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PROSPECTUS
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APPAREL TECHNOLOGIES, INC.
11,173,408 SHARES (MAXIMUM)
COMMON STOCK
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This Prospectus relates to the resale by the Selling Stockholders identified
herein of (i) an indeterminate number of shares of Common Stock, $.001 par value
("Common Stock") of Apparel Technologies, Inc. (the "Company") which may be
acquired by the Selling Stockholders upon conversion of the Company's 6%
Convertible Notes (the "6% Notes") and payment of interest on the 6% Notes, up
to a maximum of 11,020,408 shares; (ii) 100,000 shares of Common Stock of the
Company acquired by a Selling Stockholder in a private transaction which are
being offered for the account of such Selling Stockholder; and (iii) 53,000
shares issuable upon the exercise of outstanding warrants exercisable at $1.68
per share. See "Selling Stockholders and Plan of Distribution." Although the
Company will receive proceeds from the exercise of Options from time to time if
and when they are exercised, the Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders offered hereby.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
AT PAGE SIX FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol "APTX." On May 26, 1998 the last reported sales price for the
Company's Common Stock on the Nasdaq SmallCap Market was $0.25.
The date of this Prospectus is May 26, 1998
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TABLE OF CONTENTS
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AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . . . . . . . . 2
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . 12
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . . . . . . 15
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
RECENT MATERIAL CHANGES. . . . . . . . . . . . . . . . . . . . . . . . . . .17
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . .17
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices located at 7 World Trade Center, New
York, New York 10048 and Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a Web site on the Internet, http://www.sec.gov, that also contains
such reports, proxy statements and other information filed by the Company.
The Company has filed with the Commission a Registration Statement (together
with all amendments and exhibits, the "Registration Statement") on Form S-3
under the Securities Act of 1933 (the "Securities Act") with respect to the
Common Stock offered pursuant to this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
agreement or other document referred to herein are not necessarily complete and
reference is made to the copy of such agreement or other reference is made to
the Registration Statement and to the exhibits and schedules filed therewith.
Copies of the material containing this information may be obtained from the
Commission upon payment of the prescribed fee.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, all of which are previously filed with the
Commission pursuant to the Securities Exchange Act of 1934, are hereby
incorporated by reference in this Prospectus:
(i) the Company's Annual Report on Form 10-KSB and Form 10-KSB/A for the
fiscal year ended May 31, 1997 ("1997 Form 10-KSB");
(ii) the Company's Quarterly Report on Form 10-QSB and Form 10-QSB/A, for
the quarter ended August 31, 1997;
(iii) the Company's Form 10-QSB and Form 10-QSB/A for the quarter ended
November 30, 1997;
(iv) the Company's Form 10-QSB for the quarter ended February 28, 1998;
(v) the Company's Proxy Statement dated October 11, 1997;
(vi) the Company's Proxy Statement dated April 27, 1998;
(vii) The Company's Form 8-K dated June 27, 1997;
(viii) The Company's Form 8-K/A dated June 27, 1997;
(ix) The Company's Form 8-K/A dated July 14, 1997;
(x) The Company's Form 8-K/A dated February 2, 1998;
(xi) The Company's Form 8-K/A dated March 2, 1998;
(xii) The Company's Form 8-K dated December 9, 1997;
(xiii) The Company's Form 8-K/A dated February 9, 1998; and
(xiv) The Company's Form 8-K/A dated March 11, 1998.
