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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-23263
PROSPECTUS
6,450,000 Shares*
KOO KOO ROO, INC.
COMMON STOCK
(Par Value $.01 per Share)
------------------------
All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), of Koo Koo Roo, Inc., a Delaware corporation (the "Company"), offered
hereby (the "Shares") are being offered by certain selling securityholders of
the Company (the "Selling Stockholders") as described more fully herein. The
Company will not receive any of the proceeds from the sale of the Shares offered
hereby. All expenses of this offering will be paid for by the Company except
for commissions, fees and discounts of any underwriters, brokers, dealers or
agents retained by the Selling Stockholders. The Common Stock is traded on the
Nasdaq National Market under the symbol "KKRO." On June 16, 1997, the last
reported sale price of the Common Stock on the Nasdaq National Market was
$6.25 per share. Investors are urged to obtain current market data. See "Use
of Proceeds," "Selling Stockholders" and "Plan of Distribution."
* The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of: (i) all shares of Common Stock issuable upon conversion of or
otherwise in respect of 290,000 shares of the Registrant's 6% Adjustable
Convertible Preferred Stock, par value $.01 and liquidation preference $100 per
share (the "Series B Convertible Preferred Stock"), issued in a private
placement in February 1997 (the "1997 Private Placement"); (ii) all shares of
Common Stock issuable upon conversion of or otherwise in respect of 29,000
shares of Series B Convertible Preferred Stock issuable upon the exercise of
warrants (the "Series B Convertible Preferred Stock Warrants") issued in
connection with the foregoing private placement; (iii) all shares of Common
Stock issuable upon conversion of shares of Series B Convertible Preferred Stock
issuable, in lieu of cash, as dividends in respect of shares of Series B
Convertible Preferred Stock; (iv) 181,372 shares of Common Stock originally
issued in other private placement transactions; and (v) 545,000 shares of Common
Stock issuable upon exercise of outstanding options and warrants originally
issued in other private placement transactions. The number of shares of Common
Stock indicated to be issuable in connection with such transactions and offered
for resale hereby is an estimate based upon the market price of the Common Stock
set forth above, is subject to adjustment and could be materially less or more
than such estimated amount depending upon factors which cannot be predicted by
the Company at this time, including, among others, the future market price of
the Common Stock and the decisions by the holders of Series B Convertible
Preferred Stock as to when to convert such shares. If, however, the above-noted
market price of the Common Stock were used to determine the number of shares
issuable as of the first date on which the Series B Convertible Preferred Stock
may be converted, the Company would be obligated to issue a total of
approximately 5,720,000 shares of Common Stock if all 319,000 shares of
Series B Convertible Preferred Stock outstanding or issuable upon the exercise
of Series B Convertible Preferred Stock Warrants were converted on such dates.
This presentation is not intended to constitute a prediction as to the future
market price of the Common Stock or as to when holders will elect to convert
shares of Series B Convertible Preferred Stock into shares of Common Stock. See
"Risk Factors--Effect of Conversion of Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock" and "Description of Capital Stock."
-----------------------------
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. Accordingly, prospective investors should carefully
consider the factors set forth under the caption "Risk Factors" on Page 8 of
this Prospectus.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is June 16, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational reporting 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"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities of the Commission located at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at the New York Regional
Office of the Commission, Seven World Trade Center, Suite 1300, New York, New
York 10048, and at the Chicago Regional Office of the Commission, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511, or by
way of the Commission's Internet address, http://www.sec.gov. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Such reports and other information may also be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the registration of the shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the contents of any contract or other
documents referred to herein or therein are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or such other documents, which may be
obtained from the Commission as indicated above upon payment of the fees
prescribed by the Commission. Each of such statements is qualified in its
entirety by such reference.
FORWARD LOOKING STATEMENTS
The forward looking statements and comments contained in this Prospectus
concerning, among other things, the prospects for the Company to grow rapidly
and attain profitable operations, are necessarily subject to risks and
uncertainties, some of which are significant in scope and nature. Actual
results will be dependent upon many factors the outcome of which cannot be
predicted as of the date of this Prospectus. The Company believes that it has
summarized the most significant of such factors of which it is aware under the
caption "Risk Factors." Accordingly, prospective investors should carefully
consider such Risk Factors, which are provided commencing on Page 8 of this
Prospectus, in addition to the other information provided herein and
incorporated herein by reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are incorporated herein by reference: (i) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996; (ii) the
Company's Amendment No. 1 to Form 10-K on Form 10-K/A for the fiscal year ended
December 31, 1996; (iii) the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1997; (iv) the Company's Current Reports on Form 8-K
dated February 27, 1997, March 6, 1997, April 10, 1997, May 2, 1997 and June 3,
1997; and (v) the Company's Proxy Statements dated March 14, 1997 and May 20,
1997. In addition, each document filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to termination of the offering of the Shares shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date such document is filed with the Commission.
Any statement contained herein, or any document, all or a portion of which
is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the
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Registration Statement and this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document that also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of the Registration
Statement or this Prospectus. All information appearing in this Prospectus is
qualified in its entirety by the information and financial statements (including
notes thereto) appearing in the documents incorporated herein by reference.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (other than exhibits thereto) are
available without charge, upon written or oral request by any person to whom
this Prospectus has been delivered, from Ronald D. Garber, General Counsel and
Secretary, 11075 Santa Monica Blvd., Suite 225, Los Angeles, California 90025,
telephone number (310) 479-2080.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus. Without limiting the generality of the foregoing,
prospective investors should carefully consider the factors set forth under the
caption "Risk Factors."
The Company
Koo Koo Roo, Inc. (the "Company") operates restaurants in the emerging food
service category of fresh, convenient meals. The restaurants feature the
Company's proprietary Original Skinless Flame-Broiled Chicken(TM), fresh oven-
roasted hand-carved turkey, country herb rotisserie chicken, made to order
tossed salads, specialty sandwiches on fresh baked rolls, a signature vegetable
soup and more than 23 side dishes including hand-mashed potatoes, stuffing,
steamed green beans and other vegetables, rices and grains, all prepared fresh
in small batches on-site throughout the day. As of May 31, 1997, the Company
operated 31 Koo Koo Roo restaurants.
The Company's restaurants are designed to appeal to consumers who look for
good tasting, freshly prepared food, and who also appreciate menu items that are
wholesome and healthy. The products are easy to understand, high in quality and
generally low in fat, calories and cholesterol, without the negative connotation
or taste of "health food." The sights and smells of fresh food preparation,
such as turkey carving and salad tossing, are displayed in glass enclosed
stations featuring "chefs" in restaurant whites and toques.
Over the past several years, executive management, together with the
Company's corporate chef and professional designers, developed the layout, menu
and appearance of the current prototype store, referred to as the Koo Koo Roo
California Kitchen(TM) concept. The performance and continuing improvement of
this concept led management to plan for a rapid expansion starting in 1995 and
to focus on Company ownership or joint venture relationships rather than
franchising. The Company is presently emphasizing growth through the development
of additional Koo Koo Roo California Kitchen(TM) stores which will be either
owned and operated by the Company or owned in partnership with domestic and
international joint venture partners. The Company intends to act
opportunistically to establish additional joint venture arrangements and make
restaurant acquisitions and may also grow through the acquisition of
complementary businesses or by virtue of strategic alliances. Although the focus
in 1997 will be on Company-owned restaurants, the Company may pursue additional
joint ventures, franchising and/or strategic alliances.
The Company also owns 90% of the outstanding capital stock of Color Me
Mine, Inc. ("Color Me Mine"), a chain of paint-your-own ceramics studios. As of
May 31, 1997, there were ten Company-owned Color Me Mine studios, three
franchised studios and five joint venture studios open and operating.
The Company's principal executive offices are located at 11075 Santa Monica
Boulevard, Suite 225, Los Angeles, California 90025 and its telephone number is
(310) 479-2080.
Recent Developments
On February 27, 1997, the Company completed a private placement transaction
in which the Company received gross proceeds of $29.0 million in connection with
the issuance of 290,000 shares of its Series B Convertible Preferred Stock. In
connection with the private placement, the Company also agreed to issue warrants
to purchase 29,000 shares of Series B Convertible Preferred Stock at $100 per
share. The number of shares of Common Stock issuable upon conversion of the
Series B Convertible Preferred Stock, including the shares of Series B
Convertible Preferred Stock issuable upon exercise of the Series B Convertible
Preferred Stock Warrants, is subject to adjustment and will depend upon factors
which cannot be predicted
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by the Company at this time including, among other things, the future market
price of the Common Stock and the decisions by holders of shares of Series B
Convertible Preferred Stock as to when to convert such shares. See "Risk
Factors--Effect of Conversion of Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock" and "Description of Capital Stock."
On April 10, 1997, the Company's Board of Directors approved a plan for the
repurchase of up to 1.0 million shares of the Company's Common Stock. As of the
date of this Prospectus, the Company has repurchased approximately 27,500 shares
of Common Stock at an aggregate purchase price of approximately $110,000. The
Company cannot estimate the market price per share at which additional shares of
Common Stock would be repurchased, if any. However, if the Company repurchased
all 1.0 million shares of Common Stock at the price per share set forth on the
cover page of this Prospectus, the aggregate purchase price for such repurchases
would be approximately $6.5 million. The Company expects to finance the
repurchase of additional shares of Common Stock, if any, through working
capital.
