PROSPECTUS
18,483,728 Shares
HEARx LTD.
Common Stock
This Prospectus relates to up to 18,483,728 shares (the "Shares") of common
stock, par value $.10 per share (the "Common Stock"), of HEARx LTD., a Delaware
corporation (the "Company"). The Shares are issuable upon conversion of 15,000
shares of the Company's 1996 Series B-1 Convertible Preferred Stock (the "Series
B-1 Preferred Stock") and exercise of the warrants (the "Warrants") to be issued
upon such conversion, and upon conversion of 9,900 shares of the 1996 Series B-2
Convertible Preferred Stock (the "Series B-2 Preferred Stock" and, together with
the Series B-1 Preferred Stock, the "Preferred Stock"). See "Selling
Shareholders" for a complete discussion of the terms of the conversion of the
Preferred Stock. Additional Shares that may become issuable as a result of the
anti-dilution provisions of the Preferred Stock and Warrants are offered hereby
pursuant to Rule 416 under the Securities Act of 1933, as amended (the
"Securities Act"). The Company has issued, or agreed to issue, the Preferred
Stock in certain private placement transactions.
The Company will not receive any proceeds from the sale of Shares by the
Selling Shareholders, but will receive the exercise prices payable upon the
exercise of the Warrants. There can be no assurance that all or any part of the
Warrants will be exercised or that they will be exercised for cash. All expenses
incurred in connection with this offering are being borne by the Company, other
than any commissions or discounts paid or allowed by the Selling Shareholders to
underwriters, dealers, brokers or agents.
The Selling Shareholders have not advised the Company of any specific plans
for the distribution of the Shares, but it is anticipated that the Shares may be
sold from time to time in transactions (which may include block transactions) on
the American Stock Exchange (the "AMEX") at the market prices then prevailing.
Sales of the Shares may also be made through negotiated transactions or
otherwise. The Selling Shareholders and the brokers and dealers through which
the sales of the Shares may be made may be deemed to be "underwriters" within
the meaning set forth in the Securities Act, and their commissions and discounts
and other compensation may be regarded as underwriters' compensation.
See "Plan of Distribution."
The Common Stock is traded on the AMEX under the symbol "EAR." The closing
price of the Common Stock as reported on the AMEX on July 18, 1996, was $4.625
per share.
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE DISCUSSION
UNDER "RISK FACTORS" ON PAGES 6-10.
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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.
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The date of this Prospectus is August 13, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Electronic filings of such
documents are publicly available on the Commission's Web Site at
http://www.sec.gov. Copies of such materials also can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, copies are available for
inspection at the American Stock Exchange, 86 Trinity Place, New York, New York
10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement or the exhibits thereto.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information contained or incorporated by reference in the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document filed or incorporated by reference as
an exhibit to the Registration Statement 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. For further information,
reference is hereby made to the Registration Statement and exhibits thereto,
copies of which may be inspected at the offices of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 or obtained from the Commission at the same
address at prescribed rates.
INCORPORATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended December 29, 1995,
filed pursuant to Section 13(a) of the Exchange Act, as amended on Form
10-K/A and as further amended on Form 10-K/A2 (the "1995 Form 10-K"),
(2) Quarterly Report on Form 10-Q for the quarter ended March 29, 1996,
filed pursuant to Section 13(a) of the Exchange Act, as amended on Form
10-Q/A and as further amended on Form 10-Q/A2,
(3) Current Report on Form 8-K dated May 17, 1996, filed pursuant to
Section 13(a) of the Exchange Act,
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(4) Quarterly Report on Form 10-Q for the quarter ended June 28, 1996,
filed pursuant to Section 13(a) of the Exchange Act; and
(5) The description of Common Stock which is contained in the Company's
Registration Statement on Form 8-A filed under the Exchange Act.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof
shall hereby be deemed to be incorporated by reference in this Prospectus and to
be a part hereof from the date of filing of such documents. See "Available
Information." Any statement contained herein or in a document incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document incorporated or
deemed to be incorporated herein by reference, which statement is also
incorporated herein by reference, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (EXCLUDING EXHIBITS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE
INFORMATION INCORPORATED HEREIN) WILL BE PROVIDED BY FIRST CLASS MAIL WITHOUT
CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST BY SUCH PERSON TO HEARx LTD., 1250 NORTHPOINT PARKWAY, WEST PALM BEACH,
FLORIDA 33407, ATTENTION: TOMMY KEE, SECRETARY (TELEPHONE: (407) 478-8770).
