<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1996
REGISTRATION NO. 333-3162
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
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>
------------------------
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)................ 552,000 $ 15.00 $ 8,280,000 $ 2,855.17
Common Stock, par value $.0001 per
share(3).............................. 1,104,000 -- -- --
Class A Warrants(4)..................... 552,000 -- -- --
Common Stock, par value $.0001 per
share, underlying Class A
Warrants(5)........................... 552,000 $ 8.00 $ 4,416,000 $ 1,522.76
Representative's Unit Purchase
Option(6)............................. 48,000 $ .001 $ 48.00 $ .02
Units, consisting of two (2) shares of
Common Stock, par value $.0001 and one
(1) Class A Warrant................... 48,000 $ 18.00 $ 864,000 $ 297.93
Common Stock, par value $.0001 per share
underlying Representative's Unit
Purchase Option(6).................... 96,000 -- -- --
Class A Warrants, underlying
Underwriter's Unit Purchase Option.... 48,000 -- -- --
Common Stock, par value $.0001 per share
underlying Class A Warrants in
Underwriter's Unit Purchase Option.... 48,000 $ 8.00 $ 384,000 $ 132.41
Common Stock, par value $.0001 per
share(7).............................. 2,400,000 $ 7.50 $18,000,000 $ 6,206.90
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 $ 8.00 $16,000,000 $ 5,517.24
Total $ 16,532.43
Previously Paid $ 12,862.06
Amount Due $ 3,670.37
</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 144,000 shares of Common Stock and 72,000 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 $8.00 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 96,000 shares of Common Stock and 48,000 Class A Warrants at
120% of the offering price (the 'Representative's Option').
(7) 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'), 552,000 Units consisting of
1,104,000 shares of Common Stock and 552,000 Class A Warrants. The Selling
Securityholders are registering, under an alternate prospectus ('Alternate
Prospectus'), 2,400,000 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 AUGUST 2, 1996
PROSPECTUS
ML DIRECT INC.
480,000 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--$15.00
------------------------
ML Direct Inc., a Delaware corporation (the 'Company'), hereby offers
480,000 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 $8.00 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>
<S> <C> <C> <C>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Unit.......................................... $15.00 $1.50 $13.50
Total(3).......................................... $7,200,000 $720,000 $6,480,000
</TABLE>
(1) Does not reflect additional compensation to be received by the Underwriters
in the form of: (i) a non-accountable expense allowance of $216,000
($248,400 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 48,000 Units at $18.00 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 $821,000 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 72,000 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
$8,280,000, $828,000 and $853,400, respectively, and the total proceeds to
Company will be, $7,452,000 (before expenses). See 'Underwriting.'
PATTERSON TRAVIS, INC.
THE DATE OF THIS PROSPECTUS IS AUGUST , 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 2,400,000 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 12
months from the date of this Prospectus, subject to earlier release at the sole
discretion of Patterson Travis, Inc., 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 $15.00 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)
72,000 Units consisting of 144,000 shares of Common Stock and 72,000 Class A
Warrants issuable upon exercise of the Over-Allotment Option; (ii) 48,000 Units
consisting of 96,000 shares of Common Stock and 48,000 Class A Warrants issuable
upon exercise of the Representative's Option; (iii) 2,480,000 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 SHOWCASETM: 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)...... 480,000 Units at a price of $15.00 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.............................. 4,080,000
Preferred Stock(3)........................ 720,000
Class A Warrants.......................... 2,480,000
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 2,400,000
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 72,000
Units consisting of 144,000 Shares and 72,000 Class A Warrants; (ii) the
Representative's Option to purchase up to 48,000 Units consisting of 96,000
shares of Common Stock and 48,000 Class A Warrants; and (iii) 2,480,000
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)................................... 4,664,182 (394,818) 355,821
Total Assets................................................ 5,434,122 375,122 521,204
Total Liabilities........................................... 516,917 516,917 114,118
Stockholders' Equity........................................ 4,917,205 (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........................................................ (703,211) (95,290)
Net Loss.................................................................... (700,881) (93,154)
Net Loss Per Share(1)....................................................... (.17) (.02)
Weighed Average Number of Common Shares outstanding(1)...................... 4,042,400 4,042,400
</TABLE>
- ------------------
(1) Does not include the sale of 480,000 Units consisting of 960,000 shares of
Common Stock and 480,000 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, 10D and 10E) to financial statements).
(2) Gives effect to the net proceeds of the proposed public offering of
$5,659,000, 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 $700,881. 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 losses in the amount of approximately $794,000 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 $559,000 (9.9%) of the estimated $5,659,000 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 $1.18. At the initial public offering price of
$7.50 per Share, investors in this offering will experience an immediate
dilution of approximately $6.32 or 84% in net tangible book value per share and
existing investors will experience an increase of approximately $1.25 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 $1.37 per
Share which will result in dilution to the public investors of $6.13 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 76% 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 48,000 Units consisting of 96,000 shares of
Common Stock and 48,000 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 $18.00 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 of which 2,400,000 shares
of Common Stock are being registered under the Registration Statement of which
this Prospectus forms a part. 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 $5,659,000 (after
deducting approximately $936,000 in underwriting discounts and the
Representative's non-accountable expense allowance and other expenses of this
Offering estimated to be $605,000 which includes 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 70.7%
Working Capital............................................... $ 559,000 9.9%
Acquisitions and New Product Development(2)................... $ 500,000 8.8%
Redemption of Series A Preferred Stock........................ $ 600,000 10.6%
------------ ------
Total....................................................... $5,659,000 100.0%
------------ ------
------------ ------
</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
($224,878) or ($.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 480,000 Units consisting of 960,000
shares of Common Stock and 480,000 Class A Warrants with net proceeds of
$5,659,000, 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 $4,834,541 or approximately
$1.18 per share. This represents an immediate increase in pro forma net tangible
book value of $1.25 per share to the present shareholders and an immediate
dilution of $6.32 per share (84%) 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).................... $ 7.50
Net tangible deficit book value per share prior to the offering.......... $ (.07)
Increase per share attributable to Shares offered hereby................. $ 1.25
Pro Forma net tangible book value per share after offering of 480,000
Units consisting of 960,000 shares of Common Stock and 480,000 Class A
Warrants(2)........................................................... $ 1.18
---------
Dilution of net tangible book value per share to purchasers in this
offering.............................................................. $ 6.32
---------
---------
</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 $15.00 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................................ 960,000 31% $ 7,200,000 96% $7.50
Existing Shareholders........................... 3,120,000 69% $ 300,240 4% $ .10
--------- --- ------------- ----- ---------
Total......................................... 4,080,000 100% $ 7,500,240 100% $1.83
--------- --- ------------- -----
--------- --- ------------- -----
</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 480,000 Units consisting of
960,000 shares of Common Stock and 480,000 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
(4,080,000 shares outstanding as adjusted)............................ 312 408 408
Additional paid-in capital.............................................. 899,928 6,558,832 6,258,832
Common Stock Subscribed................................................. 4,000,000 -- --
Retained Earnings (Deficit)............................................. (794,035) (794,035) (794,035)
Less: Stock Subscription................................................ (4,000,000) -- --
Less: Deferred Compensation Expense..................................... (548,000) (548,000) (548,000)
Total Stockholders' Equity.............................................. (141,795) 5,517,205 4,917,205
Total Capitalization.................................................... (141,795) 5,517,205 4,917,205
</TABLE>
- ------------------
(1) Does not include the sale of 960,000 shares of Common Stock or the sale of
480,000 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 $5,659,000 from the
proposed sale of 480,000 Units consisting of 960,000 shares of Common Stock
and 480,000 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)....................... 4,664,182 (394,818) 355,821
Total Assets.................................... 5,434,122 375,122 521,204
Total Liabilities............................... 516,917 516,917 114,118
Stockholders' Equity............................ 4,917,205 (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..................................... (703,211) (95,290)
Net Loss................................................. (700,881) (93,154)
Net Loss Per Share(1).................................... (.17) (.02)
Weighed Average Number of Common Shares outstanding(1)... 4,042,400 4,042,400
</TABLE>
- ------------------
(1) Does not include the sale of 480,000 Units consisting of 960,000 shares of
Common Stock and 480,000 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, 10D and 10E to financial statements).
(2) Gives effect to the net proceeds of the proposed public offering of
$5,659,000 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
SIX MONTHS ENDED NOVEMBER 30,
MAY 31, 1996 1995
------------------ --------------
<S> <C> <C>
Revenues............................. $ 88,842 $ 759,622
Gross Profit......................... 4,306 92,257
Operating Expenses................... 707,517 187,547
Loss from Operations................. (703,211) (95,290)
Net Loss............................. (700,881) (93,154)
</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. Revenues for the period June 22,
1995 through November 30, 1995 were approximately $760,000. The decline in
revenues is the result of the decrease in orders placed by this customer. 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 revenues. For the period June 22, 1995 through November 30, 1995
the Company achieved a gross profit percentage of approximately 12%. This
percentage was the result of doing promotional sales business rather than Kiosk
program. 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
17
<PAGE>
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
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
$707,000. 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 $701,000. 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 $60,000 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.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the Six Months Ended May 31, 1996
The Company had 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. Proceeds from the issuance of Preferred Stock Units in March
1996 generated $100,000 resulting in a net cash from financing activities of
approximately $30,000.
The cash balance at May 31, 1996 was approximately $28,000. The Company
believes that its proposed public offering, with net proceeds of approximately
$5,659,000, 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, $1,350,000 for product inventory, $550,000 for
marketing and advertising, and the balance of approximately $600,000 for working
capital.
As of May 31, 1996, Accounts Payable, Accounts Payable--Related Party and
Accrued Expenses increased approximately $310,000 from the period June 22, 1995
through November 30, 1995. This increase was primarily the result of an increase
in operating activities in connection with the Company's implementation of its
business plan. Inventory increased approximately $50,000 as part of the
Company's efforts in its kiosk program. Accounts receivable increased at May 31,
1996 by $14,250 from November 30, 1995. This increase represented monies due
from sales of the Company's promotional business that was not represented by a
letter of credit.
The Notes Receivable--Related Party of $50,000 that was outstanding at
November 30, 1995 represented a demand note receivable from an entity whose
principal shareholders are also principal shareholders of the Company. This note
plus interest was paid on May 15, 1996.
Due from Related Parties of $48,982 at November 30, 1995 represented
proceeds from the letter of credit due the Company from HSND for goods shipped
as of November 30, 1995 to a nationwide consumer wholesaler and was collected in
March 1996.
Note Payable--Related Party of $36,500 at May 31, 1996 represented advances
from an entity whose partners are also principal shareholders of the Company
which is evidenced by demand notes and accrues interest at the rate of 2% over
prime.
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 $5,659,000, will provide sufficient working capital
19
<PAGE>
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.
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 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 SHOWCASETM: 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,
20
<PAGE>
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 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
21
<PAGE>
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.
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
22
<PAGE>
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 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.
25
<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 $4.50 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. 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 $4.50 per share. The
agreement also
26
<PAGE>
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.
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.
27
<PAGE>
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
SHARES 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 1.4 0
Sherbrooke Consulting, Ltd.(4).................................. 553,500 17.7 -- 0
Special Equities, Inc.(5)....................................... 1,080,000 34.6 -- 0
The MarketLink Group, Ltd.(6)................................... 685,500 22.0 3.2 132,000
Nancy Shalek(4)(7).............................................. 553,500 17.7 -- 0
James Lawless................................................... -- -- -- --
M.D. Funding, Inc.(8)........................................... 345,000 11.1 7.8 318,000
All officers and directors as a group
(three (3) persons)(3)(4)(7).................................. 673,500 21.5 1.4 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.
(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.
(Footnotes continued on next page)
28
<PAGE>
(Footnotes continued from previous page)
(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 318,000 shares of Preferred Stock and 22,500 shares of Common
Stock issuable upon exercise of 22,500 Class A Warrants.
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.
The holders of the Preferred Stock Units have agreed not to sell, assign or
transfer any of these securities for a period of twelve (12) months from the
date of this Prospectus. These securities are not subject to earlier release.
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.
29
<PAGE>
DESCRIPTION OF SECURITIES
The Company is offering 480,000 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 $8.00 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 2,400,000 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 12 months from the date of
this Prospectus, 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 3,360,000 shares of Common Stock and
2,480,000 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
Patterson Travis, Inc. is the representative, have agreed to purchase from the
Company 480,000 Units consisting of 960,000 shares of Common Stock and 480,000
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>
Patterson Travis, Inc........................................................................
-------
.....................................................................
-------
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Units to the public at $15.00 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 72,000 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 $48.00, an option (the 'Representative's Option')
to purchase up to an aggregate of 48,000 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 120% 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
twelve (12) months from the date of this Prospectus. The holders of the
Preferred Stock Units have agreed not to sell, assign or transfer any of these
securities for a period of twelve (12) months from the date of this Prospectus.
The Preferred Stock Units are not subject to earlier release. 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 (Deficit), 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.
MORTENSON & ASSOCIATES, 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(3C).................................................. -- 50,000
Due from Related Parties(3A)........................................................ -- 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 (DEFICIT)
Current Liabilities:
Accounts Payable................................................... $ 170,386 $ 170,386 $ 24,282
Accounts Payable--Related Party(3B)................................ 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(3D).................................... 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 and 600,000 Shares at May 31, 1996
and November 30, 1995, respectively, 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 and 3,000,000 Shares at May 31, 1996 and
November 30, 1995, respectively, Par Value .0001................ 312 312 300
Additional Paid-in Capital--Common Stock........................... 599,928 899,928 249,940
Common Stock Subscribed(1)......................................... 4,000,000 4,000,000 4,000,000
Retained Earnings (Deficit)........................................ (794,035) (794,035) (93,154)
Less: Stock Subscription Receivable................................ (4,000,000) (4,000,000) (4,000,000)
Deferred Compensation Expense................................. (548,000) (548,000) --
----------- ------------ ------------
Total Stockholders' Equity (Deficit)............................... (741,795) (141,795) 407,086
----------- ------------ ------------
Total Liabilities and Stockholders' Equity (Deficit)............... $ (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(3B)............................... 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 Costs............................. 52,000 --
------------ --------------
Total Selling, General and Administrative Expenses..................... 707,517 187,547
------------ --------------
Loss from Operations................................................... (703,211) (95,290)
------------ --------------
Other Income (Expense):
Interest Income........................................................ 2,389 2,136
Interest Expense....................................................... (59) --
------------ --------------
Total Other Income..................................................... 2,330 2,136
------------ --------------
Net Loss............................................................... (700,881) (93,154)
Provision for Income Taxes............................................... -- --
------------ --------------
Net Loss............................................................... $ (700,881) $ (93,154)
------------ --------------
------------ --------------
Weighted Average Number of Shares...................................... 4,042,400 4,042,400
------------ --------------
------------ --------------
Net Loss Per Share..................................................... $ (.17) $ (.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 (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------------- --------------------------------------------
ADDITIONAL ADDITIONAL COMMON
NUMBER OF AMOUNT PAID-IN NUMBER OF AMOUNT PAID-IN STOCK
SHARES AT PAR CAPITAL 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) (10D) (10E)..... -- -- -- -- -- 600,000 --
Compensation Expense(9) (10D) (10E)..... -- -- -- -- -- -- --
Common and Preferred Stock Issued for
Bridge Financing--March 29, 1996
(10C)................................. 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 $ 899,928 $4,000,000
--------- --- ---------- --------- ------ ---------- ----------
--------- --- ---------- --------- ------ ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RETAINED DEFERRED STOCK STOCKHOLDERS
EARNINGS COMPENSATION SUBSCRIPTION EQUITY
(DEFICIT) EXPENSE RECEIVABLE (DEFICIT)
--------- ------------ ------------ ------------
<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) (10D) (10E)........................... -- (600,000) -- --
Compensation Expense(9) (10D) (10E)........................... -- 52,000 -- 52,000
Common and Preferred Stock Issued for Bridge Financing--March
29, 1996 (10C).............................................. -- -- -- 100,000
Net Loss for the six months ended May 31, 1996................ (700,881) -- -- (700,881)
--------- ------------ ------------ ------------
Balance--May 31, 1996 (Unaudited)........................... $(794,035) $ (548,000) $ (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......................................................................... $ (700,881) $ (93,154)
------------ --------------
Adjustments to Reconcile Net Loss to Net Cash (Used for)
Operating Activities:
Amortization................................................................ 3,462 880
Stock Issuance Costs........................................................ 52,000 --
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............................................................. 410,861 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) Due from Related Parties--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.
