expand into a few new markets
and put in place enough new units such that it would expect to generate cash
flow sufficient to meet its on going operations and continue the modest
expansion. If the maximum offering is sold, the Company will be able to pay off
all of its debt, significantly expand its marketing efforts and significantly
expand its range of enhanced product improvements. The Company's management
expects that if a minimum offering is sold, proceeds will last a minimum of
twelve months, and if a maximum offering is sold, proceeds will last a minimum
of twenty-four months.
The Company does not currently have in place any financing arrangements
for working capital needs nor does the Company have any unused sources of
liquidity other than its cash reserves and on-going sales. There is no
arrangement for the Company's on-going capital equipment purchases.
The Company does have sufficient unused capacity with its existing ad
spaces such that, if more were rented, it could generate revenue sufficient to
cover its operating expenses and make minor capital investments. However,
management's primary goal is to acquire the capital which will enable the
Company to acquire units, both standard and specialized, and place them in new
markets, thereby expanding capacity and leading to significantly greater
revenues.
If the Company's proposed public offering is not completed in the near
future, it will seek alternate sources of financing, such as a private placement
of equity, to provide its capital resources.
DILUTION
The following discussion assumes that all of the purchase price for
each Unit is allocated solely to the one share of Common Stock included therein;
that none of the purchase price is allocated to the warrants; that the 204,999
shares of Preferred Stock, which automatically convert to Common Stock in
connection with this offering, have been converted to 204,999 shares of Common
Stock; and that the Common Stock bonus accrued at November 30, 1996 for 150,000
shares of Common Stock, not issued until December, 1996, was outstanding. In
other words, this discussion assumes that 424,999 shares of Common Stock are
outstanding prior to this offering.
The Net Tangible Book Value of the Company at November 30, 1996 was
$(631,589), or approximately $(1.49) per share (assuming that there were then
424,999 shares of Common Stock outstanding). "Net Tangible Book Value"
represents the tangible assets of the Company (total assets less intangible
assets) less all liabilities, excluding contingent liabilities. After giving
effect to the sale of a minimum of 550,000 shares, and a maximum of 1,500,000
shares at $1.00 per share and the receipt of net proceeds therefrom,
respectively, of $408,500 and $1,235,000, the Adjusted Net Tangible Book Value
of the Company at November 30, 1996 would have been $(223,089), or $(.23) per
share, assuming sale of the minimum offering; and Net Tangible Book Value of
$603,411, or $.31 per share if the maximum offering is sold. This represents an
immediate increase in the Net Tangible Book Value of $1.26 per share to current
holders of Common Stock and an immediate dilution of $1.23 per share to new
investors, if the minimum is sold. If the maximum offering had been sold, there
would have been an immediate increase in the Net Tangible Book Value of $1.80
per share to current shareholders, and an immediate dilution of $.69 to new
investors. Dilution per share is determined by subtracting net tangible book
value per share after the offering from the offering price as illustrated by the
following table:
Minimum Maximum
------- -------
Public Offering price per share . . . . . . . . . . . . . $ 1.00 $ 1.00
Net Tangible Book Value per share
at November 30, 1996. . . . . . . . . . . . $ (1.49) $(1.49)
Increase attributable to offering. . . . . . . . $ 1.26 $ 1.80
Net Tangible Book Value
per share after offering . . . . . . . . . . $ ( .23) $ .31
---- ------
Dilution to new investors. . . . . . . . . . . . $ 1.23 $ .69
==== ======
The following table sets forth, as of January 31, 1997, a comparison of
the respective investments of persons who are presently shareholders of the
Company, and of persons who purchase Units, on both a minimum and maximum basis,
in the public offering.
Total Percent
Amount Capital No. of Percent of Total
Paid Invest- Shares of Total Shares Held
Per Share ment Held Capital Invested After Closing
--------- ---- ---- ---------------- -------------
Minimum/Maximum Minimum/Maximum
--------------- ---------------
CURRENT
INVESTORS
Common(1)
Shareholders $ .32 $ 70,500 220,000 10.3%/4.3% 22.6%/11.4%
Preferred(2)
Shareholders .30 61,500 204,999 9.0%/3.8% 21.0%/10.7%
-------- ------- --------- ----------
Average or
Total .31 132,000 424,999 19.3%/8.1% 43.6%/22.1%
PUBLIC
INVESTORS(3)
Upon Completion of
Minimum
Offering 1.00 550,000 550,000 80.7% 56.4%
-------- ------- ------ ------
Total $682,000 974,999 100% 100%
======== ======= ====== ======
Maximum 1.00 1,500,000 1,500,000 91.9% 77.9%
Offering --------- --------- ------ ------
Total $1,632,000 1,924,999 100% 100%
========== ========= ====== ======
(1) Reflects the issuance of 70,000 shares for $10,500 cash and 150,000
shares for services valued at $60,000.
(2) These shares automatically convert to shares of Common Stock in
connection with this offering.
(3) No value is assigned to the Warrants included as part of the Units.
The foregoing discussion assumes: (i) no exercise of the Warrants
included in the Units; (ii) no exercise of the Underwriter's Unit Purchase
Option; and (iii) no exercise of currently outstanding options and warrants to
purchase Common Stock. The issuance of shares upon the exercise of such options
or warrants may result in additional dilution to shareholders. See
"Capitalization", "Underwriting" and "Description of Securities - Stock Options
and Warrants".
USE OF PROCEEDS
The net proceeds to the Company from the sale of Units offered hereby,
after deducting underwriting commissions, the underwriter's non-accountable
expense allowance and the estimated offering expenses payable by the Company,
are estimated to be $1,235,000, assuming the maximum offering is sold, and
$408,500 if the minimum is sold. The Company intends to use the net proceeds
from this offering substantially as follows:
If Minimum Sold If Maximum Sold
--------------- ---------------
Repayment of Debt $306,149(1) $ 503,052(2)
Marketing and
Sales Promotion(3) 30,000 421,000
Product Development
and Introduction(4) 55,000 240,000
Accumulated dividends to
preferred shareholders(5) 10,000 10,000
Working Capital 7,351 60,948
-------- ----------
Total $408,500(6) $1,235,000
======== ==========
(1) Includes $135,000,as of November 30, 1996, in principal amount of 10%
subordinated debentures (some of which are held by affiliates of the Company)
which mature on various dates in early 1997, and $171,149 in bank loans (all of
which has been personally guaranteed by Robert H. Blank, CEO, and four other
individuals who are not affiliates, but one of whom was John Tuschner, President
of the Underwriter); these include two variable rate bank loans in the aggregate
amount of $135,000 ($100,000 and $35,000, each maturing May 13, 1997, each with
an interest rate of 2.5% above the reference rate, which, at March 31, 1997, was
8.5%), long term debt of $23,485 and current portion of $12,664, as of November
30, 1996). The proceeds of these debentures and loans were used for "bridge
financing" and working capital pending the completion of the Company's public
offering. See "FINANCIAL STATEMENTS" and "CERTAIN TRANSACTIONS".
(2) Includes the items mentioned in footnote (1), above, plus $177,394 (as of
November 30, 1996) in principal amount of 11% notes (of which approximately
one-half has been personally guaranteed by Mr. Blank) to the Lease Brothers
which are payable monthly through the year 2003, and $19,509 in Notes due
shareholders, as of November 30, 1996. The obligation to the Lease Brothers was
incurred in November, 1995, as part of a stock redemption agreement. See
"CERTAIN TRANSACTIONS" and "FINANCIAL STATEMENTS".
(3) Includes sales materials, travel, sales and support staff and advertising.
(4) Includes $5,000 for IM 3-D, $40,000 for DiscoverScreen, and $10,000 for
Lasertainment, if the minimum is sold, and $115,000 for Lasertainment, $100,000
for DiscoverScreen, and $25,000 for IM 3-D, if the maximum is sold.
(5) This amount is not shown in the Company's financial statements because it
does not become due and payable until the Company makes a public offering. See
"Description of Securities- Capital Stock".
(6) Subsequent to November 30, 1996, the Company sold an additional $48,000 in
principal amount of Debentures, and if only the minimum is sold the Company
expects that the maturity date of such Debentures may be extended.
The amounts set forth above reflect the Company's present proposed
application of proceeds. The actual expenditure of proceeds may vary from the
amounts indicated above, depending upon factors such as costs for marketing, the
extent to which operating revenues are generated, and the extent to which the
Company uses its present cash on hand.
Pending utilization of the proceeds as described above, the funds will
be invested temporarily in government securities, certificates of deposit, or
other similar financial instruments.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1996, and, as adjusted, to reflect the sale of the minimum and
maximum number of Units offered hereby.
AS ADJUSTED
---------------------------
OUTSTANDING AS OF MINIMUM MAXIMUM
NOVEMBER 30, 1996 OFFERING OFFERING
----------------- -------- --------
Bank debt $135,000 $ -0- $ -0-
10% Debentures 135,000 -0- -0-
Notes-Shareholders 19,509 19,509 -0-
Current Portion long-term debt 33,178 20,514 -0-
Long-term debt (1) 23,485 -0- -0-
Long-term debt-related party 156,880 156,880 -0-
------- ------- ---
Total short and long-term debt 503,052 196,903 -0-
------- ------- ---
Redeemable convertible preferred stock(2):
Series A; 99,999 shares outstanding 30,000 -0- -0-
Series B; 105,000 shares outstanding 31,500 -0- -0-
------- --- ---
Total redeemable preferred stock 61,500 -0-(2) -0-(2)
------ ------- ------
Shareholders' equity (deficit):
Common stock, 10,000,000 shares
authorized and
70,000 issued and outstanding 700 9,750(3) 19,250(3)
Additional paid-in capital 1,345 522,295 1,339,295
Accumulated equity (deficit) (633,634) (633,634) (633,634)
-------- -------- ----------
Total shareholder equity (deficit) (631,589) (101,589)(4) 724,911(5)
Total Capitalization $( 67,037) $ 95,314 $ 724,911
========= ======== ==========
Number of Shares of Common
Stock Outstanding 70,000 974,999(6) 1,924,999(6)
====== ======= ==========
(1) Does not include real estate lease obligations for SKYWAY ADS platforms
nor office space.
(2) 265,000 shares of Preferred Stock, stated value $.30 each, are
authorized; and automatically convert into an equivalent number of
shares of Common Stock in connection with this offering, shown under
"as adjusted".
(3) Subsequent to November 30, 1996, an additional 150,000 shares of Common
Stock relating to a stock bonus, previously authorized and accrued at
November 30, 1996, were issued.
(4) Reflects application of estimated net proceeds of 408,500 resulting
from sale of minimum number of Units.
(5) Reflects application of estimated net proceeds of 1,235,000 resulting
from sale of maximum number of Units.
(6) Does not include the possible exercise of outstanding warrants for the
purchase of up to 145,667 shares (161,660 shares as of the date
hereof), nor the possible conversion of convertible notes into 462,830
shares (based on November 30, 1996 note balances), nor the possible
exercise of any warrants included as part of the Units offered hereby,
or the Underwriter's Unit Purchase Option.
BUSINESS
IN GENERAL
Illuminated Media Inc. (the "Company" or "IMI") is an advertising media
company that has developed and is selling a new form of "out-of-home"
advertising called "SKYWAY ADS". The Company's business involves the acquisition
of leased spaces accessible to large numbers of pedestrians, the installation
and maintenance of advertising platforms, and the marketing and sale of
advertising used on those platforms. The Company generates revenues through the
sale of advertising. Photos of the platforms are contained on the inside front
and rear covers of this Prospectus.
The Company was incorporated in the State of Minnesota on March 9,
1993.
The most typical form of "out-of-home" advertising is billboards, large
displays intended to attract the attention and influence the spending decisions
of passing motorists. SKYWAY ADS are intended to attract the attention and to
influence the spending decisions of individuals passing on foot. Each SKYWAY ADS
"platform" consists of three back-lit panels which hold transparent advertising
messages. SKYWAY ADS are placed in skyway corridors and shopping centers, and
can also be placed in parking ramps, bus and train stations, airports, and
wherever there is a high volume of pedestrian traffic. SKYWAY ADS are presently
used at locations throughout the central business/shopping districts of
Minneapolis and St. Paul, Minnesota and at the Mall of America in suburban
Bloomington, Minnesota.
BACKGROUND:
Advertising is often broken down into three categories: broadcast,
print and "out-of- home". The first two categories include television, radio,
newspapers, magazines, direct mail, telemarketing, and new forms such as ads on
the Internet. Examples of out-of-home advertising are billboards along public
highways, transit and airport posters, and storefront signs. SKYWAY ADS are a
form of out-of-home advertising directed toward individual consumers in
metropolitan areas who are moving about on foot.
Many metropolitan areas now have buildings connected by "skyways", and
tunnels or concourses. The use of these skyways and other connections has, in
many cities, created a new form and pattern of pedestrian traffic that does not
use city streets or sidewalks. The Company calls these types of metropolitan
areas, "Networked Cities."
