<PAGE> 1
UNITED STATES SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 000-21211
-----------------------
ML DIRECT INC.
(Name of small business issuer in its charter)
DELAWARE 13-3842020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3001 EXECUTIVE DRIVE, SUITE 120, CLEARWATER, FLORIDA
(Address of principal executive offices)
34622
(Zip Code)
(813) 572-8703
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock NASDAQ - Small Cap
Common Stock Warrants NASDAQ - Small Cap
---------------------------------------------------
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB[ ].
ML Direct Inc.'s net revenues for the year ended November 30, 1996
were $692,256.
The aggregate market value of the voting stock held by non-affiliates
on February 28, 1997 was $4,164,000. The number of shares outstanding of the
issuer's common stock, as of February 28, 1997 was 4,224,000.
<PAGE> 2
PART I
This report may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. Actual results could differ materially from those
projected or suggested in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this report.
ITEM 1 - BUSINESS
GENERAL
ML Direct Inc. (the "Company" or "ML Direct") was incorporated in the
State of Delaware on June 22, 1995. The Company sells through other channels of
distribution products that have already been sold successfully through direct
response television ("DRTV"), including infomercials and shopping networks. ML
Direct employs DRTV and consumer marketing industry executives and has pursued
and will continue to pursue affiliations with both product suppliers and
distributors.
ML Direct purchases certain products that have been sold
through DRTV and resells them to other entities (including HSS, described
below) for sale to consumers. ML Direct resells products to supermarkets,
mass merchandisers, drug chains, and department stores (collectively, broad
retail distribution), and infomercials and shopping networks (collectively,
electronic retailing) and catalogs and print media (direct marketing). The
Company's initial focus is broad retail distribution.
The Company owns 50.02% of KN2B, Inc., which does business under the
name Home Shopping Showcase(TM), Inc. ("HSS(TM)" or "Home Shopping
Showcase(TM)"). The remaining 49.98% of Home Shopping Showcase(TM) is owned by
HSN Direct Joint Venture ("HSN Direct" or "HSND"), which at the time of the
formation of HSS (TM) was a subsidiary of Home Shopping Network ("HSN"). HSND is
now a majority owned subsidiary of Flextech P.L.C. (a subsidiary of
Telecommunications Company, Inc. ("TCI")). Home Shopping Network, Inc.
continues to hold a minority equity position in HSND.
Home Shopping Showcase(TM) attempts to establish permanent in-store
programs that the Company believes will establish HSS as a distributor to
retail outlets for DRTV products. The Company will use the Home Shopping
brand name to launch its programs, relying on the familiarity of the name with
consumers. Home Shopping Showcase(TM) has entered an agreement with HSN Direct,
which entitles the Company to the exclusive marketing rights to the products and
services of HSN Direct, as well as HSND's full support in obtaining rights to
products previously marketed on HSN.
Home Shopping Showcase(TM) offers retailers two programs: (i)
permanent store-within-a-store kiosk program, and (ii) promotional sales
programs, consisting of temporary displays of individual products or "themed"
merchandise. Home Shopping Showcase(TM) is currently operating pilots of its
kiosk program in four Baker's stores and four Furr's stores. Each of these eight
pilots is offering a mix of DRTV products, leading collectible items, gift
merchandise lines, and celebrity-sponsored goods. The Baker's pilot will come to
an end on March 28, 1997. Twenty new kiosks are being placed in two leading
supermarkets in North Florida and Pennsylvania during May 1997. The retailer
has the right to discontinue the program if the program is not performing as
expected. Based on several presentations to other supermarket chains, Home
Shopping Showcase(TM) and the Company believe that there are additional chains
which may be interested in implementing the kiosk program in their stores.
Home Shopping Showcase's promotional sales program takes two forms: i)
continuity product supply sales programs where best selling TV products are sold
to retailers on a recurring basis and ii) promotional programs where best
selling TV products are sold to retailers on a one time basis. HSS is currently
in negotiations with a supplier for over 3,000 supermarkets to implement a
continuity product supply program. Although the negotiations are ongoing, there
can be no assurance a contract will be signed. The Company's promotional
program has resulted in the distribution of individual products to several
chains totaling over 2,800 retail outlets in the current year.
For the year ended November 30, 1996, the Company's gross revenue was
derived primarily from three customers, which were non-supermarket retailers:
Jack Eckerd Drug Co, Caldor Department Stores, and Play it Again Sports,
representing approximately 32%, 17% and 14% of the Company's total sales,
respectively.
BACKGROUND
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.
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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 for such products has been largely through mass
merchants, such as Kmart and WalMart. Not all products that were introduced
through DRTV have achieved retail success and there can be no guarantee that
the Company or HSS(TM) will be able to achieve success with any or all of their
retail product offerings.
SUPERMARKET DISTRIBUTION
Distribution of DRTV products to supermarkets has been limited to
date. Management believes the lack of success is due to the selling behavior
of DRTV product suppliers and the buying behavior of supermarket retailers.
The Company believes it has several competitive strengths that will allow it to
penetrate the fragmented supermarket industry and become its preferred supplier
of DRTV merchandise: distribution rights (often exclusive) to best selling DRTV
products, marketing and sales management with an extensive understanding of,
and relationships with, the supermarket industry and a success model to follow
over the last year.
The Company has secured rights to distribute to supermarkets (and
often other outlets) products from leading infomercial companies, TV shopping
networks, and licensed merchandise and collectible suppliers. The Company's
management's understanding of and relationships in the supermarket industry
have allowed the Company to both develop and begin to implement permanent and
temporary display programs which are consistent with the needs of the
supermarket retailer. Moreover, the Company's permanent display program is
modeled after other successful supermarket non-food products, such as videos,
greeting cards, film processing and fresh flowers. Home Shopping
Showcase(TM), organizes and manages a store's entire selection and display of
DRTV merchandise under the Home Shopping Showcase(TM) name. Home Shopping
Showcase(TM) regularly supplies and rotates the product mix at each supermarket
location to assure new and popular DRTV products are available. Home Shopping
Showcase(TM) will draws from a large selection of successful DRTV products to
be purchased from the Company and HSN Direct, among other suppliers. Home
Shopping Showcase(TM) operates with a revolving purchase order from each
store, making all DRTV decisions for that store.
A number of DRTV merchandise distribution organizations exist with the
experience and financial resources to develop sales and merchandising forces
capable of selling to and servicing supermarket accounts. These organizations
have done so but only to a limited extent, and with limited success yet there
is no assurance that they will not do so in the future.
AGREEMENT WITH HSN DIRECT
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(TM). The agreement provides that HSS will develop
programs to support the retail sales 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 secured financing of $4,000,000 for HSS
in September 1996 through the completion of a public offering of the Company's
stock. HSN Direct provided HSS with a license to the Home Shopping Showcase(TM)
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 retail
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 contributed its rights and agreements for the domestic retail
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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 Board of ML Direct, and Alan Kerzner, Executive Vice President of ML Direct,
to the Board of Directors of HSS(TM). The Chairman of the Board of KN2B, Inc.
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 Bylaws, 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.
EMPLOYEES
As of February 28, 1997, ML Direct had seven full-time employees, and
HSS(TM) had eleven full-time and four part-time employees.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's corporate office is in Clearwater, Florida in leased
office space. The lease is for three years and is approximately 2,400 square
feet. HSS's corporate office is located in leased space in New York City, New
York and is approximately 4,500 square feet.
The Company believes that its existing facilities are adequate to meet
the Company's needs for the foreseeable future. Should the Company need
additional space, management believes the Company will be able to secure
additional space at reasonable rates.
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered hereby to a vote of security holders of the Company.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since September 3, 1996, the date of the Company's initial public
offering, ML Direct's common stock, par value $.0001, has been traded on the
Nasdaq SmallCap market under the symbol "MLDR" and ML Direct's common stock
warrants have been traded on the Nasdaq SmallCap market under the symbol
"MLDRW." The high and low closing sale prices during the fourth quarter for ML
Direct's common stock and common stock warrants for fiscal year 1996 were as
follows:
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ---- ---
<S> <C> <C>
September 4, 1996 through November 30, 1996 16 1/4 5 5/8
COMMON STOCK WARRANTS
---------------------
September 4, 1996 through November 30, 1996 7 3/4 4
</TABLE>
On February 28, 1997, the closing sale prices of the Company's common
stock and common stock warrants were $1.00 per share and $0.59375 per warrant,
respectively. The approximate number of shareholders of record of the
Company's common stock and common stock warrants as of February 28, 1997 was
3,000 and 2,000,
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respectively. ML Direct has not paid any cash dividends since its inception and
does not anticipate paying cash dividends in the foreseeable future.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATING
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto included
elsewhere herein.
(A) RESULTS OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO THE PERIOD FROM JUNE 22, 1995
(INCEPTION) TO NOVEMBER 30, 1995.
Revenues for the year ended November 30, 1996 ("fiscal 1996") were
approximately $692,000 compared to approximately $760,000 for the period from
June 22, 1995 (Inception) through November 30, 1995 ("fiscal 1995") , a decrease
of 8.9%. Of the $692,000, approximately $618,000, or 89%, were net sales to
three large chain stores, Jack Eckerd Drug Co., Caldor Department Store and Play
it Again Sports. The sales to Jack Eckerd Drug Co. and Caldor Department Store
were in keeping with the Company's promotional sales business. The remaining
sales represent the first results of the Company's core kiosk program. Overall,
the Company achieved a gross profit percentage of 28.4% in fiscal 1996 compared
to a 12.1% gross profit percentage in the previous period. The increase in gross
profit percentage in fiscal 1996 was due to the sale of a few products to one
customer in the prior period at a lower margin.
Operating expenses for fiscal 1996 were approximately $3,290,000 compared
to approximately $188,000 in fiscal 1995. The increase in expenses reflects
growth in operational activity during fiscal 1996, as compared to mainly
start-up activity during the approximately five month period ending November 30,
1995. The most significant expenses in 1996 were for: (a) reimbursement of
miscellaneous operating costs to related parties (as described below), (b)
compensation, (c) travel and entertainment, (d) consulting fees, (e)
compensation expense recorded through amortization of deferred compensation and
(f) a provision for loss recorded for a related party note receivable.
The reimbursement was to a partnership in which both of the partners are
significant shareholders in the Company. The Company reimbursed this partnership
for expenses incurred on behalf of the Company for fiscal 1996 and fiscal 1995
as follows:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------------- -----------------
<S> <C> <C>
Rent and Utilities .................. $146,701 $ 11,782
Travel and Entertainment ............ 62,629 47,786
Outside Services .................... 98,698 60,989
Compensation and Benefits ........... 811 7,795
-------- --------
Total ............................. $308,839 $128,352
======== ========
</TABLE>
The Company's net loss for fiscal 1996 was $3,053,661 compared to its
net loss of $93,154 for fiscal 1995. The majority of the expenses which
comprised the net loss were for compensation and benefits (approximately
$1,038,000) as a result of the hiring of marketing, sales, and administrative
personnel, and for reimbursement of $308,839 of miscellaneous operating expenses
paid on behalf of the Company by a partnership in which both of the partners are
significant shareholders of the Company. In order to implement the supermarket
kiosk program within Home Shopping Showcase(TM)and to market the services of ML
Direct, additional expenses were incurred for travel and entertainment
(approximately $259,000) and consulting, which includes legal expenses
(approximately $368,000). In addition, the Company recorded additional
compensation expense (approximately $289,000) as a result of the amortization of
the deferred compensation cost which was recorded as a result of stock options
issued to employees and consultants with exercise prices below fair market
value on the date of grant. The Company recorded a provision for loss on a
related party note receivable ($500,000). See (B) LIQUIDITY & CAPITAL RESOURCES.
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(B) LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $3,260,334 at November 30, 1996.
Cash used by operating activities was $3,075,847 for fiscal 1996.
As of November 30, 1996, ML Direct had no material commitments for capital
expenditures. During fiscal year 1996 the Company used cash flows raised in the
public offering to purchase approximately $260,000 in displays and equipment.
Home Shopping Showcase plans to continue building kiosks in supermarkets through
fiscal year 1997 and the capital needs of this program are expected to be
approximately $200,000 for fiscal 1997.
In November 1996, the Company made a loan in the aggregate principal
amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks"). The Chairman of the
Board of the Company is also the Chairman of the Board of Fresh Picks. The loan
is evidenced by an Unsecured Non-Transferable Convertible Promissory Note (the
"Note"), which bears interest at prime rate plus four percent per annum and is
due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the lesser of $1.50 per share or
the price per share for common stock paid by investors in such offering. Upon
any such conversion of a portion of the Note into equity, Fresh Picks will
prepay all outstanding principal, and interest thereon, except to the extent so
converted. Due to the fact that there is no evidence that Fresh Picks will be
able to repay the loan and the Note is not collateralized, the Company has
provided an allowance for loss for the entire $500,000 principal amount of the
Note as of November 30, 1996. The Company will recognize interest income on the
Note when received in cash.
Fresh Picks, a development-stage company, is a proposed full-service
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel. Management of the
Company has been informed that Fresh Picks has secured a commitment with a
Boston-based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments
no later than year end. In addition, management of the Company has been
informed that Fresh Picks is currently in the process of seeking equity
financing from various potential investors. There can be no assurance that
Fresh Picks will be successful in obtaining such financing or that Fresh Picks
will achieve the necessary sales and profitability targets required to continue
its operations and enable Fresh Picks to repay the Note to the Company.
The Company completed a registration statement for 480,000 units at $15.00
per unit which was declared effective on September 3, 1996. Each unit consisted
of 2 shares of common stock and 1 Class A Warrant. Each Class A Warrant entitles
its holder to purchase one share of common stock at $8.00. In September of 1996,
the Company received $6,656,856, which represented the net proceeds on the sale
of 552,000 units, including the original 480,000 units, as well as the full
72,000 units available in the underwriter's over allotment. Concurrently with
the receipt of the aforementioned proceeds, the Company paid $600,933 for the
redemption of 720,000 shares of Series A Preferred Stock and $4,000,000 for the
stock subscription of 1,500 shares of Class A Common Stock in KN2B, Inc.
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the year ended November 30, 1996 and
the period ended November 30, 1995, the Company incurred net losses of
$3,053,847 and $93,154, respectively, and used cash for operating activities of
$3,075,847 and $61,211, respectively. These factors among others may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amount or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. Management is continuing
its efforts to generate positive cash flows and profits by expanding its sales
through distribution channels such as supermarkets, mass merchandisers, drug
chains, and department stores as well as informercials and shopping networks
and catalogs and print media. The Company's continuation as a going concern is
dependent upon its ability and the ability of its subsidiary to generate
sufficient cash flow to meet their obligations on a timely basis and ultimately
on the Company's and its subsidiary's attaining successful operations.
(C) OTHER SIGNIFICANT MATTERS
On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services
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to the Company. This agreement, which expires on December 31, 1999 provides
that the Company pay to TCC an initial fee of $120,000 and a monthly amount
equal to $15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC
in January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B. This agreement, which expires on
December 31, 1999 provides that the Company pay to TCC an initial fee of
$60,000 and a monthly amount equal to $7,500. The initial fees totaling
$180,000 will be capitalized and amortized over the three-year term.
The consulting agreements may be terminated by either party for non-performance.