No person has been authorized in connection with this offering to give any
information or to make any representation not contained or incorporated by
reference in this Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
the Selling Shareholders or any other person. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, any
securities other than those to which it relates, nor does it constitute an offer
to sell or a solicitation of an offer to purchase by any person in any
jurisdiction in which it is unlawful for such person to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Prospectus contains certain "forward looking" statements. The Company
desires to take advantage of the new "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all of such forward-looking statements. Specifically, the Company
refers to the forward-looking statements about the Company's future growth and
expansion (see "Risk Factors -- Recent and Future Expansion; Management of
Growth").
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RISK FACTORS
The following factors should be carefully considered in evaluating the
Company and its business before purchasing any of the Shares offered hereby.
Recent and Future Expansion; Management of Growth
The Company has expanded its network of hearing care centers recently and
plans to continue such expansion. The Company intends to fund this expansion
with the proceeds from the offering of the Preferred Stock, earnings and, to the
extent available on favorable terms to the Company, commercial lines of credit.
The Company's operating results will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from this expansion. In addition, this expansion will increase the
demands on the Company's management, technical, financial and other resources.
If the Company is unable to manage growth effectively, or to integrate fully its
infrastructure systems throughout its network of hearing care centers, its
operating results may be adversely affected.
History of Operating Losses
The Company has incurred losses in each year since its organization. There
can be no assurance that the Company will achieve profitability in the near or
long term.
Use of Proceeds
The Company will not receive any proceeds from the offer or sale of the
Shares by the Selling Shareholders, but has or will receive proceeds from the
sale of the Preferred Stock in an aggregate amount of $24,900,000 less expenses
of the offering, and will receive proceeds, if any, from the exercise of the
Warrants. The Warrants may be exercised for the purchase of up to 3,750,000
shares of Common Stock at a per share exercise price of $8.00, for an aggregate
of $30,000,000. The Company intends to use the proceeds from the sale of the
Preferred Stock and the proceeds, if any, from the exercise of the Warrants to
fund the Company's expansion, to redeem certain preferred stock and related
warrants and generally to fund the operations of the Company. There can be no
assurance that any of the Warrants will be exercised.
No Dividends
The Company has not paid any cash dividends on its Common Stock and does
not anticipate paying any such dividends in the foreseeable future.
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Reliance on Senior Management
The operations of the Company are dependent in large part upon the efforts
of Paul A. Brown, M.D., Chairman of the Board and Chief Executive Officer, and
Stephen J. Hansbrough, President and Chief Operating Officer. The loss of the
services of Dr. Brown or Mr. Hansbrough could adversely affect the conduct and
operation of the Company's business. The Company has purchased a "key man"
insurance policy on Dr. Brown's life in the amount of $3,000,000 for the benefit
of the Company.
Competition
The hearing care industry is highly fragmented with approximately 11,000
practitioners providing testing and dispensing products and services. Most
competitors are small retailers generally focusing on the sale of hearing aids
without providing comprehensive audiometric testing and other professional
services. Among the larger distributors of hearing aids are: (i) Bausch & Lomb
Inc., a hearing aid manufacturer whose distribution system is through a national
network of over 1,000 franchised stores (Miracle Ear) including 400 located in
Sears Roebuck & Co. stores; and (ii) Beltone Electronics Corp., a
privately-owned hearing aid manufacturer that distributes its products primarily
through its network of approximately 600 franchised dealers. A number of these
stores and dealers are located in the areas the Company serves. Although the
Company believes it offers more comprehensive services and products, there can
be no assurance that these large, established companies, which have far greater
resources than the Company, will not capture the market targeted by the Company.
Nor can there be any assurance that the hearing care market can be consolidated
successfully by the Company or its competitors.
Renewal of Agreements with Health Insurance and Managed Care Organizations
Since 1991, the Company has entered into agreements with certain health
insurance and managed care organizations to provide hearing care products and
services, and has established hearing care centers in the related market areas.