(B) Related Party Expenses and Accounts Payable--The Company incurred
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
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)
principal shareholders in the Company. In addition, the Company has incurred the
following expenses to this partnership:
<TABLE>
<CAPTION>
FROM JUNE 22,
DECEMBER 1, 1995 (DATE
1995 THROUGH OF INCEPTION)
MAY 31, NOVEMBER 30,
1996 1995
------------ -------------
<S> <C> <C>
Rent and Utilities.............................................. $ 58,905 $ 11,782
Travel and Entertainment........................................ 37,727 47,786
Outside Services................................................ 83,720 57,000
Compensation and Benefits....................................... 811 7,795
Other Services.................................................. 2,255 3,989
------------ -------------
Total......................................................... $183,418 $ 128,352
------------ -------------
------------ -------------
</TABLE>
As of May 31, 1996, the Company owed the partnership $94,182, which is
reflected as 'Accounts Payable--Related Party.'
(C) Note Receivable--Related Party--On November 14, 1995, the Company
entered into $50,000 demand note with annual interest of 2% over prime with an
entity whose principal shareholders are also principal shareholders of the
Company. 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.
(D) Notes Payable--Related--The Company was advanced an aggregate amount of
$36,500 from an entity whose partners are also principal shareholders of the
Company. These notes are evidenced by demand notes which accrue interest at the
rate of 2% over prime.
(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
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)
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 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.
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)
(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 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 $600,000 the 720,000 shares of Series A
preferred stock [600,000 shares referred to in the preceding paragraph plus
120,000 shares referred to in Note 10C] 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 720,000 shares of redeemable
Series A preferred 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................................................. $ (.21) $ (.03)
---------- ------------
Number of Shares................................................. 3,322,500 3,322,500
---------- ------------
</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
Executive Vice 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
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)
(9) EMPLOYMENT AGREEMENT--(CONTINUED)
compensation cost of $180,000 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 $15,000 per quarter. For the period ended
May 31, 1996, $30,000 has been expensed to operations.
(10) SUBSEQUENT EVENTS (UNAUDITED)
(A) Proposed Public Offering--The Company reached an agreement with an
underwriter to file a registration statement for 480,000 units at $15.00 per
unit. Each unit consists of two shares of common stock and one Class A Warrant
exercisable at $6.00 per warrant. The Class A Warrants entitle the holder to
purchase one share of Common Stock at $8.00 per share. The anticipated net
proceeds from this offering are approximately $5,659,000.
(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 exercisable at $4.50 per share for future
services to be rendered. The exercise price was 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. The
Company recorded deferred compensation cost of $136,000 for options issued. The
deferred compensation cost will be expensed over the next five years of
employment commencing June 1, 1996.
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 $4.50 per share. The Company recorded a deferred compensation
cost of $84,000 for the options issued, which represents the fair value of the
equity instruments issued. The deferred compensation will be expensed over the
one-year life of the consulting agreement or $21,000 per quarter. For the period
ending May 31, 1996, $7,000 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 $4.50 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 Company
recorded deferred compensation cost of $100,000 for options issued. Deferred
compensation cost will be expensed over the next year of employment. For the
period ended May 31, 1996, $12,500 has been expensed to operations. 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
<PAGE>
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 $4.50 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 Company recorded deferred compensation
cost of $100,000 for the 100,000
F-12
<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)--(CONTINUED)
options issued. Deferred compensation cost will be expensed over the next five
year of employment. For the period ending May 31, 1996, $2,500 has been expensed
to operations. 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-13
<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
------------------------
PATTERSON TRAVIS, INC.
AUGUST , 1996
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 2, 1996
ALTERNATE
PROSPECTUS
2,400,000 SHARES OF COMMON STOCK
2,000,000 CLASS A WARRANTS
ML DIRECT INC.
------------------------
The Prospectus relates to up to 2,400,000 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 480,000 Units consisting of 960,000
shares of Common Stock and 480,000 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 480,000 Units consisting of 960,000 shares of Common Stock and 480,000 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 2,400,000 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 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 2,400,000 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>
Morgan Carlton, Inc.(1).................. 96,000 80,000 96,000 80,000 -- --
Alan Kerzner(2).......................... 120,000 50,000 60,000 50,000 60,000 1.4%
M&M Creative Services, Inc.(3)........... 30,000 25,000 30,000 25,000 -- --
Special Equities, Inc.(4)................ 1,080,000 900,000 1,080,000 900,000 -- --
Sherbrooke Consulting, Ltd.(5)........... 553,500 461,250 553,500 461,250 -- --
The MarketLink Group, Ltd.(6)............ 685,500 461,250 553,500 461,250 132,000 3.2%
Judith Pace(7)........................... 345,000 22,500 27,000 22,500 318,000 7.8%
Nancy Shalek(5)(8)....................... 553,500 461,250 553,500 461,250 -- --
--------- --------- --------- --------- --------- ---
2,400,000 2,000,000
</TABLE>
- ------------------
(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.
(Footnotes continued on next page)
Alt-ii
<PAGE>
(Footnotes continued from previous page)
(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 Shares of Common Stock issuable upon the possible
conversion of 318,000 Shares of Preferred Stock and 22,500 Shares of Common
Stock issuable upon exercise of 22,500 Class A Warrants.
(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 3,360,000 shares of Common Stock,
provided, however, that shares of Common Stock held by Selling Securityholders
which are not transferable for twelve (12) months from the Effective Date
of this Prospectus or earlier with the consent of 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.
Alt-iii
<PAGE>
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
------------------------
PATTERSON TRAVIS, INC.
AUGUST , 1996
---------------------------------------------------------------
---------------------------------------------------------------
<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. The sales
of the securities were transactions by an issuer not involving any
public offering, was offered and purchased by a limited number of investors and
was made only to individuals and parties with whom the Company or its management
were previously familiar with. Therefore, each of the investors had access to
obtain information regarding the Company. The Company believes that each of the
purchasers had such knowledge and experience in financial matters that they were
capable of evaluating the merits and risks of the investment.
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 31, 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 31, 1996
- ------------------------------------------ Principal Accounting Officer
James Lawless
/s/ NANCY SHALEK Chairman of the Board and Director July 31, 1996
- ------------------------------------------
Nancy Shalek
/s/ ALAN KERZNER Executive Vice President and Director July 31, 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>
480,000 Units
Each Unit consisting of two (2) Shares of Common Stock,
par value $.0001 and one (1) Class A Redeemable Common Stock
Purchase Warrants
to purchase one (1) Share of Common Stock
ML DIRECT INC.
UNDERWRITING AGREEMENT
New York, New York
_____________________, 1996
Patterson Travis, Inc.
1 Battery Park Plaza, 2nd Floor
New York, New York 10004
ML Direct Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to you (the "Representative") and to the other underwriters, if
any, for whom you are acting as representative (the Representative and such
other underwriters, if any, being herein jointly referred to as the
"Underwriters"), an aggregate of (i) 480,000 units, each unit consisting of two
(2) shares of Common Stock, par value $.0001 per share ("Common Stock"), and
(ii) one (1) Class A redeemable Common Stock purchase warrant ("Warrant"). Each
Warrant entitles the holder to purchase one (1) share of Common Stock at $8.00
per share from _____________________, 1997 until ___________________, 2001. In
addition, the Company proposes to grant to the Underwriter the option referred
to in Section 2(b) to purchase all or any part of an aggregate of 72,000
additional units, consisting of 144,000 added Shares and 72,000 additional
Warrants.
Unless the context otherwise requires, (i) the aggregate of 480,000
units to be sold by the Company, together with all or any part of the 72,000
units which the Underwriter has the option to purchase, and the shares of Common
Stock and the Warrants comprising such units are herein called the "Units,". The
Shares and the Warrants included in the Units (including the Units which the
Underwriter has the option to purchase pursuant to paragraph 2(b) hereof) are
collectively referred to herein as the "Securities."
You have advised the Company that you (and, if applicable, the other
Underwriters) desire to purchase the Units. The Company confirms the agreements
made by it with respect to the purchase of the Units by the Underwriters as
follows:
<PAGE>
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with you that:
(a) A registration statement (File No. 333-3162) on Form SB-2
relating to the public offering of the Units , including a form of prospectus
subject to completion, copies of which have heretofore been delivered to you,
has been prepared in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and approved
by you prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by you prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus
is required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. At the time the Registration
Statement becomes effective and at all times subsequent thereto up to and on the
First Closing Date (as hereinafter defined) or the Option Closing Date, as the
case may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and (ii)
neither the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any of the Underwriters specifically
for use in the preparation thereof. It is understood that the statements set
forth in the Prospectus on page _____ with respect to stabilization, the
paragraph under the heading "Underwriting" relating to concessions to certain
dealers, and the identity of counsel to the Representative under the heading
"Legal Matters" constitute for purposes of this Section
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<PAGE>
and Section 6(b) the only information furnished in writing by or on behalf of
any of the Underwriters for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with full corporate power and authority to own its properties and
conduct its business as described in the Prospectus and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
other jurisdiction in which the nature of its business or the character or
location of its properties requires such qualification, except where the failure
to so qualify will not materially adversely affect the Company's business,
properties or financial condition.
(d) The authorized, issued and outstanding capital stock of
the Company, including the predecessors of the Company, as of the date hereof,
is as set forth in the Prospectus under "Capitalization"; the shares of issued
and outstanding capital stock of the Company set forth thereunder have been duly
authorized, validly issued and are fully paid and nonassessable; except as set
forth in the Prospectus, no options, warrants, or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company have
been granted or entered into by the Company; and the capital stock conforms to
all statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units are duly authorized, and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
The Shares have been duly authorized and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and non assessable, and free of preemptive rights, and no personal
liability will attach to the ownership thereof.
The Warrants have been duly authorized and, when
issued and delivered pursuant to this Agreement, will have been duly executed,
issued and delivered and will constitute valid and legally binding obligations
of the Company enforceable in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the right of creditors generally or by general equitable principles, and
entitled to the benefits provided by the warrant agreement pursuant to which
such Warrants are to be issued (the "Warrant Agreement"), which will be
substantially in the form filed as an exhibit to the Registration Statement. The
shares of Common Stock issuable upon exercise of the Warrants have been reserved
for issuance upon the exercise of the Warrants and when issued in accordance
with the terms of the Warrants and Warrant Agreement, will be duly and validly
authorized, validly issued, fully paid and non-assessable, and free of
preemptive rights and no personal liability will attach to the ownership
thereof. The Warrant Agreement has been duly authorized and, when executed and
delivered pursuant to this Agreement, will have been duly executed and delivered
and will constitute the valid and legally binding obligation of the Company
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally or by general equitable principles. The Warrants and Warrant
Agreement conform to the respective descriptions thereof in the Registration
Statement and Prospectus.
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The Shares and the Warrants contained in the
Underwriter's Purchase Option (as defined in the Registration Statement) have
been duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the
Underwriter's Purchase Option, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the rights of creditors generally
or by general equitable principles and the indemnification contained in
paragraph 7 of the Underwriters' Purchase Option may be unenforceable. The
shares of Common Stock included in the Units in the Underwriter's Purchase
Option and the shares of Common Stock issuable upon exercise of the Warrants
included therein when issued and sold, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights and no personal
liability will attach to the ownership thereof.
(f) This Agreement and the Underwriter's Purchase Option have
been duly and validly authorized, executed, and delivered by the Company. The
Company has full power and authority to authorize, issue, and sell the Units to
be sold by it hereunder on the terms and conditions set forth herein, and no
consent, approval, authorization or other order of any governmental authority is
required in connection with such authorization, execution and delivery or in
connection with the authorization, issuance, and sale of the Units or the
Underwriter's Purchase Option, except such as may be required under the Act
or state securities laws.
(g) Except as described in the Prospectus, or which would not
have a material adverse effect on the condition (financial or otherwise),
business prospects, net worth or properties of the Company taken as a whole (a
"Material Adverse Effect"), the Company is not in violation, breach, or default
of or under, and consummation of the transactions herein contemplated and the
fulfillment of the terms of this Agreement will not conflict with, or result in
a breach or violation of, any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge, or
encumbrance upon any of the property or assets of the Company pursuant to the
terms of any material indenture, mortgage, deed of trust, loan agreement, or
other agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the provisions of the
articles of incorporation or the by-laws of the Company, as amended, or any
statute or any order, rule or regulation applicable to the Company of any court
or of any regulatory authority or other governmental body having jurisdiction
over the Company.
(h) Subject to the qualifications stated in the Prospectus,
the Company has good and marketable title to all properties and assets
(including, without limitation, 50.02% of all shares of KN2B, Inc.) necessary
for the operation of its business as it is presently being conducted or
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee as described in the Prospectus are in full force and effect, and,
except as described in the Prospectus, the Company is not in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and, to the best knowledge of the Company, no claim has
been asserted by anyone adverse to rights of the Company as lessor, sublessor,
lessee, or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning the right of the Company to continued possession of the
leased or subleased premises or assets under any such lease or sublease except
as described or referred to in the Prospectus; and the Company owns or leases
all such
4
<PAGE>
properties described in the Prospectus as are necessary to its operations as now
conducted and, except as otherwise stated in the Prospectus, as proposed to be
conducted as set forth in the Prospectus.
(i) Moore Stephens, P.C., who have given their reports on
certain financial statements filed with the Commission as a part of the
Registration Statement, are with respect to the Company, independent public
accountants as required by the Act and the Rules and Regulations.
(j) The financial statements and schedules, together with
related notes, set forth in the Prospectus or the Registration Statement present
fairly the financial position and results of operations and changes in cash flow
position of the Company on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved except as disclosed in the Prospectus and
Registration Statement. The information set forth under the caption "Selected
Financial Data" in the Prospectus fairly present, on the basis stated in the
Prospectus, the information included therein.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and except as otherwise
disclosed or contemplated therein, the Company has not incurred any liabilities
or obligations, direct or contingent, not in the ordinary course of business, or
entered into any transaction not in the ordinary course of business, which would
have a Material Adverse Effect, and there has not been any change in the capital
stock of, or any incurrence of short-term or long-term debt by, the Company or
any issuance of options, warrants or other rights to purchase the capital stock
of the Company or any material adverse change or any development involving, so
far as the Company can now reasonably foresee a prospective adverse change in
the condition (financial or other), net worth, results of operations, business,
key personnel or properties of it which would be material to the business or
financial condition of the Company.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company exist or to the knowledge of the Company, are threatened which might be
expected to adversely affect the conduct of the business, property or operations
or the financial condition or results of operations of the Company.
(m) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state, and foreign income and franchise tax returns
required to be filed as of the date hereof and has paid all taxes shown as due
thereon; and there is no tax deficiency which has been asserted against the
Company.
(n) Except as disclosed in the Registration Statement, the
Company has sufficient licenses, permits, and other governmental authorizations
currently necessary for the conduct of its business or the ownership of its
properties as described in the Prospectus and is in all material respects
5
<PAGE>
complying therewith and owns or possesses adequate rights to use all material
patents, patent applications, trademarks, service marks, trade-names, trademark
registrations, service mark registrations, copyrights, and licenses necessary
for the conduct of such business and had not received any notice of conflict
with the asserted rights of others in respect thereof. To the best knowledge of
the Company, none of the activities or business of the Company are in violation
of, or cause the Company to violate, any law, rule, regulation, or order of the
United States, any state, county, or locality, or of any agency or body of the
United States or of any state, county or locality, the violation of which would
have a Material Adverse Effect.
(o) The Company has not, directly or indirectly, at any time
(i) made any contributions to any candidate for political office, or failed to
disclose fully any such contribution in violation of law or (ii) made any
payment to any state, federal or foreign governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (as hereinafter defined) all transfer
or other taxes, (including franchise, capital stock or other tax, other than
income taxes, imposed by any jurisdiction) if any, which are required to be paid
in connection with the sale and transfer of the Units to the Underwriters
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been complied with in all material respects.
