<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 19, 1996
REGISTRATION NO. 333-3162
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ML DIRECT INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 13-3842020
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
------------------------
<TABLE>
<S> <C>
300 PARK AVENUE JAMES LAWLESS
SUITE 1700 PRESIDENT
NEW YORK, NY 10022 300 PARK AVENUE
(212) 572-6209 SUITE 1700
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL NEW YORK, NY 10022
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
</TABLE>
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Copies to:
<TABLE>
<S> <C>
STEVEN F. WASSERMAN, ESQ. MICHAEL F. MULPETER, ESQ.
BERNSTEIN & WASSERMAN, LLP COHN & BIRNBAUM P.C.
950 THIRD AVENUE 100 PEARL STREET
NEW YORK, NY 10022 HARTFORD, CT 06103
(212) 826-0730 (203) 493-2200
(212) 371-4730 (FAX) (203) 727-0361 (FAX)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: /x/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SECURITY(2) OFFERING PRICE REGISTRATION
<S> <C> <C> <C> <C>
Units, consisting of two (2) shares of
Common Stock, par value $.0001 and one
(1) Class A Warrant(3)................ 805,000 $ 10.00 $ 8,050,000 2,775.86
Common Stock, par value $.0001 per
share(3).............................. 1,610,000 -- -- --
Class A Warrants(4)..................... 805,000 -- -- --
Common Stock, par value $.0001 per
share, underlying Class A
Warrants(5)........................... 805,000 $ 6.00 $ 4,830,000 $ 1,665.51
Representative's Unit Purchase
Option(6)............................. 70,000 $ .001 $ 70.00 $ .02
Units, consisting of two (2) shares of
Common Stock, par value $.0001 and one
(1) Class A Warrant................... 70,000 $ 12.00 $ 840,000 $ 289.65
Common Stock, par value $.0001 per share
underlying Representative's Unit
Purchase Option(6).................... 140,000 -- -- --
Class A Warrants, underlying
Underwriter's Unit Purchase Option.... 70,000 -- -- --
Common Stock, par value $.0001 per share
underlying Class A Warrants in
Underwriter's Unit Purchase Option.... 70,000 $ 6.00 $ 420,000 $ 144.83
Common Stock, par value $.0001 per
share(7).............................. 250,000 $ 5.00 $ 1,250,000 $ 431.03
Common Stock, par value $.0001 per
share(8).............................. 2,000,000 $ 5.00 $10,000,000 $ 3,348.27
Class A Warrants(8)..................... 2,000,000 $ .10 $ 200,000 $ 68.96
Common Stock, par value $.0001 per share
underlying Class A Warrants(5)(8)..... 2,000,000 $ 6.00 $12,000,000 $ 4,137.93
Total $ 12,862.06
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the 'Act'), this
Registration Statement covers such additional indeterminate number of shares
of Common Stock as may be issued by reason of adjustments in the number of
shares of Common Stock pursuant to anti-dilution provisions contained in the
Class A Warrants and the Representative's Option. Because such additional
shares of Common Stock will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Estimated solely for purposes of calculating registration fee.
(3) Includes 210,000 shares of Common Stock and 105,000 Class A Warrants which
may be issued upon the exercise of an option granted to the Representative
to cover over-allotments, if any. See 'Underwriting.'
(4) The Class A Warrants are exercisable over a four (4) year period commencing
one year from the effective date of this Offering into one (1) share of
Common Stock per Class A Warrant at an exercise price of $6.00 per share.
(5) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Class A Redeemable Common Stock Purchase
Warrants ('Class A Warrants') at the maximum exercise price thereof.
(6) The Representative's Unit Purchase Option entitles the Representative to
purchase up to 140,000 shares of Common Stock and 70,000 Class A Warrants at
120% of the offering price (the 'Representative's Option').
(7) Common Stock which is included in the Preferred Stock Units.
(8) On behalf of Selling Securityholders.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
ML DIRECT INC.
CROSS REFERENCE SHEET
(SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS 1 THROUGH 23, PART I, OF FORM SB-2)
<TABLE>
<CAPTION>
ITEM IN FORM SB-2 PROSPECTUS CAPTION
------------------------------------------------------ ------------------------------------------------------
<S> <C> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................. Facing Page of Registration Statement; Outside Front
Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information and Risk Factors.................. Prospectus Summary; Risk Factors
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price....................... Outside Front Cover Page of Prospectus; Underwriting;
Risk Factors
6. Dilution.............................................. Dilution; Risk Factors
7. Selling Securityholders............................... Description of Securities; Selling Securityholders
8. Plan of Distribution.................................. Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
9. Legal Proceedings..................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management.......................................... Principal Securityholders
12. Description of Securities............................. Description of Securities; Underwriting
13. Interest of Named Experts and Counsel................. Experts; Legal Matters
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Underwriting; Certain Transactions
15. Organization Within Last 5 Years...................... Prospectus Summary; The Company; Business
16. Description of Business............................... Business; Risk Factors
17. Management's Discussion and Analysis or Plan of
Operation........................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............................... Business--Facilities
19. Certain Relationships and Related Transactions........ Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................. Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Securities; Underwriting
21. Executive Compensation................................ Management--Executive Compensation
22. Financial Statements.................................. Selected Financial Data; Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................ *
</TABLE>
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* Omitted because Item is not applicable.
ii
<PAGE>
EXPLANATORY NOTE
This registration statement covers the primary offering of Units consisting
of two (2) shares of Common Stock and one Class A Warrant by ML Direct Inc. (the
'Company') and the concurrent offering of securities by certain selling
securityholders ('Selling Securityholders'). The Company is registering, under
the primary prospectus ('Primary Prospectus'), 805,000 Units consisting of
1,610,000 shares of Common Stock and 805,000 Class A Warrants. The Selling
Securityholders are registering, under an alternate prospectus ('Alternate
Prospectus'), 2,250,000 shares of Common Stock, 2,000,000 Class A Warrants and
2,000,000 shares of Common Stock underlying Class A Warrants. The Alternate
Prospectus pages, which follow the Primary Prospectus, contain certain sections
which are to be combined with all of the sections contained in the Primary
Prospectus, with the following exceptions: The front and back cover pages and
the sections entitled 'Concurrent Sales,' 'Selling Securityholders,'
'Underwriting' and 'Plan of Distribution' from the Alternate Prospectus pages
will be added to the Alternate Prospectus. Furthermore, all references contained
in the Alternate Prospectus to 'the offering' or 'this offering' shall refer to
the Company's offering under the Primary Prospectus.
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OF SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION, DATED JULY , 1996
PROSPECTUS
ML DIRECT INC.
700,000 UNITS, EACH UNIT CONSISTS
OF TWO (2) SHARES OF COMMON STOCK, PAR VALUE
$.0001 PER SHARE, AND ONE (1) CLASS A
REDEEMABLE COMMON STOCK PURCHASE WARRANT
OFFERING PRICE PER UNIT--$10.00
------------------------
ML Direct Inc., a Delaware corporation (the 'Company'), hereby offers
700,000 Units ('Unit'), each Unit consisting of two (2) shares of Common Stock
$.0001 par value per share (the 'Common Stock' and 'Shares') and one (1) Class A
Redeemable Common Stock Purchase Warrant (the 'Class A Warrants' and
'Warrants'). The securities comprising the Units will be separately transferable
immediately upon the date of this Offering (the 'Offering'). See 'Risk Factors'
and 'Description of Securities.' The Risk Factor Section begins on page 8 of
this Prospectus. It is contemplated that the proceeds of this offering will be
utilized by the Company to, among other things, pay a stock subscription payable
in connection with its purchase of 50.02% of the outstanding equity of the
Company's subsidiary KN2B, Inc. and to redeem the Company's outstanding
preferred stock which is held by certain affiliated and non-affiliated persons.
See 'Use of Proceeds.'
Each Class A Warrant entitles the holder to purchase one (1) share of
Common Stock at $6.00 per share during the four (4) year period commencing one
(1) year from the date of this Prospectus (the 'Effective Date'). The Class A
Warrants are redeemable by the Company for $.01 per Warrant, at any time after
, 1997, upon thirty (30) days' prior written notice, if the average
closing price or bid price of the Common Stock, as reported by the principal
exchange on which the Common Stock is traded, the Nasdaq SmallCap Market or the
National Quotation Bureau, Incorporated, as the case may be, equals or exceeds
per share for any twenty (20) consecutive trading days ending within five
(5) days prior to the date of the notice of redemption. Upon thirty (30) days'
written notice to all holders of the Class A Warrants, the Company shall have
the right to reduce the exercise price and/or extend the term of the Class A
Warrants in compliance with the requirements of Rule 13e-4 to the extent
applicable. See 'Description of Securities.'
(Continued on next page)
------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE 'DILUTION' AND 'RISK FACTORS.'
------------------------
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.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Unit.......................................... $10.00 $1.00 $9.00
Total(3).......................................... $7,000,000 $700,000 $6,300,000
</TABLE>
(1) Does not reflect additional compensation to be received by the Underwriters
in the form of: (i) a non-accountable expense allowance of $210,000
($241,500 if the Representative's over-allotment option is exercised in
full), (ii) a five year financial advisory and investment banking agreement
providing for fees of $1,666.66 per month payable in advance at the closing
of this Offering, (iii) an option to purchase 70,000 Units at $12.00 per
Unit (the 'Representative's Option') exercisable for a period of four (4)
years, commencing one (1) year from the effective date of this offering,
(iv) a finders fee agreement between the Company and the Underwriter and (v)
the agreement by the Company to pay to the Underwriter a warrant
solicitation fee in connection with the possible exercise of Warrants. The
Company and the Representative have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the 'Act'). The Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy and is therefore unenforceable. See 'Underwriting.'
(2) Before deducting expenses of the offering payable by the Company estimated
at $815,000 including the Representative's non-accountable expense allowance
and financial consulting fee referred to in Footnote (1) (not assuming
exercise of the Over-Allotment Option), registration fees, transfer agent
fees, NASD fees, Blue Sky filing fees and expenses, legal fees and expenses,
and accounting fees and expenses. See 'Use of Proceeds' and 'Underwriting.'
(3) Does not include 105,000 additional Units to cover over-allotments which the
Representative has an option to purchase for thirty (30) days from the date
of this Prospectus at the initial public offering price, less the
Representative's discount (the 'Over-Allotment Option'). If the
Over-Allotment Option is exercised in full, the total price to the public,
the underwriting discounts and commissions and the estimated expenses
including the Representative's non-accountable expense allowance will be
$8,050,000, $805,000 and $846,500, respectively, and the total proceeds to
Company will be, $7,245,000 (before expenses). See 'Underwriting.'
I.A. RABINOWITZ & CO.
THE DATE OF THIS PROSPECTUS IS JULY 19, 1996
<PAGE>
(Continued from cover)
The Company has applied for inclusion of the Common Stock and Class A
Warrants on the Nasdaq SmallCap Market, although there can be no assurances that
an active trading market will develop even if the securities are accepted for
quotation. The Units will not be listed on the Nasdaq SmallCap Market. Even if
the Company's securities are accepted for quotation and active trading develops,
the Company is still required to maintain certain minimum criteria established
by Nasdaq, of which there can be no assurance. In addition, if the Company's
securities should be removed from listing by Nasdaq at any time following the
Effective Date, the Company's securities may be subject to the 'Penny Stock
Regulations.' See 'Risk Factors--Lack of Prior Market for Common Stock' and
'Penny Stock Regulations May Impose Certain Restrictions on Marketability of
Securities.'
Also, the registration statement of which this Prospectus forms a part
covers the offering of 2,250,000 shares of Common Stock, 2,000,000 Class A
Warrants and 2,000,000 shares of Common Stock underlying Class A Warrants owned
by certain affiliated and non-affiliated persons, hereinafter collectively
referred to as the 'Selling Securityholders.' The Company will not receive any
of the proceeds on the sale of the securities by the Selling Securityholders.
The securities held by the Selling Securityholders may be sold commencing 24
months from the date of this Prospectus, except that the holders of the
Preferred Stock Units, who hold an aggregate of 720,000 shares of Preferred
Stock and 250,000 shares of Common Stock, have agreed to a thirteen (13) lock-up
month period, subject to earlier release at the sole discretion of I.A.
Rabinowitz & Co., the representative (the 'Representative') of the underwriters
of this offering (the 'Underwriters'). The Representative may release the
securities held by the Selling Securityholders at any time after all securities
subject to the Over-Allotment Option have been sold or such option has expired.
The Representative has no agreements or understandings with any of the Selling
Securityholders with respect to release of the securities prior to the
respective periods and has no present intention of releasing any or all of such
securities prior to such periods. The Company does not presently intend to make
a public announcement in the event the Representative releases any securities
prior to the respective periods. The resale of the securities of the Selling
Securityholders are subject to Prospectus delivery and other requirements of the
Securities Act of 1933, as amended (the 'Act'). Sales of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See 'Selling Securityholders.'
Prior to this offering, there has been no public market for the Common
Stock or the Class A Warrants. It is currently anticipated that the initial
public offering price will be $10.00 per Unit. The price of the Units and the
exercise price and the terms of the Warrants have been determined by
negotiations between the Company and the Representative and do not necessarily
bear any relationship to the Company's assets, book value, net worth or results
of operations or any other established criteria of value, including recent sales
of the Common Stock at an average price of $.10 per share. The Representative
may enter into arrangements with one or more broker-dealers to act as
co-underwriters of this Offering. For additional information regarding the
factors considered in determining the initial public offering price of the
Common Stock, see 'Risk Factors--Dilution,' 'Risk Factors--No Prior Public
Market; Possible Volatility of Stock Price,' 'Risk Factors--Arbitrary
Determination of Offering Price,' 'Dilution,' 'Description of Securities' and
'Underwriting.'
The Units are offered by the Representative on a 'firm commitment' basis,
when, as and if delivered to and accepted by the Representative, and subject to
prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Representative named herein and subject to its
right to reject orders in whole or in part and to certain other conditions. It
is expected that the delivery of the certificates representing the Common Stock
and Class A Warrants and payment therefor will be made at the offices of the
Representative on or about , 1996.
2
<PAGE>
AVAILABLE INFORMATION
The Company does not presently file reports and other information with the
Securities and Exchange Commission (the 'Commission'). However, following
completion of this offering, the Company intends to furnish its stockholders
with annual reports containing audited financial statements examined and
reported upon by its independent public accounting firm and such interim
reports, in each case as it may determine to furnish or as may be required by
law. After the effective date of this offering, the Company will be subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the 'Exchange Act') and in accordance therewith will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the 'Commission').
Reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material may
be inspected and copies at the public reference facilities maintained by the
Securities and Exchange Commission upon written request addressed to the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's Regional Offices at 7 World Trade Center, 13th
Floor, New York, NY 10007 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661 at prescribed rates. The Company has filed
with the Commission a registration statement on Form SB-2 (herein together with
all amendments and exhibits referred to as the 'Registration Statement') under
the Act of which this Prospectus forms a part. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information reference is made to the Registration
Statement.
IN CONNECTION WITH THIS OFFERING, THE REPRESENTATIVE MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT AMOUNT OF THE SHARES AND WARRANTS TO BE SOLD IN THIS OFFERING
MAY BE SOLD TO CUSTOMERS OF THE UNDERWRITERS WHICH MAY AFFECT THE MARKET FOR AND
LIQUIDITY OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL
BROKER-DEALERS DO NOT MAKE A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE
CAN BE NO ASSURANCE. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR
THE SALE OR PURCHASE OF THE SHARES OF COMMON STOCK AND CLASS A WARRANTS THROUGH
AND/OR WITH THE REPRESENTATIVE.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE REPRESENTATIVE MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE REPRESENTATIVE, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE COMMON STOCK. HOWEVER, THERE IS NO
ASSURANCE THAT THE REPRESENTATIVE WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE OF ANY OF THE REPRESENTATIVE'S
PARTICIPATION IN SUCH MARKET. SEE 'RISK FACTORS--LACK OF PRIOR MARKET FOR COMMON
STOCK AND CLASS A WARRANTS.' THE REPRESENTATIVE MAY DISCONTINUE SUCH ACTIVITIES
AT ANY TIME OR FROM TIME TO TIME.
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. Unless
otherwise indicated to the contrary herein, all information pertaining to the
Company's business includes information relating to both the Company and its
KN2B, Inc. majority owned subsidiary. In addition, unless otherwise indicated to
the contrary, all information appearing herein does not give effect to (i)
105,000 Units consisting of 210,000 shares of Common Stock and 105,000 Class A
Warrants issuable upon exercise of the Over-Allotment Option; (ii) 70,000 Units
consisting of 140,000 shares of Common Stock and 70,000 Class A Warrants
issuable upon exercise of the Representative's Option; (iii) 2,700,000 shares of
Common Stock issuable upon exercise of the Class A Warrants. See
'Business--Stock Option Plan and Agreements.' See 'Description of Securities.'
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
Unless otherwise indicated, all per share information set forth in this
Prospectus has been adjusted to reflect a six-for-five stock split of the
Company's Common Stock and Preferred Stock effected by the Company in March,
1996. As used in this Prospectus, except when the context otherwise requires,
references to the 'Company' or 'ML Direct' refers to the business of ML Direct
and its majority owned subsidiary KN2B, Inc.
THE COMPANY
ML Direct Inc. (the 'Company' or 'ML Direct') was incorporated in the State
of Delaware on June 22, 1995. The Company was founded to expand the marketing
opportunities of products that have already achieved sales success through
direct response television (DRTV) including both infomericals and shopping
networks. To do so, ML Direct has hired, and will continue to hire, seasoned
DRTV and consumer marketing industry executives and has pursued and will
continue to pursue affiliations with both product suppliers and various channels
of product distribution.
ML Direct intends to both acquire the rights to, and itself develop,
certain products for consumer distribution. In so doing, it will exploit both
domestic and international markets, and rely on distribution through
supermarkets, mass merchandisers, drug chains, and department stores (broad
retail distribution), as well as infomercials and shopping networks (electronic
retailing) and catalogs and print media (direct marketing). The Company's
initial focus, however, will be to capitalize and expand upon the already
established pattern of success that certain products which are first introduced
to the marketplace via electronic retailing enjoy when they are subsequently
made available at retail.
The Company owns 50.02% of the outstanding equity of KN2B, Inc. which does
business under the name Home Shopping Showcase(Trademark) ('HSS(Trademark)' or
'Home Shopping Showcase(Trademark)'). The remaining 49.98% of Home Shopping
Showcase(Trademark) is owned by HSN Direct Joint Venture (HSN Direct), which
was, until recently, a subsidiary of The Home Shopping Network, Inc. (HSN), and
is now a subsidiary of Flextech, P.L.C. (a UK company which itself is a
subsidiary of Telecommunications Company, Inc. (TCI)). HSN continues to hold a
minority equity position in HSN Direct. The Company has no affiliation with the
HSN.
Home Shopping Showcase(Trademark) will use the well established Home
Shopping brand name and product supply to create and launch permanent in-store
programs that the Company believes will establish it as a distribution source to
retail outlets for DRTV products seeking such distribution, especially
supermarkets, which the Company believes are underdeveloped as sellers of DRTV
merchandise.
Home Shopping Showcase(Trademark) believes that it will be able to achieve
success in the retail distribution of DRTV merchandise through its agreement
with HSN Direct. This strategic alliance entitles the Company to the exclusive
marketing rights to the products and services of HSN Direct and gives it easy
entree to products sold on HSN. The Company believes that it is uniquely
positioned for the next stage of growth in the retail marketplace through the
supermarket channel of distribution.