Before the advent of skyways, or similar connections, pedestrian
traffic in cities took place along city sidewalks, or, in the case of suburban
areas, in large enclosed malls. In the downtown areas of American cities that
are inter-connected by skyways or underground concourses, most pedestrian
traffic moves through those skyways or concourses. This allows pedestrians,
whether shoppers, workers, visitors, or residents, to walk around a central
business district, from building to building, without going outside, and without
using city streets or sidewalks.
In addition to the convenience for individuals traveling in downtown
areas by foot, the development of downtown areas connected by skyways or
concourses has brought advantages to building owners and business interests in
the area as well. The development of connected downtowns was, in fact, a
competitive response to suburban shopping malls, by offering a similar free flow
of pedestrian traffic, unimpeded by vehicle traffic and by affording protection
from inclement weather. Although no one portion of a downtown area typically has
as large an open space as that in a typical suburban mall, collectively there
are usually as many shops and stores "indoors" within the connected area as in
any one suburban mall. The Company is of the view that the 52 blocks which are
connected by skyway in downtown Minneapolis make it the largest "shopping mall"
in the world. "Networked Cities" such as Minneapolis create a market for a new
type of advertising which the Company is trying to deliver with its SKYWAY ADS
platforms.
Although individual stores and buildings have long used different
advertising media to reach pedestrians, skyways and tunnels create a new
category of wall space that is not within individual stores. This new category,
which consists of walls along corridors and around public areas, is typically
controlled by the building owner. This new category has, in the Company's view,
created a new market for a different kind of advertising media.
Although the Company's SKYWAY ADS platforms were originally designed
for skyways and downtown corridors, the Company has placed some of its platforms
in the Mall of America (the largest enclosed mall in the United States). The
Company intends to continue the exploration of shopping and suburban malls as a
second major type of market for its platforms.
The Company acquires, from building owners, in the areas where it
operates, the right to use wall space for the purpose of installing platforms.
Space is typically acquired under the terms of a 2 to 3 year lease and involves
the payment to the building owner of a percentage of the revenues received,
often with a minimum rental.
After the lease is obtained, the Company installs one or more of its
platforms. This requires making the necessary electrical connections and hanging
the platform. After installation, the Company arranges for regular maintenance,
inspection, and cleaning of the platform.
After platforms are in place, the Company attempts to sell advertising
for its platforms. It uses its own sales persons, and attempts to sell both to
advertisers directly and to agencies.
THE SKYWAY ADS PLATFORM AND RELATED PRODUCTS
Each SKYWAY ADS advertising platform has three 24 inch by 36 inch
panels. It has a slim profile, extending no more than four inches from the wall.
It has interior lighting, known in the advertising industry as "backlit".
Platforms fit on the walls of skyway corridors, shopping malls (entrances and
interiors), building lobbies, and transit/transportation facilities. The basic
SKYWAY ADS platform holds three transparency ads in a sectored format, although
a non- sectored format is also available.
The Company has announced the availability of two new modifications for
its SKYWAY ADS platform. One is a touchscreen interactive display called
DISCOVERSCREEN . The other is a thin film three-dimensional process called
IM3-D. Both of these devices are designed to fit within the standard SKYWAY ADS
platform.
DiscoverScreen
The DISCOVERSCREEN is based on recently developed technology already
used in other products. Earlier technology could not, however, be placed within
a four inch deep compartment, and could only be used in places, such as kiosks,
that had more than four inches of depth. The DISCOVERSCREEN allows passing
pedestrians to push any one of several on-screen buttons which cause various
types of information to appear on a screen. Then, depending on the interests and
preferences of the user, additional information can be obtained, either on the
screen, or in a printed format. Until recently, this technology, allowing use of
the DISCOVERSCREEN within the confines of the Company's four inch SKYWAY ADS
platform, was not available.
The Company has engineering drawings of DISCOVERSCREEN, and has ordered
the production of a prototype. The Company will, depending on the number of
Units sold in this offering, purchase a number of DISCOVERSCREEN units with some
of the proceeds of this offering.
See "Use of Proceeds."
The components of DISCOVERSCREEN are "off-the-shelf", standard computer
parts, and the software that runs the product will be designed to the Company's
specifications. The Company estimates that the costs to produce the first two
prototypes will be approximately $45,000. Thereafter, additional production of
DISCOVERSCREENS should cost in the range of $3,000 to $5,000 each. The Company
does not and will not own the DISCOVERSCREEN technology (and, therefore, will
not be able to prevent others from using the technology in same or similar
products), but it will own whatever DISCOVERSCREEN units it buys.
The Company expects that DISCOVERSCREEN will appeal to passing
individuals, and also allows the Company to sell an additional form of
advertising space.
IM3-D
The IM3-D product is a thin film transparency, which presents a
three-dimensional image to passing individuals. IM3-D costs substantially more
to produce than standard transparencies used in SKYWAY ADS platforms, about
$4,000 or more for the first image, as compared to $100 for a standard image.
The greater cost and the lack of any installed IM3-D product have presented a
barrier to the Company's sales to advertisers to date. The Company has
prototypes of the IM3- D product which it shows to advertisers, but it has not
yet installed any. The IM3-D product will fit in the standard SKYWAY ADS
platform. The Company intends, in an effort to dislodge the afore-mentioned
barrier to sales, to use some of the proceeds from the offering to produce one
or two ads in cooperation with a paying client, so that the advantages of such
IM3-D ads are seen by advertisers and consumers alike. The Company has a
production agreement with a local company owned by Steven Unverzagt, a director
of the Company, to help advertisers create IM3-D images.
MARKETS
As of November 30, 1996, there were 52 SKYWAY ADS platforms in place in
the Minneapolis-St. Paul, Minnesota metropolitan area, 24 in the downtown skyway
system of Minneapolis, 8 in St. Paul, and 20 at the Mall of America in
Bloomington, Minnesota.
Contracts have been signed, or are in the final stages of negotiation,
for several platforms to be placed in the Calhoun Square specialty shopping mall
in Minneapolis, and in the Des Moines Building in Des Moines, Iowa. The Company
has investigated the possible use of SKYWAY ADS in, among other cities, Dallas,
Houston, Cincinnati, Sioux City, Iowa and Winnipeg.
A table in an article in the September 30, 1996, edition of ADVERTISING
AGE magazine, which is the industry's primary trade publication, showed that
"out-of-home" advertising is the smallest media sector when compared to
broadcast and print, but that it was, from 1994 to 1995, the second fastest
growing sector in the advertising business. The table showed that 1995
expenditures by all advertisers amounted to $160.9 billion, of which the
"out-of-home" category amounted to $1.11 billion, or 0.7% of the total, which
was an increase from 0.6% in 1994.
The Company currently markets and sells its advertising primarily to
businesses located in the Minneapolis-St. Paul area. Management believes that
its ability to sell advertising space to national advertisers will be enhanced
if the Company expands its advertising space holdings into several other
markets.
TARGET MARKET SECTORS
The Company's three major target market sectors are Networked Cities,
suburban shopping malls and office buildings, and Business Improvement
Districts.
"Networked Cities"
Networked Cities have developed or are developing their downtown areas
on the Minneapolis model; that is, the core blocks of retail, commercial and
office development are connected by a series of skyways and/or concourses
(tunnels). Among the "Networked Cities" that the Company has identified so far
are: Minneapolis/St. Paul; Duluth and Rochester, Minnesota; Des Moines and Sioux
City, Iowa; Dallas and Houston, Texas; Rochester, New York; Atlanta, Georgia;
Charlotte, North Carolina; Cincinnati, Ohio; and the Canadian cities of Calgary,
Edmonton, Montreal, Toronto and Winnipeg. There can be no assurance that the
Company will be successful in placing SKYWAY ADS platforms in these cities or in
selling SKYWAY ADS advertising.
Suburban Shopping Malls and Office Buildings
The Company has installed 20 SKYWAY ADS platforms at the entrances to
the Mall of America in Bloomington, Minnesota. It has an arrangement with Simon
Property Group, the manager of the Mall of America to install SKYWAY ADS
platforms, on a trial basis in three more properties managed by the same
company: THE PAVILION, in San Jose, California; NEWPORT CENTRE, in Jersey City,
New Jersey; and MILLER HILL MALL, in Duluth, Minnesota. Each of these is a
smaller sized suburban mall, but it represents a possible expansion into this
market category. The same management company owns and/or manages several other
suburban mall properties around North America.
The Company will explore expansion into shopping malls and other retail
properties owned and/or managed by other property managers as well. The Company
has also identified suburban office building lobbies as having appropriate
characteristics for SKYWAY ADS units with DISCOVERSCREEN.
Business Improvement Districts
The Company has received substantial interest in the DISCOVERSCREEN
product from a diverse group of smaller cities and Business Improvement
Districts ("BIDs) in larger cities. BIDs have been established in recent years
to develop sections of many larger cities through tax incentives and other
inducements. Examples of BIDs that have expressed interest include New York
City (34th Street BID, Grand Central BID and Times Square BID); Los Angeles
(Fashion District BID); and Santa Monica Business District, California. Upon
competion of this offering, the Company will seek to implement its marketing
efforts aimed at converting such expression of interest into sales.
Although the expressions of interest are encouraging, there can be no
assurance that they will result in signed lease agreements with building owners
and managers, or even if they do, that sales of advertising using the
DiscoverScreen medium will result.
The Company also intends to take SKYWAY ADS and DISCOVERSCREEN into
suburban office buildings and similar properties.
SELLING AD SPACE
The Company currently sells ad space to local and national accounts
through its full-time staff of four, as of December 31, 1996. A Manager of
Direct Marketing directs the telemarketing effort, which establishes meetings
with ad agencies and potential advertisers. The Company uses walking tours of
skyway or Mall of America locations, and/or videotape production of such
locations as some of its sales tools.
The Company expects to add a Director of Sales, who will develop and
supervise a small staff of sales representatives and a Director of Properties
and Operations, who will locate new markets and properties for the Company and
oversee the administration of all markets and properties in which the Company
has a presence.
PROSPECTIVE JOINT MARKETING VENTURES
The Company has reached written agreement for a joint sales program
with the publishers of Skyway News, a weekly newspaper distributed free to
workers, shoppers and others who utilize the skyway systems in downtown
Minneapolis and St. Paul. Under the proposed agreement, sales personnel from
Skyway News will attempt to sell ad space for DISCOVERSCREEN panels to their
current local and national accounts in the Minneapolis-St. Paul area. Although
the Company and Skyway News will share the revenue stream, the Company will
benefit from the sales efforts of Skyway News personnel.
The Company has reached written agreement for a joint marketing
agreement with Lasertainment, Inc., of Roseville, Minnesota to market its laser
imaging services to the advertising community. Lasertainment is a production
company specializing in industrial shows and special events, both indoor
(closing time shows at shopping malls and/or at certain skyway locations) and
outdoor (walls of buildings in downtown locations). The Company would market the
Lasertainment services to several advertisers at the same location, as an
adjunct to its existing out of home, indoor SKYWAY ADS platform.
PLANS FOR EXPANSION
If only the minimum offering is sold, the Company's ability to expand
will be limited. However, if an amount closer to the maximum is sold, the
Company intends to use a significant amount of the net proceeds to expand its
products and services into all identified markets: Networked Cities, Suburban
Shopping Malls and office buildings, and BIDs.
Subject to the availability of sufficient funding, within the following
two years, the Company plans to expand into another ten Networked Cities in
North America and to substantially expand its presence into numerous BIDs and
suburban office centers and shopping malls.
The Company plans, whether a minimum or maximum offering results, to
place SKYWAY ADS units with interactive DISCOVERSCREEN in additional suburban
shopping malls within the first year after the completion of this offering.
COMPETITION
The Company is offering advertisers what it considers a relatively new
and effective medium for advertising directed at a relatively well defined group
of potential buyers. Even so, the Company competes for advertising dollars with
all other forms of advertising. This means that the Company is vulnerable to two
major competitive threats: either advertisers could decide to direct more of
their advertising dollars to other media, or strong competitors could enter the
Company's existing marketplace or its potential markets before the Company does.
The advertising industry is categorized into broadcast, print and
"out-of-home" media. The first two include television, magazines, newspapers,
radio, telemarketing and Internet, all of which compete in some sense, with the
Company for a limited number of advertising dollars. Out- of-home includes
billboards and other signage, roadside and rooftop billboards and other
advertising signage, each of which also competes with the Company.
There are no barriers to entry into the Company's marketplace by strong
competitors, who can be expected to have much larger capital and larger sales
organizations, so that they can obtain leased space more readily, and once
obtained, can sell more readily to national and regional advertisers.
INTELLECTUAL PROPERTY PROTECTION
The Company has no patented products. The Company believes that its use
of the technology described in the DISCOVERSCREEN, IM3-D and LASERTAINMENT do
not infringe upon patents or rights held by others, but the company cannot give
any assurances that such infringements do not exist. The Company intends to
apply for trademark protection for the names Illuminated Media Inc.,
DISCOVERSCREEN, IM3-D, and SKYWAY ADS.