All other reports and documents filed by the Company subsequent to the
date of this Prospectus pursuant to Sections 13(a), 13(c), and 14 or 15(d) of
the Exchange Act prior to the termination of the offering of the Common Stock
covered by this Prospectus shall be deemed to be incorporated by reference in
this Prospectus and
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to be a part hereof from the date of filing of those documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that such statement is modified
or replaced by a statement contained in this Prospectus or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference into this Prospectus. Any such statement so modified or superseded
shall not be deemed, except as so modified or replaced, to constitute a part
of this Prospectus. The Company will provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon the written
request of any such person, a copy of any or all of the documents referred to
above that have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies
should be directed to the Corporate Secretary, Apparel Technologies, Inc.,
2300 South Eastern Avenue, Commerce, California 90040, (213) 725-4955.
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SUMMARY
THIS PROSPECTUS, WHICH INCLUDES THE DOCUMENTS INCORPORATED HEREIN, CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING
THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE
FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO)
APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE DOCUMENTS INCORPORATED
HEREIN. AN INVESTMENT IN THE SHARES OF THE COMMON STOCK OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS DISCUSSED UNDER "RISK FACTORS."
THE COMPANY
Apparel Technologies, Inc. (the "Company") was incorporated in Delaware
in 1992 under the name American CinemaStores Inc. and commenced operations in
1993. Effective September 1997 the Company ceased using the name American
CinemaStores Inc. and began conducting business under its present name. On
November 10, 1997, the Company amended its Certificate of Incorporation to
change its legal name to Apparel Technologies, Inc.
The former business of the Company involved the operation of retail
"mini-stores" which sold movie related merchandise in lobbies of movie
theaters. In 1994 the Company opened temporary mini-stores offering similar
merchandise in malls. In 1995 the Company established the business of Sierra
Fixture & Design, Inc. ("Sierra"), which is engaged in the business of the
design, manufacturing and installation of high quality retail fixtures and
freestanding kiosks utilized in shopping malls and retail establishments
nationally.
In 1995 the Company concluded that the retail cinema store business was
not economically viable and discontinued this business in 1996. In 1996, the
Company determined to embark upon a restructuring of the Company through
strategic acquisitions of businesses.
In June 1997, under new management, the Company acquired Susan Burrowes,
Ltd., which has been engaged in the design, manufacturing and distribution of
missy and women's career apparel since 1978. Their labels include Susan
Burrowes, Just Clothes, Laura Keefer and Independence(TM).
In September 1997, the Company created a wholly owned subsidiary, Digital
Group, Inc. ("DGI"), to engage in the development and commercial
exploitation of digital print technology for apparel and sewn products, and
it acquired certain proprietary rights from its founders relating to digital
print technology. This proprietary technology allows the Company to utilize
quick turn, quick response to apparel design, allowing the design to
production cycle to be completed in 40 days rather than the traditional 120
to 180 day response time. The Company believes that this quick response will
allow apparel manufacturers to react quickly to changes in customer demand.
References herein to the "Company" include the Company and its
subsidiaries, unless the context indicates otherwise. The Company's
headquarters are located at 2300 South Eastern Avenue, Commerce, California
90040, and its telephone number is (213) 725-4955.
RISK FACTORS
See "RISK FACTORS" for a discussion of certain factors that investors
should consider carefully in
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evaluating an investment in the Common Stock offered hereby. These risk
factors include, among other things, a history of operating losses, the
continuing need for additional capital, competition and other factors.
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RISK FACTORS
THE SHARES OF THE COMPANY'S COMMON STOCK MUST BE CONSIDERED A SPECULATIVE
INVESTMENT INVOLVING A HIGH DEGREE OF RISK. IN ADDITION TO OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE INVESTING IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
LIMITED RELEVANT OPERATING HISTORY
Since 1995 the Company has been engaged in the restructuring and
consolidation of its operations, during which time it discontinued retail
operations and eliminated certain members of management. In June 1997 the
Company retained a new chief executive officer and undertook a new focus and
direction through the acquisition of Susan Burrowes, Ltd. and Digital Group,
Inc., and undertaking the commercial exploitation of proprietary digital
print technology in the apparel industry and other sewn products. Further,
as a result of a management restructuring which began in 1996, substantially
all of the Company's management has been replaced as of October 1997.