4
<PAGE>
HOME SHOPPING SHOWCASE(Trademark): THE COMPANY
Home Shopping Showcase(Trademark) brings together HSN Direct, an
established producer of infomercials and infomercial products with an
experienced management team, and ML Direct, a marketing company with ties to the
supermarket and other retail industries. ML Direct's ties are the result of
years of experience that its founders, as well as the professionals they have
been able to recruit to join ML Direct or HSS(Trademark), have had in marketing
products through all forms of retail distribution. The Company believes that HSN
Direct and ML Direct contribute the following to Home Shopping
Showcase(Trademark): knowledge, credibility, and contacts, as well as all of
their existing rights and agreements respecting products, services, programs,
and promotions introduced through DRTV for sales and marketing within the field
of domestic retail distribution. The Company believes that these contributions
should make Home Shopping Showcase(Trademark) a leader in the retail marketing
of merchandise originally sold on TV.
The Company believes that Home Shopping Showcase(Trademark) can capture a
meaningful share of the current DRTV merchandise market, and then significantly
increase the size of this market by developing programs that will enable it to
exploit what the Company believes to be the currently underdeveloped, and
potentially, explosive supermarket channel of distribution. In order to achieve
this, HSS(Trademark) believes that it must secure the rights to the best-selling
DRTV products, enroll supermarket chains in its permanent store-within-a-store
kiosk program, and execute store support operations in an effective and
cost-efficient manner.
The Company maintains its executive offices at 300 Park Avenue, Suite 1700,
New York, NY, Telephone number (212) 572-6209.
RISK FACTORS
Investment in the securities being offered hereby is highly speculative and
involves a high degree of risk including, but not limited to, the Company's lack
of an operating history, the Company's dependence on the proceeds of this
offering to continue in business, the possible need for additional financing and
the Company's history of losses. The foregoing risks may prevent the Company
from generating any meaningful revenues and achieving profitability. As a result
of these and other risks, there can be no assurance that the Company will not
continue to incur losses in the future. The above represents a summary of the
risks related to an investment in this offering. Investors are urged to read the
Risk Factors commencing on page 8 for a discussion of the material risks that
should be considered in evaluating the Company and its business.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company(1)...... 700,000 Units at a price of $10.00 per Unit. Each Unit consists of
two (2) shares of Common Stock and one (1) Class A Warrant. The
securities comprising the Units are separately transferable
immediately upon the Effective Date of this Offering. See
'Description of Securities.'
Securities Outstanding Prior to
the Offering:
Common Stock.............................. 3,120,000
Preferred Stock........................... 720,000
Class A Warrants.......................... 2,000,000
Securities Outstanding Subsequent to the
Offering(2):
Common Stock.............................. 4,520,000
Preferred Stock(3)........................ 720,000
Class A Warrants.......................... 2,700,000
Use of Proceeds........................... Payment for the Purchase of HSS Stock, Working Capital, Acquisitions
and New Product Development and Redemption of Series A Preferred
Stock. See 'Use of Proceeds.'
Risk Factors.............................. An investment in the securities offered hereby involves a high degree
of risk and immediate substantial dilution of the book value of the
Common Stock and should be considered only by persons who can afford
the loss of their entire investment. See 'Dilution' and 'Risk
Factors.'
Proposed Nasdaq SmallCap Market
Symbols(4).............................. MLDR
MLDRW
</TABLE>
- ------------------
(1) Concurrently with this offering, the Company is also registering 2,250,000
shares of Common Stock offered by affiliated and non-affiliated persons as
Selling Securityholders. See 'Selling Securityholders' and 'Certain
Transactions.'
(2) Assumes no exercise of (i) the Over-Allotment Option to purchase 105,000
Units consisting of 210,000 Shares and 105,000 Class A Warrants; (ii) the
Representative's Option to purchase up to 70,000 Units consisting of 140,000
shares of Common Stock and 70,000 Class A Warrants; and (iii) 2,700,000
Class A Warrants. See 'Description of Securities' and 'Selling
Securityholders.'
(3) Assumes no redemption of Preferred Stock.
(4) Although the Company has applied for inclusion of the Common Stock and the
Class A Warrants on Nasdaq, there can be no assurance that the Company's
securities will be included for quotation on Nasdaq, or if so included, that
the Company will be able to continue to meet the requirements for continued
quotation, or that a public trading market will develop or that if such
market develops, it will be sustained. See 'Risk Factors--Lack of Prior
Market for Common Stock.'
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information presented below for the Company's
statement of earnings for the period June 22, 1995 (date of inception) through
November 30, 1995 and the six (6) months ended May 31, 1996 are derived from the
Company's financial statements which appear elsewhere in this Prospectus. See
'Financial Statements.'
SUMMARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS ADJUSTED ACTUAL
MAY 31, 1996(2) MAY 31, 1996 NOV. 30, 1995
------------------- ---------------- ----------------
<S> <C> <C> <C>
Working Capital (Deficit)................................... 4,877,798 (394,818) 355,821
Total Assets................................................ 5,407,525 375,122 521,204
Total Liabilities........................................... 284,455 516,917 114,118
Stockholders' Equity........................................ 4,743,205 (141,795) 407,086
</TABLE>
SUMMARY STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 22, 1995
FOR THE SIX (DATE OF INCEPTION)
MONTHS ENDED THROUGH
MAY 31, 1996 NOVEMBER 30, 1995
------------ --------------------
<S> <C> <C>
Net Revenue................................................................. 88,842 759,622
Gross Profit................................................................ 4,306 92,257
Loss from Operations........................................................ (668,211) (95,290)
Net Loss.................................................................... (665,881) (93,154)
Net Loss Per Share(1)....................................................... (.16) (.02)
Weighed Average Number of Common Shares outstanding(1)...................... 4,266,571 4,266,571
</TABLE>
- ------------------
(1) Does not include the sale of 700,000 Units consisting of 1,400,000 shares of
Common Stock and 700,000 Class A Warrants in the proposed public offering.
Does include the 720,000 additional preferred and 720,000 additional common
shares issued in connection with financings in August and September of 1995
and March of 1996 (see Footnotes 8B and 10C to the financial statements) and
all options issued within one year of the Offering to any parties (see
footnotes 8, 9 and 10D) to financial statements).
(2) Gives effect to the net proceeds of the proposed public offering of
$5,485,000, and the redemption of the preferred stock of $600,000.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES
A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE PURCHASED BY
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
1. Dependence on Proceeds of this Offering to Continue in Business and
Implement Business Plan. The Company is dependent on the proceeds of this
Offering or other financings to continue in business and commence full
implementation of operations. Although the Company believes that the proceeds of
this Offering will be adequate to enable the Company to implement its business
plan, there can be no assurance that the Company will not require additional
funds. If the Company should require such additional funds to sustain its
business, and if such funds are unavailable (by additional equity or debt
financing, loans or other financings), the Company will have to reduce its
operations to a level consistent with its available funding.
2. Going Concern Auditor's Report of Accountants. As a result of the
Company's current financial conditions, the Company's independent auditors
issued a going concern report on the Company's financial statement for the
period ended November 30, 1995. The Company incurred a net loss for the period
from inception June 22, 1995 to November 30, 1995 of $93,154. For the six (6)
months ended May 31, 1996 the Company incurred a net loss of $665,881. The
Company expects to continue to utilize cash for operating activities for the
foreseeable future. The Company's independent auditor's report on the financial
statements includes an explanatory paragraph stating that the Company's ability
to continue in the normal course of business is dependent upon successful
completion of its planned public offering of equity securities to raise capital
and the success of future operating activities. These factors raise a
substantial doubt about the Company's ability to continue as a going concern.
There can be no assurance that the Company will not continue to incur net losses
in the future. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations,' 'Business,' 'Use of Proceeds' and 'Financial
Statements and Notes.'
3. Possible Need For Additional Financing. The Company's cash requirements
are anticipated to be significant. The Company may require additional funds to
sustain its business. Such financing, if obtainable at all, may be on terms
significantly adverse to the Company's present stockholders and persons who
purchase Shares and Warrants in this Offering, in terms of dilution of book
value, dividend preferences, liquidation preferences or other factors. The
Company has no commitments for any additional financing. See 'Management's
Discussion and Analysis of Financial Condition and Plan of Operation.'
4. Recent Organization; History of Losses. The Company was organized in
June 1995. Potential investors should be aware of the problems, delays, expenses
and difficulties encountered by any new company. The Company will be subject to
numerous risks, expenses, problems and difficulties typically encountered in
establishing a new business, including unanticipated problems and additional
costs relating to development and testing of products, regulatory compliance and
marketing and product introductions. From inception June 22, 1995 to May 31,
1996, the Company sustained a net loss in the amount of approximately $760,000
and the Company expects to continue to incur operating losses until such time as
it derives meaningful revenues. See 'Management's Discussion and Analysis of
Financial Condition and Plan of Operation' and 'Business.'
5. No Revenue; Probable Future Losses. The Company has not generated
significant revenues to date and does not expect to generate any significant
revenues until at least nine (9) months following the consummation of this
Offering. The Company intends to increase substantially its level of activities
following the consummation of this Offering. The Company anticipates that it
will incur losses until the Company generates sufficient revenues to offset its
operating costs and the costs of its proposed continuing expansion. See
'Management's Discussion and Analysis of Financial Condition and Plan of
Operation,' 'Business' and 'Financial Statements.'
6. Dependence on Third Parties and Limited Duration of License Rights. The
Company's business consists largely of its agreement with HSN Direct to create
and develop Home Shopping Showcase(Trademark). The agreement provides that HSN
Direct give KN2B, Inc. an exclusive license within the United States to use the
name Home Shopping Showcase(Trademark) and the Home Shopping Showcase(Trademark)
trademarks, logo and servicemarks for at
8
<PAGE>
least three years after KN2B, Inc. commences the use of such name at any given
retail location. The agreement further provides that KN2B, Inc. cannot initiate
the use of the HSS(Trademark) name after December 31, 2000. The agreement does
not contain any specific provisions for the distribution of profits; however, it
provides for a 6% royalty on net sales for each of ML Direct and HSN Direct and
further provides for the first two (2) years of the agreement, no more than 50%
of the profits of HSS(Trademark) will be distributed. The agreement provides
that, if after the first three (3) years HSS(Trademark) has not achieved
$5,000,000 in gross revenues, either ML Direct or HSN Direct shall have the
option to terminate the agreement. Any termination of the agreement will have a
material adverse effect on the Company. Further, the success of Home Shopping
Showcase(Trademark) is dependent in part on HSN Direct's success in securing
agreements for marketing products and services from suppliers, distributors, and
other third parties for DRTV and retail distribution. There can be no assurance
that HSN Direct or Home Shopping Showcase(Trademark) will be able to secure such
agreements from such third parties or that the merchandise or services marketed
on DRTV will be successful in the retail markets. Similarly, there can be no
assurance that the Company will be able to capitalize on its connection with the
supermarket and other retail industries to establish retail distribution outlets
for Home Shopping Showcase(Trademark). The failure of either HSN Direct or the
Company to so contribute to the success of Home Shopping Showcase(Trademark)
will have a material adverse effect on the Company. In addition, the name
recognition provided by the HSN Direct trademarks, logos, and servicemarks,
including Home Shopping Showcase(Trademark), will contribute directly to the
success of the Company. Home Shopping Showcase(Trademark) and therefore the
Company, would be materially adversely affected by the loss of use of such
intellectual property or if the value of such intellectual property is
diminished, either by HSN Direct's lack of success in the DRTV venue or by
infringement or misappropriation by an outside third party.
7. Uncertainty of Market Acceptance. Achieving retail market acceptance
for the products the Company is distributing will require substantial marketing
efforts. The Company intends to apply a portion of the proceeds of the Offering
to its marketing efforts. See 'Use of Proceeds.' Even if the Company consummates
the Offering, it may be required to seek additional financing to achieve its
marketing objectives. There can be no assurance that such additional financing
will be available, or that such financing will be on terms acceptable to the
Company.
8. Management to Maintain Broad Discretion in Application of
Proceeds. Approximately $385,000 (7%) of the estimated $5,485,000 of net
proceeds from the offering of the Common Stock will be applied to working
capital. Accordingly, the management of the Company will have broad discretion
as to the application and allocation of the net proceeds of this Offering. See
'Use of Proceeds.'
9. Dilution. Upon completion of this Offering assuming no exercise of the
Representative's Over-Allotment Option, and without giving effect to the
exercise of the Over-Allotment Option or the Representative's Option or the
exercise of the Class A Warrants, but giving effect to the redemption of the
Preferred Stock for $600,000, the net tangible book value per share of the
Company's Common Stock will be $1.03. At the initial public offering price of
$5.00 per Share, investors in this offering will experience an immediate
dilution of approximately $3.97 or 79% in net tangible book value per share and
existing investors will experience an increase of approximately $1.10 per Share.
In addition, in the event of the exercise of the Representative's Over-Allotment
Option, the Company will have a pro forma net tangible book value of $1.18 per
Share which will result in dilution to the public investors of $3.82 per Share.
See 'Dilution.'
10. Highly Competitive Industry. The Company expects to encounter intense
competition in the establishment of its program. Many of the Company's
competitors and potential competitors have substantially greater resources,
including capital, marketing capabilities and product pipeline. See
'Business--Competition.'
11. Control by Stockholders. Upon completion of the offering of the
Shares, the current stockholders of the Company will, as a group, have the power
to vote approximately 69% of the total outstanding shares of Common Stock and
100% of the Preferred Stock (assuming no exercise of the Over-allotment Option
and the Representative's Option). This means that the current holders of equity
securities of the Company will be able to elect all of the Company's directors
and to otherwise control the vote of most matters submitted to a vote of the
Company's stockholders. See 'Principal Stockholders.' Such control could also
preclude an unsolicited acquisition of the Company and consequently adversely
affect the market price of the Common Stock and Class A Warrants. See
'Description of Securities.'
9
<PAGE>
12. Anti-Takeover Effect of General Corporation Law of Delaware. The
Company is governed by the provisions of Section 203 of the General Corporation
Law of Delaware, an anti-takeover law enacted in 1988. As a result of Section
203, potential acquirors of the Company may be discouraged from attempting to
effect acquisition transactions with the Company, thereby possibly depriving
holders of the Company's securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions. See 'Description of Securities.'
13. No Prior Public Market; Possible Volatility of Stock Price. Prior to
this Offering there has been no public market for the Company's Common Stock or
Class A Warrants. The initial public offering price of the Common Stock and the
exercise price and the terms of the Warrants were arbitrarily determined by
negotiation between the Company and the representatives of the Representative,
and may not be indicative of the market price for the Common Stock or the Class
A Warrants in the future. See 'Underwriting' for a discussion of the factors
considered in determining the initial public offering price. Prices for many
stocks fluctuate widely, often for reasons that may be unrelated to the
operating performance of such companies. Announcements of new offerings by the
Company or its competitors, economic and other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price and marketability of the Company's Common Stock and
the Class A Warrants.
14. Lack of Prior Market for Common Stock; No Assurance of Public Trading
Market. Prior to this Offering, no public trading market existed for the Common
Stock or the Class A Warrants. There can be no assurances that a public trading
market for the Common Stock or Class A Warrants will develop, or if so
developed, will be sustained. Although the Company anticipates that the Common
Stock and the Class A Warrants will be eligible for inclusion on the Nasdaq
SmallCap Market System ('Nasdaq'), no assurance can be given that the Company's
securities will be listed on Nasdaq as of the Effective Date. Under prevailing
rules of the National Association of Securities Dealers, Inc ('NASD'), in order
to qualify for initial quotation of securities on Nasdaq, a company, among other
things, must have at least $4,000,000 in total assets, $2,000,000 in total
capital and surplus, $1,000,000 in market value of public float and a minimum
bid price of $3.00 per share. For continued Nasdaq listing, a company, among
other things, must have $2,000,000 in total assets, $1,000,000 in total capital
and surplus, $1,000,000 in market value of public float and a minimum bid price
of $1.00 per share. If the Company is unable to satisfy the requirements for
initial or continued quotation on Nasdaq, trading, if any, in the Common Stock
offered hereby would be conducted in the over-the-counter market in what are
commonly referred to as the 'pink sheets' or on the NASD OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the securities offered hereby.
The above-described rules may materially adversely affect the liquidity of the
market for the Company's securities. See 'Underwriting.'
15. Representative's Influence on the Market May Have Adverse
Consequences. Although it has no legal obligation to do so, the Representative
from time to time may act as market maker and otherwise effect transactions in
the Company's securities. However, there is no assurance that the Representative
will continue to be a dominating influence. The prices and liquidity of the
Company's securities may be significantly affected by the degree, if any, of the
Representative's participation in the market. The Representative may voluntarily
discontinue such participation at any time. Further, the market for, and
liquidity of, the Company's securities may be adversely affected by the fact
that a significant amount of the Shares or Warrants may be sold to customers of
the Representative.
16. 'Penny Stock' Regulations May Impose Certain Restrictions on
Marketability of Securities. The Securities and Exchange Commission
('Commission') has adopted regulations which generally define 'penny stock' to
be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. If the securities offered hereby are removed from listing by Nasdaq
at any time following the Effective Date, the Company's securities may become
subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
10
<PAGE>
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer must also disclose the commission 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. Consequently, the 'penny stock' rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market.
17. Arbitrary Determination of Offering Price. The initial public offering
price of the Common Stock and the exercise price and terms of the Warrants have
been arbitrarily determined by negotiations between the Company and the
Representative and does not bear any relationship to the Company's assets, book
value, net worth or results of operations of the Company or any other
established criteria of value. There is no relationship whatsoever between the
offering price of the Common Stock on the one hand and the Company's net worth,
projected earnings, book value, or any other objective criteria of value on the
other. See 'Underwriting--Pricing of the Offering.' See 'Underwriting' and
'Description of Securities.'
18. No Cash Dividends. The Company has paid no cash dividends on its
Common Stock since its inception and does not intend to pay cash dividends on
its Common Stock in the foreseeable future. Any earnings which the Company may
realize in the foreseeable future will be retained to finance the growth of the
Company. See 'Description of Securities.'
19. Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of Class A Warrants. The Company will be able to
issue the securities offered hereby and/or shares of its Common Stock upon the
exercise of the Class A Warrants and Representative's Option only if (i) there
is a current prospectus relating to the Common Stock issuable upon the exercise
of the Class A Warrants or Representative's Option under an effective
registration statement filed with the Securities and Exchange Commission, and
(ii) such Common Stock is then qualified for sale or exempt therefrom under
applicable state securities laws of the jurisdictions in which the various
holders of Class A Warrants or Representative's Option reside. There can be no
assurance, however, that the Company will be successful in maintaining a current
registration statement. The Company will be prevented, however, from issuing
Common Stock upon exercise of the Class A Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Class A Warrants. The Company may decide not
to seek, or may not be able to obtain, qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the Class
A Warrants reside. In such a case, the Class A Warrants of those purchasers will
expire and have no value if such Class A Warrants cannot be exercised or sold.
Accordingly, the market for the Class A Warrants may be limited because of the
Company's obligation to fulfill both of the foregoing requirements. See
'Description of Securities.'
20. Representative's Option. In connection with this Offering, the Company
will sell to the Representative, for nominal consideration, an option to
purchase up to an aggregate of 70,000 Units consisting of 140,000 shares of
Common Stock and 70,000 Class A Warrants (the 'Representative's Option'). The
Representative's Option will be exercisable commencing one (1) year from the
Effective Date of this Offering and ending five (5) years from the Effective
Date, at an exercise price of $12.00 per Unit subject to certain adjustments.
The holders of the Representative's Option will have the opportunity to profit
from a rise in the market price of the Common Stock, if any, without assuming
the risk of ownership. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Option is outstanding. At any time when the holders
thereof might be expected to exercise them, the Company would probably be able
to obtain additional capital on terms more favorable than those provided by the
Representative's Option. See 'Dilution' and 'Underwriting.'