Even if granted, trademark protection can be limited because
infringement is still possible and, if detected, enforcement action, at the
Company's expense, would be needed.
REGULATION
Generally, display advertising such as that engaged in by the Company
is not subject to regulation. However, some municipalities require, or may
require, local licensing, or pre- installation approval. The Company expects to
be able to comply with substantially all of such regulation in a cost-effective
manner.
LEGAL PROCEEDINGS
The Company is not presently a party to any material pending legal
proceedings.
EMPLOYEES
As of December 31, 1996, the Company had four full-time employees.
PROPERTY
The Company leases, for $500 per month, approximately 1,500 square feet
of office in downtown Minneapolis that it considers adequate for its current
needs.
The Company owns all of the SKYWAY ADS platforms which it uses.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
of the Directors and Executive Officers of the Company:
NAME AGE POSITION(S) HELD
---- --- --------------------------------------------
Robert H. Blank 55 Chief Executive Officer, Director
Richard D. Kothe 44 President, Chief Financial Officer, Director
Kenneth A. Olsen 35 Director
Gail Emerson 48 Director
Mark Verplaetse 44 Director
Mark T. Hepburn 34 Director
Steven Unverzagt 43 Director
ROBERT H. BLANK has been a director and officer of the Company since it
was founded in 1993. In November, 1995 he became Chairman of the Board of
Directors and Chief Executive Officer. Prior to 1993, Mr. Blank served, for
three years, as Chief Financial Officer of the Coborn Trust in St. Cloud,
Minnesota. Prior to that, Mr. Blank spent over 12 years in the securities
industry, ten years as a registered representative with various broker dealer
firms and two years with the Minnesota Department of Commerce.
RICHARD D. KOTHE has been an officer and director of the Company since
January, 1996. Prior to joining the Company, Mr. Kothe served as the President
of the Kemps Marigold Credit Union of Minneapolis from 1993 to 1995. From 1991
to 1993 he was the President of his own firm, CU-Tech, which provided strategic
and technology consulting services to small and medium size financial
institutions with emphasis on credit unions. In the previous 10 years, Mr. Kothe
worked in the marketing of technology services for companies including Anacomp
and First Financial Management Corp. as well as three years with
Citicorp/Citibank. Mr. Kothe has worked for or provided marketing and consulting
services to financial institutions since 1975.
KENNETH A. OLSEN is the Director of Sales and Marketing for Staff-Plus,
Inc., Minneapolis, Minnesota. He was appointed to the Board of Directors of
Illuminated Media Inc. in December, 1995. Mr. Olsen received a B.A. degree in
Education from the University of Minnesota-Duluth in 1985, and began his career
in sales with Herman's World of Sporting Goods in St. Paul. Mr. Olsen remained
in the sporting goods business until 1989, becoming District Sales Manager for
Team Choice Sporting Goods Stores for the Minnesota-Wisconsin district. In 1989,
Mr. Olsen joined Central Parking Systems in Denver, Colorado as a commercial
property manager. In 1992, he returned to Minnesota and joined Staff-Plus. Mr.
Olsen is active in the Minneapolis Downtown Council and chairs two Downtown
Skyway events.
GAIL EMERSON is President of Emerson Enterprises, Inc., a
globally-focused marketing consulting firm she founded in 1988. She has a B.A.
and M.S. from the University of Wisconsin- Madison. Her 20-year carer includes
3M, Carmichael-Lynch Advertising, and, most recently, her own business. She has
successfully directed new product launches, new company start-ups, strategic
market research projects, award-winning advertising campaigns, and innovative
global expansion programs. Ms. Emerson's areas of expertise include marketing
research, strategic marketing planning, and marketing communications. She
mentors local micro-enterprise entrepreneurs and is a volunteer team leader for
Global Volunteers, an international volunteer service organization.
MARK VERPLAETSE has spent the last 18 years working in the computer
technology arena. He has been employed by Apertus Technologies in Minneapolis,
MN since 1994 providing service to Fortune 500 companies to develop and
integrate their MIS networks. From 1992 to 1994 Mr. Verplaetse was an
independent consultant working with Fortune 1000 companies in project
development for computer technologies. He also worked for Data Trend of Mpls, MN
from 1990 to 1992 as a Project Manager for MIS Development. Prior to that he
spent 14 years, beginning in 1976 with Deluxe Corp., working in management of
the MIS department.
MARK T. HEPBURN has been in various sales and executive positions with
General Electric Company since 1985, and is currently Branch Manager of GE
Supply for the Oklahoma City and Tulsa districts, and is responsible for all
aspects of a $15 million wholesale distribution operation. Mr. Hepburn holds a
Bachelor of Engineering degree from the University of Minnesota's Institute of
Technology, and is a graduate of several GE programs, including the Experienced
Manager Course, Advanced Financial Management Seminar, and Modern Marketing
Program, among others. Mr. Hepburn is the oldest of two sons of Robert H. Blank,
Chairman and CEO of the Company.
STEVEN UNVERZAGT is currently Advertising Manager, Art Instruction
Schools, Minneapolis and is also the owner of Sun Consulting, Inc., which holds
certain marketing rights for 3-D technology currently being marketed by the
Company. Mr. Unverzagt has been Advertising and Promotions Manager for
Rollerblade, Inc., and an account manager for Colle & McVoy Advertising, Inc.,
of Minneapolis, and Grey Advertising, Inc.'s Minneapolis office. Mr. Unverzagt
received his Bachelor of Arts Degree from Augustana College, Sioux Falls, South
Dakota, and took graduate studies at the University of Minnesota Medical School
(Bio-Medical Research), and at South Dakota State University, Brookings, South
Dakota.
All directors of the Company hold office until the next annual meeting
of stockholders and until their successors have been elected and qualified or
until their death, resignation, or removal from office. The officers of the
Company are appointed by the Board of Directors and hold office until their
successors are chosen and qualified or until death, resignation, or removal from
office. There are no family relationships among any of the directors and
officers except that Mark Hepburn is the son of Robert H. Blank.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the
Company, for the fiscal year ended February 29, 1996, to each of the Company's
executive officers:
OTHER ANNUAL TOTAL
NAME OF INDIVIDUAL/POSITION CASH COMPENSATION COMPENSATION(1) COMPENSATION
- ---------------------------- ----------------- --------------- ------------
Robert H. Blank/Chief Executive Officer $42,700 $60,000 $102,700
(1) See fifth paragraph under "CERTAIN TRANSACTIONS."
When its financial resources and performance permit, the Company will
increase the compensation of its executive officers, and will possibly initiate
some type of performance-based bonus arrangement for their benefit.
EMPLOYMENT AGREEMENTS
The Company has no employment agreements with its two officers.
Although it has adopted a form of employment agreement which provides for
matters such as compensation, term, termination, and non-competition, and
although the Company expects to enter into an employment agreement with Mr.
Blank and Mr. Kothe upon the completion of this offering, no specific dollar
figures have been agreed upon and any agreement is subject to approval of the
Board of Directors.
STOCK OPTION PLAN
The Board of Directors has adopted a Stock Option Plan as a tool to
attract and retain key employees. As of the date of this Prospectus, no options
have been granted under such plan.
COMPENSATION OF DIRECTORS
Non-employee directors were not paid any fees or remuneration for
services as members of the Board of Directors during fiscal year 1996.
LIMITATION OF DIRECTOR'S LIABILITY
The Company has included provisions in its Articles of Incorporation
and Bylaws to (i) eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty (such provisions do not
eliminate liability for breaches of the duty of loyalty, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, the improper payment of dividends or redemption of stock or for any
transaction from which the director derived an improper personal benefit) and
(ii) indemnify its directors and officers to the fullest extent permitted by
Minnesota law. The Company believes that these provisions are necessary to
attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
The Company was formed in March, 1993 by Michael Lease and Mark Lease
(the "Lease Brothers") and by Robert H. Blank, each of whom may be considered a
founder of the Company. The Company issued an aggregate of 490,000 shares to
such persons in consideration of services, valued at $4,900, rendered by them to
the Company.
Later in March, 1993, the Company acquired by assignment the rights of
the Lease Brothers to an Asset Purchase Agreement, whereby the Lease Brothers
had agreed to acquire the assets of Le Cole Indoor, a division of Le Cole, Inc.
The price for such assets was $29,330. Concurrently, the Company entered into a
Management Agreement with Lease Companies, a general partnership of the Lease
Brothers, pursuant to which an aggregate of $93,300 in management fees were
accrued through November, 1995, at which time the Stock Redemption Agreement,
described below was executed. Such Management Agreement was terminated in
November, 1995.
In November, 1995 the Company executed and closed a Stock Redemption
Agreement with the Lease Brothers, its two former major shareholders (who were
also, at that time, officers and directors of the Company), and with an
affiliated entity owned by them. Under such Agreement, the Company acquired for
$.40 per share, or an aggregate of $176,000, all 440,000 shares owned by the
Lease Brothers. In addition, the Company agreed to repay $109,300 in loans and
advances made by the Lease Brothers. The Company made an initial payment of
$100,000, and issued three 11% Promissory Notes for the balance of $185,300. All
of such notes have a term of seven years and three months, maturing on March 1,
2003, are payable monthly, and are convertible at the option of the Lease
Brothers (the "Lease Option"), with respect to any principal amount then
outstanding, into shares of Common Stock of the Company at the rate of $.40 per
share. (At November 30, 1996, the principal amount of such notes, which declines
monthly, could have been converted into 443,485 shares of Common Stock.) The
Company is unable to determine when, if ever, the Lease Option will be
exercised, and, in particular does not know if it will be exercised upon
successful completion of this offering. One of such notes, in favor of the
affiliated entity, in the original amount of $93,300, was secured by the assets
of the Company and personally guaranteed by Robert H. Blank, the Company's CEO.
The Company will prepay part of the Notes to the Lease Brothers, including the
Note to the affiliated entity, out of the proceeds of this offering, if greater
than the minimum number of Units offered is sold. The Company does not have any
knowledge as to the possible intent of the Lease Brothers to convert their
notes. See "USE OF PROCEEDS."
In November, 1995, in connection with the payment of $100,000 as part
of the closing of the Stock Redemption Agreement, the Company borrowed $150,000
from Norm Winer pursuant to the terms of a 10% Promissory Note, secured by all
the assets of the Company and personally guaranteed by Robert H. Blank, the
Company's present CEO. As part of that transaction the Company issued warrants
for 50,000 shares at $.50 per share to such individual.
In February, 1996, the Board of Directors authorized the issuance of
150,000 shares of Common Stock, valued at $.40 per share, or $60,000, to Robert
H. Blank, Chief Executive Officer, as partial consideration for services
previously rendered by him.
In May, 1996, the Company obtained bank loans in the aggregate amount
of $135,000, personally guaranteed by Robert H. Blank, CEO and four other
individuals (none of whom was an affiliate of the Company, but one of whom was
John M. Tuschner, President of the Underwriter, who guaranteed $25,000 in
principal amount), the proceeds of which were used, in part, to repay the
$150,000 10% Promissory Note of November, 1995, mentioned above. The Company
issued warrants for an aggregate of 45,000 shares to the four individuals, as
part of this transaction. The Company will use part of the proceeds of this
offering to repay this debt.
During the period May, 1996 through January, 1997, the Company issued
and sold an aggregate of $135,000 in principal amount of 10% Subordinated
Debentures, and as part of such transaction, issued warrants for an aggregate of
45,667 shares. Two of the four purchasers were Mark Verplaetse and Mark T.
Hepburn, directors of the Company and the other two were individual investors.
The terms of the purchase arrangements for all purchasers were the same as for
non- affliated purchasers.
In late January and February, 1997, the Company issued and sold an
aggregate of $48,000 in principal amount of 10% Subordinated Debentures to three
accredited investors, namely, Norm Winer, Richard D. Kothe, an officer/director
and to the spouse of Robert H. Blank, an officer/director, and as part of such
transaction issued warrants for an aggregate of 15,933 shares. The terms of
their purchase arrangements were the same as for non-affliated purchasers.
Several of the afore-mentioned Debentures were due and payable on
February 28, 1996 and so, technically, are in default, but the company has not
received any notice of default and expects to have the maturity date extended,
as it did previously.
The Company's management believes that the terms of the afore-mentioned
transactions were no less favorable to the Company than would have been obtained
from the sale of securities to a non-affiliated third party.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 1, 1997, and as adjusted
to give effect to this offering by (i) each person known by the Company to be
the beneficial owner of 5% or more of the outstanding Common Stock; (ii) each
director and executive officer of the Company; and (iii) all executive officers
and directors of the Company as a group. Unless otherwise indicated, each of the
following persons has sole voting and investment authority with respect to the
shares of Common Stock set forth opposite their respective names.