On May 19, 1997, the Company acquired, out of bankruptcy, 14 Hamburger
Hamlet restaurants for total consideration consisting of $9.70 million in cash
and 150,000 restricted shares of Common Stock plus the assumption of $250,000 of
debt as well as the assumption of the related real property leases and the
payment of transaction fees and expenses. Ten of the fourteen restaurants are
located in California and the remaining four are located in the Washington, D.C.
Beltway area. The Company financed the acquisition with cash on hand. See
"Risk Factors--Management of Growth" and "Recent Developments."
On May 20, 1997, Koo Koo Roo Canada announced that it opened its first Koo
Koo Roo California Kitchen(TM) restaurant in Toronto, Canada. Koo Koo Roo Canada
is a joint venture, 60% of which is owned by local Canadian businessmen and 40%
of which is owned by Koo Koo Roo, Inc.
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The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by the
Selling Stockholders (estimate).......... 6,450,000 shares (1)
Shares of Common Stock Outstanding
Prior to the Offering.................... 18,077,817 shares (2)
Use of Proceeds.......................... The proceeds from the sale of the
shares of Common Stock offered
hereby are solely for the account of
the Selling Stockholders.
Accordingly, the Company will
receive none of the proceeds from
sales thereof. See "Use of
Proceeds."
Nasdaq National Market Common Stock
Symbol.................................. KKRO
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</TABLE>
(1) As set forth in the text on the cover of this Prospectus, this offering
includes the resale of such presently indeterminate number of shares of
Common Stock as shall be issued in respect of: (i) all shares of Common
Stock issuable upon conversion of or otherwise in respect of 290,000 shares
of the Series B Convertible Preferred Stock issued in the 1997 Private
Placement; (ii) all shares of Common Stock upon conversion of or otherwise
in respect of 29,000 shares of the Series B Convertible Preferred Stock
issuable upon the exercise of the Series B Convertible Preferred Stock
Warrants; (iii) all shares of Common Stock issuable upon conversion of
shares of Series B Convertible Preferred Stock issuable, in lieu of cash, as
dividends in respect of shares of Series B Convertible Preferred Stock; (iv)
181,372 shares of Common Stock originally issued in other private placement
transactions; and (v) 545,000 shares of Common Stock issuable upon exercise
of outstanding options and warrants originally issued in other private
placement transactions. The number of shares of Common Stock indicated to be
offered hereby on the cover of this Prospectus and above is an estimate
based upon the market price of the Common Stock set forth on the cover page
of this Prospectus assuming that all shares of Series B Convertible
Preferred Stock, including shares issuable upon exercise of the Series B
Convertible Preferred Stock Warrants, are converted on the first date
permitted. The number of shares of Common Stock issuable in connection with
such transactions and offered for resale hereby is subject to adjustment and
could be materially less or more than such amount depending upon factors
which cannot be predicted by the Company at this time, including, among
others, the future market price of the Common Stock and the decisions by
holders of Series B Convertible Preferred Stock as to when to convert such
shares. This presentation is not intended to constitute a prediction as to
the future market price of the Common Stock or as to when holders will elect
to convert shares of Series B Convertible Preferred Stock into shares of
Common Stock. See "Risk Factors--Effect of Conversion of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock" and
"Description of Capital Stock."
(2) As of April 30, 1997, excludes: (i) approximately 7.8 million shares of
Common Stock subject to presently outstanding options granted by the Company
under certain stock option plans and through direct grants, of which
approximately 4.4 million shares are issuable under options exercisable as
of the date of this Prospectus; (ii) approximately 1.6 million shares of
Common Stock issuable upon the exercise of presently outstanding warrants to
purchase Common Stock, of which approximately 1.5 million shares are
issuable pursuant to warrants exercisable as of the date of this Prospectus;
(iii) approximately 4.3 million shares of Common Stock estimated to be
issuable upon conversion of presently outstanding shares of the Company's 5%
Series A Adjustable Convertible Preferred Stock (the "Series A Convertible
Preferred Stock") issued in a private placement transaction during 1996 (the
"1996 Private Placement"); (iv) approximately 700,000 shares of Common Stock
estimated to be issuable upon conversion of or otherwise in respect of
108,000 shares of Series A Convertible Preferred Stock issuable upon the
exercise of presently outstanding warrants issued in connection with the
1996 Private Placement (the "Series A Convertible Preferred Stock
Warrants"); (v) 150,000 shares of
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Common Stock issued in connection with the acquisition of certain assets by
the Company on May 19, 1997 (subject to adjustment based on future market
prices); and (vi) Common Stock offered hereby, except for the 181,372 shares
of Common Stock identified in clause (iv) of footnote (1) above. Also
excludes 92,512 treasury shares. The number of shares of Common Stock
indicated to be issuable pursuant to clauses (iii) and (iv) of this footnote
(2) is estimated based on the market price of the Common Stock set forth on
the cover page of this Prospectus, assuming that all shares of Series A
Convertible Preferred Stock are converted on the first date permitted. As of
May 12, 1997, there were outstanding 668,928 shares of Series A Convertible
Preferred Stock outstanding, and 108,000 shares of Series A Convertible
Preferred Stock Warrants, which had not yet been converted into shares of
Common Stock. The number of shares of Common Stock issuable upon conversion
of such shares of Series A Convertible Preferred Stock is subject to
adjustment and could be materially less or more than such amount depending
upon factors which cannot be predicted at this time, including, among
others, the future market price of the Common Stock and the decisions by
holders of shares of Series A Convertible Preferred Stock as to when to
convert such shares. See "Risk Factors--Dilutive Effect of Options and
Warrants to Purchase Common Stock; Shares Available for Future Sale," "--
Effect of Conversion of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock," "Description of Capital Stock" and "Shares
Available for Future Sale."
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RISK FACTORS
The securities offered hereby involve a high degree of risk including, but
not necessarily limited to, the risk factors described below. Each prospective
investor should carefully consider the following risk factors inherent in and
affecting the business of the Company and this offering before making an
investment decision.
Limited Operating History; Limited Revenues; History of Losses. The
Company was organized in February 1987 and opened its first restaurant in August
1988 (which has since been closed). In addition, more than half of the
Company's owned and operated restaurants were opened since January 1, 1995. As
a result, the Company has a limited operating history upon which an evaluation
of the Company's performance can be made. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in the establishment of a new business and concept in the highly
competitive restaurant industry, which is characterized by a high failure rate.
Since inception, the Company has generated limited revenues and has generally
incurred operating losses. There can be no assurance that the Company will
generate significant revenue or achieve profitable operations.
Limited Number of Restaurants in Operation; Geographic Concentration of
Restaurants; Dependence on Discretionary Spending. As of May 31, 1997, the
Company operated 31 Koo Koo Roo restaurants. Of these, nine restaurants had
been in operation for more than two years and thirteen restaurants had been in
operation for less than one year. Twenty-four restaurants are in Southern
California, including eleven restaurants opened in Southern California since
1995. The Company's revenues are dependent on discretionary spending by
consumers, particularly by consumers living in the communities in which the
restaurants are located. A significant weakening in any of the local economies
in which the Company operates may cause the residents of such communities to
curtail discretionary spending which, in turn, could have a material adverse
effect on the results of operations and financial position of the entire
Company. Consequently, the results achieved to date by the Company's
restaurants may not be indicative of the prospects or market acceptance of a
larger number of restaurants, particularly in wider and more geographically
dispersed areas with varied demographic characteristics.
Uncertainty of Market Acceptance. The Company has limited marketing
experience and to date has engaged in limited marketing activities. Achieving
consumer awareness and market acceptance, particularly as the Company seeks to
penetrate new markets, such as San Francisco, Denver, Washington, D.C., and the
New York tri-state area, will require substantial efforts and expenditures by
the Company. There can be no assurance that the Company's restaurants and
ceramics studios will achieve significant market acceptance.
Proposed Expansion; Need for Additional Financing. Although the Company
intends to pursue a strategy of aggressive growth, the Company must depend on a
limited number of key experienced personnel in affecting this expansion. The
Company's proposed expansion (including, without limitation, accomplishment of
its new restaurant opening plans and expansion of Color Me Mine) will be
dependent on, among other things, market acceptance of the Company's business
concepts, the availability of suitable sites, timely development and
construction of stores, the hiring of skilled management and other personnel,
the general ability to successfully manage growth including monitoring stores,
controlling costs and maintaining effective quality controls, and the
availability of adequate financing. In addition, with respect to Color Me Mine,
the Company presently plans to focus on growth through selling individual
franchises which will be dependent upon the availability and interest of
potential qualified franchisees. The Company may also grow through the
acquisition of existing businesses to the extent that such businesses can be
acquired on advantageous terms and meet the Company's investment and market
criteria. There can be no assurance that the Company will be successful in its
proposed expansion. Until the Company increases the size of its base of
restaurants and ceramics studios, the lack of success of a small number of
stores may have a disproportionate impact on the Company's performance. To
implement its expansion, the Company expects to issue additional equity
securities in the future and, if market conditions permit, may incur additional
indebtedness. The Company regularly investigates and pursues transactions to
raise such capital. There can be no assurance that such additional capital, if
and when required, will be available on terms acceptable to the Company, or at
all. In addition, future issuances of Common Stock, if any, would dilute the
present ownership of all stockholders in the Company, including investors
purchasing shares in this offering. See "Use of Proceeds."