11
<PAGE>
21. Shares Eligible for Future Sale May Adversely Affect the Market. All
of the Company's currently outstanding shares of Common Stock are 'restricted
securities' and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act of 1933, as amended. Prospective investors
should be aware that the possibility of sales may, in the future, have a
depressive effect on the price of the Company's Common Stock in any market which
may develop and therefore, the ability of any investor to market his shares may
be dependent directly upon the number of shares that are offered and sold.
Affiliates of the Company may sell their shares during a favorable movement in
the market price of the Company's Common Stock which may have a depressive
effect on its price per share. See 'Description of Securities.'
22. Limitation on Director Liability. As permitted by Delaware corporation
law, the Company's Certificate of Incorporation limits the liability of
Directors to the Company or its stockholders for monetary damages for breach of
a Director's fiduciary duty except for liability in certain instances. As a
result of the Company's charter provision and Delaware law, stockholders may
have more limited rights to recover against Directors for breach of fiduciary
duty than as existing prior to the enactment of the law. See 'Description of
Securities--Limitation on Liability of Directors.'
23. Authorization of Preferred Stock and Potential Anti-Takeover
Effect. The Company's Certificate of Incorporation authorizes the issuance of
preferred stock with designations, rights and preferences determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. The issuance of preferred stock with anti-takeover measures could have
a depressive effect on the market price of the Common Stock and could discourage
hostile bids in which stockholders may receive premiums for their shares. See
'Description of Securities--Preferred Stock.'
24. Effect of Future Exercise of Options and Warrants. Sales of the
Company's Common Stock upon exercise of outstanding options and warrants and
options that may be issued in the future may have a depressive effect on the
price of the Units, the Common Stock and the Warrants, and issuance of
additional Common Stock upon the exercise of options, the Warrants, the
Underwriter's Options or otherwise will also dilute the proportionate ownership
of the then current stockholders of the Company. To date the Company has issued
options to purchase 966,000 shares of Common Stock at exercise prices ranging
from $2.50 to $7.00 per share. Holders of the warrants and options most likely
would exercise such warrants and options and purchase underlying Common Stock at
a time when the Company may be able to obtain capital by a new offering of
securities on terms more favorable than those provided by such warrants and
options, in which event the options and warrants may adversly effect the market
value of the Common Stock. The Company has agreed with the Representative not to
issue shares of Common Stock without the Underwriter's prior written consent
during the 24-month period following the Closing Date, other than pursuant to
the Stock Option Plan and the Warrants.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares of Common Stock
and Class A Warrants offered hereby, are estimated to be $5,485,000 (after
deducting approximately $910,000 in underwriting discounts and other expenses of
this Offering estimated to be $605,000 which includes the Representative's
nonaccountable expense allowance of $210,000 and a $100,000 financial consulting
fee payable to the Representative at the closing) (but not considering any
exercise of the Representative's Over-Allotment Option, or the Representative's
Option). There can be no assurance that the use of proceeds as indicated will
result in increased revenues from operations. The Company, based upon all
currently available information, intends to utilize such proceeds approximately
as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF PERCENTAGE(%) OF
NET PROCEEDS NET PROCEEDS
------------ ----------------
<S> <C> <C>
Purchase of HSS Stock(1)...................................... $4,000,000 72.9%
Working Capital............................................... $ 385,000 7.1%
Acquisitions and New Product Development(2)................... $ 500,000 9.1%
Redemption of Series A Preferred Stock........................ $ 600,000 10.9%
------------ ------
Total....................................................... $5,485,000 100.0%
------------ ------
------------ ------
</TABLE>
- ------------------
(1) The Company intends to use $4,000,000 of the proceeds of this offering to
pay a stock subscription payable to HSS in connection with its acquisition
of 50.02% of the outstanding equity of KN2B, Inc. HSS intends to use the
proceeds of the subscription as follows: Development and Production of
In-Store Units ($1,500,000), Purchase of Product Inventory ($1,357,000),
Marketing and Advertising ($550,000) and Working Capital ($593,000).
(2) The Company intends to acquire products and product rights as well as to
develop its own products for retail and other distribution.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion.
To the extent that the Company's expenditures are less than projected
and/or the proceeds of this Offering increase as a result of the exercise by the
Representative of their Over-Allotment Option, the resulting balances will be
retained and used for general working capital purposes. Conversely, to the
extent that such expenditures require the utilization of funds in excess of the
amounts anticipated, additional financing may be sought from other sources, such
as debt financing from financial institutions, although there can be no
assurance that such additional financing, if available, will be on terms
acceptable to the Company. See 'Risk Factors--Need For Additional Financing.'
The net proceeds of this Offering that are not expended immediately may be
deposited in interest bearing accounts, or invested in government obligations or
certificates of deposit.
13
<PAGE>
DILUTION
At May 31, 1996, the Company had outstanding an aggregate of 3,120,000
shares of Common Stock having an aggregate net tangible deficit value of
($224,459) or ($.07) per share, based on operating activity through May 31,
1996. Net tangible book value per share consists of total assets less intangible
assets and liabilities, divided by the total number of shares of Common Stock
outstanding. The shares of capital stock described above do not include any
securities subject to any outstanding warrants or options.
After giving effect to the sale of 700,000 Units consisting of 1,400,000
shares of Common Stock and 700,000 Class A Warrants with net proceeds of
$5,485,000, the redemption of 720,000 shares of Preferred Stock for $600,000
with the net proceeds of the proposed public offering, the pro forma net
tangible book value of the Common Stock would be $4,660,541 or approximately
$1.03 per share. This represents an immediate increase in pro forma net tangible
book value of $1.10 per share to the present shareholders and an immediate
dilution of $3.97 per share (79%) to the public purchasers. The following table
illustrates the dilution which investors participating in this offering will
incur and the benefit to current stockholders as a result of this offering:
<TABLE>
<S> <C> <C>
Public offering price of Common Stock offered hereby(1).................... $ 5.00
Net tangible deficit book value per share prior to the offering.......... $ (.07)
Increase per share attributable to Shares offered hereby................. $ 1.10
Pro Forma net tangible book value per share after offering of 700,000
Units consisting of 1,400,000 shares of Common Stock and 700,000 Class
A Warrants(2)......................................................... $ 1.03
------
Dilution of net tangible book value per share to purchasers in this
offering.............................................................. $ 3.97
------
------
</TABLE>
- ------------------
(1) Before deduction of underwriting discounts, commission, fees and offering
expenses.
(2) Assumes redemption of 720,000 shares of Preferred Stock for $600,000.
The following table shows the number and percentage of shares of capital
stock purchased and acquired and the amount and percentage of consideration and
average price per share paid by existing stockholders as of May 31, 1996 and to
be paid by purchasers pursuant to this offering (based upon the anticipated
public offering price of $10.00 per Unit before deducting underwriting discounts
and commissions and estimated offering expenses).
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON PERCENT CASH PERCENT OF AVERAGE
STOCK OF EQUITY CONSIDERATION TOTAL CASH PRICE PER
PURCHASED OWNED PAID CONSIDERATION SHARE
--------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
New Shareholders................................ 1,400,000 31% $ 7,000,000 95.9% $5.00
Existing Shareholders........................... 3,120,000 69% $ 300,240 4.1% $ .10
--------- --- ------------- ----- ---------
Total......................................... 4,520,000 100% $ 7,300,240 100% $1.61
--------- --- ------------- -----
--------- --- ------------- -----
</TABLE>
The foregoing table gives effect to the sale of the Common Stock offered
hereby but without giving effect to the exercise of the Representative's Option,
or any securities issuable upon the exercise of the Representative's
Over-Allotment Option or any outstanding options or warrants, including those
held by the Selling Securityholders.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996 and as adjusted gives effect to the sale of 700,000 Units consisting of
1,400,000 shares of Common Stock and 700,000 Class A Warrants offered hereby and
the application of net proceeds therefrom. The table is not adjusted to give
effect to the exercise of the Over-Allotment Option, the Class A Warrants, the
Representative's Option or any other outstanding warrants or options. This table
should be read in conjunction with the Financial Statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL(1) ADJUSTED(2) ADJUSTED(3)
---------- ----------- -----------
<S> <C> <C> <C>
Long Term Debt.......................................................... $ -- $ -- $ --
Stockholders' Equity:
Redeemable Convertible Preferred Stock.................................. 300,000 300,000 --
Common Stock, $.0001 par value, 3,120,000 shares issued and outstanding
(4,520,000 shares outstanding as adjusted)............................ 312 452 452
Additional paid-in capital.............................................. 401,928 5,886,788 5,586,788
Common Stock Subscribed................................................. 4,000,000 -- --
Retained Earnings (Deficit)............................................. (759,035) (759,035) (759,035)
Less: Stock Subscription................................................ (4,000,000) -- --
Less: Deferred Compensation Expense..................................... (85,000) (85,000) (85,000)
Total Stockholders' Equity.............................................. (141,795) 5,343,205 4,743,205
Total Capitalization.................................................... (141,795) 5,343,205 4,743,205
</TABLE>
- ------------------
(1) Does not include the sale of 1,000,000 shares of Common Stock or the sale of
1,000,000 Class A Warrants hereby offered or the redemption of 720,000
shares of Preferred Stock for $600,000 with the net proceeds of the proposed
public offering.
(2) As adjusted reflects the net proceeds of approximately $5,485,000 from the
proposed sale of 700,000 Units consisting of 1,400,000 shares of Common
Stock and 700,000 Class A Warrants.
(3) As adjusted reflects the redemption of Preferred Stock for $600,000 with the
net proceeds of the public offering.
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to cash dividends when,
as and if declared by the Board of Directors out of funds legally available
therefore. The Company has not in the past and does not currently anticipate the
declaration or payment of any cash dividends in the foreseeable future. The
Company intends to retain earnings, if any, to finance the development and
expansion of its business. Future dividend policy will be subject to the
discretion of the Board of Directors and will be contingent upon future
earnings, if any, the Company's financial condition, capital requirements,
general business conditions and other factors. Therefore, there can be no
assurance that any cash dividends of any kind will ever be paid.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the Company's statement of
earnings for the period June 22, 1995 (date of inception) through November 30,
1995 and the six (6) months ended May 31, 1996 are derived from the Company's
financial statements and which appear elsewhere in this Prospectus. See
'Financial Statements.'
SUMMARY BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS ADJUSTED ACTUAL
MAY 31, 1996(2) MAY 31, 1996 NOV. 30, 1995
--------------- ------------ -------------
<S> <C> <C> <C>
Working Capital (Deficit)....................... 4,877,798 (394,818) 355,821
Total Assets.................................... 5,407,575 375,122 521,204
Total Liabilities............................... 284,455 516,917 114,118
Stockholders' Equity............................ 4,743,205 (141,795) 407,086
</TABLE>
SUMMARY STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD
SIX MONTHS JUNE 22, 1995
ENDED (DATE OF INCEPTION)
MAY 31, 1996 THROUGH NOV. 30, 1995
------------ ---------------------
<S> <C> <C>
Net Revenue.............................................. 88,842 759,622
Gross Profit............................................. 4,306 92,257
Loss from Operations..................................... (668,211) (95,290)
Net Loss................................................. (665,881) (93,154)
Net Loss Per Share(1).................................... (.16) (.02)
Weighed Average Number of Common Shares outstanding(1)... 4,266,571 4,266,571
</TABLE>
- ------------------
(1) Does not include the sale of 700,000 Units consisting of 1,400,000 shares of
Common Stock and 700,000 Class A Warrants in the proposed public offering.
Does include the 720,000 additional preferred and 720,000 additional common
shares issued in connection with financings in August and September of 1995
and March of 1996 (see Footnotes 8B and 10C to the financial statements) and
all options issued within one year of the Offering to any parties (see
footnotes 8, 9 and 10D to financial statements).
(2) Gives effect to the net proceeds of the proposed public offering of
$5,485,000 and the redemption of the Preferred Stock for $600,000.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and notes thereto included elsewhere herein:
OVERVIEW
ML Direct initiated its operations in June of 1995 with the intent of
establishing permanent display programs in retail outlets to sell direct TV
('DRTV') merchandise. The success of DRTV merchandise in retail outlets is well
documented; however, management believes that it could be further enhanced as a
result of integrated strategic product selection and merchandising. This is
specially true in supermarkets, where there is neither the infrastructure nor
focus needed to exploit the success of hot new DRTV items on an ongoing basis.
ML Direct's agreement with HSN Direct will provide the necessary ingredients for
success with ML Direct providing the sales and marketing expertise and HSN
Direct contributing a strong brand name and access to a steady pipeline of
tested DRTV merchandise.
'HSS(Trademark) will present retailers with two types of opportunities:
permanent store-within-a-store kiosks (which are to be instituted initially in
supermarkets) and promotional sales programs (which will involve the
distribution of in-and-out displays of individual products or merchandise
grouped by 'theme' to all forms of retail distribution ('the promotional sales
business')). The kiosk program will be rolled out in a measured manner, both to
insure proper management of operational complexities, and to stay in line with
the available expansion capital provided by a combination of ML Direct's initial
cash infusion, as supplemented with HSS(Trademark)'s own free operating cash
flow. The best selling DRTV and related merchandise will be marketed through all
forms of retail distribution via promotional sales programs. By employing
experienced professionals with extensive knowledge of, and relationships with,
Home Shopping Network, the Company will be able to select the best products, and
then refine and repackage them for retail success.'
RESULTS OF OPERATIONS
Discussion for the results of operations are presented in the following
table:
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 22, 1995
THROUGH
NOVEMBER 30, SIX MONTHS ENDED
1995 MAY 31, 1996
-------------- ------------------
<S> <C> <C>
Revenues............................. $ 759,622 $ 88,842
Gross Profit......................... 92,257 4,306
Operating Expenses................... 187,547 672,517
Loss from Operations................. (95,290) (668,211)
Net Loss............................. (93,154) (665,881)
</TABLE>
For the Six Months ended May 31, 1996
Revenues for the period ended May 31, 1996 were approximately $89,000.
These revenues were primarily from the major customer whose revenues were
recorded in the period ended November 30, 1995. The Company is implementing a
supermarket program in order to alleviate the dependence upon this customer. The
revenue was comprised of approximately $59,000 from the promotional sales
business and approximately $30,000 from the Kiosk program. The Company's gross
profit on these sales was approximately $4,300 or 5% of revenue. This low gross
profit margin was attributed to a gross loss of approximately $6,400 in the
kiosk business. This gross loss was mainly attributable to start-up costs of
this program. The gross profit for the promotional sales business was in line
with the Company's expectations. 'HSS(Trademark)' is currently operating a pilot
of its store-within-a-store kiosk program in four supermarkets. Each of these
four pilots is offering a mix of best-selling DRTV product, leading
'collectibles' and 'gift' merchandise lines, and a variety of
celebrity-sponsored goods. The management of the supermarket chain within which
the pilot is being conducted is working closely with HSS(Trademark) to refine
the program prior to its broader rollout. Based on several presentations to
other supermarket chains, HSS(Trademark) and the Company believe that there is
sufficient interest in the kiosk program to meet or exceed its rollout plans.
In
17
<PAGE>
addition, HSS(Trademark) has already garnered the rights to represent two
manufacturers of DRTV products, including one of the industry's leaders, for
retail distribution, and has hired an experienced Director of Promotional
Sales, to launch its promotional sale business.
Operating expenses for the period ended May 31, 1996 were approximately
$673,000. The expenses recorded reflect operational activity for six months. The
most significant expense was reimbursed expenses to related parties and
compensation expense. The Company reimbursed a partnership in which both of the
partners are shareholders in the Company. The Company reimbursed this
partnership for expenses incurred for the Company through May 31, 1996 as
follows:
<TABLE>
<S> <C>
Rent and Utilities............................................ $ 58,905
Travel and Entertainment...................................... 37,727
Outside Services.............................................. 83,720
Compensation and Benefits..................................... 811
Other Services................................................ 2,255
----------
Total....................................................... $ 183,418
----------
----------
</TABLE>
The Company's net loss for the six months ended May 31, 1996 was
approximately $666,000. The majority of this net loss was attributable to
compensation expense of approximately $215,000 due to hiring sales and
administrative personnel and reimbursed expenses to a related party of
approximately $183,000. In order to implement the supermarket kiosk program in
HSS, additional expenses were incurred. Travel and entertainment as well as
warehousing increased approximately $55,000 and $40,000, respectively, in order
to enable the Company's representatives to launch the program. The increased
involvement in HSS, by the Company, in order to launch the supermarket kiosk
program is the most significant factor in the loss for the six months ended May
31, 1996. Expenses attributable to the subsidiary are for compensation, travel
and entertainment, warehousing, consulting and related party reimbursements.
These expenses for the period were approximately $44,000, $55,000, $40,000,
$88,000, and $77,000, respectively. The Company anticipates an increase in
operating expenses through November 30, 1996.
For the Period Ended November 30, 1995
Revenues for the period ended November 30, 1995 were approximately $760,000
with a gross profit of approximately $92,000 or 12% of revenues. The Company's
net revenues as a wholesaler were from one customer who is a nationwide consumer
wholesaler. The Company has recognized 99% of its revenue from this customer.
The Company is implementing a supermarket program in order to alleviate the
dependence upon this customer. The revenue realized by the Company for the
period ended November 30, 1995 was in keeping with HSS(Trademark) promotional
sales business plan (See overview of MD&A for detailed discussion of promotional
sales).
Operating expenses for the period ended November 30, 1995 were
approximately $188,000. The expenses recorded through November 30, 1995 reflect
operational activities for approximately six weeks despite an incorporation date
of June 22, 1995. The most significant expense was reimbursed expenses to
related parties. The Company reimbursed a partnership in which both of the
partners are shareholders in the Company. The Company reimbursed this
partnership for expenses incurred for the Company through November 30, 1995 as
follows:
<TABLE>
<S> <C>
Rent and Utilities............................................ $ 11,782
Travel and Entertainment...................................... 47,786
Outside Services.............................................. 57,000
Compensation and Benefits..................................... 7,795
Other Services................................................ 3,989
----------
Total....................................................... $ 128,352
----------
----------
</TABLE>
The Company's net loss for the period from June 22, 1995 through November
30, 1995 was $93,154 allocating to the minority interest their applicable
portion of the loss. The minority's interest portion of the net loss was
$15,116.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the Six Months Ended May 31, 1996
The Company has a working capital deficit of $394,818 at May 31, 1996.
Operating activities for the six month period ended May 31, 1996 utilized
$290,020 in cash. The Company also utilized $48,620 in cash for investing
activities. ML Direct has no material commitments for capital expenditures. The
Company expended approximately $125,000 in the period ended May 31, 1996 on
display costs. Financing activities utilized approximately $70,000 for deferred
offering costs.
The cash balance at May 31, 1996 was approximately $28,000. The Company
believes that its proposed public offering, with net proceeds of approximately
$5,485,000, will provide sufficient working capital for approximately the next
15 months and will enable the Company to pay the $4,000,000 stock subscription
for the 1,500 shares of common stock issued for its investment in KN2B, Inc.,
doing business as Home Shopping Showcase ('HSS'). Should the Company be
unsuccessful in its ability to pay the $4,000,000 and as a result HSND demands
the return of their trademarks and other non-monetary assets contributed, then
HSND would return the 1,499 shares of stock issued in HSS and the Company would
therefore control 100% of HSS. HSS intends to spend the proceeds of
approximately $4,000,000 for the development and production of in-store units in
the amount of $1,500,000, $1,400,000 for product inventory, $550,000 for
marketing and advertising, and the balance of approximately $600,000 for working
capital.
The Company is dependent on the proceeds of the proposed public offering to
continue operations. However, if such funds are unavailable, the Company will
have to continue to pursue other debt or equity financing and reduce its
operations to a level consistent with available funding. There can be no
assurances that the Company will be successful in obtaining the necessary
financing should the proposed public offering not be completed.
There are no known trends or uncertainties which have had or are expected
to have a material impact on the Company's operations.