Therefore, although the Company's present management has substantial
experience in the apparel industry and the development of digital print
technology and the Susan Burrowes division has conducted operations since
1978, the Company has a limited relevant operating history upon which an
evaluation of its prospects and performances may be made.
HISTORY OF LOSSES; SIGNIFICANT ACCUMULATED DEFICIT
The Company and its predecessors on a consolidated basis have recognized
net losses in each fiscal year to date. The Company has an accumulated
deficit through February 28, 1998, of approximately $12 million. In
addition, because the Company's recent efforts have been directed towards
product development and the introduction of new products, revenues and
operating results have been uneven and may continue to be so during Fiscal
1998 and beyond as the Company introduces new product lines. Therefore,
there can be no assurances that the Company will be able to avoid continuing
operating losses or achieve profitability.
GENERAL NEED FOR ADDITIONAL CAPITAL AND NO ASSURANCE IT WILL BE AVAILABLE
The cash flow generated from the Company's operations to date has not
been sufficient to fund its working capital needs. The Company has relied
upon external sources of financing to maintain its liquidity, principally
private and bank indebtedness and equity financing. The Company expects to
fund any operating shortfall in Fiscal 1999 from cash on hand and available
credit facilities, and will continue to seek external sources of capital to
expand its operations, which sources may include debt and equity financing,
and joint venture arrangements. There are no assurances that such funds will
be available at the times or in the amounts required by the Company. In the
event any such financing involves the issuance of equity securities, existing
stockholders may suffer dilution in net tangible book value per share. The
unavailability of funds when required by the Company could have a material
adverse effect on the Company's financial statements, results of operations
and ability to expand its operations.
HIGHLY COMPETITIVE INDUSTRIES
The industries in which the Company operates are extremely competitive.
Many of its competitors have substantially greater financial resources than
the Company, spend considerably larger sums than the Company on research, new
product development and marketing, and have long-standing customer
relationships. Furthermore, the Company must compete with many larger and
better established companies in the hiring and
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retention of qualified personnel. Although the Company believes it has
certain advantages over its competitors, including established customer
relationships and its proprietary digital printing technology, realizing and
maintaining such advantages will require the Company to continue to develop
customer relationships and will depend on market acceptance of its products.
Future revenues and profits will be dependent to a large extent on the
introduction of new products. Competitive pressures could reduce market
acceptance of the Company's products, and there can be no assurance the
Company will have the financial resources, technical expertise or marketing
and support capabilities to compete successfully in the future.
RAPIDLY CHANGING MARKETS
The apparel industry is highly competitive and fragmented and is subject
to rapidly changing consumer demands and preferences. The Company believes
that its success depends in large part on its ability to anticipate, gauge
and respond to changing consumer demands and fashion trends in a timely
manner. Although the Company believes that the quick response feature of its
digital print technology will provide both the Company and its customers with
a significant competitive advantage for those lines of apparel which utilize
this technology, failure by the Company to identify and respond appropriately
to changing consumer demands and fashion trends could adversely affect
consumer acceptance of the Company's products.
DEVELOPMENT OF DIGITAL PRINT TECHNOLOGY AND APPLICATIONS
The Company believes that there is a substantial market for the
application of its digital print technology. However, the technology and its
application in, and acceptance by, the apparel industry has not yet been
established, and there are no assurances that the Company will be successful
in establishing market acceptance or that these operations will become
profitable.
DEPENDENCE UPON CERTAIN CUSTOMERS
During the nine months ended February 28, 1998, more than half of the
Company's revenues were derived from the Susan Burrowes division. Their
customers include department stores, such as Macy's, Lord and Taylor and
Merchantile), apparel specialty stores (including: Casual Corner, August Max,
and Lane Bryant), national chain stores (including J.C. Penney's and Sears),
and the mass merchandisers (Wal-Mart). During this same period, the majority
of the Susan Burrowes revenues were derived from sales to a single customer,
J.C. Penney's. The loss of a significant customer may have a material adverse
effect on the financial condition of the Company.