The terms of a number of these agreements are to be renegotiated annually, and
most of these agreements may be terminated by either party on 90-days notice at
any time. The early termination or failure to renew the agreements could
adversely affect the operation of the hearing care centers located in the
related market areas. In addition, the early termination or failure to renew the
agreements which provide for payment to the Company on a per capita basis would
cause the Company to lower its estimates of revenues to be received over the
life of the agreements and could have an adverse effect on the Company's results
of operations. As previously disclosed, effective May 31, 1996, Humana Health
Care Plans of Florida ("Humana") declined to renew its contract with the Company
to provide coverage to Humana medicare members living on the east coast of
Florida (the contract to service Humana medicare members on the west coast of
Florida was unaffected). Total revenues from Humana east coast members were
approximately $2 million in 1995, or 18% of the Company's total revenues. While
the Company has obtained new contracts in other markets which should more than
offset the loss of revenues represented by the Humana east coast contract
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non-renewal, there can be no assurance that other contracts will not be the
subject of a non-renewal or early termination. The Company is aware of no other
potential contract terminations at this time.
Reliance on Manufacturers and Qualified Audiologists
Through its hearing care centers, the Company makes available to customers
hearing aids supplied by approximately six major manufacturers, as well as
hearing enhancement devices manufactured by other companies. The Company relies
on these manufacturers to supply such products and a significant disruption in
supply from any or all of these manufacturers could adversely affect the
Company's business. There are currently approximately 40 manufacturers of
hearing aids and related hearing enhancement devices worldwide however, so that
in the event of disruption of supply from one or more of the Company's current
suppliers, the Company believes it could obtain comparable products from other
manufacturers. There can be no assurance, however, that such products could be
obtained at prices favorable to the Company or on a timely basis. The Company
has not experienced any significant disruptions in supply in the past. In
addition, the Company's centers employ audiologists, and the Company
distinguishes itself in the industry by having qualified audiologists available
in all of the Company's centers to provide on-site patient diagnosis and related
service. The inability of the Company to attract and retain qualified
audiologists may reduce the Company's ability to distinguish itself from
competing networks of hearing aid retailers and thus adversely affect its
business. There are currently 2,000 audiologists in the United States and
approximately 200 educational institutions in the United States which offer
audiology degree/certification programs. Management believes that it will be
able to attract and retain qualified audiologists sufficient to staff its
centers for the foreseeable future.
Product and Professional Liability
In the ordinary course of its business, the Company may be subject to
product and professional liability claims alleging the failure of, or adverse
effect claimed to have been caused by, products sold or services provided by the
Company. The Company maintains insurance at a level which the Company believes
to be adequate. A successful claim in excess of the policy limits of the
Company's liability insurance could adversely affect the Company. As the
distributor of products manufactured by others, the Company believes it would
properly have recourse against the manufacturer in the event of a product
liability claim; however, there can be no assurance that recourse against a
manufacturer by the Company would be successful, or that any manufacturer will
maintain adequate insurance or otherwise be able to pay such liability.
Regulation
The practice of audiology and the dispensing of hearing aids are not
presently regulated on the Federal level. The sale of hearing aids, however, is
subject to certain limited regulations promulgated by the United States Food and
Drug Administration. Generally, state regulations, where they exist, are
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concerned primarily with the formal licensure of audiologists and of those who
dispense hearing aids and with practices and procedures involving the fitting
and dispensing of hearing aids. There can be no assurance that regulations do
not exist in jurisdictions in which the Company plans to open centers or will
not be promulgated in states in which the Company currently operates centers or
at the Federal level which may have a material adverse effect upon the Company.
Such regulations might include stricter licensure requirements for dispensers of
hearing aids, inspection of centers for the dispensing of hearing aids and the
regulation of advertising by dispensers of hearing aids. The Company knows of no
current or proposed regulations with which it, as currently operated, could not
comply.
Possible Volatility of Prices
The market price of the Common Stock has changed significantly since
October 1995. The highest bid and the lowest offer on the Nasdaq Bulletin Board
from October 2, 1995 until the Company's Common Stock was listed on the American
Stock Exchange on March 15, 1996 was $5.8125 and $.82 per share, respectively.
Since the stock began trading on the American Stock Exchange, the stock has
traded as high as $7.375 and as low as $4.00 per share. Future changes in the
market price of the Common Stock may bear no relation to the Company's results
of operations.