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Effect of Conversion of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock. The Company's Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock entitle the holders thereof to convert
such shares into shares of Common Stock. The exact number of shares of Common
Stock issuable upon conversion of all of the Series A Convertible Preferred
Stock, and the shares of Common Stock offered hereby issuable upon the
conversion of all of the shares of the Series B Convertible Preferred Stock,
cannot currently be estimated but, generally, such issuances of Common Stock,
respectively, will vary inversely with the market price of the Common Stock.
The holders of Common Stock will be materially diluted by conversion of the
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
which dilution will depend on, among other things, the future market price of
the Common Stock and the decisions by holders of shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock as to when to convert
such shares. On June 16, 1997, the last reported sales price of the Common
Stock on the Nasdaq National Market was $6.25 per share. If such market
price were used to determine the number of shares of Common Stock issuable as of
the first date on which the outstanding shares of Series A Convertible Preferred
Stock may be converted, the Company would issue a total of approximately
5,050,000 shares of Common Stock (which amount also assumes the exercise of the
outstanding Series A Convertible Preferred Stock Warrants). In addition, if
such market price of the Common Stock were used to determine the number of
shares of Common Stock issuable as of the first date on which the outstanding
shares of Series B Convertible Preferred Stock may be converted, the Company
would issue a total of approximately 5,720,000 shares of Common Stock (which
amount also assumes the exercise and conversion of the Series B Convertible
Preferred Stock Warrants). To the extent the market price per share of the
Common Stock is lower or higher than $6.25 as of any date on which
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are converted, the Company would issue more or less
shares of Common Stock than reflected in such estimate, and such difference
could be material. The number of shares of Common Stock issuable in connection
with the outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock is not a linear function of the market price of the
Common Stock, and will increase at an increasing rate as such market price
decreases (and decrease at a decreasing rate as such market price increases)
relative to a given assumed market price. The number of shares of Common Stock
may also increase should holders of Series B Convertible Preferred Stock
continue to hold such shares, thereby causing the discount to market price
applicable upon conversion of such shares to increase. This presentation is not
intended to constitute a prediction as to the future market price of the Common
Stock or as to when holders will elect to convert shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock into shares of Common
Stock. The holders of the outstanding shares of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock also possess certain registration
rights, including the right to include all of the shares of Common Stock that
such holders may desire to sell in certain underwritten public offerings by the
Company. The terms of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock do not provide for any limit on the number of shares
of Common Stock which the Company may be required to issue in respect thereof.
Stock market volatility, whether related to the stock market generally or the
Company specifically, and if coincident in time with conversions of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock, will
impact directly the number of shares of Common Stock issuable upon conversion
thereof. See "--Securities Market Factors" and "Description of Capital Stock."
Dilutive Effect of Options and Warrants to Purchase Common Stock; Shares
Available for Future Sale. As of April 30, 1997, the Company had granted
options to purchase an aggregate of approximately 7.7 million shares (excluding
approximately 95,000 shares of Common Stock offered hereby issuable upon
exercise of certain options issued in other private placement transactions) and
warrants to purchase an aggregate of approximately 1.1 million shares (excluding
approximately 450,000 shares of Common Stock offered hereby issuable upon
exercise of certain warrants issued in other private placement transactions) of
Common Stock at exercise prices ranging from $0.625 per share to $10.00 per
share, with a weighted average exercise price of $6.08 per share. In the event
that all such options and warrants are exercised for cash, the aggregate
proceeds to the Company would be approximately $54.0 million. To the extent
that the stock options and warrants are exercised, material dilution of the
ownership interest of the Company's present stockholders will occur. The
Company also expects that in the ordinary course of its business it will issue
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additional warrants and grant additional stock options including, but not
limited to, options granted pursuant to its Stock Awards and Director's Stock
Option Plans. Investors should note that the recent trading prices of the
Common Stock significantly exceeds the Company's book value for financial
accounting purposes. In addition, the approximately 1.1 million shares of
Common Stock issuable upon exercise of presently outstanding warrants and a
significant portion of the outstanding stock options and restricted shares of
Common Stock are subject to certain registration rights and, upon the
effectiveness of a registration statement covering such shares, will be eligible
for resale in the public market without restriction under the Securities Act.
Sales of substantial amounts of Common Stock by stockholders, or the perception
that such sales could occur, could adversely affect the market price for the
Common Stock. See "--Effect of Conversion of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock," "--Securities Market Factors,"
"Description of Capital Stock" and "Shares Available for Future Sale."
Management of Growth. The Company's business has grown rapidly in recent
periods and management's plans call for continued growth, which may place
significant strains on the Company's managerial, operational, financial and
information systems. This growth has in the past and may in the future involve
the acquisition of restaurants or complementary businesses. Acquisitions may
involve a number of special risks, including diversion of management's
attention, the inability to integrate successfully any acquired business, the
incurrence of legal liabilities and unanticipated events or circumstances, some
or all of which could have a material adverse effect on the Company's results of
operations, financial condition, business and prospects. The Company's success
also depends to a significant extent on the ability of its executive officers
and other members of senior management to respond to these challenges
effectively. The Company's expansion has also resulted in substantial growth in
the number of its employees, resulting in increased responsibility for both
existing and new management personnel. In addition, the Company is in the
ongoing process of evaluating and enhancing its operating and financial
procedures and systems in an effort to increase efficiencies in managing its
expanding business. There can be no assurance that the Company's management
will be able to manage future expansions successfully, or that its management,
personnel or system will be adequate to support the Company's operations or will
be implemented in a cost-effective or timely manner. Any such inabilities or
inadequacies would have a material adverse effect on the Company's business,
operating results and financial condition.
On May 19, 1997, the Company acquired, out of bankruptcy, 14 Hamburger
Hamlet restaurants. No assurance can be given that Company will be able to
manage and operate such restaurants successfully. See "--Proposed Expansion;
Need for Additional Financing" and "Recent Developments."
Competition. The restaurant industry, and particularly the quick-service
segment, is highly competitive with respect to price, service and location, and
numerous well-established competitors possess substantially greater financial,
marketing, personnel and other resources than the Company. In addition, the
quick-service industry is characterized by the frequent introduction of new
products, accompanied by substantial promotional campaigns. The Company is
required to respond to various factors affecting the restaurant industry,
including changes in consumer preferences, tastes and eating habits, demographic
trends and traffic patterns, increases in food and labor costs, competitive
pricing and national, regional and local economic conditions. In recent years
numerous companies in the quick-service industry have introduced products,
including chicken, which were developed to capitalize on growing consumer
preference for food products which are, or are perceived to be, healthful,
nutritious, low in calories and low in fat content. It can be expected that the
Company will be subject to increasing competition from companies whose products
or marketing strategies address these consumer preferences. There can be no
assurance that consumers will regard the Company's products as sufficiently
distinguishable from competitive products (such as, for example, those offered
by El Pollo Loco and Boston Market), that substantially equivalent products will
not be introduced by the Company's competitors or that the Company will be able
to compete successfully. Similarly, Color Me Mine will likely face significant
competition from similar concepts and other businesses providing leisure and
entertainment services.
10
<PAGE>
Dependence Upon Key Personnel. The success of the Company is largely
dependent on the efforts of certain key personnel of the Company, including
Kenneth Berg, its Chairman of the Board and Chief Executive Officer, and other
key executives. Although the Company has entered into employment agreements
with certain of its executive officers, none of such agreements obligate these
employees to continue to work for the Company. The loss of their services would
have a material adverse effect on the Company. Additionally, in order to
successfully implement its proposed expansion and manage anticipated growth, the
Company will be dependent upon its ability to retain existing and hire
additional qualified personnel. There can be no assurance that the Company will
be able to retain or hire necessary personnel.
Possible Conflicts of Interest; Benefits to Certain Executive Officers and
Stockholders. Kenneth Berg's employment agreement with the Company provides
that he is obligated to devote his full-time services to the Company but is
permitted to continue to engage in the other business activities currently
conducted by him. However, his employment agreement provides that he may do so
only so long as such activities do not conflict with or otherwise unreasonably
interfere with the performance of his services to the Company. Mr. Berg's
employment agreement also provides for significant payments to him upon the
occurrence of certain defined events including, among others, his termination
without "cause" and a "change in control" of the Company.
Government Regulations. The Company is subject to various federal, state
and local laws and regulations affecting its business. The Company's stores are
subject to regulation by various governmental agencies, including those
responsible for compliance with state and local licensing, zoning, land use,
construction and environmental regulations and various health, sanitation,
safety and fire standards. Any difficulties or failure in obtaining required
licenses or approvals could delay or prevent the opening of a new store. In
addition, suspension of certain licenses or approvals, due to failure to comply
with applicable regulations or otherwise, could interrupt the operations of the
affected store or otherwise adversely affect the store or the Company. The
Company is also subject to federal and state laws establishing minimum wages and
regulating overtime and working conditions. Since many of the Company's
restaurant personnel are paid at rates which may be affected by the federal
minimum wage, increases in such minimum wage (which recently have been enacted
by Congress and the State of California) may result in an increase in the
Company's labor costs. The Company cannot predict the impact on its results of
operations should applicable federal or State minimum wage laws be changed.
Federal and state franchise laws will also impose significant compliance
obligations on the Company as it pursues the expansion of Color Me Mine.
Expansion into Foreign Markets. The Company presently is seeking to expand
its business into certain foreign markets, principally through the use of
licensing agreements, joint ventures and similar arrangements with existing
local businesses and members of each respective local business community. The
Company's ability to successfully expand its business into foreign markets
depends, in part, on cultural barriers to entry, the identity of the local
businesses and members of the local business community with whom the Company
enters into any such agreements, the consumer preferences of local consumers and
acceptance in each foreign market, prevailing local economic conditions,
currency fluctuations, changes in regulatory requirements, compliance with
foreign laws and regulations, local economy inflation and local economy interest
rates. No assurance can be given that the Company will be able to establish
profitable operations in any of the foreign markets which it is pursuing.
