<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 6, 1996
REGISTRATION NO. 333-14631
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MILLBROOK PRESS INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2731 06-1390025
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(203) 740-2220 (PHONE)
(203) 740-2526 (TELECOPY)
(Address and telephone number of principal executive offices)
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(Address of principal place of business or intended principal place of business)
FRANK J. FARRELL
THE MILLBROOK PRESS INC.
2 OLD NEW MILFORD ROAD
BROOKFIELD, CONNECTICUT 06804
(203) 740-2220 (PHONE)
(203) 740-2526 (TELECOPY)
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN WOLOSKY, ESQ. DAVID ALAN MILLER, ESQ.
KENNETH A. SCHLESINGER, ESQ. RONIT V. FISCHER, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP GRAUBARD MOLLEN & MILLER
505 PARK AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10016-1903
(212) 753-7200 (PHONE) (212) 818-8800 (PHONE)
(212) 755-1467 (TELECOPY) (212) 687-6989 (TELECOPY)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this registration statement.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 6, 1996
PROSPECTUS
THE MILLBROOK PRESS INC.
[LOGO]
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,500,000 shares of common stock ("Common Stock") and 1,500,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby
(collectively, "Securities") are being sold by The Millbrook Press Inc.
("Company"). Each Warrant entitles the holder to purchase one share of Common
Stock for $4.50 during the four-year period commencing one year from the date of
this Prospectus. The Company may redeem the Warrants once they become
exercisable at a price of $.01 per Warrant, at any time upon not less than 30
days prior written notice if the last sale price of the Common Stock has been at
least 155% of the then exercise price of the Warrant (initially $6.975) on 20 of
the 25 consecutive trading days ending on the third day prior to the date on
which notice is given. See "Description of Securities."
Prior to this Offering, there has been no public market for the Securities and
there can be no assurance that any such market will develop. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price of the Securities and the exercise price of the Warrants.
The Company has applied for quotation of the Common Stock and the Warrants on
the Nasdaq SmallCap Market under the symbols "MILB," and "MILBW," respectively.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" AT PAGE 6 HEREOF AND "DILUTION" AT PAGE 13 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................... $5.00 $.50 $4.50
Per Warrant......................... $.10 $.01 $.09
Total(3)............................ $7,650,000 $765,000 $6,885,000
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Underwriter. The Company has also agreed to sell to the
Underwriter an option ("Underwriter's Purchase Option") to purchase 150,000
shares of Common Stock and/or 150,000 Warrants and to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended ("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $229,500 ($263,925 if the
Underwriter's over-allotment option is exercised in full), estimated at
approximately $560,000.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 Warrants on the same terms set forth
above, solely for the purpose of covering over-allotments, if any. If such
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$8,797,500, $879,750 and $7,917,750, respectively. See "Underwriting."
This Prospectus also relates to the offer and sale by certain persons ("Selling
Securityholders") of Warrants issued to the Selling Securityholders in
connection with the Company's August 1996 bridge financing ("Bridge Financing").
The Warrants offered by the Selling Securityholders are not part of this
underwritten Offering and the Company will not receive any of the proceeds from
the sale of such Warrants. Without the prior consent of the Underwriter, the
Selling Securityholders may not sell such Warrants for a period of one year from
the date of this Prospectus. The Underwriter has agreed that it will not grant
such consent without the prior approval of Nasdaq.
The Securities are being offered by the Underwriter, on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to the approval of certain legal matters by counsel and
certain other conditions. The Underwriter reserves the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Securities will be made
against payment therefor at the offices of the Underwriter in New York City on
or about , 1996.
GKN SECURITIES
<PAGE>
, 1996
<PAGE>
(A display of some of the Company's books)
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
OR WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
This Prospectus includes references to trademarks of entities other than the
Company, which have reserved all rights with respect to their respective
trademarks.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS
BEEN ADJUSTED TO REFLECT (I) A REVERSE STOCK SPLIT OF THE COMMON STOCK ON THE
BASIS OF .3976 SHARES OF COMMON STOCK FOR EACH SHARE OF COMMON STOCK ("REVERSE
STOCK SPLIT") EFFECTED IN AUGUST 1996 AND (II) THE CONVERSION OF ALL OUTSTANDING
SERIES A REDEEMABLE VOTING PREFERRED STOCK ("PREFERRED STOCK") AND ALL ACCRUED
AND UNPAID DIVIDENDS THEREON INTO 473,692 SHARES OF COMMON STOCK (POST-REVERSE
STOCK SPLIT), IN ACCORDANCE WITH THE COMPANY'S ARTICLES OF INCORPORATION
("PREFERRED STOCK CONVERSION"), UPON THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS FORMS A PART.
THE COMPANY
The Company is a publisher of children's nonfiction books, in both hardcover
and paperback, for the school and public library market and the consumer market.
Since its inception, the Company has published more than 680 hardcover and 330
paperback books under its Millbrook and Copper Beech imprints. The Company's
books have been placed on numerous recommended lists by libraries, retail
bookstores and educational organizations. Books published under the Millbrook
imprint have evolved from information-intensive school and library books to
include its current mix of highly graphic, consumer-oriented books. Therefore,
many of its books can be distributed to the school and public library market as
hardcover books while being simultaneously distributed to retail bookstores and
other specialty retail, direct sales and special market outlets as either
hardcover or paperback books. As a result, the Company is better able to fully
exploit a book's sales potential.
The evolution in the Company's products anticipated changes in the
book-publishing industry. In the early 1990's there were only marginal increases
in the funds allocated to book acquisition by schools and public libraries.
Conversely, the consumer market became a steady source of sales growing from
approximately $910 million in 1986 to an expected $2.6 billion in 1996. In
addition, paperbacks have become a significant factor in the classroom
marketplace as a supplemental teaching and learning tool. In 1995, the Company
began selling books in bookstores and other retail outlets with the introduction
of a high-quality line of consumer-oriented children's paperbacks under its
Copper Beech imprint.
In order to establish itself as a leading publisher of children's books for
the consumer market, the Company intends to: (i) enter new product areas, such
as preschool novelty books, books for beginning readers and early readers,
chapter books for young readers and popular reference children's books; (ii)
acquire companies or develop strategic partnerships that broaden its product
line and extend its distribution in consumer market channels; (iii) expand its
marketing capabilities in the consumer market by increasing its in-house sales
force and management; and (iv) develop books that can be exploited through
emerging distribution channels in the consumer market, including special sales
channels such as book clubs, book fairs, direct sales, catalogs, direct mail,
commercial on-line services and the Internet. The Company believes that the high
quality of its books, its emphasis on publishing books for multiple markets and
its expanded distribution capabilities make it well positioned to increase its
books sales to the consumer market while at the same time increasing its
established sales base in the school and public library market.
In February of 1994, the Company was incorporated and acquired the assets of
the Millbrook Press Inc., which had commenced operations in 1989.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
1,500,000 shares of Common Stock and
1,500,000 Warrants. Each Warrant entitles the
registered holder thereof to purchase one
share of Common Stock at a price of $4.50 per
share during the four-year period commencing
one year from the date of this Prospectus.
The Company may redeem the Warrants once they
become exercisable at a price of $.01 per
Warrant, at any time upon not less than 30
days prior written notice if the last sale
price of the Common Stock has been 155% of
the then exercise price of the Warrants
(initially $6.975) on 20 of the 25
consecutive trading days ending on the third
day prior to the day on which notice is
Securities Offered............................ given. See "Description of Securities."
Common Stock Outstanding Prior to the
Offering.................................... 1,500,000 shares
Common Stock to be Outstanding After the
Offering.................................... 3,000,000 shares
Proposed Nasdaq SmallCap Symbols.............. Common Stock: MILB
Warrants: MILBW
</TABLE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering approximately
as follows: (i) $2.5 million for product development; (ii) $1.8 million to repay
in full the unsecured promissory notes ("Bridge Notes") of the Company issued in
the Bridge Financing; (iii) $750,000 for the enhancement of marketing
capabilities; (iv) $408,000 for accrued development, manufacturing and royalty
expenses to an affiliate of a principal stockholder; and (v) $792,000 for
working capital and general corporate purposes. See "Use of Proceeds" and
"Certain Transactions."
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including
without limitation: history of losses; need for market acceptance of products;
dependence on key accounts; possible need for additional financing; potential
adverse impact of returns; seasonal business and quarterly fluctuations;
competition; and dependence on government funding. See "Risk Factors."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements of the Company appearing elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JULY 31, OCTOBER 31,
------------------------ ------------------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Actual:
Net sales................................................. $ 6,866,000 $ 9,940,000 $ 2,706,000 $ 3,266,000
Operating income (loss)................................... (616,000) (218,000) 103,000 (7,000)
Net income (loss)......................................... (806,000) (463,000) 54,000 (88,000)
Preferred dividend accrued................................ (589,000) (656,000) (161,000) (180,000)
Net loss available to common stockholders................. $(1,395,000) $(1,119,000) $ (107,000) $ (268,000)
Net loss per share after preferred dividend requirements
(primary and fully diluted)............................. $ (1.60) $ (1.09) $ (0.10) $ (0.26)
Weighted average shares................................... 872,186 1,026,308 1,026,308 1,026,308
Pro forma(1):
Net loss available to common stockholders................. $ (806,000) $ (463,000) $ 54,000 $ (88,000)
Net loss per share (primary and fully diluted)............ $ (.60) $ (.31) $ 0.04 $ (0.06)
Weighted average shares................................... 1,345,878 1,500,000 1,500,000 1,500,000
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(2)
------------ --------------
BALANCE SHEET DATA:
Total assets...................................................................... $ 14,357,000 $ 18,245,000
Working capital................................................................... 1,900,000 9,103,000
Total liabilities................................................................. 7,381,000 5,243,000
Stockholders' equity.............................................................. $ 6,976,000 $ 13,002,000
</TABLE>
- ------------------------
(1) Gives effect to the conversion of the Company's Preferred Stock and all
accrued and unpaid dividends thereon which will convert into 473,692 shares
of Common Stock in accordance with the Preferred Stock Conversion after
giving effect to the Reverse Stock Split.
(2) Reflects (i) the receipt of the net proceeds of approximately $6,325,000
from the sale of the Securities offered hereby, (ii) the repayment of the
Bridge Notes of $1,750,000 and the related effect of writing off the
$279,000, net of amortization, in financing costs relating to the Bridge
Financing and the discount on the Bridge Notes of $20,000, net of
amortization, and (iii) the repayment of $408,000 in manufacturing,
development and royalty expenses under the Company's joint venture with
Aladdin Ltd. ("Aladdin") and (iv) the reclassification of approximately $2.6
million under the Company's Loan and Security Agreement entered into with
People's Bank in December 1995 ("Loan and Security Agreement") from
short-term to long-term.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO THE EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION OR THE
UNDERWRITER'S PURCHASE OPTION OR TO THE EXERCISE OF THE WARRANTS OFFERED HEREBY,
AND DOES NOT INCLUDE: (I) 475,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE
UPON EXERCISE OF STOCK OPTIONS WHICH MAY BE GRANTED UNDER THE COMPANY'S 1994
STOCK OPTION PLAN ("STOCK OPTION PLAN"), OF WHICH OPTIONS TO PURCHASE 390,000
SHARES OF COMMON STOCK HAVE BEEN GRANTED TO DATE, AND (II) 875,000 SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF THE WARRANTS ISSUED IN
EXCHANGE FOR THE WARRANTS ISSUED IN THE BRIDGE FINANCING ("BRIDGE WARRANTS").
SEE "MANAGEMENT--EXECUTIVE COMPENSATION" AND "--STOCK OPTION PLAN," "PRINCIPAL
STOCKHOLDERS," "CERTAIN TRANSACTIONS" AND "DESCRIPTION OF SECURITIES--WARRANTS."
5
<PAGE>
THE COMPANY
The Company, incorporated in Delaware in February 1994, was founded by
Howard Graham, Frank J. Farrell and Jean E. Reynolds. The Company was the
successor to The Millbrook Press Inc., incorporated in 1989, whose financial
support was provided by Group de la Cite International ("GLC"), a French
publishing conglomerate. From 1989 until February 1994, The Millbrook Press Inc.
was a wholly owned subsidiary of Antia Publishing Company, a Delaware
corporation, which in turn was a wholly owned subsidiary of GLC. In February
1994, the founders effected a management buyout by forming the Company, which
purchased substantially all of the assets of The Millbrook Press Inc. Unless
otherwise indicated, references to the Company also includes its predecessor.
The Company and its executive offices are located at 2 Old New Milford Road,
Brookfield, Connecticut 06804, its telephone number is (203) 740-2220 and its
Worldwide Web site address is www.neca.com/mall/millbrook.
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. ACCORDINGLY, IN ANALYZING AN INVESTMENT IN THESE SECURITIES,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS.
HISTORY OF LOSSES; ACCUMULATED LOSSES. The Company has incurred significant
losses since the management buyout in February 1994. For the fiscal years ended
July 31, 1995 and July 31, 1996, and the three months ended October 31, 1996,
the Company had net losses of $806,000, $463,000 and $88,000, respectively. At
October 31, 1996, the Company had an accumulated loss of $1,748,000. The ability
of the Company to achieve profitability in the future or, if achieved, to
sustain profitability, will depend in part upon the successful and timely
introduction of new products, the successful marketing of its existing products
and the Company's ability to collect trade receivables in a timely manner. There
can be no assurance that the Company will be able to sustain net sales in the
future or achieve profitability irrespective of the level of net sales. The
Company will incur additional marketing and administrative expenses in 1997 and
expenses relating to one-time charges in the fiscal quarter in which this
Offering occurs, for financing costs relating to the Bridge Financing and the
discount on the Bridge Notes, which the Company anticipates could result in a
net loss for the fiscal year ending July 31, 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
NEED FOR MARKET ACCEPTANCE OF PRODUCTS. The nature of the publishing
industry is that net sales derived from more successful books will be used to
cover the costs of development and production of less successful books. While
the Company experienced an approximately 45% increase in net sales from the
fiscal year ended July 31, 1995, to the fiscal year ended July 31, 1996, there
can be no assurance that this growth will continue. The Company's continued
success depends on the timely introduction of successful new books and sequels
or updates to existing books to replace declining net sales from older books.
Although the Company intends to make substantial investments in product
development each year and is continually seeking new product opportunities,
there can be no assurance that any of the Company's new books will achieve
market acceptance or that, if accepted, such acceptance will be sustained for a
period long enough to recoup costs or realize profits. If market acceptance is
not sustained, the Company may be required to write-down unsold excess inventory
and/or accept substantial product returns to maintain access to its distribution
channels. See "Business--Company Strategy," "--Product Development" and "--
Competition."
DEPENDENCE ON KEY ACCOUNTS. Approximately 66% of the Company's sales in the
school and public library market in the fiscal year ended July 31, 1996 (or 45%
of the Company's net sales) were from wholesale accounts. One such wholesale
account, Baker & Taylor, accounted for approximately 37% of total wholesale
sales attributable to the Company's school and public library business in the
fiscal year ended July 31, 1996 (or 17% of the Company's net sales).
Approximately 31% of the Company's sales in the consumer market in the fiscal
year ended July 31, 1996 (or 9% of the Company's net sales) were from
6
<PAGE>
wholesale accounts. One such wholesale account, Ingram Book Company ("Ingram"),
accounted for approximately 56% of total wholesale sales attributable to the
Company's consumer business in the fiscal year ended July 31, 1996 (or 5% of the
Company's net sales). The Company expects to continue to depend on a relatively
small number of wholesalers for a significant percentage of its sales,
particularly since a relatively small number of wholesalers in the publishing
industry account for a significant portion of wholesale sales. The Company has
no contracts with any of such wholesalers and significant reductions in sales to
any one or more of the Company's largest wholesalers would have a material
adverse effect on the Company's results of operations. See "Business--Marketing
and Distribution."
POSSIBLE NEED FOR ADDITIONAL FINANCING. Since inception, the Company's
internally generated cash flow has not been sufficient to finance either its
working capital needs including trade receivables, inventory, capital equipment
requirements or its significant investment in new product development, or to
support its operations. Management believes that the net proceeds of this
Offering, together with the Company's existing resources and cash generated from
its operations, if any, will be adequate for the Company's cash requirements
through approximately July 31, 1998. However, there can be no assurance that the
Company's working capital requirements during this period will not exceed its
available resources or that these funds will be sufficient to meet the Company's
longer-term cash requirements. Accordingly, either before or after July 31,
1998, the Company may seek additional funds from borrowings or through debt or
equity financings. There can be no assurance that any additional financing will
be available to the Company on acceptable terms, if at all, when required by the
Company. Any inability by the Company to obtain additional financing, if
required, could have a material adverse effect on the financial condition and
results of operations of the Company. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
POTENTIAL ADVERSE IMPACT OF RETURNS. The practice in the publishing
industry is to permit customers, including wholesalers and retailers, to return
merchandise. The Company gives credit for books that are returned and
establishes reserves as a deduction from gross sales for returns. Historically,
returns have been approximately 8% of the Company's gross sales to school and
public library wholesalers. For the fiscal year ended July 31, 1996, consumer
sales returns were approximately 17% of gross consumer sales. The rate of return
can have a significant impact on quarterly results since certain wholesalers
have in the past returned a large quantity of products at one time irrespective
of marketplace demand for such products, rather than spreading out the returns
during the course of the year. In both the school and public library and
consumer markets, the Company now offers a preferential discount for
non-returnability, an option being taken by an increasing number of customers.
Although the Company believes its reserves have been adequate to date, there can
be no assurance that returns by customers in the future will not exceed these
historical levels or that the actual returns will not exceed the amount of
reserves in the future. In the event that the amount of reserves proves to be
inadequate, the Company's results of operation and financial condition will be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SEASONAL BUSINESS; QUARTERLY FLUCTUATIONS. A substantial portion of the
Company's business is highly seasonal, causing significant variations in
operating results from quarter to quarter. In the fiscal year ended July 31,
1996, 69% of total net sales were derived from the school and public library
market. In the school and public library market, net sales typically tend to be
lowest in the second calendar quarter and highest in the third calendar quarter,
as schools purchase heavily in anticipation of opening in September. In the
fiscal year ended July 31, 1996, 29% of total net sales came from the consumer
market. The consumer market also tends to be highly seasonal and, given the
importance of holiday gift sales, a large proportion of net sales can occur in
the third quarter in anticipation of the holiday gift season. The Company can
exercise very little control over the timing of customer orders, particularly
those of wholesalers; thus orders anticipated in the second calendar quarter,
for example, may fall into the third calendar quarter, thereby affecting both
quarters' results. In addition, even when customer orders are placed, such
orders generally are cancelable at any time without penalty. Due to the long
product development cycle of books (nine to
7
<PAGE>
18 months), the Company generally must enter into product development
commitments prior to having firm orders. In any quarter where sales fall below
the Company's expectations, the Company's financial results will be negatively
impacted because expenses based on those expectations have already been incurred
in advance of actual receipt of orders. As a result, there can be no assurance
that the Company can maintain sufficient flexibility with respect to its working
capital needs and its ability to manufacture products to be able to minimize the
adverse effects of an unanticipated shortfall in or increase in demand for its
products. Failure to predict accurately and respond to consumer demand may cause
the Company to produce excess inventory which could result in write-offs.
Conversely, if a product achieves greater success than anticipated, the Company
may not have sufficient inventory to meet customer demand, thereby losing sales.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION. Children's book publishing in the school and public library
market and in the consumer market is fragmented and highly competitive. There
are many publishers in the school and public library market who publish
materials similar to the Company's product offerings. The Company also competes
with a large number of other publishers for retail shelf space in large
bookstore chains. A number of these competitors have considerably greater
financial and marketing resources than the Company, including Childrens Press,
Dorling Kindersley Publishing Inc., Franklin Watts Inc., Lerner Publications Co.
and Troll Communications in the school and public library market and Barron's
Educational Series Inc., Candlewick Press, Larousse Kingfisher Chambers Inc.,
Random House Inc. and Usborne Publishing Ltd in the consumer market. In addition
to competition among like types of publishing programs, the overall competition
for limited educational budgets is intense when other producers of materials
used in classrooms and libraries are included, especially producers and
distributors of electronic hardware and software. Increased competition may
result in the loss of school and public library accounts, loss of shelf space
for the Company's books at retail stores and significant price competition, any
of which could adversely affect the Company's operating results. See
"Business--Industry Background" and "-- Competition."
DEPENDENCE ON GOVERNMENT FUNDING. The majority of the school and public
library funding is dependent on government funding from federal, state and local
authorities. Budget deficits affecting these three levels of government have
limited the availability of funding for school libraries and educational
programs. The school library market is especially affected by budget cutbacks as
library expenditures and needs are typically considered less important than the
expenditures and needs of the classroom. Continued restraints in the future on
federal, state and local support for educational funding could have an adverse
effect on the Company's financial condition and results of operations. See
"Business--Industry Background."
DEPENDENCE ON QUALIFIED PERSONNEL; DEPENDENCE ON MANAGEMENT. The ability to
attract and retain highly competent executives, professionals, sales personnel
and other employees is critical to the ongoing success of the Company. A stable
and skilled work force is essential to establishing and maintaining
relationships with authors, illustrators, vendors and customers, and such
relationships are critical to the Company's long-term growth. The Company has
not experienced any difficulties in attracting and retaining qualified
personnel, although there can be no assurance that it will not encounter such
problems in the future. In particular, the Company's operations are dependent on
the efforts of Jeffrey Conrad (the newly appointed Chief Executive Officer and
President), Jean E. Reynolds (Senior Vice President--Publisher), Frank J.