For the Period Ended November 30, 1995
The Company has working capital of $355,821 at November 30, 1995. Operating
activities from the period of inception, June 22, 1995, through November 30,
1995 utilized $61,211 in cash. The Company also utilized $100,565 in cash for
investing activities during this period. ML Direct has no material commitments
for capital expenditures. The Company expended approximately $40,000 in the
period ended November 30, 1995 on display costs. Financing activities in the
period ended November 30, 1995 generated approximately $500,000 resulting from
preferred stock units being issued.
Cash and equivalents at November 30, 1995 were approximately $337,000. The
Company believes that its proposed public offering, with net proceeds of
approximately $5,485,000, will provide sufficient working capital for
approximately the next 15 months and will enable the Company to pay the
$4,000,000 stock subscription receivable for the 1,500 shares of common stock
issued for its investment in KN2B, Inc., doing business as Home Shopping
Showcase ('HSS'). Should the Company be unsuccessful in its ability to pay the
$4,000,000 and as a result HSND demands the return of their trademarks and other
non-monetary assets contributed, then HSND would return the 1,499 shares of
stock issued to HSS and the Company would therefore control 100% of the HSS. HSS
intends to spend the proceeds of approximately $4,000,000 for the development
and production of in-store units in the amount of $1,500,000, $1,350,000 for
product inventory, $550,000 for marketing and advertising, and the balance of
approximately $600,000 for working capital.
There are no known trends or uncertainties which have had or are expected
to have a material impact on the Company's operations.
19
<PAGE>
BUSINESS
GENERAL
ML Direct Inc. (the 'Company' or 'ML Direct') was incorporated in the State
of Delaware on June 22, 1995. The Company was founded to expand the marketing
opportunities of products that have already achieved sales success through
direct response television (DRTV) including both infomercials and shopping
networks. To do so, ML Direct has hired, and will continue to hire, seasoned
DRTV and consumer marketing industry executives and has pursued and will
continue to pursue affiliations with both product suppliers and various channels
of product distribution.
ML Direct intends to both acquire the rights to, and itself develop,
certain products for consumer distribution. In so doing, it will exploit both
domestic and international markets, and rely on distribution through
supermarkets, mass merchandisers, drug chains, and department stores (broad
retail distribution), as well as infomercials and shopping networks (electronic
retailing) and catalogs and print media (direct marketing). The Company's
initial focus, however, will be to capitalize and expand upon the already
established pattern of success that certain products, which are first introduced
to the marketplace via electronic retailing, enjoy when they are subsequently
made available at retail.
The Company owns 50.02% of the outstanding equity of KN2B, Inc., which does
business under the name Home Shopping Showcase(Trademark), Inc.
('HSS(Trademark)' or 'Home Shopping Showcase(Trademark)'). The remaining 49.98%
of Home Shopping Showcase(Trademark) is owned by HSN Direct Joint Venture (HSN
Direct), which was, until recently, a subsidiary of The Home Shopping Network,
Inc. (HSN), and is now a subsidiary of Flextech P.L.C. (a UK company which
itself is a subsidiary of Telecommunications Company, Inc. (TCI)). HSN continues
to hold a minority equity position in HSN Direct. The Company has no affiliation
with the HSN. Home Shopping Showcase(Trademark) intends to capitalize and expand
upon the already established pattern of success that certain products first
introduced to the marketplace via direct response television (DRTV) enjoy when
they are subsequently made available at retail. See 'Certain Transactions.'
Home Shopping Showcase(Trademark) will use the well established Home
Shopping brand name and will focus its resources on creating and implementing
permanent in-store programs that the Company believes will establish it as a
distribution source to retail outlets for DRTV products seeking such
distribution. The Company will utilize the Home Shopping brand name to launch
its programs, relying on the familiarity of the name with consumers. The Company
believes that as it expands its programs and sources of product, the Home
Shopping Showcase(Trademark) name will become less prominent and be replaced
with a more descriptive new brand name.
Home Shopping Showcase(Trademark) believes that it will be able to achieve
success in the retail distribution of DRTV merchandise through its agreement
with HSN Direct. This strategic alliance entitles the Company to the exclusive
marketing rights to the products and services of HSN Direct and gives it easy
entree to products sold on HSN. The Company believes that it is uniquely
positioned for the next stage of growth in the retail marketplace through the
supermarket channel of distribution.
HOME SHOPPING SHOWCASE(Trademark): THE COMPANY
Home Shopping Showcase(Trademark) brings together HSN Direct, the
infomercial division of The Home Shopping Network, Inc. and ML Direct, an
innovative marketing company with strong ties to the supermarket and other
retail industries. HSN Direct and ML Direct contribute the following to Home
Shopping Showcase(Trademark): knowledge, credibility, and contacts, as well as
all of their existing rights and agreements respecting products, services,
programs, and promotions introduced through DRTV for sales and marketing within
the field of domestic retail distribution. The Company believes that these
contributions should make Home Shopping Showcase(Trademark) a leader in the
retail marketing of merchandise sold on television.
Home Shopping Showcase(Trademark)'s plan is to quickly capture a meaningful
share of the current DRTV market, and then to significantly increase the size of
this market by developing programs that will enable it to
20
<PAGE>
exploit new avenues of distribution, including what the Company believes to be
the currently underdeveloped, and potentially explosive, supermarket channel.
HSS(Trademark) intends to present retailers with two types of
opportunities: (i) permanent store-within-a-store kiosks, which are to be
instituted initially in supermarkets, and (ii) promotional sales programs, which
will provide them with in-and-out display programs of individual products or
'themed' merchandise groupings to all forms of retail distribution. The Company
intends to implement the kiosk program gradually to insure proper management of
operational complexities and to stay in line with the available expansion
capital provided by a combination of ML Direct's initial cash infusion and
HSS(Trademark)'s positive cash flow. Best-selling DRTV and related merchandise
will be marketed to all forms of retail distribution by promotional sales
programs. By employing experienced professionals with extensive knowledge of,
and relationships within HSN, the Company believes that it will be able to
select the best products and then refine and repackage them for optimal retail
success.
BACKGROUND
The 'As Seen On TV' Retail Marketplace:
In 1984, the Federal Communication Commission removed certain regulations
which limited television commercial time, thereby permitting the creation of
long-form commercials (or 'infomercials') as well as dedicated television
shopping channels, which were quickly recognized as new outlets of distribution
for both new and established consumer products. These new methods of marketing
have afforded undercapitalized manufacturers of lesser known products an
inexpensive testing ground for new product introductions. These direct response
channels of distribution have grown to over five (5) billion dollars in annual
consumer sales.
New products which show promise in DRTV are often repackaged, repositioned,
and repromoted to retail as 'As Seen On TV' merchandise. To date, the retail
distribution sought and realized for such products has been largely limited to
the mass merchants, such as Kmart and WalMart. Yet even this limited amount of
distribution has resulted in impressive retail sales.
Examples of the retail success of products first introduced through DRTV by
companies unrelated to HSS(Trademark) include:
o Tripledge Wiper Blades, which sold over 1,000,000 units on television,
has already sold over 25,000,000 units at retail.
o Smart Mop began by selling 500,000 units on television. During its first
three months on the market it sold over 1 million units a month at
retail.
o Ambervision has sold over 15 million pairs of sunglasses in stores over
the past five years; Morgan Fairchild's Dental White sold 3 million units
in one year and over 8 million Magic Hangers were sold at retail last
year alone.
Not all products that were initially introduced through DRTV have achieved
retail success and there can be no guarantee that HSS(Trademark) will be able to
achieve success with any or all of its retail product offerings.
Despite its already impressive size, the DRTV retail marketplace is less
than seven years old and still in its formative stage. The Company believes that
important channels of retail distribution, particularly supermarket chains, are
still largely undeveloped.
THE SUPERMARKET
DRTV products have, to date, realized very limited distribution in
supermarkets which the Company believes is a result of both the selling behavior
of DRTV product distributors and the buying behavior of supermarket retailers.
Home Shopping Showcase(Trademark) was formed to overcome the obstacles that the
Company believes has prevented supermarkets and certain other retail accounts
from achieving their potential in DRTV products, and to create and implement the
programs that the Company believes will allow them to quickly become full
participants in this significant, high margin product category. The Company
believes that some of these obstacles have included (i) DRTV merchandise
suppliers not knowing how, and not being willing, to undertake the expense to
penetrate the fragmented supermarket industry and (ii) the lack of credible
information on DRTV merchandise sales available to general merchandise buyers
in supermarkets which these buyers require to support their choosing
appropriate merchandise for retail sale.
21
<PAGE>
The Company believes that DRTV is a product-driven industry in which
hundreds of products are tested on television each year, and those which prove
successful on DRTV are brought to the retail marketplace. Management believes
that it is virtually impossible for the retail distributor of any given DRTV
product to navigate the complex supermarket marketplace in an effective and
cost-efficient manner. At the same time, the breadth of general merchandise
opportunities presented to a typical grocery chain buyer is staggering, with the
vision to pinpoint the right ones for his particular customer base often beyond
his savvy. A few DRTV merchandise distribution organizations exist with the
wherewithal to develop sales and merchandising forces capable of selling to and
servicing supermarket accounts, but their success has been limited.
Nonetheless, Home Shopping Showcase(Trademark) believes that supermarkets
present the single biggest retail opportunity for DRTV products, and expects
supermarket sales to quickly surpass those of mass merchandisers, as significant
penetration is made into this channel of distribution with the development of a
Home Shopping Showcase(Trademark) program.
Although supermarkets and mass merchandisers share a customer base
(everyone in America), supermarkets have the important advantage of seeing these
customers with significantly more frequency (2.2 visits each week vs. 1.5 visits
each week). The Company believes that supermarket 'exposures' to DRTV products
act like media impressions to reinforce the advertising message delivered via
television, thus helping to build a broad consumer 'intent to purchase' the
items so 'advertised.'
Home Shopping Showcase(Trademark) believes that it can realize significant
penetration for 'As Seen On TV' products in supermarkets by following the proven
strategy of certain other non food product categories, such as videos, greeting
cards, film processing and fresh flowers. Each has become a rapidly growing and
highly profitable category of supermarket sales. Distributors of these products
initially had to convince a supermarket to stock items that at first blush seem
so incongruous with the environment. However, several companies have now made it
easy and profitable for supermarkets to become major players in these categories
by managing product selection and merchandising.
Through its association with ML Direct and HSN Direct, Home Shopping
Showcase(Trademark) has acquired the expertise and contacts necessary to create
and implement similar turn-key 'DRTV' merchandise programs in the leading
supermarkets throughout the country. The Company's management includes
individuals with years of industry experience. See 'Management.' Home Shopping
Showcase(Trademark) will organize and manage a store's entire selection and
display of 'DRTV' merchandise under the Home Shopping Showcase(Trademark) name.
Home Shopping Showcase(Trademark) will regularly supply and rotate the product
mix at each and every supermarket location to assure that the newest and most
popular DRTV products are always available. Home Shopping Showcase(Trademark)
will draw from a large selection of successful DRTV products, using the wealth
of information it has at its disposal from HSN Direct, to actualize a highly
scientific approach to product distribution, and will closely monitor each
store's sales and adjust the product assortment in that store to meet the
specific demands of its unique customer base. To fulfill this plan, Home
Shopping Showcase(Trademark) will operate with a revolving purchase order from
the store, making all the decisions for that store based on its knowledge of the
'As Seen On TV' industry. To date, the Company has not signed any agreements
with any supermarkets.
Home Shopping Showcase(Trademark) has exclusive domestic retail
distribution rights to all of HSN Direct's products, some of which extend beyond
supermarkets to other retail channels of distribution. Through its relationship
with HSN Direct, it will continue to have sufficient product to fulfill all of
those distribution needs. Moreover, ML Direct has obtained world-wide
distribution rights on one product and may seek to obtain rights to additional
products in the future.
Through its association with HSN Direct, Home Shopping Showcase(Trademark)
can avail itself of the full resources of a large distribution company. Under
the terms of the agreement, the Company will be able to contract with HSN and/or
HSN Direct at cost for almost all of its operational needs. HSN is one of the
largest and most sophisticated companies in the DRTV business with
state-of-the-art fulfillment capabilities to receive and process orders for its
retail accounts.
HSN has four distribution centers strategically located throughout the
United States with a combined warehouse and storage of approximately three
million square feet and is able to ship and track approximately 50,000 packages
a day. Home Shopping Showcase(Trademark) may use any or all of these facilities
and benefit from HSN's
22
<PAGE>
considerable distribution expertise and cost-saving volume discounts. HSN
Direct has offered to supply Home Shopping Showcase(Trademark) with corporate
offices, equipment, and office services under the same beneficial terms. The
Company has not utilized and it does not anticipate utilizing the operational
or logistic resources of HSN Direct or Home Shopping Network in the forseeable
future.
Home Shopping Showcase(Trademark) is supported by the expertise of HSN
Direct and ML Direct. Each partner contributes a unique dimension to the
operation of Home Shopping Showcase(Trademark). HSN Direct provides insights and
access to the realm of DRTV products while ML Direct provides insights and
access to retail distribution for these products.
HOME SHOPPING SHOWCASE(TRADEMARK)
In June 1995, the Company entered into an agreement with HSN Direct which
provided for the creation of KN2B, Inc. which does business under the name Home
Shopping Showcase(Trademark). The agreement provides that HSS will develop
programs to support the retail sale of products that have been introduced
through direct response television by establishing a 'store within a store'
concept. The agreement provides that the Company owns 50.02% of HSS and HSN
Direct owns 49.98% of HSS. The Company has agreed that it will secure financing
of $4,000,000 for HSS. HSN Direct will provide HSS with a license to the Home
Shopping Showcase(Trademark)trademarks, logos and service marks within the field
of domestic retail distribution so that HSS may exploit all manner of retail
opportunities in the United States using such trademarks, logos and service
marks. This license provides for use of the HSS logo and name until December 31,
2000, at retails sites established on or before January 1, 1998 and until the
earlier of (i) December 31, 2003 or (ii) three (3) years after establishment of
retail sites established between January 1, 1998 and December 31, 2000. In
addition, HSN Direct will contribute its rights and agreements for the domestic
retail distribution of its own and/or third-party products, services, programs
and promotions introduced through DRTV. The agreement also provides that HSS
will be managed by a board of directors consisting of two representatives from
each of HSN Direct and the Company. The Company has appointed Nancy Shalek,
Chairman of the Company's Board of Directors, and Alan Kerzner, Executive Vice
President of the Company to the Board of Directors of HSS(Trademark). A
representative of the Company will be the Chairman of the Board who will be
responsible for overseeing the day-to-day management of HSS. The Chairman of the
Board will have the right to cast an additional vote to break a tie on all but
certain matters before the Board of Directors as specified in the Articles of
Incorporation of KN2B, Inc. The matters for which the chairman can not break a
tie include among other things amendment of the Certificate of Incorporation or
By-laws, creation of any encumbrance not in the ordinary course of business in
excess of $50,000, acquisition of another business and the making any material
change in the business. There are no provisions governing the resolution of the
votes in situations where the Chairman is not authorized to cast the deciding
vote.
EMPLOYEES
As of May 15, 1996, ML Direct has four (4) full-time employees, and
HSS(Trademark) has seven (7) full-time and two (2) part-time employees. Both
companies have plans for expanded work forces, with ML Direct looking to add
product sourcing and sales representatives. HSS(Trademark) will require a visual
merchandising executive, an operations manager, as well as additional field
marketing support.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
23
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors, executive officers and significant
employees, and promoters of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ----------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Nancy Shalek................. 41 Chairman of the Board and Director of ML Direct and HSS(Trademark)
James M. Lawless............. 58 President, Chief Operating Officer and Principal Accounting Officer, ML
Direct, Inc.
Alan Kerzner................. 38 Executive Vice President and Director of ML Direct, Inc. and President
and Chief Operating Officer, Home Shopping Showcase(Trademark)
Benedict V. White, Jr........ 49 Executive Vice President, ML Direct, Inc.
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Nancy Shalek is the Chairman of the Board and a Director of the Company and
Chairman of the Board of HSS. She is currently President of On Site Media, Inc.,
a position which she has held since 1992 and she is currently a director of
Com/Tech Communications Technologies, Inc. and Advanced Voice Technologies, Inc.
Previously she served as Chairman of the Board of Directors of Site Holdings,
Inc., a public corporation, and as President of The Shalek Agency, an
advertising agency that she formed in 1988. From 1987 to 1988, Ms. Shalek served
as Executive Vice President and West Coast Director of the W.B. Doner
advertising agency. W.B. Doner acquired Wexler & Shalek, an agency which she
co-founded in 1983. From 1983 through 1987, Ms. Shalek served as President of
Wexler & Shalek. Prior to that time, she was employed by the Carnation Company
and by the Voit division of AMF Corporation. Ms. Shalek has received national
and western 'Advertising Woman of the Year' awards and has lectured at
advertising industry conferences and business schools throughout the country.
Ms. Shalek holds a B.A. from the University of Pennsylvania and an M.B.A. from
the University of Southern California.
James M. Lawless is President, Chief Operating Officer and Principal
Accounting Officer of the Company. From 1994 through 1996 he served as Chairman
of the Board and President of Silver King Communications Inc., a company which
owns and operates television stations and television production facilities.
Prior to joining Silver King, Mr. Lawless was an executive at the Home Shopping
Club, a subsidiary of the Home Shopping Network. He served as the Club's Senior
Vice President of Network Operations from 1987 to 1989, and as its President
from 1990 to 1993. Mr. Lawless holds a BA from La Salle University in
Philadelphia.
Alan Kerzner is the Executive Vice President of the Company and President
and Chief Operating Officer of HSS, as well as a Director of both the Company
and HSS(Trademark). From 1991 to 1995 he served as a marketing director of
Johnson & Johnson's Consumer Products, Inc. Operating Company. Mr. Kerzner
served as Vice President of Marketing at The Rocking Horse Child Care Centers of
America from 1989 to 1991. Prior to that, Mr. Kerzner held marketing positions
at Richardson-Vicks, a division of Procter & Gamble. He holds a B.A. from the
University of Rochester and an M.B.A. from the Wharton School of The University
of Pennsylvania.
Benedict V. White, Jr. is Executive Vice President of the Company. Prior to
joining the Company, Mr. White was the President of Celebrity Marketing, a
division of the Home Shopping Network. At the Home Shopping Network, Mr. White
was at various times, President of HSN Lifeway Health Products, a position he
held for 5 years, and President of HSN Cosmetics.
24
<PAGE>
EXECUTIVE COMPENSATION
The following table provides summary information concerning cash and
certain other compensation paid or accrued by the Company to or on behalf of the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers of the Company whose compensation exceeded $100,000 during
the last two (2) fiscal years.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
------------------------ -------
ANNUAL COMPENSATION SECURITIES ALL
------------------------------- RESTRICTED UNDERLYING OTHER
OTHER ANNUAL STOCK OPTIONS LTIP COMP-
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS ENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------------------------ ---- ------ ----- ------------ ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alan Kerzner(1)
President......................... 1995 12,500 -- -- -- 60,000 -- --
-- -- -- --
---- ------ ----- ----------
-- -- -- -- -- -- -- --
-- -- -- --
-- -- -- --
---- ------ ----- ----------
---- ------ ----- ----------
</TABLE>
- ------------------
(1) Mr. Kerzner has an annual salary of $150,000 and was only paid for one (1)
month in the calendar year 1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SAR'S EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
(A) (B) (C) (D) (E)
- ---------------------------------------------- ------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Alan Kerzner.................................. 60,000 100% $ 2.50 June 30, 2000
B............................................. -- -- -- --
C............................................. -- -- -- --
D............................................. -- -- -- --
</TABLE>
Each director of the Company is entitled to receive reasonable expenses not
to exceed $150.00 incurred in attending meetings of the Board of Directors of
the Company. The members of the Board of Directors intend to meet at least
quarterly during the Company's fiscal year, and at such other times duly called.