On January 1, 1997, pursuant to the above described Consulting
Agreement between the Company and TCC, the Company entered into a Stock Option
Agreement (the "ML Option Agreement") with TCC. Pursuant to the ML Option
Agreement, the Company granted TCC an option to purchase 54,545 Shares
exercisable from January 1, 1997 through December 31, 2001 at an exercise price
of $4.50 per share. In addition, the ML Option Agreement provides that the
Company issue to TCC the following options to purchase the Company's common
stock ("Shares") at an exercise price of $4.50 per share: (i) if the Consulting
Agreement shall be in effect at any time during the 120-day period ending on
January 1, 1999, an option to purchase an additional 54,545 Shares exercisable
from January 1, 1999 through December 31, 2003; (ii) if the Consulting Agreement
shall be in effect at any time during the 120-day period ending on January 1,
2000, an option to purchase an additional 54,545 Shares exercisable from January
1, 2000 through December 31, 2004; (iii) if the Company closes any transaction
whereby the Company receives an infusion or infusions of cash (either equity or
debt), or it acquires (directly or indirectly) another company, an option to
purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
if Consulting Agreement shall be in effect at any time within the 120-day period
ending on the last day of the Company's 1997, 1998 and 1999 fiscal years, an
option to purchase the number of shares obtained by multiplying 54,545 by the
percentage increase in earnings per share from the Company's 1996 fiscal year
end earnings per share. To the extent not exercised, all options terminate on
the day immediately following the fifth anniversary of the date of grant. The
ML Option Agreement permits either party to terminate the agreement upon 90
days' notice without cause.
On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through December 31, 2001 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through December 31, 2003; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through December 31, 2004; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant. The KN2B Option Agreement permits either party to terminate the
agreement upon 90 days' notice without cause.
ITEM 7 - FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements and notes thereto
appear beginning on page F-1 hereof.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On December 24, 1996, the Company filed a Form 8-K reporting a change
in principal accountants from Moore Stephens, PC to Deloitte and Touche LLP.
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PART III
ITEM 9 - DIRECTORS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT, 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 42 Chairman of the Board of ML Direct
James M. Lawless 59 President, Chief Operating Officer and Principal Accounting
Officer
Alan Kerzner 39 Executive Vice President and Director
Benedict V. White, Jr 50 Executive Vice President
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Nancy Shalek is Chairman of the Boards of both the Company and of HSS.
She is President of Sherbrooke Consulting which is a partner in Columbus Circle.
She is currently an officer and also a director of several public and private
companies. Previously Mrs. Shalek was the President of The Shalek Agency, an
advertising agency that she formed in 1988. From 1987 to 1988, Mrs. Shalek
served as Executive Vice President and West Coast Director of the W.B. Donor
advertising agency. W.B. Donor acquired Wexler & Shalek, an agency which she
co-founded in 1983. From 1983 through 1987, Mrs. Shalek served as President of
Wexler & Shalek. Prior to that time, she held marketing positions in the
Carnation Company and in the Voit division of AMF Corporation. Mrs. 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. Mrs. Shalek holds a B.A. from the University of Pennsylvania and an
M.B.A. from the University of Southern California.
James M. Lawless has served as President, Chief Operating Officer and
Principal Accounting Officer of the Company since April 1996. 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, Inc. He served as Home Shopping Club's Senior Vice President of Network
Operations from 1987 to 1989, and as its President from 1990 to 1993.
Mr. Lawless holds a B.A. from La Salle University in Philadelphia.
Alan Kerzner is the Executive Vice President of the Company and
President and Chief Operating Officer of HSS(TM), as well as the Director of
both the Company and HSS(TM). From 1991 to 1995 he served as marketing director
of Johnson & Johnson's Consumer Products, Inc. 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 Proctor & 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. has served as Executive Vice President of the
Company since April 1996. Prior to joining the Company, Mr. White was the
President of Celebrity Marketing, a division of the Home Shopping Network, Inc.
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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's
directors, officers, and persons owning more than 10 percent of the Common Stock
are required to report their ownership of Common Stock and any changes
8
<PAGE> 9
in that ownership, on a timely basis, to the Securities and Exchange
Commission. Based on material provided to the Company, the following reports
were not filed on a timely basis: (i) a report on Form 3 required to be filed
by each of James Lawless, the Company's President and Chief Operating Officer;
Benedict White, the Company's Executive Vice President; and (ii) a report on
Form 3 and a report on Form 4 required to be filed by Alan Kerzner, the
Company's Executive Vice President; (iii) a report on Form 3 and a report on
Form 4 required to be filed by Nancy Shalek, the Company's Chairman of the
Board of Directors; (iv) a report on Form 3 and a report on Form 4 required to
be filed by Sherbrooke Consulting, Ltd; (v) a report on Form 3 and a report on
Form 4 required to be filed by Carole Landau; and (vi) a report on Form 3 and a
report on Form 4 required to be filed by the Market Link Group, Ltd. All of the
aforementioned reports, or a Form 5 covering such reports, have subsequently
been filed.
ITEM 10 - EXECUTIVE COMPENSATION
The following table provides summary information concerning cash and
certain other compensation paid or accrued during each of the last two fiscal
years 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 $100,000 during the last fiscal year ( the "Named
Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- ----------------------
OTHER RESTRICTED
ANNUAL ANNUAL STOCK STOCK
NAMES AND FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#)
- ------------------ ------ ------ ------ ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Alan Kerzner (1) 1996 150,000 -- 2,215 -- 60,000
Executive VP 1995 12,500 -- -- -- --
James Lawless(2) 1996 75,000 -- -- -- 100,000
President 1995 -- -- -- -- --
Benedict White(3) 1996 125,000 -- 37,500 -- 600,000
Executive VP 1995 -- -- -- -- --
</TABLE>
(1) Mr. Kerzner was hired in December 1995 and his annual salary is
$150,000. The Company paid $2,215 on his behalf for a life insurance
contract under the terms of his employment agreement.
(2) Mr. Lawless was hired in April 1996 and his annual salary is $120,000.
(3) Mr. White was hired in April 1996 and his annual salary is $200,000 and
he receives a $5,000 per month expense allowance.
OPTION GRANTS
Set forth below is information with respect to options to purchase the
Company's Common Stock granted to the Named Executive Officers during fiscal
year 1996. The grants to Messrs. Kerzner, Lawless, and White were made under the
ML Direct 1995 Stock Plan.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTIONS/SAR'S PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS/SAR'S EMPLOYEES IN EXERCISE OR BASE ---------------------
NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE 5%($) 10%($)
- ------------- ---------- ----------- ------------ --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alan Kerzner 60,000 5.7% $ 2.50 June 30, 2000 32,326 69,615
James Lawless 100,000 9.5% $ 4.50 December 31, 2002 153,043 347,202
Benedict White 600,000 57.1% $ 4.50 December 31, 2002 918,258 2,083,215
</TABLE>
(1) Gains are reported net of the option exercise price but before taxes
associated with the exercise. These amounts represent certain assumed
rates of appreciation only.
As of November 30, 1996 there were no options or SARS issued under the 1995
Incentive Stock Option and Stock Appreciation Rights Plan ("Incentive Option
Plan").
9
<PAGE> 10
BOARD COMPENSATION
Each director of the Company is entitled to receive reasonable expenses
not to exceed $150 incurred in attending meetings of the Board of Directors of
the Company. The Directors of the Company did not receive any compensation in
fiscal for 1996 for Board related expenses.
OPTION EXERCISES
<TABLE>
<CAPTION>
Value of Unexercised,
Number of Unexercised In-the-Money
Shares Options Held at Fiscal Options at
Acquired on Value Year End (#) Fiscal Year-End ($)(2)
Name Exercise(#) Realized ($) Exercisable Unexercisable(1) Exercisable Unexercisable
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan Kerzner - - 60,000 - 195,000 -
James Lawless - - - 100,000 - 125,000
Benedict White - - - 600,000 - 750,000
</TABLE>
(1) Messrs. Lawless and White's options were not exercisable until January 1,
1997 at which time they vested 100%, although the shares under the 1995
Stock Plan are not registered.
(2) Represents the difference between the $5.75 closing stock price on November
29, 1996 and the exercise price of the options and does not include the
federal and state taxes due upon exercise.
EMPLOYMENT AGREEMENTS
The Company has entered into a three 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 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. The exercise price was determined by management.
On April 15, 1996, the Company entered into a one 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 sole 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 exercise price was
determined by management. 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 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 sole discretion of the
Board of Directors. Mr. White also receives a $5,000 per month expense
allowance. 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 exercise price was
determined by management. The agreement also provides that Mr. White has the
right to receive an additional 500,000 options at fair market value in
increments of 100,000 options during the ensuing five years, if he is employed
by the Company. The agreement also provides for the Company to purchase
life insurance of not less than $500,000, which shall be payable to his estate.
On May 15, 1996, Home Shopping Showcase(TM) entered into a two year
employment agreement, effective June 3, 1996, with Win Taylor, pursuant to which
Mr. Taylor will serve as Home Shopping Showcase(TM)'s Executive Vice President
of Sales and Marketing. Mr. Taylor's agreement calls for annual compensation of
$140,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Taylor was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$ 7.50 per share. The exercise price was determined by management. Mr. Taylor's
options vest, and are then immediately exercisable as follows: 33,333 options on
July 1, 1997; 33,333 options on July 1, 1998; and 33,334 options on July 1,
1999, should he have continued to be employed by the Company at each of the just
prior year ending dates (June 2nd of 1997, 1998, and 1999, respectively) of his
employment. The agreement also provides for the Company to purchase life
insurance of not less than $500,000 which shall be payable to his estate.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1997 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%)
10
<PAGE> 11
percent of the outstanding shares; (ii) the Company's directors; and the
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
COMMON (%) OF
NAME AND ADDRESS OF STOCK COMMON
BENEFICIAL OWNER * OWNED STOCK
- ------------------ ----- -----
<S> <C> <C>
Alan Kerzner(1) ............................. 60,000 1.31%
Nancy Shalek(2) ............................. 141,818 3.11%
James Lawless ............................... 100,000 2.19%
Benedict White .............................. 100,000 2.19%
M.D. Funding, Inc. .......................... 318,000 6.96%
750 Lexington Avenue
New York, NY 10022
All officers and directors as a group
(four(4) persons) ......................... 401,818 8.80%
</TABLE>
(1) 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.
(2) Of the 141,818 shares, 60,000 shares of common stock are owned by James
Shalek, Mrs. Shalek's husband. The remaining shares are options granted
and vested to The Columbus Circle, a partnership of which one of the two
general partners is owned and controlled by Mrs. Shalek.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED 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(TM). 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 agreed that it would secure financing
of $4,000,000 for HSS. HSN Direct provided HSS with a license to the Home
Shopping Showcase(TM) 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 contributed 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.
In November 1996, the Company made a loan in the aggregate principal
amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks"). The Chairman of the
Board of the Company is also the Chairman of the Board of Fresh Picks. The loan
is evidenced by an Unsecured Non-Transferable Convertible Promissory Note
(the "Note"), which bears interest at prime rate plus four percent per annum
and is due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the
11
<PAGE> 12
lesser of $1.50 per share or the price per share for common stock paid by
investors in such offering. Upon any such conversion of a portion of the Note
into equity, Fresh Picks will prepay all outstanding principal, and interest
thereon, except to the extent so converted. Due to the fact that there is no
evidence that Fresh Picks will be able to repay the loan and the Note is not
collateralized, the Company has provided an allowance for loss for the entire
$500,000 principal amount of the Note as of November 30, 1996. The Company will
recognize interest income on the Note when received in cash.
Fresh Picks, a development-stage company, is a proposed full-service
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel. Management of the
Company has been informed that Fresh Picks has secured a commitment with a
Boston based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments
no later than year end. In addition, management of the Company has been informed
that Fresh Picks is currently in the process of seeking equity financing from
various potential investors. There can be no assurance that Fresh Picks will be
successful in obtaining such financing or that Fresh Picks will achieve the
necessary sales and profitability targets required to continue its operations
and enable Fresh Picks to repay the note to the Company.
The Company obtained financing during fiscal 1996 in the amount of
$582,000 from Marketlink, a partnership consisting of two partners, The
MarketLink Group, Ltd. ("MLG") and Sherbrooke Consulting, Inc., to provide short
term working capital to the Company prior to the public offering. MLG is a
stockholder of the Company and Sherbrooke Consulting, Inc. is a corporation
wholly owned by Nancy Shalek, an officer and Chairman of the Company's Board of
Directors. The $582,000 plus interest of $9,496 was repaid by the Company in
September 1996.
The Company incurred approximately $12,300 per month, on a month-to-month
basis, for office space and office services provided to it by Marketlink. In
addition, the partnership paid certain other expenses on behalf of the Company
during fiscal year 1996 and its first months of operation in 1995, such as
travel and entertainment, outside services and compensation expense. For the
year ended November 30, 1996, and the period from June 22, 1995 (date of
inception) through November 30, 1995, the Company reimbursed this partnership
approximately $309,000 and $128,000, respectively.
On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services to the
Company. This agreement, which expires on December 31, 1999 provides that the
Company pay to TCC an initial fee of $120,000 and a monthly amount equal to
$15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC in
January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B, Inc. This agreement, which expires on
December 31, 1999 provides that the Company pay to TCC an initial fee of $60,000
and a monthly amount equal to $7,500. The initial fees totaling $180,000 will be
capitalized and amortized over the three-year term. The consulting agreements
may be terminated by either party for non-performance.
On January 1, 1997, pursuant to the above described Consulting Agreement
between the Company and TCC, the Company entered into a Stock Option Agreement
(the "ML Option Agreement") with TCC. Pursuant to the ML Option Agreement, the
Company granted TCC an option to purchase 54,545 Shares exercisable from January
1, 1997 through December 31, 2001 at an exercise price of $4.50 per share. In
addition, The ML Option Agreement provides that the Company issue to TCC the
following options to purchase the Company's common stock ("Shares") at an
exercise price of $4.50 per share: (i) if the Consulting Agreement shall be in
effect at any time during the 120-day period ending on January 1, 1999, an
option to purchase an additional 54,545 Shares exercisable from January 1, 1999
through December 31, 2003; (ii) if the Consulting Agreement shall be in effect
at any time during the 120-day period ending on January 1, 2000, an option to
purchase an additional 54,545 Shares exercisable from January 1, 2000 through
December 31, 2004; (iii) if the Company closes any transaction whereby the
Company receives an infusion or infusions of cash (either equity or debt), or it
acquires (directly or indirectly) another company, an option to purchase the
number of Shares obtained by dividing by 4.5, the total consideration received
by the Company in the case of a cash infusion, or the total consideration given
by the Company in the case of an acquisition, and (iv) if Consulting Agreement
shall be in effect at any time within the 120-day period ending on the last day
of the Company's 1997, 1998 and 1999 fiscal years, an option to purchase the
number of shares obtained by multiplying 54,545 by the percentage increase in
earnings per share from the
12
<PAGE> 13
Company's 1996 fiscal year end earnings per share. To the extent not exercised,
all options terminate on the day immediately following the fifth anniversary of
the date of grant.
On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through December 31, 2001 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through December 31, 2003; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through December 31, 2004; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant.
Both contracts mentioned above allow termination of the agreement by
either party, without cause, upon not less than 90 days prior written notice to
the other.
As part of the Company's agreement between the Company and HSND, each
of the Company and HSND are to receive from HSS a royalty of 6% of all sales. In
addition to these royalties, the Company and/or HSS may, from time to time, be
required to pay royalties to suppliers other than HSND in order to acquire from
them the retail rights to their DRTV merchandise. As of November 30, 1996 the
Company accrued $108,517 in royalties payable to HSND.
The Company had outstanding at November 30, 1995, 600,000 shares of
Series A Preferred Stock, which were a part of preferred stock units (each
consisting of one share of Series A Preferred and one share of common) issued by
the Company to several related parties in August and September of 1995 in
exchange for $500,000. The 600,000 common shares so issued were included in the
March 1996 six-for-five stock split. The Series A Preferred Stock was
convertible, at the option of the holder, into a second share of common stock,
or was redeemable, by the Company, for approximately $.833 per share, which
approximates the original purchase price of the units. The Company redeemed the
600,000 shares of Series A Preferred Stock for approximately $500,000 with a
portion of the proceeds of the public offering described in Note (3) to the
Company's consolidated financial statements.