DEPENDENCE UPON THIRD PARTY MANUFACTURERS
The Company subcontracts virtually all of its manufacturing for Susan
Burrowes and Sierra divisions to third party manufacturers in the Los Angeles
area. The Company does not have any long-term agreements with any of these
manufacturers. Although the Company believes that its relationships with its
subcontractors are satisfactory and alternative sources are available, the
use of third party manufacturers increases the risk of delay of shipments to
its customers and increases the risk of higher costs if the Company's
manufacturers are not available when required.
RISKS ASSOCIATED WITH ACHIEVING AND MANAGING GROWTH
The Company's business plan calls for rapid growth and expansion.
Implementation of this plan carries certain risks, including the need to
expand to upgrade and expand its information systems, operations and
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personnel to respond to increased demand, and the need to attract, retain,
develop and manage an increasing number of employees. Failure to enhance
operating control systems or unexpected difficulties encountered during
expansion could materially adversely affect the Company's financial condition
and results of operation.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon the timing of
new product introductions by the Company. The Company's quarterly operating
results may also fluctuate significantly depending on other factors,
including the introduction of new products by the Company's competitors,
market acceptance of the Company's products, adoption of new technologies,
and manufacturing costs and capabilities.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a considerable degree on the continued services of
Kathryn Van Ness, its President, as well as a limited number of highly
qualified employees. The Company has non-competition and secrecy agreements
with these individuals; however, the Company does not maintain life
insurance. The loss of any of these individuals could have a material
adverse effect on the Company.
PROTECTION OF PATENTS, TRADEMARKS PROPRIETARY TECHNOLOGY
The Company seeks to protect its proprietary technology by means of
patent protection, trade secrets and unpatented proprietary know-how. The
Company also protects its trademarks through registration wherever possible.
Presently, the Company has no issued patents. No assurance can be given that
pending or future patent applications will issue as patents or that any
patents which may be issued will provide the Company with adequate protection
with respect to the covered products or technology. Moreover, a portion of
the Company's proprietary technology is dependent upon unpatented trade
secrets and know-how. Although the Company enters into confidentiality
agreements with individuals and companies having access to proprietary
technology whenever practicable, such agreements may not provide meaningful
protection for this technology in the event of any unauthorized use or
disclosure of such know-how. Further, in cases where patent protection does
not exist, the Company may be exposed to competitors who independently
develop substantially equivalent technology or otherwise gain access to the
Company's trade secrets, know-how or other proprietary information. In
addition, no assurances can be given that the Company's trademarks will not
be challenged or infringed upon by others.
PRICE VOLATILITY
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. In addition, the market prices of the
common stock of many publicly traded Nasdaq SmallCap companies have in the
past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or
its competitors, developments or disputes concerning patents or proprietary
rights, publicity regarding actual or potential results relating to products
under development by the Company or its competitors, and other external
factors, as well as period to-period fluctuations in the Company's financial
results, may have a significant impact on the market price of the Common
Stock.
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
The Articles of Incorporation of the Company currently authorize the
Board of Directors to issue up to 60,000,000 shares of Common Stock. The
power of the Board of Directors to issue shares of Common Stock or
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warrants to purchase shares of Common Stock is not subject to shareholder
approval under Delaware state law. Any additional issuance of the Company's
Common Stock may have the effect of further diluting the equity interest of
shareholders.
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ISSUANCE OF SHARES OF PREFERRED STOCK
The Company's Board of Directors also has the authority to issue up to
5,000,000 shares of Preferred Stock, and to determine the price, and the
rights, preferences, privileges and restrictions, without any further vote or
action by the Company's stockholders. Because the holders of Preferred Stock
may be entitled to vote on certain matters as a class, issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change of
control of the Company. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire control of the Company.