Insurance and Potential Liability. The Company maintains insurance,
including insurance relating to personal injury, in amounts which the Company
currently considers adequate. Nevertheless, a partially or completely uninsured
claim against the Company, if successful and of sufficient magnitude, could have
a material adverse effect on the Company.
Securities Market Factors. The market price for the Company's Common Stock
is significantly affected by such factors as the Company's financial results,
opening of new restaurants and ceramics studios and performance of existing
stores, introduction of new products by the Company or its competitors, status
of compliance with franchise regulation and various factors affecting the quick-
service restaurant and leisure
11
<PAGE>
time industries generally. Additionally, in recent years, the stock market has
experienced a high level of price and volume volatility and market prices for
many companies, particularly small emerging growth companies, have experienced
wide price fluctuations not necessarily related to the operating performance of
such companies. The market price for the Common Stock may be affected by
general stock market volatility. Any such volatility, whether related to the
stock market generally or the Company specifically, and if coincident in time
with conversions of Convertible Preferred Stock, will also impact directly the
number of shares of Common Stock issuable upon conversion of shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock and in
respect of the other securities issued in the Company's 1996 Private Placements
and 1997 Private Placement. See "--Effect of Conversion of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock" and "Description of
Capital Stock."
No Common Stock Dividends. To date, the Company has not paid any cash
dividends on its Common Stock and does not intend to declare any such dividends
in the foreseeable future. The Company is obligated to pay dividends at the rate
of 5% per annum on its Series A Convertible Preferred Stock (which may be paid
in cash or, subject to certain restrictions, in shares of Common Stock which may
be offered for resale under the Securities Act) and 6% per annum on its Series B
Convertible Preferred Stock (which may be paid in cash or, subject to certain
restrictions, in additional shares of Series B Convertible Preferred Stock
convertible into shares of Common Stock which may be offered for resale
hereunder). During 1996, the dividends payable in respect of the Series A
Convertible Preferred Stock for the quarter ended March 31, 1996 were paid in
cash and the remaining three quarterly dividends were paid in shares of Common
Stock. Dividends payable in respect of the Series A Convertible Preferred Stock
for the quarter ended March 31, 1997 were paid in cash. The Company has not
determined whether future dividends payable on the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock will be paid in cash or
additional securities. See "Description of Capital Stock--Preferred Stock--
Series A Convertible Preferred Stock" and "--Series B Convertible Preferred
Stock."
Possible Issuance of Additional Shares of Preferred Stock without
Stockholder Approval. The Company's Certificate of Incorporation authorizes the
issuance of "blank check" Preferred Stock with such designations, rights and
preferences as may be determined from time-to-time by the Company's Board of
Directors. Accordingly, the Board is empowered, without approval by holders of
the Common Stock, to issue additional shares of Preferred Stock with dividend,
liquidations, redemption, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock. It was pursuant to this authority that the shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock were
issued. In the event of issuance, Preferred Stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company may issue additional shares of Preferred
Stock in the future to raise capital. See "Description of Capital Stock."
12
<PAGE>
USE OF PROCEEDS
The proceeds from the sale of the shares of Common Stock offered hereby are
solely for the account of the Selling Stockholders. Accordingly, the Company
will receive none of the proceeds from sales thereof. However, certain of the
shares of Common Stock offered hereby are issuable in the future upon the
conversion of shares of Series B Convertible Preferred Stock issuable upon the
exercise of the 29,000 Series B Convertible Preferred Stock Warrants issued in
connection with the 1997 Private Placement. If all of such warrants to purchase
Series B Convertible Preferred Stock were exercised, the Company would receive
gross proceeds of approximately $2.9 million in the aggregate, unless such
warrants are exercised, at the holders option, on a net basis without the
payment of additional consideration pursuant to the terms of such warrants. In
addition, if all of the approximately 545,000 shares of Common Stock offered
hereby issuable upon the exercise of options and warrants issued in other
private placement transactions are exercised, the Company would receive gross
proceeds of approximately $3.1 million in the aggregate. The Company expects to
use the proceeds from the exercise of such warrants and options, if any, for
general corporate purposes. See "Description of Capital Stock."
RECENT DEVELOPMENTS
On February 27, 1997, the Company completed a private placement offering of
290,000 shares of the Company's newly established Series B Convertible Preferred
Stock and received aggregate net proceeds therefrom of approximately $26.9
million (after cash fees to the placement agent and estimated transaction
expenses). The Series B Convertible Preferred Stock has a liquidation
preference of $100.00 per share, is non-voting and is entitled to quarterly
dividends of 6% per annum, first payable on August 1, 1997, which dividends may
be paid either in cash or, at the option of the Company, in additional shares of
Series B Convertible Preferred Stock, valued at $100.00 per share. On May 29,
1997, 43,500 shares of the Series B Convertible Preferred Stock became eligible
for conversion. Each month thereafter, a portion of the remaining 246,500
shares of Series B Convertible Preferred Stock becomes convertible ratably, such
that all shares of Series B Convertible Preferred Stock will be convertible on
and after November 1, 1997. The Series B Convertible Preferred Stock will be
convertible at a discount to the Common Stock ranging from 3% to 25%, depending
upon the date on which such shares are converted. Accordingly, the exact number
of shares of Common Stock issuable upon conversion of the Series B Convertible
Preferred Stock cannot be determined and will depend upon, among other things,
the future market price of the Common Stock at the date of conversion and the
decisions by holders of shares of Series B Convertible Preferred Stock as to
when to convert such shares. The Company has agreed to issue to the placement
agent in the private placement transaction three-year warrants to purchase
29,000 shares of Series B Convertible Preferred Stock at $100.00 per share and
paid 6 3/4% of the gross proceeds from the issuance and sale of the Series B
Convertible Preferred Stock as cash consideration for such services. See "Risk
Factors--Effect of Conversion of Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock" and "Description of Capital Stock."
On April 10, 1997, the Company's Board of Directors approved a plan for the
repurchase of up to 1.0 million shares of the Company's Common Stock. As of the
date of this Prospectus, the Company has repurchased approximately 27,500 shares
of Common Stock at an aggregate purchase price of approximately $110,000. The
Company cannot estimate the market price per share at which additional shares of
Common Stock would be repurchased, if any. However, if the Company repurchased
all 1.0 million shares of Common Stock at the price per share set forth on the
cover page of this Prospectus, the aggregate purchase price for such repurchases
would be approximately $6.5 million. The Company expects to finance the
repurchase of additional shares of Common Stock, if any, through working
capital.
On May 19, 1997, the Company acquired, out of bankruptcy, 14 Hamburger
Hamlet restaurants for total consideration equal to $9.70 million in cash and
150,000 restricted shares of Common Stock plus the assumption of $250,000 of
debt and the leases covering the restaurants to be acquired and the payment of
transaction fees and expenses. Ten of the fourteen restaurants are located in
California and the remaining four
13
<PAGE>
are located in the Washington, D.C. Beltway area. The Company financed the
acquisition with cash on hand. No assurance can be given, however, that the
Company will be able to manage and operate such restaurants successfully. See
"Risk Factors--Proposed Expansion; Need for Additional Financing" and "--
Management of Growth."
On May 20, 1997, Koo Koo Roo Canada announced that it opened its first Koo
Koo Roo California Kitchen(TM) restaurant in Toronto, Canada. Koo Koo Roo Canada
is a joint venture, 60% of which is owned by local Canadian businessmen and 40%
of which is owned by Koo Koo Roo, Inc.
SHARES AVAILABLE FOR FUTURE SALE
In general, Rule 144 under the Securities Act, as recently amended by the
Commission ("Rule 144"), provides that a person (or persons whose sales are
aggregated) who is an affiliate of the Company or who has beneficially owned
shares that were issued and sold in reliance upon exemptions from registration
under the Securities Act ("Restricted Shares") for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of one percent (1%) of the then outstanding shares of Common Stock
or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the filing of a notice of intent to sell. Sales under
Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is not deemed to have been an "affiliate" of the
Company at any time during the three months preceding a sale, and who has
beneficially owned Restricted Shares for at least two years, is entitled to sell
such shares under Rule 144(k) without regard to volume limitations, manner-of-
sale provisions, notice requirements or the availability of current public
information about the Company. Additional material amendments to Rule 144 have
been proposed by the Commission and the Company cannot predict whether such
proposed amendments will be adopted or, if adopted, the effect of any such
amendment on the Company or the market for shares of the Common Stock.
Of the approximately 24.5 million shares of Common Stock estimated to be
outstanding upon completion of this offering (subject to the assumptions set
forth or referred to on the cover page of this Prospectus related to future
market prices of the Common Stock and conversion decisions made by holders of
the Series B Convertible Preferred Stock), approximately 22.0 million shares
will have been registered under the Securities Act and will be freely tradeable,
and approximately 2.5 million shares will be saleable subject to compliance with
the requirements of Rule 144 and approximately 26,000 shares of Common Stock
will be tradeable subject to the holding period restrictions under, and
compliance with the other requirements of, Rule 144 discussed above. See
"Summary--The Offering."