PERCENT OF CLASS(1)
---------------------------------------
NUMBER OF SHARES AFTER AFTER
NAME AND ADDRESS OF BENEFICIALLY OWNED BEFORE MINIMUM MAXIMUM
BENEFICIAL OWNER AS OF NOVEMBER 30, 1996 OFFERING OFFERING(2) OFFERING(3)
- ---------------- ----------------------- -------- -------- --------
Robert H. Blank 216,600(4) 49.4% 21.5% 10.9%
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Richard Kothe 2,666(5) .1 * *
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Kenneth A. Olsen -0- -- -- --
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Gail Emerson -0- -- -- --
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Mark Verplaetse 16,667(5) 3.8 1.7 .9
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Mark T. Hepburn 5,000(5) 1.2 .5 .3
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Steven Unverzagt -0- -- -- --
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Norm Winer 62,000(5) 12.7 6.0 3.1
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Sona T. Plummer 46,345(6) 9.8 4.5 2.3
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Rick Johnson 204,999(7) 48.2 21.0 10.6
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
Lease Brothers 462,830(8) 52.1 32.2 19.4
15 S. Fifth Street, Suite 715
Minneapolis, MN 55402
* less than .1%
All executive officers and directors
as a group (7 persons)(9) 240,933 52.8% 24.0% 12.3%
(1) This calculation is based on 220,000 shares of Common Stock and 204,999
shares of Convertible Preferred Stock (which have the same voting
rights as Common Stock and which are automatically convertible into
Common Stock as part of this offering), or an aggregate of 424,999
shares outstanding with voting power as of November 30, 1996.
(2) Includes only the 550,000 shares and not the 550,000 warrants which are
part of the Units.
(3) Includes only the 1,500,000 shares and not the 1,500,000 warrants which
are part of the Units.
(4) Includes 150,000 shares of Common Stock authorized by the Company's
Board of Directors in February, 1996, and accrued as a liability, but
not issued and delivered until December, 1996, after the date of the
Company's November 30, 1996 unaudited financial statements, and
includes, also, 16,600 shares (10,000 shares directly, and 6,666 shares
pursuant to a warrant) owned by Mr. Blank's spouse. Mr. Blank disclaims
any beneficial interest in such 16,600 shares.
(5) All of such shares are held only in the form of warrants for the
purchase of shares of Common Stock.
(6) Of such shares, 10,000 shares of Common Stock are held directly and the
remaining shares are held indirectly in the form of warrants for the
purchase of 17,000 shares of Common Stock and notes convertible into
19,345 shares of Common Stock.
(7) Consists of Preferred Stock only. Some of such shares are held in the
name of Mr. Johnson's children.
(8) Consists only of convertible promissory notes which can, as of November
30, 1996, be converted into the number of shares of Common Stock shown.
See "CERTAIN TRANSACTIONS".
(9) This table does not take account of the possible exercise of presently
outstanding warrants for the purchase of 161,660 shares, (see "CERTAIN
TRANSACTIONS") nor the possible exercise of any warrants sold as part
of this offering nor the possible exercise of any part of the
Underwriter's Unit Purchase Option that is issuable upon completion of
this offering, but does include all shares owned beneficially by the
officers and directors shown (including 30,933 shares subject to
warrants).
DESCRIPTION OF SECURITIES
UNITS
Each unit offered hereby consists of one share of Common Stock and one
redeemable Warrant. Warrants are immediately exercisable and separately
transferable from the Common Stock. Each Warrant entitles the holder to
purchase, at any time until redemption or five years following the Effective
Date, two shares of Common Stock at an exercise price of $2.75 per share,
subject to adjustment.
The Company is not presently aware of any arrangements which may result
in a change in its control, except to the extent that the successful completion
of the offering described in this Prospectus would place more than 50% of
outstanding voting shares in the hands of public investors.
CAPITAL STOCK
The Company's authorized capital stock consists of 10,000,000
undesignated shares, $.01 par value. After the closing of this offering, there
will be, prior to the automatic conversion of Preferred Stock, issued and
outstanding 770,000 shares of Common Stock, in case of the sale of the minimum
offering; and 1,720,000 shares of Common Stock in case of the sale of the
maximum offering. After automatic conversion of Preferred Stock in connection
with this offering, there will be 974,999 and 1,924,999 shares outstanding,
respectively, in the event of a minimum or maximum offering.
In addition, the Company has issued and outstanding 99,999 shares of
Class A Convertible Preferred Stock, par value $.01, stated value $.30; and
105,000 shares of Class B Convertible Preferred Stock, par value $.01, stated
value $.30. All outstanding shares of Preferred Stock will automatically be
converted into shares of Common Stock in connection with this offering.
As of the date hereof, there were three record holders of Common Stock
and four record holders (but only one beneficial holder) of Preferred Stock.
COMMON STOCK
There are no preemptive, subscription, conversion or redemption rights
pertaining to the Common Stock. The absence of preemptive rights could result in
a dilution of the interest of existing shareholders should additional shares of
Common Stock be issued. Holders of the Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of assets legally
available therefore, and to share ratably in the assets of the Company available
upon liquidation.
Each share of Common Stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. The Class A and
Class B Convertible Preferred Stock have the same voting rights as the Common
Stock. Collectively these three classes of stock are referred to as the "voting
stock". Accordingly, the holders of more than fifty percent of all of the
outstanding shares of voting stock can elect all of the directors. Significant
corporate transactions such as amendments to the articles of incorporation,
mergers, sales of assets and dissolution or liquidation require approval by the
affirmative vote of the majority of the outstanding shares of the voting stock.
Other matters to be voted upon by the holders of voting stock normally require
the affirmative vote of a majority of the shares present at the particular
shareholder's meeting. The Company's director's and officers as a group
beneficially own 49.4% of the outstanding voting stock of the Company. Upon
completion of this offering, assuming the minimum and maximum number of shares
offered is sold, respectively, such persons will beneficially own either 21.5%
or 10.9% of the outstanding shares.
The rights of holders of the shares of Common Stock may become subject
in the future to prior and superior rights and preferences in the event the
Board of Directors establishes one or more additional classes of Common Stock or
one or more additional series of Preferred Stock. The Board of Directors has no
present plans to establish any such additional class or series.
REDEEMABLE WARRANTS
The redeemable warrants included as part of the Units will be issued
under and governed by the provisions of a Warrant Agreement (the "Warrant
Agreement") between the Company and Norwest Bank as Warrant Agent (the "Warrant
Agent"). The following summary of the Warrant Agreement is not complete, and is
qualified in its entirety by reference to the Warrant Agreement, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is part.
The shares of Common Stock and the redeemable warrants offered as part
of the Units are detachable and separately transferable. One redeemable warrant
entitles the holder ("warrant holder") to purchase two shares of Common Stock
during the five years following the Effective Date, subject to earlier
redemption, provided that at such time a current Registration Statement relating
to the shares of Common Stock issuable upon exercise of the warrants is in
effect and the issuance of such shares is qualified for sale or exempt from
qualification under applicable state securities laws. Each redeemable warrant
will be exercisable at a price equal to $2.75 per share, subject to adjustment
in certain events.
The redeemable warrants are subject to redemption by the Company, on
not less than 30 days written notice, at a price of $.01 per warrant at any time
following a period of 20 consecutive trading days where the per share closing
price of the Common Stock exceeds $3.25 (subject to adjustment). For these
purposes, the closing price of the Common Stock, if the Common Stock is listed
on a national securities exchange, shall be determined by the last reported sale
price on the primary exchange on which the Common Stock is traded. Holders of
the redeemable warrants will automatically forfeit all rights thereunder except
the right to receive the $.01 redemption price per warrant unless the redeemable
warrants are exercised before they are redeemed.
The warrant holders are not entitled to vote, receive dividends or
exercise any of the rights of holders of shares of Common Stock for any purpose.
The redeemable warrants are in registered form and may be presented for
transfer, exchange, or exercise at the office of the Warrant Agent. There is
currently no established market for the redeemable warrants and there is no
assurance that any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and
the number of shares of Common Stock purchasable upon exercise of the redeemable
warrants, to protect warrant holders against dilution in certain events,
including stock dividends, stock splits, reclassification, and any combination
of Common Stock, or the merger, consolidation, or disposition of substantially
all the assets of the Company.
The redeemable warrants may be exercised upon surrender of the
certificate therefor on or prior to the expiration date (or earlier redemption
date) at the offices of the Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the certificate properly completed and executed
as indicated, accompanied by payment of the full exercise price (by certified or
cashier's check payable to the order of the Company) for the number of
redeemable warrants being exercised.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming sale of the maximum number
of shares offered, and assuming the automatic conversion of 204,999 shares of
Convertible Preferred Stock into an equivalent number of shares of Common Stock,
there will be 1,924,999 shares of Common Stock issued and outstanding. The
shares purchased in this offering will be freely tradable without registration
or other restriction under the Securities Act of 1933, as amended (the
"Securities Act"), except for any shares purchased by an "affiliate" of the
Company (as defined in the Act).
All the currently outstanding shares of Common Stock and Preferred
Stock were acquired in reliance upon the "private placement" exemption provided
by Section 4(2) of the Securities Act and are deemed restricted securities
within the meaning of Rule 144 ("Restricted Shares"). Restricted Shares may not
be sold unless they are registered under the Securities Act or are sold pursuant
to an applicable exemption from registration, including an exemption under Rule
144. Of the 424,999 Restricted Shares presently outstanding, 169,999 are
eligible for sale under Rule 144 commencing on the 90th day following the
Effective Date; and the balance of 255,000 will become eligible for sale under
Rule 144, assuming all of the other requirements of Rule 144 have been
satisfied. However, the holders of all Restricted Shares, except for two
individuals who each own 10,000 shares, have agreed, as a condition of the
Underwriting Agreement between the Company and the Underwriter, that they will
not sell or grant any option for the sale of, or otherwise dispose of any equity
securities of the Company (or any securities convertible into or exchangeable
for equity securities of the Company) for 12 months after the date hereof,
without the prior consent of the Underwriter, which will not unreasonably be
withheld. See CAPITALIZATION and HIGH RISK FACTORS, No. 17, for information as
to outstanding options and warrants and securities convertible into Common
Stock.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) including persons deemed to be affiliates,
whose restricted securities have been fully paid for and held for at least two
years from the later of the date of issuance by the Company or acquisition from
an affiliate, may sell such securities in broker's transactions or directly to
market makers, provided that the number of shares sold in any three month period
may not exceed the greater of 1% of the then outstanding shares of Common Stock
or the average weekly trading volume of the shares of Common Stock in the
over-the-counter market during the four calendar weeks preceding the sale. Sales
under Rule 144 are also subject to certain notice requirements and the
availability of current public information about the Company. After three years
have elapsed from the later of the issuance of restricted securities from the
Company or their acquisition from an affiliate, such securities may be sold
without limitation by persons who are not affiliates under the rule.
In general, under Rule 701 as currently in effect, any employee,
consultant or advisor of the Company who purchases shares from the Company by
exercising a stock option outstanding on the date of the offering is eligible to
resell such shares 90 days after the date of the Prospectus in reliance on Rule
144, but without compliance with certain restrictions contained in Rule 144,
including the holding period requirement. Currently, the Company has no stock
options outstanding that could be exercised under Rule 701, and there are no
plans to issue any such options in the foreseeable future.
Following this offering, the Company cannot predict the effect, if any,
that sales of the Common Stock or the availability of such Common Stock for
sale, will have on the market price prevailing from time to time. Nevertheless,
sales by existing shareholders of substantial amounts of Common Stock could
adversely affect prevailing market prices for the Common Stock if and when a
public market exists.
MINNESOTA ANTI-TAKEOVER LAW
The Company is governed by the provisions of Sections 302A.671 and
302A.673 of the Minnesota Business Corporation Act. In general, Section 302A.671
provides that the shares of a corporation acquired in a "control share
acquisition" have no voting rights unless voting rights are approved in a
prescribed manner. A "control share acquisition" is an acquisition, directly or
indirectly, of beneficial ownership of shares that would, when added to all the
other shares beneficially owned by the acquiring person, entitle the acquiring
person to have voting power of 20% or more in the election of directors. In
general, Section 302A.673 prohibits a publicly held Minnesota corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of four years after the date of the transaction in which the person
became an interested shareholder, unless the business combination is approved in
a prescribed manner. "Business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
shareholder. An "interested shareholder" is a person who is the beneficial
owner, directly or indirectly, of 10% or more of the corporation's voting stock
or who is an affiliate or associate of the corporation and at any time within
four years prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The Company has selected Norwest Shareowner Services, Norwest Bank
Minnesota, N.A., 161 North Concord Exchange, P.O. Box 738, South St. Paul,
Minnesota 55075-0738, telephone (612) 450-4061, to act as Registrar and Transfer
Agent for the Company's Common Stock and Warrant Agent for the Redeemable
Warrants.
INDEMNIFICATION
The Company's Bylaws and the provisions of the Minnesota Business
Corporation Act, which govern the actions of the Company, provide that present
and former directors and officers of the Company shall be indemnified against
certain liabilities and expenses which any of them may incur as a result of
being, or having been, a director or officer of the Company. Indemnification is
contingent upon certain conditions being met, including, that the person: has
not been previously indemnified by another party for the same matter; has acted
in good faith; has received no improper personal benefit; and, in the case of a
criminal proceeding, has no reason to believe that the conduct complained of was
unlawful and reasonably believed that the conduct complained of was in the best
interests of the Company, or in certain circumstances, reasonably believed that,
the conduct complained of was not opposed to the best interests of the Company.