The Company has no current plans to issue shares of Preferred Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The shares being offered and sold pursuant to this Prospectus, prior to
their registration with the U.S. Securities and Exchange Commission, were
"restricted securities" under the Securities Act of 1933, as amended, and
therefore were not freely tradable except in accordance with Rule 144, upon
compliance with its requirements, including a holding period of not less than
one year and limitations on the amount of securities that may be sold. As a
result of the registration under the 1933 Act of the shares proposed to be
sold by the Selling Stockholders from time to time pursuant to this
Prospectus, such shares may be sold without restriction under the 1933 Act.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could have a material adverse effect on
the market price of the Common Stock.
FAILURE TO MEET CONTINUED LISTING REQUIREMENTS ON NASDAQ; RISK OF LOW PRICED
SECURITIES; SMALLCAP MARKET; PENNY STOCK
The Company's Common Stock and Warrants are currently listed on the
Nasdaq SmallCap Market (the "SmallCap Market"). The National Association of
Securities Dealers, Inc. has established certain standards for the initial
listing and continued listing of a security on the SmallCap Market. For
continued listing on the SmallCap Market, an issuer must, among other things,
maintain at least $2,000,000 in tangible net assets, a market capitalization
of $35 million or net income of $500,000 in the most recently completed
fiscal year or in two of the last three most recent years. In addition,
continued listing requires a minimum of two market makers and a minimum bid
price of $1.00 per share. The Company is not presently in compliance with
these listing standards. The Company is attempting to achieve compliance
with these standards by obtaining additional equity financing to increase its
tangible net assets and intends to effect a reverse stock split if necessary.
The Company has also applied to Nasdaq to obtain a temporary exemption from
the listing requirements and presented its request for a temporary exemption
at a hearing held by Nasdaq on April 30, 1998. There are no assurances that
the Company will be able to meet the listing maintenance requirements within
the time and on the conditions required by Nasdaq to avoid delisting, even if
a temporary exemption from the maintenance requirements is granted.
If the Company's securities were excluded from Nasdaq, it could adversely
affect the prices of such securities and the ability of the holders to sell
them. Delisting may restrict investors' interest in the Company's securities
and materially adversely affect the trading market and prices for such
securities and the Company's ability to issue additional securities or to
secure additional financing. It is anticipated that if the Company's
securities are delisted, trading, if any, in such securities would be
conducted in the over-the-counter market on the National Association of
Securities Dealers, Inc. OTC Electronic Bulletin Board established for
securities that do not meet the Nasdaq listing requirements, or quoted in
what are commonly referred to as the "pink sheets."
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As a result, an investor may find it more difficult to dispose of or to
obtain accurate price quotations and volume information concerning the
Company's Common Stock.
Moreover, if the Common Stock is delisted from the SmallCap Market and
the trading price of the Common Stock is less than $5.00 per share, such
securities would likely be subject to the low priced security or so-called
"penny stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. For any transaction involving a penny
stock, unless exempt, the rules require, among other things, the delivery,
prior to the transaction, of a disclosure schedule required by the Securities
and Exchange Commission relating to the penny stock market. Such rules also
require that the broker determine, based upon information obtained from the
investor, that transactions in penny stocks are suitable for the investor,
and require the broker to obtain the written consent of the investor prior to
effecting the penny stock transaction. The broker-dealer must also disclose
the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally,
monthly statements must be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in
penny stocks. If the Common Stock should subsequently become characterized as
a penny stock, the market liquidity for such securities could be severely
affected. In such an event, the regulations relating to penny stocks could
limit the ability of broker-dealers to sell such securities and, thus, the
ability of shareholders to sell their shares in the secondary market.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does
not expect to pay any cash dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in its business.
The Company is not a party to any agreements which restrict its ability to
pay dividends in the future.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
first becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of Section 203 could also
have the effect of delaying or preventing a change in control of the Company.
FORWARD-LOOKING STATEMENTS
When used in this Prospectus and the documents incorporated herein by
reference, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify, in certain circumstances,
forward-looking statements. Such statements are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those projected, including the risks described in this "Risk Factors"
section. Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such statements. The Company also undertakes no
obligation to update these forward-looking statements.