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.
ITEM 13 - EXHIBITS AND REPORTS OR FORM 8-K
(a) List of Documents Filed as Part of this Report
(1) Consolidated Financial Statements - See Index to Consolidated
Financial Statements on page F-1 of this Form 10-KSB Annual
Report.
Independent Auditors' Report - Deloitte & Touche LLP
Independent Auditors' Report - Moore Stephens, PC
(2) Exhibits
27.01 - Financial Data Schedule (for SEC use only)
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<S> <C> <C>
3.01 - Certificate of Incorporation of the Company filed as Exhibit 3.01 in the Company's Registration Statement on Form
SB-2.
3.02 - Certificate of Correction of the Company filed as Exhibit 3.02 in the Company's Registration Statement on Form SB-2.
3.03 - Certificate of Designation Establishing a Series of Shares of Series A Redeemable Convertible Preferred Stock of the
Company filed as Exhibit 3.03 in the Company's Registration Statement on Form SB-2.
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C>
3.04 - By-Laws of the Company filed as Exhibit 3.04 in the Company's Registration Statement on Form SB-2.
4.01 - Form of Warrant Agreement by and among the Company and American Stock Transfer & Trust Company filed as Exhibit 4.01
in the Company's Registration Statement on Form SB-2.
4.02 - Form of Representative's Purchase Option Company filed as Exhibit 4.02 in the Company's Registration Statement on
Form SB-2.
10.01 - Form of Series A Preferred Stock Subscription Agreement filed as Exhibit 10.01 in the Company's Registration
Statement on Form SB-2.
10.02 - Letter of Agreement by and between the Company and HSN Direct Joint Venture dated June 12, 1995 and amendments
thereto filed as Exhibit 10.02 in the Company's Registration Statement on Form SB-2.
10.03 - Employment Agreement by and between Alan Kerzner and the Company dated as of December 1, 1995 filed as Exhibit 10.03
in the Company's Registration Statement on Form SB-2.
10.04 - Form of Financial Consulting Agreement by and between the Company and I.AA. Rabinowitz & Co. filed as Exhibit 10.04
in the Company's Registration Statement on Form SB-2.
10.05 - Employment Agreement by and between James Lawless and the Company dated April 15, 1996 filed as Exhibit 10.05 in the
Company's Registration Statement on Form SB-2.
10.06 - Agreement by and between EGW Enterprises, Ltd. and the Company dated April 8, 1996 filed as Exhibit 10.06 in the
Company's Registration Statement on Form SB-2.
10.07 - Employment Agreement by and between Benedict White and the Company dated April 15, 1996 filed as Exhibit 10.07 in the
Company's Registration Statement on Form SB-2.
10.08 - Consulting Agreement dated January 1, 1997 between the Company and Columbus Circle
10.09 - Consulting Agreement dated March 11, 1997 between Home Shopping Showcase and Columbus Circle
10.11 - Stock Option Agreement dated January 1, 1997 between the Company and Columbus Circle
10.12 - Stock Option Agreement dated January 1, 1997 between KN213, Inc. and Columbus Circle
10.13 - Loan Agreement dated November, 1996 between the Company and Fresh Picks Inc.
11.1 - Loss Per Share Calculations
16 - Letter from Moore Stephens, PC, the predecessor auditor, to the Securities and Exchange Commission filed with the
Company's Form 8-K on December 24, 1996 incorporated by reference herein.
21 - Subsidiaries of the Company
23.01 - Consent of Bernstein & Wasserman (including in Exhibit 5.01) filed as Exhibit 23.01 in the Company's Registration
Statement on Form SB-2.
27.01 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
On December 24, 1996, the Company filed a Form-8K reporting a change in
principal accountants from Moore Stephens, PC to Deloitte and Touche LLP.
14
<PAGE> 15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ML DIRECT INC.
March 17, 1997 By: /s/ Nancy Shalek
-----------------------------------
Nancy Shalek
Chairman of the Board
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW
BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND
ON THE DATE INDICATED.
/s/ NANCY SHALEK March 17, 1997
- -------------------------------
Nancy Shalek
Chairman of the Board
/s/ JAMES M. LAWLESS March 17, 1997
- -------------------------------
James M. Lawless
President and
Principal Accounting Officer
/s/ ALAN KERZNER March 17, 1997
- -------------------------------
Alan Kerzner
Director
15
<PAGE> 16
ML DIRECT INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report..........................................................................F-2
Predecessor Auditors' Report..........................................................................F-3
Consolidated Balance Sheet as of November 30, 1996....................................................F-4
Consolidated Statements of Operations.................................................................F-5
Consolidated Statements of Stockholders' Equity ......................................................F-6
Consolidated Statements of Cash Flows.................................................................F-7
Notes to Consolidated Financial Statements...........................................................F-8
</TABLE>
F-1
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
ML Direct, Inc.
Clearwater, Florida
We have audited the accompanying consolidated balance sheet of ML Direct Inc.
(the "Company") and its subsidiary as of November 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended November 30, 1996. 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 financial position of ML Direct Inc. and
its subsidiary as of November 30, 1996 and the results of their operations, and
their cash flows for the year ended November 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended November
30, 1996 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1, "Going Concern - 1996", to the consolidated
financial statements, the Company's recurring losses and negative cash flows
from operating activities raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Tampa, Florida
March 17, 1997
F-2
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
ML Direct Inc.
New York, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of ML Direct, Inc. and its subsidiary 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 results of operations
and cash flows of ML Direct Inc. and its subsidiary for the period June 22,1995
(date of inception) to November 30, 1995, in conformity with generally accepted
accounting principles.
The accompanying 1995 consolidated financial statements have been prepared
assuming that ML Direct Inc. will continue as a going concern. As discussed in
Note 1, "Going Concern - 1995" 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 1 - Going Concern - 1995. 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-3
<PAGE> 19
ML DIRECT, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, 1996
-----------------
<S> <C>
CURRENT ASSETS
Cash and Cash Equivalents............................................ $ 2,562,227
Inventory............................................................ 1,150,590
Accounts Receivable, Net............................................. 437,432
Prepaid Expenses..................................................... 588,455
------------
Total Current Assets.................................... 4,738,704
------------
FIXED ASSETS, NET...................................................... 290,234
------------
OTHER ASSETS
Organizational Cost, Net............................................. 17,240
Unsecured Non-Transferable Convertible Promissory Note Receivable -
Related Party, Net of Allowance for Loss of $500,000.............. --
Security Deposits.................................................... 130,400
Other................................................................ 100,000
------------
Total Other Assets............................................... 247,640
------------
TOTAL ASSETS..................................................... $ 5,276,578
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable..................................................... $ 1,162,359
Accrued Returns and Allowances....................................... 73,654
Accrued Expenses..................................................... 133,840
Accrued Royalty to Related Party .................................... 108,517
------------
Total Current Liabilities ....................................... 1,478,370
------------
COMMITMENTS............................................................ --
STOCKHOLDERS' EQUITY
Preferred Stock--$.0001 par value; 1,000,000
shares of "Blank Check", No Shares Issued and Outstanding......... --
Common Stock--$.0001 par value; 15,000,000 Shares Authorized,
4,224,000 Shares Issued and Outstanding............................ 422
Additional Paid-In-Capital........................................... 7,605,851
Retained Earnings (Deficit).......................................... (3,146,815)
Deferred Compensation Expense........................................ (661,250)
------------
Total Stockholders' Equity................................ 3,798,208
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $ 5,276,578
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 20
ML DIRECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 22, 1995
YEAR ENDED (DATE OF INCEPTION) THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
REVENUES, NET ...................................... $ 692,256 $ 759,622
COST OF SALES ...................................... 495,272 667,365
----------- -----------
Gross Profit ...................................... 196,984 92,257
----------- -----------
OPERATING EXPENSES
Selling Expense .................................. 919,965 21,721
General and Administrative Expenses .............. 1,542,734 37,474
Reimbursements to Related Party .................. 308,839 128,352
Provision for loss - Related Party Note Receivable 500,000 --
Depreciation and Amortization Expense ............ 18,306 --
----------- -----------
Total Operating Expenses ....................... 3,289,844 187,547
----------- -----------
LOSS FROM OPERATIONS ............................. (3,092,860) (95,290)
----------- -----------
OTHER INCOME (EXPENSE)
Interest Income .................................. 48,695 2,136
Interest Expense ................................. (9,496) --
----------- -----------
Total Other Income (Expense) ................... 39,199 2,136
----------- -----------
NET LOSS .......................................... $(3,053,661) $ (93,154)
=========== ===========
Weighted Average Number of Shares ................. 3,686,272 4,442,400
=========== ===========
NET LOSS PER SHARE ................................ $ (.83) $ (.02)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 21
ML DIRECT INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common
Stock Additional Stock Additional Common
$0.0001 Paid-in $0.0001 Paid-in Stock
ParValue Capital ParValue Capital Subscribed
-----------------------------------------------------------------
<S> <C> <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 60 249,940 60 249,940 --
Common Stock Subscribed -- -- -- -- 4,000,000
Net Loss for the Period June 22, 1995 through
November 30, 1995 -- -- -- -- --
---- --------- ---- ----------- -----------
Balance at November 30, 1995 60 249,940 300 249,940 4,000,000
Stock Options Issued -- -- -- 950,000 --
Compensation Expense -- -- -- -- --
Issuance of Preferred Stock Units 12 49,988 12 49,988 --
Issuance of Common Stock, Net of Offering Costs of $1.6M -- -- 110 6,656,856 (4,000,000)
Redemption of Preferred Stock at $.833 Stated Value (72) (299,928) -- (300,933) --
Net Loss for the Year Ended November 30,1996 -- -- -- -- --
---- --------- ---- ----------- -----------
Balance at November 30, 1996 $ -- $ -- $422 $ 7,605,851 $ --
==== ========= ==== =========== ===========
<CAPTION>
Deferred Stock Total
Retained Compensation Subscription Stockholders'
Earnings Expense Receivable Equity
-------------------------------------------------------------------
<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 -- -- -- 500,000
Common Stock Subscribed -- -- (4,000,000) --
Net Loss for the Period June 22, 1995 through
November 30, 1995 (93,154) -- -- (93,154)
----------- --------- ----------- -----------
Balance at November 30, 1995 (93,154) -- (4,000,000) 407,086
Stock Options Issued -- (950,000) -- --
Compensation Expense -- 288,750 -- 288,750
Issuance of Preferred Stock Units -- -- -- 100,000
Issuance of Common Stock, Net of Offering Costs of $1.6M -- -- 4,000,000 6,656,966
Redemption of Preferred Stock at $.833 Stated Value -- -- -- (600,933)
Net Loss for the Year Ended November 30,1996 (3,053,661) -- -- (3,053,661)
----------- --------- ----------- -----------
Balance at November 30, 1996 $(3,146,815) $(661,250) $ -- $ 3,798,208
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 22
ML DIRECT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE JUNE 22, 1995
YEAR ENDED THROUGH
NOVEMBER 30, 1996 NOVEMBER 30, 1995
----------------- ------------------
<S> <C> <C>
Cash Flows-Operating
Activities:
Net Loss $ (3,053,661) $ (93,154)
Adjustments to Reconcile Net Loss to Net Cash Used by
Operating Activities:
Depreciation and Amortization 18,306 880
Deferred Compensation 288,750 --
Provision for Loss - Related Party Note Receivable 500,000 --
Changes in Current Assets and Liabilities
(Increase) in Accounts Receivable (437,432) --
(Increase) in Prepaid Expenses (654,382) (34,073)
(Increase) in Inventory (1,150,590) --
(Increase) Decrease in Related Party Receivable 48,982 (48,982)
Increase in Accounts Payable and Payroll Taxes 1,134,761 27,526
Increase in Accounts Payable - Related Party 108,517 --
Increase in Accrued Expenses 119,663 14,177
Increase in Accrued Returns and Allowances 1,239 72,415
---------------- ------------------
Net Cash Used In Operating Activities (3,075,847) (61,211)
---------------- ------------------
Cash Flows - Investing Activities:
Purchases of Displays and Equipment (259,963) (40,000)
Organization Costs (14,370) (10,565)
Investment in Unsecured Non-Transferable Convertible Promissory
Note receivable - Related Party (500,000) --
Principal Payment/Repayment of Note Receivable from
Related Party 50,000 (50,000)
Security Deposits (130,400) --
---------------- ------------------
Net Cash Used In Investing Activities (854,733) (100,565)
---------------- ------------------
Cash Flows - Financing Activities:
Proceeds from Related Party for Short Term Financing 582,000 --
Repayment of Short Term Financing from Related Party (582,000) --
Proceeds from Issuance of Preferred Stock Units 100,000 500,000
Net Proceeds from Issuance of Common Stock 6,656,856 --
Redemption of Preferred Stock (600,933) 240
Offering Costs -- (1,580)
---------------- -------------------
Net Cash Provided By Financing Activities 6,155,923 498,660
---------------- ------------------
Increase in Cash and Cash Equivalents 2,225,343 336,884
Cash and Cash Equivalents - Beginning of Periods 336,884 --
---------------- ------------------
Cash and Cash Equivalents - End of Periods $ 2,562,227 $ 336,884
================ ==================
Supplemental Disclosures:
Interest Paid $ 9,496 $ --
================ ==================
Income Taxes Paid $ -- $ --
================ ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 23
ML DIRECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
GENERAL
ML Direct, Inc. (the 'Company'), a Delaware corporation, was incorporated
on June 22, 1995. In that same month, June of 1995, the Company entered into a
binding letter of intent with HSN Direct Joint Venture ('HSND') which provided
for the creation of a new entity, KN2B, Inc., which operates under the name
"Home Shopping Showcase(TM)" ('HSS'). HSS was organized to establish permanent
display programs in retail venues through which a variety of consumer products,
all of which had already been successfully marketed via direct response
television (DRTV) programming and/or advertising, could be offered for sale. At
the time of execution of the binding letter of intent, HSND was a subsidiary of
the Home Shopping Network, Inc. HSND is now a majority-owned subsidiary of
Flextech, P.L.C. (a UK Company, which itself is a subsidiary of
Telecommunications Company, Inc.). Home Shopping Network, Inc. continues to hold
a minority equity position in HSND. The binding letter of intent between the
Company and HSND has been twice amended, first in August of 1995 in connection
with the Company's initial funding of HSS, and then in February of 1996, in
connection with the change in majority ownership of HSND.
The Company contributed $4,000,000 in cash to HSS, as well as its existing
and future retail rights to products and services, in exchange for the 1,500
shares of Class A Common Stock of HSS it was issued pursuant to the letter of
intent. The Company funded the $4,000,000 from the proceeds of the completed
public offering in September 1996. HSND, on the other hand, contributed the
right to use the name "Home Shopping Showcase(TM)" and certain related
trademarks, logos and service marks, as well as its existing and future retail
rights to products and services, in exchange for the 1,499 shares of Class B
Common Stock of HSS it was issued pursuant to the letter of intent. See
discussion in Note (5).
GOING CONCERN -- 1996
The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, during the year ended November 30, 1996 and
the period ended November 30, 1995, the Company incurred net losses of
$3,053,847 and $93,154, respectively, and used cash for operating activities of
$3,075,847 and $61,211, respectively. These factors among others may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amount or
the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. Management is continuing
its efforts to generate positive cash flows and profits by expanding its sales
through distribution channels such as supermarkets, mass merchandisers, drug
chains, and department stores as well as informercials and shopping networks
and catalogs and print media. The Company's continuation as a going concern is
dependent upon its ability and the ability of its subsidiary to generate
sufficient cash flow to meet their obligations on a timely basis and ultimately
on the Company's and its subsidiary's attaining successful operations.