As of May 12, 1997, the Company also had outstanding 668,928 shares of its
Series A Convertible Preferred Stock and warrants to issue an additional 108,000
shares of Series A Convertible Preferred Stock. Such shares of Series A
Convertible Preferred Stock are convertible into a presently indeterminate
number of shares of Common Stock. If, however, $6.25 per share (the last
reported sale price of the Common Stock on the Nasdaq National Market on June
16, 1997) were used to determined the number of shares of Common Stock issuable
upon conversion, the Company would be obligated to issue a total of
approximately 5,050,000 shares of Common Stock if all shares of Series A
Convertible Preferred Stock outstanding or issuable upon the exercise of the
Series A Convertible Preferred Stock Warrants were converted. All such shares
have been registered for resale under the Securities Act. See "--Effect of
Conversion of Series A Convertible Preferred Stock and the Series B Convertible
Preferred Stock."
In addition, as of April 30, 1997, approximately 1.1 million shares of
Common Stock were issuable upon exercise of presently outstanding warrants
(excluding the warrants issued in connection with the 1996 and 1997 Private
Placements and approximately 450,000 shares of Common Stock offered hereby
issuable upon exercise of certain warrants issued in other private placement
transactions), and approximately 7.7
14
<PAGE>
million shares of Common Stock were issuable upon exercise of presently
outstanding options (excluding approximately 95,000 shares of Common Stock
offered hereby issuable upon exercise of certain options issued in other private
placement transactions). Such shares are entitled to certain registration
rights, and upon the effectiveness of a registration statement covering such
shares, would be eligible for resale in the public market without restriction
under the Securities Act. Until any such registration is effective, such shares
of Common Stock would be tradeable subject to the holding period restrictions
under, and compliance with the other requirements of, Rule 144 discussed above.
On May 19, 1997, the Company acquired, out of bankruptcy, 14 Hamburger
Hamlet restaurants. Pursuant to the terms of the asset acquisition agreement,
if the market value of the 150,000 restricted shares of Common Stock issued in
connection with the asset acquisition is less than $11.67 per share on November
19, 1998 (as adjusted for customary antidilutive adjustments, if any, during
such period), the Company agreed to pay cash, or issue additional shares of
Common Stock to the sellers such that the aggregate value of such cash or
additional shares of Common Stock, together with the original 150,000 restricted
shares of Common Stock originally issued in connection with the acquisition,
shall equal $1,750,000.
Kenneth Berg, the Company's Chairman and Chief Executive Officer, and Mel
Harris, one of the Company's Directors, each has agreed for the 14-month period
following the original issuance of the Series B Convertible Preferred Stock, not
to sell, and not to permit any of their controlled affiliates to sell, more than
10% of the Common Stock owned by such stockholder as of such date without the
prior consent of the placement agent in connection with the private placement of
the Series B Convertible Preferred Stock.
No predictions can be made as to the effect that sales of Common Stock
under Rule 144, pursuant to a registration statement or otherwise, or the
availability of shares of Common Stock for sale, will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices and could impair the
Company's future ability to raise capital through an offering of its equity
securities. Further, certain of the share amounts set forth above under the
caption "Shares Available for Future Sale" are estimates based only on recent
market prices, are subject to adjustment, and could be materially less or more
than such estimated amounts depending upon factors which cannot be predicted at
this time, including, among others, the future market price per share of the
Common Stock and conversion decisions made by holders of both the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock. See
"Risk Factors--Dilutive Effect of Options and Warrants; Shares Available for
Future Sale," and "--Effect of Conversion of Series A Convertible Preferred
Stock and the Series B Convertible Preferred Stock."
15
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares to be offered hereby as of May 12, 1997, and as
adjusted to reflect the sale of the securities offered hereby, by the Selling
Stockholders. Except as otherwise indicated, to the knowledge of the Company,
all persons listed below have sole voting and investment power with respect to
their securities, except to the extent that authority is shared by spouses under
applicable law or as otherwise noted below. The information in the table
concerning the Selling Stockholders who may offer Common Shares hereunder from
time to time is based on information provided to the Company by such
securityholders, except for the assumed conversion ratio of shares of Series B
Convertible Preferred Stock into Common Stock, which is based solely on the
assumptions discussed or referenced in footnote (1) to the table, and the
assumed conversion ratio of shares of Series A Convertible Preferred Stock into
Common Stock, which is based solely on the assumptions discussed or referenced
in footnote (2) to the table. Information concerning such Selling Stockholders
may change from time to time and any changes of which the Company is advised
will be set forth in a Prospectus Supplement to the extent required. See "Plan
of Distribution."
<TABLE>
<CAPTION>
Common Shares Common Shares Common Shares
Beneficially to be Sold Beneficially
Owned Prior to in the Owned After
the Offering/(1)/ Offering/(1)/ the Offering
Name of ----------------- ------------- -------------
Selling Stockholder Number Percent Number Number Percent
------------------- ---------- ----------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
AG Arb Partners, L.P. 40,293/(2)/ * 17,604 22,689 *
AG Long Term Super Fund, 35,209 * 35,209 0 0
L.P.
Angelo, Gordon & Co., L.P. 54,656/(2)/ * 35,209 19,447 *
Michael Angelo 50,494/(2)/ * 44,011 6,483 *
Alfred Partners LLC 205,465/(2)/ 1.1% 140,836 64,029 *
ARBCO Associates, L.P. 88,022 * 88,022 0 0
Gerard K. Cappello 274,903/(2)/ 1.5% 170,673 104,140 *
9,928/(3)/ 9,928
Linda Cappello 412,352/(2)/ 2.3% 256,145 156,207 *
14,893/(3)/ 14,893
CC Investments, LDC 213,014 1.2% 213,014 0 0
Robert A. Davidow and 100,540/(2)/ * 88,022 12,518 *
Diana R. Davidow, JTWROS
Deere Park Capital 176,045 * 176,045 0 0
Management, Inc.
DFG Corporation 52,958/(2)/ * 6,285 46,673 *
Elliott Associates, L.P. 352,089 1.9% 352,089 0 0
European American 26,407 * 26,407 0 0
Securities Inc.
Fayerweather Associates 44,011 * 44,011 0 0
Lawrence K. Fleischman 214,419/(2)/ 1.2% 127,632 86,787 *
8,273/(3)/ 8,273
Christomano B. Garcia Trust 17,604 * 17,604 0 0
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Common Shares Common Shares Common Shares
Beneficially to be Sold Beneficially
Owned Prior to in the Owned After
the Offering/(1)/ Offering/(1)/ the Offering
Name of ------------------- -------------- ------------
Selling Stockholder Number Percent Number Number Percent
------------------- ---------- ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C>
Gotham Capital III, L.P. 349,262/(2)/ 1.9% 299,276 49,986 *
High Risk Opportunities 176,045 * 176,045 0 0
HUB Fund Ltd.
JMG Capital Partners, L.P. 277,904/(2)/ 1.2% 176,045 51,859 *
KA Investments LDC 21,125 * 21,125 0 0
Andrew Kaplan 8,802 * 8,802 0 0
Jerry Kaplan 12,323 * 12,323 0 0
Stanley A. Kaplan 17,604 * 17,604 0 0
Karpnale Investment PTE LTD 88,022 * 88,022 0 0
Kayne, Anderson 172,190/(2)/ * 88,022 84,168 *
Non-Traditional
Investments, L.P.
Charles B. Krusen 17,604 * 17,604 0 0
Lakeshore International, 216,305/(2)/ 1.2% 132,033 84,272 *
Ltd.
LICAP Partners 70,418 * 70,418 0 0
Theodore Meisel 43,247/(2)/ * 35,209 8,038 *
Merced Partners L.P. 178,554/(2)/ * 44,011 134,543 *
Nelson Partners 541,654/(2)/ 2.9% 176,045 365,609 2.0%
Newberg Family Trust UTA 239,164/(2)/ 1.3% 176,045 63,119 *
DTD 12/18/90
NU Investments LLC 31,688 * 31,688 0 0
NY-DBL Diamond Group 35,209 * 35,209 0 0
Offense Group Associates, 237,504/(2)/ 1.3% 176,045 61,459 *
L.P.
Olympus Securities, Ltd. 419,784/(2)/ 2.3% 176,045 243,739 1.3%
Palamundo LDC 23,000/(2)/ * 2,905 20,095 *
ProFutures Special 88,022 * 88,022 0 0
Equities Fund, L.P.
John J. Pujol 8,802 * 8,802 0 0
Raphael, L.P. 82,906/(2)/ * 44,011 38,895 *
RGC International 220,056 1.2% 220,056 0 0
Investors LDC
Alfred Romano 8,802 * 8,802 0 0
RSP VI Limited Partnership 26,407 * 26,407 0 0
Seneca Capital 58,862/(2)/ * 13,485 45,377 *
International
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Common Shares Common Shares Common Shares
Beneficially to be Sold Beneficially
Owned Prior to in the Owned After
the Offering/(1)/ Offering/(1)/ the Offering
Name of ----------------------- ------------- -----------------
Selling Stockholder Number Percent Number Number Percent
- --------------------------- -------- --------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Seneca Capital L.P. 313,065/(2)/ 1.7% 58,306 254,759 1.4%
Lisa G. Shine 20,102/(2)/ * 12,323 7,779 *
SIL Nominees Ltd. 590,967/(2)/ 3.2% 281,671 309,296 1.7%
Strome Global Income Fund 17,604 * 17,604 0 0
Strome Offshore Limited 228,858 1.3% 228,858 0 0
Strome Susskind Hedgecap 228,858 1.3% 228,858 0 0
Fund, L.P.