(q) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(r) Except as disclosed in the Registration Statement, the
Company has no subsidiaries.
(s) Except as disclosed in the Registration Statement, the
Company has not entered into any agreement pursuant to which any person is
entitled either directly or indirectly to compensation from the Company for
services as a finder in connection with the proposed public offering.
(t) Except as disclosed in the Prospectus, no officer,
director, or stockholder of the Company has any National Association of
Securities Dealers, Inc. (the "NASD") affiliation.
2. Purchase, Delivery and Sale of the Units
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the Underwriters, and the
Underwriters agree to buy from the Company (i) at $13.50 per Unit, at the place
and time hereinafter specified, 480,000 Units (the "First Units").
Delivery of the First Units against payment therefor shall
take place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New
York,
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<PAGE>
New York (or at such other place as may be designated by agreement between the
Representative and the Company) at 10:00 a.m., New York time, on
_____________________, 1996, or at such later time and date as the
Representative may designate in writing to the Company at least two business
days prior to such purchase, but not later than _____________________, 1996,
such time and date of payment and delivery for the First Units being herein
called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriters to
purchase all or any part of an aggregate of an additional 72,000 Units at the
same price per Unit, respectively, as the Underwriters shall pay for the First
Units being sold pursuant to the provisions of subsection (a) of this Section 2
(such additional Units being referred to herein as the "Option Units"). This
option may be exercised within 30 days after the effective date of the
Registration Statement upon written notice by the Underwriters to the Company
advising as to the amount of Option Units as to which the option is being
exercised, the names and denominations in which the certificates for such Option
Units are to be registered and the time and date when such certificates are to
be delivered. Such time and date shall be determined by the Representative but
shall not be earlier than four nor later than ten full business days after the
exercise of said option (but in no event more than 40 days after the First
Closing Date), nor in any event prior to the First Closing Date, and such time
and date is referred to herein as the "Option Closing Date." Delivery of the
Option Units against payment therefor shall take place at the offices of
Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York (or at such
other place as may be designated by agreement between the Representative and the
Company). The Option granted hereunder may be exercised only to cover
over-allotments in the sale by the Underwriters of First Units referred to in
subsection (a) above. No Option Units shall be delivered unless all First Units
shall have been delivered to the Underwriters as provided herein.
(c) The Company will make the certificates for the securities
to be purchased by the Underwriters hereunder available to the Underwriters for
checking at least two full business days prior to the First Closing Date or the
Option Closing Date (which are collectively referred to herein as the "Closing
Dates"). The certificates shall be in such names and denominations as the
Underwriters may request, at least three full business days prior to the Closing
Dates. Delivery of the certificates at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities
to be purchased by the Underwriters hereunder will be delivered by the Company
to the Underwriters for the account of the Underwriters against payment of the
respective purchase prices by the Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriters exercise the option
to purchase from the Company all or any portion of the Option Units pursuant to
the provisions of subsection (b) above, payment for such Units shall be made to
or upon the order of the Company by certified or bank cashier's checks payable
in New York Clearing House
7
<PAGE>
funds at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York,
New York (or at such other place as may be designated by agreement between the
Representative and the Company), at the time and date of delivery of such Units
as required by the provisions of subsection (b) above, against receipt of the
certificates for such Units by the Underwriters for the Underwriters' accounts
registered in such names and in such denominations as the Underwriters may
reasonably request.
It is understood that the Underwriters propose to offer the
Units to be purchased hereunder to the public upon the terms and conditions set
forth in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective. If required, the Company will file
the Prospectus and any amendment or supplement thereto with the Commission in
the manner and within the time period required by Rule 424(b) under the Act.
Upon notification from the Commission that the Registration Statement has become
effective, the Company will so advise the Representative and will not at any
time, whether before or after the effective date, file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representative shall not previously have been advised and furnished with a copy
or to which the Representative or its counsel shall have reasonably objected in
writing or which is not in compliance with the Act and the Rules and
Regulations. At any time prior to the later of (A) the completion by the
Underwriters of the distribution of the Units contemplated hereby (but in no
event more than nine months after the date on which the Registration Statement
shall have become or been declared effective) and (B) 25 days after the date on
which the Registration Statement shall have become or been declared effective,
the Company will prepare and file with the Commission, promptly upon the
Representative's request, any amendments or supplements to the Registration
Statement or Prospectus which, in the opinion of counsel to the Company and the
Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Units.
As soon as the Company is advised thereof, the Company will
advise the Representative and provide the Representative copies of any written
advice, of the receipt of any comments of the Commission, of the effectiveness
of any post-effective amendment to the Registration Statement, of the filing of
any supplement to the Prospectus or any amended Prospectus, of any request made
by the Commission for an amendment of the Registration Statement or for
supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop order or other order or threat thereof suspending the effectiveness of
the Registration Statement or any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering in any jurisdiction, or of the institution of any
proceedings for any of such purposes, and will use its best efforts to prevent
the issuance of any such order, and, if issued, to obtain as soon as possible
the lifting thereof.
The Company has caused to be delivered to the Underwriters
copies of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters
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and dealers to use the Prospectus in connection with the sale of the Units for
such period as in the opinion of counsel to the Underwriters and the Company the
use thereof is required to comply with the applicable provisions of the Act and
the Rules and Regulations. In case of the happening, at any time within such
period as a Prospectus is required under the Act to be delivered in connection
with sales by the Underwriters or dealer of any event of which the Company has
knowledge and which materially affects the Company or the securities of the
Company, or which in the opinion of counsel for the Company and counsel for the
Underwriters should be set forth in an amendment of the Registration Statement
or a supplement to the Prospectus in order to make the statements therein not
then misleading, in light of the circumstances existing at the time the
Prospectus is required to be delivered to a purchaser of the Units or in case it
shall be necessary to amend or supplement the Prospectus to comply with law or
with the Rules and Regulations, the Company will notify the Underwriters
promptly and forthwith prepare and furnish to the Underwriters copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as the Underwriters may reasonably request, in order that the
Prospectus, as so amended or supplemented, will not contain any untrue statement
of a material fact or omit to state any material facts necessary in order to
make the statements in the Prospectus, in the light of the circumstances under
which they are made, not misleading. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to the
Underwriters, except that in case the Underwriters are required, in connection
with the sale of the Units to deliver a Prospectus nine months or more after the
effective date of the Registration Statement, the Company will upon request of
and at the expense of the Underwriters, amend or supplement the Registration
Statement and Prospectus and furnish the Underwriters with reasonable quantities
of prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations thereunder in connection with the offering and issuance of
the Units.
(b) The Company will furnish such information as may be
required and to otherwise cooperate and use its best efforts to qualify to
register the Securities for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications and furnish such information as may be required for that purpose
and to comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent of service of process in any jurisdiction in any action other
than one arising out of the offering or sale of the Securities. The Company
will, from time to time, prepare and file such statements and reports as are or
may be required to continue such qualification in effect for so long a period as
the counsel to the Company and the Underwriters deem reasonably necessary.
(c) If the sale of the Securities provided for herein is not
consummated as a result of the Company not performing its obligations hereunder
in all material respects, the Company shall pay all costs and expenses incurred
by it which are incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable expenses of the Representative (including the
reasonable fees and expenses of counsel to the Representative).
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(d) The Company will use its best efforts to (i) cause a
registration statement under the Exchange Act to be declared effective
concurrently with the completion of this offering and will notify you in writing
immediately upon the effectiveness of such registration statement, and (ii) if
requested by you, to obtain and keep current a listing in the Standard & Poors
or Moody's OTC Industrial Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to the Representative during the period ending five
(5) years from the date hereof, (i) as soon as practicable after the end of each
fiscal year, but no earlier than the filing of such information with the
Commission a balance sheet of the Company and any of its subsidiaries as at the
end of such fiscal year, together with statements of income, surplus and cash
flow of the Company and any subsidiaries for such fiscal year, all in reasonable
detail and accompanied by a copy of the certificate or report thereon of
independent accountants; (ii) as soon as practicable after the end of each of
the first three fiscal quarters of each fiscal year, but no earlier than the
filing of such information with the Commission, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as soon
as they are publicly available, a copy of all reports (financial or other)
mailed to security holders; (iv) as soon as they are available, a copy of all
non-confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which any
class of securities of the Company is listed; and (v) such other information as
you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e) above will
be on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to the Representative at or
before the First Closing Date two signed copies of the Registration Statement
including all financial statements and exhibits filed therewith, and of all
amendments thereto, and will deliver to the Representative such number of
conformed copies of the Registration Statement, including such financial
statements but without exhibits, and of all amendments thereto, as the
Representative may reasonably request. The Company will deliver to or upon the
Representative's order, from time to time until the effective date of the
Registration Statement, as many copies of any Preliminary Prospectus filed with
the Commission prior to the effective date of the Registration Statement as the
Representative may reasonably request. The Company will deliver to the
Underwriters on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its security
holders and to the registered holders of its Warrants and deliver to the
Representative as soon as it is practicable to do so but in no event later than
90 days after the end of twelve months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
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(i) The Company will apply the net proceeds from the sale of
the Units substantially for the purposes set forth under "Use of Proceeds" in
the Prospectus, and will file such reports with the Commission with respect to
the sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will promptly prepare and file with the
Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
opinion of counsel to the Underwriters and counsel to the Company, may be
reasonably necessary or advisable in connection with the distribution of the
Units, and will use its best efforts to cause the same to become effective as
promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Warrants and the Underwriters' Purchase Option outstanding from
time to time.
(l) For a period of twelve (12) months from the First Closing
Date, neither the Company nor any of the Selling Stockholders (as defined in the
Registration Statement) will, directly or indirectly, offer, sell (including any
short sale), issue, grant any option for the sale of, acquire any option to
dispose of, or otherwise dispose of any shares of capital stock or other
securities of the Company, other than securities which comprise, or are derived
from, the Preferred Stock Units (as defined in the Registration Statement),
without the prior written consent of the Representative, other than as set forth
in the Registration Statement. In order to enforce this covenant, the Company
shall impose stop-transfer instructions with respect to the shares of capital
stock or other securities owned by such Selling Stockholders until the end of
such period (subject to any exceptions to such limitation on transferability set
forth in the Registration Statement).
(m) For a period of twelve (12) months from the First Closing
Date, none of the Selling Stockholders will, directly or indirectly, offer, sell
(including any short sale), grant any option for the sale of, acquire any option
to dispose of, or otherwise dispose of any of the shares of Common Stock which
comprise the Preferred Stock Units, other than as set forth in the Registration
Statement. In order to enforce this covenant, the Company shall impose
stop-transfer instructions with respect to such shares of Common Stock owned by
such Selling Stockholders until the end of such period (subject to any
exceptions to such limitation on transferability set forth in the Registration
Statement).
(n) Upon completion of this offering, the Company will make
all filings required, including registration under the Exchange Act, to obtain
the listing of the Shares, the Warrants, and Common Stock in the NASDAQ system,
and will use its best efforts to effect and maintain such listing for at least
five years from the date of this Agreement to the extent that the Company has at
least 300 record holders of Common Stock.
(o) Except for the transactions contemplated by this
Agreement, the Company represents that it has not taken and agrees that it will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
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stabilization or manipulation of the price of the Units, Shares, or Warrants or
to facilitate the sale or resale of the Securities or the Units.
(p) On the First Closing Date and simultaneously with the
delivery of the Units, the Company shall execute and deliver to you the
Underwriter's Purchase Option. The Underwriter's Purchase Option will be
substantially in the form filed as an Exhibit to the Registration Statement.
(q) James Lawless shall be President , and Alan Kerzner and
Benedict White shall be Executive Vice Presidents of the Company on the Closing
Dates. Upon the Closing Dates, the Company will have in force key person life
insurance on the lives of Messrs. Lawless, Kerzner, and White in an amount of
not less than $1,000,000.00 each and will maintain such insurance until at least
_____________________, ________.
(r) For a period of five (5) years from the Effective Date,
the Company, at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders, provided that the Company shall not be required to file a report
of such accountants relating to such review with the Commission.
(s) The Representative shall have the right to request the
Company to use its best efforts to have one (1) director nominated by or
reasonably acceptable to the Representative nominated for election to the Board
of Directors for three (3) years following the Effective Date, and the Company
will use its best efforts to cause such nominee to be elected to the Board of
Directors. If the Representative fails to identify such nominee, or if such
nominee is not elected to the Board of Directors, the Company further agrees to
allow up to one (1) representative designated by the Representative from time to
time to receive timely, written notice of all Board of Directors meetings (which
meetings include committee meetings of the Board of Directors) and notice of all
telephonic Board meetings and the right to attend all Board meetings and
participate in all telephonic Board meetings for three (3) years following the
Effective Date. The Representative shall also have the right to obtain copies of
the minutes from all Board of Directors meetings for five (5) years following
the Effective Date of the Registration Statement, whether or not a
representative of the Representative attends of participates in any such Board
meeting.
(t) The Company agrees to pay to the Representative a finder's
fee of 5.0% of the first $4,000,000.00, 4.0% of the next $1,000,000.00, 3.0% of
the next $1,000,000.00 and 2% of the excess, if any, over $6,000,000.00, of the
aggregate consideration received by the Company with respect to any transaction
(including, but not limited to, mergers, acquisitions, joint ventures, and any
other business for the Company) introduced to the Company by the Representative
and consummated by the Company (an "Introduced Consummated Transaction") during
the five (5) year period commencing on the First Closing Date. The entire amount
of any such finder's fee due and payable to Representative shall be paid in full
by certified funds or cashier's check payable to the order of Representative or
in cash, at the first closing of the Introduced Consummated Transaction for
which the finder's fee is due.
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(u) The Company agrees to pay to the Representative a warrant
solicitation fee of 4.0% of the exercise price of any of the Warrants exercised
beginning one (1) year after the Effective Date if (a) the market price of the
Company's Common Stock on the date the Warrant is exercised is greater than the
exercise price of the Warrant, (b) the exercise of the Warrant was solicited by
an NASD member firm, which was designated in writing by the holder of the
Warrant and such member provided bona fide services in connection with such
solicitation, (c) the Warrant is not held in a discretionary account, (d)
disclosure of this compensation arrangement is made upon the sale and exercise
of the Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6
under the Exchange Act , and (f) solicitation of the exercise is in compliance
with the NASD (Notice to Members 81-38 (September 22, 1981)).
4. Conditions of Underwriters' Obligation. The obligations of the
Underwriters to purchase and pay for the Units which the Underwriters have
agreed to purchase hereunder, are subject to the accuracy (as of the date
hereof, and as of the Closing Dates) of and compliance with the representations
and warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 a.m., New York time,
on the day following the date of this Agreement, or at such later time or on
such later date as to which the Representative may agree in writing; on or prior
to the Closing Dates no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that or a
similar purpose shall have been instituted or shall be pending or, to the
Representative's knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the satisfaction of the
Commission; and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order proceedings with
respect thereto be instituted or pending or threatened. If required, the
Prospectus shall have been filed with the Commission in the manner and within
the time period required by Rule 424(b) under the Act.