GOING CONCERN -- 1995
As shown in the accompanying consolidated financial statements, the
Company incurred a net loss of $93,154 for the period ended November 30, 1995,
utilized $61,211 in cash for operating activities, and did not have sufficient
cash to achieve its operating objectives. These factors created an uncertainty
about the Company's ability to continue as a going concern at November 30, 1995.
The Company was 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 was dependent on the success of the public
offering. The financial statements at November 30, 1995 did not include any
adjustments that might have been necessary if the Company was unable to continue
as a going concern.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation -- The consolidated financial statements
include both the accounts of the Company and KN2B, Inc. The Company holds an
ownership interest in KN2B, Inc. which is greater than 50%, and has been given
control over the day-to-day operations of KN2B through the terms of the binding
letter of intent. The consolidated financial statements have been prepared with
material intercompany transactions and balances eliminated in the consolidation.
In the consolidated financial statements, the Company has not recognized the
minority interest of KN2B, Inc. owned by HSND, which would be a payable to the
Company from HSND due to the fact that HSND has no cost basis in their
investment in KN2B, Inc.
(B) Revenue Recognition -- The Company's policy is to record revenues when
title passes to the customer. Revenues from certain products sold with the right
of return, principally sales to supermarket chains, are recognized net of a
provision for estimated returns. The revenue for the year ended November 30,
1996 and the period ended November 30, 1995 is net of returns and allowances of
$53,926 and $37,216, respectively. There was an outstanding letter of credit at
November 30, 1995 of approximately $60,000 repaid upon shipment of merchandise.
(C) Cash and Cash Equivalents -- For purposes of reporting cash flows,
cash and cash equivalents include cash and short-term investments with original
maturities of less than 90 days. Total cash and cash equivalents is comprised of
$42,656 in cash on deposit and cash equivalents consist of $2,519,571 at
November 30, 1996 and are invested in interest bearing money market accounts.
(D) Prepaid Expenses -- Prepaid Expenses include a deposit for the
purchase of inventory of $463,828, packaging supplies of approximately
$125,000.
F-8
<PAGE> 24
(E) 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.
(F) Net Loss Per Share -- Net loss per share was calculated based on the
weighted average number of shares outstanding during the periods presented
including all common stock equivalents. All share data has been adjusted to
reflect the six-for-five stock split in March 1996. Although the Company
reported a net loss in both periods presented, the loss per share includes
certain common stock equivalents issued within a one year period prior to the
Company's initial public offering.
(G) Accounts Receivable, Net -- Accounts Receivable is net of an allowance
for doubtful accounts at November 30, 1996 of approximately $23,942.
(H) Reserve for Returns -- The Company has provided an allowance for
possible returns of approximately 6% of revenues in 1996 and 3.5% in 1995 from
non-supermarket sales, based on management's analysis of actual returns to date.
This allowance percentage will be reviewed periodically and adjusted as
necessary.
(I) Note Receivable-Related Party -- The Company will recognize interest
income on the Note when received in cash. See discussion of the Note Receivable
in Note (4).
(J) Business Concentration/Economics Dependency -- To date, the Company's
sales have been, and will continue to be, primarily to mass and specialty retail
outlets. The Company's business plan anticipates an ultimate emphasis on what it
believes to be the heretofore under-penetrated supermarket channel of
distribution. Still the Company expects, and has so far realized, greater early
success in sales to non-supermarket outlets.
During its first five months of operation, the period ended November 30,
1995, all of the Company's net revenue was as a result of one order from one
customer, Service Merchandise, a non-supermarket retailer. Moreover, for the
year ended November 30,1996, the Company's gross revenue was primarily from
three customers, which were non-supermarket retailers: Jack Eckerd Drug Co.,
Caldor Department Stores, and Play it Again Sports representing approximately
32%, 17%, and 14% of the Company's total sales, respectively. The Company's
first foray into what it anticipates will be its area of specialization, the
Home Shopping Showcase(TM) kiosk program for supermarkets, was with grocery
chains, Baker's in Nebraska and Furrs in New Mexico. The Kiosk program accounted
for 10% of the Company's total sales for the year ended November 30, 1996.
(K) Fixed Assets, net -- Fixed assets, net, includes display units placed
in service in fiscal 1996 and office equipment and computers purchased during
fiscal year 1996, net of depreciation expense to date. Display units are
depreciated on the straight-line method over a five year period, and office
equipment and computer equipment are depreciated over seven and three years,
respectively. Depreciation expense for the year ended November 30, 1996 was
$11,490. There were no fixed assets recorded at November 30, 1995.
(L) Other Assets -- Organizational costs are amortized on the
straight-line method over a five year period and are net of accumulated
amortization of $6,816 as of November 30, 1996. Other assets includes a
$100,000 five year consulting agreement with Patterson Travis, Inc., the
underwriter of the public offering. See discussion of consulting agreement in
Note 3.
F-9
<PAGE> 25
(M) Security Deposit -- The Company purchased a certificate of deposit in
the amount of $125,400 as collateral for a letter of credit issued as a security
deposit for the Company's New York office lease. Interest income is recognized
as earned on the certificate of deposit. The Company also has a security deposit
for the Clearwater office lease of $5,000.
(N) Risk Concentrations -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist primarily of cash.
As of November 30, 1996, the Company had a non-cash equivalent, the
above-mentioned Certificate of Deposit, on deposit with a financial institution.
The institution's excess liability to the Company on that Certificate of
Deposit, over the federally insured limit of $100,000, was $25,400.
The Company's business, to date, has largely been the product of the
binding letter of intent it signed with HSND. Further, the Home Shopping
Showcase(TM) name and marks, under which the Company and HSND intend to operate
this cooperative venture, lend brand recognition, and thus, a measure of
credibility, to the Company's retail offerings. The loss of use of such
intellectual property, through the termination of this agreement or the
diminution in its value caused either by HSND's lack of success in the DRTV
venue or by the infringement or misappropriation of the intellectual property
by an outside third party, could have a material adverse effect on the Company.
Moreover, the success of Home Shopping Showcase(TM) is dependent on the
success the Company, HSND, and HSS, itself, securing, from manufacturers and
distributors, the retail distribution rights to their successful DRTV
merchandise. There can be no assurance that the Company, HSND, or HSS will be
able to secure sufficient rights from such third parties, nor that such
merchandise, when offered in the retail marketplace, will achieve a level of
success similar to that which it achieved through DRTV marketing. Finally,
there can be no assurance that the Company will be able to capitalize on its
relationships within the supermarket and other retail industries to establish
the number and quality of retail distribution outlets necessary to actualize
the Home Shopping Showcase(TM) program as it was envisioned.
(O) Use of Estimates -- The preparation of the consolidated 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 may differ from those
estimates.
(P) Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with
Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to
Employees).
(Q) Reclassifications -- Certain amounts have been reclassified in the
period from June 22, 1995 (inception date) to November 30, 1995 to be comparable
to the consolidation financial statement presentation for fiscal year 1996.
(R) Fair Value of Financial Instruments -- The estimated fair value of
amounts reported in the consolidated financial statements have been determined
by using available market information and appropriate valuation methodologies.
The carrying value of all current assets and current liabilities approximates
fair value because of their short-term nature. The fair value of long-term
assets approximates the carrying value, based on market prices.
(3) PUBLIC OFFERING
The Company filed a registration statement for 480,000 units at $15.00 per
unit which was declared effective on September 3, 1996. Each unit consisted of 2
shares of common stock and 1 Class A Warrant. Each Class A Warrant entitles its
holder to purchase one share of common stock at $8.00 per share during the four
year period commencing one year from the effective date of the registration
statement . In September of 1996, the Company received $6,656,856, which
represented the net proceeds on the sale of 552,000 units, including the
original 480,000 units, as well as the full 72,000 units available in the
underwriter's over allotment. Concurrently with the receipt of the
aforementioned proceeds, the Company paid $600,933 for the redemption of 720,000
shares of Series A Preferred Stock and $4,000,000 for the stock subscription of
1,500 shares of Class A Common Stock in KN2B, Inc.
F-10
<PAGE> 26
The following table is a detail of the proceeds received by the Company
upon completion of the public offering on September 3, 1996:
<TABLE>
<CAPTION>
# OF UNITS PRICE/UNITS TOTAL
---------- ----------- -----
<S> <C> <C> <C>
PROCEEDS
Initial Offering of 448,000 units 480,000 $15.00 $7,200,000
Over-Allotment Option 72,000 15.00 1,080,000
------- ----------
TOTAL OFFERING PROCEEDS 552,000 8,280,000
======= ----------
DEDUCTION FROM PROCEEDS
Underwriter's Discounts and Commissions 828,000
Underwriter's Non Accountable Expense Allowance 248,400
Legal Fees 321,070
Accounting and Auditing Fees 110,000
Printing and Other Fees 115,674
----------
TOTAL DEDUCTIONS 1,623,144
----------
NET PROCEEDS FROM INITIAL PUBLIC OFFERING $6,656,856
==========
</TABLE>
In conjunction with the public offering, the Company entered into a five
year consulting agreement with Patterson Travis, Inc. in which the Company will
be provided with financial planning and business consulting services.
(4) RELATED PARTY TRANSACTIONS
Related Party Expenses and Accounts Payable -- The Company incurred
approximately $12,300 per month, on a month-to-month basis, for office space and
office services provided to it by a partnership in which both of the partners
are principal shareholders in the Company. In addition, the partnership paid
certain other expenses on behalf of the Company during its first months of
operation. For the year ended November 30, 1996, and the period from June 22,
1995 (date of inception) through November 30, 1995, the Company reimbursed this
partnership for payment of expenses on the Company's behalf as follows:
<TABLE>
<CAPTION>
For the Year From June 22, 1995
Ended (Date of Inception) to
November 30, 1996 November 30, 1995
----------------- -----------------
<S> <C> <C>
Rent and Utilities .............. $146,701 $ 11,782
Travel and Entertainment ........ 62,629 47,786
Outside Services ................ 98,698 60,989
Compensation and Benefits ....... 811 7,795
-------- --------
Total ......................... $308,839 $128,352
======== ========
</TABLE>
The Company obtained short-term financing during fiscal 1996 in the
amount of $582,000 from Marketlink, a partnership consisting of two partners,
The MarketLink Group, Ltd. ("MLG") and Sherbrooke Consulting, Inc., to provide
short term working capital to the Company prior to the public offering. MLG is a
principal stockholder of the Company and Sherbrooke Consulting, Inc. is a
corporation wholly owned by an officer and Chairman of the Company's Board of
Directors. The $582,000 plus interest of $9,496 was repaid by the Company in
September 1996.
F-11
<PAGE> 27
In November 1996, the Company made an unsecured loan in the aggregate
principal amount of $500,000 to Fresh Picks, Inc. ("Fresh Picks"). The Chairman
of the Board of the Company, is also the Chairman of the Board of Fresh Picks.
The loan is evidenced by a Non-Transferable Convertible Promissory Note (the
"Note"), which bears interest at prime rate plus four percent per annum and is
due and payable on the earlier of (i) the completion of a private equity
offering by Fresh Picks in an amount greater than or equal to $6 million, or
(ii) November 14, 1998. The Company may, at its discretion, exercise its option
to convert a portion of the Note into a maximum of 100,000 shares of common
stock of Fresh Picks upon consummation of a private equity offering of Fresh
Picks, such conversion to be at the price of the lesser of $1.50 per share or
the price per share for common stock paid by investors in such offering. Upon
any such conversion of a portion of the Note into equity, Fresh Picks will
prepay all outstanding principal, and interest thereon, except to the extent so
converted. Due to the fact that there is no evidence Fresh Picks will be able to
repay the loan and the Note is not collateralized, the Company has provided an
allowance for loss for the entire $500,000 principal amount of the Note as of
November 30, 1996. The Company will recognize interest income on the Note when
received in cash.
Fresh Picks, a development-stage company, is a proposed full-service
provider of music retail services to the grocery industry. The idea for Fresh
Picks arose from the similar objective to that of the Company of growing sales
in supermarkets. As such, the Chairman of the Board of both the Company and
Fresh Picks and the president of HSS and a former officer of Fresh Picks have
worked closely during original planning and formulation of business plans and
pilot markets for Fresh Picks. Initially pilots for HSS and Fresh Picks were
tested in the same Omaha stores served by the Company and the Company and Fresh
Picks have used the same outside operations personnel. Management of the
Company has been informed the Fresh Picks has secured a commitment with a
Boston-based supermarket chain to establish six planned pilot departments by
April 30, 1997, in those supermarkets, leading to an additional 20 departments
no later than year end. In addition, management of the Company has been informed
that Fresh Picks is currently in the process of seeking equity financing from
various potential investors. There can be no assurance that Fresh Picks will be
successful in obtaining such financing or that Fresh Picks will achieve the
necessary sales and profitability targets required to continue its operations
and enable Fresh Picks to repay the Note to the Company.
On January 1, 1997, the Company entered into a Consulting Agreement with
The Columbus Circle ("TCC"), a New York partnership of which one of the two
general partners is owned and controlled by the Company's Chairman, pursuant to
which TCC agrees to provide certain general management and other services to the
Company. This agreement, which expires on December 31, 1999, provides that the
Company pay to TCC an initial fee of $120,000 and a monthly amount equal to
$15,000. KN2B, Inc. also entered into a Consulting Agreement with TCC in
January, 1997, pursuant to which TCC agrees to provide certain general
management and other services to KN2B, Inc. This agreement, which expires on
December 31, 1999 provides that KN2B, Inc. pay to TCC an initial fee of $60,000
and a monthly amount equal to $7,500. The initial fees totaling $180,000 will be
capitalized and amortized over the three-year term. The consulting agreements
may be terminated by either party for non-performance.
On January 1, 1997, pursuant to the above described Consulting Agreement
between the Company and TCC, the Company entered into a Stock Option Agreement
(the "ML Option Agreement") with TCC. Pursuant to the ML Option Agreement, the
Company granted TCC an option to purchase 54,545 Shares exercisable from January
1, 1997 through January 1, 2002 at an exercise price of $4.50 per share. In
addition, the ML Option Agreement provides that the Company issue to TCC the
following options to purchase the Company's common stock ("Shares") at an
exercise price of $4.50 per share: (i) if the Consulting Agreement shall be in
effect at any time during the 120-day period ending on January 1, 1999, an
option to purchase an additional 54,545 Shares exercisable from January 1, 1999
through January 1, 2004; (ii) if the Consulting Agreement shall be in effect
at any time during the 120-day period ending on January 1, 2000, an option to
purchase an additional 54,545 Shares exercisable from January 1, 2000 through
January 1, 2005; (iii) if the Company closes any transaction whereby the
Company receives an infusion or infusions of cash (either equity or debt), or it
acquires (directly or indirectly) another company, an option to purchase the
number of Shares obtained by dividing by 4.5, the total consideration received
by the Company in the case of a cash infusion, or the total consideration given
by the Company in the case of an acquisition, and (iv) if Consulting Agreement
shall be in effect at any time within the 120-day period ending on the last day
of the Company's 1997, 1998 and 1999 fiscal years, an option to purchase the
number of shares obtained by multiplying 54,545 by the percentage increase in
earnings per share from the
F-12
<PAGE> 28
Company's 1996 fiscal year end earnings per share. To the extent not exercised,
all options terminate on the day immediately following the fifth anniversary of
the date of grant. The ML Option Agreement permits either party to terminate
the agreement upon 90 days' notice without cause.