Potential Dilution; Shares Eligible for Future Sale; Possible Effect on
Additional Equity Financing
A substantial number of shares of Common Stock (including the Shares
offered hereby) are issuable by the Company upon the conversion of convertible
preferred stock (including the Preferred Stock) and the exercise of warrants
(including the Warrants) and options which the Company has issued or agreed to
issue, which would result in substantial dilution to a shareholder's percentage
ownership interest in the Company and could adversely affect the market price of
the Common Stock. Under the applicable conversion formulas of the convertible
preferred stock, (i) the number of shares of Common Stock issuable upon
conversion is inversely proportional to the market price of the Common Stock at
the time of conversion (i.e., the number of shares issuable increases as the
market price of the Common Stock decreases); (ii) there is no cap on the number
of shares of Common Stock which may be issuable; and (iii) a minimum of
10,020,000 shares are issuable (based on a fixed conversion price of $5.00 per
share). In addition, the number of shares issuable upon the conversion of the
convertible preferred stock and the exercise of warrants and options is subject
to adjustment upon the occurrence of certain dilutive events.
On July 12, 1996, there were issued and outstanding a total of 66,940,738
shares of Common Stock. If the Preferred Stock and the Warrants were deemed
converted and exercised, as the case may be, as of July 12, 1996 (based on the
fixed conversion price of $5.00 per share) there would be issuable 7,980,000
shares of Common Stock. In addition, if all other convertible preferred stock,
warrants and options which the Company has issued also were deemed converted
and/or exercised on July 12, 1996, there would be issuable approximately
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23,726,183 shares of Common Stock. Upon all such issuances, there would be
outstanding 98,895,696 shares of Common Stock (including the Shares offered
hereby). Of these, the Company has registered for resale 18,483,728 shares (the
Shares offered hereby) and has granted demand registration rights in respect of
approximately 33,774,908 additional shares. The sale or availability for sale of
a significant number of shares of Common Stock in the public market could
adversely effect the market price of the Common Stock. In addition, certain
holders of outstanding shares of preferred stock have rights to approve and/or
participate in certain types of future equity financing by the Company. The
availability to the Company of additional equity financing, and the terms of any
such financing, may be adversely affected by the foregoing.
Continued AMEX Listing
The Common Stock was listed and began trading on the AMEX on March 15,
1996. The AMEX will consider delisting a company's securities if, among other
things, the company fails to maintain stockholder's equity of at least
$2,000,000 if the company has sustained losses from continuing operations or net
losses in two of its three most recent fiscal years; the company fails to
maintain stockholder's equity of $4,000,000 if the company has sustained losses
from continuing operations or net losses in three of its four most recent fiscal
years; or the company has sustained losses from continuing operations or net
losses in its five most recent fiscal years. If, for any reason, the Company
were unable to meet such requirements, the Common Stock could be delisted from
the AMEX. In that event, trading, if any, in the Common Stock would be conducted
in the over-the-counter market and the ability of holders to sell or otherwise
dispose of such shares could be adversely affected. In addition, if such
delisting were to occur, transactions in shares of the Common Stock could become
subject to the Commission's "penny stock" regulations. The Company has no reason
to believe that its Common Stock may be delisted from the AMEX.
"Penny Stock" Regulations
The Commission has adopted regulations that define a "penny stock" to
include any over-the-counter equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. The regulations require the
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prescribed by the Commission relating to the penny stock market, subject to
certain exemptions. A broker-dealer effecting transactions in penny stocks must
disclose the commissions payable to both the broker-dealer and any registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing the recent price information for the penny stock held in
the account and information on the limited market in penny stocks. If the penny
stock regulations were to become applicable to transactions in shares of the
Common Stock, they could adversely affect the ability of holders to sell or
otherwise dispose of such shares.
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Potential Change in Voting Control of the Company
As of March 29, 1996, the directors and executive officers of the Company
beneficially owned, as a group, approximately 20.2% of the 65,909,183 shares of
Common Stock then outstanding. If all convertible preferred stock, warrants and
options which the Company has issued or agreed to issue were deemed converted
and/or exercised on July 12, 1996, the directors and executive officers would
beneficially own approximately 13% of the then outstanding Common Stock. See "
- -- Potential Dilution; Shares Eligible for Future Sale; Possible Effect on
Additional Equity Financing." In the event of a change in voting control of the
Company, the current directors and officers of the Company could be replaced.
THE COMPANY
The Company operates a network of hearing care centers which provide a wide
range of audiological products and services for the hearing impaired. The
Company's strategy focuses on contracting with managed care and health insurance
companies to provide to their members and beneficiaries high quality hearing
care utilizing state-of-the-art facilities with a wide range of diagnostic and
rehabilitative services, qualified professional staff and hearing education
learning programs. The Company also provides such quality hearing care to the
general population at the Company's centers.