(b) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Bernstein & Wasserman, LLP,
counsel for the Company, in form and substance satisfactory to counsel for the
Underwriters, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with all requisite corporate power and authority to own its
properties and conduct its business as described in the Registration Statement
and Prospectus and is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other jurisdiction in which the
ownership or leasing of its properties or conduct of its business requires such
qualification except where the failure to qualify or be licensed will not have a
Material Adverse Effect;
(ii) the authorized capitalization of the Company as
of the date hereof is as set forth under "Capitalization" in the Prospectus; all
shares of the Company's outstanding Preferred Stock (as defined in the
Prospectus) and Common Stock requiring authorization for issuance by directors
have been duly authorized and upon payment of consideration therefor, will be
validly issued, fully paid and non-assessable and conform in all material
respects to the description thereof contained
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in the Prospectus; to such counsel's knowledge the outstanding shares of
Preferred Stock and Common Stock of the Company have not been issued in
violation of the preemptive rights of any shareholder and the shareholders of
the Company do not have any preemptive rights or other rights to subscribe for
or to purchase, nor are there any restrictions upon the voting or transfer of
any of the Preferred Stock or the Common Stock except as provided in the
Prospectus; the Common Stock, the Warrants, the Underwriters' Purchase Option,
and the Warrant Agreement conform in all material respects to the respective
descriptions thereof contained in the Prospectus; the Shares and Warrants have
been, and the shares of Common Stock to be issued upon exercise of the Warrants,
the Underwriters' Purchase Option, and all other outstanding warrants upon
issuance in accordance with the terms of Underwriters' Purchase Option, will
have been, duly authorized and, when issued and delivered in accordance with
their respective terms, will be duly and validly issued, fully paid,
non-assessable, free of preemptive rights and no personal liability will attach
to the ownership thereof; all prior sales by the Company of the Company's
securities have been made in compliance with or under an exemption from
registration under the Act and applicable state securities laws; a sufficient
number of Units and shares of Common Stock has been reserved for issuance upon
exercise of the Warrants and the Underwriters' Purchase Option, and to the best
of such counsel's knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Units as contemplated by this Agreement gives
rise to any registration rights other than those which have been waived or
satisfied for or relating to the registration of any shares of Common Stock or
as otherwise being exercised in connection with the concurrent offering;
(iii) this Agreement, the Underwriters' Purchase
Option, and the Warrant Agreement have been duly and validly authorized,
executed, and delivered by the Company;
(iv) the certificates evidencing the shares of Common
Stock comply with the Delaware General Corporation Law; the Warrants will be
exercisable for Shares of Common Stock in accordance with the terms of the
Warrants and at the prices therein provided for;
(v) except as otherwise disclosed in the Registration
Statement, such counsel knows of no pending or threatened legal or governmental
proceedings to which the Company is a party which would materially adversely
affect the business, property, financial condition, or operations of the
Company; or which question the validity of the Units, this Agreement, the
Warrant Agreement, or the Underwriters' Purchase Option, or of any action taken
or to be taken by the Company pursuant to this Agreement, the Warrant Agreement,
or the Underwriters' Purchase Option; to such counsel's knowledge there are no
governmental proceedings or regulations required to be described or referred to
in the Registration Statement which are not so described or referred to;
(vi) the execution and delivery of this Agreement,
the Warrant Agreement, or the Underwriters' Purchase Option and the incurrence
of the obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated, will not result in a breach or
violation of, or constitute a default under the certificate or articles of
incorporation or by-laws of the Company, or to the best knowledge of counsel
after due inquiry, in the performance or observance of any material obligations,
agreement, covenant, or condition contained in any bond, debenture, note, or
other evidence of indebtedness or in any material contract, indenture, mortgage,
loan agreement, lease, joint venture, or other agreement or instrument to which
the Company is a party or by which it or any of its properties is bound or in
violation of any order, rule,
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regulation, writ, injunction, or decree of any government, governmental
instrumentality, or court, domestic or foreign, the result of which would have a
Material Adverse Effect;
(vii) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for that purpose have been instituted or are pending before, or
threatened by, the Commission; the Registration Statement and the Prospectus
(except for the financial statements and other financial data contained therein,
or omitted therefrom, as to which such counsel need express no opinion) as of
the Effective Date comply as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations;
(viii) in the course of preparation of the
Registration Statement and the Prospectus such counsel has participated in
conferences with the President, Executive Vice President and Chairman of the
Board of the Company with respect to the Registration Statement and Prospectus
and our discussions did not disclose to such counsel any information which gives
such counsel reason to believe that the Registration Statement or any amendment
thereto at the time it became effective contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto, and other financial
information (including without limitation, the pro forma financial information)
and schedules contained therein, as to which such counsel need express no
opinion);
(ix) all descriptions in the Registration Statement
and the Prospectus, and any amendment or supplement thereto, of contracts and
other agreements to which the Company is a party are accurate and fairly present
in all material respects the information required to be shown, and such counsel
is familiar with all contracts and other agreements referred to in the
Registration Statement and the Prospectus and any such amendment or supplement
or filed as exhibits to the Registration Statement, and such counsel does not
know of any contracts or agreements to which the Company is a party of a
character required to be summarized or described therein or to be filed as
exhibits thereto which are not so summarized, described, or filed;
(x) no authorization, approval, consent, or license
of any governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale, or delivery of the Units by
the Company, in connection with the execution, delivery, and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Underwriters' Purchase Option or the
Securities underlying the Underwriters' Purchase Option, other than
registrations or qualifications of the Units under applicable state or foreign
securities or Blue Sky laws and registration under the Act; and
(xi) the Shares and the Warrants have been duly
authorized for quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
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<PAGE>
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Representative or counsel for the
Representative shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of Delaware upon opinions of counsel
satisfactory to the Representative, in which case the opinion shall state that
they have no reason to believe that the Underwriters and they are not entitled
to so rely.
(c) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Hannoch Weisman, counsel for
KN2B, Inc., in form and substance satisfactory to counsel for the Underwriters,
to the effect that:
(i) KN2B, Inc. has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with all requisite corporate power and authority to own its
properties and conduct its business as described in the Registration Statement
and Prospectus and is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other jurisdiction in which the
ownership or leasing of its properties or conduct of its business requires such
qualification except where the failure to qualify or be licensed will not have a
Material Adverse Effect;
(ii) KN2B, Inc.'s authorized shares of capital stock
consist of 2,999 shares of capital stock, par value $.01 per share, 1,500 of
which are shares of Class A Common Stock ("Class A Stock"), and 1,499 shares of
which are shares of Class B Common Stock ("Class B Stock"). As of the date
hereof, (i) 1,500 shares of Class A Stock are held beneficially and of record by
ML Direct, Inc., and (ii) 1,499 shares of Class B Stock are held beneficially
and of record by HSN Direct Joint Venture. All of such outstanding shares of
Class A Stock and Class B Stock are validly issued, fully paid and
nonassessable. There are no outstanding preemptive or other preferential rights,
conversion rights, or other rights, options, warrants, or agreements granted or
issued by or binding upon KN2B, Inc. for the purchase or acquisition of any
shares of its capital stock.
(iii) The License Agreement constitutes the legal,
valid and binding obligation of the parties thereto, enforceable in accordance
with the terms thereof. To the best knowledge of such counsel, each of the
parties to the License Agreement are in compliance with the terms thereof, and
no event or condition has occurred or is existing which, with the passage of
time or the giving of notice, or both, could constitute a default under, or
breach of the terms of, the License Agreement. The License Agreement provides
KN2B, Inc. with a valid license to use the trademarks set forth in Exhibit B
thereto and the other properties described therein in the manner and in the
geographic area described therein (and as described in the Registration
Statement).
(iv) To the best knowledge of such counsel, there is
neither pending nor threatened any action, suit, proceeding or claim to which
KN2B, Inc. is a party or by which any of its properties or assets is subject.
(d) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Cohn & Birnbaum P.C., counsel to
the Representative.
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(e) The Underwriters shall have received a letter prior to the
effective date of the Registration Statement and again on and as of the First
Closing Date from Moore Stephens, P.C., independent public accountants for the
Company, substantially in the form reasonably acceptable to the Representative
and including estimates of the Company's revenues and results of operations for
the period ending at the end of the month immediately preceding the effective
date.
(f) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects with the same effect as if made on and as of the
Closing Dates taking into account for the Option Closing Dates the effect of the
transactions contemplated hereby and the Company shall have performed all of its
obligations hereunder and satisfied all the conditions on its part to be
satisfied at or prior to such Closing Date; (ii) the Registration Statement and
the Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and shall in all material respects conform to the
requirements thereof, and neither the Registration Statement nor the Prospectus
nor any amendment or supplement thereto shall contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; (iii) there shall
have been, since the respective dates as of which information is given, no
material adverse change, or to the Company's knowledge, any development
involving a prospective material adverse change, in the business, properties,
condition (financial or otherwise), results of operations, capital stock,
long-term or short-term debt, or general affairs of the Company from that set
forth in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the effective
date of the Registration Statement, and the Company shall not have incurred any
material liabilities or entered into any material agreement not in the ordinary
course of business other than as referred to in the Registration Statement and
Prospectus; (iv) except as set forth in the Prospectus, no action, suit, or
proceeding at law or in equity shall be pending or threatened against the
Company which would be required to be set forth in the Registration Statement,
and no proceedings shall be pending or threatened against the Company before or
by any commission, board, or administrative agency in the United States or
elsewhere, wherein an unfavorable decision, ruling, or finding would materially
and adversely affect the business, property, condition (financial or otherwise),
results of operations, or general affairs of the Company, and (v) the
Underwriters shall have received, at the First Closing Date, a certificate
signed by each of the President and the principal operating officer of the
Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (e).
(g) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Underwriters to purchase and pay for the Option
Units referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective
at the Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending, or, to the Underwriter's knowledge or the
knowledge of the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for additional information
shall have been complied with to the satisfaction of the Commission.
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(ii) At the Option Closing Date there shall have been
delivered to the Representative the signed opinion of Bernstein & Wasserman,
LLP, counsel to the Company, dated as of the Option Closing Date, in form and
substance reasonably satisfactory to Cohn & Birnbaum P.C., counsel to the
Representative, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date pursuant to
Sections 4(b) hereof, except that such opinion, where appropriate, shall cover
the Option Units.
(iii) At the Option Closing Date there shall have be
delivered to the Representative a certificate of the President and the principal
operating officer of the Company, dated the Option Closing Date, in form and
substance reasonably satisfactory to Cohn & Birnbaum P.C., counsel to the
Representative, substantially the same in scope and substance as the certificate
furnished to you at the First Closing Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date there shall have been
delivered to the Representative a letter in form and substance satisfactory to
the Representative from Moore and Stephens, P.C., dated the Option Closing Date
and addressed to the Representative confirming the information in their letter
referred to in Section 4(e) hereof and stating that nothing has come to their
attention during the period from the ending date of their review referred to in
said letter to a date not more than five business days prior to the Option
Closing Date, which would require any change in said letter if it were required
to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option Units shall
be reasonably satisfactory in form and substance to you, and you and Cohn &
Birnbaum P.C., counsel to the Representative, shall have been furnished with all
such documents, certificates, and opinions as you may reasonably request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties, or statements of the
Company or its compliance with any of the covenants or conditions contained
herein.
(h) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to either of
the Closing Dates, for members of the NASD to execute transactions (as principal
or agent) in the Shares, the Warrants, or Common Stock and no proceedings for
the taking of such action shall have been instituted or shall be pending, or, to
the knowledge of the Underwriters or the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it has no
knowledge that any such action is in fact contemplated by the Commission or the
NASD.
(i) At the First Closing Date, the Representative and the
Company shall have entered into a consulting agreement, in form and substance
satisfactory to counsel for the Underwriter, which shall provide, without
limitation, that (i) the Company shall engage the Representative as a consultant
to the Company for a period of five (5) years, and (ii) the Representative shall
be paid an annual retainer fee of $20,000 per year (which amount shall be paid
in full in advance on the First Closing Date).
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(j) On or prior to the First Closing Date, the Company shall
have obtained written releases from any and all other investment banking firms
having rights to underwrite an offering of the Company's securities.
(k) If any of the conditions herein provided for in this
Section shall not have been fulfilled in all material respects as of the date
indicated, this Agreement and all obligations of the Underwriters under this
Agreement may be cancelled at, or at any time prior to, either of the Closing
Dates by the Underwriters notifying the Company of such cancellation in writing
or by telegram at or prior to the applicable Closing Date. Any such cancellation
shall be without liability of any of the Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Units is subject to the following conditions:
(a) The Registration Statement shall have become effective not
later than 10:00 a.m. New York time, on the day following the date of this
Agreement, or on such later date as the Company and the Representative may agree
in writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued under the Act
or any proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Units on
exercise of the option provided for in Section 2(b) hereof shall be affected.
6. Indemnification
(a) The Company agrees (i) to indemnify and hold harmless each
of the Underwriters and each person, if any, who controls any of the
Underwriters within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act against any losses, claims, damages, or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which any such Underwriter or such controlling person may
become subject, under the Act or otherwise, and (ii) to reimburse, as incurred,
each of the Underwriters and such controlling persons for any legal or other
expenses reasonably incurred in connection with investigating, defending against
or appearing as a third party witness in connection with any losses, claims,
damages, or liabilities; insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) relating to (i) and (ii) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in (A) the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, (B) any blue sky application
or other document executed by the Company specifically for that purpose
containing written information specifically furnished by the Company and filed
in any state or other jurisdiction in order to qualify any or all of the Units
under the securities laws thereof (any such application, document or information
being hereinafter called a "Blue Sky Application"), or arise out of or are based
upon the omission or alleged omission to state in the Registration Statement,
any Preliminary Prospectus, Prospectus, or any amendment or supplement thereto,
or in any Blue Sky
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Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be required to indemnify any of the Underwriters and any controlling person
or be liable in any such case to the extent, but only to the extent, that any
such loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any of the Underwriters specifically for use in the
preparation of the Registration Statement or any such amendment or supplement
thereof or any such Blue Sky Application or any such preliminary Prospectus or
the Prospectus or any such amendment or supplement thereto, provided, further
that the indemnity with respect to any Preliminary Prospectus shall not be
applicable on account of any losses, claims, damages, liabilities, or litigation
arising from the sale of Units to any person if a copy of the Prospectus was not
delivered to such person at or prior to the written confirmation of the sale to
such person. This indemnity will be in addition to any liability which the
Company may otherwise have.
(b) Each of the Underwriters will indemnify and hold harmless
the Company, each of its directors, each nominee (if any) for director named in
the Prospectus, each of its officers who have signed the Registration Statement
and each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages, or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and reasonable attorneys' fees) to which the Company or any
such director, nominee, officer, or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by any of the
Underwriters specifically for use in the preparation thereof and for any
violation by any of the Underwriters in the sale of such Units of any applicable
state or federal law or any rule, regulation or instruction thereunder relating
to violations based on unauthorized statements by any of the Underwriters or any
of their representatives, provided that such violation is not based upon any
violation of such law, rule, or regulation or instruction by the party claiming
indemnification or inaccurate or misleading information furnished by the Company
or its representatives, including information furnished to the Underwriters as
contemplated herein. This indemnity agreement will be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
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it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the reasonable fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party and in
the reasonable judgment of the counsel to the indemnified party, it is advisable
for the indemnified party to be represented by separate counsel (in which case
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party, which firm shall be designated in writing by the indemnified
party). No settlement of any action against an indemnified party shall be made
without the consent of the indemnified party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnified party. If it
is ultimately determined that indemnification is not permitted, then an
indemnified party will return all monies advanced to the indemnifying party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which the indemnification provided in
Section 6 hereof is requested but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case,
then the Company and each person who controls the Company, in the aggregate, and
the Underwriters shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) (after contribution from
others) in such proportions that the Underwriters are responsible in the
aggregate for that portion of such losses, claims, damages, or liabilities
represented by the percentage that the underwriting discount per Share appearing
on the cover page of the Prospectus bears to the public offering price appearing
thereon and the Company shall be responsible for the remaining portion,
provided, however, that if such allocation is not permitted by applicable law,
then allocated in such proportion as is appropriate to reflect relative benefits
but also the relative fault of the Company and the Underwriters and controlling
persons, in the aggregate, in connection with the statements or omissions which
resulted in such damages and other relevant equitable considerations shall also
be considered. The relative fault shall be determined by reference to, among
other things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact, such statement or omission relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if the
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respective obligations of the Company and the Underwriters contribute pursuant
to this Section 7 were to be determined by pro rata or per capita allocation of
the aggregate damages or by any other method of allocation that does not take
account of the equitable considerations referred to in this Section 7. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 1(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. As used in this paragraph, the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then the Underwriters and
each person who controls any of the Underwriters shall be entitled to
contribution from the Company, its officers, directors, and controlling persons,
and the Company, its officers, directors, and controlling persons shall be
entitled to contribution from the Underwriters to the full extent permitted by
law. The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company and the Underwriters. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
8. Costs and Expenses
(a) Whether or not this Agreement becomes effective or the
sale of the Units to the Underwriters is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing, and distribution under the Act of the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto), Preliminary Prospectus, and the Prospectus, as
amended or supplemented, the fee of the NASD in connection with the filing
required by the NASD relating to the offering of the Units contemplated hereby;
all expenses, including reasonable fees and disbursements of counsel to the
Underwriters, in connection with the qualification of the Securities or the
Units under the state securities or blue sky laws which the Representative shall
designate; the cost of printing and furnishing to the Underwriters copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, and the Blue Sky Memorandum, any fees relating to the listing of the
Shares, the Warrants, and Common Stock on NASDAQ or any other securities
exchange; the cost of printing the certificates representing the Securities,
and the fees of the transfer agent. The Company shall pay any and all taxes
(including any transfer, franchise, capital stock, or other tax imposed by any
jurisdiction) on sales to the Underwriters hereunder. The Company will also pay
all costs and expenses incident to the furnishing of any amended Prospectus or
of any supplement to be attached to the Prospectus as called for in Section 3(a)
of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at
the First Closing Date pay to the Representative a non-accountable expense
allowance of $210,000.00. In the event the over-allotment option is exercised,
the Company shall pay to the Representative at the Option Closing Date an
additional amount in the aggregate equal to 3.0% of the gross proceeds received
upon exercise of the over-allotment option. In the event the transactions
contemplated hereby are not consummated by reason of any action by the
Representative (except if such prevention is based upon a breach by the Company
of any covenant, representation, or
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<PAGE>
warranty contained herein or because any other condition to the Representative's
obligations hereunder required to be fulfilled by the Company is not fulfilled)
the Company shall not be liable for any expenses of the Representative,
including the Representative's legal fees. In the event the transactions
contemplated hereby are not consummated by reason of the Company being unable to
perform its obligations hereunder in all material respects, the Company shall be
liable for the actual accountable out-of-pocket expenses of the Representative,
including reasonable legal fees, not to exceed in the aggregate $100,000.00.