Farrell (Vice President and Secretary) and Howard Graham (Vice President). The
Company has employment agreements with Mr. Conrad and Ms. Reynolds which expire
in October 1999 and December 1998, respectively. It is anticipated that both Mr.
Farrell and Mr. Graham will resign as officers of the Company effective December
31, 1996, or shortly thereafter. The Company has entered into consulting
agreements with Mr. Farrell and Mr. Graham commencing January 1, 1997 and
expiring December 1998. Each of the consulting agreements between the Company
and Mr. Farrell and Mr. Graham provides that each of them shall be available to
perform certain services for the Company for a minimum of six months per year.
In addition to the services to be rendered to the Company by Mr. Farrell and Mr.
Graham, each
8
<PAGE>
of them will be involved in various business projects unrelated to the business
of the Company. Substantially all of the duties currently performed by Mr.
Farrell and Mr. Graham as officers of the Company will be performed by Jeffrey
Conrad (the newly appointed Chief Executive Officer and President). The Company
has obtained a "key person" insurance policy on the life of Mr. Conrad in the
amount of $1,000,000, under which the Company is the beneficiary. The loss of
the services of any one of the above named persons could have a material adverse
effect on the Company. See "Management."
DEPENDENCE ON CO-PUBLISHING RIGHTS/RELATIONSHIPS. The Company sells books
developed by its own editorial staff and authors, books fully developed by other
publishers and purchased by Millbrook, as well as books co-developed by
Millbrook and other publishers as a way of spreading production costs and risks.
Such multiple sourcing utilizes a broad band of creative talent to generate book
concepts through finished books. Approximately 20% of the Company's net sales in
the fiscal year ended July 31, 1996, were derived from products sourced from
outside publishers and packagers. Competition for these arrangements is
substantial and the Company competes directly with larger companies having
greater financial and marketing resources. Although the Company has been
successful in developing such relationships in the past, there can be no
assurance that it will continue to enjoy such success in the future. See
"Business-- Company Strategy" and "--Product Development."
DEPENDENCE ON AUTHORS, ILLUSTRATORS. The ability to attract successful and
highly qualified authors and illustrators is critical to the ongoing success of
the Company. Competition for this type of resource is intense and authors and
illustrators have many options in terms of publisher affiliation. The Company
has been successful in developing long-term relationships with a number of
excellent authors and illustrators in the past, but there can be no assurance
that the Company can continue to retain superior-quality authors and
illustrators in the future. See "Business--Company Strategy" and "--Product
Development."
DEPENDENCE ON THIRD PARTY MANUFACTURERS; ABILITY TO OFFSET MANUFACTURING
COSTS. The Company's books are printed and bound by third-party manufacturers
who pass on certain costs, including paper costs, to the Company. The Company
requires substantial amounts of high-quality paper to manufacture its products,
and in periods of short supply, competition for paper can be substantial,
increasing the cost of manufacturing. To cover such costs, the Company has been
successful in raising prices of its books in the past, but there can be no
assurance that the Company will be able to raise prices in the future.
Management believes that current arrangements for the manufacture of the
Company's books are satisfactory for the Company's anticipated requirements.
Nevertheless, there can be no assurance that in the future these third parties'
manufacturing capacities will be sufficient to satisfy the Company's
requirements, that interruptions or delays in manufacturing will not adversely
affect the Company's operations, or that alternative manufacturing sources will
be available to the Company on commercially reasonable terms or at all. In
particular, due to the short-run nature of the Company's manufacturing needs,
the Company, is restricted to a select list of specialty book manufacturers.
During fiscal year 1996, Worzalla Publishing, Inc. ("Worzalla") and Aladdin
provided approximately 36% and 31% of the Company's printing and bindings needs,
respectively. The Company has no contract with Worzalla and while the Company
believes that other specialty book manufacturers would be available, if
necessary, the inability of the Company to obtain printing for its books at
favorable prices, or at all, could have a material adverse effect on the
Company's results of operations. See "Business--Manufacturing and Shipping."
POSSIBLE TERMINATION OF AGREEMENT WITH ALADDIN. In May 1994, the Company
entered into an agreement with Aladdin, whereby Aladdin agreed to produce no
less than 50 books per year for the Company through January 1, 2002. The books
are to be wholly-owned by the Company. Aladdin is responsible for the
production, printing and binding of such books, although development costs for
such books are shared by Aladdin and the Company. Aladdin retains the sales
rights for these books to countries other than the U.S.A., Canada and the
Philippines. Royalties are paid to Aladdin based on the Company's sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world. As of December 5, 1996, net payables to Aladdin
were approximately $727,000 of which the
9
<PAGE>
Company was delinquent on approximately $408,000. From October 17, 1996 to
December 5, 1996, the Company paid Aladdin $512,000. The terms of payment under
the agreement are as follows: (i) merchandising costs are due 90 days from the
date of shippment; (ii) royalty payments are made on June 30 and December 31 of
each year and are due 90 days from such date; and (iii) plant and development
costs are due each month in the amount of $30,000 with a reconciliation done at
December 31 of each year. Aladdin may terminate its agreement with the Company
in the event of a material breach by the Company of any of the terms and
conditions of the agreement. The Company's payment delinquency constitutes a
material breach under the agreement, although Aladdin has agreed to waive this
default until the consummation of this Offering. In the future, in the event of
a material breach by the Company of any of the terms and conditions of the
agreement, Aladdin may terminate the agreement which would have a material
adverse effect on the Company. See "Use of Proceeds" and "Certain Transactions."
SIGNIFICANT PORTION OF PROCEEDS USED TO SATISFY INDEBTEDNESS; BENEFIT TO
AFFILIATES. Approximately $1.8 million, or 29% of the net proceeds received by
the Company from this Offering, will be used to repay the Bridge Notes and
accrued interest, of which approximately $513,000 will be repaid to entities
which are 5% stockholders of the Company and affiliated with certain directors
of the Company, and approximately $408,000, or 6% of the net proceeds of the
Offering, will be used to satisfy payables and accrued product development
expenses in connection with the Company's joint venture with Aladdin, an
affiliate of an entity that is a principal stockholder of the Company, under the
terms of its joint venture with the Company. See "Use of Proceeds" and "Certain
Transactions."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $800,000, or
13%, of the net proceeds of the Offering has been allocated to working capital
and general corporate purposes. The Company will have broad discretion regarding
how and when such proceeds will be applied and will use a portion of such
proceeds to pay salaries, including salaries of its executive officers. See "Use
of Proceeds."
DEPENDENCE ON CREDIT FACILITY. The Company entered into the Loan and
Security Agreement in December 1995. Under the terms of the Loan and Security
Agreement, People's Bank has taken a first-priority security interest in
substantially all of the Company's assets, which assets serve as collateral for
the Loan and Security Agreement. Although the Company has not been in default
under its Loan and Security Agreement, in anticipation of the Bridge Financing
and this Offering and in order to continue to comply with certain covenants of
the Loan and Security Agreement, the Company obtained from People's Bank a
waiver of all of the financial covenants in the Loan and Security Agreement,
including those with respect to the Company's current ratio, total liabilities
to tangible net worth ratio and tangible net worth until December 31, 1996.
Without the waiver from People's Bank, the consummation of the Bridge Financing
would have caused the Company to be in default of all of the financial covenants
in the Loan and Security Agreement. In the event that the Company is in default
under the Loan and Security Agreement in the future or is unable to repay or
refinance such loan upon maturity, People's Bank could foreclose its lien which
would have a material adverse effect on the Company. As of October 31, 1996, the
Company had borrowings outstanding of approximately $2.6 million under the Loan
and Security Agreement. On November 18, 1996, the Company received a $175,000
in-formula overline extending the availability of the Loan and Security
Agreement, which had a maximum credit line of $2.7 million. This overline is
governed by the same terms of the Loan and Security Agreement and will terminate
on December 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
MANAGEMENT OF GROWTH. The Company has experienced significant growth in
recent years, and this growth has placed significant demands on the Company's
management, operational and financial resources. In addition, the Company has
recently hired a new Chief Executive Officer and President, Jeffrey Conrad, and
will be appointing a new Chief Financial Officer. There can be no assurance that
the Company's new management will be successfully integrated into the business
of the Company or if the
10
<PAGE>
Company continues to grow, that management will be effective in attracting and
retaining additional qualified personnel, expanding the Company's physical
facilities, integrating acquired businesses or otherwise managing growth. If the
Company is unable to manage growth effectively, the Company's business,
financial condition and operating results could be materially adversely
affected. See "Business" and "Management."
CONTROL BY CURRENT STOCKHOLDERS, DIRECTORS AND OFFICERS. The Company's
current principal stockholders, directors and officers, and certain of their
affiliates, will beneficially own approximately 45% of the outstanding Common
Stock immediately after this Offering and will have significant influence over
the outcome of all matters submitted to the stockholders for approval, including
the election of directors of the Company, thereby enabling such current
principal stockholders, directors and officers, and their affiliates to control
all major decisions of the Company. Furthermore, such concentration of ownership
may have the effect of preventing a change in control of the Company. See
"Principal Stockholders" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Securities offered
hereby will incur an immediate and substantial dilution of approximately 36% of
their investment in the Common Stock because the net tangible book value of the
Company's Common Stock after this Offering will be approximately $3.26 per share
as compared with the initial public offering price of $5.00 per share of Common
Stock and $.10 per Warrant. See "Dilution."
NO PRIOR MARKET; POTENTIAL LOSS OF ACTIVE TRADING MARKET; ARBITRARY OFFERING
PRICE; POSSIBLE VOLATILITY OF STOCK PRICE. There has been no prior market for
the Company's Common Stock or Warrants, and there can be no assurance that a
public market for the Common Stock or the Warrants will develop or be sustained
after the Offering. The Company's Common Stock and Warrants have been approved
for trading on the Nasdaq SmallCap Market ("Nasdaq") although there can be no
assurance that an active trading market in the Securities will develop or be
maintained. To continue to be listed on Nasdaq after the Offering, the Company
must satisfy certain maintenance criteria. The failure to meet these maintenance
criteria in the future may result in the Common Stock or Warrants being
ineligible for quotations on Nasdaq and trading, if any, of the Common Stock and
the Warrants would thereafter be conducted on the OTC Bulletin Board. As a
result of such ineligibility for quotations, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of the Common Stock or the Warrants. The public offering prices of the
Securities and the exercise price and other terms of the Warrants being offered
hereby were established by negotiation between the Company and the Underwriter
and may not be indicative of prices that will prevail in the trading market. In
the absence of an active trading market, purchasers of the Common Stock or the
Warrants may experience substantial difficulty in selling their securities. The
trading price of the Company's Common Stock and Warrants is expected to be
subject to significant fluctuations in response to variations in quarterly
operating results, changes in analysts' earnings estimates, general conditions
in the publishing industry and other factors. In addition, the stock market is
subject to price and volume fluctuations that affect the market prices for
companies and that are often unrelated to operating performance. See
"Description of Securities" and "Underwriting."
RISK OF LOW PRICED SECURITIES. To continue to be listed on the Nasdaq
SmallCap Market after the Offering, the Company must satisfy certain maintenance
criteria. The failure to meet these maintenance criteria in the future may
result in the Common Stock or Warrants being ineligible for quotations on Nasdaq
and trading, if any, of the Common Stock and the Warrants would thereafter be
conducted on the OTC Bulletin Board. As a result of such ineligibility for
quotations, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Common Stock or the Warrants.
Furthermore, the regulations of the Securities and Exchange Commission
promulgated under the Exchange Act require additional disclosure relating to the
market for penny stocks in connection with trades in any stock defined as a
penny stock. Commission regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Unless
11
<PAGE>
an exception is available, those regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. Moreover,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Company may redeem
the Warrants once they become exercisable, at a price of $.01 per Warrant, at
any time upon not less than 30 days prior written notice if the last sale price
of Common Stock has been at least 155% of the then-exercise price of the
Warrants (initially $6.975) on 20 of the 25 consecutive trading days ending on
the third day prior to the date on which notice is given. Notice of redemption
of the Warrants could force the holders to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for them to do so, to
sell the Warrants at the current market price when they might otherwise wish to
hold the Warrants, or to accept the redemption price which would be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities--Warrants."
NO DIVIDENDS. The Company has never paid cash dividends on its Common
Stock. The Company intends to retain any future earnings to finance its growth.
Accordingly, any potential investor who anticipates the need for current
dividends from an investment in the Common Stock should not purchase any of the
Securities offered hereby. In addition, the Loan and Security Agreement limits
the Company's ability to pay dividends without the lender's consent. See
"Dividend Policy."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside. The Company has undertaken
and intends to file and keep current a prospectus which will permit the purchase
and sale of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the securities are to be offered, no assurance can be
given that such qualification will occur. The Warrants may be deprived of any
value and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or is exempt from
qualification in the jurisdictions in which the holders of the Warrants reside.
See "Description of Securities--Warrants."
WARRANT EXERCISE PRICE AND EFFECT ON TRADING PRICE OF COMMON STOCK. The
Warrants being offered hereby have an exercise price below the initial offering
price of the Common Stock. Each Warrant entitles the holder to purchase one
share of Common Stock for $4.50 during the four-year period commencing one year
from the date of this Prospectus. This makes it likely that a substantial number
of the Warrants may be exercised in the future. Such exercise would be dilutive
to the net tangible book value of the Common Stock being offered hereby. In
addition, purchasers in the public offering may be willing to sell their Common
Stock into the public market at prices less than the initial offering price
because of gains in the
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<PAGE>
market price of or realized on the sale or exercise of their Warrants. Such
sales could adversely affect the public market price of the Common Stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Immediately after this
Offering, there will be outstanding stock options pursuant to the Stock Option
Plan to purchase an aggregate of 390,000 shares of Common Stock at a per-share
exercise price equal to the Offering Price of the Common Stock. In addition,
there will be outstanding 2,375,000 Warrants, including 875,000 Warrants issued
in exchange for the Bridge Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock for $4.50 during the four-year period
commencing one year from the date of this Prospectus. The exercise of any of
such outstanding stock options and Warrants, and the Underwriter's Purchase
Option (and the Warrants included therein) will dilute the percentage ownership
of the Company's stockholders, and any sales in the public market of Common
Stock underlying such stock options, Warrants and the Underwriter's Purchase
Option (and the Warrants included therein) may adversely affect prevailing
market prices for the Common Stock. Moreover, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected,
since the holders of such outstanding securities can be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in
such stock options, Warrants and the Underwriter's Purchase Option. In addition,
the Company has granted certain demand and piggy-back registration rights to the
Underwriter with respect to the securities issuable upon exercise of the
Underwriter's Purchase Option. See "Management--Stock Option Plan," "Certain
Transactions," "Description of Securities" and "Underwriting."
FUTURE SALES OF COMMON STOCK. Sales of the Company's Common Stock in the
public market after this Offering by existing stockholders could adversely
affect the market price of the Common Stock or the Warrants. See "Shares
Eligible for Future Sale."
ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS. Pursuant to its
Certificate of Incorporation, as amended, the Company has an authorized class of
1,000,000 shares of preferred stock which may be issued by the Board of
Directors on such terms and with such rights, preferences and designations as
the Board may determine without any vote of the stockholders. Issuance of such
preferred stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. Issuance of additional shares of Common Stock could
result in the dilution of the voting power of the Common Stock purchased in this
Offering. In addition, certain "anti-takeover" provisions of the Delaware
General Corporation Law, among other things, may restrict the ability of the
stockholders to expect a merger or business combination or to obtain control of
the Company. See "Description of Securities--Preferred Stock" and "--Delaware
Law."
LIMITED LIABILITY FOR DIRECTORS. The Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions under Delaware law. This may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against a director. In addition, the Company's By-laws
provide for mandatory indemnification of directors and officers. See
"Description of Securities--Limitation on Liability and Indemnification
Matters."
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<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this Offering constitutes the dilution per share of Common Stock to investors in
this Offering. Net tangible book value per share is determined by dividing the
net tangible book value (total tangible assets less total liabilities) by the
number of outstanding shares of Common Stock. The following discussion and
tables allocate no value to the exercise of the Warrants.
As of October 31, 1996, the Company had a net tangible book value of
$3,459,000, or approximately $2.31 per share of Common Stock (based on 1,500,000
shares of Common Stock outstanding at October 31, 1996). After giving effect to
the sale of the Securities offered hereby (less underwriting discounts and
estimated expenses of this Offering) and the application of the net proceeds
therefrom, the pro forma net tangible book value at that date would have been
$9,764,000, or approximately $3.26 per share. This represents an immediate
increase in net tangible book value of approximately $.95 per share to existing
stockholders and an immediate dilution of approximately $1.84 per share, or
approximately 36%, to investors in this Offering.
The following table illustrates the per share dilution without giving effect
to results of operations of the Company subsequent to October 31, 1996.
<TABLE>
<S> <C> <C>
Public offering price of the Securities....................... $ 5.10
Net tangible book value before Offering............... $ 2.31
Increase attributable to new investors................ .95
---------
Pro forma net tangible book value after Offering.............. 3.26
---------
Dilution to new investors..................................... $ 1.84
---------
---------
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid and the average price per share paid by existing stockholders and by
investors pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............................... 1,500,000 50% $ 10,191,000 57% $ 6.79
Investors in this Offering.......................... 1,500,000 50 7,650,000 43 $ 5.10
---------- --- ------------- ---
---------- --- ------------- ---
Total....................................... 3,000,000 100% $ 17,841,000 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby are estimated to be approximately $6.3 million (approximately $7.4
million if the Underwriter's over-allotment option is exercised in full). The
Company intends to apply the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ----------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Product Development.................................................... $ 2,550,000 40.5%
Repayment of Bridge Notes.............................................. 1,800,000 28.6
Marketing Enhancements................................................. 750,000 11.9
Payable to an Affiliate................................................ 408,000 6.5
Working Capital and General Corporate Purposes......................... 792,000 12.5
------------ -----
Total.............................................................. $ 6,300,000 100.0%
------------ -----
</TABLE>
Approximately $2,550,000 of the net proceeds of this Offering will be
allocated to product development, consisting of expanding the Company's product
lines in the consumer market through publishing preschool novelty books, books
for beginning readers and early readers, chapter books for young readers and
popular children's reference books. See "Business--Company Strategy."
Approximately $1,800,000 of the net proceeds of this Offering will be used
to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in August 1996. The Bridge Notes consist of 17 1/2 notes in the
aggregate principal amount of $1.75 million, bearing interest at the rate of 10%
per annum through November 30, 1996 and at a rate of 15% per annum thereafter
and payable upon the consummation of this Offering. If the Offering is
consummated in December 1996, the interest to be paid on the Bridge Notes will
be approximately $44,600. Approximately $513,000 of the principal and interest
to be repaid on the Bridge Notes is held by 5% stockholders and entities
affiliated with directors of the Company. The net proceeds from the sale of the
Bridge Notes have been used primarily for working capital purposes, including
payments to suppliers and the repayment of $500,000 of principal amount of
unsecured notes ("Prebridge Notes") and $16,000 of accrued interest. In the
event that this Offering is not consummated, the holders of the Bridge Notes may
elect to convert the entire principal amount of the Bridge Notes and interest
payable thereon into the number of shares of Common Stock equal to the principal
amount and interest payable divided by $2.50. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Approximately $750,000 of the net proceeds of this Offering will be
allocated to marketing enhancements including (i) attracting and hiring
marketing management personnel to direct and focus the Company's marketing
efforts, (ii) increasing the use of direct mail, expanding the circulation of
catalogs and extending advertising programs, (iii) increasing the in-house sales
force in the consumer market and (iv) expanding the Company's telemarketing
programs. See "Business--Company Strategy."
As of December 5, 1996, net payables to Aladdin were approximately $727,000
of which the Company was delinquent on approximately $408,000. From October 17,
1996 to December 5, 1996, the Company paid Aladdin $512,000. The terms of
payment under the agreement are as follows: (i) merchandising costs are due 90
days from the date of shipment; (ii) royalty payments are made on June 30 and
December 31 of each year and are due 90 days from such date; and (iii) plant and
development costs are due each month in the amount of $30,000 with a
reconciliation done at December 31 of each year. Approximately $408,000 of the
net proceeds of this Offering will be used to repay the accrued development,
manufacturing and royalty expenses under its joint venture with Aladdin, an
affiliate of Archon Press, Inc., a principal stockholder of the Company. See
"Certain Transactions."
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<PAGE>
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including, among other things,
additional inventory and increases in accounts receivable, payment of general
corporate expenses (including the costs of being a public company), salaries of
additional financial and management personnel, salaries of executive officers,
and the costs of possible license or acquisition of fully developed products or
businesses complementary to the Company's operations (although the Company is
not currently negotiating to acquire any business and has no commitments,
understandings or arrangements with respect to any such acquisition). If the
Underwriter exercises the over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,100,000, which will also be
added to the Company's working capital.
Based on its current operating plan, the Company anticipates that the
proceeds of the Offering, together with existing resources and cash generated
from operations, if any, should be sufficient to satisfy the Company's
contemplated working capital requirements through July 31, 1998. There can be no
assurance, however, that the Company's working capital requirements during this
period will not exceed its available resources or that these funds will be
sufficient to meet the Company's longer term cash requirements for operations.