EMPLOYMENT AGREEMENTS
As of November 30, 1995, the Company has entered into a three (3) year
employment agreement, which expires November 30, 1998, with Alan Kerzner
pursuant to which Mr. Kerzner serves as the Company's Executive Vice President
effective December 1, 1995. The agreement provides for Mr. Kerzner to receive a
salary of $150,000 per annum as well as payment of a bonus at the sole
discretion of the Board of Directors. The agreement also provides that the
Company purchase life insurance for Mr. Kerzner of not less than $500,000 which
shall be payable to his estate. Additionally, Mr. Kerzner was granted an option
to purchase 60,000 shares of ML Direct's Common Stock for $2.50 per share at any
time on or after July 1, 1996 and on or before June 30, 2000.
On April 15, 1996, the Company entered into a one (1) year employment
agreement with James Lawless pursuant to which Mr. Lawless serves as the
Company's President. The agreement provides that Mr. Lawless will receive a
salary of $120,000 per annum and a bonus at the discretion of the Board of
Directors. The agreement also provides that Mr. Lawless be issued an option to
purchase up to 100,000 shares of Common Stock at any time between January 1,
1997 and December 31, 2002 at a price of $3.00 per share. The agreement also
provides for the Company to purchase life insurance of not less than $500,000
which shall be payable to his estate.
On April 15, 1996, the Company entered into a five (5) year employment
agreement with Benedict White pursuant to which Mr. White serves as the
Company's Executive Vice President. The agreement provides that Mr. White will
receive a salary of $200,000 per annum and a bonus at the discretion of the
Board of Directors.
25
<PAGE>
The agreement also provides that Mr. White be issued an option to purchase up to
100,000 shares of Common Stock at any time between January 1, 1997 and December
31, 2002 at a price of $3.00 per share. The agreement also provides that Mr.
White has the right to receive an additional 500,000 options at fair market
value in increments of 100,000 options during the ensuing five years, if he is
employed by the Company. The agreement also provides for the Company to purchase
life insurance of not less than $500,000 which shall be payable to his estate.
STOCK OPTION PLANS AND AGREEMENTS
Incentive Option and Stock Appreciation Rights Plan--As of March 1996, the
Directors of the Company adopted and the stockholders of the Company approved
the adoption of, the Company's 1995 Incentive Stock Option and Stock
Appreciation Rights Plan ('Incentive Option Plan'). The purpose of the Incentive
Option Plan is to enable the Company to encourage key employees and Directors to
contribute to the success of the Company by granting such employees and
Directors incentive stock options ('ISOs') as well as non-qualified options and
stock appreciation rights ('SARs').
The Incentive Option Plan will be administered by the Board of Directors or
a committee appointed by the Board of Directors (the 'Committee') which
Committee will consist solely of independent directors (directors who are not
officers or employees of the Company), which will determine, in its discretion,
among other things, the recipients of grants, whether a grant will consist of
ISOs, non-qualified options or SARs or a combination thereof, and the number of
shares to be subject to such options and SARs.
The Incentive Option Plan provides for the granting of ISOs to purchase
Common Stock at an exercise price to be determined by the Board of Directors or
the Committee not less than the fair market value of the Common Stock on the
date the option is granted. Non-qualified options and freestanding SARs may be
granted with any exercise price. SARs granted in tandem with an option have the
same exercise price as the related option.
The total number of shares with respect to which options and SARs may be
granted under the Incentive Option Plan is 2,000,000. ISOs may not be granted to
an individual to the extent that in the calendar year in which such ISOs first
become exercisable the shares subject to such ISOs have a fair market value on
the date of grant in excess of $100,000. No option or SAR may be granted under
the Incentive Option Plan after April 15, 2005 and no option or SAR may be
outstanding for more than ten years after its grant. Additionally, no option or
SAR can be granted for more than five (5) years to a shareholder owning 10% or
more of the Company's outstanding Common Stock.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock,
or in a combination of both. The Company may lend to the holder of an option
funds sufficient to pay the exercise price, subject to certain limitations. SARs
may be settled, in the Board of Directors' discretion, in cash, Common Stock, or
in a combination of cash and Common Stock. The exercise of SARs cancels the
corresponding number of shares subject to the related option, if any, and the
exercise of an option cancels any associated SARs. Subject to certain
exceptions, options and SARs may be exercised any time up to three months after
termination of the holder's employment.
The Incentive Option Plan may be terminated or amended at any time by the
Board of Directors, except that, without stockholder approval, the Incentive
Option Plan may not be amended to increase the number of shares subject to the
Incentive Option Plan, change the class of persons eligible to receive options
or SARs under the Incentive Option Plan or materially increase the benefits of
participants.
To date no options or SARs have been granted under the Incentive Option
Plan. No determinations have been made regarding the persons to whom options or
SARs will be granted in the future, the number of shares which will be subject
to such options or SARs or the exercise prices to be fixed with respect to any
option or SAR.
Non-Qualified Option Plan--As of March 1996, the Directors and stockholders
of the Company adopted the 1995 Non-Qualified Stock Option Plan (the
'Non-Qualified Option Plan'). The purpose of the Non-Qualified Option Plan is to
enable the Company to encourage key employees, Directors, consultants,
distributors, professionals and independent contractors to contribute to the
success of the Company by granting such employees, Directors, consultants,
distributors, professionals and independent contractors non-qualified options.
26
<PAGE>
The Non-Qualified Option Plan will be administered by the Board of Directors or
the Committee in the same manner as the Incentive Option Plan.
The Non-Qualified Option Plan provides for the granting of non-qualified
options at such exercise price as may be determined by the Board of Directors,
in its discretion. The total number of shares with respect to which options may
be granted under the Non-Qualified Option Plan is 2,000,000.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash or in shares of Common Stock
(based on the fair market value of the Common Stock on the date prior to
exercise), or in a combination of both. The Company may lend to the holder of an
option funds sufficient to pay the exercise price, subject to certain
limitations. Subject to certain exceptions, options may be exercised any time up
to three months after termination of the holder's employment.
The Non-Qualified Option Plan may be terminated or amended at any time by
the Board of Directors, except that, without stockholder approval, the
Non-Qualified Option Plan may not be amended to increase the number of shares
subject to the Non-Qualified Option Plan, change the class of persons eligible
to receive options under the Non-Qualified Option Plan or materially increase
the benefits of participants.
To date 966,000 options have been granted under the 1995 Non-Qualified
Option Plan.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding shares of
the Company's Common Stock by (i) any holder of more than five (5%) percent of
the outstanding shares; (ii) the Company's directors; and (iii) the directors
and officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
(%) OF (%) OF
SHARE OF COMMON COMMON
COMMON STOCK STOCK SHARES OF
NAME AND ADDRESS OF STOCK BEFORE AFTER PREFERRED
BENEFICIAL OWNER OWNED OFFERING(1) OFFERING STOCK(2)
- ---------------------------------------------------------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Alan Kerzner(3)................................................. 120,000 3.8 2.6 0
Sherbrooke Consulting, Ltd.(4).................................. 553,500 17.7 1.2 0
Special Equities, Inc.(5)....................................... 1,080,000 34.6 2.4 0
The MarketLink Group, Ltd.(6)................................... 685,500 22.0 15.2 132,000
Nancy Shalek(4)(7).............................................. 553,500 17.7 1.2 0
James Lawless................................................... -- -- -- --
M.D. Funding, Inc.(8)........................................... 198,000 6.3 0.4 198,000
All officers and directors as a group
(three (3) persons)(3)(4)(7).................................. 673,500 21.5 3.8 0
</TABLE>
- ------------------
(1) Does not include the Common Stock issued pursuant to the over-allotment
option and the Representative's Option.
(2) Each share of Preferred Stock is convertible into two (2) shares of Common
Stock if not redeemed within six (6) months of the Closing of the public
offering.
(3) Includes 60,000 shares of Common Stock issuable upon exercise of 60,000
options. Does not include shares of Common Stock issuable upon exercise of
50,000 Class A Warrants.
(4) Sherbrooke Consulting, Ltd., a corporation wholly owned by Nancy Shalek,
Chairman of the Board of Directors of the Company, is the record holder of
such shares. Ms. Shalek may be deemed to hold sole investment and voting
power over such shares. Does not include 60,000 shares of Common Stock and
shares of Common Stock issuable upon exercise of 60,000 Class A Warrants and
shares of Common Stock issuable upon the possible conversion of 60,000
shares of preferred stock owned by James Shalek, the husband of Ms. Shalek,
and 461,250 shares of Common Stock issuable upon exercise of 461,250 Class A
Warrants held by Sherbrooke.
(Footnotes continued on next page)
27
<PAGE>
(Footnotes continued from previous page)
(5) Special Equities, Inc. is a corporation whose sole shareholder is Michael
Lulkin. Does not include shares of Common Stock issuable upon the possible
exercise of 900,000 Class A Warrants.
(6) The MarketLink Group, Ltd. is a corporation whose sole shareholder is Carole
Landau. Does not include shares of Common Stock issuable upon the possible
conversion of 132,000 shares of Preferred Stock and shares of Common Stock
issuable upon exercise of 461,250 Class A Warrants.
(7) Includes 553,500 shares of Common Stock owned by Sherbrooke Consulting, Ltd,
a corporation wholly owned by Nancy Shalek.
(8) Does not include shares of Common Stock issuable upon the possible
conversion of 198,000 shares of Preferred Stock.
CERTAIN TRANSACTIONS
In June 1995, the Company entered into an agreement with HSN Direct which
provided for the creation of KN2B, Inc., which does business under the name Home
Shopping Showcase(Trademark). The agreement provides that HSS will develop
programs to support the retail sale of products that have been introduced
through direct response television by executing a 'store within a store'
concept. The agreement provides that the Company owns 50.02% of HSS and HSN
Direct owns 49.98% of HSS. The Company has agreed that it will secure financing
of $4,000,000 for HSS. HSN Direct will provide HSS with a license to the Home
Shopping Showcase(Trademark) trademarks, logos and service marks within the
field of domestic retail distribution so that HSS may exploit all manner of
retail opportunities in the United States using such trademarks, logos and
service marks. This license provides use of the HSS logo and names until
December 31, 2000, at retail sites established on or before January 1, 1998 and
the earlier of (i) December 31, 2003 or (ii) three (3) years after establishment
of retail sites established between January 1, 1998 and December 31, 2000. In
addition, HSN Direct will contribute its rights and agreements for the domestic
retail distribution of its own and/or third party products, services, programs
and promotions introduced through DRTV. The agreement also provides that HSS
will be managed by a Board of Directors consisting of two representatives from
each of HSN Direct and the Company. A representative of the Company will be
Chairman of the Board and take primary responsibility for overseeing the
day-to-day management of HSS. The Chairman of the Board will have the right to
cast an additional vote to break a tie on all but certain matters before the
Board of Directors as specified in the Articles of Incorporation of KN2B, Inc.
The matters for which the chairman can not break a tie include among other
things amendment of the Certificate of Incorporation or By-laws, creation of any
encumbrance not in the ordinary course of business in excess of $50,000,
acquisition of another business and the making of any material change in the
business. There are no provisions governing the resolution of the votes in
situations where the Chairman is not authorized to cast the deciding vote.
The Company has made payment in the amount of $128,352 to Marketlink, a
partnership consisting of two partners, The MarketLink Group, Ltd. ('MLG') and
Sherbrooke Consulting, Inc. to reimburse the partnership for expenses it
advanced on behalf of the Company. MLG is a principal stockholder of the Company
and Sherbrooke Consulting, Inc. is a corporation wholly owned by Nancy Shalek,
an officer and director and a principal stockholder of the Company.
In August and September 1995 and March 1996, the Company issued 720,000
shares of Preferred Stock that are a part of the Preferred Stock Units for
$600,000. The 720,000 Preferred Stock Units consisted of 720,000 shares of
Preferred Stock and 720,000 shares of Common Stock. The Preferred Stock is
convertible into one (1) share of Common Stock, unless, if after six (6) months
after the close of the proposed public offering, the Company has not redeemed
the Preferred Stock, in which case the conversion rate is two (2) shares of
Common Stock for one (1) share of Preferred Stock. The Company can redeem the
Preferred Stock for $.83 per share.
On March 1, 1996, the Company effected a six-for-five stock split.
The Company believes that the terms of all of the transactions discussed in
this section were no less favorable to the Company than those which could have
been obtained from non-affiliated parties. Transactions between the Company and
its officers, directors, employees and affiliates will be on terms no less
favorable to the Company than can be obtained from unaffiliated parties.
28
<PAGE>
DESCRIPTION OF SECURITIES
The Company is offering 700,000 Units, each Unit consisting of two (2)
shares of Common Stock, par value $.0001 per share, and one (1) Class A Warrant.
COMMON STOCK
The Company is authorized to issue up to 15,000,000 shares of Common Stock,
of which 3,120,000 shares were issued and outstanding as of the date of this
Prospectus. All of the issued and outstanding shares of Common Stock are fully
paid, validly issued and non-assessable.
Subject to the rights of holders of preferred stock, if any, holders of
shares of Common Stock of the Company are entitled to share equally on a per
share basis in such dividends as may be declared by the Board of Directors out
of funds legally available therefor. There are presently no plans to pay
dividends with respect to the shares of Common Stock. See 'Dividend Policy.'
Upon liquidation, dissolution or winding up of the Company, after payment of
creditors and the holders of any senior securities of the Company, including
preferred stock, if any, the assets of the Company will be divided pro rata on a
per share basis among the holders of the shares of Common Stock. The Common
Stock is not subject to any liability for further assessments. There are no
conversion or redemption privileges nor any sinking fund provisions with respect
to the Common Stock and the Common Stock is not subject to call. The holders of
Common Stock do not have any pre-emptive or other subscription rights.
Holders of shares of Common Stock are entitled to cast one vote for each
share held at all stockholders' meetings, including the annual meeting, for all
purposes, including the election of directors. The Common Stock does not have
cumulative voting rights.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 1,000,000 shares of
'blank check' preferred stock, 720,000 of which are outstanding, whereby the
Board of Directors of the Company shall have the authority, without further
action by the holders of the outstanding Common Stock, to issue shares of
preferred stock from time to time in one or more classes or series, to fix the
number of shares constituting any class or series and the stated value thereof,
if different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such class
or series. The Company has agreed with the Representative that it will not issue
any such shares for a period of 24 months from the date of this Prospectus
without the prior written consent of the Representative.
SERIES A PREFERRED STOCK
Designation and Amount; Par Value. The shares of such series are
designated as Series A Preferred Stock and the number of shares constituting
such series is 720,000, all of which are issued and outstanding prior to the
Effective Date of the offering hereof. The Series A Preferred Stock has $.0001
par value per share.
Dividends. The Company shall pay preferential dividends to the holders of
the Series A Preferred Stock at the rate of eight percent (8%) per annum of the
liquidation preference or $.08 per share. The amount of dividends payable for
the initial dividend period shall be computed on the basis of 360-day year from
the Effective Date through January 1, 1997. Such dividends shall accrue whether
or not they have been declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends. The
Company may, in its discretion, issue in lieu of a cash dividend shares of
Common Stock having a fair market value equal to the dividend amount.
Conversion. Each share of Series A Preferred Stock is convertible into one
(1) Share of Common Stock, at the option of the holder, provided however, that
in the event the Company has not redeemed the Preferred Stock within six (6)
months after the closing of this offering, then each share of Preferred Stock is
convertible into two (2) shares of Common Stock.
29
<PAGE>
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, each share
of Series A Preferred Stock shall have a liquidation preference of $.83 per
share plus unpaid annual dividends that have accrued to date of payment.
Voting Rights. The holders of Series A Preferred Shares shall have no
right to vote on matters presented to the stockholders of the Company.
Redemption. The Series A Preferred Stock is subject to redemption by the
Company, upon thirty (30) days prior written notice at a price of approximately
$.833 per share.
Rank. The shares of Series A Preferred Stock rank senior to all series of
preferred stock in all respects.
CLASS A WARRANTS
Each Class A Warrant (the 'Class A Warrants' or 'Warrants') represents the
right to purchase one share of Common Stock at an exercise price of $6.00 per
share, for a period of four (4) years, commencing one year after the Effective
Date of this Offering. Each Class A Warrant is redeemable by the Company for
$.05 per Class A Warrant at any time after March 5, 1997, upon thirty (30) days'
prior written notice, if the closing price of the Common Stock, as reported by
the principal exchange on which the Common Stock is traded, the Nasdaq SmallCap
Market or the National Quotation Bureau Incorporated, as the case may be,
exceeds $ per share for twenty (20) consecutive trading days prior to
the date of the notice of redemption. Upon thirty (30) days' written notice to
all holders of Class A Warrants, the Company shall have the right, subject to
compliance with Rule 13E-4 under the Securities Act of 1934 and the filing of
Schedule 13E-4 and, if required, a post-effective amendment to this registration
statement, to reduce the exercise price and/or extend the term of the Class A
Warrant. After expiration, the Warrants will be void and of no value. The
Warrants underlying the Representative's Options have the same terms and
conditions as the Warrants to be sold to the public in this Offering.
The Class A Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Class A Warrants. If the Company does not or is unable to maintain a current
effective registration statement, the Warrantholders will be unable to exercise
the Class A Warrants and the Class A Warrants may become valueless. Moreover, if
the shares of Common Stock underlying the Class A Warrants are not registered or
qualified for sale in the state in which a warrantholder resides, such holder
might not be permitted to exercise the Class A Warrants.
The Company will deliver Warrant certificates to the purchasers for each
Class A Warrant purchased. Thereafter, Warrant certificates may be exchanged for
new certificates of different denominations, and may be exercised or transferred
by presenting them at the offices of the Transfer Agent. Holders of the Class A
Warrants may sell the Class A Warrants if a market exists rather than exercise
them. However, there can be no assurance that a market will develop or continue
as to such Class A Warrants. If the Company is unable to qualify the Common
Stock underlying such Class A Warrants for sale in certain states, holders of
the Company's Class A Warrants in those states will have no choice but to either
sell such Class A Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price to
the Warrant Agent. The Class A Warrants may be exercised in whole or from time
to time in part. If less than all of the Class A Warrants evidenced by a Warrant
certificate are exercised, a new Warrant certificate will be issued for the
remaining number of Class A Warrants.
Holders of the Class A Warrants are protected against dilution of the
equity interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as to
terminate the Class A Warrants, the Class A Warrants may be exercised
immediately prior to such action. In the event of liquidation, dissolution or
winding up of the Company, holders of the Class A Warrants are not entitled to
participate in the Company's assets.
For the life of the Class A Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
Common Stock. The exercise of the Class A Warrants will result in the
30
<PAGE>
dilution of the then book value of the Common Stock of the Company held by the
public investors and would result in a dilution of their percentage ownership of
the Company. The terms upon which the Company may obtain additional capital may
be adversely affected through the period that the Class A Warrants remain
exercisable. The holders of these Class A Warrants may be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain
equity capital on terms more favorable than those provided for by the Class A
Warrants.
Because the Class A Warrants being offered hereby may be transferred, it is
possible that the Class A Warrants may be acquired by persons residing in states
where the Company has not registered, or is not exempt from registration such
that the shares of Common Stock underlying the Class A Warrants may not be sold
or transferred upon exercise of the Class A Warrants. Warrantholders residing in
those states would have no choice but to attempt to sell their Class A Warrants
or to let them expire unexercised. Also, it is possible that the Company may be
unable, for unforeseen reasons, to cause a registration statement covering the
shares underlying the Class A Warrants to be in effect when the Class A Warrants
are exercisable. In that event, the Class A Warrants may expire unless extended
by the Company, as permitted by the terms of the Warrants because a registration
statement must be in effect, including audited financial statements, in order
for warrantholders to exercise their Class A Warrants.