(c) Except as disclosed in the Registration Statement, no
person is entitled either directly or indirectly to compensation from the
Company, from any of the Underwriters or from any other person for services as a
finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless each of the Underwriters against any losses, claims,
damages, or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all reasonable attorneys' fees), to which any of the
Underwriters or person may become subject insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon the claim of any person (other than an employee of the party claiming
indemnity) or entity that he or it is entitled to a finder's fee in connection
with the proposed offering by reason of such person's or entity's influence or
prior contact with the indemnifying party.
9. Effective Date. The Agreement shall become effective upon its
execution except that the Representative may, at its option, delay its
effectiveness until 11:00 a.m., New York time on the first full business day
following the effective date of the Registration Statement, or at such earlier
time on such business day after the effective date of the Registration Statement
as the Representative in its discretion shall first commence the initial public
offering of the Units. The time of the initial public offering shall mean the
time of release by the Representative of the first newspaper advertisement with
respect to the Units, or the time when the Units are first generally offered by
the Underwriters to dealers by letter or telegram, whichever shall first occur.
This Agreement may be terminated by the Underwriter at any time before it
becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13,
14, and 15 shall remain in effect notwithstanding such termination.
10. Termination
(a) After this Agreement becomes effective, this Agreement,
except for Sections 3(c), 6, 7, 8, 12, 13, 14, and 15 hereof, may be terminated
at any time prior to the First Closing Date, and the option referred to in
Section 2(b) hereof, if exercised, may be cancelled at any time prior to the
Option Closing Date, by the Representative if in the Representative's judgment
it is impracticable to offer for sale or to enforce contracts made by the
Underwriter for the resale of the Securities agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident, or other calamity, or
from any labor dispute or court or government action, order, or decree, (ii)
trading in securities on the New York Stock Exchange or the American Stock
Exchange having been suspended or limited, (iii) material governmental
restrictions having been imposed on trading in securities generally (not in
force and effect on the date hereof), (iv) a banking moratorium having been
declared by federal or New York state authorities, (v) an outbreak of major
international hostilities involving the United States or other substantial
national or international calamity having occurred, (vi) a pending or threatened
legal or governmental proceeding or action relating generally to the
23
<PAGE>
Company's business, or a notification having been received by the Company of the
threat of any such proceeding or action, which would materially adversely affect
the Company; (vii) except as contemplated by the Prospectus, the Company is
merged with or consolidated into or acquired by another company or group or
there exists a binding legal commitment for the foregoing or any other material
change of ownership or control occurs; (viii) the passage by the Congress of the
United States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by the Representative to have a
material adverse impact on the business, financial condition, or financial
statements of the Company (ix) any material adverse change in the financial or
securities markets beyond normal market fluctuations having occurred since the
date of this Agreement, or (x) any material adverse change having occurred,
since the respective dates of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects, or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business.
(b) If the Representative elects to prevent this Agreement
from becoming effective or to terminate this Agreement as provided in this
Section 10, the Company shall be promptly notified by the Representative, by
telephone or telegram, confirmed by letter.
11. Underwriters' Purchase Option. At or before the First Closing Date,
the Company will sell the Underwriters or their designees for a consideration of
$48.00, and upon the terms and conditions set forth in the form of Underwriter's
Purchase Option annexed as an exhibit to the Registration Statement, an
Underwriters' Purchase Option to purchase an aggregate of 48,000 Units. In the
event of conflict in the terms of this Agreement and the Underwriter's Purchase
Option with respect to language relating to the Underwriters' Purchase Option,
the language of the Underwriters' Purchase Option shall control.
12. Representations and Warranties of the Underwriters. The
Underwriters each represent and warrant to the Company that each is registered
as a broker-dealer in all jurisdictions in which each is offering the Units and
that each will comply with all applicable state or federal laws relating to the
sale of the Units, including but not limited to, violations based on
unauthorized statements by the Underwriters or their representatives.
13. Representations, Warranties and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties, and other
statements of the Company and the Underwriters and the undertakings set forth in
or made pursuant to this Agreement will remain in full force and effect until
three years from the date of this Agreement, regardless of any investigation
made by or on behalf of the Underwriters, the Company, or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Securities and the termination of this Agreement.
14. Notice. Any communications specifically required hereunder to be in
writing, if sent to the Underwriters, will be mailed, delivered, or telecopied
and confirmed to them at Patterson Travis, Inc., 1 Battery Park Plaza, New York,
New York 10004, with a copy sent to Cohn & Birnbaum P.C., 100 Pearl Street,
Hartford,
24
<PAGE>
Connecticut 06103-4500, Attention: Michael F. Mulpeter, Esq., or if sent to the
Company, will be mailed, delivered, or telecopied and confirmed to it at 300
Park Avenue, New York, New York 10022, with a copy sent to Bernstein &
Wasserman, LLP, 950 Third Avenue, New York, New York 10022, Attention: Steven
Wasserman, Esq. Notice shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication.
15. Parties in Interest. The Agreement herein set forth is made solely
for the benefit of the Underwriters, the Company, any person controlling the
Company or any of the Underwriters, and directors of the Company, nominees for
directors (if any) named in the Prospectus, its officers who have signed the
Registration Statement, and their respective executors, administrators,
successors, assigns and no other person shall acquire or have any right under or
by virtue of this Agreement. The term "successors and assigns" shall not include
any purchaser, as such purchaser, from any of the Underwriters of the
Securities.
16. Applicable Law. This Agreement will be governed by, and construed
in accordance with, of the laws of the State of New York applicable to
agreements made and to be entirely performed within New York.
17. Counterparts. This agreement may be executed in one or more
counterparts each of which shall be deemed to constitute an original and shall
become effective when one or more counterparts have been signed by each of the
parties hereto and delivered to the other parties (including by fax, followed by
original copies by overnight mail).
18. Entire Agreement; Amendments. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings, and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in writing, signed by the
Representative and the Company.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
ML DIRECT INC.
By ______________________________
Its
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<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
PATTERSON TRAVIS, INC.
By ______________________________
Its
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<PAGE>
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY
SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY
KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE
DATE.
ML DIRECT INC.
480,000 UNITS
EACH UNIT CONSISTING OF TWO (2) SHARES OF COMMON STOCK,
AND ONE (1) CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
SELECTED DEALERS AGREEMENT
_____________________, 1996
Dear Sirs:
(1) Patterson Travis, Inc., named as the Representative in the enclosed
Preliminary Prospectus ("the Representative"), proposes to offer on a firm
commitment basis, subject to the terms and conditions and execution of the
Underwriting Agreement, (i) 480,000 units, each unit consisting of two (2)
shares of common stock (including any additional units offered pursuant to an
over-allotment option, the "Units"), par value $.0001 per share, of ML Direct
Inc. (the "Company") (the "Common Stock"), and (ii) one (1) Class A Redeemable
Common Stock purchase warrant (the "Warrant"). Each Warrant entitles the holder
to purchase one share of Common Stock of the Company. The Units are more
particularly described in the enclosed Preliminary Prospectus, additional copies
of which as well as the Prospectus (after effective date) will be supplied in
reasonable quantities upon request.
(2) The Representative is soliciting offers to buy Units, upon the
terms and conditions hereof, from Selected Dealers, who are to act as
principals, including you, who are (i) registered with the Securities and
Exchange Commission ("the Commission") as broker-dealers under the Securities
Exchange Act of 1934, as amended ("the 1934 Act"), and members in good standing
with the National Association of Securities Dealers, Inc. ("the NASD"), or (ii)
dealers of institutions with their principal place of business located outside
the United States, its territories and possessions and not registered under the
1934 Act who agree to make no sales within the United States, its territories
and possessions or to persons who are nationals thereof or residents therein
and, in making sales, to comply with the NASD's interpretation with respect to
free-riding and withholding.
<PAGE>
Units are to be offered to the public at a price of $15.00 per Unit. Selected
Dealers will be allowed a concession of not less than _____% of the offering
price. You will be notified of the precise amount of such concession prior to
the effective date of the Registration Statement. The offer is solicited subject
to the issuance and delivery of the Units and their acceptance by the
Underwriter, to the approval of legal matters by counsel and to the terms and
conditions as herein set forth.
(3) Your offer to purchase may be revoked in whole or in part without
obligation or commitment of any kind by you any time prior to acceptance and no
offer may be accepted by us and no sale can be made until after the registration
statement covering the Units has become effective with the Commission. Subject
to the foregoing, upon execution by you of the Offer to Purchase below and the
return of same to us, you shall be deemed to have offered to purchase the number
of Units set forth in your offer on the basis set forth in paragraph 2 above.
Any oral notice by us of acceptance of your offer shall be immediately followed
by written or telegraphic confirmation preceded or accompanied by a copy of the
Prospectus. If a contractual commitment arises hereunder, all the terms of this
Selected Dealers Agreement shall be applicable. We may also make available to
you an allotment to purchase Units, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an exchange of
confirmations reflecting completed transactions. All references hereafter in
this Agreement to the purchase and sale of the Units assume and are applicable
only if contractual commitments to purchase are completed in accordance with the
foregoing.
(4) You agree that in re-offering the Units, if your offer is accepted
after the Effective Date, you will make a bona fide public distribution of same.
You will advise us upon request of the Units purchased by you remaining unsold,
and we shall have the right to repurchase such Units upon demand at the public
offering price less the concession as set forth in paragraph 2 above. Any of the
Units purchased by you pursuant to this Agreement are to be re-offered by you to
the public at the public offering price, subject to the terms hereof and shall
not be offered or sold by you below the public offering price before the
termination of this Agreement.
(5) Payment for Units which you purchase hereunder shall be made by you
on such date as we may determine by certified or bank cashier's check payable in
New York Clearinghouse funds to Patterson Travis, Inc. Certificates for the
securities shall be delivered as soon as practicable at the offices of Patterson
Travis, Inc., One Battery Park Plaza, New York, New York 10004. Unless
specifically authorized by us, payment by you may not be deferred until delivery
of certificates to you.
(6) A registration statement covering the offering has been filed with
the Commission in respect to the Units. You will be promptly advised when the
registration statement becomes effective. Each Selected Dealer in selling the
Units pursuant hereto agrees (which agreement shall also be for the benefit of
the Company) that it will comply with the applicable requirements of the
Securities Act of 1933 and of the 1934 Act and any applicable rules and
regulations issued under said Acts. No person is authorized by the Company or by
the Representative to give any information or to make any representations other
than those contained in the Prospectus in connection with the sale of the Units.
Nothing contained herein shall render the Selected Dealers a member of the
underwriting group or partners with the Representative or with one another.
2
<PAGE>
(7) You will be informed by us as to the states in which we have been
advised by counsel the Units have been qualified for sale or are exempt under
the respective securities or blue sky laws of such states, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell Units in any state.
(8) The Representative shall have full authority to take such action as
we may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. The Representative shall not be under any liability to you,
except such as may be incurred under the Securities Act of 1933 and the rules
and regulations thereunder, except for lack of good faith and except for
obligations assumed by us in this Agreement, and no obligation on our part shall
be implied or inferred herefrom.
(9) Selected Dealers will be governed by the conditions herein set
forth until this Agreement is terminated. This Agreement will terminate when the
offering is completed. Nothing herein contained shall be deemed a commitment on
our part to sell you any Units; such contractual commitment can only be made in
accordance with the provisions of paragraph 3 hereof.
(10) You represent that you are a member in good standing of the
National Association of Securities Dealers, Inc. ("Association") and registered
as a broker-dealer or are not eligible for membership under Section I of the
By-Laws of the Association who agree to make no sales within the United States,
its territories, or possessions or to persons who are nationals thereof or
residents therein and, in making sales, to comply with the NASD's interpretation
with respect to free-riding and withholding. Your attention is called to the
following: (a) Article III, Sections 1, 8, 24, 25, 26 and 36 of the Rules of
Fair Practice of the Association and the interpretations of said Section
promulgated by the Board of Governors of such Association including the
interpretation with respect to "Free-Riding and Withholding"; (b) Section 10(b)
of the 1934 Act and Rules 10b-6 and 10b-10 of the general rules and regulations
promulgated under said Act; (c) Securities Act Release #3907; (d) Securities Act
Release #4150; and (e) Securities Act Release #4968 requiring the distribution
of a Preliminary Prospectus to all persons reasonably expected to be purchasers
of Units from you at least 48 hours prior to the time you expect to mail
confirmations. You, if a member of the Association, by signing this Agreement,
acknowledge that you are familiar with the cited law, rules, and releases, and
agree that you will not directly and/or indirectly violate any provisions of
applicable law in connection with your participation in the distribution of the
Units. You further agree not to execute any transaction in Units in a
discretionary account without the specific written approval of the customer.
(11) In addition to compliance with the provisions of paragraph 10
hereof, you will not, until advised by us in writing or by wire that the entire
offering has been distributed and closed, bid for or purchase Units in the open
market or otherwise make a market in such securities or otherwise attempt to
induce others to purchase such securities in the open market. Nothing contained
in this paragraph 11 shall, however, preclude you from acting as agent in the
execution of unsolicited orders of customers in transactions effectuated for
them through a market maker.
(12) You understand that the Representative may in connection with the
offering engage in stabilizing transactions. If the Representative contracts for
or purchases in the open market in connection with such stabilization any Units
sold to you hereunder and not effectively placed by you, the Representative may
charge you the
3
<PAGE>
Selected Dealer's concession originally allowed you on the Units so purchased,
and you agree to pay such amount to us on demand.
(13) By submitting an Offer to Purchase you confirm that your net
capital is such that you may, in accordance with Rule 15c3-1 adopted under the
1934 Act, agree to purchase the number of Units you may become obligated to
purchase under the provisions of this Agreement.
(14) You acknowledge that the offering of the Units is being made in
accordance with the requirements of Schedule E to the By-Laws of the NASD.
Accordingly, as required by Schedule E to the By-Laws of the NASD, you agree
that (i) you shall not recommend to a customer the purchase of Units unless you
shall have reasonable grounds to believe that the recommendation is suitable for
such customer on the basis of information furnished by such customer concerning
the customer's investment objectives, financial situation and needs, and any
other information known to you, (ii) in connection with all such determinations,
you shall maintain in your files the basis for such determination, and (iii) you
shall not execute any transaction in Units in a discretionary account without
the prior specific written approval of the customer.