In the event the Company's plans or assumptions change or prove to be
inaccurate, or the proceeds of the Offering together with cash generated from
future revenues, if any, prove to be insufficient to fund operations (due to
unanticipated expenses, problems or other factors), the Company may find it
necessary and/or advisable to reallocate some of the proceeds within the above-
described categories or to use portions thereof for other purposes and therefore
management will have significant discretion regarding how and when such proceeds
will be applied.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest-bearing investments.
DIVIDEND POLICY
The Company has never paid any cash dividends on the Common Stock and it is
currently the intention of the Company not to pay cash dividends on its Common
Stock for the foreseeable future. Management intends to reinvest earnings, if
any, in the development and expansion of the Company's business. Any future
declaration of cash dividends will be at the discretion of the Board of
Directors and will depend upon the earnings, capital requirements and financial
position of the Company, general economic conditions and other pertinent
factors. In addition, the Loan and Security Agreement prohibits the distribution
or declaration or payment of any dividends (in cash or in stock) on, or
purchase, acquisition, redemption, or retirement of, any of the Company's
capital stock without the prior written consent of People's Bank which consent
shall not be unreasonably withheld.
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company: (i) at October 31, 1996; and (ii) as adjusted to give effect to the
sale of the 1,500,000 shares of Common Stock and 1,500,000 Warrants offered
hereby, the Preferred Stock Conversion and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(2)
------------ --------------
<S> <C> <C>
Short-term debt..................................................................... $ 2,628,000 $ --
Long-term obligations............................................................... 1,730,000 2,628,000
Stockholders' equity:
12% Series A Voting Cumulative Preferred Stock, par value 0.01 per share; 10,000
shares authorized, 4,700 shares issued and outstanding; 1,000,000 shares
authorized, no shares issued and outstanding, as adjusted....................... 6,370,000(1) --
Common Stock, $.01 par value; 5,000,000 shares authorized;
12,000,000 shares authorized, as adjusted; 1,026,308 shares issued and
outstanding, actual; 3,000,000 shares issued and outstanding, as adjusted....... 10,000 30,000
Additional paid-in capital.......................................................... 4,014,000 16,689,000
Accumulated deficit................................................................. (3,418,000) (3,717,000)
------------ --------------
Total stockholders' equity........................................................ 6,976,000 13,002,000
------------ --------------
Total capitalization............................................................ $ 8,706,000 $ 15,630,000
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) On the effective date of the Registration Statement, of which this
Prospectus is a part, all of the outstanding shares of the Company's
Preferred Stock and all accrued and unpaid dividends thereon will convert
into 473,692 shares of Common Stock in accordance with the Preferred Stock
Conversion after giving effect to the Reverse Stock Split.
(2) Reflects (i) the receipt of the net proceeds of approximately $6,325,000
from the sale of the Securities offered hereby, (ii) the repayment of the
Bridge Notes of $1,750,000 and the related effect of writing off $279,000,
net of amortization, in financing costs relating to the Bridge Financing and
the discount on the Bridge Notes of $20,000, net of amortization and (iii)
the reclassification of approximately $2.6 million under the Company's Loan
and Security Agreement from short-term to long-term.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES TO FINANCIAL STATEMENTS
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
GENERAL
In February 1994, the Company was incorporated and acquired the assets of
The Millbrook Press Inc., which had commenced operations in 1989. Prior to
January 1991, The Millbrook Press Inc. had no revenues and incurred expenses
related to administrative costs associated with the formation and production of
its first publication list. Subsequent to January 1991, the Company has had
significant net sales to the school and public library market. For the fiscal
year ended July 31, 1996, the Company's net sales increased by 45% to $9.9
million from $6.9 million in the fiscal year ended July 31, 1995. For the
quarter ended October 31, 1996 the Company's net sales increased by 21% to $3.3
million from $2.7 million for the quarter ended October 31, 1995. This increase
was primarily attributable to greater sales to the consumer market. To date,
however, the Company has had continuing losses. These losses are primarily
attributable to the costs associated with the investment in expanding the
Company's operations and developing and expanding the Company's product line. In
particular, the Company has incurred significant expenses relating to the
establishment of the infrastructure which can enable the Company to sell books
to the consumer market and/or develop books that can appeal to both the school
and public library market and the consumer market. These expenses include
establishing distribution channels and marketing the Company's products. The
Company believes that for the fiscal year ending July 31, 1997, net sales will
increase due to its ability to produce books which can appeal to both the school
and public library market and the consumer market. However, the Company
anticipates that additional marketing and administrative expenses, and financing
costs relating to one-time charges in the fiscal quarter in which this Offering
occurs, could result in a net loss for the fiscal year ending July 31, 1997.
Generally, the Company's general and administrative, manufacturing support and
product development costs do not vary directly with net sales. Consequently, if
net sales continue to increase in accordance with the Company's expectations,
the Company believes that it could achieve profitability in periods subsequent
to the fiscal year ending July 31, 1997. However, there can be no assurance that
such net sales will increase in accordance with the Company's expectations or
that the Company will ever achieve profitability.
CONSUMER MARKET COMPARED TO THE SCHOOL AND PUBLIC LIBRARY MARKET
In addition to an increase in net sales, as the Company sells more of its
products in the consumer market, its results of operations and financial
condition could be influenced by certain distinctions between the consumer
market and the school and public library market. It is generally more difficult
to collect receivables in the consumer market than in the school and public
library market. Sales to the consumer market have a higher return rate than
sales to the school and public library market and accordingly the Company will
need to deduct a higher reserve for returns from its gross sales. And sales to
the consumer market have a lower gross profit margin than sales to the school
and public library market because consumer sales have higher sales discounts and
promotional allowances than sales to the school and public library market.
VARIABILITY IN QUARTERLY RESULTS
A substantial portion of the Company's business is highly seasonal, causing
significant variations in operating results from quarter to quarter. In the
school and public library market, net sales tend to be lowest in the second
calendar quarter and highest in the third calendar quarter, as schools purchase
heavily in anticipation of opening in September. The consumer market also tends
to be highly seasonal and, given
18
<PAGE>
the importance of holiday gift sales, a large proportion of net sales can occur
in the third calendar quarter in anticipation of the holiday gift season. The
Company expects its future net sales and operating results will reflect these
seasonal factors. In addition, the Company's quarterly operating results have
varied significantly depending on factors such as the timing of customer orders
and are likely to do so in the future. The Company can exercise very little
control over the timing of customer orders, particularly those of wholesalers,
thus orders anticipated in the second calendar quarter, for example, may fall
into the third calendar quarter, thereby affecting both quarters' results. In
addition, even when customer orders are placed, such orders are generally
cancellable at any time. Due to the long product development cycle of books
(nine to 18 months), the Company generally must invest significantly in product
development prior to having firm orders. The financial results in any quarter
where net sales fall below Company expectations will be negatively impacted as
expenses based on those expectations have already been incurred in advance of
actual receipt of orders. In addition, there can be no assurance that the
Company can maintain sufficient flexibility with respect to its working capital
needs and its ability to manufacture products to be able to minimize the adverse
affects of an unanticipated shortfall in or an increase in demand for its
products. Failure to predict accurately and respond to consumer demand may cause
the Company to produce excess inventory which could result in write-offs.
Conversely, if a product achieves greater success than anticipated, the Company
may not have sufficient inventory to meet customer demand.
SALES INCENTIVES AND RETURNS
In connection with the introduction of new books, many book publishers,
including the Company, discount prices of existing products, provide certain
promotional allowances and credits or give other sales incentives to their
customers. The Company intends to continue such practices in the future. In
addition, the practice in the publishing industry is to permit customers
including wholesalers and retailers to return merchandise. Most books not sold
may be returned to the Company, and the Company gives credit for such returned
books. The rate of return also can have a significant impact on quarterly
results since certain wholesalers have in the past returned large quantities of
products at one time irrespective of marketplace demand for such product, rather
than spreading out the returns during the course of the year. The Company
computes net sales by concurrently deducting a reserve for returns from its
gross sales. Return allowances may vary as a percentage of gross sales based on
actual return experience. The Company believes that as gross sales to the
consumer market increase as a proportion of its overall sales, returns will
constitute a greater proportion of net sales. Although the Company believes its
reserves have been adequate to date, there can be no assurance that returns by
customers in the future will not exceed historically observed percentages or
that the level of returns will not exceed the amount of reserves in the future.
In the event that the amount reserved proves to be inadequate, the Company's
operating results will be adversely affected.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statement of
operations for the fiscal years ended July 31, 1995 and 1996, and for the three
months ended October 31, 1995 and 1996, and the relative percentage of net sales
represented by certain income and expense items:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31, THREE MONTHS ENDED OCTOBER 31,
---------------------------------------------- ----------------------------------------------
1995 1996 1995 1996
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 6,866 100.0% $ 9,940 100.0% $ 2,706 100.0% $ 3,266 100.0%
Cost of sales................... 3,407 49.6 5,099 51.3 1,373 50.7 1,743 53.4
--------- --------- --------- ---------
Gross profit.................. 3,459 50.4 4,841 48.7 1,333 49.3 1,523 46.6
Operating expenses:
Selling and marketing......... 3,024 44.0 3,854 38.8 937 34.6 1,140 34.9
General and administrative.... 1,051 15.3 1,205 12.1 293 10.8 390 11.9
--------- --------- --------- ---------
Total operating expenses.... 4,075 59.4 5,059 50.9 1,230 45.5 1,530 46.8
Operating income (loss)......... (616) (9.0) (218) (2.2) 103 3.8 (7) (0.2)
Interest expense................ 190 2.7 245 2.5 49 1.8 81 2.5
--------- --------- --------- ---------
Net income (loss)............... $ (806) (11.7)% $ (463) (4.7)% $ 54 2.0% $ (88) (2.7)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1995.
NET SALES. Net sales increased $560,000, or approximately 21%, from $2.7
million for the three months ended October 31, 1995, to $3.3 million for the
three months ended October 31, 1996. This increase is solely attributable to
increases in net sales to the consumer market, which increased approximately 93%
from $830,000 in the three months ended October 31, 1995, to $1.6 million in the
three months ended October 31, 1996. Net sales in the school and public library
market decreased $74,000, or approximately 4%, from $1.8 million in the three
months ended October 31, 1995, to $1.7 million in the three months ended October
31, 1996. This decrease was primarily attributable to a change in the timing of
purchasing patterns of several wholesalers, particularly Baker & Taylor, which
reduced advanced purchases. Management believes that the reduction in advanced
purchases will be offset by the increase in restocking orders, thus neutralizing
the overall effect on expected school and public library sales during the course
of the upcoming year. In addition, returns have increased by $144,000 over the
prior three months ended October 31, 1995 as a result of trends in the industry.
COST OF SALES. Cost of sales increased $370,000, or approximately 27%, from
$1.4 million in the three months ended October 31, 1995, to $1.7 million in the
three months ended October 31, 1996. This increase is primarily attributable to
the increase in net sales. Cost of sales was approximately 51% and 53% of net
sales in the three months ended October 31, 1995 and 1996, respectively. Cost of
sales increased as a percentage of net sales in the three months ended October
31, 1996 due to the proportionately higher level of product sold to the consumer
market. Sales to the consumer market comprised approximately 50% in the three
months ended October 31, 1996, as compared to approximately 33% in the three
months ended October 31, 1995. The terms and conditions of sales in the consumer
market cause it to have a higher cost of sales since consumer sales have higher
discounts and promotional allowances than sales to the school and public library
market.
SELLING AND MARKETING. Selling and marketing expenses increased $203,000,
or approximately 22%, from $937,000 in the three months ended October 31, 1995,
to $1.1 million in the three months ended October 31, 1996. This increase is
primarily attributable to the substantial increase in consumer sales which carry
an overall higher distribution cost. Additionally, certain special wholesale
school and library sales
20
<PAGE>
occurred in the three months ended October 31, 1996 which carried higher
discounts than is typical, causing fulfillment costs to rise as a percentage of
net sales. This increase also reflects the effect of the Company's efforts to
expand its production department in order to better control schedules and to
substantially decrease the cost of and dependence on freelance help.
Additionally, the Company has continued to increase marketing expenditures in
order to expand the infrastructures needed to deliver the anticipated increase
in sales for fiscal year 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$97,000, or approximately 33%, from $293,000 in the three months ended October
31, 1995, to $390,000 in the three months ended October 31, 1996. This increase
was primarily attributable to increased personnel and the establishment of a
consumer credit and collection capability. Additionally, provision for
amortization of financing costs also contributed to this increase.
NET INTEREST AND OTHER EXPENSES. Net interest expense increased by $32,000,
or approximately 65%, from $49,000 as at the end of the three months ended
October 31, 1995, to $81,000 for the three months ended October 31, 1996. Such
increases were largely due to higher than average borrowings.
FISCAL YEARS ENDED JULY 31, 1995 AND 1996
NET SALES. Net sales increased $3.0 million, or approximately 45%, from
$6.9 million for the fiscal year ended July 31, 1995, to $9.9 million for the
fiscal year ended July 31, 1996. This increase is primarily attributable to
increases in net sales to the consumer market, which increased from $908,000 in
the fiscal year ended July 31, 1995, to $2.8 million in the fiscal year ended
July 31, 1996. In the fiscal year ended July 31, 1996, the Company published 55
books for the consumer market as compared to 28 books for this market in the
prior fiscal year. This increase was primarily attributable to the increase in
books published under the Company's Copper Beech imprint and the crossover of
books published under the Millbrook imprint into the consumer market. Net sales
in the school and public library market increased from $5.5 million in the
fiscal year ended July 31, 1995 to $6.8 million in the fiscal year ended July
31, 1996. This increase is attributable to the introduction and crossover of
books published under the Copper Beech imprint into the Company's traditional
school and public library market and sales from the Company's backlist.
COST OF SALES. Cost of sales increased $1.7 million, or approximately 50%,
from $3.4 million in the fiscal year ended July 31, 1995, to $5.1 million in the
fiscal year ended July 31, 1996. Cost of sales was approximately 49.6% and 51.3%
of net sales in the fiscal years ended July 31, 1995 and 1996, respectively.
Cost of sales increased as a percentage of net sales due primarily to the terms
and conditions of sales in the consumer market as opposed to the school and
public library market (i.e., consumer sales have higher discounts and
promotional allowances than sales to the school and public library market).
SELLING AND MARKETING. Selling and marketing expenses increased $830,000,
or approximately 27%, from $3.0 million in the fiscal year ended July 31, 1995,
to $3.8 million in the fiscal year ended July 31, 1996. This increase is
primarily attributed to increases in commissions and salaries of marketing
personnel and warehousing and distribution costs. However, as a percentage of
net sales, selling and marketing expenses decreased from approximately 44% in
the fiscal year ended July 31, 1995, to 39% in the fiscal year ended July 31,
1996. Management anticipates that while such expenses will be approximately 40%
of net sales during the fiscal year ended July 31, 1997, they should constitute
a lower percentage of net sales beyond the fiscal year ended July 31, 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$154,000, or approximately 15%, from $1.1 million in the fiscal year ended July
31, 1995 to $1.2 million in the fiscal year ended July 31, 1996, primarily as a
result of costs relating to additional personnel and the Company's debt
financings. However, as a percentage of net sales, general and administrative
expenses decreased from approximately 15% in the fiscal year ended July 31,
1995, to 12% in the fiscal year ended July 31, 1996.
21
<PAGE>
NET INTEREST AND OTHER EXPENSES. Net interest expense increased by $55,000
or 29% from $190,000 in the fiscal year ended July 31, 1995, to $245,000 for the
fiscal year ended July 31, 1996. Such increases are largely due to higher
average borrowings on the Company's line of credit.
INCOME TAXES. The Company has incurred cumulative net operating losses for
federal tax purposes of approximately $970,000. In the absence of an ownership
change as defined in the Internal Revenue Code of 1986, as amended ("Code"),
these federal net operating losses would be available to reduce the federal
income taxes of the Company in the future, although such federal net operating
loss carryforward will expire in the years 2009 through 2011. Upon the
completion of this Offering utilization of the net operating loss carryforwards
may be subject to a substantial annual limitation due to the ownership change
limitations provided by the Code. The annual limitation may result in the
expiration of net operating loss carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company's internally generated cash flow has not been
sufficient to finance either its working capital needs including trade
receivables, inventory, capital equipment requirements or its significant
investment in new product development, or to support operations. Due to the long
product development cycle of books (nine to 18 months), the Company generally
must enter into product development commitments prior to having firm orders. In
addition, the Company has experienced delays in obtaining external financing. As
a result, the Company has experienced working capital shortfalls in the past,
which has restricted the Company's ability to conduct and develop its business
as planned. The Company has not generated positive cash flows from operations
over any twelve-month period since inception.
The Company has met its capital requirements to date in part through
borrowings under the Loan and Security Agreement. At October 31, 1996, the
balance outstanding under the revolving credit facility was approximately $2.6
million. Currently, the Company's credit line under the Loan and Security
Agreement is (i) fully utilized; (ii) secured by substantially all of the
Company's assets with advances based upon 80% of the Company's eligible accounts
receivables and 50% of the Company's inventory, with this segment capped at $1.5
million of the total line of $2.7 million; and (iii) partially guaranteed by
Jean E. Reynolds, Howard Graham and Frank J. Farrell. See "Certain
Transactions." Although the Company has not been in default under its Loan and
Security Agreement, in anticipation of the Bridge Financing and this Offering
and in order to continue to comply with certain covenants in the Loan and
Security Agreement, People's Bank has modified certain financial covenants in
the Loan and Security Agreement until December 31, 1996. The Company believes
that with the proceeds from this Offering it will be in compliance with the
covenants under the Loan and Security Agreement even after the modifications to
the covenants expire. The Loan and Security Agreement also restricts the ability
of the Company to obtain working capital in the form of indebtedness other than
indebtedness incurred in the ordinary course of the Company's business, to grant
security interests in the assets of the Company or to pay dividends on the
Company's securities. On November 18, 1996, the Company received a $175,000
in-formula overline extending the availability of the Loan and Security
Agreement, which had a maximum credit line of $2.7 million. This overline is
governed by the same terms of the Loan and Security Agreement and will terminate
on December 31, 1996. The Company expects to fully utilize this additional
credit for working capital purposes prior to the consummation of the Offering.
In addition to bank borrowings, the Company's principal sources of capital
since August 1, 1994, have been as follows:
(i) Between October 1994 and April 1995, the Company issued an aggregate
of 77,656 shares of Common Stock to Archon Press for $500,000. See "Certain
Transactions."
(ii) In June 1995, the Company issued an aggregate of 155,312 shares of
Common Stock to Applewood Associates, L.P. ("Applewood"), 21st Century
Communications T-E Partners, L.P. ("21st
22
<PAGE>
T-E"), 21st Century Foreign Partners ("21st Foreign") and 21st Century
Communications Partners, L.P. ("21st Partners" and, collectively with 21st
T-E and 21st Foreign, "21st Century Funds") for an aggregate purchase price
of $1,000,000. See "Certain Transactions."
(iii) In April 1996, the Company consummated a financing ("Prebridge
Financing") by issuing the Prebridge Notes. Applewood, 21st T-E, 21st
Foreign and 21st Partners purchased $250,000, $57,000, $23,000 and $170,000
principal amounts of the Prebridge Notes, respectively. See "Use of
Proceeds," "Principal Stockholders" and "Certain Transactions."
(iv) In August 1996, the Company issued an aggregate of 1.75 million
Bridge Notes in connection with the Bridge Financing, in which the Company
issued 17 1/2 Bridge Units ("Bridge Units") at a purchase price of $100,000
per Bridge Unit, each Bridge Unit consisting of a $100,000 principal amount
Bridge Note and 50,000 Bridge Warrants each to purchase one share of Common
Stock at a purchase price of $5.00 per share. Upon the effective date of the
Offering, the Bridge Warrants automatically convert into an aggregate of
875,000 Warrants. As part of such Bridge Financing, the Prebridge Notes were
converted into Bridge Units. The Bridge Notes are in the aggregate principal
amount of $1.75 million, bearing interest at the rate of 10% per annum
through November 30, 1996, and at a rate of 15% per annum thereafter, with
principal and interest payable in full upon the consummation of this
Offering. The Bridge Notes are being repaid out of the proceeds from this
Offering. See "Use of Proceeds," "Certain Transactions," "Principal
Stockholders" and "Selling Securityholders and Plan of Distribution."
As of October 31, 1996, the Company had working capital of $1,900,000. At
such date, an aggregate of approximately $7.0 million (or 92.5%) of the
Company's total current assets consisted of accounts receivable and inventories
and the Company had accounts payable and accrued expenses of approximately $2.7
million, of which it was delinquent on approximately $1.1 million. Based on its
current operating plan, the Company anticipates that the proceeds of the
Offering, together with existing resources and cash generated from operations,
if any, will be sufficient to satisfy the Company's contemplated working capital
requirements through approximately July 31, 1998. However, there can be no
assurance that the Company's working capital requirements will not exceed its
available resources or that these funds will be sufficient to meet the Company's
longer-term cash requirements for operations. Accordingly, either before or
after July 31, 1998, the Company may seek additional funds from borrowings or
through debt or equity financings.
23
<PAGE>
BUSINESS
OVERVIEW
The Company is a publisher of children's nonfiction books, in both hardcover
and paperback, for the school and public library market and the consumer market.
Since its inception, the Company has published more than 680 hardcover and 330
paperback books under its Millbrook and Copper Beech imprints. The Company's
books have been placed on numerous recommended lists by libraries, retail
bookstores and educational organizations. Books published under the Millbrook
imprint have evolved from information-intensive school and library books to
include its current mix of highly graphic, consumer-oriented books. Therefore,
many of its books can be distributed to the school and public library market as
hardcover books while being simultaneously distributed to the consumer market as
either hardcover or paperback books. As a result, the Company is better able to
fully exploit a book's sales potential.