In addition, the Company's Articles of Incorporation provide that a
director of the Company shall not be liable for monetary damages for a breach of
such director's fiduciary duty, except for a breach of the duty of loyalty, acts
not in good faith or in knowing violation of law, violations of state securities
laws, or for actions from which the director derived an improper personal
benefit. The Company has not obtained directors and officers liability
insurance.
Insofar, as the indemnification of liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions of its Articles of Incorporation,
Bylaws and the provisions of the Minnesota Business Corporation Act, or
otherwise, the Company has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
UNDERWRITING
The Company through its Underwriter, Tuschner & Company, Inc., is
offering hereby a Minimum of 550,000 Units and up to a Maximum of 1,500,000
Units at the offering price of $1.00 per Unit. The Company and the Underwriter
have entered into an Underwriting Agreement whereby the Underwriter has been
retained as the exclusive agent of the Company to use its best efforts to offer
and sell these Units to the public in states in which this offering is
authorized for sale. There is no assurance that any of the securities offered
hereby will be sold, and there is no firm commitment from the Underwriter or any
other broker-dealer or person to sell or pay for any Units offered hereby. The
Underwriter intends to seek certain selected broker-dealers to participate in
this offering, who must agree to act as agents in the sale of these securities
and who are members of the National Association of Securities Dealers ("NASD").
The Company will pay the Underwriter a 10% sales commission and a 3%
nonaccountable expense allowance relating to the sale of the Units offered
hereby of which $5,000 has been advanced. The Underwriter may reallow all or a
portion of its agency selling commissions and expense allowance to any selected
dealers in regard to Units sold by them in this offering. The Underwriting
Agreement also provides for certain indemnification of the Underwriter and any
selected dealers by the Company, including certain liabilities arising out of
the Securities Act of 1933, as amended. Insofar as indemnification under this
Act may be permitted by the provisions of the Underwriting Agreement, the
Company is informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and thus
unenforceable.
All funds received for the sale of the Minimum 550,000 Units offered
hereby will be deposited in an impoundment account with Bank Windsor,
Minneapolis, Minnesota, acting as Impoundment Agent pursuant to the terms of a
written Impoundment Agreement, to be held until the earlier of (i) the date the
minimum offering proceeds have been received in such escrow account, or (ii) the
60th day after the effective date of this Prospectus (plus an additional 30-day
period if extended by the mutual consent of the Underwriter and the Company). In
the event the minimum offering is not sold during this 60-day period, or 90-day
period if extended, the proceeds from the sale of Units in this offering will be
refunded to subscribers promptly in full, without interest thereon or deduction
therefrom. Until such time as the proceeds of this offering have been released
from escrow, purchasers will be deemed subscribers and not shareholders of the
Company, and they will have no right to demand return of their subscription
payments during the escrow period. After sale of the Minimum Units, the Company
and the Underwriter may continue to offer the balance of this offering for any
remainder of the 60-day, or extended 90-day, period of this offering.
The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of Units offered hereby to any accounts over which it
exercises discretionary authority.
The Company's securities are considered "penny stock" under a
Securities and Exchange Commission rule that imposes additional sales practice
requirements on underwriters and broker-dealers who sell such securities to
persons other than established customers and institutional accredited investors
(generally institutions with assets in excess of $5,000,000). For transactions
covered by the rule, the underwriter or broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written agreement to the transaction prior to the sale. Such underwriters or
broker-dealers must also, prior to the purchase, provide the customer with a
risk disclosure document which identifies risks associated with investing in
"penny stocks" and which describes the market therefor as well as a brief
description of the broker-dealer's obligations under certain "Penny Stock Rules"
and rights and remedies available to customers under federal and state
securities laws. The broker-dealer must obtain a signed and dated
acknowledgement from its customer demonstrating that the customer has actually
received the required risk disclosure document before the first transaction in a
penny stock. Consequently, such rules will affect the ability of the Underwriter
and any broker-dealers to sell the Company's securities and will affect the
ability of purchasers in this offering to sell their securities in the secondary
market, if any.
The Company also has agreed to issue a Unit Purchase Option granting
the Underwriter the right to purchase that number of Units of the Company equal
to 10% of the total Units sold in this offering, with this option exercisable
over a four-year period commencing one year from the date of this Prospectus at
an exercise price of $1.20 per Unit. The rights under this Unit Purchase Option
are not transferable for a one-year period except to officers or shareholders of
the Underwriter. The Unit Purchase Option contains standard adjustments to
prevent dilution in the event of stock splits or dividends, mergers, or other
business combinations, and other such events. In addition, these warrants also
provide the Underwriter with certain registration rights including "piggy-back"
participatory rights and a one-time demand registration right. If the Unit
Purchase Option is exercised and any underlying securities of the Company are
later sold at prices exceeding the exercise price of this option, the
Underwriter may be deemed to have received additional underwriting compensation.
Upon the exercise of each Warrant which is exercised after
_____________, 1997, the Company will pay the Underwriter a fee of three percent
(3%) of the aggregate exercise price, of which one percent (1%) may be
re-allowed to any dealer who solicited the exercise (which may also be the
Underwriter) if: (i) the closing bid price of the Company's Common Stock on the
date the Warrant is exercised is greater than the then exercise price of the
Warrants; (ii) the exercise of the Warrant is solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the Warrant is not held
in a discretionary account; and (iv) the solicitation of the exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Securities and
Exchange Act of 1934.
The Units offered hereby are subject to prior sales or withdrawal,
cancellation, or suspension of the offering without notice, and to the right of
the Underwriter to reject offers to purchase such Units in whole or in part.
There is no provision for any installment sales in this offering, and all shares
of Common Stock involved in these Units will be fully-paid and nonassessable
upon the Units being purchased in this offering.
The Underwriter was incorporated in 1993 and commenced business as a
Minneapolis- based broker-dealer in May, 1994. This is the second public
offering in which it has served as a managing or lead underwriter or exclusive
agent for the sale of securities.
None of the officers or directors of the Company plan to purchase any
of the Units offered hereby. Although affiliates of the Company may purchase
Units in this offering in order to attain completion of the minimum offering
hereby, the Company is not aware of any such planned purchase by an affiliate.
Any such purchases will be made for investment purposes only, and not for
redistribution.
John M. Tuschner, President of the Underwriter, owns warrants for the
purchase of 8,333 shares which were acquired as compensation for personally
guaranteeing some of the Company's bank debt in 1996. See "CERTAIN
TRANSACTIONS."
Pursuant to the Underwriting Agreement, all directors and five percent
shareholders of the Company have agreed not to sell, transfer or otherwise
dispose of an aggregate of 404,999 shares of Common Stock during a one-year
lock-up period commencing on the date of this Prospectus without the prior
written consent of the Underwriter.
REPORTS TO SHAREHOLDERS
The Company is not currently a reporting company. After completion of
this offering, the company intends to make available to its shareholders annual
reports containing audited financial statements and a report by independent
certified public accountants, and quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
LEGAL MATTERS
The validity of the issuance of the units of Common Stock offered
hereby will be passed upon for the Company by Keller & Lokken, P.A., St. Paul,
Minnesota. Certain legal matters will be passed upon for the Underwriter by
Furber Timmer Zahn, PLLP, Minneapolis, Minnesota.
EXPERTS
The balance sheets of the Company as of February 29, 1996 and February
28, 1995 and the related statements of income, shareholders' deficit and cash
flows for the years then ended included in this Prospectus have been audited by
Silverman Olson Thorvilson & Kaufmann, LTD, certified public accountants, as set
forth in their reports thereon (which contains an explanatory paragraph with
respect to substantial doubt about the Company's ability to continue as a going
concern and management's plans described in Note 2 of the financial statements)
appearing elsewhere in the Registration Statement. Such financial statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE AND ADDITIONAL INFORMATION
The Company is not at present a reporting company under the Securities
Exchange Act of 1934, as amended, and therefore is not required and does not
file periodic reports with the Securities and Exchange Commission.
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act (the "Registration Statement"), with respect to the securities
offered hereby, with the Securities and Exchange Commission ("SEC") in
Washington, D.C. This Prospectus, filed as part of the Registration Statement,
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto, certain portions of which have been omitted
in accordance with the rules and regulations of the SEC. For further information
with respect to the Company and the shares offered hereby, reference is made to
the Registration Statement and to the exhibits and schedules thereto, which may
be inspected without charge, or copies of which may be obtained from the SEC's
Washington, D.C. office, 450 Fifth Street N.W., Washington, D.C. 20549 upon
payment of the prescribed fees. In addition, such information is available
without charge through use of the SEC's EDGAR system, which allows interested
persons to obtain on-line access to such information.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, including the Company. The address is
(http://www.sec.gov).
Although all of the Company's material contracts are described in the
Prospectus, statements made in the Prospectus as to the contents of any
contract, agreement or document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference.
The Company will provide without charge to each person who receives a
prospectus, upon written or oral request of such person, a copy of any exhibits
to the Registration Statement. Inquiries should be directed to Richard D. Kothe,
Illuminated Media Inc., 15 S. Fifth Street, Suite 715, Minneapolis, MN 55402,
telephone number 612-338-3554, FAX 612-370-0381.
ILLUMINATED MEDIA, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED
NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
ILLUMINATED MEDIA, INC.
INDEX TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
Independent Auditors' Report 1
Balance Sheet 2
Statement of Operations 3
Statement of Shareholders' Deficit 4
Statement of Cash Flows 5-6
Notes to the Financial Statements 7-18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Illuminated Media, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Illuminated Media, Inc. as of
February 29, 1996 and February 28, 1995, and the related statements of
operations, shareholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Illuminated Media, Inc. as of
February 29, 1996 and February 28, 1995, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company's recurring
losses, negative cash flows from operations and net working capital deficiency
raise substantial doubt as to its ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The 1996
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
July 31, 1996, except for Notes 2
and 16 which are dated February 14, 1997
ILLUMINATED MEDIA, INC.
BALANCE SHEET
FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND NOVEMBER 30, 1996 (UNAUDITED)
NOVEMBER 30,
1996
ASSETS 1996 1995 (UNAUDITED)
--------- --------- -----------
Current assets:
Cash $ 4,795 $ -- $ 15,767
Accounts receivable, net of allowance for
doubtful accounts of $24,818, $-0-
and $67,132, respectively 10,287 7,400 30,310
Prepaid expenses 5,000 -- 5,000
Other receivables - related parties (Note 3) 6,590 200 529
--------- --------- ---------
Total current assets 26,672 7,600 51,606
Property and equipment, net (Note 4) 42,675 45,154 37,059
Other assets 398 597 249
--------- --------- ---------
Total assets $ 69,745 $ 53,351 $ 88,914
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Checks drawn in excess of available funds $ -- $ 245 $ --
Note payable (Note 5) 150,000 -- --
Notes payable - bank (Note 6) -- -- 135,000
Notes payable - shareholders (Note 7) 19,509 5,000 19,509
Debentures payable (Note 8) -- -- 20,000
Debentures payable-related party (Note 8) -- -- 115,000
Accounts payable 49,713 29,384 84,529
Accrued expenses - related parties (Note 15) 65,916 60,226 63,217
Accrued expenses 6,096 3,683 8,205
Deferred revenue -- 1,000 --
Current portion of long-term debt (Note 9) 11,710 10,329 12,664
Current portion of long-term debt -
related parties (Note 10) 12,826 -- 20,514
--------- --------- ---------
Total current liabilities 315,770 109,867 478,638
Long-term debt (Note 9) 31,290 42,430 23,485
Long-term debt - related parties (Note 10) 172,474 -- 156,880
--------- --------- ---------
Total liabilities 519,534 152,297 659,003
--------- --------- ---------
Contingencies and commitments (Notes 14 and 15) -- -- --
Redeemable preferred stock:
Series A convertible preferred stock,
$.30 stated value; 110,000 shares authorized
and 99,999 shares issued and outstanding (Note 11) 30,000 30,000 30,000
Series B convertible preferred stock
$.30 stated value; 155,000 shares authorized
and 105,000 shares issued and outstanding (Note 11) 31,500 31,500 31,500
--------- --------- ---------
Total redeemable preferred stock 61,500 61,500 61,500
--------- --------- ---------
Shareholders' deficit:
Common Stock, $.01 par value; 735,000 shares
authorized and 70,000, 510,000 and 70,000
issued and outstanding, respectively 700 5,100 700
Additional paid-in capital 1,345 9,800 1,345
Accumulated deficit (513,334) (175,346) (633,634)
--------- --------- ---------
Total shareholders deficit (511,289) (160,446) (631,589)
--------- --------- ---------
Total liabilities, redeemable preferred
stock and shareholders' deficit $ 69,745 $ 53,351 $ 88,914
========= ========= =========
The accompanying notes are an integral part
of the financial statements.