(15) All communications from you should be directed to us at the office
of the Underwriter, Patterson Travis, Inc., One Battery Park Plaza, New York,
New York 10004. All communications from us to you shall be directed to the
address to which this letter is mailed.
Very truly yours,
PATTERSON TRAVIS, INC.
By ______________________________
Its
ACCEPTED AND AGREED TO AS OF
THE _____ DAY OF ________, 1996
_____________________________________
[Name of Dealer]
By __________________________________
Its
4
<PAGE>
To: Patterson Travis, Inc.
One Battery Park Plaza
New York, New York 10004
We hereby subscribe for _____________ Units of ML Direct Inc., each
consisting of two (2) shares of Common Stock, par value $.0001 per share, of ML
Direct Inc., and one (1) Class A Redeemable Common Stock Purchase Warrant, in
accordance with the terms and conditions stated in the foregoing letter. We
hereby acknowledge receipt of the Prospectus referred to in the first paragraph
thereof relating to said Units. We further state that in purchasing said Units
we have relied upon said Prospectus and upon no other statement whatsoever,
whether written or oral. We confirm that we are a dealer actually engaged in the
investment banking or securities business and that we are either (i) a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") or (ii) a dealer with its principal place of business located outside
the United States, its territories and its possessions and not registered as a
broker or dealer under the Securities Exchange Act of 1934, as amended, who
hereby agrees not to make any sales within the United States, its territories or
its possessions or to persons who are nationals thereof or residents therein. We
hereby agree to comply with the provisions of Section 24 of Article III of the
Rules of Fair Practice of the NASD, and if we are a foreign dealer and not a
member of the NASD, we also agree to comply with the NASD's interpretation with
respect to free-riding and withholding, to comply, as though we were a member of
the NASD, with the provisions of Sections 8 and 36 of Article III thereof as
that Section applies to non-member foreign dealers.
________________________________________
[Name of Dealer]
By _____________________________________
Address
________________________________________
________________________________________
Dated ____________________, 1996
<PAGE>
WARRANT AGREEMENT
AGREEMENT, dated as of this _____ day of _____________________, 1996,
by and between ML DIRECT INC., a Delaware corporation ("Company"), and AMERICAN
STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with a public offering of up to 552,000 units
("Units"), each Unit consisting of two (2) shares of the Company's Common
Stock, $.0001 par value ("Shares"), and one (1) Class A Redeemable Common Stock
Purchase Warrant ("Warrant") pursuant to an underwriting agreement (the
"Underwriting Agreement") dated _____________________, 1996 between the Company
and Patterson Travis, Inc. (the "Representative"), and the issuance to (i) the
Representative or its designees of an Underwriter's Purchase Option to purchase
48,000 additional Units dated as of _____________________, 1996 (collectively
referred to herein as the "Underwriter's Purchase Option"), and (ii) certain
investors of bridge units including 600,000 shares of Common Stock, 500,000
shares of preferred stock of the Company, and 2,000,000 Warrants (the "Bridge
Units"), the Company will issue up to 2,600,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties
hereto agree as follows:
1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the
Company, which at the date hereof consists of __________ authorized shares,
$.0001 par value, and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect to the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution, or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include (i) only shares of such
class designated in the Company's Certificate of Incorporation as Common Stock
on the date of the original issue of the Warrants or (ii), in the case of any
reclassification, change, consolidation, merger, sale, or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities, or
<PAGE>
property provided for in such section or (iii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon exercise of the Warrants as a result of a subdivision or combination of
shares or consisting of a change in par value, or from par value to no par
value, or from no par value to par value, such shares of Common Stock as so
reclassified or changed.
(b) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located at the date hereof at 40 Wall
Street, New York, New York 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date
on which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean
____________________, 1997.
(e) "Purchase Price" shall mean the purchase price per share
to be paid upon exercise of each Warrant in accordance with the terms hereof,
which price shall be $8.00 per share, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof, and subject to the Company's
right, in its sole discretion, to reduce the Purchase Price upon notice to all
warrantholders.
(f) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.05 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as
of any particular date, the person in whose name the certificate representing
the Warrant shall be registered on that date on the books maintained by the
Warrant Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, as the Company's transfer agent, or its authorized successor, as
such.
(i) "Warrant Expiration Date" shall mean 5:00 p.m. (New York
time) on _____________________, 2001 or the Redemption Date as defined in
Section 8, whichever is earlier; provided that if such date shall in the State
of New York be a holiday or a day on which banks are authorized or required to
close, then 5:00 p.m. (New York time) on the next following day which in the
State of New York is not a holiday or a day on which banks are authorized or
required to close. Upon notice to all warrantholders the Company shall have the
right to extend the warrant expiration date.
2. Warrants and Issuance of Warrant Certificates
(a) A Warrant initially shall entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase one (1) share
of Common Stock upon the exercise
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thereof, in accordance with the terms hereof, subject to modification and
adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and delivered to the Warrant Agent. Upon
written order of the Company signed by its President or Chairman or a Vice
President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued, and delivered by the Warrant
Agent.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 2,600,000 shares
of Common Stock, subject to adjustment as described herein, upon the exercise
of Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date,
upon the exercise of fewer than all Warrants represented by any Warrant
Certificate, to evidence any unexercised Warrants held by the exercising
Registered Holder, (iii) those issued upon any transfer or exchange pursuant to
Section 6, (iv) those issued in replacement of lost, stolen, destroyed, or
mutilated Warrant Certificates pursuant to Section 7, (v) those issued pursuant
to the Unit Purchase Option, and (vi) those issued at the option of the
Company, in such form as may be approved by the its Board of Directors, to
reflect any adjustment or change in the Purchase Price, the number of shares of
Common Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 9 hereof.
(e) Pursuant to the terms of the Underwriter's Purchase
Option, the Representative may purchase up to 48,000 Warrants.
3. Form and Execution of Warrant Certificates
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers, or other marks of
identification or designation and such legends, summaries, or endorsements
printed, lithographed, or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage or to the requirements of
Section 2(b). The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange, or in lieu of
mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in
registered form.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President, or any Vice President and by
its Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned.
In case any officer
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of the Company who shall have signed any of the Warrant Certificates shall
cease to be an officer of the Company or to hold the particular office
referenced in the Warrant Certificate before the date of issuance of the
Warrant Certificates or before countersignature by the Warrant Agent and issue
and delivery thereof, such Warrant Certificates may nevertheless be
countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4 hereof.
4. Exercise. Each Warrant may be exercised by the Registered Holder
thereof at any time on or after the Initial Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein and in the applicable Warrant Certificate. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of the Warrant. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons
entitled to receive the same, a certificate or certificates for the securities
deliverable upon such exercise (plus a certificate for any remaining
unexercised Warrants of the Registered Holder), provided that the Warrant Agent
shall refrain from causing such issuance of certificates pending clearance of
checks received in payment of the Purchase Price pursuant to such Warrants.
Upon the exercise of any Warrant and clearance of the funds received, the
Warrant Agent shall promptly remit the payment received for the Warrant (the
"Warrant Proceeds") to the Company or as the Company may direct in writing.
5. Reservation of Shares; Listing; Payment of Taxes, etc.
(a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issue upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery, be duly and validly
issued, fully paid, nonassessable, and free from all taxes, liens, and charges
with respect to the issue thereof, (other than those which the Company shall
promptly pay or discharge) and that upon issuance such shares shall be listed
on each national securities exchange or eligible for inclusion in each
automated quotation system, if any, on which the other shares of outstanding
Common Stock of the Company are then listed or eligible for inclusion.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will, to the extent the Purchase Price is less than
the Market Price (as hereinafter defined), in good faith and as expeditiously
as reasonably possible, endeavor to secure such registration or approval and
will use its reasonable efforts to obtain appropriate approvals or
registrations under state "blue sky" securities laws. With respect to any such
securities, however,
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Warrants may not be exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp, or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance, or delivery of any shares upon exercise
of the Warrants; provided, however, that if the shares of Common Stock are to
be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock issuable upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions. The Company will file with the Warrant Agent a statement setting
forth the name and address of the Transfer Agent of the Company for shares of
Common Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue, and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof in accordance with its
regular practice. Upon due presentment for registration of transfer of any
Warrant Certificate at such office, the Company shall execute and the Warrant
Agent shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or
his attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In addition,
the Company may require payment by such holder of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter
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<PAGE>
retained by the Warrant Agent until termination of this Agreement or
resignation as Warrant Agent, or disposed of or destroyed, at the direction of
the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary. The Warrants which are being publicly offered in Units
with shares of Common Stock pursuant to the Underwriting Agreement will be
immediately detachable from the Common Stock and transferable separately
therefrom.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and loss, theft,
destruction, or mutilation of any Warrant Certificate and (in case of loss,
theft, or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
8. Redemption.
(a) On not less than thirty (30) days notice given at any
time after _____________________, 1997, the Warrants may be redeemed, at the
option of the Company, at a redemption price of $0.05 per Warrant, provided the
Market Price of the Common Stock receivable upon exercise of the Warrant shall
equal or exceed $______________ (the "Target Price"), subject to adjustment as
set forth in Section 8(f) below. Market Price for the purpose of this Section 8
shall mean the average closing bid price for any twenty (20) consecutive
trading days ending within ten (10) days prior to the date of the notice of
redemption, which notice shall be mailed no later than five days thereafter, of
the Common Stock as reported by the National Association of Securities Dealers,
Inc., Automatic Quotation System, or the National Quotation Bureau
Incorporated. All Warrants of a class, except those comprising the Unit
Purchase Option, must be redeemed if any of that class are redeemed.
(b) If the conditions set forth in Section 8(a) are met, and
the Company desires to exercise its right to redeem the Warrants, it shall mail
a notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at such holder's last address as shall appear on
the records maintained pursuant to Section 6(b). Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that
the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time)
on the business day immediately preceding the date fixed for redemption. The
date fixed for the redemption of the Warrant shall be the Redemption Date. No
failure to mail such notice nor
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any defect therein or in the mailing thereof shall affect the validity of the
proceedings for such redemption except as to a Registered Holder (a) to whom
notice was not mailed or (b) whose notice was defective. An affidavit of the
Warrant Agent or of the Secretary or an Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the Redemption
Date. On and after the Redemption Date, Holders of the Warrants shall have no
further rights except to receive, upon surrender of the Warrant, the Redemption
Price.
(e) From and after the Redemption Date, the Company shall, at
the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of
one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants
shall expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the redemption price,
shall cease.
(f) If the shares of the Company's Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, the Target Price shall be proportionally adjusted by the ratio which the
total number of shares of Common Stock outstanding immediately prior to such
event bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
9. Adjustment of Exercise Price and Number of Shares of Common Stock
or Warrants
(a) Subject to the exceptions referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the Market Price of the Common Stock (as defined in Section 8) on the
date of the sale or issue of any shares of Common Stock as a stock dividend to
the holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale,
issuance, subdivision, or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares, the Purchase
Price in effect immediately prior to such Change of Shares shall be changed to
a price (including any applicable fraction of a cent) determined by multiplying
the Purchase Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the issuance of such additional shares and the
number of shares of Common Stock which the aggregate consideration received
(determined as provided in subsection 9(f)(vii) below) for the issuance of such
additional shares would purchase at such current market price per share of
Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately after the issuance of such
additional shares. Such adjustment shall be made successively whenever such an
issuance is made.
"Market Price" for the purpose of this Agreement
shall mean (i) the average closing bid price for any twenty (20) consecutive
trading days within a period of thirty (30) consecutive trading days ending
within fifteen (15) days prior to the date of the notice of redemption,
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which notice shall be mailed no later than five (5) days thereafter, of the
Common Stock as reported by the National Association of Securities Dealers,
Inc. Automatic Quotation System ("NASDAQ") or (ii) the last reported sale
price, for fifteen (15) consecutive business days, ending within ten (10) days
of the date of the notice of redemption, which notice shall be mailed no later
than five (5) days thereafter, on the primary exchange on which the Common
Stock is traded, if the Common stock is traded on a national securities
exchange.
Upon each adjustment of the Purchase Price pursuant
to this Section 9, the total number of shares of Common Stock purchasable upon
the exercise of each Warrant shall (subject to the provisions contained in
Section 9(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price in effect immediately prior to such
adjustment multiplied by a fraction, the numerator of which shall be the
Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in effect immediately after
such adjustment.
(b) The Company may elect, upon any adjustment of the
Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu
of the adjustment in the number of shares of Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Common Stock. Each Warrant held of record prior to such adjustment of
the number of Warrants shall become that number of Warrants (calculated to the
nearest tenth) determined by multiplying the number one by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10 hereof, the number of additional Warrants to which such
Holder shall be entitled as a result of such adjustment or, at the option of
the Company, cause to be distributed to such Holder in substitution and
replacement for the Warrant Certificates held by him prior to the date of
adjustment (and upon surrender thereof, if required by the Company) new Warrant
Certificates evidencing the number of Warrants to which such Holder shall be
entitled after such adjustment.
(c) In case of any reclassification, capital reorganization,
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization, or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage, or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization, or other change,
consolidation, merger, sale, or conveyance by a holder of the number of shares
of Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization, or other
change, consolidation, merger, sale, or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company
shall not effect any such consolidation, merger, or sale unless prior to or
simultaneously with the consummation thereof the
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successor (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing assets or other appropriate corporation or
entity shall assume, by written instrument executed and delivered to the
Warrant Agent, the obligation to deliver to the holder of each Warrant such
shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holders may be entitled to purchase and the other obligations
under this Agreement. The foregoing provisions shall similarly apply to
successive reclassifications, capital reorganizations, and other changes of
outstanding shares of Common Stock and to successive consolidations, mergers,
sales, or conveyances.
(d) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon
exercise of the Warrants, the Warrant Certificates theretofore and thereafter
issued shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(d) hereof, continue to express the Purchase
Price per share, the number of shares purchasable thereunder, and the
Redemption Price therefor as the Purchase Price per share, the number of shares
purchasable thereunder and the Redemption Price therefor were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to
this Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to the Representative, and to
each registered holder of Warrants at his last address as it shall appear on
the registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an officer
of the Warrant Agent or the Secretary or an Assistant Secretary of the Company
that such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock outstanding
at any given time shall include shares of Common Stock owned or held by or for
the account of the Company, and the sale or issuance of such treasury shares or
the distribution of any such treasury shares shall not be considered a Change
of Shares for purposes of said sections.
(ii) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or decrease of at least
$.10 in such price; provided that any adjustments which by reason of this
subsection (ii) are not required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment(s) so carried forward, shall require an increase
or decrease of at least $.10 in the Purchase Price then in effect hereunder.
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(iii) In case of (1) the sale by the Company for
cash of any rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or any securities convertible into or
exchangeable for Common Stock without the payment of any further consideration
other than cash, if any (such convertible or exchangeable securities being
herein called "Convertible Securities"), or (2) the issuance by the Company,
without the receipt by the Company of any consideration therefor, of any rights
or warrants to subscribe for or purchase, or any options for the purchase of,
Common Stock or Convertible Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of such rights,
warrants, or options shall consist of cash, whether or not such rights,
warrants, or options, or the right to convert or exchange such Convertible
Securities, are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such rights, warrants, or options
or upon the conversion or exchange of such Convertible Securities (determined
by dividing (x) the minimum aggregate consideration payable to the Company upon
the exercise of such rights, warrants, or options, plus the consideration
received by the Company for the issuance or sale of such rights, warrants, or
options, plus, in the case of such Convertible Securities, the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange thereof, by the
total maximum number of shares of Common Stock issuable upon the exercise of
such rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities issuable upon (y) the exercise of such rights, warrants,
or options) is less than the fair market value of the Common Stock on the date
of the issuance or sale of such rights, warrants, or options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or sale of such rights,
warrants, or options) shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have been
sold for cash in an amount equal to such price per share.
(iv) In case of the sale by the Company for cash of
any Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible
Securities (determined by dividing (x) the total amount of consideration
received by the Company for the sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable upon the conversion or exchange thereof, by (y)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities) is less than the fair market value
or the Common Stock on the date of the sale of such Convertible Securities,
then the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities (as of the date of the
sale of such Convertible Securities) shall be deemed to be outstanding shares
of Common Stock for purposes of Sections 9(a) and 9(b) hereof and shall be
deemed to have been sold for cash in an amount equal to such price per share.