The consumer market in children's books consists of books purchased by
consumers through the traditional trade bookstores such as Barnes & Noble and
Waldenbooks and educational chain stores such as Zany Brainy and Learningsmith,
Inc., as well as the non-traditional distribution channels such as direct sales,
catalogs, direct mail, book clubs, book fairs, non-book retail stores, and on a
smaller scale, certain museums, national parks, historical sites, theme parks,
gift shops and toy stores.
In order to establish itself as a leading publisher of children's books for
the consumer market, the Company intends to: (i) begin publishing preschool
novelty books, books for beginning readers and early readers, chapter books for
young readers and children's popular-reference books; (ii) acquire companies or
develop strategic partnerships that broaden its product line and extend its
distribution in consumer market channels; (iii) expand its marketing
capabilities in the consumer market by increasing its in-house sales force and
management; and (iv) develop books that can be exploited through emerging
distribution channels in the consumer market, including special sales channels
such as book clubs, book fairs, direct sales, catalogs, direct mail, commercial
on-line services and the Internet. The Company believes that the high quality of
its books, its emphasis on publishing books for multiple markets and its
expanded distribution capabilities makes it well positioned to increase its
books sales to the expanding consumer market while at the same time increasing
its established sales base in the school and public library market.
INDUSTRY BACKGROUND
The Company operates in two distinct markets: the school and public library
market, and the consumer market. The fastest-growing segment of the children's
book marketplace is paperbacks; their sales increased by 21% in 1995. Hardcover
children's books experienced a 5.2% sales increase in 1995. This trend is
continuing and The Book Industry Study Group anticipates that the demand for
children's hardcover books will increase by a rate of 4.7% and that for
children's paperback books will increase by a rate of 8.3%, each on a compounded
basis from 1995 through the year 2000. As a result of that growth, BOOK INDUSTRY
TRENDS 1996 predicts that public library expenditures on children's books will
reach approximately $190 million in the year 2000, and school library
expenditures will reach approximately $174 million in the year 2000, for a total
of approximately $364 million. Veronis, Suhler & Associates predicts that by the
year 2000, children's hardcover book sales in the consumer market will reach
approximately $1.6 billion and children's paperback book sales in the consumer
market will reach approximately $1.4 billion, for a total of approximately $3.0
billion.
SCHOOL AND PUBLIC LIBRARY MARKET
The school and public library market is undergoing significant change due to
long-term social and economic forces. The United States Department of Education
predicts that the student population from kindergarten through twelfth grade
will increase 8% from 1995 to 2006, with an overall net gain of approximately
3.8 million students. Because many school districts allocate instructional
material funds on a "per head" basis, the Company believes that money allocated
to schools for book acquisitions should
24
<PAGE>
increase as the student population increases. Purchases are primarily driven by
favorable book reviews. Age-appropriate books on the right topic with favorable
reviews sell along a predictable curve. In addition to the demographic changes,
demand for books has also increased as a result of the school and public library
market becoming increasingly aware of, and responsive to, supporting the
innovative instructional programs being developed and used in the classroom. New
teaching philosophies such as the "reading initiative," the "whole-language
movement" and "cross-curriculum teaching" developed in the 1980s and 1990s have
increased the demand for different and better books. Librarians are working with
classroom teachers to select books that meet classroom criteria of being
multicultural, visually stimulating, interesting, curriculum-related and
suitable for a range of reading-ability.
CONSUMER MARKET
Demand for children's books should also increase in the consumer market due
to the projected increase in the number of school-age children. The Company
believes that, in addition to the larger school age population the most
important factors that will sustain larger sales of children's books include the
increased availability of quality books, particularly paperback books, and the
convenience of being able to purchase inexpensive paperback books as opposed to
traveling to libraries. In addition, the Company believes the growth in the
number of affluent, better-educated parents and the increased emphasis they
place on education as a whole has also contributed to this trend.
Demand for children's books in the consumer market has also increased
because the methods by which hardcover and paperback books are distributed have
changed significantly in the past five years, leading to greater accessibility
and shelf space for books. Traditionally, books were primarily sold at small
local bookstores with limited selections. Many such bookstores were replaced by
larger mall bookstores which in turn, were replaced by book superstores (such as
Barnes & Noble). Concurrently, alternate means of distribution have developed.
For example, books are now sold by certain retailers such as T.J. Maxx,
educational chain stores such as Learningsmith and Zany Brainy, outlets and
warehouse clubs such as Sam's Warehouse, COSTCO and B.J.'s and on a smaller
scale, certain museums, national parks, historical sites, theme parks, gift
shops and toy stores. Books are also more accessible to children and parents
through the expansion of direct sales channels such as book fairs, school and
consumer book clubs, display sales and catalogs. Book fairs are generally
week-long events conducted on school premises and sponsored by school librarians
and/or parent-teacher organizations and are intended to provide students with
quality books at reasonable prices in order to help them become more interested
in reading. The Company has identified more than 600 catalogs that sell
children's books, including such oddly diverse ones as an anatomical supply
catalog.
CROSSOVER OF SALES
Demand for children's books has also increased because a book can now be
sold to both the school and public library market and the consumer market.
Traditionally, hardcover library books addressed topics typical for school
reports and research and were created with the purpose of maximizing information
content rather than appealing to consumers. Because books sold in the school and
public library market in the past were sold to librarians/teachers based on
content, the product was often informationally rich, but somewhat aesthetically
unappealing. Conversely, a paperback book sold in the consumer market was not
designed as an information source, but rather to attract a consumer's attention
and thereby sell itself from the shelf, and accordingly failed to address
certain topics and lacked the informational content of library books. The
Company's books, and books for the children's book market in general, are now
designed to appeal to both markets. A book filled with information is combined
with an attractive title, cover and internal design to catch the eye of the
consumer browsing the shelf. The same book can then be bound as a hardcover book
and sold to school and public libraries. Additionally, as either a hardcover or
a paperback, the book appeals to teachers and can be used as supplemental
reading in the classroom.
25
<PAGE>
COMPANY STRATEGY
The Company's goal is to be a "one-stop publisher," publishing and marketing
a diverse product line servicing most of the major segments of the children's
book market. The Company's strategy is to continue to diversify its products and
the distribution channels for those products by capitalizing on the long-term
and short-term changes occurring in the children's book publishing industry in
both the school and public library market and particularly in the consumer
market.
The Company believes that this diversified approach to its product line will
enable it to achieve broad market penetration in the children's book market and
minimize the risk of fluctuations or weakness in any one particular segment. The
Company believes that its experience in publishing children's books as well as
its reputation for quality gained over the past six years, combined with the
evolution and anticipated growth rates for children's books in the school and
public library and consumer markets, creates an opportunity for the Company to
expand the list of books in which it maintains a significant ownership interest
and expand the recognition of its brand names. The Company believes that the
elements required to achieve this goal are (i) publishing books of the highest
quality, created either in house, through packaging arrangements or licensed,
with the ability to satisfy two or more of the markets which it now services,
(ii) expanding its product offerings to take advantage of its investments in
distribution and its exposure to the consumer market and (iii) enhancing its
existing marketing operations to support its product line expansion initiatives.
Industry conditions among publishers in recent years has led to ongoing
divestitures and the Company intends to accelerate its growth and increase its
market penetration by selectively acquiring other publishers of children's books
or by formulating strategic alliances to increase the market exposure of its
books. The Company also intends to explore opportunities in electronic media by
selectively participating in publishing and marketing opportunities on
commercial on-line services and on the Internet. Key elements of the Company's
strategy are:
- CROSSOVER OF SALES. The Company believes that significant opportunities
exist to market products typically developed for one market into other
markets. To initiate its strategy of selling books which can crossover
into two or more markets, in 1995 the Company began reformatting many of
its previously published ("back-list") school and public library books
under its Millbrook imprint into paperback books and selling them in the
consumer market. In addition, the Company's paperback books have also
been sold as supplemental materials for the classroom. Similarly, the
Company's books under the Copper Beech imprint are also published in
hardcover format to sell to the school and public library market. The
Company will seek to continue to produce books in the future under both
the Millbrook and Copper Beech imprints that will appeal to two or more
markets in order to fully exploit a book's sales potential.
- TARGET NEW MARKET NICHES/ACQUISITION OPPORTUNITIES. The Company is
continually seeking new market niches which offer opportunities for
significant sales growth. The Company has targeted the preschool novelty
area as a future market and plans to enter that segment with books
containing moveable elements or books bundled with additional
merchandise. The Company will publish books for the beginning reader
(four to six years old) and early reader (five to eight years old) as
well as chapter books for ages seven through 11. The Company will publish
popular reference materials for young readers from seven through 15. In
addition, the Company will seek to expand its penetration of the
supplemental classroom market where its books may also be used as
instructional material. Where possible, the Company will re-format
existing books for distribution into new markets, leveraging its
investments in product development over a broader base.
The Company may also seek acquisition opportunities covering niche
markets in which the Company does not currently compete and product
extensions in its existing markets. The Company's product development
strategy may include joint ventures with strategic partners to minimize
up-front development costs. Currently, however, the Company has no
commitments or agreements with respect to any acquisitions.
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- ENHANCE MARKETING AND SALES FORCE. Since inception, the Company has
increased its penetration into the school and public library market. The
Company intends to continue to build on these efforts by increasing its
use of direct mail, expanding circulation of catalogs and extending its
advertising programs to achieve better coverage and increased marketplace
penetration. The Company also intends to enhance its telemarketing
capabilities in order to help strengthen sales of books to retailers. In
the consumer market, the Company intends to rely more heavily on an in-
house sales force rather than a commissioned sales force, with a view to
entirely replacing the commissioned force with in-house personnel in the
future. The Company believes this change will enable it to more
effectively concentrate the Company's selling efforts on mass retail,
major book chains and special sales accounts and to facilitate the
Company's entry into newly targeted markets.
- EXPAND DISTRIBUTION. The Company intends to expand its existing channels
of distribution by increasing its use of in-store promotion, consumer
advertising and telemarketing. The Company believes that decision-making
with respect to purchasing books is becoming more complex due to
expansion in types of outlets selling books and the increasing use of
marketing techniques that put the Millbrook imprint in direct contact
with children, parents and teachers will increase sales. The Company
intends to increase its participation in book fairs, book clubs, catalogs
and to distribute its books to other alternative retail outlets. The
Company may also seek to enter into additional strategic partnerships to
extend its distribution in both the consumer and in school and public
library market channels. Currently, however, the Company has no
commitments or agreements with respect to any strategic partnership.
- ADAPT PRODUCT TO NEW TECHNOLOGIES. The Company has begun digitally
storing the text and graphics of its books so as to be well positioned to
take advantage of opportunities in the electronic media industry,
including commercial on-line services and the Internet, if and when such
opportunities become available.
- CONTINUE TO DEVELOP HIGH QUALITY BOOKS. The Company intends to develop
additional books through internal development in collaboration with its
network of authors and artists. The Company is now selectively entering
into agreements with certain high-profile authors and illustrators to
increase the recognition of its brand names.
PRODUCTS
The Company publishes children's books in hardcover and paperback formats
for the school and public library market and the consumer market. When the
Company began publishing books in 1991, the books created were mainly series
books and were intended to be sold singularly and in sets to the school and
public library market. Since then, the Company's products have evolved into a
diverse set of highly-graphic, consumer-oriented single books. The Company's
Millbrook imprint primarily targets the school and public library market, while
its Copper Beech imprint primarily targets the consumer market. Nevertheless,
the Company designs virtually all of its books to appeal to teachers and
librarians, as well as to children and parents. This approach allows the
Company's books to be introduced simultaneously in more than one market, with
the intent of increasing sales. For example, in 1995, the Company published 111
hardcover books under the Millbrook imprint for the school and public library
market, of which 59 books were suitable for and published simultaneously as
hardcovers or paperbacks to be sold in the consumer market, and 42 hardcover
books under the Copper Beech imprint to be sold in the consumer market, of which
26 books were suitable for and published simultaneously as hardcovers or
paperbacks, to be sold in the school and public library market.
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The following list is an example of the hardcover books published by the
Company under its Millbrook imprint from Spring 1995 through the Fall 1996 which
have either paperback or hardcover editions to be sold in the school and public
library or consumer market:
CRAFTS FOR VALENTINES DAY
THE QUILT-BLOCK HISTORY OF PIONEER DAYS WITH PROJECTS KIDS CAN MAKE
NATURE IN YOUR BACKYARD: SIMPLE ACTIVITIES FOR CHILDREN
COMPOST! GROWING GARDENS FROM YOUR GARBAGE
MICHAEL ROSEN'S ABC
EVERY DAY IS EARTH DAY: A CRAFT BOOK
THE CROCODILE AND THE DENTIST
CITYMAZE! A COLLECTION OF AMAZING CITY MAZES
THE CHILDREN'S ATLAS OF THE TWENTIETH CENTURY
BEARS AT THE BEACH: COUNTING FROM 10 TO 20
NOW I KNOW BETTER: KIDS TELL KIDS ABOUT SAFETY
THE ANCIENT EGYPTIANS: LIFE IN THE NILE VALLEY
MALCOLM X: HIS LIFE AND LEGACY
YITZHAK RABIN: ISRAEL'S SOLDIER STATESMAN
The following list is an example of the hardcover books published by the
Company under its Copper Beech imprint from Spring 1995 through Fall 1996 which
have either paperback or hardcover editions to be sold in the school and public
library or consumer market:
PIRATES
PLAYING WITH MAGNETS
THE PLANETS
THE PYRAMIDS
KNIGHTS: FACT OR FICTION
BLOOD
MOST EXCELLENT BOOK OF HOW TO BE A MAGICIAN
MOST EXCELLENT BOOK OF HOW TO BE A PUPPETEER
BRAIN SURGERY FOR BEGINNERS
53 1/2 THINGS THAT SAVED THE WORLD AND SOME THAT DIDN'T
FASCINATING FACTS ABOUT SHARKS
PRODUCT DEVELOPMENT
The Company develops books through internal and external resources. The
Company may also acquire books through co-publishing arrangements and/or the
acquisition of other licenses.
INTERNAL DEVELOPMENT
Nearly 75% of the books published under the Millbrook imprint are produced
by the Company's editorial staff. A book concept can originate from a number of
sources such as (i) analysis of the Company's sales statistics for an existing
book to help assess how a similar book targeting a similar age group will fare,
(ii) analysis of school age demographics and other social and economic factors
from current philosophical trends in education (i.e., the whole language
movement) to the globalization of education, (iii) review of competitors' books
to determine if and how the Company can publish a superior book on a similar
topic, (iv) reading children's magazines to determine what young people are
interested in and (v) maintaining personal contacts with librarians, teachers
and booksellers. Once conceived, a book proposal is circulated to the sales,
production, marketing, design and financial departments of the Company for their
input and depending on the input, the proposal will go forward or be terminated.
A favorable decision causes the editorial department to contract with an
appropriate author and/or artist
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from its pool of approximately 350 authors and artists. The Company believes it
has excellent relationships with its authors and artists, including many
well-known names in the field.
Authors and artists are typically engaged on a royalty basis. Royalties on
hardcover and paperback editions are paid on the net sales and range from 6% to
10% of net sales with an average of 7% of net sales for hardcover and paperback
books. The Company believes its average royalty rates are slightly lower than
overall industry standards. The Company expects its average royalty rates to
increase as the Company increases its emphasis on consumer-oriented books.
Virtually all of Millbrook's contracts call for an advance payment against
future royalties. Advances range from $1,000 for a simple series book to as much
as $13,000 to a well-known artist for a picture book. In almost all cases, the
Company retains control of all book club, reprint, electronic, foreign,
serialization and commercial rights. The income generated from such arrangements
is divided equally between the Company and the author.
Upon the delivery of a manuscript from an author/illustrator and after
editing, fact-checking and approval, the Company's in-house staff plans and
prepares the layout, illustrations and cover to be used for the book. Upon
completion of the editing, graphics and layout, a computer produces a mechanical
of the book with all elements in place. A cost estimate is then prepared which
determines print quantity and retail price of the book. Book printing is done by
an outside supplier, usually in the United States, on a bid contract basis. The
Company's products require varying periods of development time depending upon
the complexity of the graphics and design as well as the editing process. Most
of the Company's books can be developed in a period that ranges from nine to 18
months. Millbrook is often cited in reviews of the Company's books for one or
more outstanding design elements (cover, layout, type, etc.). Jackets and
interior design are either created in-house or assigned to freelance artists
under the supervision of the Company's art department. The use of outside
authors, illustrators and freelancers for jacket design, fact-checking and copy
editing allows the Company to produce a large number of books per year with a
relatively small staff and allows a tremendous amount of flexibility needed for
the Company to continue to produce a broad product line.
EXTERNAL DEVELOPMENT
Approximately 25% of books published under the Millbrook imprint are
produced by outside sources. Most of these books are produced by outside
packagers that cooperate and consult with Millbrook during the development
process but otherwise provide the full range of services needed to publish
children's books. These arrangements include cooperation with other publishers
in England, such as Templar or Quarto, to which the Company pays a share of the
cost of developing a relatively expensive book such as an atlas, and the Company
retains the rights to sell the book in the United States and Canada while the
publisher retains the right to sell the book in its home country and/or
elsewhere. At present, the Company has six regular suppliers from England and
two United States companies with whom it has ongoing projects. The Company has
entered into an exclusive, long-term joint venture with Aladdin, a major
children's packager for the international market, which expires on January 1,
2002, but can be renewed thereafter, to produce 50 nonfiction titles per year to
be published under the Company's newly-created imprint, Copper Beech. The
exclusive agreement between the Company and Aladdin was designed to produce
books with strong consumer market appeal in popularly priced paperback books as
well as content suitable for hardcover books for sale to libraries. In May 1994,
the Company entered into an agreement with Aladdin, whereby Aladdin agreed to
produce no less than 50 books per year for the Company through January 1, 2002.
The books are to be wholly owned by the Company. Aladdin is responsible for the
production, printing and binding of such books, although development costs for
such books are shared by Aladdin and the Company. Aladdin retains the sales
rights for these books to countries other than the United States, Canada and the
Philippines. Royalties are paid to Aladdin based on the Company sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world. See "Certain Transactions."
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LICENSES
In the normal course of its business, the Company acquires licenses from
foreign book publishers for the rights to market and sell in the United States
books which were created either with or without input from the Company. The
licensing usually includes all subsidiary rights such as first and second
serialization, commercial rights, electronic rights, foreign and translation
rights, reprint rights and rights to any means yet to be developed for
transmitting information.
MARKETING AND DISTRIBUTION
The Company's sales and marketing efforts are designed to broaden product
distribution, increase the number of first-time and repeat purchasers, promote
brand-name recognition, assist retailers and properly position, package and
merchandise the Company's products. The Company utilizes various marketing
techniques designed to promote brand awareness and recognition and to maximize
the amount of shelf space devoted to its product line in retail outlets,
including complementary copies, reviews and recommendations, catalogs,
advertising, brochures, exhibits, publicity campaigns and in-store promotions.
The Company's marketing efforts are geared toward its two major markets: (i) the
school and public library market and (ii) the consumer market.
SCHOOL AND PUBLIC LIBRARY
The Company targets the school and public library market through three main
channels: wholesalers, telemarketing and direct sales. Large school and public
library systems tend to purchase their books through wholesalers on a bid basis,
while smaller systems purchase directly from a commission sales representative
or through a telemarketing program such as the one the Company conducts. During
the fiscal year ended July 31, 1996, approximately 66% of the Company's sales in
the school and public library market were made through wholesalers. While
wholesalers do not engage in sales and marketing efforts on behalf of the
Company's products, they provide schools and public libraries with a wide range
of selection and convenience as well as discounts on bulk orders. Baker &
Taylor, one of the largest wholesalers in the school and public library market,
accounted for 17% of the Company's net sales in the fiscal year ended July 31,
1996. While the Company believes that there are alternative wholesalers
available, a significant reduction in sales to Baker & Taylor would have a
material adverse effect on the Company's results of operations. Through a
complementary marketing program of telemarketing, advertising, review programs
and direct sales calls, the Company believes that one of its greatest strengths
is its ability to reach the individual teacher, principal or librarian making
the purchase decision. Telemarketing generates 27% of the Company's sales in the
school and public library market. Telemarketing penetrates the market through
its "preview program" where books are given on loan to teachers and other
decision-makers on the premise that the quality of the book will sell itself.
The remaining 7% of the Company's sales in this area results from direct-selling
efforts where commissioned salespersons conduct face-to-face meeting at schools
and libraries with decision-makers or by purchase from the Company's catalogs
and advertising.
The Company markets its books in numerous ways to support the foregoing
efforts. The Company sends complementary copies of each newly published book to
library media reviewers and columnists and major county or district school
systems that have their own review and recommendation process. The Company also
maintains personal contact with reviewers on a regular basis. The Company
believes that a favorable review in a respected library journal can
significantly influence the sales prospects of a particular book. Many of the
Company's books published under the Millbrook imprint have received favorable
reviews, but there can be no assurance that the Company will continue to receive
favorable reviews in the future. The Company produces three catalogs and one
magazine insert per year. For its school and library accounts, the Company
produces one full-line catalog, consisting of a complete annotated backlist as
well as new publications for Fall that is mailed to 100,000 current and
perspective accounts. An eight-page insert is produced in January to introduce
the new list for Spring for distribution in the School Library Journal (the
major professional journal from which librarians make purchase decisions) and at
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conventions throughout the year. The Company produces two full-line catalogs per
year for the consumer market in May and December. The Company also advertises in
many consumer journals, newsletters and newspapers. The Company produces
promotional materials for individual titles, themes, authors and illustrators.