Strome Susskind Hedgecap 96,824 * 96,824 0 0
Fund, L.P.
The Tail Wind Fund Ltd. 79,220 * 79,220 0 0
Trust Company of America 195,938 1.1% 195,938 0 0
FBO Perspective Advisory
Company
Jeffrey Ullman 99,008/(2)/ * 44,011 54,997 *
Western Reserve Life 52,813 * 52,813 0 0
Assurance Company
Western Reserve Life 15,316 * 15,316 0 0
Assurance Company
Wood Gundy London Ltd. 88,022 * 88,022 0 0
ZPG Securities 7,042 * 7,042 0 0
Ad Marketing 10,000/(3)/ * 10,000/(3)/ 0 0
Robert Courson 75,000/(3)/ * 75,000/(3)/ 0 0
Bob Muh 25,000/(3)/ * 25,000/(3)/ 0 0
Don Wohl 100,000/(3)/ * 100,000/(3)/ 0 0
Iacocca Capital Partners 250,000/(3)/ 1.4% 250,000/(3)/ 0 0
Irving Link 15,000/(3)/ * 15,000/(3)/ 0 0
Chris Furie 30,000/(3)/ * 30,000/(3)/ 0 0
Mark Beychock 15,000/(3)/ * 15,000/(3)/ 0 0
Ken Grier Family Trust 26,633/(3)/ * 26,633/(3)/ 0 0
Robin Monroe & Josh Culver 128,571/(3)/ * 128,571/(3)/ 0 0
Harry S. Stahl 25,000/(3)/ * 25,000/(3)/ 0 0
Centrium Associates 26,168/(3)/ * 26,168/(3)/ 0 0
</TABLE>
- -------------------------
* Represents less than 1% of the outstanding Common Stock.
18
<PAGE>
(1) Except in the case of Shares indicated with the footnote (2) or (3), such
beneficial ownership represents an estimate of the number of shares of Common
Stock issuable upon the conversion of shares of Series B Convertible
Preferred Stock beneficially owned by such person (either directly or through
the exercise of Series B Convertible Preferred Stock Warrants), assuming the
last reported sales price of $6.25 per share of Common Stock on June 16,
1997 was used to determine the number of shares of Common Stock issuable as
of the first date on which Series B Convertible Preferred Stock may be
converted and that all dividends on shares of Series B Convertible Preferred
Stock are paid, in lieu of cash, in additional shares of Series B Convertible
Preferred Stock. The actual number of shares of Common Stock offered hereby
is subject to adjustment and could be materially less or more than the
estimated amount indicated depending upon factors which cannot be predicted
by the Company at this time, including, among others, application of the
conversion provisions based on market prices prevailing at the actual date of
conversion and whether dividends on shares of Series B Convertible Preferred
Stock are paid in cash or in additional shares of Series B Convertible
Preferred Stock. In order to calculate the number of shares of Series B
Convertible Preferred Stock or Series B Convertible Preferred Stock Warrants
to purchase such shares beneficially held, multiply the amount included in
the column captioned "Common Shares Beneficially Owned Prior to the Offering"
(other than share amounts indicated with the footnote (2) or (3)), or the
amount included in the column captioned "Common Shares to be Sold in the
Offering," by 0.056804. This presentation is not intended to constitute a
prediction as to the future market price of the Common Stock or as to when
holders will elect to convert shares of Series B Convertible Preferred Stock
into shares of Common Stock. The shares of Series B Convertible Preferred
Stock (other than the shares of Series B Convertible Preferred Stock issued
as dividends) and the Series B Convertible Preferred Stock Warrants were
issued in the 1997 Private Placement. See "Risk Factors--Effect of
Conversion of Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock" and "Description of Capital Stock."
(2) Such beneficial ownership represents an estimate of the aggregate number of
shares of Common Stock issuable upon the conversion of shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock
beneficially owned by such person (either directly or through the exercise
of Series A Convertible Preferred Stock Warrants and Series B Convertible
Preferred Stock Warrants) as of the date of this Prospectus, assuming the
last reported sales price of $6.25 per share of Common Stock on June 16,
1997 was used to determine the number of shares of Common Stock issuable
upon conversion of such shares of Series A Convertible Preferred Stock
convertible as of the date of this Prospectus and such shares of Series B
Convertible Preferred Stock as of the first date on which Series B
Convertible Preferred Stock may be converted and that all dividends on
shares of Series B Convertible Preferred Stock are paid, in lieu of cash, in
additional shares of Series B Convertible Preferred Stock. The actual
number of shares of Common Stock issuable upon conversion of all of such
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock is subject to adjustment and could be materially less or more than the
estimated amount indicated depending upon factors which cannot be predicted
by the Company at this time, including, among others, application of the
conversion provisions based on market prices prevailing at the actual date
of conversion and whether dividends on shares of Series B Convertible
Preferred Stock are paid in cash or in additional shares of Series B
Convertible Preferred Stock. This presentation is not intended to
constitute a prediction as to the future market price of the Common Stock or
as to when holders will elect to convert shares of Series B Convertible
Preferred Stock into shares of Common Stock. The shares of Series A
Convertible Preferred Stock and the Series A Convertible Preferred Stock
Warrants were issued in the 1996 Private Placements. The shares of Series B
Convertible Preferred Stock (other than the shares of Series B Convertible
Preferred Stock issued as dividends) and the Series B Convertible Preferred
Stock Warrants were issued in the 1997 Private Placement. See "Risk
Factors--Effect of Conversion of Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock" and "Description of Capital
Stock."
(3) Represents beneficial ownership of shares of Common Stock issued in other
private placements.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
issuance of 55,000,000 shares of capital stock, of which 50,000,000 shares are
designated as Common Stock, par value $0.01 per share, and 5,000,000 shares are
designated as Preferred Stock, par value $0.01 per share, 1,350,000 of which
have been designated as shares of Series A Convertible Preferred Stock and
400,000 of which have been designated as Series B Convertible Preferred Stock.
As of April 30, 1997, 18,077,817 shares of Common Stock (net of treasury shares)
and 668,928 shares of Series A Convertible Preferred Stock were issued and
outstanding. In March 1996, 1,200,000 shares of Series A Convertible Preferred
Stock were issued in the 1996 Private Placements and, through April 30, 1997,
531,072 of such shares had been converted into 3,633,835 shares of Common Stock
(excluding shares of Common Stock issued as payment-in-kind dividends). On
February 27, 1997, 290,000 shares of Series B Convertible Preferred Stock were
issued in the 1997 Private Placement. As of April 30, 1997, no shares of Series
B Convertible Preferred Stock had been converted.
Common Stock
Holders of Common Stock are entitled to one vote for each share of Common
Stock on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. The rights, privileges and preferences of the holders
of Common Stock are subject to the rights of the holders of the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock and of any
shares of Preferred Stock that may be designated and issued by the Company in
the future. Subject to the restrictions contained in Preferred Stock issued by
the Company, holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors out of legally available funds. Upon any
liquidation, dissolution or winding up of the Company, subject to the rights of
holders of shares of Preferred Stock, holders of Common Stock are entitled to
share pro rata in any distribution to the stockholders. Holders of Common Stock
do not have preemptive or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock.
Pursuant to Section 2115 of the California Corporations Code (the
"California Law"), a corporation incorporated in a State other than California
(such as the Company, which is incorporated in Delaware) may nevertheless be
subject to certain of the provisions of the California Law (as specified in
Section 2115 of the California Law) applicable to California corporations
(commonly designated a "Quasi-California Corporation") if more than one-half of
its outstanding voting securities are owned of record by persons having
addresses in California and more than half of its business is conducted in
California (generally, if the average of its property factor, payroll factor and
sales factor (as defined in Sections 25129, 25132 and 25134, respectively of the
California Revenue and Taxation Code) is more than 50 percent during its latest
full income year). Such a foreign corporation will not be treated as a Quasi-
California Corporation if, however, it has more than 800 holders of a class of
securities qualified for trading on the Nasdaq National Market. Based on the
stockholders list prepared for the Company's June 17, 1997 Annual Meeting of
Stockholders, the Company exceeds this requirement by a significant amount and,
accordingly, Section 2115 is not presently applicable to the Company.
Preferred Stock
The Company's Board of Directors, without the approval of the holders of
the Common Stock, is authorized to designate for issuance up to 5,000,000 shares
of Preferred Stock, in such series and with such rights, privileges and
preferences as the Board of Directors may from time to time determine. As of
the date of this Prospectus, 1,350,000 of such shares have been designated as
Series A Convertible Preferred Stock, 668,928 of which were issued and
outstanding as of April 30, 1997 and 108,000 are subject to the Series A
Convertible Preferred Stock Warrants; and 400,000 of such shares have been
designated as Series B Convertible Preferred Stock, 290,000 of which are issued
and outstanding as of the date of this Prospectus and 29,000 of which are
subject to Series B Convertible Preferred Stock Warrants. The Company has no
current plans to issue any of the 42,000 shares of Series A Convertible
Preferred Stock that are unissued and
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<PAGE>
not subject to Series A Convertible Preferred Stock Warrants or of the 81,000
shares of Series B Convertible Preferred Stock that are unissued and not subject
to Series B Convertible Preferred Stock Warrants, except, in the case of Series
B Convertible Preferred Stock, as dividends in respect of shares of Series B
Convertible Preferred Stock outstanding from time to time.