On January 1, 1997, pursuant to above described Consulting Agreement
between KN2B, Inc. and TCC, the Company entered into a Stock Option Agreement
with TCC (the "KN2B Option Agreement"). Pursuant to the KN2B Option Agreement,
the Company granted TCC an option to purchase 27,273 Shares exercisable from
January 1, 1997 through January 1, 2002 at an exercise price of $4.50 per
share. In addition, the KN2B Option Agreement provides that the Company issue to
TCC the following options to purchase Shares at an exercise price of $4.50 per
share: (i) provided that the Consulting Agreement shall be in effect at any time
during the 120-day period ending on January 1, 1999, an option to purchase
27,273 Shares exercisable from January 1, 1999 through January 1, 2004; (ii)
provided that the Consulting Agreement shall be in effect at any time during the
120-day period ending on January 1, 2000, an option to purchase 27,273 Shares
exercisable from January 1, 2000 through January 1, 2005; (iii) in the event
that KN2B closes any transaction whereby the Company receives an infusion or
infusions of cash (either equity or debt), or KN2B acquires (directly or
indirectly) another company, and such transaction was initiated by TCC and
closed prior to the termination of the Consulting Agreement or within the
120-day period following the termination of the Consulting Agreement, an option
to purchase the number of Shares obtained by dividing by 4.5, the total
consideration received by the Company in the case of a cash infusion, or the
total consideration given by the Company in the case of an acquisition, and (iv)
provided that the Consulting Agreement shall be in effect at any time within the
120-day period ending on the last day of the Company's 1997, 1998 and 1999
fiscal years, an option to purchase the number of shares obtained by multiplying
27,273 by the percentage increase in KN2B's earnings per share from KN2B's 1996
fiscal year end earnings per share. To the extent not exercised, all options
terminate on the day immediately following the fifth anniversary of the date of
grant. The KN2B Option Agreement permits either party to terminate the
agreement upon 90 days' notice without cause.
See Note (5) for a description of the Company's license and royalty
agreement with the Company and HSND.
See Note (7) for a description of the issuance of preferred stock to
related parties and the redemption of this preferred stock.
See Note (10) for a description of the Company's employment agreements
with certain employees.
(5) LICENSE AND ROYALTIES
(A) In connection with the Company's agreement with HSND, HSND has
provided HSS with a license to the Home Shopping Showcase(TM) 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. The license provides for use of the Home
Shopping Showcase(TM) trademarks, logos, and service marks until December 31,
2000 at retail sites established on or before January 1, 1998, and until the
earlier of (i) December 31, 2003 or (ii) three years after establishment at
retail sites established between January 1, 1998 and December 31, 2000.
As a result of negotiations between the Company and HSND, substantiated by
an independent 3rd party appraisal, the Company believes that the combination of
the Home Shopping Showcase(TM) trademarks, logos and service marks and all of
the existing and future retail rights to HSND's products and services, are
fairly valued at approximately $4,000,000. For financial statement purposes,
however, the Home Shopping Showcase(TM) trademarks, logos, and service marks, as
well as the existing and future retail rights, are presented at HSND's cost
basis, which is zero.
(B) As part of the Company's agreement between the Company and HSND,
each of the Company and HSND are to receive from HSS a royalty of 6% of all
sales. In addition to these royalties, the Company and/or HSS may, from time to
time, be required to pay royalties to suppliers other than HSND in order to
acquire from them the retail rights to their DRTV merchandise. As of November
30, 1996 the Company accrued $108,517 in royalties payable to HSND.
(6) INCOME TAXES
As of November 30, 1996 and 1995, the Company had net operating loss
carryforwards of approximately $800,000 and $93,000, respectively, which will
expire in the years 2004 and 2003, respectively. Accordingly, there were no
provisions made for income taxes. However, based upon the Internal Revenue
Service regulations
F-13
<PAGE> 29
governing the utilization of net operating loss carryforwards where the
corporation has issued substantial additional stock, much of this loss carry
forward 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. The deferred tax asset was approximately $600,000 at November
30, 1996. Because of the uncertainties discussed above, any deferred tax
asset established for utilization of the Company's tax loss carry forwards would
correspondingly require a valuation allowance of the same amount ($600,000 at
November 30, 1996) pursuant to SFAS No. 109. Accordingly, no deferred tax asset
is reflected in these consolidated financial statements.
(7) CAPITAL STOCK
(A) Preferred Stock -- The Company is authorized to issue 1,000,000 shares
of 'Blank Check' preferred stock with a par value of $.0001 per share. The
Company had outstanding at November 30, 1995, 600,000 shares of Series A
Preferred Stock, which were a part of preferred stock units (each consisting of
one share of Series A Preferred and one share of common) issued by the Company
to several related parties in August and September of 1995 in exchange for
$500,000. The 600,000 common shares so issued were included in the March 1996
six-for-five stock split. On March 29, 1996, the Company issued an additional
120,000 Series A Preferred Stock units in exchange for an additional $100,000.
The Series A Preferred Stock was convertible, at the option of the holder, into
a second share of common stock, or was redeemable, by the Company, for
approximately $.833 per share, which approximates the original purchase price of
the units. The Company redeemed the outstanding total of 720,000 shares of
Series A Preferred Stock for $600,933 with a portion of the proceeds of the
public offering described in Note (3).
(B) Common Stock -- The Company is authorized to issue 15,000,000 shares
of common stock with par value of $.0001 per share. In March of 1996, the
Company declared a stock split whereby the shareholders received six shares of
common stock for every five shares held at the date of the split. All
share-data included in the consolidated financial statements has been
retroactively adjusted to reflect the six-for-five stock split. On June 22,
1995, the Company issued 2,400,000 shares of common stock and 2,000,000 Class A
warrants, exercisable at $6.00 per share for four years commencing one year from
the close of the a public offering, to the founders of the Company for $240.
(C) Class A Warrants --Each Class A Warrant ("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 years, commencing one year after September 3, 1996,
the effective date of the initial public offering. Each Warrant is redeemable by
the Company for $.05 per Warrant at any time after September 3, 1997, upon 30
days' prior written notice, if the closing price of the Common Stock, as
reported by the Nasdaq Small Cap Market exceeds $12.00 per share for 20
consecutive trading days prior to the date of the notice of redemption.
The Company has granted warrants and has granted options to purchase
stock under the 1995 Stock Option Plan as follows:
<TABLE>
<CAPTION>
Warrants Stock Options
-------- -------------
Number of Exercise Number of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Authorized June 22, 1995 2,000,000 $ --
Outstanding Balance - November 1995 2,000,000 $ 6.00 -- --
Issued/Grants 552,000 8.00 1,051,000 2.50-7.50
Exercised -- -- -- --
Canceled -- -- -- --
Outstanding Balance - November 1996 2,552,000 1,051,000
========= =========
Exercisable at November 30, 1996 -- -- 391,000
=========
</TABLE>
See Note 10 for a discussion of deferred compensation expense recorded as
a result of options granted to employees under the terms of employment
agreements. The remaining deferred compensation expense recorded is a result of
options issued to consultants at below market value prices.
F-14
<PAGE> 30
(9) PROSPECTIVE AUTHORITATIVE PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("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 value based method of accounting prescribed by
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.
(10) EMPLOYMENT AGREEMENTS
(A) As of December 1, 1995, the Company entered into a three-year
employment agreement with Alan Kerzner, pursuant to which Mr. Kerzner will serve
as the Company's Executive Vice President and a member of its Board of
Directors, and as the President and Chief Operating Officer of its Home Shopping
Showcase(TM) subsidiary. Mr. Kerzner's agreement calls for annual compensation
of $150,000 and provides for a bonus at the discretion of the Board of
Directors. In connection with the employment agreement, Mr. Kerzner was also
granted an option to purchase 60,000 shares of the Company's unregistered common
stock for $2.50 per share at any time on or after July 1, 1996, and on or
before June 30, 2000. The exercise price was determined by management.
The Company recorded deferred compensation cost of $180,000 for the options
issued, which represented the difference between the value of the options at the
time of issuance and their exercise price of $2.50. The deferred compensation
expense will be amortized over the life of the employment agreement. For the
year ended November 30, 1996, $60,000 was expensed to operations. Mr. Kerzner's
agreement also provides for the Company to purchase life insurance of not less
than $500,000 on his behalf, the proceeds of which shall be payable to his
estate.
(B) On April 15, 1996, the Company entered into a one-year employment
agreement with James Lawless, pursuant to which Mr. Lawless will serve as the
Company's President. Mr. Lawless's agreement calls for annual compensation of
$120,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Lawless was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$4.50 per share. The exercise price was determined by management. The options
are exercisable at any time on or after January 1, 1997 and on or before
December 31, 2002.
The Company recorded deferred compensation cost of $100,000 for the
options issued, which represented the difference between the value of the
options at the time of issuance and their exercise price of $4.50. The deferred
compensation expense will be amortized over the life of the employment
agreement. For the year ended November 30, 1996, $62,500 was expensed to
operations. Mr. Lawless's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.
(C) On April 15, 1996, the Company entered into a five-year employment
agreement with Ben White, pursuant to which Mr. White will serve as the
Company's Executive Vice President. Mr. White's agreement calls for annual
compensation of $200,000 and provides for a bonus at the discretion of the Board
of Directors. Mr. White also receives a $5,000 per month expense allowance. In
connection with the employment agreement, Mr. White was also granted an option
to purchase 600,000 shares of the Company's unregistered common stock for $4.50
per share on or after January 1, 1997 and on or before December 31, 2002. The
exercise price was determined by management. The right to purchase one-sixth of
such shares (100,000) vested on the date of the agreement, with the remainder of
the shares vesting in 100,000 option increments on January 1st of each 1997,
1998, 1999, 2000 and 2001, so long as he continues to be employed by the
Company.
F-15
<PAGE> 31
The Company recorded deferred compensation cost of $600,000 for the
options issued, which represented the difference between the value of the
options at the time of issuance and their exercise price of $4.50. The deferred
compensation expense will be amortized over the life of the employment
agreement. For the year ended November 30, 1996, $75,000 was expensed to
operations. Mr. White's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.
(D) On May 15, 1996, Home Shopping Showcase(TM) entered into a two-year
employment agreement, effective June 3, 1996, with Win Taylor, pursuant to which
Mr. Taylor will serve as Home Shopping Showcase(TM)'s Executive Vice President
of Sales and Marketing. Mr. Taylor's agreement calls for annual compensation of
$140,000 and provides for a bonus at the discretion of the Board of Directors.
In connection with the employment agreement, Mr. Taylor was also granted an
option to purchase 100,000 shares of the Company's unregistered common stock for
$7.50 per share. The exercise price was determined by management. Mr. Taylor's
options vest, and are then immediately exercisable as follows: 33,333 options on
July 1, 1997; 33,333 options on July 1, 1998; and 33,334 options on July 1,
1999, should he have continued to be employed by the Company at each of the just
prior year ending dates (June 2nd of 1997, 1998, and 1999, respectively) of his
employment. Mr. Taylor's agreement also provides for the Company to purchase
life insurance of not less than $500,000 on his behalf, the proceeds of which
shall be payable to his estate.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space in New York, New York and Clearwater,
Florida in connection with its operations under non-cancelable operating leases.
The lease in New York was entered into on August 29,1996. The lease in
Clearwater was entered into on December 1, 1996. Prior to this lease the office
space in Florida was leased on a month to month basis.
The future payments under the operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending
November 30 Amount
----------- ------
<S> <C>
1997 $216,504
1998 220,657
1999 221,810
2000 183,600
2001 61,200
--------
Total Minimum Lease Payments $903,771
========
</TABLE>
Rent expense charged to operations from these operating leases for the
year ended November 30, 1996 was approximately $65,000. Rent expense for the
period ended November 30, 1995 is disclosed in the Related Party footnote 4.
F-16
<PAGE> 1
EXHIBIT 10.08
THE COLUMBUS CIRCLE
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made as of this 1st
day of January, 1997, by and between The Columbus Circle, a New York limited
partnership (the "Consultant") and ML Direct, Inc., a Delaware corporation
(the "Company"). The parties hereby agree as follows:
1. Term.
The term of this Agreement shall begin on the date set forth above and
shall continue until the earlier of (a) December 31, 1999 and (b) the
termination of this Agreement by either party in accordance with Paragraph 9
hereof.
2. Consulting Services.
The Consultant agrees to perform such consulting services (the
"Consulting Services") as shall be agreed from time to time by the Company and
the Consultant. At the commencement of this Agreement, the services to be
rendered by the Consultant are those set forth on Schedule I hereto. The
Consultant shall perform the Consulting Services in a professional manner and
such services or the result thereof shall conform to the Company's standards,
specifications, and other requirements. The Consultant shall be available to
provide Consulting Services at the request of the Company for up to six (6)
man-days per month during the term of this Agreement.
3. Compensation; Stock Options.
In consideration for the performance of the Consulting Services, the
Company shall grant to the Consultant non-qualified options pursuant to the
option agreement attached hereto as Exhibit A. In addition, the Company shall
pay to the Consultant the additional compensation as is specified on Schedule
II hereto.
4. Proprietary Information.
The Consultant acknowledges that he or she may be furnished or may
otherwise receive or have access to information which relates to the Company's
past, present or future products, research, development, inventions, processes,
techniques, design or other technical information and data, etc. (the
"Proprietary Information"). The Consultant agrees to preserve and protect the
confidentiality of the Proprietary Information and all physical forms thereof,
whether disclosed to the Consultant before this Agreement is signed or
afterward. In addition, the Consultant shall not disclose or disseminate the
Proprietary Information to any third party and shall not use the Proprietary
Information for his or her own benefit or for the benefit of any third party.
The foregoing obligations shall not apply to any information which (i) is
publicly known; (ii) is given to the Consultant by someone else who is not
obligated to maintain confidentiality; or (iii) the Consultant had already
developed prior to the day the Agreement is signed, as evidenced by
<PAGE> 2
contemporaneously dated documents. Within three days after the termination of
this Agreement (or any other time at the Company's request), the Consultant
shall return to the Company all copies of Proprietary Information in tangible
form.
5. Representations.
The Consultant represents and warrants that (i) he or she is able to
perform the Consulting Services and that he or she does not have any
understanding or agreement with anyone else which restricts his or her ability
to perform such services; (ii) that any services he or she provides and
information or materials he or she develops for or discloses to the Company
shall not in any way be based upon any confidential or proprietary information
derived from any source other than the Company, unless the Consultant is
specifically authorized in writing by such source to use such proprietary
information; and (iii) that if the Company incurs any liability or expense as a
result of any claim that any of the above warranties is not true, the
Consultant shall indemnify the Company and hold it harmless against all such
liability or expense, including reasonable attorney's fees, provided that the
Company notifies the Consultant of the claim and cooperates with the Consultant
in defending against the claim. The Consultant shall notify the Company if he
or she ever becomes aware of any such claim.
6. Work for Hire; Assignment of Rights.
Everything the Consultant writes or develops in the course of
providing the Consulting Services shall be works made for hire and therefore
the property of the Company. If for any reason something the Consultant writes
or develops while performing the Consulting Services is not considered a work
made for hire, without any additional consideration the Consultant assigns to
the Company all right, title and interest therein, including all patent and
copyright rights, and agrees to execute at the Company's request a subsequent
document or documents as further evidence of this assignment. In addition,
without any additional consideration, the Consultant agrees to assign to the
Company all right, title and interest in any invention, patentable or not, made
or conceived solely by him or jointly with others during the course of
performing the Consulting Services. The Consultant shall promptly disclose any
such invention to the Company and shall, upon request, execute an assignment to
the Company of any patent, trade secret or other proprietary right and shall do
anything else reasonably necessary to enable the Company to perfect its rights
therein. The Consultant hereby agrees to indemnify the Company and hold it
harmless against all liabilities or expenses, including reasonable attorney's
fees, which may be incurred as a result of the breach by the Consultant of any
of the representations or covenants set forth in this Paragraph 6. The
obligations contained in this Paragraph 6 shall continue until fulfilled and
shall not be affected by the termination of this Agreement. The obligations of
the Consultant under this Paragraph 6 shall be binding on his or her assigns,
executors, administrators and other legal representatives to the extent that
any of them can fulfill those obligations left unfulfilled by the Consultant.