The Company currently operates more than 50 centers primarily located in
Connecticut, Florida, New York, and New Jersey. Over the next several years, the
Company's primary emphasis, depending on the availability of capital, will be
opening (or selectively acquiring) additional Company-owned centers in these
states.
The Company's principal executive offices are located at 1250 Northpoint
Parkway, West Palm Beach, Florida 33407, and its telephone number is (407)
478-8770.
RECENT DEVELOPMENTS
In February 1996 the Company applied for listing of its Common Stock on the
American Stock Exchange (the "AMEX"). The AMEX approved the Company's
application, and on March 15, 1996, the Company's Common Stock began trading on
the AMEX. Pursuant to the terms of the preferred stock held by Minnesota Mining
and Manufacturing Company ("3M") or for which 3M had options or warrants, upon
the listing of the Company's Common Stock on the AMEX, all such preferred stock
automatically converted into Common Stock. All such preferred stock has now been
cancelled.
In an effort to obtain funding for the expansion of the Company's centers
in compliance with its managed care and other institutional provider contracts,
the Company entered into agreements for a side-by-side offering of its
securities pursuant to Regulation D and Regulation S, each promulgated under the
Securities Act of 1933, as amended. The Preferred Stock and Warrants were the
subject of the Regulation D offering. The first of two contemplated closings of
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the Regulation D offering was completed on May 7, 1996. In that closing, the
Company sold to the investors (the Selling Shareholders hereunder) a total of
7,500 shares of Series B-1 Preferred Stock and 4,950 shares of Series B-2
Preferred Stock for an aggregate purchase price of $12,450,000. The second
closing, to which the investors are committed upon the effectiveness of the
Registration Statement of which this Prospectus is a part, will involve the
purchase and sale of an additional 7,500 shares of Series B-1 Preferred Stock
and 4,950 shares of Series B-2 Preferred Stock for an aggregate purchase price
of $12,450,000.
In the related Regulation S offering, the Company sold 5,100 shares of a
convertible preferred stock (the "Series A Preferred Stock") for a total
purchase price of $5,100,000.
Certain of the proceeds from the May 1996 financing, plus some of the
Company's then existing funds, were used to redeem all of the shares of the 1996
Senior Preferred Stock and certain related warrants (a total redemption price to
the Company of $6,040,000). As a result of the redemption of the 1996 Senior
Preferred Stock, the only outstanding preferred stock of the Company is that
which was issued in connection with the May 1996 financing.
The balance of the net proceeds to the Company from the May 1996 financing,
and the proceeds from the anticipated closing upon the effectiveness of the
Registration Statement, will be used by the Company to fund its expansion
program and for general corporate purposes.
In connection with these private placements, the Company expects to report
a noncash charge against earnings (loss) available to common stockholders of
approximately $9,000,000 during 1996. This charge relates to the discounted
conversion price for the shares of Common Stock issuable on conversion of the
Preferred Stock, and will only impact the calculation of earnings per share
related to the Common Stock.
Effective May 31, 1996, Humana Health Care Plans of Florida ("Humana")
declined to renew its contract with the Company to provide coverage to Humana
Medicare members living on the east coast of Florida. The contract between
Humana and the Company to provide hearing care to its Medicare members on the
west coast of Florida remains in place at this time and is unaffected by this
non-renewal. While the cancellation represents the loss of approximately
$2,000,000 in annual revenues, the Company has obtained in 1996 sufficient new
business with other providers to replace those lost Humana revenues.
Nevertheless, there can be no assurance that other contracts will not be the
subject of a non-renewal or early termination. The Company is aware of no other
potential contract terminations at this time.
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SELLING SHAREHOLDERS
None of the Selling Shareholders is an affiliate of the Company or, unless
otherwise indicated in the footnotes to the following table, has had any
position, office or other material relationship with the Company or any of its
affiliates within the past three years except as a shareholder of the Company.