(v) In case the Company shall modify the rights of
conversion, exchange, or exercise of any of the securities referred to in
subsection (iii) above or any other securities of the Company convertible,
exchangeable, or exercisable for shares of Common Stock, for any reason other
than an event that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is less
than the market price on the date prior to such modification, the Purchase
Price to be in effect after such modification shall be determined by
multiplying the Purchase Price in effect immediately prior to such event by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding multiplied by the market price
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<PAGE>
on the date prior to the modification plus the number of shares of Common Stock
which the aggregate consideration receivable by the Company for the securities
affected by the modification would purchase at the market price and of which
the denominator shall be the number of shares of Common Stock outstanding on
such date plus the number of shares of Common Stock to be issued upon
conversion, exchange, or exercise of the modified securities at the modified
rate. Such adjustment shall become effective as of the date upon which such
modification shall take effect.
(vi) On the expiration of any such right, warrant,
or option or the termination of any such right to convert or exchange any such
Convertible Securities, the Purchase Price then in effect hereunder shall
forthwith be readjusted to such Purchase Price as would have obtained (a) had
the adjustments made upon the issuance or sale of such rights, warrants,
options, or Convertible Securities been made upon the basis of the issuance of
only the number of shares of Common Stock theretofore actually delivered (and
the total consideration received therefor) upon the exercise of such rights,
warrants, or options or upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis of the Purchase Price
as adjusted under clause (a) for all transactions (which would have affected
such adjusted Purchase Price) made after the issuance or sale of such rights,
warrants, options, or Convertible Securities.
(vii) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Company therefore
shall be deemed to be the gross sales price therefor without deducting
therefrom any expense paid or incurred by the Company or any underwriting
discounts or commissions or concessions paid or allowed by the Company in
connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to
the number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the sale or exercise of the Warrants,
including without limitation the sale or exercise of any of the Warrants
comprising the Underwriters' Purchase Option; or
(ii) upon the sale of any shares of Common Stock in
the Company's initial public offering; or
(iii) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not such rights, warrants, or options were
outstanding on the date of the original sale of the Warrants or were thereafter
issued or sold; or
(iv) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon the
issuance or sale of such Convertible Securities and whether or not such
Convertible Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities in a private placement unless the issuance or sale price
is less than 85% of the fair market value of the
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<PAGE>
Common Stock on the date of issuance, in which case the adjustment shall only
be for the difference between 85% of the fair market value and the issue or
sale price; or
(vi) upon the issuance or sale of Common Stock or
Convertible Securities to shareholders of any corporation which merges into the
Company, or from which the Company acquires assets and some or all of the
consideration consists of equity securities of the Company if such issuance or
sale to such shareholders is in proportion to their stock holdings of such
corporation immediately prior to the acquisition but only if no adjustment is
required pursuant to any other provision of this Section 9.
(h) As used in this Section 9, the term "Common Stock" shall
mean and include the Company's common stock authorized on the date of the
original issue of the Units and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution, or winding up of the Company; provided, however, that
the shares issuable upon exercise of the Warrants shall include only shares of
such class designated in the Company's Certificate of Incorporation as Common
Stock on the date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale, or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities, or
property provided for in such section or (ii), in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon exercise of the Warrants as a result of a subdivision or combination or
consisting or a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant, or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding,
the rights, warrants, or options to which each Registered Holder would have
been entitled if, on the record date used to determine the stockholders
entitled to the rights, warrants, or options being granted by the Company, the
Registered Holder were the holder of record of the number of whole shares of
Common Stock then issuable upon exercise (assuming, for purposes of this
section 9(j), that exercise of warrants is permissible during periods prior to
the Initial Warrant Exercise Date) of his Warrants. Such grant by the Company
to the holders of the Warrants shall be in lieu of any adjustment which
otherwise might be called for pursuant to this Section 9.
10. Reduction of Purchase Price and Extension of Expiration Date.
Notwithstanding anything herein to the contrary, the Company shall have the
right, subject to compliance with Rule 13e-4 promulgated under the Securities
Exchange Act of 1934 and the filing of Schedule 13e-4 with the Securities and
Exchange Commission, and upon not less than thirty (30) days' written notice
given to every holder of a Warrant, to reduce the Purchase Price and/or to
extend the Warrant Expiration Date.
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11. Fractional Warrants and Fractional Shares
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called for
upon any exercise hereof, the Company shall pay to the Holder an amount in cash
equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(i) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the NASDAQ Quotation System, the current value shall
be the last reported sale price of the Common Stock on such exchange on the
last business day prior to the date of exercise of this Warrant or if no such
sale is made on such day, the average of the closing bid and asked prices for
such day on such exchange; or
(ii) If the Common Stock is not listed or admitted
to unlisted trading privileges, the current value shall be the
mean of the last reported bid and asked prices reported by the
National Quotation Bureau, Inc. on the last business day prior to
the date of the exercise of this Warrant; or
(iii) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
12. Warrant Holders Not Deemed Stockholders. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of
a stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to
no par value, consolidation, merger, or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common
Stock in accordance with the provisions hereof.
13. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own
benefit, enforce against the Company his right to exercise his Warrants for the
purchase of shares of Common Stock in the manner provided in the Warrant
Certificate and this Agreement.
14. Agreement of Warrant Holders. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a warrant that:
(a) The Warrants are transferable only on the registry books
of the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
13
<PAGE>
duly endorsed or accompanied by a proper instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true, and lawful owner of the Warrants represented thereby for
all purposes, and neither the Company nor the Warrant Agent shall be affected
by any notice or knowledge to the contrary, except as otherwise expressly
provided in Section 7 hereof.
15. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel
Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, splitup, combination, or exchange.
16. Concerning the Warrant Agent. The Warrant Agent acts hereunder as
agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value, or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts
contained herein or for any action taken, suffered, or omitted by it in
reliance on any warrant Certificate or other document or instrument believed by
it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in any Warrant Certificate, or (iii) be liable for any act or
omission in connection with this Agreement except for its own negligence or
wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction,
order, or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board, President, any Vice President,
its Secretary, or Assistant Secretary, (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order, or demand believed
by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to
14
<PAGE>
indemnify the Warrant Agent and save it harmless against any and all losses,
expenses, and liabilities, including judgments, costs, and counsel fees, for
anything done or omitted by the Warrant Agent in the execution of its duties
and powers hereunder except losses, expenses, and liabilities arising as a
result of the Warrant Agent's negligence or wilful misconduct.
The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising
as a result of the Warrant Agent's own negligence or wilful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or
any inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for
the appointment of a new warrant agent. Any new warrant agent, whether
appointed by the Company or by such a court, shall be a bank or trust company
having a capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a stock transfer company. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties, and responsibilities as if it had been originally named herein
as the Warrant Agent, without any further assurance, conveyance, act, or deed;
but if for any reason it shall be necessary or expedient to execute and deliver
any further assurance, conveyance, act, or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further
act, provided that such corporation is eligible for appointment as successor to
the Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed to the Company and to the Registered Holder of each
Warrant Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any
of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
17. Modification of Agreement. The Warrant Agent and the Company may
by supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Warrant Certificates;
provided, however, that this Agreement shall not otherwise be modified,
supplemented, or altered in any respect except with the
15
<PAGE>
consent in writing of the Registered Holders of Warrant Certificates
representing not less than 50% of the Warrants then outstanding; and provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or the Purchase Price therefor, or the
acceleration of the Warrant Expiration Date, shall be made without the consent
in writing of the Registered Holder of the Warrant Certificate representing
such Warrant, other than such changes as are specifically prescribed by this
Agreement as originally executed or are made in compliance with applicable law.
18. Notices. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class, registered or certified mail, postage prepaid
as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, 300 Park Avenue, New York, New York 10022, Attention:
President, with a copy sent to Bernstein & Wasserman, LLP, 950 Third Avenue,
New York, New York 10022, Attention: Steven F. Wasserman, Esq.; or at such
other address as may have been furnished to the Warrant Agent in writing by the
Company; and if to the Warrant Agent, at its Corporate office.
19. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
20. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the holders from time to time of Warrant Certificates. Nothing
in this Agreement is intended or shall be construed to confer upon any other
person any right, remedy, or claim, in equity or at law, or to impose upon any
other person any duty, liability, or obligation.
21. Termination. This Agreement shall terminate at the close of
business on the Warrant Expiration Date of all the Warrants or such earlier
date upon which all Warrants have been exercised, except that the Warrant Agent
shall account to the Company for cash held by it and the provisions of Section
15 hereof shall survive such termination.
22. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
ML DIRECT INC.
By ______________________________
Its
16
<PAGE>
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By ______________________________
Its
Authorized Officer
17
<PAGE>
EXHIBIT A
[Form of Face of Class A Warrant Certificate]
No.
VOID AFTER ____________, 2001
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE
FOR PURCHASE OF COMMON STOCK
ML DIRECT INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant
Agreement (as hereinafter defined), one (1) fully paid and nonassessable share
of Common Stock, $.0001 par value, of ML DIRECT INC., a Delaware corporation
(the "Company"), at any time after _____________________, 1997 (the "Separation
Date") and prior to the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of AMERICAN
STOCK TRANSFER & TRUST COMPANY as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $8.00 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to ML Direct Inc.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement") dated
_____________________, 1996, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
_____________________, 2001, or such earlier date as the Warrants shall be
redeemed. If such date shall in the State of New York be a holiday or a day on
which the banks are authorized to close, then the Expiration Date shall mean
5:00 p.m.
<PAGE>
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding. This Warrant shall not be exercisable by a
Registered Holder in any state in which it would be unlawful for the Company to
deliver the shares of Common Stock upon exercise of this Warrant.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment of this Warrant
Certificate at such office for registration of transfer, together with any
transfer fee in addition to any tax or other governmental charge imposed in
connection with such transfer, a new Warrant Certificate or Warrant
Certificates representing an equal aggregate number of Warrants will be issued
to the transferee in exchange therefor, subject to the limitations provided in
the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant at any time after _____________________,
1997, provided the Market Price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall exceed $______________
per share. Notice of redemption shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.05 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto
duly authorized, and a facsimile of its corporate seal to be imprinted hereon.
ML DIRECT INC.
By ______________________________
Its
By ______________________________
Its
Date: ______________________________
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By ______________________________
Its
Authorized Officer
3
<PAGE>
[Form of Reverse of Class A Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to
exercise _____ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
--------------------------------------------
(please insert social security or other identifying number)
and be delivered to
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
--------------------------------------------
--------------------------------------------
--------------------------------------------
(Address)
---------------------------------
(Date)
---------------------------------
(Taxpayer Identification Number)
<PAGE>
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned registered holder hereby
sells, assigns, and transfers unto
--------------------------------------------
(please insert social security or other identifying number)
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
all (if not all, insert number of Warrants to be transferred _________) of the
Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _________________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
---------------------------------
(Date)
---------------------------------
Signature of Registered Holder
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
2
<PAGE>
Option to Purchase
70,000 Units
ML DIRECT INC.
UNDERWRITER'S PURCHASE OPTION
Dated: _____________________, 1996
THIS CERTIFIES that PATTERSON TRAVIS, INC., 1 Battery Park Plaza, New
York, New York 10004 (hereinafter sometimes referred to as the "Holder"), is
entitled to purchase from ML DIRECT INC., a Delaware corporation (hereinafter
referred to as the "Company"), at the prices and during the periods as
hereinafter specified, up to 48,000 units (the "Units"), each consisting of two
(2) shares of the Company's Common Stock, $.0001 par value, as now constituted
("Common Stock") and one (1) Class A redeemable Common Stock purchase warrant
(the "Warrant"). Each Warrant entitles the holder to purchase one (1) share of
Common Stock at $8.00 per share from _____________________, 1997 until
_____________________, 2001.
The Units have been registered under a Registration Statement on Form
SB-2 (File No. 333-3162) declared effective by the Securities and Exchange
Commission on _____________________, 1996 (the "Registration Statement"). This
Option (the "Option") to purchase 48,000 Units (the "Option Units") was
originally issued pursuant to an underwriting agreement between the Company and
I. A. Rabinowitz & Co., as underwriter (the "Underwriter"), in connection with
a public offering of 480,000 Units (the "Public Securities") through the
Underwriter, in consideration of $48.00 received for the Option.
Except as specifically otherwise provided herein, the Units issued
pursuant to this Option shall bear the same terms and conditions as described
under the caption "Description of Securities" in the Registration Statement,
and except that the Holder shall have registration rights under the Securities
Act of 1933, as amended (the "Act"), for the Option, the Warrants and the
Common Stock included in the Option Units, and the shares of Common Stock
underlying the Warrants, as more fully described in paragraph 6 of this Option.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option,
and during the periods as follows:
(a) Between _____________________, 1997 and
_____________________, 2001, inclusive, the Holder shall have the option to
purchase Units hereunder at a price of
<PAGE>
$18.00 per Unit (subject to adjustment pursuant to paragraph 8 hereof) (the
"Exercise Price").
(b) After _____________________, 2001, the Holder shall have
no right to purchase any Units.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the Holder at the
address of the Holder appearing on the books of the Company); (ii) payment to
the Company of the Exercise Price then in effect for the number of Units
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s)' designated in the purchase form to the
effect that such person(s) agree(s) to be bound by the provisions of paragraph
6 and subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option shall
be deemed to have been exercised, in whole or in part to the extent specified,
immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance with the foregoing provisions of
this paragraph 2, and the person or persons in whose name or names the
certificates for Warrants or shares of Common Stock shall be issuable upon such
exercise shall become the holder or holders of record of such Warrants or
Common Stock at that time and date. The Common Stock and the certificates for
the Warrants or Common Stock so purchased shall be delivered to the Holder
within a reasonable time, not exceeding ten (10) days, after the rights
represented by this Option shall have been so exercised.
3. This Option shall not be transferred, sold, assigned, or
hypothecated until _____________________, 1997, except that it may be
transferred to successors of the Holder and may be assigned in whole or in part
to any member of the National Association of Securities Dealers, Inc. that acts
as a selected dealer in connection with the sale of the Public Securities or
any person who is an officer or partner of the Holder during such period or any
person who is an officer or partner of such selected dealer during such period.
Any such assignment shall be effected by the Holder (i) executing the form of
assignment at the end hereof and (ii) surrendering this Option for cancellation
at the office or agency of the Company referred to in paragraph 2 hereof,
accompanied by a certificate (signed by an officer of the Holder if the Holder
is a corporation), stating that each transferee is a permitted transferee under
this paragraph 3 hereof; whereupon the Company shall issue, in the name or
names specified by the Holder (including the Holder), a new Option or Options
of like tenor and representing in the aggregate rights to purchase the same
number of Units as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued or part of the Units purchased hereunder and upon exercise
of the Warrants will, upon issuance, be duly and validly issued, fully paid and
nonassessable, and no personal liability will attach to the holder thereof. The
Company further covenants and agrees that during the periods within which this
Option may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of its Common Stock to provide for the
exercise of this Option and for issuance upon exercise of the Warrants.
5. This Option shall not entitle the Holder to any voting,
dividend, or other rights as a stockholder of the Company.
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<PAGE>
6. (a) During the period set forth in paragraph 1(b) hereof, the
Company shall advise the Holder or its transferee, whether the Holder holds the
Option or has exercised the Option and holds Units or any securities underlying
the Units, by written notice at least 30 days prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Act
covering any securities of the Company, for its own account or for the account
of others (other than a registration statement on Form S-4 or S-8 or any
successor forms thereto), and will for a period of five years from the
effective date of the Registration Statement, upon the request of the Holder,
include in any such post-effective amendment or registration statement, such
information as may be required to permit a public offering of the Option, or
all or any of the Units underlying the Option, the Common Stock or Warrants
included in the Units, or the Common Stock issuable upon exercise of the
Warrants (the "Registrable Securities"). The Company shall supply prospectuses
and such other documents as the Holder may request in order to facilitate the
public sale or other disposition of the Registrable Securities, use its best
efforts to register and qualify any of the Registrable Securities for sale in
such states as such Holder designates provided that the Company shall not be
required to qualify as a foreign corporation or a dealer in securities or
execute a general consent to service of process in any jurisdiction in any
action and do any and all other acts and things which may be reasonably
necessary or desirable to enable such Holders to consummate the public sale or
other disposition of the Registrable Securities, and furnish indemnification in
the manner provided in paragraph 7 hereof. The Holder shall furnish information
and indemnification as set forth in paragraph 7 except that the maximum amount
which may be recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of the Registrable Securities.