Series A Convertible Preferred Stock
Each share of Series A Convertible Preferred Stock is entitled to receive
dividends, payable quarterly, at the rate of 5% per annum in preference to any
payment made on any other shares of capital stock of the Company. Any dividend
payable on the Series A Convertible Preferred Stock may be paid, at the option
of the Company, either (i) in cash or (ii) upon proper notice, in shares of
Common Stock if such shares have been registered for resale under the Securities
Act. If a dividend is paid in Common Stock, the shares to be issued as a
dividend shall be valued at the average of the daily means between the low
trading price and the closing price of the Common Stock over the three
consecutive trading days prior to the related dividend record date. Each share
of Series A Convertible Preferred Stock is also entitled to a liquidation
preference of $25.00 per share, plus any accrued but unpaid dividends, in
preference to any other class or series of capital stock of the Company. Except
as otherwise provided by applicable law, holders of shares of Series A
Convertible Preferred Stock have no voting rights.
As of the date of this Prospectus, all shares of Series A Convertible
Preferred Stock are convertible into shares of Common Stock. The number of
shares of Common Stock issuable upon conversion of shares of Series A
Convertible Preferred Stock will equal the liquidation preference of the shares
being converted divided by the conversion price applicable to the Common Stock
(the "Series A Conversion Price"). The Series A Conversion Price is the lesser
of (a) 71% of the average of the daily means between the low trading price of
the Common Stock and the closing price of the Common Stock for all the trading
days during the 13th month after March 20, 1996, the date of issuance (equal to
a conversion price of $3.8566 per share) or (b) 71% of the average of the daily
means between the low trading price and the closing price of the Common Stock
during the three days immediately preceding the date of conversion. The Series
Conversion Price is also subject to adjustment for customary anti-dilution
events such as stock splits, stock dividends, reorganizations and certain
mergers affecting the Common Stock. The shares of Series A Convertible Preferred
Stock were originally placed in March 1996.
The Series A Convertible Preferred Stock may be redeemed in whole or in
part at any time, on at least 30 days' notice, at a redemption price equal to
$25.00 per share plus accrued and unpaid dividends if (i) the average closing
price of the Common Stock for the 20 consecutive trading days prior to the date
of such notice exceeds $18.00 per share and (ii) the shares of Common Stock
issuable upon conversion are subject to an effective resale registration
statement under the Securities Act or may otherwise be sold pursuant to Rule
144(k) under the Securities Act. Further, the Company may require holders of
Series A Convertible Preferred Stock to convert such shares into shares of
Common Stock if the Company sells Common Stock for cash in a registered
underwritten public offering and the underwriters agree to sell all shares of
Common Stock that holders of Series A Convertible Preferred Stock desire to sell
in the offering. In such event, the conversion price for such shares will be the
public offering price, less the underwriters' gross spread, reduced by the
Series A Applicable Percentage set forth above.
The exact number of shares issuable upon conversion of all of the Series A
Convertible Preferred Stock cannot currently be estimated but, generally, such
issuances of Common Stock will vary inversely with the market price of the
Common Stock. The holders of Common Stock ownership interest will be materially
diluted by conversion of the Series A Convertible Preferred Stock, which
dilution will depend on, among other things, the future market price of the
Common Stock and the conversion decisions made by holders of the Series A
Convertible Preferred Stock. The terms of the Series A Convertible Preferred
Stock do not provide for any limit on the number of shares of Common Stock which
the Company may be required to issue in respect thereof. Investors should
review carefully the material under "Risk Factors--Effect of Series A
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<PAGE>
Convertible Preferred Stock and Series B Convertible Preferred Stock" and
"Securities Market Factors" as well as the other information contained or
incorporated by reference in this Prospectus.
Series B Convertible Preferred Stock
Each share of Series B Convertible Preferred Stock is entitled to receive
dividends, payable commencing August 1, 1997 and thereafter quarterly on
November 1, February 1, May 1 and August 1 of each year, when and as declared by
the Company's Board of Directors, at the rate of 6% per annum in preference to
any payment made on any shares of Common Stock or any other class or series of
capital stock of the Corporation ranking junior to the Series B Convertible
Preferred Stock. Any dividend payable after the date of issuance of the Series
B Convertible Preferred Stock may be paid, at the option of the Company, either
(i) in cash or (ii) upon proper notice, in additional shares of Series B
Convertible Preferred Stock valued at $100.00 per share, if (1) the shares of
Common Stock issuable upon conversion of such Series B Convertible Preferred
Stock have been registered for resale under the Securities Act (as provided for
hereunder) and the registration statement, including the prospectus with respect
to such shares of Common Stock, remains in effect at the date of the delivery of
such shares of Series B Convertible Preferred Stock or (2) such shares of Common
Stock may be sold pursuant to Rule 144(k) under the Securities Act. Each share
of Series B Convertible Preferred Stock is also entitled to a liquidation
preference of $100.00 per share, plus any accrued but unpaid dividends, in
preference to any other class or series of capital stock of the Company, other
than the Series A Convertible Preferred Stock and any other class or series of
capital stock which is entitled to priority over the Series B Convertible
Preferred Stock; provided, however, that a share of Series B Convertible
Preferred Stock which is converted into Common Stock prior to August 1, 1997
shall receive no adjustment for accrued dividends, and the liquidation
preference of such shares, for conversion purposes, shall not include any amount
in respect of accrued and unpaid dividends. Except as otherwise provided by
applicable law, holders of shares of Series B Convertible Preferred Stock have
no voting rights.
Commencing May 29, 1997, 15% of the number of shares of Series B
Convertible Preferred Stock held of record by each holder on such day became
convertible into shares of Common Stock, and thereafter on the successive
monthly anniversaries of such day an equal number of such shares of Series B
Convertible Preferred Stock shall become convertible. On and after November 1,
1997, all shares of Series B Convertible Preferred Stock will be convertible
into shares of Common Stock. The number of shares of Common Stock issuable upon
conversion of shares of Series B Convertible Preferred Stock will equal the
liquidation preference of the shares being converted divided by the then-
effective conversion price applicable to the Common Stock (the "Series B
Conversion Price"); provided, however, that a share of Series B Convertible
Preferred Stock which is converted into Common Stock prior to August 1, 1997
shall receive no adjustment for accrued and unpaid dividends. The Series B
Conversion Price as of any date during the eight-month period following the date
of issuance shall be the lesser of (i) the actual selling price at which the
holder converting has sold shares of Common Stock (if any) during the three
trading days prior to conversion in a bona fide trade with an unaffiliated third
party (which may not be less than the lowest trading price on the date of such
trade as reported by the Nasdaq National Market) or (ii) the average of the
daily low trading prices of the Common Stock for the three consecutive trading
days prior to conversion, in either case reduced by the Series B Applicable
Percentage (as defined below). The Series B Conversion Price as of any date
after the eight-month period following the date of issuance through the 14th
month following the date of issuance shall be the lowest trading price of the
Common Stock during the five trading days immediately preceding the date of
conversion, reduced by the Series B Applicable Percentage. The "Series B
Applicable Percentage" is dependent upon the amount of time which has passed
from original issuance to the date of measurement, being 3% through the fourth
month and from the fifth month through the end of the fourteenth month being 4%,
5%, 12%, 12 3/4%, 13 1/2%, 14 1/2%, 16%, 19%, 22% and 25%, respectively. At any
date more than fourteen months after the date of issuance, the Series B
Conversion Price will be the lesser of (a) 75% of the average of the daily low
trading prices of the Common Stock for all the trading days during the 14th
month or (b) 75% of the lowest trading price of the Common Stock during the five
trading days immediately preceding the date of conversion. The Series B
Conversion Price is at all times also subject to adjustment for customary anti-
dilution events such as stock splits, stock dividends, reorganizations and
certain mergers
22
<PAGE>
affecting the Common Stock. On February 27, 2000, all of the then outstanding
shares of Series B Convertible Preferred Stock will be automatically converted
into shares of Common Stock at the then-applicable Series B Conversion Price.
Notwithstanding the foregoing, no holder of Series B Convertible Preferred Stock
will be entitled to convert any share of Series B Convertible Preferred Stock
into shares of Common Stock if, following such conversion, the holder and its
affiliates (within the meaning of the Securities Exchange Act of 1934) will be
the beneficial owners (as defined in Rule 13d-3 thereunder) of 10% or more of
the outstanding shares of Common Stock.
In addition, following conversion of the Series B Convertible Preferred
Stock into shares of Common Stock, the initial holders of such shares of Common
Stock will be limited on resales of such shares to the greatest of: (i) 10% of
the average daily trading volume of the Common Stock for the five trading days
preceding any such sale date; (ii) 20,000 shares; and (iii) 10% of the trading
volume for the Common Stock on the date of any such sale.
The Company may require holders of Series B Convertible Preferred Stock to
convert such shares into shares of Common Stock if the Company sells Common
Stock for cash in a registered underwritten public offering and the underwriters
agree to sell all shares of Common Stock that holders of Series B Convertible
Preferred Stock desire to sell in the offering. In such event, the conversion
price for such shares will be the public offering price, less the underwriters'
gross spread, reduced by the Applicable Percentage set forth above.
The exact number of shares issuable upon conversion of all of the Series B
Convertible Preferred Stock and offered hereby cannot currently be estimated
but, generally, such issuances of Common Stock will vary inversely with the
market price of the Common Stock. The holders of Common Stock ownership
interest will be materially diluted by conversion of the Series B Convertible
Preferred Stock, which dilution will depend on, among other things, the future
market price of the Common Stock and the conversion decisions made by holders of
the Series B Convertible Preferred Stock. Investors should review carefully the
material under "Risk Factors--Effect of Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock" and "Securities Market Factors" as
well as the other information contained or incorporated by reference in this
Prospectus.