F-2
ILLUMINATED MEDIA, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOVEMBER NOVEMBER
30, 1996 30, 1995
1996 1995 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ---------
Revenues $ 236,932 $ 134,411 $ 181,012 $ 174,808
--------- --------- --------- ---------
Operating expenses:
General and administrative - related party 33,660 48,520 -- 33,660
General and administrative 360,510 163,223 274,152 181,513
--------- --------- --------- ---------
Total operating expenses 394,170 211,743 274,152 215,173
--------- --------- --------- ---------
Loss from operations (157,238) (77,332) (93,140) (40,365)
Other income (expense):
Interest expense (17,239) (3,813) (33,485) (6,964)
Miscellaneous income 2,442 2,483 6,325 753
Loss on disposal of property and equipment (2,808) -- -- --
--------- --------- --------- ---------
Total other income (expense) (17,605) (1,330) (27,160) (6,211)
--------- --------- --------- ---------
Net loss $(174,843) $ (78,662) $(120,300) $ (46,576)
========= ========= ========= =========
Net loss per share $ (.31) $ (.12) $ (.52) $ (.07)
========= ========= ========= =========
Weighted average number of
shares outstanding 561,929 672,833 232,833 670,422
========= ========= ========= =========
The accompanying notes are an integral part
of the financial statements.
F-3
ILLUMINATED MEDIA, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
COMMON STOCK
-------------------------- ADDITIONAL TOTAL
PAID ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT IN CAPITAL DEFICIT DEFICIT
--------- --------- --------- --------- ---------
Balance at February 28, 1994 510,000 $ 5,100 $ 9,800 $ (96,684) $ (81,784)
Net loss -- -- -- (78,662) (78,662)
--------- --------- --------- --------- ---------
Balance at February 28, 1995 510,000 5,100 9,800 (175,346) (160,446)
Common stock redemption (Note 12) (440,000) (4,400) (8,455) (163,145) (176,000)
Net loss -- -- -- (174,843) (174,843)
--------- --------- --------- --------- ---------
Balance at February 29, 1996 70,000 700 1,345 (513,334) (511,289)
Net loss (Unaudited) -- -- -- (120,300) (120,300)
--------- --------- --------- --------- ---------
Balance at November 30, 1996
(Unaudited) 70,000 $ 700 $ 1,345 $(633,634) $(631,589)
========= ========= ========= ========= =========
The accompanying notes are an integral part
of the financial statements.
F-4
ILLUMINATED MEDIA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOVEMBER 30, NOVEMBER 30,
1996 1995
1996 1995 (UNAUDITED) (UNAUDITED)
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(174,843) $ (78,662) $(120,300) $ (46,576)
Adjustments to reconcile net loss
to net cash used in operating activities
Depreciation and amortization 15,076 12,139 9,934 11,307
Loss on disposal of property
and equipment 2,808 -- -- --
Decrease (increase) in assets:
Accounts receivable (2,887) 3,575 (20,023) (17,156)
Prepaid expenses (5,000) -- -- --
Other receivables - related parties (6,390) (200) 6,061 (10,971)
Increase (decrease) in liabilities:
Accounts payable 20,329 17,277 34,816 (3,125)
Accrued expenses - related parties 98,990 35,530 (2,699) 34,099
Accrued expense 2,413 1,713 2,109 (1,307)
Deferred revenue (1,000) (7,100) -- (1,000)
--------- --------- --------- ---------
Net cash used in operating activities (50,504) (15,728) (90,102) (34,729)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (15,206) (31,944) (4,169) (15,207)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in note payable 150,000 -- (150,000) 150,000
Proceeds from the issuance of:
Notes payable - bank -- -- 135,000 --
Note payable - shareholders 14,509 -- -- 14,509
Debentures payable -- -- 20,000 --
Debentures payable-related party -- -- 115,000 --
Long-term debt -- 59,362 -- --
Redemption of common stock (84,000) -- -- (84,000)
Payment of long-term debt (9,759) (25,926) (6,851) (8,466)
Payment of long-term debt - related parties -- -- (7,906) --
Increase (decrease) in checks drawn
in excess of available funds (245) 245 -- (245)
--------- --------- --------- ---------
Net cash provided by
financing activities 70,505 33,681 105,243 71,798
--------- --------- --------- ---------
Increase (decrease) in cash 4,795 (13,991) 10,972 21,862
Cash - beginning of year -- 13,991 4,795 --
--------- --------- --------- ---------
Cash - end of year $ 4,795 $ -- $ 15,767 $ 21,862
========= ========= ========= =========
The accompanying notes are an integral part
of the financial statements.
F-5
ILLUMINATED MEDIA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOVEMBER NOVEMBER
30, 1996 30, 1995
1996 1995 (UNAUDITED) (UNAUDITED)
------- ------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,937 $ 3,099 $35,007 $ 6,140
======= ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the year ended February 29, 1996 and the nine months ended November 30,
1995:
The Company converted $93,300 of accrued expenses - related parties to a
long-term note payable (Note 10).
As partial redemption of 440,000 shares of $.01 par value common stock,
the Company issued long-term debt aggregating $92,000 (Note 12).
The accompanying notes are an integral part
of the financial statements.
F-6
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Nature of Organization:
Illuminated Media, Inc. (formerly Skyway Advertising, Inc.) or
the "Company" is engaged in the business of providing a medium
for out-of-home advertising called Skyway Ads. Each Skyway Ad
unit consists of three back-lit advertising panels. Skyway Ads
units are located primarily in skyway corridors, shopping
centers and parking ramps in the Minneapolis/St. Paul
metropolitan area.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is
computed using accelerated methods and is charged to expense
based on the estimated useful lives of the assets.
Expenditures for additions and improvements are capitalized,
while repairs and maintenance are expense as incurred.
Other Assets:
Other assets consist of organization costs and are being
amortized straight-line over five years.
Income Taxes:
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes, if any. Deferred taxes
represent the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
purposes.
Net Loss Per Share of Common Stock:
Net loss per share has been calculated in accordance with
Staff Accounting Bulletin Topic 4D, which requires that all
common stock, options and warrants issued within one year
prior to the Company's filing of its initial public offering
be considered outstanding for all periods presented, even if
the impact of the incremental shares is anti-dilutive. For all
of the years and periods presented, the weighted average
number of shares actually outstanding, has been increased for
the number of shares that would be outstanding assuming that
all of the warrants (Note 14) were exercised and the 60,000
share common stock grant (Note 15) were issued; less the
shares assumed to be reacquired by the Company using the
initial public offering proceeds, at $1.00 per share.
F-7
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of trade
accounts receivable. Accounts receivable arise from the sale
of advertising space to a diversified customer base located
primarily in Minnesota. The Company performs ongoing credit
evaluations of its customers' financial condition, and
generally requires no collateral from its customers.
Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principals requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
New Accounting Pronouncements:
The Company has not adopted Statement of Financial Accounting
SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123) in fiscal 1996. SFAS 123 is effective for years beginning
after December 15, 1995 and prescribes accounting and
reporting standards for all stock-based compensation plans.
Since the Company intends to elect continued recognition of
certain stock-based compensation using the intrinsic value
method prescribed under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, no effect on
the Company's expense recognition is expected.
Cash Equivalents:
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments and time deposits
of three months or less to be cash equivalents.
Basis of Presentation:
The unaudited nine month periods ended November 30, 1996 and
1995 reflect all adjustments which, in the opinion of
management, are necessary for the fair presentation of the
Company's financial position, results of operations and cash
flows.
F-8
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 2: CONTINUED EXISTENCE AND MANAGEMENT'S PLANS
During 1996, the Company incurred a net loss of $(174,843) and
negative cash flows from operations of $(50,504), resulting in
a negative working capital of $(289,098) and an accumulated
deficit of $(513,334) at February 29, 1996.
During the nine months ended November 30, 1996, the Company
incurred a net loss of $(120,300) and negative cash flows from
operations of $(90,102), resulting in a negative working
capital of $(427,032) and an accumulated deficit of
$(633,634). As a result of the Company's financial position,
management believes that additional capital will be necessary
to enable the Company to continue its operations.
The Company has engaged a brokerage firm to raise a minimum of
$550,000 to a maximum of $1,500,000 of capital through the
sale of common stock in a public offering. Management also
believes that the Company's expansion into new markets and the
addition of product enhancements, both financed through the
public offering, as well as the establishment of a new credit
policy will result in improved operating results. Management
believes that the amount to be raised and the expected
improvements in operating results, will be adequate to fund
the cash requirements of the Company through February 28,
1997. No assurance can be provided, however, that the amount
of capital raised, if any, or the improved operating results
will be sufficient to meet these needs.
As of February 14, 1997, the public offering had not
commenced.
NOTE 3: OTHER RECEIVABLES - RELATED PARTIES
Other receivables - related parties consisted of the following
at:
November 30,
February February 1996
29, 1996 28, 1995 (Unaudited)
-------- -------- -----------
Director/ shareholders $ 5,840 $ - $ -
Employee 750 200 529
--------- --------- ---------
$ 6,590 $ 200 $ 529
========= ========= =========
Other receivables are unsecured and due on demand.
F-9
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
November
February February 30, 1996
29, 1996 28, 1995 (Unaudited)
-------- -------- -----------
Advertising panels $ 66,663 $ 58,525 $ 70,501
Furniture 1,217 1,217 1,548
Equipment 3,359 1,641 3,359
-------- -------- --------
71,239 61,383 75,408
Less accumulated depreciation (28,564) (16,229) (38,349)
-------- -------- --------
Property and equipment, net $ 42,675 $ 45,154 $ 37,059
======== ======== ========
All property and equipment is being depreciated over estimated
useful lives of 5-7 years.
Depreciation expense was $14,877 and $11,940 for the years
ended February 29, 1996 and February 28, 1995, respectively.
For the periods ended November 30, 1996 and 1995, depreciation
expense was $9,785 and $11,158, respectively.
NOTE 5: NOTE PAYABLE
At February 29, 1996, note payable consisted of a short term
loan bearing interest at 10%, payable at the earlier of March
27, 1996 or the closing of the Company's initial public
offering. The note is secured by substantially all corporate
assets and guaranteed by two of the Company's shareholders. In
addition, the Company issued warrants to the note holder to
purchase up to 55,000 shares of the Company's common stock at
a per share price of $.50 (Note 14).
NOTE 6: NOTES PAYABLE - BANK
As of November 30, 1996, the Company has two notes from a bank
aggregating $135,000. The notes bear interest at a variable
rate (10.75% at November 30, 1996) and mature May 13, 1997.
The notes are secured by substantially all corporate assets
and personally guaranteed by four unrelated individuals. As
inducement for these guarantees, the Company has issued these
individuals warrants to purchase 45,000 shares of the
Company's common stock at $.50 per share expiring September
1998 (Note 14).
F-10
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 7: NOTES PAYABLE - SHAREHOLDERS
Notes payable - shareholders consisted of the following at:
November
February February 30, 1996
29, 1996 28, 1995 (Unaudited)
-------- -------- -----------
Note payable to an officer/shareholder
with interest at 5%. The note is unsecured
and due on demand. $ 5,000 $ 5,000 $ 5,000
Note payable to a shareholder with interest at 12% payable
monthly. The note is secured by advertising panels and is due
on demand. At the option of the holder, the note can be
converted into the Company's common stock at a conversion
price of $.75 per share anytime before September 1999. 14,509 - 14,509
--------- --------- ---------
Total notes payable -shareholders $ 19,509 $ 5,000 $ 19,509
========= ========= =========
NOTE 8: DEBENTURES PAYABLE
As of November 30, 1996, the Company has issued debentures
aggregating $135,000. The debentures bear interest at 10%
payable at various maturity dates through February 28, 1997.
The debentures are secured by substantially all corporate
assets. As inducement to the debenture holders, the Company
issued warrants to purchase 45,667 shares of the Company's
common stock, 21,667 expiring September 1998 and 24,000
expiring November 1998 (Note 14). Debentures aggregating
$115,000 and the related warrants to purchase 38,667 shares of
the Company's common stock were issued to a current
shareholder and to two directors of the Company.
NOTE 9: LONG-TERM DEBT
As of February 29, 1996, February 28, 1995 and November 30,
1996, the Company has a note payable to a credit union
aggregating $43,000, $52,759 and $36,149, respectively. The
note accrues interest at 13.5% payable monthly. The note is
secured by substantially all corporate assets and guaranteed
by an officer/shareholder of the Company. The note matures in
May 1999.
F-11
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 9: LONG-TERM DEBT (CONTINUED)
Future maturities of long-term debt are as follows at
February 28:
1997 $ 11,710
1998 13,393
1999 15,317
2000 2,580
---------
Total $ 43,000
=========
NOTE 10: LONG-TERM DEBT - RELATED PARTIES
Long-term debt - related parties consisted of the following
at:
November
February February 30, 1996
29, 1996 28, 1995 (Unaudited)
--------- ---------- ---------
Note payable to a Partnership (Note 15) owned by former
officers/shareholders of the Company with interest 11%,
principal and interest payable monthly beginning April 1996.