It also produces standard "leave-behind" sell sheets that refresh a librarian's
recollection of a sales presentation. Finally, the Company exhibits its books at
many national conventions covering both the school and public library and
consumer markets.
The expanding use of children's books in the classroom, especially in
paperback formats, has complicated the traditional distribution networks since
contacting the particular teacher or other individual in charge of curriculum
decisions can be more difficult than contacting the school librarian. The
Company has created marketing programs to extend school sales beyond the library
and into the classroom. For example, the Company's telemarketing division is
currently test-marketing curriculum-related books and materials to teachers,
principals and curriculum coordinators.
CONSUMER
The sales channels in the consumer market are more diverse than the school
and public library market and require a different marketing approach. The
Company has recently attracted experienced and talented sales and marketing
personnel. The new in-house consumer sales group covers the two major areas:
traditional consumer book markets and non-traditional consumer book markets. The
Company's merchandising and marketing programs have increased its traditional
and non-traditional consumer sales from $908,000 in fiscal year 1995 to over
$2.8 million in fiscal 1996 even though its personnel were in place for only
four months in fiscal year 1995. Prior to June 1995, the Company's books were
distributed in the consumer market by an unrelated third party.
As is the case with the school and public library market, a large proportion
of the Company's sales in the consumer market are made through wholesalers.
Ingram, one of the largest wholesalers in the consumer market, accounted for 5%
of the Company's net sales in the fiscal year ended July 31, 1996, and 56% of
its wholesale sales to the consumer market. While the Company believes that
there are alternative wholesalers available, a significant reduction in sales to
Ingram would have a material adverse effect on the Company's operations.
The Company has three sales groups: the in-house sales group, the
commissioned sales group and the special sales group. The in-house sales group,
consisting of an in-house sales director, a merchandising manager and a
full-time salaried sales person, is responsible for sales, promotion and
merchandising to the major national and large regional accounts. This group is
also responsible for sales to the network of wholesalers supporting these
accounts. The commissioned sales group currently consists of approximately 30
commissioned representatives who are responsible for sales to independent book
stores, small regional chains and certain special sales outlets and regional
jobbers. The special sales group markets to specialized retail outlets such as
museums, national parks, historical sites, theme parks, gift shops and toy
stores and consumer companies such as direct sales catalogs and direct mail. The
Company's sales representatives sell the full range of the Company's products.
The sales groups provide the Company with valuable insight by obtaining feedback
from customers on current product performance and potential acceptance of
proposed products. In addition to the marketing efforts discussed with respect
to the school and public library market, the Company conducts additional
marketing designed to increase brand name recognition in the consumer market.
The Company makes certain that good reviews, which can stimulate sales, are sent
to the news media on a regular basis which can stimulate sales. The Company
participates with various outlets in advertising directly to individuals through
media and catalogs. In-store promotions, such as posters, point of purchase
displays, brochures, holiday end-of-counter and front-of-store displays, are
also utilized by the Company to further enhance its sales in the consumer
market.
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MANUFACTURING AND SHIPPING
All of the Company's books are printed and bound by third-party
manufacturers. During fiscal year 1996, approximately 36% of the Company's
printing and binding needs were provided by Worzalla, an industry leader in
library-bound, short-run printing and binding. Manufacturing is a significant
expense item for the Company, with a total of $3.3 million (or approximately 33%
of net sales) spent in 1996. The Company has used Worzalla's services since the
Company's inception and enjoys a strong working relationship with Worzalla. The
Company believes it has sufficient alternative sources of manufacturing services
to meet its foreseeable needs should Worzalla's services no longer be available
to the Company although manufacturing costs could be adversely impacted.
Shipping orders accurately and promptly upon their receipt is an important
factor in the Company's customer service and in closing a sale. Most publishing
companies ship products within one week of receipt of a customer order, and in
general the Company meets or betters this timetable. The Company processes
customer orders through an in-house order processing department. The Company
leases warehouse space from, and its products are shipped by, Mercedes
Distribution Company of Brooklyn, New York.
COMPETITION
The children's book publishing marketplace in the school and public library
market and in the consumer market is fragmented and very competitive.
Competition in the school and public library market is based upon quality of
products, brand name recognition and book content. In the consumer market, the
primary factors are brand name recognition, book content, availability and
price.
There are many publishers of material similar to the Company's product
offerings. The Company's chief and direct competitors in the school and public
library market include Childrens Press, Dorling Kindersley Publishing Inc.,
Franklin Watts Inc., Gareth Stevens Inc., Lerner Publications Co. and Troll
Communications. The Company's chief and direct competitors in the consumer
market include Barron's Educational Series Inc., Candlewick Press, Dorling
Kindersley Inc., Larousse Kingfisher Chambers Inc., Random House Inc. and
Usborne Publishing Ltd.
The Company also competes with a large number of other publishers for retail
shelf space in large bookstore chains such as Barnes & Noble, Borders and
Waldenbooks. In addition to competition among like types of publishing programs,
the overall competition for limited educational budgets is intense when other
producers of materials used in classrooms and libraries are included, especially
producers and distributors of electronic hardware and software. A number of
these competitors have considerably greater financial and marketing resources
than the Company, although the Company believes that the depth of experience of
its management and its connections into the hierarchy of the education sector
gives the Company a competitive edge not only in producing quality books
marketable in the school and library and consumer markets, but also in
foreseeing long-term and short-term social and economic forces influencing the
children's book industry.
PROTECTION OF PROPRIETARY RIGHTS
Nearly all of the Company's books have been copyrighted in the United
States, in the name of the author or artist and then all such copyrights have
been assigned to the Company. As a result, the Company owns the exclusive right
to exploit the copyright in the marketplace. On books created in-house by the
Company, it owns world rights for all aspects of the market, including first and
second serialization, commercial rights, electronic rights, foreign and
translation rights, reprint rights, and rights to any means yet to be developed
for transmitting information. There are a limited number of books for which
foreign rights and electronic rights will revert to the author if the Company
does not exploit them in a given period of time, usually two years after
publication. On books that are imported under the Millbrook imprint, the Company
has exclusive rights for all United States markets and the Philippines. On more
than half of the imported titles, the Company holds Canadian rights as well. The
Company's trade names Millbrook and
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Copper Beech are used to publish books primarily for the school and library
market and consumer market, respectively. The Company considers these trade
names material to its business.
For the Copper Beech titles, the Company has exclusive rights for all
markets in the United States and Canada. World rights are retained for books
originated by Aladdin and the Company participates in the profits generated from
such sales on a 25% basis.
EMPLOYEES
As of the date of this Prospectus, the Company has approximately 68
employees. Approximately 60% are full-time and 40% are part-time. The Company
has never experienced a work stoppage and its employees are not covered by a
collective bargaining agreement. The Company believes its relations with its
employees are good.
PROPERTIES
The Company owns no real property. The Company conducts its operations
through two facilities. The Company leases approximately 5,500 square feet of
office space in Brookfield, Connecticut at a current rental of $64,340 per year
plus utilities and taxes. This lease expires in December 2002. The Company also
leases approximately 1,900 square feet of space in New York City at a rental of
$33,330 per year plus utilities and taxes. This lease expires in April 2004. The
Company leases warehouse space equal to approximately 24,000 square feet in
Brooklyn, New York at a rental of $84,000 per year, which includes data
processing and order-entry services. This lease expires in September 1997. The
Company also leases office space in Southampton, New York at a current rental of
$13,284 per year plus utilities and taxes. This lease expires in September 1997.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Barry Fingerhut...................................... 51 Chairman of the Board
Jeffrey Conrad....................................... 53 President and Chief Executive Officer
Jean E. Reynolds..................................... 54 Senior Vice President-Publisher
Donald A. D'Angelo................................... 57 Vice President and Chief Financial Officer
Frank J. Farrell..................................... 60 Vice President, Secretary and Director
Howard Graham........................................ 66 Vice President and Director
Michael J. Marocco................................... 37 Director
Barry Rubenstein..................................... 52 Director
</TABLE>
BARRY FINGERHUT has served as the Chairman of the Board of the Company since
February 1994. Mr. Fingerhut has served as President since 1994, Senior Vice
President from 1981 to 1994 and a director since 1981 of GeoCapital Corporation,
a registered investment advisory firm. Since February 1995, Mr. Fingerhut has
served as a director and officer of InfoMedia Associates, Ltd. ("InfoMedia"), a
New York corporation, which is a general partner of the 21st Century Funds. In
addition, since 1992, he has served as a general partner of Applewood
Associates, L.P. ("Applewood"), an investment partnership. Mr. Fingerhut also
serves as a director of Glasser Legal Works, Inc., a niche publisher of legal
texts, journals and seminars and Carriage Funeral Services Inc., an operator of
funeral homes.
JEFFREY CONRAD has served as President and Chief Executive Officer of the
Company since October 1996. From March 1992 to October 1996, Mr. Conrad served
in various capacities at Larousse Kingfisher Chambers Inc., a subsidiary of the
British publishing company Larousse PLC, most recently as President and Chief
Executive Officer from January 1993 to October 1996. Prior thereto, Mr. Conrad
was the Executive Vice President of Garland Press, an academic and reference
publisher from 1981 to March 1992.
JEAN E. REYNOLDS, one of the Company's founders, has served as Senior Vice
President-Publisher since October 1996 and as President of the Company from its
inception in 1989 to October 1996. From 1970 to 1981, Ms. Reynolds served in
various management positions at Grolier, Inc. ("Grolier"), including the
editor-in-chief of Young People's Publications and of The New Book of Knowledge.
Ms. Reynolds is a director of the Book Industry Study Group and chairs its
Juvenile Interest Group, which monitors industry statistics. She is a director
of the industry trade organization, The Children's Book Council. She also serves
as a director of Kiper Enterprises, Inc., a private company specializing in
first aid materials and Wellington Leisure Products, Inc., a private company
specializing in the manufacturer of rope, craft and watersports material.
DONALD A. D'ANGELO has served as Chief Financial Officer and Assistant
Secretary of the Company since February 1994, and a Vice President of the
Company since June 1992. From 1989 until 1992, Mr. D'Angelo was an independent
financial consultant in the publishing industry as well as a financial
consultant to individuals.
FRANK J. FARRELL, one of the Company's founders, has served as a Vice
President, Secretary and a director of the Company since its inception in 1989,
and is primarily responsible for overseeing the Company's operations and
finances. From 1978 to 1989, Mr. Farrell served in various senior management
positions with Grolier and its subsidiaries, including President of Grolier
Educational Corporation and President of Grolier Electronic Publishing, Inc. and
Group Vice President of Grolier's domestic reference materials operations. He
also served on Grolier's board of directors from 1988 to 1989.
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HOWARD GRAHAM, one of the Company's founders, has served as a Vice President
and director of the Company since its inception in 1989 and is primarily
responsible for the Company's marketing programs. From 1970 to 1988, Mr. Graham
served in various senior management positions at Grolier and its subsidiaries,
including President of Grolier International and executive Vice President of
Grolier. He also served on Grolier's board of directors from 1983 to 1988. Mr.
Graham currently serves as a director of the Save the Children Fund, a nonprofit
corporation.
MICHAEL J. MAROCCO has served as a director of the Company since February
1994. Mr. Marocco is a managing director of Sandler Capital Management which he
joined in 1989. He is a general partner of Sandler Associates and, through
affiliates, a general partner of the Sandler Media Partnerships, Sandler
Mezzanine Partnerships, 21st Partners, 21st T-E and 21st Foreign. He was a Vice
President at Morgan Stanley & Co. Inc., serving in its communications group,
from 1984 to 1989. Mr. Marocco is a director of YES! Entertainment, a public
company manufacturing children's toys and other educational and interactive
products, and of Source Media, Inc., a public company specializing in
interactive television.
BARRY RUBENSTEIN has served as a director of the Company since February
1994. Since February 1995, Mr. Rubenstein has served as a director and officer
of InfoMedia. In addition, since 1992, 1979 and 1976, respectively, Mr.
Rubenstein has served as a general partner of Applewood, Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. Mr.
Rubenstein also serves as a director of Infonautics, Inc., a provider of on-line
and internet information.
The Board of Directors has a Stock Option and Compensation Committee which
administers the Stock Option Plan and makes recommendations concerning salaries,
incentive compensation for employees of and consultants to the Company, and an
Audit Committee which reviews the results and scope of the audit and other
services provided by the Company's independent accountants. The Stock Option and
Compensation Committee is composed of Messrs. Fingerhut, Rubenstein and Graham
and the Audit Committee is composed of Messrs. Fingerhut, Marocco and Farrell.
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. All directors hold office until the next
annual meeting of the Company or until their successors have been duly elected
or qualified. There are no family relationships among any of the executive
officers and directors of the Company.
The Company intends to maintain a "key person" life insurance policy in the
amount of $1.0 million on the life of Mr. Conrad after the Offering.
DIRECTOR COMPENSATION
The Company's directors are not compensated for attendance at meetings. The
Company currently does not plan to compensate its outside directors for services
rendered in their capacity as directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the year ended July 31, 1996 to Jean E. Reynolds, the
principal executive officer of the Company, and each of the Company's most
highly compensated executive officers whose salary and bonus exceeded $100,000
with respect to the fiscal year ended July 31, 1996 ("Named Executive
Officers").
35
<PAGE>
<TABLE>
<S> <C> <C>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION(1)
<S> <C> <C>
<CAPTION>
NAME AND PRINCIPAL POSITIONS YEAR SALARY
<S> <C> <C>
Jean E. Reynolds......................................... 1996 $125,000(2)
Senior Vice President-
Publisher
Frank J. Farrell......................................... 1996 $100,000(3)
Vice President
Howard Graham............................................ 1996 $100,000(3)
Vice President
</TABLE>
(1) Certain of the officers of the Company routinely receive other benefits from
the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during fiscal 1996, did
not exceed the lesser of $50,000 and 10% of the compensation set forth above
as to any named individual.
(2) Prior to October 1996, Jean E. Reynolds was the President of the Company. As
of October 1996, Jeffrey Conrad became Chief Executive Officer and President
of the Company. Mr. Conrad will be paid a base salary of $200,000 per year
and has received options to purchase 80,000 shares of the Company's Common
Stock.
(3) Amounts paid to Messrs. Farrell and Graham constitute consulting fees paid
to Farrell Associates, Inc. and Graham International Publishing and
Research, Inc., respectively.
STOCK OPTION PLAN
The Company's Stock Option Plan was adopted to attract and retain employees
and provides for the issuance of options to purchase up to an aggregate of
475,000 shares of Common Stock. To date, options to purchase 390,000 shares of
Common Stock have been granted under the Stock Option Plan. All options
currently outstanding under the Stock Option Plan have an exercise price equal
to the Offering Price. Under the Stock Option Plan, options to purchase shares
of Common Stock may be granted to any full-time or part-time employee,
consultant or officer. The Stock Option Plan is currently administered by the
Company's Stock Option and Compensation Committee, which is generally empowered
to interpret the Stock Option Plan, prescribe rules and regulations relating
thereto and determine the individuals to whom options are to be granted.
Under the Stock Option Plan, the per-share exercise price for incentive
stock options ("ISOs") will be the greater of the fair market value of a share
of Common Stock on the date the option is granted or the Offering Price and for
non-qualified stock options ("NQSOs") will be not less than the Offering Price.
Upon exercise of an option, the optionee may pay the purchase price with
previously acquired securities of the Company, provided that with respect to
ISOs applicable holding requirements under the Code are satisfied.
Unless otherwise determined by the Stock Option and Compensation Committee,
ISOs and NQSOs granted under the Stock Option Plan shall be exercisable for a
term not greater than seven years from the date of grant and vest after a
five-year period at a rate of one-fifth upon each successive anniversary of the
date of grant; provided, however, that with respect to all unvested options
which are currently outstanding, 50% shall vest one year from the date of this
Prospectus and 50% shall vest two years from the date of this Prospectus;
provided, however, further, that all options shall vest completely upon the
fifth anniversary of the date of grant. In addition, all options granted under
the Stock Option Plan become fully vested if (a) the optionee is employed by the
Company on or within 90 days of (i) the sale of all or substantially all
36
<PAGE>
of the assets of the Company, (ii) the sale or exchange of an amount of the
Company's stock to an unaffiliated third party that results in a change of
control, (b) on the date of the optionee's death or (c) on the date the optionee
becomes disabled. ISOs are not transferable other than by will or the laws of
descent and distribution. NQSOs may be transferred, subject to certain
restrictions. Options may be exercised during the holder's lifetime only by the
holder, his or her guardian or legal representative.
The Stock Option and Compensation Committee may modify, suspend or terminate
the Stock Option Plan; provided, however, that certain material modifications
affecting the Stock Option Plan must be approved by the stockholders, and any
change in the Stock Option Plan that may adversely affect an optionee's rights
under an option previously granted under the Stock Option Plan requires the
consent of the optionee.
STOCK OPTION GRANTS
No stock options were granted to the Named Executive Officers during the
fiscal year ended July 31, 1996.
FISCAL YEAR END OPTION VALUES
No options were exercised by the Named Executive Officers during fiscal
1996. The following table shows the number of shares covered by both exercisable
and unexercisable employee stock options, as of July 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT JULY IN-THE-MONEY
31, 1996 OPTIONS AT JULY 31, 1996
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
<S> <C> <C>
Jean E. Reynolds.................... 21,000/31,500 0
Frank J. Farrell.................... 31,500/47,250 0
Howard Graham....................... 31,500/47,250 0
</TABLE>
(1) The exercise price of the options held by the Named Executive Officers was
amended after July 31, 1996, to the Offering Price of the Company's Common
Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors of the Company made all compensation decisions
regarding compensation of executive officers during the Company's 1996 fiscal
year. During such period, Messrs. Farrell and Graham were executive officers and
directors of the Company. For information concerning transactions with the
Directors of the Company and entities affiliated with certain Directors, see
"Certain Transactions."
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS
The Company has entered into an employment agreement with Jeffrey Conrad
pursuant to which he is employed on a full-time basis as the Company's Chief
Executive Officer and President. The term of the employment agreement expires in
October 1998, and is automatically renewable for a one-year term unless either
party terminates the employment agreement at least thirty (30) days prior to the
expiration of the initial term or any subsequent term. Mr. Conrad's annual base
cash compensation under the employment agreement is $200,000. Mr. Conrad can
also receive a bonus equal to 15% of his salary if the Company meets the
objectives agreed upon each fiscal year in advance by the Board of Directors. As
of the date of this Prospectus, the Stock Option and Compensation Committee has
not finalized such objectives for the
37
<PAGE>
fiscal year ending July 31, 1997. In addition, Mr. Conrad received options to
purchase 80,000 shares of Common Stock at an exercise price equal to the
Offering Price pursuant to the Stock Option Plan. Mr. Conrad has agreed not to
compete with the Company during the term of his employment agreement and for a
period of two years thereafter.
The Company has entered into an employment agreement with Jean E. Reynolds
pursuant to which she is employed on a full-time basis as the Company's Senior
Vice President--Publisher. The term of the employment agreement expires in two
years from the date of this Prospectus and is automatically renewable for a
one-year term unless either party terminates the employment agreement at least
thirty (30) days prior to the expiration of the initial term or any subsequent
term. Ms. Reynolds annual base cash compensation under the employment agreement
is $125,000. Ms. Reynolds' base salary will be reviewed annually by the Board of
Directors. Ms. Reynolds has agreed not to compete with the Company during the
term of her employment agreement and for a period of two years thereafter.
The Company has entered into a consulting agreement with Frank J. Farrell
commencing January 1, 1997 pursuant to which he will be a consultant for a
minimum of six months per year with the time of such service to be determined by
the Board of Directors or the Chief Executive Officer. It is anticipated that
Mr. Farrell will resign as Vice President and Secretary of the Company effective
December 31, 1996, or shortly thereafter. The consulting agreement between the
Company and Mr. Farrell provides that Mr. Farrell shall provide certain services
with respect to, including but not limited to, cash management, relations with
respect to major vendors, relations with respect to banks, relations with
respect to legal advisors, compliance with the legal requirements of the
Securities Act and the Securities Exchange Act of 1934, as amended ("Exchange
Act"), relations with respect to outside auditors and any audit-related issues,
the development of internal controls, such as inventory and finance controls,
due diligence and evaluation with respect to potential acquisitions, the
development, review and critique of the Company's strategic planning, relations
with respect to its personnel and any other area which the Chief Executive
Officer and/or the Board of Directors may request. In addition to the services
to be rendered to the Company by Mr. Farrell, he will be involved in various
business projects unrelated to the business of the Company. Substantially all of
the duties currently performed by Mr. Farrell as an officer of the Company will
be performed by Jeffrey Conrad (the newly appointed Chief Executive Officer and
President). The term of the consulting agreement expires in December 1998. Mr.
Farrell's cash compensation under the consulting agreement is $60,000 during the
first year of the agreement and $50,000 during the second year of the agreement.
Mr. Farrell has agreed not to compete with the Company during the term of his
consulting agreement and for a period of two years thereafter.