The following table sets forth information with respect to the Selling
Shareholders, based upon information provided by them.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior to Offering Shares Beneficially
Name of Selling Shareholder <F1> Shares Being Offered Owned After Offering <F2>
- -----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
Capital Ventures International 3,600,000 <F3> 3,600,000 0
Nelson Partners 1,400,000 <F3> 1,400,000 0
Olympus Securities, Ltd. 1,000,000 <F3> 1,000,000 0
Newsun Limited 500,000 <F4> 500,000 0
Halifax Fund L.P. 400,000 <F4> 400,000 0
Wood Gundy London Limited 300,000 <F4> 300,000 0
Zanett Lombardier, Ltd. <F5> 200,000 <F4> 200,000 0
OTATO Limited Partnership 200,000 <F4> 200,000 0
Lake Management LDC 140,000 <F4> 140,000 0
KA Investments LDC 60,000 <F4> 60,000 0
OVDA Fund, Ltd. 50,000 <F4> 50,000 0
M.S.I. Investments Limited 50,000 <F4> 50,000 0
A.J. Gesundheit 50,000 <F4> 50,000 0
Charles B. Krusen <F6> 30,000 <F4> 30,000 0
- ---------------------------
<FN>
<F1> Assumes that all shares of Series B-1 Preferred Stock and Series B-2 Preferred Stock which the Selling Shareholders are
committed to purchase are purchased and that the Preferred Stock is converted at the fixed conversion price of $5.00 with the
Company redeeming the shares otherwise issuable in respect of the 8% premium. Pursuant to the terms of the Preferred Stock and
the Warrants, the Preferred Stock is convertible and the Warrants are exercisable by the holders thereof only to the extent
that the number of shares of Common Stock thereby issuable, together with the number of shares of Common Stock then held by
such holder and its affiliates (not including shares underlying unconverted shares of Preferred Stock and unexercised Warrants)
would not exceed 4.9% of the then outstanding Common Stock as determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. Accordingly, the number of shares of Common Stock set forth below for each Selling
Shareholder may exceed the actual number of shares of Common Stock that such Selling Shareholder could own beneficially at any
given time through its ownership of the Preferred Stock and Warrants.
<F2> Assumes all Shares offered hereby are sold to persons who are not affiliates of the Selling Shareholders. The Selling
Shareholders may, but are not required to, sell all Shares offered hereby.
<F3> Includes Shares issuable upon conversion of shares of Series B-1 Preferred Stock and upon exercise of Warrants issuable upon
such conversion.
<F4> Includes Shares issuable upon conversion of shares of Series B-2 Preferred Stock.
<F5> Zanett Capital, Incorporated received from the Company a finders fee in the amount of approximately $1,053,000 in connection
with the sale of the Preferred Stock. Zanett Lombardier, Ltd. is an affiliate of Zanett Capital, Incorporated.
<F6> Zanett Capital, Incorporated received from the Company a finders fee in the amount of approximately $1,053,000 in connection
with the sale of the Preferred Stock. Charles B. Krusen has been an employee of Zanett Securities Corp., an affiliate of Zanett
Capital, Incorporated, since July 15, 1996 and will receive a portion of this finders fee as compensation for his efforts as a
placement agent in connection with the sale of the Preferred Stock.
</TABLE>
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The Shares offered hereby are issuable upon the conversion of 15,000 shares
of the Series B-1 Preferred Stock, the exercise of the Warrants issuable upon
such conversion, and the conversion of 9,900 shares of the Series B-2 Preferred
Stock. Pursuant to the terms of the Securities Purchase Agreement among the
Company and the Selling Shareholders, the Selling Shareholders purchased one
half of the shares of Preferred Stock at a closing held on May 7, 1996. The
remaining one-half of the shares of Preferred Stock are purchasable by each
Selling Shareholder for an aggregate purchase price of $12,450,000, upon a
second closing which is conditioned upon, among other things, the effectiveness
of the Registration Statement of which this Prospectus is a part. No condition
to such closing is within the Selling Shareholders' control.
Upon conversion of the Preferred Stock, holders will be entitled to receive
a number of shares of Common Stock determined by dividing the stated value of
the Preferred Stock ($1,000 per share), plus a premium in the amount of 8% per
annum of the stated value from the date of issuance (unless the Company chooses
to redeem the shares otherwise issuable in respect of that premium), by a
conversion price equal to the lesser of (i) $5.00, and (ii) a percentage
(ranging from 100% on or before July 7, 1996, to 75% after May 7, 1997) of the
average of the closing bid prices for shares of Common Stock for the ten trading
day period immediately prior to conversion, subject to adjustment upon the
occurrence of certain dilutive events. The Preferred Stock may be converted by
holders at any time prior to May 7, 1999, and must be converted on that date.