2
<PAGE> 3
7. Non-Competition.
During the term of this Agreement and for a period of one year
thereafter, the Consultant agrees that he or she will not, directly or
indirectly, as an owner, director, stockholder, consultant, independent
contractor, agent or otherwise, engage or assist any other person (other than
the Company) to engage anywhere in the world in the business of creating,
distributing or selling products or providing services competitive with those
offered by the Company. The Consultant shall not, directly or indirectly,
solicit for employment any of the Company's employees until at least one year
after the end of the Agreement.
8. Termination.
(a) This Agreement may be terminated by either party in the event
that the other party has not performed any material covenant or has otherwise
breached any material term of this Agreement (i) upon receipt of written notice
thereof if the non-performance or breach is incapable of cure, or (ii) upon the
expiration of thirty (30) days (or such additional cure period as the
non-defaulting party may authorize) after receipt of written notice thereof if
the non-performance or breach is capable of cure and has not been cured.
(b) This Agreement may be terminated by either party upon not less
than 90 days' prior written notice to the other.
(c) If the Consultant breaches this Agreement, the Company can (in
addition to all of its other rights) require the Consultant to give it all work
in progress in exchange for compensation earned to the date of termination.
The Consultant acknowledges that his breach (or threatened breach) of any of
his obligations under Paragraphs 5, 6, or 7 could irreparably injure the
Company and the Consultant could not remedy the damage caused the Company
simply by paying the Company some amount of money.
(d) OTHER THAN FOR BREACHES OF THE CONSULTANT'S OBLIGATIONS UNDER
PARAGRAPHS 5, 6, OR 7, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
FOR ANY CONSEQUENTIAL INCIDENTAL OR SPECIAL DAMAGES ARISING OUT OF ANY DEFAULT
UNDER THIS AGREEMENT, WHETHER IN CONTRACT OR TORT.
9. Miscellaneous.
(a) The Consultant shall continue to be bound by all obligations
described in Paragraphs 5 and 6 after the termination of this Agreement for
whatever reason and shall continue to be bound by all obligations described in
Paragraph 7 after the termination of this Agreement pursuant to Paragraph 8(a)
as a result non-performance or breach by the Consultant.
(b) This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to
conflicts of law principles.
3
<PAGE> 4
(c) This Agreement is the entire agreement between the parties.
Any change in the Agreement must be made in writing and signed by both the
Company and the Consultant.
(d) In the event that any term or provision of this Agreement
shall be deemed by a court of competent jurisdiction to be overly broad in
scope, duration or area of applicability, the court considering the same shall
have the power and is hereby authorized and directed to limit such scope,
duration or area of applicability, or all of them, so that such term or
provision is no longer overly broad and to enforce the same as so limited.
Subject to the foregoing sentence, in the event any provision of this Agreement
shall be held to be invalid or enforceable for any reason, such invalidity or
unenforceability shall attach only to such provision and shall not affect or
render invalid or unenforceable any other provision of this Agreement.
(e) Either party's waiver of a default by the other does not
constitute a waiver of future or other defaults.
(f) The Consultant is performing services for the Company as an
independent contractor, and the parties are not partners or joint venturers.
Neither party can bind the other to any agreement with anyone else without the
prior written consent of such other party.
* * * * * * * * *
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ML DIRECT, INC.
By:
----------------------------------
Title:
--------------------------------
THE COLUMBUS CIRCLE
By:
----------------------------------
Title:
--------------------------------
5
<PAGE> 6
SCHEDULE I
Description of Consulting Services
The Consultant shall provide the following services to the Company to the
extent it is requested from time to time to do so by the Chief Executive
Officer or the Board of Directors of the Company: (i) general management
services, (ii) marketing, consulting and sales support, (iii) evaluating and
assisting with respect to proposed mergers, acquisitions, strategic alliances
and third party arrangements (such as licensing agreements), and (iv) arranging
equity or debt financings.
<PAGE> 7
SCHEDULE II
Compensation
The Company shall pay to the Consultant (a) an initial fee of $120,000,
payable in 12 equal monthly installments on the first day of each month
beginning on February 1, 1997, and (b) an monthly amount equal to $15,000.
<PAGE> 1
EXHIBIT 10.09
THE COLUMBUS CIRCLE
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") is made as of this 1st
day of January, 1997, by and between The Columbus Circle, a New York limited
partnership (the "Consultant") and Home Shopping Showcase, Inc. or KN2B, Inc.,
a Delaware corporation (the "Company"). The parties hereby agree as follows:
1. Term.
The term of this Agreement shall begin on the date set forth above and
shall continue until the earlier of (a) December 31, 1999 and (b) the
termination of this Agreement by either party in accordance with Paragraph 9
hereof.
2. Consulting Services.
The Consultant agrees to perform such consulting services (the
"Consulting Services") as shall be agreed from time to time by the Company and
the Consultant. At the commencement of this Agreement, the services to be
rendered by the Consultant are those set forth on Schedule I hereto. The
Consultant shall perform the Consulting Services in a professional manner and
such services or the result thereof shall conform to the Company's standards,
specifications, and other requirements. The Consultant shall be available to
provide Consulting Services at the request of the Company for up to three (3)
man-days per month during the term of this Agreement.
3. Compensation; Stock Options.
In consideration for the performance of the Consulting Services, the
Company shall cause ML Direct to grant to the Consultant non-qualified options
pursuant to the option agreement attached hereto as Exhibit A. In addition,
the Company shall pay to the Consultant the additional compensation as is
specified on Schedule II hereto.
4. Proprietary Information.
The Consultant acknowledges that he or she may be furnished or may
otherwise receive or have access to information which relates to the Company's
past, present or future products, research, development, inventions, processes,
techniques, design or other technical information and data, etc. (the
"Proprietary Information"). The Consultant agrees to preserve and protect the
confidentiality of the Proprietary Information and all physical forms thereof,
whether disclosed to the Consultant before this Agreement is signed or
afterward. In addition, the Consultant shall not disclose or disseminate the
Proprietary Information to any third party and shall not use the Proprietary
Information for his or her own benefit or for the benefit of any third party.
The foregoing obligations shall not apply to any information which (i) is
publicly known; (ii) is given to the Consultant by someone else who is not
obligated to maintain confidentiality; or (iii) the Consultant had already
developed prior to the day the Agreement is signed, as evidenced by
<PAGE> 2
contemporaneously dated documents. Within three days after the termination of
this Agreement (or any other time at the Company's request), the Consultant
shall return to the Company all copies of Proprietary Information in tangible
form.
5. Representations.
The Consultant represents and warrants that (i) he or she is able to
perform the Consulting Services and that he or she does not have any
understanding or agreement with anyone else which restricts his or her ability
to perform such services; (ii) that any services he or she provides and
information or materials he or she develops for or discloses to the Company
shall not in any way be based upon any confidential or proprietary information
derived from any source other than the Company, unless the Consultant is
specifically authorized in writing by such source to use such proprietary
information; and (iii) that if the Company incurs any liability or expense as a
result of any claim that any of the above warranties is not true, the
Consultant shall indemnify the Company and hold it harmless against all such
liability or expense, including reasonable attorney's fees, provided that the
Company notifies the Consultant of the claim and cooperates with the Consultant
in defending against the claim. The Consultant shall notify the Company if he
or she ever becomes aware of any such claim.
6. Work for Hire; Assignment of Rights.
Everything the Consultant writes or develops in the course of
providing the Consulting Services shall be works made for hire and therefore
the property of the Company. If for any reason something the Consultant writes
or develops while performing the Consulting Services is not considered a work
made for hire, without any additional consideration the Consultant assigns to
the Company all right, title and interest therein, including all patent and
copyright rights, and agrees to execute at the Company's request a subsequent
document or documents as further evidence of this assignment. In addition,
without any additional consideration, the Consultant agrees to assign to the
Company all right, title and interest in any invention, patentable or not, made
or conceived solely by him or jointly with others during the course of
performing the Consulting Services. The Consultant shall promptly disclose any
such invention to the Company and shall, upon request, execute an assignment to
the Company of any patent, trade secret or other proprietary right and shall do
anything else reasonably necessary to enable the Company to perfect its rights
therein. The Consultant hereby agrees to indemnify the Company and hold it
harmless against all liabilities or expenses, including reasonable attorney's
fees, which may be incurred as a result of the breach by the Consultant of any
of the representations or covenants set forth in this Paragraph 6. The
obligations contained in this Paragraph 6 shall continue until fulfilled and
shall not be affected by the termination of this Agreement. The obligations of
the Consultant under this Paragraph 6 shall be binding on his or her assigns,
executors, administrators and other legal representatives to the extent that
any of them can fulfill those obligations left unfulfilled by the Consultant.
2
<PAGE> 3
7. Non-Competition.
During the term of this Agreement and for a period of one year
thereafter, the Consultant agrees that he or she will not, directly or
indirectly, as an owner, director, stockholder, consultant, independent
contractor, agent or otherwise, engage or assist any other person (other than
the Company) to engage anywhere in the world in the business of creating,
distributing or selling products or providing services competitive with those
offered by the Company. The Consultant shall not, directly or indirectly,
solicit for employment any of the Company's employees until at least one year
after the end of the Agreement.
8. Termination.
(a) This Agreement may be terminated by either party in the event
that the other party has not performed any material covenant or has otherwise
breached any material term of this Agreement (i) upon receipt of written notice
thereof if the non-performance or breach is incapable of cure, or (ii) upon the
expiration of thirty (30) days (or such additional cure period as the
non-defaulting party may authorize) after receipt of written notice thereof if
the non-performance or breach is capable of cure and has not been cured.
(b) This Agreement may be terminated by either party upon not less
than 90 days' prior written notice to the other.
(c) If the Consultant breaches this Agreement, the Company can (in
addition to all of its other rights) require the Consultant to give it all work
in progress in exchange for compensation earned to the date of termination.
The Consultant acknowledges that his breach (or threatened breach) of any of
his obligations under Paragraphs 5, 6, or 7 could irreparably injure the
Company and the Consultant could not remedy the damage caused the Company
simply by paying the Company some amount of money.
(d) OTHER THAN FOR BREACHES OF THE CONSULTANT'S OBLIGATIONS UNDER
PARAGRAPHS 5, 6, OR 7, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
FOR ANY CONSEQUENTIAL INCIDENTAL OR SPECIAL DAMAGES ARISING OUT OF ANY DEFAULT
UNDER THIS AGREEMENT, WHETHER IN CONTRACT OR TORT.
9. Miscellaneous.
(a) The Consultant shall continue to be bound by all obligations
described in Paragraphs 5 and 6 after the termination of this Agreement for
whatever reason and shall continue to be bound by all obligations described in
Paragraph 7 after the termination of this Agreement pursuant to Paragraph 8(a)
as a result non-performance or breach by the Consultant.
(b) This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York without regard to
conflicts of law principles.
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<PAGE> 4
(c) This Agreement is the entire agreement between the parties.
Any change in the Agreement must be made in writing and signed by both the
Company and the Consultant.
(d) In the event that any term or provision of this Agreement
shall be deemed by a court of competent jurisdiction to be overly broad in
scope, duration or area of applicability, the court considering the same shall
have the power and is hereby authorized and directed to limit such scope,
duration or area of applicability, or all of them, so that such term or
provision is no longer overly broad and to enforce the same as so limited.
Subject to the foregoing sentence, in the event any provision of this Agreement
shall be held to be invalid or enforceable for any reason, such invalidity or
unenforceability shall attach only to such provision and shall not affect or
render invalid or unenforceable any other provision of this Agreement.
(e) Either party's waiver of a default by the other does not
constitute a waiver of future or other defaults.
(f) The Consultant is performing services for the Company as an
independent contractor, and the parties are not partners or joint venturers.
Neither party can bind the other to any agreement with anyone else without the
prior written consent of such other party.
* * * * * * * * *
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
HOME SHOPPING SHOWCASE, INC.
By:
-----------------------------------
Title:
-------------------------------
THE COLUMBUS CIRCLE
By:
-----------------------------------
Title:
-------------------------------
5
<PAGE> 6
SCHEDULE I
Description of Consulting Services
The Consultant shall provide the following services to the Company to the
extent it is requested from time to time to do so by the Chief Executive
Officer or the Board of Directors of the Company: (i) general management
services, (ii) marketing, consulting and sales support, (iii) evaluating and
assisting with respect to proposed mergers, acquisitions, strategic alliances
and third party arrangements (such as licensing agreements), and (iv) arranging
equity or debt financings.
<PAGE> 7
SCHEDULE II
Compensation
The Company shall pay to the Consultant (a) an initial fee of $60,000,
payable on the date hereof and (b) an monthly amount equal to $7,500.
<PAGE> 1
EXHIBIT 10.11
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") dated as of the 1st day
of January, 1997, is made and entered into by and between ML DIRECT INC., a
Delaware corporation with its principal offices located at 3000 Executive
Drive, Suite 200, Clearwater, Florida, 04622 (the "Company"), and THE COLUMBUS
CIRCLE, a New York partnership whose address is 211 East 49th Street, New York,
New York (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Company has agreed to grant options to the Optionee
pursuant to the terms and conditions of this Agreement and a Consulting
Agreement (the "Consulting Agreement") of even date herewith between the
Company and the Optionee; and
WHEREAS, the Optionee desires to accept the granting of such options,
subject to the terms and conditions of this Agreement.
NOW, THEREFORE, the Company and the Optionee hereby agree as follows:
Section 1. Grant of Options. The Company hereby grants
to the Optionee an option to purchase 54,545 shares of the Company's common
stock, par value $.0001 per share ("Common Stock").
Section 2. Granting of Additional Options.
(a) Provided that this Agreement shall have been in
effect at any time during the 120-day period ending on the second anniversary
of the date hereof, the Company shall grant to the Optionee options to purchase
54,545 shares of Common Stock on such second anniversary, and provided that
this Agreement shall have been in effect at any time
1
<PAGE> 2
during the 120-day period ending on the third anniversary of the date hereof,
the Company shall grant to the Optionee options to purchase 54,545 shares of
Common Stock on such third anniversary.
(b) In the event the Company closes a Transaction (as
defined below) prior to the termination of this Agreement, or within the
120-day period following the termination of this Agreement, the Company shall
grant to the Optionee options to purchase the number of shares of Common Stock
as shall be equal to the amount obtained by dividing the Transaction Value (as
defined below) by 4.5, which options shall be granted on the date of the
closing of the Transaction (or, in the case of "contingent consideration" as
referred to below, when such consideration is actually paid). For purposes of
this Agreement, "Transaction" shall mean any infusion or infusions of capital
(either equity or debt), or any acquisition in whole or in part by the Company
or any subsidiary thereof of a corporation, partnership or other business
organization, regardless of the structure of the transaction (including but not
limited to a merger with another company, a purchase of another company's
stock, a purchase of all or of substantially all of another company's assets,
etc.); provided that "Transaction" shall not include any infusion of capital or
any acquisition if such transaction is effected without the involvement of the
Optionee. "Transaction Value" shall mean (i) in the case of an infusion of
capital, the amount of capital received by the Company, and (ii) in the case of
an acquisition, any and all consideration given by the Company in the
Transaction, including but not limited to cash consideration, the fair market
value of any capital stock issued by the Company in the Transaction, any
liabilities assumed or guarantees given by the Company, any stated future
consideration, any contingent
2
<PAGE> 3
consideration (when earned), and any consideration given to individuals
affiliated or associated with the acquired company in connection with
non-competition, consulting or employment agreements (but only to the extent in
excess of customary compensation for services).