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SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
All of the shares of Common Stock of the Company covered by this
Prospectus which may be offered and sold from time to time are being sold for
the account of the selling stockholders named in the table below under
"Shares of Common Stock Offered by Selling Stockholders (the "Selling
Stockholders"). The shares which may be offered and sold from time to time
by the Selling Stockholders include: (i) an indeterminate number of shares
of Common Stock which may be acquired by the Selling Stockholders upon
conversion of the $2.7 million aggregate principal amount of the Company's 6%
Notes, up to 11,020,408 shares, and payment of interest on the 6% Notes; (ii)
100,000 shares of Common Stock of the Company acquired by a Selling
Stockholder in a private transaction which are being offered for the account
of such Selling Stockholder; and (iii) 53,000 shares issuable upon the
exercise of outstanding warrants exercisable at $1.68 per share.
The shares of Common Stock offered by the Selling Stockholders may be
offered for sale from time to time at market prices prevailing at the time of
sale or at negotiated prices, and without payment of any underwriting
discounts or commissions except for usual and customary selling commissions
paid to brokers or dealers. This Prospectus has been prepared so that future
sales of the shares of Common Stock by the Selling Stockholders will not be
restricted other than as set forth herein. In connection with any sales, the
Selling Stockholders and any brokers participating in such sales may be
deemed to be "underwriters" within the meaning of the Securities Act.
Pursuant to rules promulgated under the Exchange Act, a Selling
Stockholder who is neither affiliated nor directly or indirectly acting in
concert with the issuer or with any other Selling Stockholder will be
required to observe the appropriate "cooling off" period and other
restrictions only prior to the individual stockholder's distribution and
until such distribution ends or the shares are withdrawn from registration.
Conversely, a Selling Stockholder who is affiliated or acting in concert with
the issuer or another Selling Stockholder will be required to observe the
appropriate "cooling off" period and other restrictions under Regulation M
with respect to all offers and sales by affiliated persons.
Except as set forth below, no Selling Stockholder has had any material
relationship with the Company or an affiliate of the Company within the past
three years. Christopher J. Ebert, a former officer and director of the
Company, received 100,000 shares of Common Stock as part of an employment
termination agreement whereby Mr. Ebert relinquished the right to receive
250,000 shares of Common Stock.
The shares of Common Stock sold for the account of the Selling
Stockholders may be sold in one or more of the following transactions: (a)
block trades in which the broker or dealer so engaged will attempt to sell
such shares as agent but may position and resell a portion of the block as
principal to facilitate any transaction, (b) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus, and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
brokers and dealers engaged by Selling Stockholders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive
commissions or discounts from Selling Stockholders in amounts to be
negotiated (and, if such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser). Broker-dealers may agree with the
Selling Stockholders to sell a specified number of such shares at a
stipulated price per share, and, to the extent such a broker-dealer is unable
to do so acting as agent for a Selling Stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer
commitment to such Selling Stockholder. Broker-dealers who acquire such
shares as principals may thereafter resell such shares from time to time in
transactions (which may involve crosses and book transactions and which may
involve sales to and through other broker-dealers, including transaction, of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or
at negotiated
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<PAGE>
transactions or otherwise, at market prices prevailing at the time of sale or
at negotiated prices, and in connection with such resales may pay to or
receive from the purchasers of such shares commissions as described above.
Listed below are the names of each selling stockholder (the "Selling
Stockholders"), the total number of shares owned and the number of shares to
be sold in this offering by each Selling Stockholder, and the percentage of
Common Stock owned by each Selling Stockholder before and after this Offering:
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF SHARES OF
COMMON STOCK TO COMMON STOCK
SHARES OF BE OFFERED FOR OWNED OF
COMMON STOCK SELLING RECORD AFTER
OWNED OF RECORD STOCKHOLDER'S COMPLETION OF
NAME PRIOR TO OFFERING** ACCOUNT** OFFERING
- ------------------ ------------------------ ------------------ --------------------
NUMBER PERCENT NUMBER PERCENT
------------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Banque Franck,
S.A. 1,224,490 (1) 5.6 1,224,290 (1) - -
Christopher J.