The Company has entered into a consulting agreement with Howard Graham
commencing January 1, 1997 pursuant to which he will be a consultant for a
minimum of six months per year with the time of such service to be determined by
the Board of Directors or the Chief Executive Officer. It is anticipated that
Mr. Graham will resign as Vice President of the Company effective December 31,
1996, or shortly thereafter. The consulting agreement between the Company and
Mr. Graham provides that Mr. Graham shall provide certain services with respect
to, including but not limited to, strategic planning, market development,
acquisition searches, product planning, international sales, joint ventures and
any other area which the Chief Executive Officer and/or the Board of Directors
may request. In addition to the services to be rendered to the Company by Mr.
Graham, he will be involved in various business projects unrelated to the
business of the Company. Substantially all of the duties currently performed by
Mr. Graham as an officer of the Company will be performed by Jeffrey Conrad (the
newly appointed Chief Executive Officer and President). The term of the
consulting agreement expires in December 1998. Mr. Graham's annual base cash
compensation under the consulting agreement is $60,000 during the first year of
the agreement and $50,000 during the second year of the agreement. Mr. Graham
has agreed not to compete with the Company during the term of his consulting
agreement and for a period of two years thereafter.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to beneficially own
more than 5% of the capital stock, (ii) each of the Company's directors, (iii)
each of the Named Officers and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the address for directors, executive officers
and 5% stockholders is 2 Old New Milford Road, Brookfield, Connecticut 06804.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS OWNED(1) OFFERING OFFERING(1)
- -------------------------------------------------------------------------- ----------- ---------- -------------
<S> <C> <C> <C>
Barry Fingerhut........................................................... 1,120,748(2) 74.7% 37.4%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Irwin Lieber.............................................................. 1,120,748(3) 74.7% 37.7%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Barry Rubenstein.......................................................... 1,120,748(4) 74.7% 37.4%
68 Wheatley Road
Brookville, NY 11545
Harvey Sandler............................................................ 911,261(5) 60.8% 30.4%
767 Fifth Avenue, 45th Floor
New York, NY 10153
John Kornreich............................................................ 900,917(6) 60.1% 30.0%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Barry Lewis............................................................... 900,917(7) 60.1% 30.0%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Michael J. Marocco........................................................ 900,917(8) 60.1% 30.0%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Andrew Sandler............................................................ 887,988(9) 59.2% 29.6%
767 Fifth Avenue, 45th Floor
New York, NY 10153
21st Century Communications Foreign Partners, L.P......................... 883,678(10) 58.9% 29.5%
c/o Fiduciary Trust (Cayman) Limited
P.O. Box 1062
Grand Cayman, B.W.I
21st Century Communications Partners, L.P................................. 883,678(11) 58.9% 29.5%
767 Fifth Avenue, 45th Floor
New York, NY 10053
21st Century Communications T-E Partners, L.P............................. 883,678(12) 58.9% 29.5%
767 Fifth Avenue, 45th Floor
New York, NY 10053
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS OWNED(1) OFFERING OFFERING(1)
- -------------------------------------------------------------------------- ----------- ---------- -------------
<S> <C> <C> <C>
Jonathan Lieber........................................................... 215,523(13) 14.4% 7.2%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Seth Lieber............................................................... 215,523(14) 14.4% 7.2%
767 Fifth Avenue, 45th Floor
New York, NY 10153
Applewood Associates, L.P.(15)............................................ 211,213 14.1% 7.0%
68 Wheatley Road
Brookville, NY 11545
Frank J. Farrell.......................................................... 104,277(16) 6.8% 3.4%
Howard Graham............................................................. 104,277(17) 6.8% 3.4%
Archon Press.............................................................. 80,993(18) 5.4% 2.7%
28 Percy Street
Wipold, London
England
Jean E. Reynolds.......................................................... 37,172(19) 2.4% 1.2%
Jeffrey Conrad............................................................ -- -- --
All directors and executive officers as a group (8 persons)............... 1,409,570(20) 86.2% 44.9%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock upon the exercise of options, warrants currently exercisable, or
exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Represents (i) 25,857 shares of Common Stock owned by Mr. Fingerhut, (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign and (iii) 211,213 shares of Common Stock owned by
Applewood. By virtue of being a shareholder, officer and director of
InfoMedia which is a general partner of 21st Partners, 21st T-E and 21st
Foreign, and a general partner of Applewood, Mr. Fingerhut may be deemed to
have shared power to vote and to dispose of 1,094,891 shares of Common Stock
owned by such recordholders, of which Mr. Fingerhut disclaims beneficial
ownership, except to the extent of his equity interest in such
recordholders.
(3) Represents (i) 25,857 shares owned by Mr. Lieber, (ii) 883,678 shares of
Common Stock owned by 21st Partners, 21st T-E and 21st Foreign, and (iii)
211,213 shares of Common Stock owned by Applewood. By virtue of being a
shareholder, officer and director of InfoMedia which is a general partner of
21st Partners, 21st T-E and 21st Foreign, and a general partner of
Applewood, Mr. Lieber may be deemed to have shared power to vote and dispose
of the shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign and Applewood. Mr. Lieber disclaims beneficial ownership of the
securities owned by 21st Partners, 21st T-E and 21st Foreign and Applewood,
except to the extent of his equity interest in such recordholders.
(4) Represents (i) an aggregate of 883,678 shares of Common Stock owned by 21st
Partners, 21st T-E and 21st Foreign, and (ii) an aggregate of 237,070 shares
of Common Stock owned by Applewood and
40
<PAGE>
Woodland Partners ("Woodland"). By virtue of being a shareholder, officer
and director of InfoMedia which is a general partner of 21st Partners, 21st
T-E and 21st Foreign and a general partner of Applewood and Woodland, Mr.
Rubenstein may be deemed to have shared power to vote and dispose of the
shares owned by 21st Partners, 21st T-E and 21st Foreign, Applewood and
Woodland. Mr. Rubenstein disclaims beneficial ownership of all of the above
securities except to the extent of his equity interest in such
recordholders.
(5) Represents (i) 27,583 shares of Common Stock owned by Mr. Sandler and (ii)
883,678 shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign. By virtue of being the majority shareholder and director of an
entity which is a general partner of an entity which is the general partner
of another entity which is a general partner of 21st Partners, 21st T-E and
21st Foreign, Mr. Sandler may be deemed to have shared power to vote and to
dispose of such 883,678 shares of Common Stock, of which Mr. Sandler
disclaims beneficial ownership.
(6) Represents (i) 17,239 shares of Common Stock owned by Mr. Kornreich and (ii)
883,678 shares of Common Stock owned by 21st Partners, 21st T-E and 21st
Foreign. By virtue of being the majority shareholder and director of an
entity which is a general partner of an entity which is the general partner
of another entity which is a general partner of 21st Partners, 21st T-E and
21st Foreign, Mr. Kornreich may be deemed to have shared power to vote and
to dispose of such 883,678 shares of Common Stock, of which Mr. Kornreich
disclaims beneficial ownership.
(7) Represents (i) 17,239 shares of Common Stock owned by Mr. Lewis and (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign. By virtue of being the majority shareholder and director
of an entity which is a general partner of an entity which is the general
partner of another entity which is a general partner of 21st Partners, 21st
T-E and 21st Foreign, Mr. Lewis may be deemed to have shared power to vote
and to dispose of such 883,678 shares of Common Stock, of which Mr. Lewis
disclaims beneficial ownership.
(8) Represents (i) 17,239 shares of Common Stock owned by Mr. Marocco and (ii)
an aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st
T-E and 21st Foreign. By virtue of Mr. Marocco being the sole shareholder,
officer and director of an entity which is a general partner of an entity
which is the general partner of another entity which is a general partner of
21st Partners, 21st T-E and 21st Foreign, Mr. Marocco may be deemed to have
shared power to vote and to dispose of such 883,678 shares of Common Stock,
of which Mr. Marocco disclaims beneficial ownership.
(9) Represents (i) 4,310 shares of Common Stock owned by Mr. Sandler and (ii) an
aggregate of 883,678 shares of Common Stock owned by 21st Partners, 21st T-E
and 21st Foreign. By virtue of being the majority shareholder and director
of an entity which is a general partner of an entity which is the general
partner of another entity which is a general partner of 21st Partners, 21st
T-E and 21st Foreign, Mr. Sandler may be deemed to have shared power to vote
and to dispose of such 883,678 shares of Common Stock, of which Mr. Andrew
Sandler disclaims beneficial ownership.
(10) Represents (i) 80,662 shares of Common Stock owned by 21st Foreign and (ii)
599,160 shares of Common Stock and 203,856 shares of Common Stock owned by
21st Partners and 21st T-E, respectively, of which 21st Foreign disclaims
beneficial ownership. The general partners of 21st Foreign are Sandler
Investment Partners, L.P., a New York limited partnership ("Sandler General
Partner") and InfoMedia. The general partner of the Sandler General Partner
is Sandler Capital Management, a New York general partnership ("SCM"). The
general partners of SCM are corporations that are affiliates of Harvey
Sandler, Barry Lewis, John Kornreich, Michael Marocco and Andrew Sandler.
Infomedia's shareholders are Irwin Lieber, Barry Fingerhut and Barry
Rubenstein.
(11) Represents (i) 599,160 shares of Common Stock owned by 21st Partners and
(ii) 203,856 shares of Common Stock and 80,662 shares of Common Stock owned
by 21st T-E and 21st Foreign, respectively, of which 21st Partners disclaims
beneficial ownership. The general partners of 21st Partners are the
41
<PAGE>
Sandler General Partner and InfoMedia. The general partner of the Sandler
General Partner is SCM. The general partners of SCM are corporations that
are affiliates of one or more of Harvey Sandler, Barry Lewis, John
Kornreich, Michael Marocco and Andrew Sandler. Infomedia's shareholders are
Irwin Lieber, Barry Fingerhut and Barry Rubenstein.
(12) Represents (i) 203,856 shares of Common Stock owned by 21st T-E and (ii)
599,160 shares of Common Stock and 80,662 shares of Common Stock owned by
21st Partners and 21st Foreign, respectively, of which 21st T-E disclaims
beneficial ownership. The general partners of 21st Partners are the Sandler
General Partner and InfoMedia. The general partner of the Sandler General
Partner is SCM. The general partners of SCM are corporations that are
affiliates of one or more of Harvey Sandler, Barry Lewis, John Kornreich,
Michael Marocco and Andrew Sandler. Infomedia's shareholders are Irwin
Lieber, Barry Fingerhut and Barry Rubenstein.
(13) Represents (i) 4,310 shares of Common Stock owned by Mr. Lieber and (ii)
211,213 shares of Common Stock owned by Applewood. By virtue of being an
affiliate of an entity which is a general partner of Applewood, Mr. Lieber
may be deemed to have shared power to vote and dispose of the shares of
Common Stock owned by Applewood, Mr. Lieber disclaims beneficial ownership
with respect to the securities owned by Applewood, except to the extent of
his equity interest in such recordholder. Jonathan Lieber is the son of
Irwin Lieber.
(14) Represents (i) 4,310 shares of Common Stock owned by Mr. Lieber and (ii)
211,213 shares owned by Applewood. By virtue of being an affiliate of an
entity which is a general partner of Applewood, Mr. Lieber may be deemed to
have shared power to vote and dispose of the shares of Common Stock owned by
Applewood. Mr. Lieber disclaims beneficial ownership with respect to the
securities owned by Applewood, except to the extent of his equity interest
in such recordholder. Seth Lieber is the son of Irwin Lieber.
(15) The general partners of Applewood are Irwin Lieber, Barry Rubenstein, Barry
Fingerhut and Applewood Capital Corp., a New York corporation.
(16) Includes 34,498 shares of Common Stock issuable upon presently exercisable
options.
(17) Represents 34,498 shares of Common Stock issuable upon presently
exercisable options and 69,779 shares of Common Stock which are owned by Mr.
Graham and his wife as joint tenants.
(18) Includes 3,337 shares of Common Stock issuable upon presently exercisable
options held by Charles Nicholas, who is the controlling stockholder and a
director of Archon Press.
(19) Includes 21,666 shares of Common Stock issuable upon presently exercisable
options.
(20) Includes 90,662 shares of Common Stock issuable upon presently exercisable
options and 1,120,748 shares owned by 21st Foreign, 21st Partners, 21st T-E,
Applewood and Woodland.
42
<PAGE>
CERTAIN TRANSACTIONS
SALES OF DEBT AND EQUITY SECURITIES. From time to time, the Company has
raised capital through the sale of debt and equity securities. Most of the
investors in such offerings have been officers, directors and entities
associated with directors, and beneficial owners of 5% or more of the Company's
securities. In each transaction, such persons participated on terms no more
favorable than those offered to all other investors and the Company believes
each transaction was on terms as favorable as the Company might expect from
arm's length transactions with unrelated third parties.
In May 1994, the Company entered into an agreement with Aladdin, whereby
Aladdin agreed to produce no less than 50 books per year for the Company through
January 1, 2002. The books are to be wholly-owned by the Company. Aladdin is
responsible for the production, printing and binding of such books, although
development costs for such books are shared by Aladdin and the Company. Aladdin
retains the sales rights for these books to countries other than U.S.A., Canada
and the Philippines. Royalties are paid to Aladdin based on the Company sales.
Development recovery amounts are paid to the Company based on sales by Aladdin
to other parts of the world. Net payables to Aladdin at July 31, 1996 and 1995,
were $556,000 and $355,000, respectively, which includes goods on order,
payables, shared product development costs and net royalty payments. As of
December 5, 1996, net payables to Aladdin were approximately $727,000 million of
which the Company was delinquent on approximately $408,000. Approximately
$408,000 of the net proceeds of this Offering will be used to pay Aladdin.
Concurrent with the agreement with Aladdin, The Archon Press, an
Aladdin-affiliated company, agreed to invest $500,000 in the Company in return
for Common Stock. This investment was received by the Company over a period of
months in the fiscal year ended July 31, 1995, as follows:
- In October 1994, the Company issued 31,063 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $200,000.
- In December 1994, the Company issued 15,531 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $100,000.
- In February 1995, the Company issued 15,531 shares of its Common Stock at
a price of $6.44 per share to Archon Press for an aggregate purchase
price of $100,000.
- In April 1995, the Company issued 15,531 shares of its Common Stock at a
price of $6.44 per share to Archon Press for an aggregate purchase price
of $100,000.
In June 1995, the Company entered into Subscription Agreements pursuant to
which it sold to Applewood and 21st Century Funds an aggregate of 155,312 shares
of Common Stock at a price of $6.44 per share, for an aggregate purchase price
of $1,000,000.
In December 1995, the Company entered into the Loan and Security Agreement
which provides the Company with a $2.7 million revolving line of credit. Such
line of credit is partially collateralized by the Company's accounts
receivables, which are personally guaranteed by Messrs. Graham and Farrell and
Ms. Reynolds. However, each of such officers has a right of contribution from
all of the current stockholders of the Company in the event the Company fails to
indemnify each of such officers from a claim under the guaranty. Such officers
do not intend to personally guarantee any indebtedness or other obligations of
the Company in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In April 1996, in connection with the Prebridge Financing, Applewood, 21st
T-E, 21st Foreign and 21st Partners, entities that own more than 5% of the
outstanding Common Stock, purchased $250,000, $57,000, $23,000 and $170,000
principal amounts of the Prebridge Notes, respectively.
In August 1996, the Company consummated the Bridge Financing. As part of
such Bridge Financing, Applewood, 21st T-E, 21st Foreign and 21st Partners
converted their Prebridge Notes into Bridge Units
43
<PAGE>
and accordingly received $250,000 principal amount of Bridge Notes and 125,000
Bridge Warrants, $57,000 principal amount of Bridge Notes and 28,500 Bridge
Warrants, $23,000 principal amount of Bridge Notes and 11,500 Bridge Warrants
and $170,000 principal amount of Bridge Notes and 85,000 Bridge Warrants,
respectively. Upon the effective date of this Offering, the Bridge Warrants will
be automatically converted into Warrants on a one-for-one basis. Each Warrant
entitles the holder to purchase one share of Common Stock at a price of $4.50
during the four-year period commencing one year from the date of this
Prospectus. Messrs. Rubenstein and Fingerhut, directors of the Company, are
general partners of Applewood and are directors and officers of InfoMedia, which
is a general partner of 21st Foreign, 21st T-E and 21st Partners. Mr. Marocco, a
director of the Company, is an officer and director of an entity which is a
general partner of an entity that is a general partner of 21st Foreign, 21st T-E
and 21st Partners.
The Company has adopted a policy whereby all future transactions between the
Company and its officers, directors, principal stockholders or affiliates, will
be approved by a majority of the Board of Directors, including all of the
independent and disinterested members of the Board of Directors or, if required
by law, a majority of disinterested stockholders, and will be on terms no less
favorable to the Company than could be obtained in arm's length transactions
from unaffiliated third parties.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 13,000,000 shares, consisting
of 12,000,000 shares of Common Stock, $.01 par value per share and 1,000,000
shares of preferred stock, $.01 par value per share ("Preferred Stock"). As of
October 15, 1996, there were 1,500,000 shares of Common Stock outstanding. Upon
the completion of this Offering there will be 3,000,000 shares of Common Stock
outstanding, after giving effect to the Preferred Stock Conversion. No shares of
Preferred Stock will be outstanding after the date hereof.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after payment
of liabilities and after provision has been made for each class of stock, if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption, preemptive or other subscription rights, and there
are no conversion provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued and paid for as set forth in this Prospectus, will be, fully
paid and nonassessable.
PREFERRED STOCK
On the effective date of the Registration Statement, of which this
Prospectus is a part, all of the outstanding shares of the Company's Preferred
Stock and all accrued and unpaid dividends thereon will convert into 473,692
shares of Common Stock (post-Reverse Stock Split) in accordance with the
Company's Certificate of Incorporation, as amended. Subsequent to the Preferred
Stock Conversion, the Company's authorized shares of Preferred Stock may be
issued in one or more series, and the Board of Directors is authorized, without
further action by the stockholders, to designate the rights, preferences,
limitations and restrictions of and upon shares of each series, including
dividend, voting, redemption and conversion rights. The Board of Directors also
may designate par value, preferences in liquidation and the number of shares
constituting any series. The Company believes that the availability of Preferred
Stock
44
<PAGE>
issuable in series will provide increased flexibility for structuring possible
future financings and acquisitions, if any, and in meeting other corporate
needs. It is not possible to state the actual effect of the authorization and
issuance of any series of Preferred Stock upon the rights of holders of Common
Stock until the Board of Directors determines the specific terms, rights and
preferences of a series of Preferred Stock. However, such effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, or impairing liquidation rights of such shares
without further action by holders of the Common Stock. In addition, under
various circumstances, the issuance of Preferred Stock may have the effect of
facilitating, as well as impeding or discouraging, a merger, tender offer, proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management. Issuance of Preferred Stock
could also adversely effect the market price of the Common Stock. The Company
has no present plan to issue any additional shares of Preferred Stock.
WARRANTS
Each Warrant, including Warrants converted from Bridge Warrants, are issued
pursuant to a Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company as warrant agent. The following statements are subject
to the detailed provisions of and are qualified in their entirety by reference
to the Warrant Agreement, which is included as an exhibit to the Registration
Statement of which this Prospectus is a part.
During the four-year period commencing one year after the date of this
Prospectus, each Warrant will entitle the registered holder to purchase one
share of the Company's Common Stock at an exercise price of $4.50 per share. The
Warrants may be called by the Company with the Underwriter's prior consent at
any time once they become exercisable, for a redemption price of $.01 per
Warrant if notice of not less than 30 days is given and the last sale price of
the Common Stock has been at least 155% of the then exercise price of the
Warrants on 20 of the 25 trading days ending on the third day prior to the day
on which notice is given. No fractional shares of Common Stock will be issued in
connection with the exercise of Warrants. Upon exercise, the Company will pay
the holder the value of any such fractional shares in cash, based upon the
market value of the Common Stock at such time.
The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is then a current prospectus relating to such
Common Stock, and only if such Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. The Company has undertaken and
intends to file and keep current a prospectus which will permit the purchase and
sale of the Common Stock underlying the Warrants, but there can be no assurance
that the Company will be able to do so. Although the Company intends to seek to
qualify for sale the shares of Common Stock underlying the Warrants in those
states in which the securities are to be offered, no assurance can be given that
such qualification will occur.
The Warrants will expire at 5:00 p.m., New York time, on the fifth
anniversary of the date of this Prospectus. In the event a holder of Warrants
fails to exercise the Warrants prior to their expiration, the Warrants will
expire and the holder thereof will have no further rights with respect to the
Warrants.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the Warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of a merger, acquisition, recapitalization, or split-up of
the Common Stock, the issuance of a stock dividend or any similar event. No
assurance can be given that the market price of the Company's Common Stock will
exceed the exercise price of the Warrants at any time during the exercise
period.
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<PAGE>
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Certificate of Incorporation, as amended, limits the personal liability of a
director or officer to the Company for monetary damages for breach of fiduciary
duty of care as a director. Liability is not eliminated for (i) any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or stock purchases or
redemptions pursuant to Section 174 of the DGCL, or (iv) any transaction from
which the director derived an improper personal benefit.
The Company has also entered into indemnification agreements with each of
its directors and executive officers. The indemnification agreements provide
that the directors and executive officers will be indemnified to the fullest
extent permitted by applicable law against all expenses (including attorneys'
fees), judgments, fines and amounts reasonably paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, on account of their services as a director or
officer of the Company or of any subsidiary of the Company or of any other
company or enterprise in which they are serving at the request of the Company.
No indemnification will be provided under the indemnification agreements,
however, to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder, the business combination is
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. A "business combination" includes mergers, stock or asset sales and
other transactions resulting in a financial benefit to the interested
stockholder.