(c) Provided that this Agreement shall have been in
effect at any time within the 120-day period ending on the last day of its
1997, 1998, and 1999 fiscal years, respectively, then within ten days after the
delivery to the Company of its audited financial statements for such fiscal
year (but in no event later than 90 days after the end of the Company's fiscal
year), the Company shall grant to the Optionee options to purchase the number
of shares of Common Stock as shall be equal to the amount obtained by
multiplying 54,545 by a fraction, the numerator of which shall be the excess of
the Company's earnings per share for such fiscal year over the Company's
earnings per share for its 1996 fiscal year, and the denominator of which shall
be the absolute value of the Company's earnings per share for its 1996 fiscal
year.
Section 3. Exercise Price. The exercise price for the options
granted pursuant to Section 1 and Section 2 (the "Options") shall be $4.50 per
share (the "Exercise Price").
Section 4. Vesting and Exercise Period. Each Option shall
vest on the date of grant and may be exercised during the period commencing on
the date of grant and continuing through and including the fifth anniversary of
the date of grant.
Section 5. Termination of Options. To the extent not
exercised, Options shall terminate on the day immediately following the fifth
anniversary of the date of grant.
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<PAGE> 4
Section 6. Term. Subject to the provisions of Section
2, the Company's obligation to grant additional Options hereunder shall
terminate on the date of the termination of the Consulting Agreement.
Section 7. Exercise of Options. The Options may be
exercised in whole or in part in accordance with the provisions of this
Agreement by the Optionee's tendering written notice of exercise together with
the Exercise Price (or a proportionate part thereof if any Option is partially
exercised), which shall be payable in immediately available funds or by way of
the delivery of a secured demand promissory note, and with such security, as
shall be in form and substance acceptable to the Company and the Optionee. The
Company will reasonably cooperate with the Optionee and its broker to
coordinate the payment of the Exercise Price and the delivery of the shares to
be issued upon the exercise of Options (the "Option Shares") in the event that
the Optionee sells the Option Shares concurrently with its exercise of an
Option.
Section 8. Corporate Events. In the event of a proposed
liquidation of the Company, a proposed sale of all or substantially all of its
assets or its Common Stock, a proposed merger or consolidation, or a proposed
separation or reorganization, the Board of Directors may by notice (the
"Termination Notice") to the Optionee declare that any Options shall terminate
as of a date (the "Termination Date") to be fixed by the Board of Directors,
which date shall be not less than 30 days after the Optionee's receipt of the
Termination Notice; provided however, that (a) if the Termination Date shall be
within either of the 120-day periods described in Section 2(a) hereof, the
granting of the Option that would have been granted at the end of said period
pursuant to Section 2(a) shall be accelerated to the date of
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<PAGE> 5
the Termination Notice, and (b) if the Termination Date shall be within any of
the 120-day periods described in Section 2(c) hereof, the Company and the
Optionee shall jointly estimate in good faith the number of Option Shares that
would have been included in the Option that would have been granted with
respect to the fiscal year in which such 120-day period occurred, and the
granting of such Option shall accelerate to the date of the Termination Notice.
Section 9. No Stockholder Rights. Nothing set forth herein
shall give the Optionee any rights or privileges as a stockholder of the
Company prior to Optionee's exercise of any of the Options.
Section 10. Share Certificates. Upon receipt of payment in
full of the Exercise Price as provided herein, and after taking such steps as
it deems necessary to satisfy any withholding tax obligations imposed upon it
by any level of government, the Company will cause one or more stock
certificates evidencing the Optionee's ownership of the Option Shares so
purchased by the Optionee to be issued to the Optionee.
Section 11. Restrictions. Neither the Options nor the
Option Shares have been, nor is there any assurance that they will be,
registered under the Securities Act of 1933, as amended (the "Act"). All
Option Shares shall be "restricted securities" as that term is defined in Rule
144 promulgated under the Act. The certificates representing such Option
Shares shall bear an appropriate legend restricting their transfer. Such
Option Shares cannot be sold, transferred, assigned or otherwise hypothecated
without registration under the Act and applicable state securities laws or
unless a valid exemption from registration is then available under applicable
federal and state securities laws and the Optionee has furnished the
5
<PAGE> 6
Company with an opinion of counsel to that effect, which opinion shall be
satisfactory in form and substance to the Company.
Section 12. Share Adjustments. If there is any change in
the number of shares of Common Stock on account of the payment of stock
dividends, recapitalization resulting in stock splits, combinations or
exchanges of shares of Common Stock, or other event in which the Company issues
Common Stock without consideration, the number of shares of Common Stock
available for purchase through the exercise of the Options, and the Exercise
Price, shall be proportionately adjusted by the Company.
Section 13. Miscellaneous Provisions.
(a) Notices. All notices to be given hereunder shall be in
writing and sent to the parties by personal delivery, certified mail, return
receipt requested, or by reputable overnight courier, and shall be addressed to
each party's respective address, as set forth in the first paragraph of this
Agreement, or to such other address as such party shall give to the other party
hereto by a notice given in accordance with this Section and, shall be
effective when actually received by the party being noticed.
(b) Assignment. This Agreement and the rights granted
hereunder may not be assigned in whole or in part by the Optionee without the
prior written consent of the Company.
(c) Further Assurances. Both parties hereto shall execute
and deliver such other instruments and do such other acts as may be necessary
to carry out the intent and purposes of this Agreement.
(d) Captions. The captions contained in this Agreement are
inserted only as a
6
<PAGE> 7
matter of convenience and in no way define, limit, extend or prescribe the
scope of this Agreement or the intent of any of the provisions hereof.
(e) Completeness and Modification. This Agreement constitutes
the entire understanding between the parties hereto superseding all prior and
contemporaneous agreements or understandings among the parties hereto
concerning the grant of Options to the Optionee. This Agreement shall not be
terminated, except in accordance with its terms, or amended, other than in a
writing executed by both of the parties hereto.
(f) Waiver. The waiver of a breach of any term or condition of
this Agreement shall not be deemed to constitute the waiver of any other breach
of the same or any other term or condition.
(g) Severability. The invalidity or enforceability, in
whole or in part, of any covenant, promise or undertaking, or any section,
subsection, paragraph, sentence, clause, phrase or word or of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
portions thereof.
(h) Construction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without
reference to its provisions regarding conflicts of laws.
(i) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the parties.
[Signatures appear on following page.]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth in the first paragraph of this Agreement.
ML DIRECT INC.
BY:
----------------------------------
James Lawless
President
THE COLUMBUS CIRCLE
BY: Sherbrooke Consulting, Ltd.
BY:
----------------------------------
8
<PAGE> 1
EXHIBIT 10.12
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") dated as of the 1st day
of January, 1997, is made and entered into by and between ML DIRECT INC., a
Delaware corporation with its principal offices located at 645 Fifth Avenue,
Suite 1102, New York, New York, 10022 (the "Company"), and THE COLUMBUS CIRCLE,
a New York partnership whose address is 211 East 49th Street, New York, New
York (the "Optionee").
W I T N E S S E T H:
WHEREAS, the Company has agreed to grant options to the Optionee
pursuant to the terms and conditions of this Agreement and a Consulting
Agreement (the "Consulting Agreement") of even date herewith between KN2B, Inc.
(a majority-owned subsidiary of the Company)("KN2B") and the Optionee; and
WHEREAS, the Optionee desires to accept the granting of such options,
subject to the terms and conditions of this Agreement.
NOW, THEREFORE, the Company and the Optionee hereby agree as follows:
Section 1. Grant of Options. The Company hereby grants
to the Optionee an option to purchase 27,273 shares of the Company's common
stock, par value $.0001 per share ("Common Stock").
Section 2. Granting of Additional Options.
(a) Provided that this Agreement shall have been in
effect at any time during the 120-day period ending on the second anniversary
of the date hereof, the Company shall grant to the Optionee options to purchase
27,273 shares of Common Stock on such
1
<PAGE> 2
second anniversary, and provided that this Agreement shall have been in effect
at any time during the 120-day period ending on the third anniversary of the
date hereof, the Company shall grant to the Optionee options to purchase 27,273
shares of Common Stock on such third anniversary.
(b) In the event KN2B closes a Transaction (as defined
below) prior to the termination of this Agreement, or within the 120-day period
following the termination of this Agreement, the Company shall grant to the
Optionee options to purchase the number of shares of Common Stock as shall be
equal to the amount obtained by dividing the Transaction Value (as defined
below) by 4.5, which options shall be granted on the date of the closing of the
Transaction (or, in the case of "contingent consideration" as referred to
below, when such consideration is actually paid). For purposes of this
Agreement, "Transaction" shall mean any infusion or infusions of capital
(either equity or debt), or any acquisition in whole or in part by KN2B or any
subsidiary thereof of a corporation, partnership or other business
organization, regardless of the structure of the transaction (including but not
limited to a merger with another company, a purchase of another company's
stock, a purchase of all or of substantially all of another company's assets,
etc.); provided that "Transaction" shall not include any infusion of capital or
any acquisition if such transaction is effected without the involvement of the
Optionee. "Transaction Value" shall mean (i) in the case of an infusion of
capital, the amount of capital received by KN2B, and (ii) in the case of an
acquisition, any and all consideration given by KN2B in the Transaction,
including but not limited to cash consideration, the fair market value of any
capital stock issued by the Company in the Transaction, any liabilities assumed
or guarantees
2
<PAGE> 3
given by the Company, any stated future consideration, any contingent
consideration (when earned), and any consideration given to individuals
affiliated or associated with the acquired company in connection with
non-competition, consulting or employment agreements (but only to the extent in
excess of customary compensation for services).
(c) Provided that this Agreement shall have been in
effect at any time within the 120-day period ending on the last day of its
1997, 1998, and 1999 fiscal years, respectively, then within ten days after the
delivery to KN2B of its audited financial statements for such fiscal year (but
in no event later than 90 days after the end of KN2B's fiscal year), the
Company shall grant to the Optionee options to purchase the number of shares of
Common Stock as shall be equal to the amount obtained by multiplying 27,273 by
a fraction, the numerator of which shall be the excess of KN2B's earnings per
share for such fiscal year over KN2B's earnings per share for its 1996 fiscal
year, and the denominator of which shall be the absolute value of KN2B's
earnings per share for its 1996 fiscal year.
Section 3. Exercise Price. The exercise price for the options
granted pursuant to Section 1 and Section 2 (the "Options") shall be $4.50 per
share (the "Exercise Price").
Section 4. Vesting and Exercise Period. Each Option shall
vest on the date of grant and may be exercised during the period commencing on
the date of grant and continuing through and including the fifth anniversary of
the date of grant.
Section 5. Termination of Options. To the extent not
exercised, Options shall terminate on the day immediately following the fifth
anniversary of the date of grant.
Section 6. Term. Subject to the provisions of Section 2,
the Company's
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<PAGE> 4
obligation to grant additional Options hereunder shall terminate on the date of
the termination of the Consulting Agreement.
Section 7. Exercise of Options. The Options may be
exercised in whole or in part in accordance with the provisions of this
Agreement by the Optionee's tendering written notice of exercise together with
the Exercise Price (or a proportionate part thereof if any Option is partially
exercised), which shall be payable in immediately available funds or by way of
the delivery of a secured demand promissory note, and with such security, as
shall be in form and substance acceptable to the Company and the Optionee. The
Company will reasonably cooperate with the Optionee and its broker to
coordinate the payment of the Exercise Price and the delivery of the shares to
be issued upon the exercise of Options (the "Option Shares") in the event that
the Optionee sells the Option Shares concurrently with its exercise of an
Option.
Section 8. Corporate Events. In the event of a proposed
liquidation of the Company, a proposed sale of all or substantially all of its
assets or its Common Stock, a proposed merger or consolidation, or a proposed
separation or reorganization, the Board of Directors may by notice (the
"Termination Notice") to the Optionee declare that any Options shall terminate
as of a date (the "Termination Date") to be fixed by the Board of Directors,
which date shall be not less than 30 days after the Optionee's receipt of the
Termination Notice; provided however, that (a) if the Termination Date shall be
within either of the 120-day periods described in Section 2(a) hereof, the
granting of the Option that would have been granted at the end of said period
pursuant to Section 2(a) shall be accelerated to the date of the Termination
Notice, and (b) if the Termination Date shall be within any of the 120-day
4
<PAGE> 5
periods described in Section 2(c) hereof, the Company and the Optionee shall
jointly estimate in good faith the number of Option Shares that would have been
included in the Option that would have been granted with respect to the fiscal
year in which such 120-day period occurred, and the granting of such Option
shall accelerate to the date of the Termination Notice.
Section 9. No Stockholder Rights. Nothing set forth herein
shall give the Optionee any rights or privileges as a stockholder of the
Company prior to Optionee's exercise of any of the Options.
Section 10. Share Certificates. Upon receipt of payment
in full of the Exercise Price as provided herein, and after taking such
steps as it deems necessary to satisfy any withholding tax obligations imposed
upon it by any level of government, the Company will cause one or more stock
certificates evidencing the Optionee's ownership of the Option Shares so
purchased by the Optionee to be issued to the Optionee.
Section 11. Restrictions. Neither the Options nor the Option
Shares have been, nor is there any assurance that they will be, registered
under the Securities Act of 1933, as amended (the "Act"). All Option Shares
shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificates representing such Option Shares
shall bear an appropriate legend restricting their transfer. Such Option
Shares cannot be sold, transferred, assigned or otherwise hypothecated without
registration under the Act and applicable state securities laws or unless a
valid exemption from registration is then available under applicable federal
and state securities laws and the Optionee has furnished the Company with an
opinion of counsel to that effect, which opinion shall be satisfactory in
5
<PAGE> 6
form and substance to the Company.
Section 12. Share Adjustments. If there is any change in
the number of shares of Common Stock on account of the payment of stock
dividends, recapitalization resulting in stock splits, combinations or
exchanges of shares of Common Stock, or other event in which the Company issues
Common Stock without consideration, the number of shares of Common Stock
available for purchase through the exercise of the Options, and the Exercise
Price, shall be proportionately adjusted by the Company.
Section 13. Miscellaneous Provisions.
(a) Notices. All notices to be given hereunder shall be in
writing and sent to the parties by personal delivery, certified mail, return
receipt requested, or by reputable overnight courier, and shall be addressed to
each party's respective address, as set forth in the first paragraph of this
Agreement, or to such other address as such party shall give to the other party
hereto by a notice given in accordance with this Section and, shall be
effective when actually received by the party being noticed.
(b) Assignment. This Agreement and the rights granted
hereunder may not be assigned in whole or in part by the Optionee without the
prior written consent of the Company.
(c) Further Assurances. Both parties hereto shall execute
and deliver such other instruments and do such other acts as may be necessary
to carry out the intent and purposes of this Agreement.
(d) Captions. The captions contained in this Agreement are
inserted only as a matter of convenience and in no way define, limit, extend or
prescribe the scope of this
6
<PAGE> 7
Agreement or the intent of any of the provisions hereof.
(e) Completeness and Modification. This Agreement constitutes
the entire understanding between the parties hereto superseding all prior and
contemporaneous agreements or understandings among the parties hereto
concerning the grant of Options to the Optionee. This Agreement shall not be
terminated, except in accordance with its terms, or amended, other than in a
writing executed by both of the parties hereto.
(f) Waiver. The waiver of a breach of any term or condition of
this Agreement shall not be deemed to constitute the waiver of any other breach
of the same or any other term or condition.
(g) Severability. The invalidity or enforceability, in whole
or in part, of any covenant, promise or undertaking, or any section,
subsection, paragraph, sentence, clause, phrase or word or of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
portions thereof.
(h) Construction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without
reference to its provisions regarding conflicts of laws.
(i) Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the parties.
[Signatures appear on following page.]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first set forth in the first paragraph of this Agreement.
ML DIRECT INC.
BY:
----------------------------------
James Lawless
President
THE COLUMBUS CIRCLE
BY: Sherbrooke Consulting, Ltd.