The Company shall use its best efforts to cause the managing underwriter or
underwriters of a proposed underwritten offering to permit the holders of
Registrable Securities requested to be included in the registration to include
such securities in such underwritten offering on the same terms and conditions
as any similar securities of the Company included therein. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering advises
the holders of Registrable Securities that the total amount of securities which
they intend to include in such offering is such as to materially and adversely
affect the success of such offering, then the amount of securities to be
offered for the accounts of holders of Registrable Securities shall be
eliminated, reduced, or limited to the extent necessary to reduce the total
amount of securities to be included in such offering to the amount, if any,
recommended by such managing underwriter or underwriters (any such reduction or
limitation in the total amount of Registrable Securities to be included in such
offering to be borne by the holders of Registrable Securities proposed to be
included therein pro rata). The Holder will pay its own legal fees and expenses
and any underwriting discounts and commissions on the securities sold by such
Holder and shall not be responsible for any other expenses of such
registration.
(b) If any 50% holder (as defined below) shall give notice to
the Company at any time during the period set forth in paragraph 1(b) hereof to
the effect that such holder desires to register under the Act any of the
Registrable Securities under such circumstances that a public distribution
(within the meaning of the Act) of any such securities will be involved then
the Company will promptly, but no later than 45 days after receipt of such
notice, file a post-effective amendment to the current Registration Statement
or a new registration statement pursuant to the Act, to the end that the
Registrable Securities may be publicly sold under the Act as promptly as
practicable thereafter and the Company will use its best efforts to cause such
registration to become and remain effective for a period of 120 days (including
the taking of such steps as are reasonably necessary to obtain the removal of
any stop order); provided that such holder shall furnish the Company with
appropriate information in connection therewith as the Company may reasonably
request in writing. The 50%
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<PAGE>
holder (which for purposes hereof shall mean any direct or indirect transferee
of such holder) may, at its option, request the filing of a post-effective
amendment to the current Registration Statement or a new registration statement
under the Act with respect to the Registrable Securities on only one occasion
during the term of this Option. The Holder may at its option request the
registration of the Option and/or any of the securities underlying the Option
in a registration statement made by the Company as contemplated by paragraph
6(a) or in connection with a request made pursuant to this paragraph 6(b) prior
to acquisition of the Units issuable upon exercise of the Option and even
though the Holder has not given notice of exercise of the Option. The 50%
holder may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the Option,
the Units as a unit, or separately as to the Common Stock and/or the Warrants
included in the Units and/or the Common Stock issuable upon exercise of the
Warrants, and such registration rights may be exercised by the 50% holder prior
to or subsequent to the exercise of the Option. Within ten business days after
receiving any such notice pursuant to this subparagraph (b) of paragraph 6, the
Company shall give notice to the other holders of the Options, advising that
the Company is proceeding with such post-effective amendment or registration
statement and offering to include therein the securities underlying the Options
of the other holders. Each holder electing to include its Registrable
Securities in any such offering shall provide written notice to the Company
within twenty (20) days after receipt of notice from the Company. The failure
to provide such notice to the Company shall be deemed conclusive evidence of
such holder's election not to include its Registrable Securities in such
offering. Each holder electing to include its Registrable Securities shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. In the event such registration statement is not
filed within the period specified herein, the expiration date of this Option
and the underlying Warrants shall be extended by an amount of time equal to the
delay in filing. All costs and expenses of the first such post-effective
amendment or new registration statement shall be borne by the Company, except
that the holders shall bear the fees of their own counsel and any underwriting
discounts or commissions applicable to any of the securities sold by them. If
the Company determines to include securities to be sold by it in any
registration statement pursuant to this paragraph 6(b), such registration shall
be deemed to have been a registration under paragraph 6(a).
The Company shall be entitled to postpone the filing of any
registration statement pursuant to this paragraph 6(b) otherwise required to be
prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Rule 10b-6 under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing that such a
registration statement would have a material adverse effect on the consummation
of such offering or (iv) the Company is subject to an underwriter's lock-up as
a result of an underwritten public offering and such underwriter has refused in
writing, the Company's request to waive such lock-up. In the event of such
postponement, the Company shall be required to file the registration statement
pursuant to this paragraph 6(b), within 60 days of the consummation of the
event requiring such postponement.
The Company will use its best efforts to maintain such
registration statement or post-effective amendment current under the Act for a
period of at least six months (and for up to an additional three months if
requested by the Holder) from the effective date thereof. The Company shall
supply prospectuses, and such other documents as the Holder may reasonably
request in order to
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facilitate the public sale or other disposition of the Registrable Securities,
use its best efforts to register and qualify any of the Registrable Securities
for sale in such states as such holder designates, provided that the Company
shall not be required to qualify as a foreign corporation or a dealer in
securities or execute a general consent to service of process in any
jurisdiction in any action and furnish indemnification in the manner provided
in paragraph 7 hereof.
(c) The term "50% holder" as used in this paragraph 6 shall
mean the holder of at least 50% of the Common Stock and the Warrants (or the
Common Stock issuable upon exercise of the Warrants) underlying the Option
(considered in the aggregate) and shall include any owner or combination of
owners of such securities, which ownership shall be calculated by determining
the number of shares of Common Stock and Warrants (or the Common Stock issuable
upon exercise of the Warrants) held by such owner or owners.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares issued or issuable upon the exercise of
any options, is filed under the Act, amended or supplemented, the Company will
indemnify and hold harmless each holder of the securities covered by such
registration statement, amendment, or supplement (such holder being hereinafter
called the "Distributing Holder"), and each person, if any, who controls
(within the meaning of the Act) the Distributing Holder, and each underwriter
(within the meaning of the Act) of such securities and each person, if any, who
controls (within the meaning of the Act) any such underwriter, against any
losses, claims, damages, or liabilities, joint or several, to which the
Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any such registration statement or any preliminary prospectus
or final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Distributing Holder and each
such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder or any other Distributing Holder, for use
in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each
person, if any, who controls the Company (within the meaning of the Act)
against any losses, claims, damages, or liabilities, joint and several, to
which the Company or any such director, officer, or controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said
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<PAGE>
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer, or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
paragraph 7.
(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory
to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make
a distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall
be adjusted so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Notwithstanding anything to the contrary
contained in the Warrant Agreement, in the event an adjustment to the Exercise
Price is effected pursuant to this subsection (a) (and a corresponding
adjustment to the number of Option Units is made pursuant to subsection (f)
below), the exercise price of the Warrants shall be adjusted so that it shall
equal the price determined by multiplying the exercise price of the Warrants by
a fraction, the denominator of which shall be the number of shares of Common
Stock outstanding immediately after giving effect to such action and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. In such event, there shall be no adjustment
to the number of shares of Common Stock or other securities issuable upon
exercise of the Warrants. Such adjustment shall be made successively whenever
any event listed above shall occur.
(b) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (the "Subscription Price") (or
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<PAGE>
having a conversion price per share) less than the current market price of the
Common Stock (as defined in subparagraph (h) below) on the record date
mentioned below, the Exercise Price shall be adjusted so that the same shall
equal the price determined by multiplying the number of shares then comprising
an Option Unit (after giving effect to exercise of the Warrants) by the product
of the Exercise Price in effect immediately prior to the date of such issuance
multiplied by a fraction, the numerator of which shall be the sum of the number
of shares of Common Stock outstanding on the record date mentioned below and
the number of additional shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent
that shares of Common Stock are not delivered (or securities convertible into
Common Stock are not delivered) after the expiration of such rights or warrants
the Exercise Price shall be readjusted to the Exercise Price which would then
be in effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions referred to in
subparagraph (a) above) or subscription rights or warrants (excluding those
referred to in subparagraph (b) above), then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the number of
shares then comprising an Option Unit (after giving effect to exercise of the
Warrants) by the product of the Exercise Price in effect immediately prior
thereto multiplied by a fraction, the numerator of which shall be the total
number of shares of Common Stock outstanding multiplied by the current market
price per share of Common Stock (as defined in subparagraph (h) below), less
the fair market value (as determined by the Company's Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by such current market price per share of
Common Stock. Such adjustment shall be made successively whenever such a record
date is fixed. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) In case the Company shall issue shares of its Common
Stock excluding shares issued (i) in any of the transactions described in
subparagraph (a) above, (ii) upon the issuance or exercise of options granted
to the Company's directors, employees, and consultants under a plan or plans
adopted by the Company's Board of Directors and approved by its shareholders,
if such shares would otherwise be included in this subparagraph (d), (but only
to the extent that the aggregate number of shares excluded hereby and issued
after the date hereof, shall not exceed 5% of the Company's Common Stock
outstanding at the time of any issuance), (iii) upon exercise of options and
warrants outstanding or authorized for grant as of the date hereof and this
Option, (iv) to shareholders of any corporation which merges into the Company
or from which the Company acquires assets and some or all of the consideration
consists of equity securities of the Company in proportion to their stock
holdings of such corporation immediately prior to such merger, upon such
merger, (v) issued in
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a bona fide public offering pursuant to a firm commitment underwriting, but
only if no adjustment is required pursuant to any other specific subparagraph
of this paragraph 8 (without regard to subparagraph (i) below) with respect to
the transaction giving rise to such rights and (vi) in connection with any
nonregistered offering of Common Stock or securities convertible into or
exercisable for Common Stock, unless the issuance or sale price is less than
85% of the current market price of the Common Stock on the date of issuance, in
which case the adjustment shall only be for the difference between 85% of the
current market price and the issue or sale price for a consideration per share
(the "Offering Price") less than the current market price per share (as defined
in subparagraph (h) below) on the date the Company fixes the offering price of
such additional shares, then the Exercise Price shall be adjusted immediately
thereafter so that it shall equal the price determined by multiplying the
number of shares then comprising an Option Unit (after giving effect to
exercise of the Warrants) by the product of the Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of which
shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received (determined
as provided in subparagraph (g) below) for the issuance of such additional
shares would purchase at such current market price per share of Common Stock,
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made.
(e) In case the Company shall issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in subparagraphs (b) and (c) above) for a
consideration per share of Common Stock (the "Conversion Price") initially
deliverable upon conversion or exchange of such securities (determined as
provided in subparagraph (g) below) less than the current market price per
share (as defined in subparagraph (h) below) in effect immediately prior to the
issuance of such securities, then the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the number of shares then comprising an Option Unit (after giving
effect to exercise of the Warrants) by the product of the Exercise Price in
effect immediately prior thereto multiplied by a fraction, the numerator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such securities and the number of shares
of Common Stock which the aggregate consideration received (determined as
provided in subparagraph (g) below) for such securities would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for such
securities at the initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(f) Whenever the Exercise Price payable upon exercise of this
Option is adjusted pursuant to subparagraphs (a), (b), (c), (d), or (e) above,
the number of Option Units purchasable upon exercise of this Option shall
simultaneously be adjusted by multiplying the number of Option Units initially
issuable upon exercise of this Option by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
(g) For purposes of any computation respecting consideration
received pursuant to subparagraphs (d) and (e) above, the following shall
apply:
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(i) in the case of the issuance of shares of
Common Stock for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any commissions,
discounts, or other expenses incurred by the Company for any underwriting of
the issue or otherwise in connection therewith;
(ii) in the case of the issuance of shares of
Common Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board of Directors of the Company
(irrespective of the accounting treatment thereof), whose determination shall
be conclusive; and
(iii) in the case of the issuance of
securities convertible into or exchangeable for shares of Common Stock, the
aggregate consideration received therefor shall be deemed to be the
consideration received by the Company for the issuance of such securities plus
the additional minimum consideration, if any, to be received by the Company
upon the conversion or exchange thereof (the consideration in each case to be
determined in the same manner as provided in clauses (A) and (B) of this
subparagraph (g)).
(h) For the purpose of any computation under subparagraphs
(b), (c), (d), and (e) above, the current market price per share of Common
Stock at any date shall be deemed to be the average of the daily closing prices
for 20 consecutive business days before such date. The closing price for each
day shall be the last sale price regular way or, in case no such reported sale
takes place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on such exchange, the average of the highest reported bid
and lowest reported asked prices as reported by NASDAQ, or other similar
organization if NASDAQ is no longer reporting such information, or if not so
available, the fair market price as determined by the Board of Directors.
(i) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least ten
cents ($0.10) in such price; provided, however, that any adjustments which by
reason of this subparagraph (i) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this paragraph 8 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything
in this paragraph 8 to the contrary notwithstanding, the Company shall be
entitled, but shall not be required, to make such changes in the Exercise
Price, in addition to those required by this paragraph 8, as it shall
determine, in its sole discretion, to be advisable in order that any dividend
or distribution in shares of Common Stock, or any subdivision, reclassification
or combination of Common Stock, hereafter made by the Company shall not result
in any Federal Income tax liability to the holders of Common Stock or
securities convertible into Common Stock (including Warrants issuable upon
exercise of this Option).
(j) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly, but no later than 10 days after any
request for such an adjustment by the Holder, cause a notice setting forth the
adjusted Exercise Price and adjusted number of Option Units issuable upon
exercise of this Option and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Holder, at
the address set forth herein, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors
(who may be the regular
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accountants employed by the Company) to make any computation required by this
paragraph 8, and a certificate signed by such firm shall be conclusive evidence
of the correctness of such adjustment.
(k) In the event that at any time, as a result of an
adjustment made pursuant to subparagraph (a) above, the Holder thereafter shall
become entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of this
Option shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in subparagraphs (a) to (i), inclusive above.
9. This Agreement shall be governed by and in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, ML Direct Inc. has caused this Option to be signed
by its duly authorized officers under its corporate seal, and this Option to be
dated _____________________, 1996.
ML DIRECT INC.
By
------------------------------
Its
(Corporate Seal)
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PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby
irrevocably elects to exercise the purchase rights represented by such Option
for, and to purchase thereunder,
Units of ML Direct Inc., each Unit consisting of two (2) shares of
Common Stock, $.0001 par value, and one (1) Class A Redeemable Common Stock
Purchase Warrant, and herewith makes payment of $______________ therefor, and
requests that the certificates for shares of Common Stock and the Warrants be
issued in the name(s) of, and delivered to ________________________ whose
address(es) is (are)_________________________________________________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________________________ the right to purchase Units
represented by the foregoing Option to the extent of _____ Units, and appoints
_________________________________ attorney to transfer such rights on the books
of ML Direct Inc., with full power of substitution in the premises.
Dated:
By ______________________________
Address:
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------------------------------
In the presence of:
<PAGE>
[LETTER HEAD OF BERNSTEIN & WASSERMAN, LLP]
July 29, 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 960,000 shares of the Company's Common Stock, par value $.0001 per share
(the "Common Stock") and 480,000 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 144,000 shares of Common
Stock and 72,000 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 96,000 shares of Common Stock and 48,000 Class A
Warrants, and the registration of an additional 2,400,000 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 documents submitted to us as copies thereof.
As to various questions of fact material to such
<PAGE>
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 Common 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
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1996 1995
------------ ------------
[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............................................................................. 202,400 202,400
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
------------ ------------
SHARES OUTSTANDING FOR EARNINGS PER SHARE.......................................... 4,042,400 4,042,400
------------ ------------
------------ ------------
NET (LOSS)........................................................................... $ (700,881) $ (93,154)
------------ ------------
------------ ------------
NET (LOSS) PER SHARE................................................................. $ (.17) $ (.02)
------------ ------------
------------ ------------
</TABLE>
This computation is submitted in accordance with Regulation S-B Item 601.
<PAGE>
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.
On July 1, 1996, the firm of Mortenson and Associates, P.C. changed
its name to Moore Stephens, P.C.
/s/ MOORE STEPHENS, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
July 30, 1996