The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer agent, warrant agent and registrar for the Common Stock and the
Company's Warrants is Continental Stock Transfer & Trust Company, New York, NY.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and after giving effect to the Preferred
Stock Conversion, the Company will have outstanding 3,000,000 shares of Common
Stock, not including shares of Common Stock issuable upon exercise of
outstanding options or warrants.
46
<PAGE>
- Of these outstanding shares, the 1,500,000 shares of Common Stock sold to
the public in this Offering may be freely traded without restriction or
further registration under the Securities Act, except that any shares
that may be held by an "affiliate" of the Company (as that term is
defined in the rules and regulations under the Securities Act) may be
sold only pursuant to a registration under the Securities Act or pursuant
to an exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
- The 1,500,000 shares of Common Stock outstanding prior to the
consummation of this Offering are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares") and
may not be sold unless such sale is registered under the Securities Act,
or is made pursuant to an exemption from registration under the
Securities Act, including the exemption provided by Rule 144. Of such
shares, 1,313,594 shares are presently available for sale pursuant to
Rule 144, (ii) 15,531 shares will be available for sale pursuant to Rule
144 commencing February 1997 and (iii) 15,531 shares will be available
for sale pursuant to Rule 144 commencing April 1997 and (iv) 155,344
shares will be available for sale pursuant to Rule 144 commencing June
1997. All officers, directors and existing stockholders of the Company
have agreed that for a period of 24 months after the date of this
Prospectus, they will not sell any of their shares (representing all of
the Restricted Shares) without the prior consent of the Underwriter. See
"Description of Securities."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least two years (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Securities and Exchange
Commission ("Commission"), provided certain public information, manner of sale
and notice requirements are satisfied. A stockholder who is deemed to be an
affiliate of the Company, including members of the Board of Directors and senior
management of the Company, will still need to comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock that are not restricted securities, unless
such sale is registered under the Securities Act. A stockholder (or stockholders
whose shares are aggregated) who is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale by such stockholder, and
who has beneficially owned restricted securities for at least three years, will
be entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. The Commission is currently considering a reduction
in the required holding periods under Rule 144.
No predictions can be made of the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect the then-prevailing
market price.
47
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has agreed to register for sale under the Securities Act
concurrently with the Offering the Warrants converted from the Bridge Warrants.
An aggregate of 875,000 Warrants may be offered and sold pursuant to this
Prospectus by the holders thereof. The Warrants offered by the Selling
Securityholders are not part of the underwritten Offering. The Company will not
receive any of the proceeds from the sale of the Warrants.
The Warrants registered for sale on behalf of the Selling Securityholders
under the Registration Statement of which this Prospectus forms a part may be
offered and sold from time to time in regular brokerage transactions (which may
include block transactions) on the Nasdaq SmallCap Market ("Nasdaq"), in
transactions directly with market makers, in certain privately-negotiated
transactions, or through a combination of such methods of sale, at fixed prices
which may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Selling Securityholders may effect such transactions by
selling their Warrants directly to purchasers or to or through broker-dealers
(including the Underwriter), which may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions,
or commissions from the Selling Securityholders and/or the purchasers of the
Warrants for whom such broker-dealers may act as agents or to whom they sell as
principal, or both. The Selling Securityholders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their Warrants. The
Selling Securityholders and any broker-dealers that act in connection with the
sale of the Warrants might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act.
The Company has agreed to update this Prospectus as required by the
Securities Act or the Exchange Act to reflect transactions between Selling
Securityholders and the Underwriter which require this Prospectus to be updated
or a "sticker" supplement to be filed pursuant to Rule 424(c) of the Securities
Act.
The following table sets forth the name of each Selling Securityholder and
the shares of Common Stock beneficially owned on December 1, 1996 and the number
of Warrants registered for resale. All of such Warrants are being registered for
sale under the Registration Statement of which this Prospectus forms a part, and
the Company believes that all such Warrants will be owned by the respective
holders thereof following the consummation of the Offering and prior to resale.
Notwithstanding that such Warrants are being registered, the Selling
Securityholders have agreed that none of such Warrants may be sold prior to one
year following the consummation of the Offering without the prior written
consent of the Underwriter. The Underwriter has agreed that it will not grant
such consent without the prior approval of Nasdaq.
Although none of the Selling Securityholders has ever held any position or
office with the Company or had any other material relationship with the Company,
21st Partners, 21st T-E, 21st Foreign and Applewood are affiliated with certain
directors and current stockholders of the Company. Rebecca Rubenstein is the
daughter of Barry Rubenstein. Jeffrey Rubinstein is the brother of Barry
Rubenstein. Barry Rubenstein disclaims beneficial ownership of all shares of
Common Stock held by Rebecca Rubenstein and Jeffrey Rubinstein. See "Principal
Stockholders."
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<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK NUMBER OF
BENEFICIALLY WARRANTS
OWNED(1) REGISTERED
------------------- FOR
SELLING SECURITYHOLDER NUMBER PERCENT RESALE
- ---------------------------------------------------------------------- ---------- ------- ---------
<S> <C> <C> <C>
Applewood Associates L.P.............................................. 211,213 14.1% 125,000
Gordon M. Freeman..................................................... 0 3.3% 100,000
21st Century Communications Partners, L.P............................. 883,678(2) 29.5% 85,000
Steven Etra........................................................... 0 1.0% 31,250
21st Century Communications T-E Partners, L.P......................... 883,678(3) 29.5% 28,500
Damerel Trading S.A................................................... 0 * 25,000
ALSA, Inc............................................................. 0 * 25,000
Rebecca Rubenstein.................................................... 0 * 25,000
Jeffrey Rubinstein.................................................... 0 * 25,000
William Wolfson....................................................... 0 * 25,000
Chana Sasha Foundation................................................ 0 * 16,667
Abraham Wolfson....................................................... 0 * 16,667
Aaron Wolfson......................................................... 0 * 16,666
Leon Abramson and Lorraine Abramson................................... 0 * 12,500
Richard Ackerman...................................................... 0 * 12,500
David Alexander....................................................... 0 * 12,500
Neil Bellett.......................................................... 0 * 12,500
Robert Bender......................................................... 0 * 12,500
Daniel Berger and Carolyn Berger...................................... 0 * 12,500
Kenneth D. Cole....................................................... 0 * 12,500
Drew Effron........................................................... 0 * 12,500
Chris Engel........................................................... 0 * 12,500
Richard Etra and Kenneth Etra......................................... 0 * 12,500
Andrew Feiner......................................................... 0 * 12,500
Ernest Gottdiener..................................................... 0 * 12,500
Paula Graff........................................................... 0 * 12,500
Peter Hunt............................................................ 0 * 12,500
Daniel A. Kaplan...................................................... 0 * 12,500
Richard C. Kaufman and Elaine J. Lenart............................... 0 * 12,500
Norman Kurtz.......................................................... 0 * 12,500
Mariwood Investments.................................................. 0 * 12,500
Anthony Peyser........................................................ 0 * 12,500
RJB Partners, L.P..................................................... 0 * 12,500
Alan J. Rubin......................................................... 0 * 12,500
Curtis Schenker....................................................... 0 * 12,500
Alan and Nancy Shapiro................................................ 0 * 12,500
Carl E. Siegel........................................................ 0 * 12,500
21st Century Communications Foreign Partners, L.P..................... 883,678(4) 29.5% 11,500
Steven Rosen.......................................................... 0 * 6,250
Gregory Trubowitsch................................................... 0 * 6,250
Charles Warshaw....................................................... 0 * 6,250
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock upon the exercise of options, warrants
currently exercisable, or exercisable or convertible within 60 days, are
deemed outstanding for computing the percentage ownership of the person
holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other
49
<PAGE>
person. As of the date of this Prospectus, none of the Warrants are
currently exercisable within 60 days and accordingly the shares of Common
Stock underlying such Warrants are not deemed to be outstanding.
(2) Represents (i) 599,160 shares of Common Stock owned by 21st Partners, (ii)
203,856 shares of Common Stock owned by 21st T-E and 80,662 shares of Common
Stock owned by 21st Foreign, of which 21st Partners disclaims beneficial
ownership.
(3) Represents (i) 203,856 shares of Common Stock owned by 21st T-E, (ii)
599,160 shares of Common Stock owned by 21st Partners and (iii) 80,662
shares of Common Stock owned by 21st Foreign, of which 21st T-E disclaims
beneficial ownership.
(4) Represents (i) 80,662 shares of Common Stock owned by 21st Foreign, (ii)
599,160 shares of Common Stock owned by 21st Partners and (iii) 203,856
shares of Common Stock owned by 21st T-E, of which 21st Foreign disclaims
beneficial ownership.
UNDERWRITING
GKN Securities Corp. ("Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 1,500,000 shares of Common Stock and 1,500,000 Warrants (collectively, the
"Securities"). The obligations of the Underwriter under the Underwriting
Agreement are subject to approval of certain legal matters by counsel and
various other conditions precedent, and the Underwriter is obligated to purchase
all of the Securities offered by this Prospectus (other than the Securities
covered by the over-allotment option described below) if any are purchased.
The Underwriter has advised the Company that it proposes to offer the
Securities to the public at the initial offering price set forth on the cover
page of this Prospectus and to certain dealers at that price less a concession
not in excess of $ per share of Common Stock and $ per Warrant. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share of Common Stock and $ per Warrant to certain other
dealers. After this Offering, the offering price and other selling terms may be
changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Securities
offered by this Prospectus (including the sale of any Securities subject to the
Underwriter's over-allotment option), $50,000 of which has been paid to date.
The Company also has agreed to pay all expenses in connection with qualifying
the shares of Common Stock offered hereby for sale under the laws of such states
as the Underwriter may designate and registering this Offering with the National
Association of Securities Dealers, Inc., including fees and expenses of counsel
retained for such purposes by the Underwriter.
The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company at
the offering price, less underwriting discounts and the nonaccountable expense
allowance, up to an aggregate of 225,000 additional shares of Common Stock
and/or 225,000 additional Warrants for the sole purpose of covering
over-allotments, if any.
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Warrants. Additionally, other
NASD members may be engaged by the Underwriter in its solicitation efforts. To
the extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Commission, the Company has agreed to pay the Underwriter for
bona fide services rendered a commission equal to 5% of the exercise price for
each Warrant exercised if the exercise was solicited by the Underwriter. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such services may also include disseminating information, either
orally or in writing, to
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warrantholders about the Company or the market for the Company's securities, and
assisting in the processing of the exercise of the Warrants. No compensation
will be paid to the Underwriter in connection with the exercise of the Warrants
if the market price of the underlying shares of Common Stock is lower than the
exercise price, the Warrants are held in a discretionary account, the Warrants
are exercised in an unsolicited transaction, the warrantholder has not confirmed
in writing that the Underwriter solicited such exercise or the arrangement to
pay the commission is not disclosed in the prospectus provided to warrantholders
at the time of exercise. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, while it is soliciting
exercise of the Warrants, the Underwriter will be prohibited from engaging in
any market activities or solicited brokerage activities with regard to the
Company's securities unless the Underwriter has waived its right to receive a
fee for the exercise of the Warrants.
In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $100, the Underwriter's Purchase Option,
consisting of the right to purchase up to an aggregate of 150,000 shares of
Common Stock and/or an aggregate of 150,000 Warrants. The Underwriter's Purchase
Option is exercisable initially at a price of 110% of the initial offering price
of the Securities for a period of four years commencing one year from the date
hereof. The Underwriter's Purchase Option may not be transferred, sold, assigned
or hypothecated during the one year period following the date of this Prospectus
except to officers of the Underwriter and the selected dealers and their
officers or partners. The Underwriter's Purchase Option grants to the holders
thereof certain "piggyback" and demand rights for periods of seven and five
years, respectively, from the date of this Prospectus with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the Underwriter's Purchase Option.
Pursuant to the Underwriting Agreement, all of the officers, directors and
existing stockholders of the Company as of the date of this Prospectus (who hold
in the aggregate 1,500,000 outstanding shares of Common Stock) have agreed not
to sell any of their shares of Common Stock until 24 months from the date of
this Prospectus. In addition, the Underwriting Agreement provides that, for a
period of three years from the date of this Prospectus, the Company will
recommend and use its best efforts to elect a designee of the Underwriter as a
member of the Board of Directors. Alternatively, the Underwriter will have the
right to send a representative to observe each meeting of the Board of
Directors. The Underwriter has not yet selected such designee or representative.
During the three-year period following the date of this Prospectus, the
Underwriter shall have the right to purchase for the Underwriter's account or to
sell for the account of the officers and directors of the Company (and any
family member or affiliate of any of the foregoing persons), any securities sold
by any of such persons in the open market.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the Offering Price of the Securities and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriter and do not necessarily bear any relation to established
valuation criteria. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, included an assessment of the prospect
for the industry in which the Company will compete, the Company's management and
the Company's capital structure.
In August 1996, the Underwriter acted as placement agent in the Bridge
Financing and was paid commissions of $148,750 (8.5%) and a nonaccountable
expense allowance of $52,500 (3%).
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby are
being passed upon for the Company by Olshan Grundman Frome & Rosenzweig LLP, New
York, New York. Graubard Mollen & Miller, New York, New York, has served as
counsel to the Underwriter in connection with this Offering.
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<PAGE>
EXPERTS
The financial statements of Millbrook as of July 31, 1995 and 1996 and for
each of the years in the two year period ended July 31, 1996 have been included
herein and in the Registration Statement of which this Prospectus is a part, in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock and Warrants offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions having been
omitted from this Prospectus in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, the securities
offered by this Prospectus and such omitted information, reference is made to
the Registration Statement, including any and all exhibits and amendments
thereto. Statements contained in this Prospectus concerning the provisions of
any document filed as an exhibit are of necessity brief descriptions thereof and
are not necessarily complete, and in each instance reference is made to the copy
of the document filed as an exhibit to the Registration Statement, each such
statement being qualified in its entirety by this reference.
Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith the Company files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at public reference
facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and 7 World Trade Center, New York, New York 10048. Copies of
such material, including the Registration Statement, can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Common Stock and the Warrants are traded on
the Nasdaq SmallCap Market and The Boston Stock Exchange. The foregoing material
should also be available for inspection at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C., 20006 and The
Boston Stock Exchange, One Boston Place, Boston, Massachusetts 02108. The
Commission also maintains a site on the Worldwide Web that contains reports,
proxy and information statements and other information regarding Registrants
that file electronically. The address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited and reported on by its
independent public accounting firm, and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
YEAR END FINANCIAL INFORMATION
Independent Auditors' Report................................................... F-2
Balance Sheets at July 31, 1995 and 1996....................................... F-3
Statements of Operations for the years ended July 31, 1995 and 1996............ F-4
Statements of Stockholders' Equity for the years ended July 31, 1995 and
1996......................................................................... F-5
Statements of Cash Flows for the years ended July 31, 1995 and 1996............ F-6
Notes to Financial Statements at July 31, 1995 and 1996........................ F-7
INTERIM FINANCIAL INFORMATION
Balance Sheet at of October 31, 1996 (Unaudited)............................... F-16
Statements of Operations for the three months ended October 31, 1995 and 1996
(Unaudited).................................................................. F-17
Statement of Stockholders' Equity for the three months ended October 31, 1996
(Unaudited).................................................................. F-18
Statements of Cash Flows for the three months ended October 31, 1995 and 1996
(Unaudited).................................................................. F-19
Notes to Financial Statements at October 31, 1996 (Unaudited).................. F-20
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and The Board of Directors
The Millbrook Press Inc.:
We have audited the accompanying balance sheets of The Millbrook Press Inc.
as of July 31, 1995 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Millbrook Press Inc. as
of July 31, 1995 and 1996 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
October 16, 1996
New York, New York
F-2
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEETS
JULY 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash............................................................................. $ 538,000 $ 134,000
Accounts receivable (less allowance for returns and bad debts of $213,000 in 1995
and $329,000 in 1996).......................................................... 1,283,000 2,084,000
Inventories...................................................................... 2,658,000 3,477,000
Royalty advances, net............................................................ 394,000 364,000
Prepaid expenses................................................................. 326,000 292,000
------------- -------------
Total current assets........................................................... 5,199,000 6,351,000
------------- -------------
Plant costs, net................................................................... 2,063,000 2,582,000
Fixed assets, net.................................................................. 235,000 270,000
Goodwill, net...................................................................... 3,431,000 3,245,000
Royalty advances, net.............................................................. 127,000 67,000
Other assets....................................................................... 23,000 59,000
------------- -------------
Total assets................................................................... $ 11,078,000 $ 12,574,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (note 4).................................................. $ 2,000,000 $ 2,742,000
Accounts payable and accrued expenses............................................ 1,483,000 2,141,000
Royalties payable................................................................ 91,000 150,000
------------- -------------
Total current liabilities...................................................... 3,574,000 5,033,000
Shareholder notes (note 5)......................................................... -- 500,000
------------- -------------
Total liabilities.............................................................. 3,574,000 5,533,000
------------- -------------
Commitments (note 9)
Stockholders' equity:
12% Series A voting, cumulative Preferred Stock, par value $.01 per share;
authorized 10,000 shares; issued and outstanding 4,700 shares (at aggregate
liquidation preference including dividends in arrears)......................... 5,534,000 6,190,000
Common stock--par value $.01 per share, authorized 5,000,000 shares; issued and
outstanding 1,026,308 shares in 1995 and 1996.................................. 10,000 10,000
Additional paid-in capital....................................................... 3,991,000 3,991,000
Accumulated deficit.............................................................. (2,031,000) (3,150,000)
------------- -------------
Total stockholders' equity..................................................... 7,504,000 7,041,000
------------- -------------
Total liabilities and stockholders' equity..................................... $ 11,078,000 $ 12,574,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Net sales........................................................................... $ 6,866,000 $ 9,940,000
Cost of sales....................................................................... 3,407,000 5,099,000
------------- -------------
Gross profit...................................................................... 3,459,000 4,841,000
------------- -------------
Operating expenses:
Selling and marketing............................................................. 3,024,000 3,854,000
General and administrative........................................................ 1,051,000 1,205,000
------------- -------------
Total operating expenses........................................................ 4,075,000 5,059,000
------------- -------------
Operating loss...................................................................... (616,000) (218,000)
Interest expense.................................................................... 190,000 245,000
------------- -------------
Net loss............................................................................ (806,000) (463,000)
Preferred dividend accrued.......................................................... (589,000) (656,000)
------------- -------------
Net loss available to common stockholders........................................... $ (1,395,000) $ (1,119,000)
------------- -------------
------------- -------------
Loss per share after preferred dividend requirements (primary and fully diluted).... $ (1.60) $ (1.09)
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1994........... 4,700 $ 4,945,000 793,340 $ 8,000 $ 2,493,000 $ (636,000) $ 6,810,000
Sale of common stock............... -- -- 232,968 2,000 1,498,000 -- 1,500,000
Preferred stock dividend........... -- 589,000 -- -- -- (589,000) --
Net loss........................... -- -- -- -- -- (806,000) (806,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at July 31, 1995........... 4,700 5,534,000 1,026,308 10,000 3,991,000 (2,031,000) 7,504,000
Preferred stock dividend........... -- 656,000 -- -- -- (656,000) --
Net loss........................... -- -- -- -- -- (463,000) (463,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at July 31, 1996........... 4,700 $ 6,190,000 1,026,308 $ 10,000 $ 3,991,000 $ (3,150,000) $ 7,041,000
----- ------------ ---------- --------- ------------ ------------- -------------
----- ------------ ---------- --------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................................... $ (806,000) $ (463,000)
Depreciation and amortization..................................................... 1,102,000 1,047,000
Provision for returns and bad debts............................................... 18,000 116,000
Changes in assets and liabilities:
Increase in accounts receivable................................................. (252,000) (917,000)
Increase in inventories......................................................... (1,034,000) (819,000)
Decrease in royalty advances.................................................... 57,000 90,000
(Increase) decrease in prepaid expenses......................................... (194,000) 34,000
Increase in other assets........................................................ -- (36,000)
Increase in accounts payable and accrued expenses............................... 480,000 658,000
Increase in royalties payable................................................... 26,000 59,000
------------- -------------
Net cash used in operating activities......................................... (603,000) (231,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures.............................................................. (112,000) (102,000)
Plant costs....................................................................... (1,221,000) (1,313,000)
------------- -------------
Net cash used in investing activities......................................... (1,333,000) (1,415,000)
------------- -------------
Cash flows from financing activities:
Repayment of debt................................................................. -- (2,000,000)
Proceeds from borrowings under notes payable...................................... 600,000 3,242,000
Proceeds from sale of capital stock............................................... 1,500,000 --
------------- -------------
Net cash provided by financing activities..................................... 2,100,000 1,242,000
------------- -------------
Net increase (decrease) in cash............................................... 164,000 (404,000)
Cash at beginning of period....................................................... 374,000 538,000
------------- -------------
Cash at end of period............................................................. $ 538,000 $ 134,000
------------- -------------
------------- -------------
Supplemental disclosures:
Interest paid..................................................................... $ 190,000 $ 239,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995 AND 1996
(1) DESCRIPTION OF THE BUSINESS AND FINANCIAL STATUS AND PLANS
DESCRIPTION OF THE BUSINESS
The Millbrook Press Inc. ("Company") was incorporated and commenced
operations as an independent company on February 23, 1994. The Company is a
publisher of children's nonfiction books, in both hardcover and paperbacks, for
preschoolers through young adults. The Company's books are distributed to the
school and public library market, trade bookstores and other specialty retail
and direct sales markets through wholesalers, its own telemarketing efforts and
commissioned sales representatives. The Company was formed to acquire the net
assets of a wholly owned subsidiary of Antia Publishing Company, which is a
wholly owned subsidiary of Groupe de la Cite International, a French
corporation.