The note is secured by substantially all corporate assets and
is guaranteed by an officer/ shareholder of the Company. The
note matures in March 2003. $ 93,300 $ - $ 89,320
Notes payable - common stock redemption (Note 12) to two
former officer/shareholders of the Company with interest at
11%, principal and interest payable monthly beginning April
1996. The notes are secured by substantially all corporate
assets and are guaranteed by an officer/ shareholder of the
Company. The notes mature in March 2003. 92,000 - 88,074
--------- ---------- ---------
185,300 - 177,394
Less current portion (12,826) - (20,514)
--------- ---------- ---------
Long-term debt - related parties $ 172,474 $ - $ 156,880
========= ========== =========
F-12
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 10: LONG-TERM DEBT - RELATED PARTIES (CONTINUED)
The holders of the notes payable - common stock redemption
have an unqualified option to convert any remaining unpaid
notes payable into shares of the Company's common stock at a
conversion price of $.40 per share (Note 15).
Future maturities of long-term debt - related parties are as
follows at February 28:
1997 $ 12,826
1998 21,083
1999 23,522
2000 26,244
2001 29,082
Thereafter 72,543
----------
$ 185,300
==========
NOTE 11: PREFERRED STOCK
Series A Convertible/Redeemable Preferred Stock:
The Company has outstanding 99,999 shares of voting,
cumulative, convertible, redeemable series A preferred stock
with a stated value of $.30 per share. Each share of series A
preferred stock is convertible into one share of common stock
beginning in June 1995 at the option of the holder, or is
automatically converted at the date that the Company initiates
a public offering of its capital stock. The holders of series
A preferred stock have the right to require the Company to
redeem all or a portion of the preferred shares at a
redemption price equal to the stated value of the stock plus
any accumulated and unpaid dividends. Dividends are payable
annually on December 31 of each year, if declared, at a rate
of 8% of the stated value of the preferred shares. No
dividends were declared during the years ended February 29,
1996 and February 28, 1995 or during the period ended November
30, 1996.
Series B Convertible/Redeemable Preferred Stock:
The Company has outstanding 105,000 shares of voting,
cumulative, convertible, redeemable series B preferred stock
with a stated value of $.30 per share. The holder of the
shares has the option to either convert each share of series B
preferred stock into one share of common stock or require that
the Company redeem the preferred stock at a redemption price
of $.50 per share. In addition, each share of series B
preferred stock is automatically converted into one share of
common stock at the date that the Company initiates a public
offering of its capital stock. Dividends are payable monthly,
if declared, at a rate of 8% of the stated value of the
preferred shares. Series B preferred stock has dividend
preferences over both common stock and Series A preferred
stock. No dividends were declared during the years ended
February 26, 1996 and February 28, 1995 or during the period
ended November 30, 1996.
F-13
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 12: COMMON STOCK REDEMPTION
During the year ended February 29, 1996, the Company redeemed
440,000 shares of its common stock by paying the shareholders
$84,000 and issuing notes aggregating $92,000 (Note 10).
NOTE 13: INCOME TAXES
For the years ended February 29, 1996 and February 28, 1995,
the effective rate varies from the maximum federal statutory
rate as a result of the following items:
1996 1995
------ ------
Tax benefit computed at maximum
federal statutory rate (34.0)% (34.0)%
Loss to be carried forward 34.0 34.0
------ -----
Provision for income taxes - % - %
====== ======
For the period ended November 30, 1996 and 1995, the effective
rate varies from the maximum federal statutory rate as a
result of the following items:
1996 1995
(Unaudited) (Unaudited)
----------- -----------
Tax benefit computed at maximum
federal statutory rate (34.0)% (34.0)%
Loss to be carried forward 34.0 34.0
------ ------
Provision for income taxes - % - %
====== ======
For financial statement purposes, no tax benefit has been
reported for the years ended February 29, 1996 and February
28, 1995 or the periods ended November 30, 1996 and 1995 as
the Company has had significant losses in recent years and
realization of the tax benefit is uncertain. Accordingly, a
valuation allowance has been established for the full amount
of the deferred tax asset.
Deferred taxes represent the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Temporary differences result
primarily from using the cash basis of accounting for income
tax reporting versus the accrual basis used for financial
reporting, and from the net operating loss carryforwards.
F-14
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 13: INCOME TAXES (CONTINUED)
Deferred taxes consisted of the following at:
November
February February 30, 1996
29, 1996 28, 1995 (Unaudited)
--------- --------- -----------
Asset:
Net Operating Loss carryforward $ 37,400 $ 24,000 $ 63,600
Adjustments to cash basis:
Accounts payable 34,000 20,000 41,700
Accrued expenses 15,000 - 9,800
--------- --------- -----------
Net Deferred tax asset 86,400 44,000 115,100
Less Valuation allowance (86,400) (44,000) (115,100)
--------- --------- -----------
Net deferred tax asset $ - $ - $ -
========= ========= ===========
The net change in the deferred tax valuation allowance was an
increase of $47,400 and $21,000 for the years ended February
29, 1996 and February 28, 1995, respectively and $23,700 and
$11,600 for the periods ended November 30, 1996 and 1995,
respectively.
As of February 28, 1996, the Company had net operating loss
carryforwards for income tax purposes as follows:
Carryforwards Net Operating
Expires Loss
February 28 Carryforwards
------------- -------------
2009 $ 60,000
2010 43,000
2011 56,000
-----------
$ 159,000
==========
NOTE 14: COMMITMENTS AND CONTINGENCIES
Operating Leases:
The Company leases space for its advertising panels from
various skyway systems and shopping centers located in the
Minneapolis and St. Paul area. These non-cancelable leases
provide for contingent payments based upon a percentage
(ranging from 8% to 40%, with the majority at 20%) of
advertising revenues generated from each location. These
leases have terms of two to five years and expire at various
dates through November 1998.
Rent expense for the years ended February 29, 1996 and
February 28, 1995 was $58,945 and $24,182, respectively. For
the periods ended November 30, 1996 and 1995, rent expense was
$55,200 and $43,106, respectively.
F-15
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 14: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Stock Warrants:
Beginning in fiscal 1996, the Company issued warrants as an
inducement for short-term financing and loan guarantees (Notes
5, 6 and 8). As of February 29, 1996, the Company had warrants
to purchase 55,000 shares of common stock outstanding and
exercisable at $.50 per share. There were no warrants
outstanding as of February 28, 1995. As of November 30, 1995,
the Company had warrants to purchase 50,000 shares of common
stock outstanding and exercisable at $.50 per share. As of
November 30, 1996, the following warrants to purchase shares
of the Company's were outstanding and exercisable.
Common Shares Exercise Price
Under Warrants Per Share Expiration Date
-------------- --------- ---------------
50,000 $ .50 November 1997
5,000 $ .50 February 1998
66,667 $ .50 September 1998
24,000 $ .50 November 1998
----------
145,667
==========
Upon completion of the Company's initial public offering, the
exercise price on the warrants to purchase 145,667 common
shares, including 38,667 issued to a current shareholder and
to two directors (Note 8), is adjusted to one-half of the
price of the Company's common shares in its initial public
offering.
During the years ended February 29, 1996 and February 28, 1995
and during the nine month periods ended November 30, 1996 and
1995, no warrants were exercised.
Significant Customers:
During the years ended February 29, 1996 and February 28, 1995
and the nine months ended November 30, 1996 and 1995,
significant customers comprised the following percent of total
sales.
(Unaudited)
February 28, November 30,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Customer A 19.3% - % - % 21.4%
Customer B 15.2 - 17.2 15.4
Customer C 12.2 14.4 - 12.0
Customer D - 21.8 - -
Customer E - 10.1 - -
---- ---- ---- ----
Total significant customers 46.7% 46.3% 17.2% 48.8%
==== ==== ==== ====
F-16
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 15: RELATED PARTY TRANSACTIONS
Lease Companies:
During fiscal 1996 and 1995, the Company had a management
agreement with Lease Companies, a partnership owned by former
officers/shareholders of the Company. Pursuant to the
management agreement, the Company will pay Lease Companies
$4,050 per month plus 10% of monthly revenue in excess of
$21,500 in exchange for administrative, accounting and sales
services. During the years ended February 29, 1996 and
February 28, 1995, the Company incurred management fees of
$33,660 and $48,520, respectively, of which $93,300 and
$60,226 remained unpaid at February 29, 1996 and February 28,
1995. The unpaid management fees at February 28, 1995, are
included in accrued expenses -related parties on the
accompanying balance sheet. During 1996, the contract
terminated and unpaid management fees were converted into a
long-term note payable (Note 10). During the periods ended
November 30, 1996 and 1995, management fees aggregated $0 and
$33,660, respectively.
Stock Grants:
In fiscal 1996, an officer/shareholder of the Company was
granted 150,000 shares of the Company's common stock in
recognition for past service to the Company. The grant has
been valued at $60,000 and is included in accrued expenses -
related parties on the accompanying balance sheet at February
29, 1996 and November 30, 1996.
Stock Options:
During fiscal 1996 in connection with the redemption of the
Company's common stock (Notes 10 and 12), the Company issued
two former officers/shareholders an unqualified option to
convert their notes payable into shares of the Company's
common stock at a conversion price of $.40 per share. The
options expires in December 1997.
During fiscal 1996 in connection with a loan from a Company
shareholder (Note 7), the Company issued the shareholder an
unqualified option to convert the note payable into shares of
the Company's common stock at a conversion price of $.75 per
share. The option expires in September 1999.
During fiscal 1994, the Company sold series B
convertible/redeemable preferred stock in a private placement
(Note 11). In accordance with the private placement, all
purchasers of the preferred stock received an option to
purchase common stock at $.30 per share. In connection with
the series B preferred stock issuance, a board member was
issued an unqualified option to purchase 50,000 shares of
preferred stock at an option price of $.30 per share. These
options expires in January 1997.
As of November 30, 1996, none of the options discussed above
had been exercised.
F-17
ILLUMINATED MEDIA, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
AND THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995 (UNAUDITED)
NOTE 16: SUPPLEMENTAL EARNINGS PER SHARE
As of February 14, 1997, the Company has initiated efforts for
the registration of a minimum of 550,000 to a maximum of
1,500,000 shares of common stock at $1.00 per share, in an
initial public offering (IPO) with the Securities and Exchange
Commission. Upon the successful completion, the Company has
estimated that approximate proceeds, from $300,000, if the
minimum is sold, to $500,000, if the maximum is sold, will be
used to retire outstanding debt. In connection with the IPO,
series A and B preferred stock outstanding of 99,999 and
105,000, respectively, will be converted into 204,999 shares
of common stock (Note 11) and preferred dividends of $10,000
will be paid.
Summarized below is the unaudited proforma supplemental
earnings per share assuming, as of the beginning of the year
and the nine month period presented below, that the minimum
and maximum amount of common shares being offered in the IPO
were sold and outstanding, that the preferred stock was
converted to common stock, the preferred stock dividends are
paid and that a portion of the proceeds were used to repay
debt.
Minimum Offering Maximum Offering
-------------------------- --------------------------
February 29, November February 29, November
1996 30, 1996 1996 30, 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Net loss $ (165,317) $ (93,035) $ (157,604) $ (87,925)
=========== ========== ========== ==========
Net loss per share
adjusted for preferred $ (.13) $ (.10) $ (.07) $ (.05)
stock dividend =========== ========== ========== ==========
Weighted average number
of shares outstanding 1,316,928 987,832 2,266,928 1,937,832
=========== ========== ========== ==========
F-18
[Photos of Skyway Ads platforms to be added]
UNTIL (INSERT DATE) ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
Summary of Offering.............................................................
The Company.....................................................................
High Risk Factors...............................................................
Selected Financial Data.........................................................
Management's Discussion.........................................................
Dilution........................................................................
Use of Proceeds.................................................................
Dividend Policy.................................................................
Capitalization..................................................................
Business........................................................................
Management......................................................................
Principal Shareholders..........................................................
Certain Transactions............................................................
Description of Securities.......................................................
Underwriting....................................................................
Legal Matters...................................................................
Experts.........................................................................
Additional Information..........................................................
Financial Statements............................................................
-----------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, imply
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy in any state in which such offer or solicitation is not
lawful, or to any person to whom it is unlawful to make such an offer or
solicitation.
1,500,000 UNITS
ILLUMINATED MEDIA INC.
Each Unit Consists of One Share of
Common Stock and One Common Stock
Warrant to Purchase Two
Shares of Common Stock
--------------------
PROSPECTUS
--------------------
TUSCHNER & COMPANY, INC.
April , 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 302A.521, Minnesota Statutes, the Company is
required to indemnify its directors, officers, employees, and agents against
liability under certain circumstances, including liability under the Securities
Act of 1933, as amended (the "Act"). See also Article VII of the Company's
Articles of Incorporation, filed herewith as Exhibit 3.1. The general effect of
such provisions is to relieve the directors and officers of the Company from
personal liability which may be imposed for certain acts performed in their
capacity as directors or officers of the Company, except where such persons have
not acted in good faith.