Ebert 100,000 * 100,000 - -
Thomson
Kernaghan & Co. 9,795,918 (1) 32.2 9,795,918 (1) - -
Wall Street
Consultants 53,000 * 53,000 - -
</TABLE>
____________________________
* Less than one percent.
**Assumes the exercise of all Options
(1) Assumes a conversion price of $0.245 pershare, the conversion of all 6%
Notes and payment of interest in cash. The actual conversion price is
equal to between 70-83% of the market price of the Common Stock during
the five days immediately preceding the date of conversion. Therefore,
the actual number of shares sold pursuant to this Prospectus could be
more or less than the number shown, depending upon the conversion
price and the dollar amount converted.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of March 25, 1998, the authorized capital stock of the Company
consisted of 30,000,000 shares of Common Stock, par value $.001 per share, of
which 20,642,387 were issued and outstanding, and 5,000,000 shares of
Preferred Stock, none of which were outstanding. On May 22, 1998, the
Company's shareholders approved an amendment to the Company's Certificate of
Incorporation increasing the number of authorized shares of Common Stock from
30,000,000 to 60,000,000.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders and have no cumulative voting rights.
Common stockholders are entitled to receive such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Common Stock has no preemptive or conversion rights
or other subscription rights and there are no redemptive or sinking funds
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable, and all the shares of Common Stock
offered by the Company hereby will, when issued, be fully paid and
nonassessable.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company is authorized
to issue "blank check" preferred stock, which may be issued from time to time
in one or more series upon authorization by the Company's Board of Directors.
The Board of Directors, without further approval of the shareholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each series of
preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, discourage bids
for the Company's Common Stock at a premium or otherwise adversely affect the
market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). In general, Section 203 prohibits certain publicly held
Delaware corporations from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date of
the transaction in which the person or entity became an interested
stockholder, unless the business combination is approved in a prescribed
manner. For purposes of Section 203, "business combination" is defined
broadly to include mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
is any person or entity who, together with affiliates and associates, owns
(or within the three immediately preceding years did own) 15% or more of the
Company's voting stock. The provisions of Section 203 requiring a super
majority vote to approve certain corporate transactions could enable a
minority of the Company's stockholders to exercise veto powers over such
transactions and could have the effect of delaying or preventing a change in
control of the Company without further action by the stockholders.
EXCULPATION AND INDEMNIFICATION PROVISIONS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification
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<PAGE>
of officers and directors under certain circumstances against expenses
incurred in successfully defending against a claim and authorizes Delaware
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such person because of their being or having been an officer or
director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to
eliminate or limit a director's liability to the corporation and its
stockholders for monetary damages arising out of certain alleged breaches of
their fiduciary duty. Section 102(b)(7) provides that no such limitation of
liability may affect a director's liability with respect to any of the
following: (i) breaches of the director's duty of loyalty to the corporation
or its stockholders; (ii) acts or omissions not made in good faith or which
involve intentional misconduct of knowing violations of law; (ii) liability
for dividends paid or stock repurchased or redeemed in violation of the
Delaware General Corporation Law; or (iv) any transaction from which the
director derived an improper personal benefit. Section 102(b)(7) does not
authorize any limitation on the ability of the corporation or its
stockholders to obtain injunctive relief, specific performance or other
equitable relief against directors.
Article Nine of the Company's Certificate of Incorporation and the
Company's By-laws provide that all persons who the Company is empowered to
indemnify pursuant to the provisions of Section 145 of the General
Corporation law of the State of Delaware (or any similar provision or
provisions of applicable law at the time in effect), shall be indemnified by
the Company to the full extent permitted thereby. The foregoing right of
indemnification is not deemed to be exclusive of any other rights to which
those seeking indemnification may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors, or otherwise.