LIMITATION ON LIABILITY OF DIRECTORS
In connection with the Offering, the Representative has agreed to indemnify
the Company, its directors, and each person who controls it, within the meaning
of Section 15 of the Securities Act, with respect to any statement in or
omission from the registration statement or the Prospectus or any amendment or
supplement thereto, if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Representative
specifically for or in connection with the preparation of the registration
statement, the Prospectus, or any such amendment or supplement thereto.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise.
Article Nine of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section 102
of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Insofar as indemnification
for liabilities arising under the Securities 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 Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage for
its officers and directors.
TRANSFER AGENT & REGISTRAR
The transfer agent and registrar for the Company's securities is American
Stock Transfer & Trust Company.
31
<PAGE>
SELLING SECURITYHOLDERS
This registration statement, of which this Prospectus forms a part, also
covers the registration of 2,250,000 shares of Common Stock, 2,000,000 Class A
Warrants and 2,000,000 shares of Common Stock underlying Class A Warrants owned
by certain affiliated and non-affiliated persons, hereinafter collectively
referred to as the 'Selling Securityholders.' See 'Certain Transactions.' The
shares of Common Stock and Class A Warrants held by the Selling Securityholders
have been issued prior to the Effective Date of this offering. The Common Stock
has been registered under the Securities Act of 1933, as amended ('Act'), is not
part of the underwriting, and may be sold commencing thirteen months from the
date of this Prospectus with regard to the Preferred Stock Units and 24 months
from the date of this Prospectus with regard to the other securities, subject to
the earlier release by the Representative. The resale of the securities by the
Selling Securityholders is subject to Prospectus delivery and other requirements
of the Act.
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transaction between sellers and purchasers without a broker-dealer. In effecting
sales, brokers or dealers engaged by the Selling Securityholders may arrange for
other brokers or dealers to participate. The Selling Securityholders and
intermediaries through whom such securities are sold may be deemed
'underwriters' within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholder or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby. As of the date of this Prospectus, the freely
tradeable securities of the Company will be 3,650,000 shares of Common Stock and
2,700,000 Class A Warrants.
32
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriters, as set forth below and for whom I.A.
Rabinowitz & Co. is the representative, have agreed to purchase from the Company
700,000 Units consisting of 1,400,000 shares of Common Stock and 700,000 Class A
Warrants offered hereby from the Company on a 'firm commitment' basis, if any
are purchased.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER UNITS
- --------------------------------------------------------------------------------------------- -------
<S> <C>
I.A. Rabinowitz & Co.........................................................................
-------
......................................................................
-------
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Units to the public at $10.00 per Unit as set forth on the cover page of this
Prospectus and that they may allow to certain dealers who are NASD members
concessions not to exceed $ per Unit, of which not in excess of
$ per Unit may be reallowed to other dealers who are members of the
NASD. After the initial public offering, the public offering price, concession
and reallowance may be changed by the Underwriters. The Underwriter does not
intend to sell any of the securities of the Company to accounts for which it
exercises discretionary authority.
The public offering price of the Unit and the exercise price and the terms
of the Warrants were arbitrarily determined by negotiations between the Company
and the Representative and do not necessarily relate to the assets, book value
or results of operations of the Company or any other established criteria of
value.
The Company has granted an option to the Representative, exercisable during
the 30-day period from the date of this Prospectus, to purchase up to a maximum
of 105,000 additional Units at the offering price, less the underwriting
discount, to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Representative against certain liabilities in connection
with the Registration Statement, including liabilities arising under the 1933
Act. Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to officers, directors or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
The Company has agreed to pay to the Representative a non-accountable
expense allowance of 3% of the aggregate offering price of the Units offered
hereby, including any Units purchased pursuant to the Over-Allotment Option.
The Company has agreed to sell to the Representative, or its designees, for
an aggregate purchase price of $100, an option (the 'Representative's Option')
to purchase up to an aggregate of 70,000 Units. The Representative's Option
shall be exercisable during a four-year period commencing one (1) year from the
Effective Date. The Representative's Option may not be assigned, transferred,
sold or hypothecated by the Representative until twelve months after the
Effective Date of this Prospectus, except to officers or partners of the
Representative or to selling group members in this Offering. Any profits
realized upon the sale of the Units issuable upon exercise of the
Representative's Option may be deemed to be additional underwriting
compensation. The exercise price of the Units issuable upon exercise of the
Representative's Option during the
33
<PAGE>
period of exercisability shall be 160% of the initial public offering price of
the Units. The exercise of the Representative's Option and the number of Units
covered thereby are subject to adjustment in certain events to prevent dilution.
For the life of the Representative's Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of the
Company's Units, Common Stock and Warrants with a resulting dilution in the
interest of other stockholders. The Company may find it more difficult to raise
capital for its business if the need should arise while the Representative's
Option is outstanding. At any time when the holders of the Representative's
Option might be expected to exercise it, the Company would probably be able to
obtain additional capital on more favorable terms.
If the Company enters into a transaction (including a merger, joint
venture, equity financing, debt financing, or the acquisition of another entity)
introduced to the Company by the Representative, the Company has agreed to pay
the Representative a finder's fee equal to 5% of the first $4,000,000 of
consideration involved in the transaction, ranging in $1,000,000 increments down
to 2% of the excess, if any, over $6,000,000.
The Company has agreed with the Representative that the Company will pay to
the Underwriter a warrant solicitation fee (the 'Warrant Solicitation Fee')
equal to four percent (4%) of the exercise price of the Class A Warrants
exercised beginning one (1) year after the Effective Date and to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission. Such Warrant Solicitation Fee will be paid to the Representative
if (a) the market price of the Common Stock on the date that any Class A
Warrants is exercised is greater than the exercise price of the Class A Warrant;
(b) the exercise of such Class A Warrant was solicited by the Underwriter; (c)
prior specific written approval for exercise is received from the customer if
the Class A Warrant is held in a discretionary account; (d) disclosure of this
compensation agreement is made prior to or upon the exercise of such Class A
Warrant; (e) solicitation of the exercise is not in violation of Rule 10b-6 of
the Exchange Act; and (f) solicitation of the exercise is in compliance with
NASD Notice to Member 81-38. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Representative will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Company's securities for the period from nine (9)
business days prior to any solicitation of the exercise of any Class A Warrant
or nine (9) business days prior to the exercise of any Class A Warrant based on
a prior solicitation until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Representative may have to receive such a fee for the exercise of Class A
Warrants following such solicitation. As a result, the Representative may be
unable to continue to provide a market for the Company's securities during that
certain period while the Class A Warrants are exercisable. See 'Risk Factors--
Lack of Prior Market for Units, Common Stock and Class A Warrants; No Assurance
of Public Trading Market.'
Upon the closing of the sale of the Units offered hereby, the Company will
enter into a five-year financial advisory and investment banking agreement with
the Representative pursuant to which the Company will be obligated to pay
$100,000 payable in advance upon the closing of the Offering, for financial and
investment advisory services to the Company.
Prior to the date of this Prospectus, all of the shareholders of the
Company's Common Stock and Class A Warrants as of the Effective Date have agreed
in writing not to sell, assign or transfer any of their shares of the Company's
securities without the Representative's prior written consent for a period of
twenty four (24) months from the closing of the offering, except for the holders
of the Preferred Stock Units, who have agreed to a thirteen (13) month period.
In addition, the Company has agreed not to issue any securities for a period of
twenty four (24) months from the closing of the offering.
The Representative shall have the option to appoint one individual to serve
on the Company's Board of Directors for a period of three (3) years from the
Effective Date. In lieu of nominating a director, the Representative may
designate a non-director observer to attend meetings of the Company's Board of
Directors for three (3) years after the Effective Date.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Representative's Option Agreement which have been filed as
exhibits hereto.
34
<PAGE>
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Units,
Common Stock or Class A Warrants. The initial public offering price for the
Units and the exercise price and the terms of the Warrants have been determined
by negotiations between the Company and the Representative. Among the factors
considered in the negotiations were the market price of the Company's Common
Stock and Warrants, an analysis of the areas of activity in which the Company is
engaged, the present state of the Company's business, the Company's financial
condition, the Company's prospects, an assessment of management, the general
condition of the securities market at the time of this Offering and the demand
for similar securities of comparable companies. The public offering price of the
Units and Warrants does not necessarily bear any relationship to assets,
earnings, book value or other criteria of value, including recent sales of the
securities of the Company at an average price of $.10 per share.
The Company anticipates that the Common Stock and Class A Warrants will be
listed for quotation on Nasdaq under the symbols MLDR and MLDRW, but there can
be no assurances that an active trading market will develop, even if the
securities are accepted for quotation. The Representative intends to make a
market in all of the publicly-traded securities of the Company. The Units will
not be listed for quotation.
LITIGATION
The Company is not a party to any legal proceedings and, to the best of its
information, knowledge and belief, none is contemplated or has been threatened.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022.
Bernstein & Wasserman, LLP, has served, and continues to serve, as counsel to
the Representative in matters unrelated to this Offering. Certain legal matters
will be passed upon for the Representative by Cohn & Birnbaum P.C., 100 Pearl
Street, Hartford, Connecticut 06103.
EXPERTS
Certain of the financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been examined by Moore Stephens,
P.C. formerly known as Mortenson and Associates, P.C., independent certified
public accountants, whose reports thereon appear elsewhere herein and in the
Registration Statement.
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form SB-2
filed by the Company with the Securities and Exchange Commission (the
'Commission') under the Securities Act and omits certain information contained
in the Registration Statement. Reference is hereby made to the Registration
Statement and to its exhibits for further information with respect to the
Company and the Common Stock offered hereby. Statements contained herein
concerning provisions of documents are necessarily summaries of such documents,
and each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at: 450 Fifth Street, Washington, D.C. 20549; and at the offices of
the Commission located at 7 World Trade Center, New York, NY 10048; and copies
of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549 at prescribed rates.
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of
ML Direct Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of ML Direct
Inc. and its subsidiary as of November 30, 1995, and the related consolidated
statement of operations, stockholders' equity, and cash flows for the period
from June 22, 1995 (date of inception) to November 30, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ML Direct Inc. and its subsidiary as of November 30, 1995, and the consolidated
results of their operations, and their cash flows for the period from June 22,
1995 (date of inception) to November 30, 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that ML Direct Inc. will continue as a going concern. As discussed in
Note 7 to the consolidated financial statements, the Company's lack of operating
history and insufficient cash to achieve its operating objectives raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 7. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
December 20, 1995
F-1
<PAGE>
ML DIRECT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents........................................................... $ 28,144 $336,884
Inventory........................................................................... 49,887 --
Accounts Receivable................................................................. 14,250 --
Note Receivable--Related Party...................................................... -- 50,000
Due from Related Parties............................................................ -- 48,982
Prepaid Expenses.................................................................... 29,818 33,834
Interest Receivable................................................................. -- 239
------------ ------------
Total Current Assets................................................................ 122,099 469,939
------------ ------------
Other Assets:
Display Costs....................................................................... 165,359 40,000
Organizational Costs--Net........................................................... 10,984 9,685
Deferred Offering Costs............................................................. 71,680 1,580
Deposits............................................................................ 5,000 --
------------ ------------
Total Other Assets.................................................................. 253,023 51,265
------------ ------------
Total Assets........................................................................ $375,122 $521,204
------------ ------------
------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-2
<PAGE>
ML DIRECT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL HISTORICAL
MAY 31, MAY 31, NOVEMBER 30,
1996 1996 1995
----------- ------------ ------------
(NOTE 8B) (UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable................................................... $ 170,386 $ 170,386 $ 24,282
Accounts Payable--Related Party.................................... 94,182 94,182 --
Accrued Returns and Allowances..................................... 74,498 74,498 72,415
Accrued Expenses................................................... 84,364 84,364 14,177
Payroll Taxes Payable.............................................. 56,987 56,987 3,244
Note Payable--Related Party........................................ 36,500 36,500 --
----------- ------------ ------------
Total Current Liabilities.......................................... 516,917 516,917 114,118
----------- ------------ ------------
Commitments.......................................................... -- -- --
----------- ------------ ------------
Stockholders' Equity:
Redeemable Convertible Series A Preferred Stock--Authorized
1,000,000 Shares of 'Blank Check' Preferred, Issued and
Outstanding 720,000 Shares, Par Value .0001(8B)................. -- 72 60
Additional Paid-in Capital--Preferred Stock........................ -- 299,928 249,940
Common Stock--Authorized 15,000,000 Shares, Issued and Outstanding
3,120,000 Shares, Par Value .0001............................... 312 312 300
Additional Paid-in Capital--Common Stock........................... 101,928 401,928 249,940
Common Stock Subscribed(1)......................................... 4,000,000 4,000,000 4,000,000
Retained Earnings (Deficit)........................................ (759,035) (759,035) (93,154)
Less: Stock Subscription Receivable................................ (4,000,000) (4,000,000) (4,000,000)
Deferred Compensation Expense................................. (85,000) (85,000) --
----------- ------------ ------------
Total Stockholders' Equity......................................... (741,795) (141,795) 407,086
----------- ------------ ------------
Total Liabilities and Stockholders' Equity......................... $ 224,878 $ 375,122 $ 521,204
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-3
<PAGE>
ML DIRECT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JUNE 22, 1995
MONTHS ENDED THROUGH
MAY 31, NOVEMBER 30,
1996 1995
------------ --------------
(UNAUDITED)
<S> <C> <C>
Revenues--Net............................................................ $ 88,842 $ 759,622
Cost of Sales............................................................ 84,536 667,365
------------ --------------
Gross Profit........................................................... 4,306 92,257
------------ --------------
Selling, General and Administrative Expenses:
Commissions............................................................ 46,000 21,721
Travel and Entertainment............................................... 60,468 326
Display Materials...................................................... 17,260 750
Reimbursed Expenses to Related Party................................... 183,418 128,352
Compensation and Benefits.............................................. 214,652 13,909
Consulting Fees........................................................ 19,886 16,425
Professional Fees...................................................... 23,770 --
Rent and Utilities..................................................... 13,976 --
Other.................................................................. 36,066 6,064
Warehouse Expenses..................................................... 40,021 --
Compensation Expense--Stock Issuance Cost.............................. 17,000 --
------------ --------------
Total Selling, General and Administrative Expenses..................... 672,517 187,547
------------ --------------
Loss from Operations................................................... (668,211) (95,290)
------------ --------------
Other Income (Expense):
Interest Income........................................................ 2,389 2,136
Interest Expense....................................................... (59) --
------------ --------------
Total Other Income..................................................... 2,330 2,136
------------ --------------
Net Loss............................................................... (665,881) (93,154)
Provision for Income Taxes............................................... -- --
------------ --------------
Net Loss............................................................... $ (665,881) $ (93,154)
------------ --------------
------------ --------------
Weighted Average Number of Shares...................................... 4,266,571 4,266,571
------------ --------------
------------ --------------
Net Loss Per Share..................................................... $ (.16) $ (.02)
------------ --------------
------------ --------------
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-4
<PAGE>
ML DIRECT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------------- -----------------------------------------------
EXCESS ADDITIONAL COMMON
NUMBER OF AMOUNT OVER NUMBER OF AMOUNT PAID-IN STOCK
SHARES AT PAR PAR SHARES AT PAR CAPITAL SUBSCRIBED
--------- --------- -------- --------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Stock Issued to Founders--
June 22, 1995.................... -- $-- $ -- 2,400,000 $240 $ -- $ --
Common and Preferred Stock Issued
as part of Preferred Stock Units
sold in August and September of
1995 issued for $500,000
cash(8B)......................... 600,000 60 249,940 600,000 60 249,940 --
Common Stock Subscribed(1)......... -- -- -- -- -- -- 4,000,000
Net Loss for the Period June 22,
1995 through November 30, 1995... -- -- -- -- -- -- --
--------- --- -------- --------- ------ ---------- ----------
Balance--November 30, 1995....... 600,000 60 249,940 3,000,000 300 249,940 4,000,000
Stock Options Issued(9) and (10D).. -- -- -- -- -- 102,000 --
Compensation Expense(9) and (10D).. -- -- -- -- -- -- --
Common and Preferred Stock Issued
for Bridge Financing--March 29,
1996............................. 120,000 12 49,988 120,000 12 49,988 --
Net Loss for the six months ended
May 31, 1996..................... -- -- -- -- -- -- --
--------- --- -------- --------- ------ ---------- ----------
Balance--May 31, 1996
(Unaudited).................... 720,000 $72 $299,928 3,120,000 $312 $ 401,928 $4,000,000
--------- --- -------- --------- ------ ---------- ----------
--------- --- -------- --------- ------ ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
RETAINED DEFERRED STOCK EQUITY
EARNINGS COMPENSATION SUBSCRIPTION CONTROLLING
(DEFICIT) EXPENSE RECEIVABLE INTEREST
--------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Stock Issued to Founders--June 22, 1995....................... $ -- $ -- $ -- $ 240
Common and Preferred Stock Issued as part of Preferred Stock
Units sold in August and September of 1995 issued for
$500,000 cash(8B)........................................... -- -- -- 500,000
Common Stock Subscribed(1).................................... -- -- (4,000,000) --
Net Loss for the Period June 22, 1995 through November 30,
1995........................................................ (93,154) -- -- (93,154)
--------- ------------ ------------ -----------
Balance--November 30, 1995.................................. (93,154) -- (4,000,000) 407,086
Stock Options Issued(9) and (10D)............................. -- (102,000) -- --
Compensation Expense(9) and (10D)............................. -- 17,000 -- 17,000
Common and Preferred Stock Issued for Bridge Financing--
March 29, 1996.............................................. -- -- -- 100,000
Net Loss for the six months ended May 31, 1996................ (665,881) -- -- (665,881)
--------- ------------ ------------ -----------
Balance--May 31, 1996 (Unaudited)........................... $(759,035) $(85,000) $ (4,000,000) $ (141,795)
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-5
<PAGE>
ML DIRECT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE SIX JUNE 22, 1995
MONTHS ENDED THROUGH
MAY 31, NOVEMBER 30,
1996 1995
------------ --------------
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net Loss......................................................................... $ (665,881) $ (93,154)
------------ --------------
Adjustments to Reconcile Net Loss to Net Cash (Used for)
Operating Activities:
Amortization................................................................ 3,462 880
Stock Issuance Costs........................................................ 17,000 --
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Prepaid Expenses and Accrued Interest......................................... 4,255 (34,073)
Related Party Receivable...................................................... 48,982 (48,982)
Accounts Receivable........................................................... (14,250) --
Inventory..................................................................... (49,887) --
Increase (Decrease) in Liabilities:
Accounts Payable.............................................................. 146,104 24,282
Accounts Payable--Related Party............................................... 94,182 --
Allowance for Returns......................................................... 2,083 72,415
Accrued Expenses.............................................................. 70,187 14,177
Payroll Taxes Payable......................................................... 53,743 3,244
------------ --------------
Total Adjustments............................................................. 375,861 31,943
------------ --------------
Net Cash--Operating Activities................................................... (290,020) (61,211)
------------ --------------
Investing Activities:
Purchases of Displays............................................................ (125,359) (40,000)
Organizational Costs............................................................. (4,761) (10,565)
Note Receivable--Related Party................................................... 50,000 (50,000)
Note Payable--Related Party...................................................... 36,500 --
Deposits......................................................................... (5,000) --
------------ --------------
Net Cash--Investing Activities................................................... (48,620) (100,565)
------------ --------------
Financing Activities:
Proceeds from Issuance of Preferred Stock Units(8B).............................. 100,000 500,000
Proceeds from Issuance of Common Stock........................................... -- 240
Deferred Offering Costs.......................................................... (70,100) (1,580)
------------ --------------
Net Cash--Financing Activities................................................... 29,900 498,660
------------ --------------
Net Change in Cash and Cash Equivalents.......................................... (308,740) 336,884
Cash and Cash Equivalents--Beginning of Periods.................................... 336,884 --
------------ --------------
Cash and Cash Equivalents--End of Periods........................................ $ 28,144 $ 336,884
------------ --------------
------------ --------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest...................................................................... $ -- $ --
State and Federal Income Taxes................................................ $ -- $ --
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
See Note 1 to the financial statements.