Upon conversion of the Series B-1 Preferred Stock, holders also will be entitled
to receive Warrants to acquire, at an exercise price of $8.00 per share,
additional shares of Common Stock equal to the number of shares of Common Stock
issuable to them upon such conversion, up to a maximum of 3,750,000 shares and
subject to certain other limitations and to adjustment upon the occurrence of
certain dilutive events. The Warrants may be exercised by the holders at any
time prior to the fifth anniversary of their issuance. The foregoing summary is
qualified in its entirety by the terms of the Preferred Stock and Warrants.
Under the applicable conversion formula, the number of shares of Common
Stock issuable upon conversion of the Preferred Stock will be higher if the
market price of the Common Stock at the time of conversion is lower, and there
is no cap on the number of shares of Common Stock which may be issuable. In
addition, the number of shares issuable upon the conversion of the Preferred
Stock and the exercise of the Warrants is subject to adjustment upon the
occurrence of certain dilutive events. The 18,483,728 Shares offered hereby
represent the number of shares which would be issuable if the Preferred Stock
were converted at a conversion price equal to $1.69 per share, the maximum
number of Warrants were issued (3,750,000) and exercised, and no limitations or
adjustments were applicable. (Additional Shares that may become issuable as a
result of the anti-dilution provisions of the Preferred Stock and Warrants are
also offered hereby pursuant to Rule 416 under the Securities Act.)
PLAN OF DISTRIBUTION
The Shares offered hereby may be offered and sold from time to time by the
Selling Shareholders, or by pledgees, donees, transferees or other successors in
interest. Such offers and sales may be made from time to time on the AMEX or
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otherwise, at prices and on terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. The methods by which
the Shares may be sold may include, but not be limited to, the following: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account; (c) an exchange
distribution in accordance with the rules of such exchange; (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
(e) privately negotiated transactions; (f) short sales; and (g) a combination of
any such methods of sale. In effecting sales, brokers or dealers engaged by the
Selling Shareholders may receive commissions or discounts from the Selling
Shareholders or from the purchasers in amounts to be negotiated immediately
prior to the sale. The Selling Shareholders may also sell such Shares in
accordance with Rule 144 under the Securities Act.
The Company has agreed to use its best efforts to maintain the
effectiveness of the registration of the Shares offered hereby until the earlier
of the date upon which all of the Shares offered hereby have been sold or the
date on which the Shares offered hereby, in the opinion of counsel, may be
immediately sold by the Selling Shareholders without registration.
The Selling Shareholders and any brokers participating in such sales may be
deemed to be underwriters within the meaning of the Securities Act. There can be
no assurance that the Selling Shareholders will sell any or all of the Shares
offered hereby.
The Company is bearing all of the costs relating to the registration of the
Shares. Any commissions, discounts or other fees payable to a broker, dealer,
underwriter, agent or market maker in connection with the sale of any of the
Shares will be borne by the Selling Shareholders. The Company will not receive
any of the proceeds from this offering, but will receive the exercise price
payable upon the exercise of the Warrants if the Warrants are exercised for
cash.
Pursuant to the registration rights granted to the Selling Shareholders in
connection with the sale by the Company of the Preferred Stock, the Company has
agreed to indemnify the Selling Shareholders, any person who controls a Selling
Shareholder, and any underwriters for the Selling Shareholders, against certain
liabilities and expenses arising out of or based upon the information set forth
or incorporated by reference in this Prospectus, and the Registration Statement
of which this Prospectus is a part, including liabilities under the Securities
Act. Any commissions paid or any discounts or concessions allowed to any broker,
dealer, underwriter, agent or market maker and, if any such broker, dealer,
underwriter, agent or market maker purchases any of the Shares as principal, any
profits received on the resale of such Shares, may be deemed to be underwriting
commissions or discounts under the Securities Act.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby has been passed
upon for the Company by Bryan Cave LLP, Washington, D.C.
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EXPERTS
The consolidated financial statements and schedules of the Company as of
December 29, 1995, and December 30, 1994, and for the years ended December 29,
1995, December 30, 1994, and September 30, 1993, and the three months ended
December 31, 1993, have been audited by BDO Seidman, LLP, independent certified
public accountants, as indicated in their report with respect thereto, and are
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 29, 1995, and are incorporated herein by reference, in reliance upon
the authority of such firm as experts in accounting and auditing in giving said
reports.
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