General
Under applicable Delaware law and the Company's Certificate of
Incorporation, the Company's Board of Directors has the authority, without
further action by the stockholders, to issue additional shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any series of unissued preferred stock
and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the stockholders. Issuance
of additional shares of preferred stock may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common Stock
in the event of a liquidation or payment of preferred dividends. The issuance
of additional shares of preferred stock, and shares of Common Stock into which
such preferred stock may be converted, may, among other things, have the effect
of delaying, deferring or preventing a change in control of the Company,
discouraging tender offers for the Company and inhibiting certain equity
issuances until substantially all such shares are converted or redeemed. The
Company currently has no plans to designate and/or issue any additional shares
of preferred stock, except those issuable pursuant to the Convertible Preferred
Stock Warrants and as dividends on shares of Series B Convertible Preferred
Stock.
Warrants and Options
In connection with certain 1996 private placement transactions, the Company
agreed to issue to the placement agents in the transactions the Series A
Convertible Preferred Stock Warrants to purchase 108,000 shares of Series A
Convertible Preferred Stock at $25.00 per share and common stock warrants to
purchase
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<PAGE>
40,500 shares of Common Stock at $7.75 per share. Such warrants are exercisable
for a period of five years. Pursuant to its terms, the Series A Convertible
Preferred Stock is convertible at the Series A Conversion Price. The number of
shares of Common Stock issuable upon exercise of the common stock warrants is
also subject to adjustment. None of such warrants had been exercised as of
April 30, 1997. See "--Common Stock" and "--Preferred Stock--Series A
Convertible Preferred Stock."
In connection with the 1997 Private Placement, the Company agreed to issue
to the Placement Agent the Series B Convertible Preferred Stock Warrants to
purchase 29,000 shares of Series B Convertible Preferred Stock at $100.00 per
share. The Series B Convertible Preferred Stock Warrants are exercisable for a
period of three years from the date of issuance for securities that are
substantially identical to the Series B Convertible Preferred Stock. In
addition, on each of the first and second anniversary of the issuance of the
Series B Convertible Preferred Stock Warrants, the Company may, at its option,
call the warrants for mandatory exercise for one-third of the original shares
issuable upon exercise, subject to adjustment, provided, that the Common Stock
issuable upon conversion of the Series B Convertible Preferred Warrant stock
have been registered for resale under the Securities Act, and a current
prospectus is available on the date of delivery of such stock. The Series B
Convertible Preferred Stock Warrants, at the option of the holder, may be
exercised on a net basis without the payment of additional consideration
pursuant to their terms, subject to the prevailing market price of the Company's
Common Stock on the date of exercise. The shares of Common Stock issuable upon
exercise and conversion of the Series B Convertible Preferred Stock Warrants are
registered for resale under the Securities Act.
In addition to the warrants issued in connection with the 1996 Private
Placements and the 1997 Private Placement, the Company had outstanding as of
April 30, 1997 warrants to purchase an aggregate of approximately 1.1 million
shares of Common Stock (excluding approximately 450,000 shares of Common Stock
offered hereby issuable upon exercise of certain warrants issued in other
private placement transactions) at an average exercise price of $5.53 and
presently outstanding options to purchase an aggregate of approximately 7.7
million shares of Common Stock (excluding approximately 95,000 shares of Common
Stock offered hereby issuable upon exercise of certain options issued in other
private placement transactions) at a weighted average exercise price of $6.16.
Delaware Law and Limitations on Changes in Control
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents
an "interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging in
a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the transaction
in which the interested stockholder became an interested stockholder or approved
the business combination; (ii) upon consummation of the transaction that
resulted in the interested stockholder's becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66-2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder.
The Company's bylaws require advance notice of any action (including
nomination of directors) to be proposed at any annual or special meeting of
stockholders and set forth other specific procedures that a stockholder must
follow to properly bring any business in front of such a meeting. In addition,
the bylaws provide that a special meeting of the Company's stockholders may only
be called by the Chairman of the Board of Directors of the Company or by a
majority of the total number of directors which the Company
24
<PAGE>
would have if there were no vacancies; no such meeting may be called by the
stockholders. A director may be removed from office at any time, with or
without cause by stockholders, but only by the affirmative vote of the holders
of at least 75% of the then-outstanding shares of voting stock of the Company.
Any amendment of the bylaws or certain provisions of the Certificate of
Incorporation by stockholders will require the affirmative vote of the holders
of at least 75% of the shares of Common Stock then outstanding.
These bylaw provisions, the provisions authorizing the Board of Directors
to issue preferred stock without stockholder approval and the provisions of
Section 203 of the DGCL could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the Delaware General Corporation
Law. This provision has no effect on any non-monetary remedies that may be
available to the Company or its stockholders, nor does it relieve the Company or
its directors from compliance with federal or state securities laws. The
Certificate of Incorporation also provides that each person who is or was or had
agreed to become a director or officer of the Company or of certain affiliated
entities shall be indemnified by the Company, in accordance with its bylaws, to
the full extent permitted from time to time by the Delaware General Corporation
Law and that the Company may enter into one or more agreements with any person
which provide for indemnification greater or different therefrom. The bylaws
provide that each person who was or is made a party or is threatened to be made
a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
or a person of whom he or she is the legal representative is or was a director,
officer or employee of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another enterprise,
including service with respect to employee benefit plans, whether the basis of
such proceeding is alleged action in an official capacity as a director,
officer, employee or agent, or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Company to the fullest extent authorized by the Delaware General Corporation
Law. The bylaws also provide for advancement of expenses. Following any
"change in control" of the Company of the type required to be reported under
Item 1 to Form 8-K promulgated under the Exchange Act, any determination of
entitlement to indemnification under the Company's bylaws must be made by
independent legal counsel.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock, the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock is
ChaseMellon Shareholder Services, L.L.C.
25
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that the sale or
distribution of the Common Stock may be effected directly to purchasers by the
Selling Stockholders or by pledgees, donees, transferees or other successors in
interest, as principals or through one or more underwriters, brokers, dealers or
agents from time to time in one or more transactions (which may involve crosses
or block transactions) (i) on any stock exchange, in the Nasdaq National Market,
or in the over-the-counter market, (ii) in transactions otherwise than on any
stock exchange or in the over-the-counter market, or (iii) through the writing
of options (whether such options are listed on an options exchange or otherwise)
on, or settlement of short sales of, the Common Stock. Any of such transactions
may be effected at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, at varying prices determined at the
time of sale or at negotiated or fixed prices, in each case a determined by the
Selling Stockholder or by agreement between the Selling Stockholder and
underwriters, brokers, dealers or agents, or purchasers. If the Selling
Stockholders effect such transactions by selling Common Stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders or commissions from purchaser of
Common Stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The Selling
Stockholders and any brokers, dealers or agents that participate in the
distribution of the Common Stock may be deemed to be underwriters, and any
profit on the sale of Common Stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Under the securities laws of certain states, the Common Stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in certain states the Common Stock may not be sold unless the Common
Stock has been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
The Company will pay all of the expenses incident to the registration,
offering and sale of the Common Stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents.
The Company has agreed to indemnify the Selling Stockholders and their
controlling persons against certain liabilities, including liabilities under the
Securities Act. The Company estimates that the expenses of the offering to be
borne by it will be approximately $145,000. The Company will not receive any
proceeds from the sale of any of the Common Stock by the Selling Stockholders.
Cappello & Laffer Capital Corp. acted as placement agent in connection with
the placement of the Series B Convertible Preferred Stock which has been or will
be converted into the Common Stock offered hereby, and said firm received a fee
and warrants from the Company in connection therewith.
The Company has informed the Selling Stockholders that the anti-
manipulation provisions of Regulation M under the Exchange Act may apply to
purchases and sales of Common Stock by the Selling Stockholders, and that there
are restrictions on market-making activities by persons engaged in the
distribution of the Common Stock. The Company has also advised the Selling
Stockholders that if a particular offer of Common Stock is to be made on terms
constituting a material change from the information set forth above with respect
to the Plan of Distribution, then to the extent required, a Prospectus
Supplement must be distributed setting forth such terms and related information
as required.
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LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by McKenna & Stahl, Irvine, California. Harry S. Stahl, a
partner in McKenna & Stahl, owns options to acquire 25,000 shares of Common
Stock, which shares are offered hereby.
EXPERTS
The consolidated financial statements incorporated herein by reference have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
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================================================================================
No dealer, salesperson 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 in
connection with this offering must not be relied upon as having been authorized
by the Company or by any Selling Stockholder. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that the information contained herein is correct as of any time subsequent to
the date of this Prospectus.
______________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information............. 2
Forward Looking Statements........ 2
Incorporation of Certain
Documents by Reference............ 2
Prospectus Summary................ 4
Risk Factors...................... 8
Use of Proceeds................... 13
Recent Developments............... 13
Shares Available for Future Sale.. 14
Selling Stockholders.............. 16
Description of Capital Stock...... 20
Plan of Distribution.............. 26
Legal Matters..................... 27
Experts........................... 27
</TABLE>
================================================================================
================================================================================
KOO KOO ROO, INC.
Common Stock
(Par Value $.01 per Share)
___________________
PROSPECTUS
___________________
June 16, 1997
================================================================================