Insofar as indemnification for liabilities arising out of the
Securities Act of 1933 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 Securities and Exchange
Commission, such indemnification is against public policy, as expressed in the
Act, and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the Registrant in connection with
the issuance and distribution of the securities registered hereby are set forth
in the following table:
SEC Registration Fee $ 3,709
Blue Sky Registration Fees 1,000
NASD Filing Fee 3,609
Transfer agent 7,500
Printing and engraving 12,000
Legal 26,000
Accounting 16,000
Miscellaneous 182
--------
Total: $ 70,000
========
Note: The foregoing estimated expenses do not include
commissions, nor the Underwriter's non-accountable
expense allowance, nor the fees and expenses of
Underwriter's counsel, payable by the Registrant.
Item 26. Recent Sales of Unregistered Securities.
Since November 30, 1993, the Registrant has sold securities in
the amounts, at the times and for the consideration listed below.
a. In February, 1994, the Registrant sold 105,000 shares of
its Series B Convertible Preferred Stock to one individual investor, Rick
Johnson, for $.30 per share, or an aggregate of $31,500. In connection with that
transaction, the Registrant granted to such investor, for no additional
consideration, an option (which has now expired, unexercised), until January 28,
1997, to purchase 50,000 shares of Preferred Stock at $.30 per share.
b. In September, 1995, the Registrant sold to one individual a
12% note, in the aggregate amount of $14,509.00, which by its terms was
convertible until September, 1999 to Common Stock of the Registrant at the rate
of $.75 per share, or an aggregate of 19,345 shares.
c. As part of a stock redemption agreement in November, 1995,
with two individuals (the Lease Brothers, who were officers and directors of the
Registrant) and a business entity wholly owned by them, the Registrant issued
three Promissory Notes to such persons in the aggregate principal amount of
$185,300 and granted such persons an option for the life of the outstanding
principal balance owing to them, to convert such balance into shares of the
Registrant's Common Stock at $.40 per share (which, at November 30, 1996, would
have entitled them to purchase up to 443,485 shares of Common Stock). The
Registrant did not receive any separate consideration for the granting of such
option.
d. In November, 1995, in connection with a $150,000 loan
transaction, the Registrant issued a Warrant for 50,000 shares to the individual
who made the loan and subsequently issued a Warrant for an additional 5,000
shares to such individual, as part of an agreement to extend the maturity date
of such loan. The Registrant did not receive any separate consideration for the
issuance of such Warrants.
e. On various dates between May, 1996 and November, 1996, the
Registrant sold an aggregate of $135,000 in principal amount of 10% Subordinated
Debentures, together with an aggregate of 45,667 Warrants to purchase Common
Stock to four individual investors (of whom two, Mr. Verplaetse and Mr. Hepburn,
were directors of the Registrant, the third, Mr. Winer, was an accredited
investor, and the fourth was a sophisticated investor who was already a
shareholder of the Registrant). The Registrant did not receive any separate
consideration for the granting of such Warrants.
f. In February, 1996, the Board of Directors authorized the
issuance of 150,000 shares of Common Stock, valued at $.40 per share, or
$60,000, to Robert H. Blank, Chief Executive Officer, as partial consideration
for services previously rendered by him. Such shares were issued in December,
1996.
g. In August, 1996, in connection with the obtaining of two
bank loans aggregating $135,000, the Registrant issued Warrants for an aggregate
of 45,000 shares of Common Stock to four individuals who personally guaranteed
such loan. In addition, as security for their guarantees, the Registrant issued
10% debentures to each of such individuals in an amount equivalent to that which
they personally guaranteed, and such individuals have confirmed in writing that
such debentures will bear interest and become due and payable only at such time,
if ever, as there is a default on the bank loans and the individual advances
funds to the bank. None of such individuals was an affiliate of the Company,
although one, John M. Tuschner, was a principal of the Underwriter in this
transaction, and each was considered sophisticated. The Registrant did not
receive any separate consideration for the granting of such Warrants or
Debentures.
h. On various dates in late January, 1997, and February, 1997,
the Registrant sold an aggregate of $48,000 in principal amount of 10%
Subordinated Debentures, together with an aggregate of 15,993 Warrants to
purchase Common Stock to three individual investors (Mr. Kothe, an officer and
director of the Registrant, Mr. Winer, and the spouse of Mr. Blank, an officer
and director). The Registrant did not receive any separate consideration for the
granting of such Warrants.
There were no underwriting discounts or commissions paid by
the Registrant as part of any such transactions. However, a registered
securities broker-dealer did assist with the loan transaction in November, 1995,
described in Item 26.c., and, as a result, became entitled to a 7% cash
commission, payable by the Registrant after the lender was repaid.
All securities transactions listed for this Item 26 were made
in reliance upon the exemptions from registration provided by Rule 504 under
Section 3(b) and by Section 4(2) of the Securities Act of 1933, as amended (in
that sales were made for an aggregate of less than $1,000,000 in any 12 month
period to a small number of persons, many of whom were accredited investors, and
all of whom considered sophisticated and were required to purchase for
investment purposes only, and each of the instruments recited that they were
issued for investment purposes only).
Item 27. Exhibits.
(a) Exhibits filed and to be filed.
(i) The following Exhibits were previously filed as part
of this Registration Statement:
1.1. Form of Underwriting Agreement between the Registrant
and Tuschner & Co.,Inc.
1.3. Form of Escrow Agreement.
1.4. Form of Impoundment Agreement.
3.1. Articles of Incorporation of the Registrant, dated
March 9, 1993, with amendments.
3.2. Bylaws of the Registrant, dated March 9, 1993, as
amended May 5, 1993
4.2. Form of Warrant Agreement by and among the
Registrant, the Underwriter, and the Warrant Agent,
including a Form of Warrant Certificate.
4.3. Form of the Registrant's 10% Subordinated Debenture
Due September 30, 1996, and other dates.
4.4. Form of the Registrant's Warrant to Purchase Common
Shares, expiring November 10, 1998, and other dates.
4.5. Form of Maturity Extension Agreement for Debentures.
10.1. Stock Redemption Agreement, dated November 28, 1995,
between the Regisrant and various Lease Brothers
entities, together with exhibits thereto, namely
three promissory notes, a personal guaranty and a
security agreement.
10.2. Bridge Financing Agreement, dated November 27, 1995,
between the Registrant and Norman Winer, together
with exhibits thereto, namely Promissory Note,
Security Agreement, Guaranty of Re-Payment, form of
Subordination Agreement and form of Temporary Waiver
of Right to Put.
10.3. Form of lease with building for space for Skway Ad
platform.
10.4. Form of advertising contract for Skyway Ad.
10.5. Lease Agreement between Registrant and its lessor.
10.6. Registrant's Corporate Stock Option Plan.
10.7. Form of Executive Employment Agreement.
24.1. Consent of Silverman Olson Thorvilson & Kaufmann
Ltd., Independent Auditor.
25.1. Form of Power of Attorney, running from each of the
Registrant's directors namely Robert H. Blank,
Richard D. Kothe, Gail Emerson, Mark Verplaetse,
Kenneth A. Olsen, Steven Unverzagt, and Mark T.
Hepburn, to Robert H. Blank and Richard D. Kothe, CEO
and CFO of the Registrant, respectively, with respect
to signing of this Registration Statement and any
amendments.
27.1. Financial Data Schedule.
(ii) The following exhibits are filed as part of this
Amendment No. 1:
1.2. Form of Underwriter's Unit Purchase Option.
4.1. Form of Common Stock certificate.
5.1. Opinion of Keller & Lokken, P.A. regarding legality
of securities.
10.8 Letter Agreement with Simon Property Group.
10.9 Letter Agreement with Lasertainment Productions
International.
10.10 Joint Marketing Agreement with Skyway Publications,
Inc.
10.11 Consulting Agreement with Sun Consulting, Inc.
10.12 Bank Windsor Loan Documents.
24.1-A Consent of Silverman Olson Thorvilson & Kaufmann
Ltd., Independent Auditor, updated to a current date.
24.2. Consent of Keller & Lokken, P.A. Contained in Exhibit
5.1 to this Registration Statement.
Item 28. Undertaking.
a. Rule 415 Offering [Item 512(a) of Regulation S-B] The small
business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or
events which, individually or together,
represent a fundamental change in the
information in the registration statement;
and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
b. Equity offerings of nonreporting small business issuers [Item 512(d) of
Regulation S-B]:
The small business issuer will provide to the underwriter, at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
c. Request for Acceleration of Effective Date [Item 512(e) of Regulation S-B]:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer 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 small business issuer 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.
Signatures
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and authorized this
Amendment No. 1 to its Registration Statement to be signed on its behalf by the
undersigned, in the City of Minneapolis, State of Minnesota, on April 7, 1997.
ILLUMINATED MEDIA, INC.
/s/Robert H. Blank
--------------------------------
By: Robert H. Blank,
Chief Executive Officer
In accordance with the requirements of the Securities Act of
1933, this Amendment No. 1 to its Registration Statement was signed by the
following persons in the capacities and on the dates stated.
Signature Title Dated:
--------- ----- ------
/s/ Robert H. Blank Chief Executive Officer, April 7, 1997
- ------------------------- and Director (Principal
Robert H. Blank Executive Officer)
/s/Richard D. Kothe Chief Financial Officer, April 7, 1997
- ------------------------- President, and Director
(Principal Financial Officer,
Principal Accounting Officer)
* Director )
- ------------------------- )
Gail Emerson )
)
* Director )
- ------------------------- )
Kenneth Olsen )
)
* Director ) By: /s/ Robert H. Blank
- ------------------------- ) ---------------------------
Mark Verplaeste ) Robert H. Blank
) Attorney-in-Fact
* Director )
- ------------------------- )
Steve Unverzagt )
) April 7, 1997
* Director )
- ------------------------- )
Mark T. Hepburn )
* Executed by Robert H. Blank as Attorney-in-Fact
As filed with the Securities and Exchange Commission on April 7, 1997.
Registration No. 33-22443
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------
ILLUMINATED MEDIA INC.
----------------------------
INDEX TO EXHIBITS
EXHIBITS PAGE NO.
(i) Previously filed:
1.1. Form of Underwriting Agreement between the Registrant and
Tuschner & Co.,Inc.
1.3. Form of Escrow Agreement.
1.4. Form of Impoundment Agreement.
3.1. Articles of Incorporation of the Registrant, dated March 9,
1993, with amendments.
3.2. Bylaws of the Registrant, dated March 9, 1993, as amended May
5, 1993
4.2. Form of Warrant Agreement by and among the Registrant, the
Underwriter, and the Warrant Agent, including a Form of
Warrant Certificate.
4.3. Form of the Registrant's 10% Subordinated Debenture Due
September 30, 1996, and other dates.
4.4. Form of the Registrant's Warrant to Purchase Common Shares,
expiring November 10, 1998, and other dates.
4.5. Form of Maturity Extension Agreement for Debentures.
10.1. Stock Redemption Agreement, dated November 28, 1995, between
the Regisrant and various Lease Brothers entities, together
with exhibits thereto, namely three promissory notes, a
personal guaranty and a security agreement.
10.2. Bridge Financing Agreement, dated November 27, 1995, between
the Registrant and Norman Winer, together with exhibits
thereto, namely Promissory Note, Security Agreement, Guaranty
of Re-Payment, form of Subordination Agreement and form of
Temporary Waiver of Right to Put.
10.3. Form of lease with building for space for Skway Ad platform.
10.4. Form of advertising contract for Skyway Ad.
10.5. Lease Agreement between Registrant and its lessor.
10.6. Registrant's Corporate Stock Option Plan.
10.7. Form of Executive Employment Agreement.
24.1. Consent of Silverman Olson Thorvilson & Kaufmann Ltd.,
Independent Auditor.
25.1. Form of Power of Attorney, running from each of the
Registrant's directors namely Robert H. Blank, Richard D.
Kothe, Gail Emerson, Mark Verplaetse, Kenneth A. Olsen, Steven
Unverzagt, and Mark T. Hepburn, to Robert H. Blank and Richard
D. Kothe, CEO and CFO of the Registrant, respectively, with
respect to signing of this Registration Statement and any
amendments.
27.1. Financial Data Schedule.
(ii) The following exhibits are filed herewith:
1.2. Form of Underwriter's Unit Purchase Option.
4.1. Form of Common Stock certificate.
5.1. Opinion of Keller & Lokken, P.A. regarding legality of
securities.
10.8 Letter Agreement with Simon Property Group.
10.9 Letter Agreement with Lasertainment Productions International.
10.10 Joint Marketing Agreement with Skyway Publications, Inc.
10.11 Consulting Agreement with Sun Consulting, Inc.
10.12 Bank Windsor Loan Documents.
24.1- Consent of Silverman Olson Thorvilson & Kaufmann Ltd.,
Independent Auditor.
24.2. Consent of Keller & Lokken, P.A. Contained in Exhibit 5.1 to
this Registration Statement.