Article Ten of the Company's Certificate of Incorporation provides that
no director of the Company will be personally liable to the Company or its
stockholders; (i) for any monetary damages for breaches of fiduciary duty of
loyalty to the Company or its stockholders': (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the General Corporation of Law of the
State of Delaware; or (iv) for any transaction from which the director
derived an improper personal benefit.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Continental Stock Transfer & Trust Company, New York, New York.
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<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of
Common Stock offered hereby will be passed upon for the Company by Guzik &
Associates, Los Angeles, California. Samuel S. Guzik, Esq., a principal of
this firm, is a Director of the Company and its General Counsel. Mr. Guzik
owns 75,000 shares of the Common Stock and options to purchase 500,000 shares
of the Company's Common Stock at $0.56 per share, which vest over four years.
EXPERTS
The consolidated financial statements of the Company and subsidiaries for
the years ended May 31, 1997, and May 31, 1996, incorporated by reference in
this Prospectus and Registration Statement, have been audited by BDO Seidman,
LLP, independent certified public accountants. Such financial statements and
schedules have been so incorporated in reliance upon the authority of such
firm as experts in accounting and auditing. The financial statements of
Susan Burrowes, Ltd. for the year ended February 28, 1997, incorporated by
reference in this Prospectus and Registration Statement, have been audited by
Cohn Handler & Co., an Accountancy Corporation, independent certified public
accountants. The financial statements of Cactus Europe SARL for the ten
months ended October 31, 1997, incorporated by reference in this Prospectus
and Registration Statement, have been audited by BDO Gendrot, independent
certified public accountants. Such financial statements have been so
incorporated in reliance upon the authority of such firm as experts in
accounting and auditing.
RECENT MATERIAL CHANGES
DEBT FINANCING
In May 1998 the Company entered into an agreement with a private investor
to loan $2 million to the Company in installments over a 90 day period. The
first installment, in the amount of $600,000, was funded on May 19, 1998.
The loans bear interest at the rate of 6% per annum and are due and payable
in June 2000. The principal amount is convertible into Common Stock of the
Company at a conversion price equal to 75% of the market price of the Common
Price during the five trading days immediately preceding the date of
conversion, subject to conversion. The Company is entitled to redeem the
loans at any time upon payment of the outstanding principal amount, accrued
interest and a redemption premium equal to 25% of the principal amount
redeemed. The holder of the loans is entitled to have the Company register
the shares issuable upon conversion of the loans under applicable securities
laws.
TERMINATION OF INVESTMENT BANKING AGREEMENT
In May 1998 the Company unilaterally terminated its investment banking
relationship with First Fidelity Capital, Inc. of Beverly Hills, California.
The election to terminate the relationship was made as a result of serious
breaches by First Fidelity of its agreement with the Company, including its
failure to honor funding commitments of approximately $5 million at the times
and in the amounts agreed to be provided by First Fidelity, dissemination of
confidential, non-public information regarding the Company to third parties,
and conflicts of interest resulting from its representation of certain
investors. The investment banking relationship was originally entered into
in April 1997 by the Company's former management.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement under
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<PAGE>
the Securities Act of 1933, as amended, with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and the Common Stock,
reference is hereby made to such Registration Statement, exhibit and
schedules. Statements contained in this Prospectus regarding the contents of
any contract or other document are not necessarily complete with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the
Commission in Washington, D.C. and copies of such material may be obtained
from such upon payment of the fees prescribed by the Commission.
No dealer, salesman or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus. If given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or solicitation of an offer to buy any
securities other than the shares of Common Stock to which it relates or an
offer or solicitation to any person in any jurisdiction where such an offer
or solicitation would be unlawful. Neither delivery of this Prospectus nor
sale made hereunder shall under any circumstances create an implication that
information contained herein is correct as of any time subsequent to its date.
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