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-6
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(1) ORGANIZATION AND BUSINESS
ML Direct Inc. (the 'Company'), a Delaware corporation, was incorporated on
June 22, 1995. In June 1995, the Company entered into a binding letter of intent
with HSN Direct Joint Venture ('HSND') which provided for the creation of KN2B,
Inc. doing business as Home Shopping Showcase ('HSS'). HSND was a subsidiary of
Home Shopping Network, Inc. and is now a subsidiary of Flextech, P.L.C. (a UK
Company, which itself is a subsidiary of Telecommunications Company, Inc.
('TCI'). HSND continues to hold a minority equity position in HSS. This
agreement was amended on February 15, 1996. This binding agreement provides that
HSS will develop programs to support the retail sale of products that have been
introduced through direct response television ('DRTV') through implementing both
a 'store within a store' concept and a promotions sale business. The Company as
a result of arm's length negotiations agreed to contribute $4,000,000 cash as
evidenced by a stock subscription agreement and its existing and future retail
rights to products and services as a capital contribution for the issued 1,500
shares of Class A Common Stock of HSS. The $4,000,000 stock subscription
receivable from the Company will be paid from a proposed public offering. HSND
contributed the right to use the name 'Home Shopping Showcase' and certain
related trademarks, logos and service marks and its existing and future retail
rights to products and services for the issued 1,499 shares of Class B Common
Stock of HSS (See Note 6).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its majority owned subsidiary, KN2B,
Inc. The Company owns more than a 50% ownership in KN2B ('HSS') and has
operational control. Therefore, consolidated financial statements are presented.
Material intercompany transactions and balances have been eliminated in
consolidation.
(B) Revenue Recognition--The Company's policy is to record revenues when
title passes to the customer. These initial revenues are net of returns and
allowance of $37,216 and letters of credit costs of $1,791. There was an
outstanding letter of credit at November 30, 1995 of approximately $60,000 to be
repaid upon shipment of merchandise.
(C) Cash Equivalents--The Company considers all highly liquid instruments
with a maturity of three months or less when purchased to be cash equivalents.
The Company did not have any cash equivalents at November 30, 1995 and May 31,
1996.
(D) Net Loss Per Share--Net loss per share was calculated based on the
number of shares outstanding during the periods presented. All shares or
equivalents issued at below the IPO price (within one year prior to the initial
filing of the IPO) are included for all periods presented. All share data have
been adjusted to reflect the six-for-five stock split in March 1996.
(E) Business Concentration--Economic Dependency--The Company's business
activity is with the retail marketplace primarily through the supermarket
channel of distribution. For the period ended November 30, 1995, the Company's
net revenues were from one customer with a non-supermarket retail outlet.
(F) Reserve for Returns--The Company has provided an allowance for possible
returns for approximately 3.5% of gross revenues. The allowance is based on a
review of actual returns by management.
(G) Other Assets--Display costs and organizational costs are to be
amortized on the straight-line method over a five year period. Amortization for
the organization costs for the period ended November 30, 1995 and May 31, 1996
was $880 and $3,462, respectively. There was no amortization for the display
costs as the displays have not been placed in service.
F-7
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(H) Risk Concentrations--Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of cash. At
November 30, 1995, the Company had deposits in financial institutions which
exceeded the $100,000 federally insured limit. The excess of the institution's
deposit liability to the Company over the federally insured limit amounted to
approximately $148,000.
The Company's business consists largely of an agreement with HSN Direct to
create and develop Home Shopping Showcase. Any termination of the agreement will
have a material adverse effect on the Company. Further, the success of Home
Shopping Showcase is dependent in large part on HSN Direct's success in securing
agreements for marketing products and services from suppliers, distributors, and
other third parties for DRTV and retail distribution. There can be no assurance
that HSN Direct or Home Shopping Showcase will be able to secure such agreements
from such third parties or that the merchandise or services marketed on DRTV
will be successful in the retail markets. Similarly, there can be no assurance
that the Company will be able to capitalize on its connection with the
supermarket and other retail industries to establish retail distribution outlets
for Home Shopping Showcase. The failure of either HSN Direct or the Company to
so contribute to the success of Home Shopping Showcase will have a material
adverse effect on the Company. In addition, the name recognition provided by the
HSN Direct trademarks, logos, and service marks, including Home Shopping
Showcase, and, therefore, the Company, would be materially adversely affected by
the loss of use of such intellectual property or if the value of such
intellectual property is diminished, either by HSN Direct's lack of success in
the DRTV venue or by infringement or misappropriation by an outside third party.
(I) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual amounts could differ from those estimates.
(J) Stock Options and Similar Equity Instruments Issued to Employees--The
Company uses the intrinsic value method to recognize cost in accordance with APB
25 (Accounting for Stock Issued to Employees).
(K) Inventory--Inventory is comprised of consumer goods. The inventory is
stated at the lower of cost or market with cost being determined on the
first-in, first-out ('FIFO') method.
(L) Deferred Offering Costs--Deferred offering costs consists of
professional fees incurred in relation to the proposed public offering. Upon the
successful completion of the offering these costs will be recorded as a
reduction of the net proceeds of the offering and reflected as a reduction to
stockholders' equity.
(3) RELATED PARTY TRANSACTIONS
(A) At November 30, 1995, the Company had a related party receivable of
$48,982, which represented proceeds of a letter of credit due the Company from
HSND for goods shipped as of November 30, 1995 to a nationwide consumer
wholesaler. The letter of credit when opened by the customer in favor of HSND
was transferred to HSS. This receivable was not collected until March of 1996
when the proceeds from the letters of credit were received by HSND and remitted
to the Company.
F-8
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(3) RELATED PARTY TRANSACTIONS--(CONTINUED)
(B) The Company pays approximately $2,000 per month on a month-to-month
basis for office space and services to a partnership wherein two of the partners
are principal shareholders in the Company. In addition, the Company reimbursed
this partnership for expenses incurred for the Company as follows:
<TABLE>
<CAPTION>
FROM JUNE 22,
1995 (DATE DECEMBER 1,
OF INCEPTION) 1995 THROUGH
NOVEMBER 30, MAY 31,
1995 1996
------------- ------------
<S> <C> <C>
Rent and Utilities.............................................. $ 11,782 $ 58,905
Travel and Entertainment........................................ 47,786 37,727
Outside Services................................................ 57,000 83,720
Compensation and Benefits....................................... 7,795 811
Other Services.................................................. 3,989 2,255
------------- ------------
Total......................................................... $ 128,352 $183,418
------------- ------------
------------- ------------
</TABLE>
(C) The Company entered into demand note receivable from an entity whose
principal shareholders are also principal shareholders of the Company on
November 14, 1995 for $50,000 with interest of 2% over prime annually. Monthly
installments of interest shall be paid over 60 months commencing February 1,
1996. All principal and interest is due no later than January 1, 1999.
(4) INCOME TAXES
No provision for income taxes has been made because the Company incurred a
loss for both financial reporting and income tax purposes.
For tax purposes, the Company has a net operating loss of approximately
$93,000 as of November 30, 1995. However, based upon present Internal Revenue
regulations governing the utilization of net operating loss carryovers where the
corporation has issued substantial additional stock, most of this loss carryover
may not be available to the Company.
Generally accepted accounting principles require the establishment of a
deferred tax asset for all deductible temporary differences and operating loss
carryforwards. Because of the uncertainties discussed above and in Note 7 any
deferred tax asset established for utilization of the Company's tax loss
carryforwards would correspondingly require a valuation allowance of the same
amount pursuant to SFAS No. 109. Accordingly, no deferred tax asset is reflected
in these financial statements.
(5) NEW AUTHORITATIVE PRONOUNCEMENT
The Financial Accounting Standards Board ('FASB') has issued SFAS 107,
'Disclosure about Fair Value of Financial Instruments' which is effective for
fiscal years beginning after December 31, 1992, except for entities with less
than $150 million in total assets for which the effective date is fiscal years
ending after December 15, 1995. The Company has adopted SFAS 107 for the fiscal
year ended November 30, 1996. Adoption of SFAS 107 is not expected to have a
material impact on the Company's financial position or results of operations.
The Financial Accounting Standards Board ('FASB') issued Statement of
Financial Accounting Standards ('SFAS') No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March of
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements
F-9
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(5) NEW AUTHORITATIVE PRONOUNCEMENT--(CONTINUED)
issued for fiscal years beginning after December 15, 1995. Adoption of SFAS No.
121 is not expected to have a material impact on the Company's financial
statements.
The FASB has also issued SFAS No. 123 'Accounting for Stock-Based
Compensation,' in October 1995. SFAS No. 123 uses a fair value based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles board ('APB') Opinion No. 25, 'Accounting for Stock Issued
to Employees.' The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company will adopt the disclosure requirements on December 1, 1996. SFAS 123
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
(6) LICENSE
In connection with the Company's agreement with HSND, HSND will provide HSS
with a royalty-free license to the Home Shopping Showcase(Trademark) trademarks,
logos and service marks within the field of domestic retail distributors so that
HSS may exploit all manner of retail opportunities in the United States using
such trademarks, logos and service marks. As a result of arms-length
negotiations between the Company and HSND, HSS believes the trademarks, logos
and service marks and its existing and future retail rights to products and
services contributed by HSND have an approximate fair value of $4,000,000. For
financial statement purposes, trademarks, logos, and service marks are presented
at HSND's cost basis, which is zero. (See Note 1).
This license provides for use of the HSS logo and name until December 31,
2000 at retail sites established on or before January 1, 1998 and until earlier
of (i) December 31, 2003 or (ii) three years after establishment at retail sites
established between January 1, 1998 and December 31, 2000.
(7) GOING CONCERN
As shown in the accompanying financial statements, the Company has incurred
a net loss of $93,154 for the period ended November 30, 1995, has utilized
$61,211 in cash for operating activities, and does not have sufficient cash to
achieve its operating objectives. These factors create uncertainty about the
Company's ability to continue as a going concern.
The Company is currently in the process of filing a registration statement
to raise approximately $5,485,000 of net proceeds. The ability of the Company to
continue as a going concern is dependent on the success of this registration
statement. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
(8) CAPITAL STOCK
(A) Common Stock--The Company is authorized to issue 15,000,000 shares of
common stock with par value of .0001 per share. The Company issued 2,400,000
shares of common stock and 2,000,000 Class A warrants exercisable at $6.00 per
share for common stock for four years commencing one year from the close of the
proposed public offering to the founders of the Company for $240 in June 1995.
(B) Preferred Stock--The Company is authorized to issue 1,000,000 shares of
'Blank Check' preferred stock with par value of .0001 per share. The Company had
outstanding at November 30, 1995, 600,000 shares of Series A Preferred Stock
that were issued as a part of the preferred stock units issued in August and
September of 1995 for $500,000. The 600,000 Series A Preferred Stock units
consisted of 600,000 shares of Series A Preferred
F-10
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(8) CAPITAL STOCK--(CONTINUED)
Stock and 600,000 shares of common stock. The Series A preferred stock is
convertible, at the option of the holder, into one share of common stock. If,
however, after six months after the close of the proposed public offering, the
Company has not redeemed the Series A Preferred Stock, then the conversion rate
is two shares of common stock for one share of Series A Preferred Stock. The
Company can redeem the Series A Preferred Stock for approximately $.833 per
share. The Company can pay preferred dividends to the holders of the Series A
Preferred Stock at the rate of eight percent (8%) per annum of the liquidation
preference or $.08 per share. In the event of any voluntary or involuntary
liquidation, each share of Series A Preferred Stock shall have a liquidation
preference of $1.00 per share plus unpaid annual dividends that have accrued to
date of payment. The holders of the Series A Preferred Stock have no right to
vote on matters presented to the stockholders of the Company. The shares of
Series A Preferred Stock rank senior to all series of Preferred Stock in all
respects.
The Company intends to redeem for $500,000 the 600,000 shares of preferred
stock with the proceeds from the proposed public offering. A pro forma balance
sheet as of May 31, 1996 which gives effect to the proposed redemption of the
Series A Preferred Shares for $500,000, but not the expected proposed public
offering proceeds, is presented on the face of the balance sheet (See Notes 10A
and 10C).
The following supplementary earnings per share is furnished to show what
they would have been if the retirement of the redeemable preferred shares had
taken place at the beginning of the respective periods (See Note 10C).
<TABLE>
<CAPTION>
PERIODS ENDED
--------------------------
MAY 31, NOVEMBER 30,
1996 1995
---------- ------------
<S> <C> <C>
(Loss) Per Share................................................. $ (.19) $ (.03)
---------- ------------
Number of Shares................................................. 3,546,571 3,546,571
---------- ------------
</TABLE>
(C) Options and Warrants--A summary of stock options and warrants for the
period ended November 30, 1995 follows:
<TABLE>
<CAPTION>
WARRANTS OPTIONS
--------------------- ---------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding Balance--June 1995.................. -- -- -- --
Issued/Grants................................. 2,000,000 $ 6.00 -- --
Exercised..................................... -- -- -- --
Canceled......................................
Outstanding Balance--November 1995.............. 2,000,000 $ 6.00 -- --
Exercisable at November 30, 1995................ -- -- -- --
</TABLE>
(9) EMPLOYMENT AGREEMENT
On November 30, 1995, the Company entered into a three year employment
agreement with the Executive Vice President of the Company for annual
compensation of $150,000 and a bonus at the discretion of the Board of Directors
effective December 1, 1995. Also on November 30, 1995, the Company granted the
President effective December 1, 1995 an option to purchase 60,000 shares of the
Company's common stock for $2.50 per share at any time after July 1, 1996, but
prior to June 30, 2000. The Company recorded a deferred compensation cost of
$30,000 for the options issued, which represents the difference between the
value of the options at the time of issuance and the exercise price of $2.50.
The deferred compensation will be expensed over the life of the employment
agreement or $2,500 per quarter.
F-11
<PAGE>
ML DIRECT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED MAY 31, 1996 IS UNAUDITED)
(10) SUBSEQUENT EVENTS (UNAUDITED)
(A) Proposed Public Offering--The Company reached an agreement with an
underwriter to file a registration statement for 700,000 units at $10.00 per
unit. Each unit consists of two shares of common stock and one Class A Warrant
exercisable at $6.00 per warrant. The anticipated net proceeds from this
offering are approximately $5,485,000.
(B) Stock Split--The Company declared a six-for-five stock split in March
of 1996 for both the common and preferred stock. All share data has been
adjusted retroactively to reflect the six-for-five stock split.
(C) Preferred Stock Units--On March 29, 1996, the Company issued an
additional 120,000 preferred stock units consisting of 120,000 shares of
preferred stock and 120,000 shares of common stock for $100,000. The Company can
redeem the preferred stock for approximately $.833 per share. The Company
intends to redeem for $100,000 the 120,000 shares of preferred stock with the
proceeds from the proposed public offering.
(D) Options to Employees and Consultants--In May of 1996, the Company
issued to two employees options to purchase during the next five years 136,000
shares of the Company's common stock at various prices ranging from $3.00 to
$7.20 per share. These prices were based on the fair market value of the shares
on the granting date after consideration of any restrictions applicable to the
shares to be issued pursuant to the option agreements.
In April of 1996, the Company issued to two consultants options to purchase
during the next five years 70,000 shares of the Company's common stock
exercisable at $3.00 per share. The Company recorded a deferred compensation
cost of $72,000 for the options issued, which represents the fair value of the
equity instruments issued. The deferred compensation will be expensed over the
life of the consulting agreement or $18,000 per quarter. For the period ending
May 31, 1996, $12,000 has been expensed to operations.
(E) Employment Agreement--On April 15, 1996, the Company entered into a one
(1) year employment agreement with the Company's President. The agreement
provides that he will receive a salary of $120,000 per annum and a bonus at the
discretion of the Board of Directors. The agreement also provides that he be
issued an option to purchase up to 100,000 shares of common stock at any time
between January 1, 1997 and December 31, 2002 at a price of $3.00 per share. The
exercise price was determined by management taking into consideration the fair
market value of the shares after consideration of any of the restrictions
applicable to the shares to be issued pursuant to the agreement. The agreement
also provides for the Company to purchase life insurance of not less than
$500,000 which shall be payable to his estate.
On April 15, 1996, the Company entered into a five (5) year employment
agreement with the Company's Executive Vice President. The agreement provides
that he will receive a salary of $200,000 per annum and a bonus at the
discretion of the Board of Directors. The agreement also provides that he be
issued an option to purchase up to 100,000 shares of common stock at any time
between January 1, 1997 and December 31, 2002 at a price of $3.00 per share. The
exercise price was determined by management taking into consideration the fair
market value of the shares after consideration of any of the restrictions
applicable to the shares to be issued pursuant to the agreement. The agreement
also provides that he has the right to receive an additional 500,000 options at
fair market value in increments of 100,000 options during the ensuing five years
if he is employed by the Company. The agreement also provides for the Company to
purchase life insurance of not less than $500,000 which shall be payable to his
estate.
(11) INTERIM FINANCIAL STATEMENTS
The interim financial statements as of and for the six months ended May 31,
1996 include all adjustments which in the opinion of management are necessary in
order to make the financial statements not misleading.
F-12
<PAGE>
---------------------------------------------------------------
---------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................... 3
Prospectus Summary...................................... 4
The Offering............................................ 6
Summary Financial Information........................... 7
Risk Factors............................................ 8
Use of Proceeds......................................... 13
Dilution................................................ 14
Capitalization.......................................... 15
Dividend Policy......................................... 15
Selected Financial Data................................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 17
Business................................................ 20
Management.............................................. 24
Principal Stockholders.................................. 27
Certain Transactions.................................... 28
Description of Securities............................... 29
Selling Securityholders................................. 32
Underwriting............................................ 33
Litigation.............................................. 35
Legal Matters........................................... 35
Experts................................................. 35
Additional Information.................................. 35
Financial Statements.................................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
ML DIRECT INC.
------------------------
PROSPECTUS
------------------------
I.A. RABINOWITZ & CO.
JULY , 1996
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 1996
ALTERNATE
PROSPECTUS
2,250,000 SHARES OF COMMON STOCK
2,000,000 CLASS A WARRANTS
ML DIRECT INC.
------------------------
The Prospectus relates to up to 2,250,000 shares (the 'Shares') of common
stock, $.0001 par value (the 'Common Stock') 2,000,000 Class A Warrants and
2,000,000 Shares of Common Stock underlying 2,000,000 Class A Warrants of ML
Direct Inc., a Delaware corporation (the 'Company') held by certain affiliated
and non-affiliated persons (collectively, the 'Selling Securityholders'). The
Shares are being voluntarily registered by the Company concurrently with the
Company's initial public offering, and are not part of the underwriting. The
Shares may not be transferred for twenty-four (24) months unless permitted
sooner by the Representative. The Representative may release the securities held
by the Selling Securityholders at any time after all securities subject to the
Over-Allotment Option have been sold or such option has expired. The Risk Factor
section begins on page of this Prospectus.
The Company has applied for inclusion of the Common Stock and Class A
Warrants on the Nasdaq Small Cap Market ('Nasdaq'), although there can be no
assurances that an active trading market will develop even if the securities are
accepted for quotation. Additionally, even if the Company's securities are
accepted for quotation and active trading develops, the Company is still
required to maintain certain minimum criteria established by Nasdaq, of which
there can be no assurance. See 'Risk Factors--Lack of Prior Market for Common
Stock.'
The Common Stock offered by this Prospectus may be sold from time to time
by the Selling Securityholders or by their transferees. No underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with sales of such securities.