BY:
----------------------------------
8
<PAGE> 1
EXHIBIT 10.13
THIS NON-TRANSFERABLE CONVERTIBLE PROMISSORY NOTE (THE "NOTE") AND THE
SHARES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"); AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER, AND MAY NOT BE OFFERED OR SOLD
DIRECTLY OR INDIRECTLY TO OR FOR THE ACCOUNT OR BENEFIT OF ANY PERSON EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER, OR
AN EXEMPTION FROM, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
NON-TRANSFERABLE CONVERTIBLE PROMISSORY NOTE
November 15, 1996
FOR VALUE RECEIVED, Fresh Picks, Inc., a Delaware corporation ("Maker"),
with an address at Colonnade Building, 4050 Innslake Drive, Suite 210, Glen
Allen, VA 23060, hereby promises to pay to the order of ML Direct Inc., a
Delaware corporation ("Holder"), with an address at 3001 Executive Drive, Suite
120, Clearwater, Florida, 34622, the principal amount of five hundred thousand
dollars ($500,000), together with interest from the date hereof on the unpaid
principal balance outstanding from time to time, at a rate per annum equal to
the rate announced by Chase Manhattan Bank on the date hereof, as its prime
rate (or the equivalent thereof), plus 4.0% (the "Interest Rate"). Accrual of
interest shall commence on the date hereof and continue until payment in full
of the principal sum has been made. Interest on any payment of principal and,
to the extent not prohibited by law, on any payment of interest which is not
paid when due (whether, upon maturity, acceleration or otherwise), shall be
paid on demand at a rate equal to the Interest Rate, plus 5%. In no event
shall the payments made in connection herewith exceed the maximum rate of
interest allowable by applicable law. Payment shall be made in lawful money
of the United States of America in immediately available funds and shall be
made at such place as may be designated in writing by Holder. The outstanding
principal balance hereof, together with all accrued and unpaid interest
thereon, shall be due and payable on November 14, 1998 (the "Maturity Date"),
unless (i) such payment shall be otherwise accelerated as provided herein or
(ii) Holder elects to convert a portion of the amounts owed hereunder into
shares of the Maker's common stock, $.0001 par value
<PAGE> 2
(the "Common Stock") as provided herein.
This Note is subject to the following additional provisions:
1. SECURITIES LAWS. Holder, by acceptance hereof, agrees that this Note is
being acquired for investment and that Holder will not offer, sell or otherwise
dispose of this Note or the shares of Common Stock issuable upon conversion
thereof except under circumstances which will not result in a violation of the
Securities Act or any applicable state securities law or similar laws relating
to the sale of securities.
2. TRANSFER OF NOTE. In the event of the transfer of this Note as
provided for in Section 1 above, the right to convert all or a portion of this
Note into shares of Common Stock, as provided for in Section 3 below, shall
terminate and be of no further force or effect simultaneously with such
transfer.
3. CONVERSION.
(a) Holder is entitled at Holder's option and subject to Sections 4 and 5
below, at any time commencing on the day on which Holder is notified by Maker
(the "Trigger Date") of the closing of one or more private offerings of equity
by Maker in which the net proceeds received by Maker are in the aggregatee
equal to or greater than $6,000,000 (the "Offering"), and continuing thereafter
for 30 days from the Trigger Date, to notify Maker of Holder's election to
convert (the "Conversion Option") all or a portion of this Note into a maximum
of 100,000 shares of Common Stock, at a conversion price equal to the lesser of
the price per share of the Common Stock sold in the Offering provided that it
is an Offering of Common Stock, or $1.50 per share of the Maker's Common Stock.
Maker shall notify Holder of the closing of the Offering promptly, and in any
case no more than five days following such closing. Such conversion shall be
effectuated by Holder's delivering to Maker the form of conversion notice
attached hereto as Exhibit A (the "Notice of Conversion") evidencing Holder's
intention to convert this Note or a specified portion hereof, in accordance
with this Section 3(a). No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded to the nearest whole share. The date on which the Notice of Conversion
is given shall be deemed to be the date on which Maker receives the Notice of
Conversion as set forth above.
(b) The closing of the conversion of all or a portion of this Note, as
provided in Section 3(a), will take place on the tenth day after Maker receives
the Notice of Conversion (the "Mandatory Prepayment Date") at the offices of
Maker, or any other location as may be designated by Maker, at which Closing
(i) Holder will deliver this Note for cancellation, with such endorsements as
are reasonably requested by Maker, (ii) Maker will deliver to Holder the Common
<PAGE> 3
Stock to be acquired by Holder pursuant to such Notice of Conversion, and (iii)
Maker will pay the balance of the principal and interest due on the Note in
accordance with Section 4 below. If the Mandatory Prepayment Date should occur
on a weekend or a holiday, the Mandatory Prepayment Date will be the first
business day following the weekend or holiday.
4. MANDATORY PREPAYMENT. On the Mandatory Prepayment Date, Maker shall
prepay all outstanding principal and interest accrued thereon accept to the
extent all or a portion thereof is converted pursuant to Section 3 above.
5. VOLUNTARY PREPAYMENT.
(a) If, prior to the closing of any private offering of the Maker's
capital stock, Maker intends to prepay this Note, Maker shall deliver to Holder
a notice (the "Prepayment Notice") of Maker's intent to prepay this Note, in
full or in part, provided that no such prepayment shall be permitted without
the prior written consent of Holder. Upon such written consent, the amount of
the outstanding principal balance hereof specified in the Prepayment Notice,
together with all accrued and unpaid interest thereon, shall be due and payable
on the date (the "Prepayment Date") set forth in the Prepayment Notice, which
date shall be no less than 45 days and no more than 60 days after the date of
Holder's receipt of the Prepayment Notice. If Holder consents to such
prepayment and Maker does not notify Holder at least ten days prior to the
Prepayment Date of any reason why such prepayment will not occur, the amount of
the outstanding principal balance hereof specified in the Prepayment Notice,
together with all accrued and unpaid interest thereon shall be due and payable
on the Prepayment Date.
(b) Prior to the closing of the Offering, but after the closing of a
private offering in which the net proceeds received by the Maker are less than
$6,000,000, Maker shall have the right to deliver to Holder a Prepayment
Notice of Maker's intent to prepay this Note, in full or in part. Holder shall
then be entitled at Holder's option and subject to Section 3 above, any time
commencing on the day on which Holder is notified by Maker of the closing of
such a private offering of equity by Maker and continuing thereafter for 30
days from receipt of such notice, to notify Maker of Holder's election to
convert all or a portion of this Note into a maximum of 100,000 shares of
Common Stock in accordance with Section 3 above. Such conversion and payment
of the outstanding balance hereof shall be effectuated in accordance with
Section 3 and 4 above.
6. REPORTING REQUIREMENTS. No later than 45 days after the last day of
each fiscal quarter of Maker, and no later than 90 days after the last day of
Maker's fiscal year, Maker shall deliver to Holder a reasonably detailed
report, certified by Maker's Chief Financial Officer, showing Maker's financial
condition as of the end of such quarter and containing a narrative discussion
of any material developments during such period, and Maker's results of
operations for
<PAGE> 4
the quarter. In addition, Maker shall keep Holder reasonably apprised of the
status of any proposed Offering, including, without limitation, the proposed
closing date of any Offering, any extensions thereof, and the actual closing of
the Offering. Holder agrees to keep all such information regarding Maker's
financial condition and proposed Offering confidential.
7. WAIVERS.
(a) Maker hereby expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
acceleration or intent to accelerate, bringing of suit and diligence in taking
any action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereto,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder; and
(b) Maker hereby voluntarily and intentionally waives any right it may
have to trial by jury in any suit, action or proceeding brought with respect to
any dispute arising out of or relating to this Note or any course of conduct,
course of dealing, statements or actions of either Maker or Holder.
8. COST AND EXPENSES. Maker agrees to pay all costs and expenses,
including reasonable attorneys' fees, expenses and disbursements which may be
incurred by Holder in collecting any amount due under, or enforcing any other
rights with respect to this Note. Notwithstanding the foregoing, Maker will
not pay any costs incurred in connection with Holder's conversion of this Note.
9. DEFAULT UNDER THIS NOTE.
(a) If one or more of the following described "Events of Default" shall
occur:
(i) Maker shall default in the payment of principal or interest on this
Note for a period of three days following the due date; or
(ii) Maker shall fail to convert the Note into shares of Common Stock, if
required, pursuant to Section 3 above, or to make any prepayment
required by Sections 4 or 5 above; or
(iii)Maker shall fail to perform or observe, in any material respect, any
other covenant, term, provision, condition, agreement or obligation of
Maker under this Note and such failure shall continue uncured for a
<PAGE> 5
period of 30 days after notice from Holder of such failure; or
(iv) Maker shall (1) become insolvent; (2) admit in writing its inability
to pay its debts generally as they mature; (3) make an assignment for
the benefit of creditors or commence proceedings for its dissolution;
or (4) apply for, or consent to the appointment of, a trustee,
liquidator or receiver for its or for a substantial part of its
property or business; or
(v) a trustee, liquidator or receiver shall be appointed for Maker or for
a substantial part of its property or business without its consent and
shall not be discharged within 30 days after such appointment; or
(vi) any governmental agency or any court of competent jurisdiction at the
instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of
Maker and shall not be dismissed within 30 days thereafter; or
(vii)any money judgment, writ or warrant of attachment, or similar process
in excess of one hundred thousand dollars ($100,000) in the aggregate
shall be entered or filed against Maker or any of its properties or
other assets and shall remain unpaid, unvacated, unbounded or unstayed
for a period of 15 days or in any event later than five days prior to
the day of any proposed sale thereunder; or
(viii)bankruptcy, reorganization, insolvency or liquidation proceedings or
other proceedings for relief under any bankruptcy law or any law for
the relief of debtors shall be instituted by or against Maker and, if
instituted against Maker, shall not be dismissed within 30 days after
such proceeding is instituted against Maker or if Maker shall by any
action or answer approve of, consent to, or acquiesce in any such
proceedings or admit the material allegations of, or default in
answering a petition filed in any such proceeding;
then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
Holder and in Holder's sole discretion the outstanding principal of this Note
and all accrued and unpaid interest shall become immediately due and payable,
Holder may, by notice in writing with regard to subsections (i) through (iii)
above, and without any notice with regard to subsections (iv) through (viii)
above, exercise the rights and remedies herein and by
<PAGE> 6
law.
(b) In addition to any rights or remedies specifically expressed herein,
Holder may exercise any and all rights and remedies available under applicable
law, all rights and remedies being cumulative and not exclusive of each other.
If Holder so chooses, this Note may be transferred, assigned, sold or
hypothecated following default of this Note in accordance with Sections 1 and 2
herein. If Holder must institute legal proceedings to enforce this Note, Maker
agrees to pay Holder, in addition to any indebtedness due and unpaid, all
reasonable costs and expenses of such proceedings including reasonable
attorneys' fees, expenses and disbursements.
10. NOTICE. Unless otherwise specifically provided herein, all notices to
be given hereunder shall be in writing and shall be considered given when
delivered personally or by facsimile transmission, one business day after being
deposited with a reputable overnight courier, and three business days after
being mailed by registered or certified mail, postage prepaid, return receipt
requested which shall be addressed to each party's respective address, as set
forth in the first paragraph of this Agreement, or to such other address as
such party shall give to the other party hereto by a notice given in accordance
with this Section.
11. COMPLETE AGREEMENT. This Note constitutes the full and entire
understanding and agreement between Maker and Holder with respect to the
subject matter hereof. Neither this Note nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument signed by
Maker and Holder. The obligations of Maker hereunder shall not be subject to
any defense, set off, counterclaim, recoupment or termination whatsoever based
upon the invalidity, illegality or unenforceability of any other agreements
between Maker and Holder or otherwise.
12. GOVERNING LAW. This Note and the rights and obligations of the parties
hereunder shall be construed and interpreted in accordance with the internal
laws of the Commonwealth of Virginia without regard to the choice of laws
principles thereof. The provisions of this Note may not be changed orally. In
any suit, action or proceeding in connection with, or enforcement of, this
Note, Maker submits to the non-exclusive jurisdiction of the courts of the
Commonwealth of Virginia or of the federal government in such Commonwealth, and
expressly waives all objections it may have as to venue in any of such courts
or any claim of inconvenient forum. Maker consents to service of process by
mailing a copy thereof by registered or certified mail, return receipt
requested, to Maker at its principal office and agrees that such service shall
be deemed in every respect effective service of process.
The invalidity or unenforceability of any provision of this Note shall not
affect the other provisions hereof and the remaining provisions of this Note
shall remain operative and in full
<PAGE> 7
force and effect.
IN WITNESS WHEREOF, Maker has caused this instrument to be duly executed
by an officer thereunto duly authorized.
Dated: , 1997 FRESH PICKS, INC.
------------------------
By:
------------------------------
Name:
Title:
<PAGE> 8
EXHIBIT A
The undersigned hereby irrevocably elects to convert ____________________
of the principal amount of the Non-Transferable Convertible Promissory Note due
November 14, 1998 (the "Note"), issued by Fresh Picks, Inc. (the "Company"),
into ___________ shares of the Company's Common Stock, $.0001 par value (the
"Common Stock"), according to the terms and provisions set forth in Section 3
of the Note.
The undersigned acknowledges that the Note and the Common Stock
(collectively, the "Securities") have not been registered under the Securities
Act of 1933, and may not be offered or sold to or for the account of any
person, except pursuant to an effective registration statement as to such
Securities or an applicable exemption from such registration requirements and
applicable state securities laws.
----------------------------------
ML Direct Inc.
Date: By:
---------------------- ----------------------------------
Authorized Signature
Print Name:
-----------------------
Address:
-----------------------
<PAGE> 1
EXHIBIT 11.1
ML DIRECT INC.
LOSS PER SHARE
<TABLE>
<CAPTION>
June 22, 1995
(Inception)
Year ended through
November 30 November 30
1996 1995
---------- ----------
<S> <C> <C>
Weighted Average Shares Outstanding Disregarding Outstanding
Stock Option and Preferred Shares During Each Period 3,338,272 2,400,000
Shares Assumed Issued by Exercise of Stock Options Based
on the Treasury Stock Method 348,000 602,400
Common Shares issued with Series A Convertible Preferred Stock - 720,000
Assumed Conversion of Series A Convertible
Stock redeemed in September 1996 - 720,000
---------- ----------
3,686,272 4,442,400
========== ==========
Net Loss $3,053,661 $ (93,154)
========== ==========
Net Loss Per Share $ (0.83) $ (0.02)
========== ==========
</TABLE>
This Computation is submitted in accordance with Regulation SB Item 601.
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES OF ML DIRECT INC.
A DELAWARE CORPORATION
AS OF FEBRUARY 28, 1997
State of
Subsidiary Incorporation
- --------- -------------
KN2B, Inc. dba Home Shopping Showcase Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 2,562,227
<SECURITIES> 0
<RECEIVABLES> 461,374
<ALLOWANCES> 23,942
<INVENTORY> 1,150,590
<CURRENT-ASSETS> 4,738,704
<PP&E> 301,724
<DEPRECIATION> 11,490
<TOTAL-ASSETS> 5,276,578
<CURRENT-LIABILITIES> 1,478,370
<BONDS> 0
0
0
<COMMON> 422
<OTHER-SE> 3,797,786
<TOTAL-LIABILITY-AND-EQUITY> 5,276,578
<SALES> 692,256
<TOTAL-REVENUES> 740,951
<CGS> 495,272
<TOTAL-COSTS> 2,789,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 500,000
<INTEREST-EXPENSE> 9,496
<INCOME-PRETAX> (3,053,661)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,053,661)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> (.83)
</TABLE>