The Selling Securityholders and intermediaries through whom such securities
may be sold may be deemed 'underwriters' within the meaning of the Securities
Act of 1933, as amended ('Securities Act'), with respect to the securities
offered and any profits realized or commissions received may be deemed
underwriting compensation. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities, including liabilities under the
Securities Act.
On the date hereof, the Company commenced, pursuant to a registration
statement, and initial public offering of 700,000 Units consisting of 1,400,000
shares of Common Stock and 700,000 Class A Warrants. See 'Concurrent Sales.'
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders. All costs incurred in the
registration of the securities of the Selling Securityholders are being borne by
the Company. See 'Selling Securityholders.'
------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
INCLUDED IN THE UNITS AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE 'DILUTION' AND 'RISK FACTORS.'
------------------------
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 , 1996
Alt-i
<PAGE>
ALTERNATE
CONCURRENT SALES
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering (the 'Offering')
of 700,000 Units consisting of 1,400,000 shares of Common Stock and 700,000
Class A Warrants by the Company was declared effective by the Securities and
Exchange Commission ('SEC'), and the Company commenced the sale of the shares of
Common Stock and Warrants offered thereby. Sales of securities under this
Prospectus by the Selling Securityholders or even the potential of such sales
may have an adverse effect on the market price of the Company's securities.
SELLING SECURITYHOLDERS
This registration statement, of which this Prospectus forms a part, also
covers the registration of 2,250,000 shares of Common Stock, 2,000,000 Class A
Warrants and 2,000,000 shares of Common Stock underlying 2,000,000 Class A
Warrants. The Shares may be sold commencing thirteen (13) months from the date
of this prospectus with regard to the Preferred Stock Units and twenty four (24)
months from the Effective Date, subject to the earlier release by the
Representative; provided, however, the Representative may release such
securities after full subscription of the securities being offered in the
offering at any time after the securities in the offering have been sold. The
resale of the securities by the Selling Securityholders is subject to Prospectus
delivery and other requirements of the Act. Accordingly, an additional 2,250,000
shares of Common Stock will become transferrable at such times.
The following table sets forth the holders of the shares of Common Stock
which are being offered by the Selling Stockholders and the number of shares
owned before the offering, the number of shares being offered and the number of
shares and the percentage of the class to be owned after the offering is
complete.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF SHARES OF SHARES OF
COMMON CLASS A SHARES OF COMMON COMMON
STOCK WARRANTS COMMON CLASS A STOCK STOCK
OWNED OWNED STOCK WARRANTS OWNED OWNED
BEFORE BEFORE OFFERED OFFERED AFTER AFTER
OFFERING OFFERING HEREBY HEREBY OFFERING OFFERING
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
K.A.M. Group, Inc........................ 120,000 0 41,667 0 78,333 1.7%
M.D. Funding, Inc........................ 198,000 0 68,750 0 129,250 2.8%
Morgan Carlton, Inc.(1).................. 96,000 80,000 80,000 80,000 16,000 0.3%
Alan Kerzner(2).......................... 120,000 50,000 50,000 50,000 70,000 1.5%
M&M Creative Services, Inc.(3)........... 30,000 25,000 25,000 25,000 5,000 0.1%
Special Equities, Inc.(4)................ 1,080,000 900,000 900,000 900,000 180,000 3.9%
Sherbrooke Consulting, Ltd.(5)........... 553,500 461,250 461,250 461,250 92,250 2.0%
Howard Goldfarb.......................... 60,000 0 20,833 0 39,167 .8%
Seymour and Rosalind Shalek.............. 30,000 0 10,417 0 19,583 .4%
The MarketLink Group, Ltd.(6)............ 685,500 461,250 507,083 461,250 178,417 3.9%
James Shalek............................. 60,000 0 20,833 0 39,167 .9%
Judith Pace(7)........................... 27,000 22,500 22,500 22,500 4,500 0.1%
Ulster Investments, Ltd.................. 120,000 0 41,667 0 78,333 1.7%
Nancy Shalek(5)(8)....................... 553,500 461,250 461,250 461,250 92,250 2.0%
--------- --------- --------- --------- --------- ---
2,250,000 2,000,000
--------- --------- --------- --------- --------- ---
--------- --------- --------- --------- --------- ---
</TABLE>
(Footnotes on next page)
Alt-ii
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Does not include 80,000 Shares of Common Stock issuable upon exercise of
80,000 Class A Warrants held by Morgan Carlton, Inc.
(2) Does not include 50,000 Shares of Common Stock issuable upon exercise of
50,000 Class A Warrants held by Alan Kerzner. Includes 60,000 Shares of
Common Stock issuable upon exercise of 60,000 Options.
(3) Does not include 25,000 Shares of Common Stock issuable upon exercise of
25,000 Class A Warrants held by M&M Creative Services, Inc.
(4) Does not include 900,000 Shares of Common Stock issuable upon exercise of
900,000 Class A Warrants held by Special Equities, Inc.
(5) Sherbrooke Consulting, Ltd., a corporation wholly owned by Nancy Shalek,
Chairman of the Board of Directors of the Company is the record holder of
such shares. Ms. Shalek may be deemed to hold sole investment and voting
power over such shares. Does not include 461,250 Shares of Common Stock
issuable upon exercise of 461,250 Class A Warrants held by Sherbrooke or
60,000 Shares of Common Stock issuable upon the possible conversion of
60,000 Shares of Preferred Stock owned by James Shalek, the husband of Ms.
Shalek.
(6) Does not include 461,250 Shares of Common Stock issuable upon exercise of
461,250 Class A Warrants held by The MarketLink Group, Ltd. and Shares of
Common Stock issuable upon the possible conversion of 132,000 Shares of
Preferred Stock.
(7) Does not include 22,500 Shares of Common Stock issuable upon exercise of
22,500 Class A Warrants held by Judith Pace.
(8) Includes shares of Common Stock and Class A Warrants owned by Sherbrooke
Consulting, Ltd., a corporation wholly owned by Ms. Shalek.
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transaction between sellers and purchasers without a broker-dealer. In effecting
sales, brokers or dealers engaged by the Selling Securityholders may arrange for
other brokers or dealers to participate. The Selling Securityholders and
intermediaries through whom such securities are sold may be deemed
'underwriters' within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholder or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby. As of the date of this Prospectus, the freely
tradeable securities of the Company will be 3,650,000 shares of Common Stock,
provided, however, that shares of Common Stock held by Selling Securityholders
which are not transferable for thirteen (13) months from the
Alt-iii
<PAGE>
date of this prospectus with regard to the Preferred Stock Units and twenty four
(24) months from the Effective Date of this Prospectus or earlier with the
consent of date be permitted by the Representative. The Representative may
release such securities upon full subscription of the securities being offered
hereby at any time after the securities have been sold.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions, privately-negotiated transactions or through sales to one
or more broker-dealers for resale of such shares as principals, including the
Representative, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees or commissions may be paid
by the Selling Securityholders in connection with such sales of securities. The
securities offered by the Selling Securityholders may be sold by one or more of
the following methods, without limitations: (a) a block trade in which a broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers, and (d)
face-to-face transaction between sellers and purchasers without a broker-dealer.
In effecting sales, brokers or dealers engaged by the Selling Securityholders
may arrange for other brokers or dealers to participate. The Selling
Securityholders and intermediaries through whom such securities are sold may be
deemed 'underwriters' within the meaning of the Securities Act with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for shares purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
Alt-iv
<PAGE>
[ALTERNATE PAGE]
---------------------------------------------------------------
---------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Available Information............................... 3
Prospectus Summary.................................. 4
The Offering........................................ 6
Summary Financial Information....................... 7
Risk Factors........................................ 8
Use of Proceeds..................................... 13
Dilution............................................ 14
Capitalization...................................... 15
Dividend Policy..................................... 15
Selected Financial Data............................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 17
Business............................................ 20
Management.......................................... 24
Principal Stockholders.............................. 27
Certain Transactions................................ 28
Description of Securities........................... 29
Concurrent Sales.................................... ALT. ii
Selling Securityholders............................. ALT. ii
Plan of Distribution................................ ALT. iv
Underwriting........................................ 33
Litigation.......................................... 35
Legal Matters....................................... 35
Experts............................................. 35
Additional Information.............................. 35
Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
ML DIRECT INC.
------------------------
PROSPECTUS
------------------------
I.A. RABINOWITZ & CO.
JULY , 1996
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE>
[This page intentionally left blank]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In connection with the Offering, the Representative agreed to indemnify the
Company, its directors, and each person who controls it within the meaning of
Section 15 of the Securities Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Representative specifically for or in
connection with the preparation of the registration statement, the prospectus,
or any such amendment or supplement thereto.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise.
Article Nine of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Insofar as indemnification
for liabilities arising under the Securities 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 Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage for
its officers and directors.
ITEMS 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this Offering are as follows:
<TABLE>
<S> <C>
SEC filing fee................................................ $ 18,601
Nasdaq filing fee............................................. $ 11,000
NASD filing fee............................................... $ 5,894
Accounting fees and expenses*................................. $110,000
Legal fees and expenses*...................................... $250,000
Blue Sky fees and expenses*................................... $ 55,000
Printing and engraving*....................................... $ 50,000
Transfer Agent's and Registrar fees*.......................... $ 2,500
Miscellaneous expenses*....................................... $ 2,005
--------
Total......................................................... $505,000
--------
--------
</TABLE>
- ------------------
* Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information sets forth all securities of the Company sold by
it since inception, which securities were not registered under the Securities
Act of 1933, as amended:
In June 1995, the Company, in reliance on Section 4(2) of the
Securities Act of 1933, as amended, issued 2,400,000 shares of Common Stock
and 2,000,000 Class A Warrants in consideration of $240. No underwriting
discounts or commissions were paid in connection with the issuance.
In August and September, 1995 and March 1996, in reliance on Section
4(2) of the Securities Act of 1933, as amended, the Company issued 720,000
Preferred Stock Units, each unit consisting of one (1) share of Preferred
Stock and one (1) share of Common Stock, to seven (7) stockholders for an
aggregate amount of $600,000. These were no underwriting discounts or
commissions paid in connection with the issuance. The issuance of the
securities were in transactions not involving any public offerings.
With respect to the above-described issuances of securities, the Company
has relied on Section 4(2) of the Securities Act of 1933, as amended, such that
the sales of the securities were transactions by an issuer not involving any
public offering.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are 'restricted securities,' as defined in Rule 144 of the
rules and the regulations of the Securities and Exchange Commission, Washington
D.C. 20549. All of the aforesaid securities were issued for investment purposes
only and not with a view to redistribution, absent registration. All of the
aforesaid persons have been fully informed and advised concerning the
Registrant, its business, financial and other matters. Transactions by the
Registrant involving the sales of these securities set forth above were issued
pursuant to the 'private placement' exemptions under the Securities Act of 1933,
as amended, as transactions by an issuer not involving any public offering. The
Registrant has been informed that each person is able to bear the economic risk
of his investment and is aware that the securities were not registered under the
Securities Act of 1933, as amended, and cannot be re-offered or re-sold until
they have been so registered or until the availability of an exemption
therefrom. The transfer agent and registrar of the Registrant will be instructed
to mark 'stop transfer' on its ledgers to assure that these securities will not
be transferred absent registration or until the availability of an exemption
therefrom is determined.
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
3.01* Certificate of Incorporation of the Company.
3.02* Certificate of Correction of the Company.
3.03* Certificate of Designation Establishing a Series of Shares of Series A Redeemable Convertible Preferred
Stock of the Company.
3.04* By-Laws of the Company.
4.01* Form of Warrant Agreement by and among the Company and American Stock Transfer & Trust Company.
4.02* Form of Representative's Purchase Option.
5.01* Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
7.01* Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
10.01* Form of Series A Preferred Stock Subscription Agreement.
10.02* Letter of Agreement by and between the Company and HSN Direct Joint Venture dated June 12, 1995 and
amendments thereto.
10.03* Employment Agreement by and between Alan Kerzner and the Company dated as of December 1, 1995.
10.04* Form of Financial Consulting Agreement by and between the Company and I.A. Rabinowitz & Co.
10.05* Employment Agreement by and between James Lawless and the Company dated April 15, 1996.
10.06* Agreement by and between EGW Enterprises, Ltd. and the Company dated April 8, 1996.
10.07* Employment Agreement by and between Benedict White and the Company dated April 15, 1996.
11.1 Earnings [Loss] Per Share
23.01 Consent of Bernstein & Wasserman (included in Exhibit 5.01)
23.02 Consent of Moore Stephens, P.C. formerly known as Mortenson & Associates, P.C.
</TABLE>
- ------------------
* Previously filed
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) Rule 415 Offering
The undersigned registrant will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution;
2. For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers
The undersigned Registrant will provide to the Representative at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Representative to
permit prompt delivery to each purchaser.
(c) Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions referred to in Item 22 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) Rule 430A
The undersigned Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(2) For any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new Registration Statement for
the securities offered in the Registration Statement, and that the offering of
the securities at that time as the initial bona fide offering of those
securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant, certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York on July 18, 1996.
ML DIRECT INC.
By: /S/ JAMES LAWLESS
----------------------------------
James Lawless
President and Chief Operating Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------- --------------
<S> <C> <C>
/s/ JAMES LAWLESS President and Chief Operating Officer and July 18, 1996
- ------------------------------------------ Principal Accounting Officer
James Lawless
/s/ NANCY SHALEK Chairman of the Board and Director July 18, 1996
- ------------------------------------------
Nancy Shalek
/s/ ALAN KERZNER Executive Vice President and Director July 18, 1996
- ------------------------------------------
Alan Kerzner
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ ---------------------------------------------------------------------------------------------- --------
<S> <C> <C>
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
3.01* Certificate of Incorporation of the Company.
3.02* Certificate of Correction of the Company.
3.03* Certificate of Designation Establishing a Series of Shares of Series A Redeemable Convertible
Preferred Stock of the Company.
3.04* By-Laws of the Company.
4.01* Form of Warrant Agreement by and among the Company and American Stock Transfer & Trust
Company.
4.02* Form of Representative's Purchase Option.
5.01 Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
7.01* Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
10.01* Form of Series A Preferred Stock Subscription Agreement.
10.02* Letter of Agreement by and between the Company and HSN Direct Joint Venture dated June 12,
1995 and amendments thereto.
10.03* Employment Agreement by and between Alan Kerzner and the Company dated as of December 1, 1995.
10.04* Form of Financial Consulting Agreement by and between the Company and I.A. Rabinowitz & Co.
10.05* Employment Agreement by and between James Lawless and the Company dated April 15, 1996.
10.06* Agreement by and between EGW Enterprises, Ltd. and the Company dated April 8, 1996.
10.07* Employment Agreement by and between Benedict White and the Company dated April 15, 1996.
11.1 Earnings [Loss] Per Share
23.01 Consent of Bernstein & Wasserman (included in Exhibit 5.01)
23.02 Consent of Moore Stephens, P.C. formerly known as Mortenson & Associates, P.C.
</TABLE>
- ------------------
* Previously filed
<PAGE>
[LETTERHEAD OF BERNSTEIN & WASSERMAN, LLP]
ATTORNEYS AT LAW
950 THIRD AVENUE
NEW YORK, NY 10022-2705
----------
TELEPHONE (212) 826-0730
TELECOPIER (212) 371-4730
July 18, 1996
Board of Directors
ML Direct Inc.
300 Park Avenue
New York, New York 10022
Re: ML Direct Inc.
Registration Statement on Form SB-2
Gentlemen:
We have acted as counsel for ML Direct Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing by the
Company of a registration statement (the "Registration Statement") on
Form SB-2, File No. 333-3162, under the Securities Act of 1933, relating
to the public offering of 1,400,000 shares of the Company's Common
Stock, par value $.0001 per share (the "Common Stock") and 700,000 Class
A Redeemable Common Stock Purchase Warrant (the "Class A Warrant"). The
offering also involves the grant to the Underwriters of an option to
purchase an additional 210,000 shares of Common Stock and 105,000 Class
A Warrants to cover over-allotments in connection with the offering, the
sale to the Underwriter of an option (the "Representative's Option") to
purchase up to 140,000 shares of Common Stock and 70,000 Class A
Warrants, and the registration of an additional 2,250,000 shares of
Common Stock and 2,000,000 Class A Warrants on behalf of selling
stockholders (the "Selling Securityholder's Securities").
We have examined the Certificate of Incorporation and the By-Laws
of the Company, the minutes of the various meetings and consents of the
Board of Directors of the Company, drafts of the Underwriting Agreement
relating to the offering of the Common Stock and Class A Warrants,
drafts of the Warrant Agreement and Representative's Option, draft forms
of certificates representing the Common Stock and the Class A Warrants,
originals or copies of such records of the Company, agreements,
certificates of public officials, certificates of officers and
representatives of the Company and others, and such other documents,
certificates, records, authorizations, proceedings, statutes and
judicial decisions as we have deemed necessary to form the basis of the
opinion expressed below. In such examination, we have assumed the
genuiness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to originals of all
<PAGE>
BERNSTEIN & WASSERMAN, LLP
documents submitted to us as copies thereof. As to various questions
of fact material to such opinion, we have relied upon statements and
certificates of officers and representatives of the Company and others.
Based on the foregoing, we are of the opinion that:
1. All shares of Common Stock have been duly authorized and, when
issued and sold in accordance with the Prospectus, will be validly
issued, fully paid and non-assessable.
2. The Class A Warrants and the Representative's Option have been duly
authorized and, when issued and sold in accordance with the Prospectus,
will be validly issued.
3. The shares of Comnmon Stock and Class A Warrants included in the
Selling Securityholder's Securities have been duly authorized, validly
issued, fully paid and nonassessable; and, when sold in accordance with
the appropriate prospectus (the "Selling Securityholder Prospectus")
forming a part of the Registration Statement, will continue to be duly
authorized, validly issued, fully paid and nonassessable.
4. The shares of Common Stock issuable upon exercise of the Class A
Warrants, the Representative's Option and the Class A Warrants included
in the Selling Securityholders Securities have been duly authorized and
reserved for issuance and, when issued in accordance with the terms of
the Class A Warrants, the Representative's Option or the Class A
Warrants included in the Selling Securityholders Securities, as the case
may be, will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to be named in the Registration Statement, the
Prospectus and the Selling Securityholder Prospectus as attorneys who
have passed upon legal matters in connection with the offering of the
securities offered thereby under the caption "Legal Matters."
We further consent to your filing a copy of this opinion as an exhibit
to the Registration Statement.
Very truly yours,
/s/ BERNSTEIN & WASSERMAN
BERNSTEIN & WASSERMAN
B&W/jm
<PAGE>
EXHIBIT 11.1
ML DIRECT INC.
EARNINGS (LOSS) PER SHARE
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MAY 31, NOVEMBER 30,
1996 1995
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[UNAUDITED]
<S> <C> <C>
Average Shares Outstanding Disregarding Outstanding Stock Options, and Preferred
Shares During Each Period.......................................................... 2,400,000 2,400,000
Shares Assumed Issued by Exercise of Stock Options Based on the Treasury Stock
Method............................................................................. 426,571 426,571
Common Shares Issued with Series A Convertible Preferred Stock....................... 720,000 720,000
Assumed Conversion of Series A Convertible Preferred Stock........................... 720,000 720,000
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SHARES OUTSTANDING FOR EARNINGS PER SHARE.......................................... 4,266,571 4,266,571
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NET (LOSS)........................................................................... $ (665,881) $ (93,154)
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NET (LOSS) PER SHARE................................................................. $ (.16) $ (.02)
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This computation is submitted in accordance with Regulation S-B Item 601.
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
ML Direct Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated December 20, 1995,
relating to the consolidated financial statements of ML Direct Inc. which is
contained in the Prospectus.
We also consent to the reference to us under the caption 'Experts' in the
Prospectus.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
July 18, 1996