On February 23, 1994 the Company sold 4,700 shares of preferred stock and
715,684 shares of common stock for a total of $6,700,000 and used a portion of
such proceeds to acquire substantially all of the net assets related to the
business of the Company. In conjunction with the acquisition, the purchase price
was allocated as follows:
<TABLE>
<S> <C>
Cash paid, including acquisition costs...................... $ 3,025,000
Fair value of liabilities assumed........................... 6,384,000
-------------
Total purchase price...................................... 9,409,000
Less: Fair value of assets acquired......................... 5,718,000
-------------
Costs in excess of fair value of net assets acquired........ $ 3,691,000
-------------
-------------
</TABLE>
Also on February 23, 1994, the Company repaid acquired debt payable to
Societe Generale in the amount of $4,911,000.
During fiscal 1995 and June 1994, the Company sold 232,968 and 77,656 shares
of common stock for $1,500,000 and $500,000, respectively. Of the 232,968 shares
sold, 77,656 were sold to The Archon Press through the transaction described
below.
Concurrent with the agreement with Aladdin Books, detailed in note 9, The
Archon Press, an Aladdin-affiliated company, agreed to invest $500,000 in The
Millbrook Press. This investment was received over a period of months in fiscal
1995. Archon currently owns 77,656 common shares (7.57%) of the Company.
FINANCIAL STATUS AND PLANS
The Company has incurred losses of $1,660,000 since its inception. The
Company has taken or is planning the following actions to fund its ongoing
operations and to maintain compliance with certain covenants relating to its
notes payable to its bank.
- The Company has obtained a deferral of compliance with certain covenants
under its notes payable to the bank through December 31, 1996.
- In August 1996, the Company received proceeds of $1,036,000, net of
offering costs ($214,000) and the conversion of shareholder loans
($500,000) as described in note 12. These proceeds were used to fund
working capital requirements. The aggregate debt of $1,750,000 becomes due
and payable
F-7
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(1) DESCRIPTION OF THE BUSINESS AND FINANCIAL STATUS AND PLANS (CONTINUED)
upon the earlier of February 28, 1998 or the completion of an initial
public offering by the Company.
- The Company is in the process of offering 1,500,000 shares of common stock
in an initial public offering to raise approximately $6,325,000 which is
scheduled for completion in the second quarter of fiscal 1997. Management
intends to use the proceeds to repay the $1,750,000 bridge loan and
finance its working capital needs and the expansion of its operations.
There can be no assurance that the initial public offering will be
successfully completed and that, absent of the initial public offering, the
Company will be in compliance with its debt covenants once the waiver expires on
December 31, 1996 or that the Company will be able to repay its indebtedness
when due. If the initial public offering is not successfully completed, the
Company anticipates that it will have to refinance existing indebtedness, sell
assets and/or otherwise raise funds in either the private or public markets and
seek further waivers from its lenders. There can be no assurance, however, that
the Company will be able to raise such funds.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISKS
Revenue from the sale of books to wholesalers is recognized at shipment. The
Company provides a reserve for product returns. Sales from telemarketing
activities are recognized when the customer accepts all or part of a sample
shipment.
Ongoing credit evaluations of customers' financial condition are performed
and collateral is not required. One customer accounted for 19% and 17% of the
Company's net sales for the years ended July 31, 1995 and 1996, respectively.
INVENTORIES
Inventories of sheets and bound books, which are primarily located in a
public warehouse and in-transit or at customers as inventory on preview, are
stated at the lower of cost or market, with cost determined by the average cost
method.
ROYALTY ADVANCES
Licensing agreements for rights to future publications usually require a
non-refundable partial payment of the royalty in advance of the publication. The
Company charges royalty advances to expense in the period during which the
related sales are recorded. If it appears that an advance will exceed total
royalties to be incurred based upon estimated sales, such excess is immediately
expensed. Royalty advances for publications to be published in excess of one
year from the balance sheet date are classified as non-current assets.
PLANT COSTS
Plant costs consisting of plates, photo engraving, separations, and other
text costs of unpublished books are amortized over three to five years from
publication date or the estimated remaining life, if
F-8
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shorter. Plant costs at July 31, 1995 and 1996 are presented net of accumulated
amortization of $1,300,000 and $979,000, respectively.
ADVERTISING COSTS
Advertising costs are expensed in the periods in which the costs are
incurred. Catalog costs consisting of the costs of producing and distributing
catalogs and costs of complementary copies are expensed ratably over the year in
which the costs are incurred in relation to sales. Advertising expense for the
years ended July 31, 1995 and 1996 was $349,000 and $328,000, respectively.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation and amortization of fixed
assets are computed on the straight-line method based on useful lives ranging
from 7-10 years for office furniture and equipment and 5 years for computers.
Leasehold improvements are amortized over the lesser of the lease term or the
life of the asset.
GOODWILL AND OTHER LONG LIVED ASSETS
Goodwill represents the excess of the cost over the fair value of the net
assets of the Company acquired on February 23, 1994. For financial reporting
purposes, the excess of cost over the fair value of net assets acquired is
amortized over 20 years using the straight-line method. Accumulated amortization
at July 31, 1995 and 1996 is $259,000 and $446,000, respectively. Pursuant to
Internal Revenue Code Section 197, for Federal income tax purposes such goodwill
is deductible over 15 years.
The Company systematically reviews the recoverability of its long lived
assets by comparing their unamortized carrying value to their anticipated
undiscounted future cash flows. Any impairment is charged to expense when such
determination is made.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER SHARE
Earnings (loss) per share are net earnings (loss) less the dividend
requirements on preferred stock, divided by the weighted average number of
common stock outstanding for the periods. Per share data does not assume the
exercise of common stock options issued under the non-qualified 1994 Stock
Option Plan or the exercise of the warrants issued in conjunction with the
Bridge financing (note 12) because the effects of such exercise would have been
antidilutive. Per share data reflects the reverse stock split effected on August
29, 1996 described in note 12.
F-9
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 123--Accounting for
Stock-Based Compensation. As allowable by SFAS 123, the Company does not intend
to recognize compensation cost for stock-based employee compensation
arrangements, but rather, starting in fiscal 1997, will disclose the pro-forma
impact on net income (loss) and earnings (loss) per share as if the fair value
stock-based compensation had been recognized starting in fiscal 1996.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates either are not applicable or are not
significant to the financial statements of the Company.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenue and expenses during the reported periods. Actual
results could vary from the estimates and assumptions used in the preparation of
the accompanying financial statements.
(3) FIXED ASSETS
Fixed assets at July 31, 1995 and 1996, consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Office furniture and equipment........................................ $ 105,000 $ 125,000
Computers............................................................. 176,000 241,000
Telecommunication equipment........................................... 25,000 33,000
Leasehold improvements................................................ 19,000 28,000
---------- ----------
325,000 427,000
Accumulated depreciation.............................................. (90,000) (157,000)
---------- ----------
$ 235,000 $ 270,000
---------- ----------
---------- ----------
</TABLE>
(4) NOTES PAYABLE TO BANKS
The Company had a revolving line of credit from a bank that expired December
31, 1995. The note payable provided for an interest rate at the bank's base rate
(8.75% at July 31, 1995) plus .5% and was collateralized by substantially all of
the assets of the Company. The maximum available principal amount was
$2,000,000, all of which was outstanding at July 31, 1995.
On December 14, 1995, the Company entered into a revolving line of credit
agreement with a bank that provides for borrowings up to $2,700,000. The
proceeds of the new line of credit were used to pay off the $2,000,000
outstanding principal balance of the previous note. The new line of credit
expires on December 15, 1998 and provides for an interest rate at the bank's
base rate plus .5% (8.75% at July 31, 1996). On July 29, 1996 the bank increased
the available line of credit to $2,875,000. The additional line of
F-10
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(4) NOTES PAYABLE TO BANKS (CONTINUED)
$175,000 expired August 31, 1996. At July 31, 1996, the amount outstanding under
this credit agreement was $2,742,000. The advances under this line of credit are
collateralized by substantially all of the assets of the Company.
The revolving line of credit contains various covenants which include, among
other things, a minimum tangible net worth requirement. Although the Company has
not been in default under its line of credit agreement, in anticipation of the
Bridge Loan (decribed in note 12) and in order to maintain compliance with
certain covenants, the Company has obtained a waiver of certain covenants from
the bank that expires on December 31, 1996. The revolving line of credit
prohibits the Company from the declaration or payment of dividends without the
banks prior consent, however, dividends on preferred stock may continue to
accrue.
(5) SHAREHOLDER NOTES
On April 15, 1996, the Company issued interest-bearing promissory notes to
certain shareholders for an aggregate of $500,000. The notes carried interest at
10% and were converted into units sold by the Company as part of the private
placement bridge offering completed by the Company on August 29, 1996 as
described in note 12.
(6) INCOME TAXES
No Federal or state income taxes have been provided for the years ended July
31, 1995 and 1996, due to the Company's net operating losses. The actual income
tax expense differs from the "expected" income tax benefit computed by applying
the U.S. Federal corporate income tax rate to loss before income taxes for the
years ended July 31, 1995 and 1996 as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Computed "expected" income tax benefit.............................. $ (274,000) $ (158,000)
State and local income taxes, net of Federal benefit................ (32,000) (18,000)
Increase in valuation allowance..................................... 302,000 171,000
Nondeductible expenses.............................................. 4,000 5,000
----------- -----------
Provision for income taxes........................................ $ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-11
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to the
deferred tax assets and deferred tax liabilities at July 31, 1995 and 1996 are
the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowances...................................... $ 81,000 $ 125,000
Inventory reserves.................................................. 44,000 104,000
Accruals not currently deductible................................... 6,000 17,000
Plant cost amortization............................................. 241,000 230,000
Net operating loss carryforwards.................................... 259,000 368,000
---------- ----------
631,000 844,000
Less: Valuation allowance............................................. 608,000 779,000
---------- ----------
Net deferred tax asset............................................ 23,000 65,000
Deferred tax liabilities:
Goodwill amortization............................................... (21,000) (56,000)
Fixed asset depreciation............................................ (2,000) (9,000)
---------- ----------
(23,000) (65,000)
---------- ----------
Net deferred income taxes............................................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences or net operating loss carryforwards become
deductible. Based on the Company's net operating losses to date, the Company has
established a valuation allowance of $779,000 at July 31, 1996. The Company's
tax net operating loss carryforward of approximately $970,000 at July 31, 1996,
expires in the years 2009 to 2011. The Tax Reform Act of 1986 included certain
provisions relating to changes in stock ownership which, if triggered, could
result in future annual limitations on the utilization of the net operating loss
carryforwards.
(7) STOCK OPTION PLAN
The Company has reserved 310,000 shares of common stock under its
non-qualified 1994 Stock Option Plan ("Option Plan") which provides that a
Committee, appointed by the Board of Directors, may grant stock options to
eligible employees, officers of the Company or its affiliates. The number of
shares reserved for issuance is adjusted in accordance with the provisions of
the Plan. All stock options granted by the Company expire seven years after the
grant date and are issued at exercise prices which are not less than the
estimated fair value of the stock as determined by the Company on the date of
grant. Stock options vest in 20% increments in each of the five years after the
date of grant. In the event the Company has an initial public offering, all
non-vested options on the effective date of the initial public offering will
vest 50% one year from that date and an additional 50% two years from that date.
F-12
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(7) STOCK OPTION PLAN (CONTINUED)
As of July 31, 1995 and 1996, there were options outstanding for 245,500
shares and 285,000 shares, respectively, at an exercise price of $8.00 per
share. As of July 31, 1996, there were 107,000 options exercisable. During
fiscal 1996, no options were canceled.
In August and October 1996, the Company granted an additional 25,000 and
80,000 shares, respectively, under the Option Plan.
In October 1996, the Company amended the Option Plan to increase the number
of shares of common stock reserved under the Option Plan from 310,000 to
475,000; decrease the exercise price from $8.00 per share to the initial public
offering price; permit the granting of incentive stock options; and allow the
Stock Option and Compensation Committee of the Board of Directors to set vesting
provision at the time of grant for future stock options granted.
(8) 401(K) PROFIT SHARING PLAN
The Company maintains a Non-standardized Prototype Cash or Deferred Profit
Sharing 401(k) Plan ("Plan"). Participation in the Plan by employees requires
that they complete one month of service for the Company and attain 21 years of
age. Employees on the Plan's effective date did not have to satisfy the one-
month service requirement. The Company determines each year a discretionary
matching contribution. Such additional contribution, if any, shall be allocated
to employees in proportion to each participant's contribution. The Company did
not contribute to the Plan during the years ended July 31, 1995 and 1996.
(9) COMMITMENTS
The Company leases office facilities under operating leases which expire at
various dates through 2004. The leases are subject to escalation clauses as they
relate to certain expenses of the lessor, i.e., utilities and real estate taxes.
Minimum future rental payments under non-cancelable operating leases having
initial or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JULY 31 AMOUNT
------------ -----------
<S> <C>
1997.......................... $ 124,000
1998.......................... 130,000
1999.......................... 131,000
2000.......................... 134,000
2001.......................... 138,000
Thereafter.................... 250,000
-----------
$ 907,000
-----------
-----------
</TABLE>
Rent expense for the years ended July 31, 1995 and 1996 were $138,000 and
$126,000, respectively.
In May 1994, the Company entered into an agreement with Aladdin Books, a
British publishing company, whereby Aladdin agreed to produce no less than 50
titles per year for Millbrook through January 1, 2002. The titles are to be
wholly owned by Millbrook. Aladdin is responsible for production, printing and
binding. Production costs are shared by Aladdin and Millbrook. Aladdin retains
sales rights
F-13
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(9) COMMITMENTS (CONTINUED)
for these titles to countries other than the United States, Canada and the
Philippines. Royalties are paid to Aladdin based on Millbrook sales. Development
recovery amounts are paid to Millbrook based on sales by Aladdin to other parts
of the world. Net payables to Aladdin at July 31, 1995 and 1996 are $355,000 and
$556,000, respectively.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The carrying amount approximates fair value because of the short term
maturity of these instruments.
NOTES PAYABLE
The carrying amount of these financial instruments approximates fair values
based on the fact that the related interest rates fluctuate with market rates.
(11) PREFERRED STOCK
The Company's preferred stock has a preference in liquidation of $1,000 per
share and is redeemable at the option of the Company at the liquidation value
plus accrued and unpaid dividends. The terms of the preferred stock provide for
annual cumulative dividends equal to 12% of the liquidation value, which are
added to the liquidation value each March 31. In the event the Company has an
initial public offering, all preferred shares outstanding, plus accrued and
unpaid dividends will convert to 473,692 shares of common stock. At July 31,
1996 dividends in arrears amounted to $1,490,000 ($317 per share).
(12) SUBSEQUENT EVENTS
RECAPITALIZATION PLAN
In August 1996, the Board of Directors of the Company approved a
recapitalization plan that includes (i) a bridge financing ("Bridge Loan") in
the principal amount $1,750,000 and the issuance of an aggregate amount of
875,000 warrants as outlined below (ii) a planned initial public offering of
1,500,000 shares of common stock and 1,500,000 warrants ("Warrants") to purchase
one share of common stock for $4.50.
In connection with the Bridge Loan, the Company effected a reverse stock
split of common stock on the basis of .3976 shares of common stock for each
share of common stock. Common stock outstanding and earnings (loss) per share
data reflect the reverse stock split for all periods presented.
On October 16, 1996, the Company increased the number of authorized shares
of common stock from 5,000,000 shares to 12,000,000 shares and increased the
number of authorized shares of preferred stock from 10,000 shares to 1,000,000
shares. The preferred stock may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders.
BRIDGE LOAN
On August 29, 1996, the Company consummated the closing of a private
placement bridge offering in which it sold 17 1/2 units for an aggregate of
$1,750,000. Each unit consists of a $100,000 interest bearing
F-14
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1995 AND 1996
(12) SUBSEQUENT EVENTS (CONTINUED)
unsecured convertible promissory note ("Note") and a warrant to purchase 50,000
shares of common stock at an initial exercise price of $5.00 per share ("Bridge
Warrant"). On the effective date of an initial public offering the Bridge
Warrants automatically convert into an aggregate 875,000 Warrants. The Note
provides for interest at a rate of 10% per annum through November 30, 1996 and
thereafter a rate of 15% per annum and is payable upon the earlier of February
28, 1998 or the closing of an initial public offering by the Company. The
carrying value of the Note has been reduced by $23,000 to reflect the fair
market value of the Bridge Warrants at issue date and will be accreted up to the
face value of $1,750,000 using the interest method. Fees incurred in connection
with the financing were $314,000.
In the event the Company does not successfully complete an initial public
offering the holders of the Notes can elect to convert the entire principal
amount and interest payable into the number of shares of common stock equal to
the principal amount and interest payable divided by $2.50.
F-15
<PAGE>
THE MILLBROOK PRESS INC.
BALANCE SHEET
OCTOBER 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash......................................................................... $ 100,000
Accounts receivable (less allowance for returns and bad debts of $427,000)... 2,889,000
Inventories.................................................................. 4,099,000
Royalty advances, net........................................................ 301,000
Prepaid expenses............................................................. 162,000
----------
Total current assets....................................................... 7,551,000
----------
Plant costs, net............................................................... 2,772,000
Fixed assets, net.............................................................. 284,000
Goodwill, net.................................................................. 3,197,000
Royalty advances, net.......................................................... 129,000
Other assets (note 3).......................................................... 424,000
----------
Total assets............................................................... $14,357,000
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 4)............................................... $2,628,000
Accounts payable and accrued expenses........................................ 2,738,000
Royalties payable............................................................ 285,000
----------
Total current liabilities.................................................. 5,651,000
Long-term debt................................................................. 1,730,000
----------
Total liabilities.......................................................... 7,381,000
----------
Stockholders' equity:
12% Series A voting, cumulative Preferred Stock, par value $.01 per share;
authorized 10,000 shares; issued and outstanding 4,700 shares (at aggregate
liquidation preference including dividends in arrears)..................... 6,370,000
Common Stock, par value $.01 per share, authorized 5,000,000 shares; issued
and outstanding 1,026,308 shares........................................... 10,000
Additional paid-in capital................................................... 4,014,000
Accumulated deficit.......................................................... (3,418,000)
----------
Total stockholders' equity................................................. 6,976,000
----------
Total liabilities and stockholders' equity................................. $14,357,000
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-16
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net sales............................................................................. $ 2,706,000 $ 3,266,000
Cost of sales......................................................................... 1,373,000 1,743,000
------------ ------------
Gross profit........................................................................ 1,333,000 1,523,000
------------ ------------
Operating expenses:
Selling and marketing............................................................... 937,000 1,140,000
General and administrative.......................................................... 293,000 390,000
------------ ------------
Total operating expenses.......................................................... 1,230,000 1,530,000
------------ ------------
Operating income (loss)............................................................... 103,000 (7,000)
Interest expense...................................................................... 49,000 81,000
------------ ------------
Net income (loss)..................................................................... 54,000 (88,000)
Preferred dividend accrued............................................................ (161,000) (180,000)
------------ ------------
Net loss available to common stockholders............................................. $ (107,000) $ (268,000)
------------ ------------
------------ ------------
Net loss per share after preferred dividend requirements (primary and fully
diluted)............................................................................. $ (.10) $ (.26)
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED OCTOBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1996........... 4,700 $ 6,190,000 1,026,308 $ 10,000 $ 3,991,000 $ (3,150,000) $ 7,041,000
Preferred stock dividend........... -- 180,000 -- -- -- (180,000) --
Issuance of common stock
warrants.......................... -- -- -- -- 23,000 -- 23,000
Net loss........................... -- -- -- -- -- (88,000) (88,000)
----- ------------ ---------- --------- ------------ ------------- -------------
Balance at October 31, 1996........ 4,700 $ 6,370,000 1,026,308 $ 10,000 $ 4,014,000 $ (3,418,000) $ 6,976,000
----- ------------ ---------- --------- ------------ ------------- -------------
----- ------------ ---------- --------- ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE>
THE MILLBROOK PRESS INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ 54,000 $ (88,000)
Depreciation and amortization..................................................... 270,000 322,000
Provision for returns and bad debts............................................... 75,000 98,000
Changes in assets and liabilities:
Increase in accounts receivable................................................. (1,047,000) (903,000)
Increase in inventories......................................................... (276,000) (622,000)
Decrease in royalty advances.................................................... 5,000 1,000
Decrease in prepaid expenses.................................................... 198,000 130,000
Increase in other assets........................................................ -- (405,000)
Increase in accounts payable and accrued expenses............................... 833,000 597,000
Increase in royalties payable................................................... 10,000 135,000
------------- -------------
Net cash provided by (used in) operating activities........................... 122,000 (735,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures.............................................................. (6,000) (32,000)
Plant costs....................................................................... (468,000) (403,000)
------------- -------------
Net cash used in investing activities......................................... (474,000) (435,000)
------------- -------------
Cash flows from financing activities:
Repayment of debt................................................................. -- (500,000)
Repayment of borrowings under note payable........................................ -- (114,000)
Proceeds from long-term debt...................................................... -- 1,750,000
------------- -------------
Net cash provided by financing activities..................................... -- 1,136,000
------------- -------------
Net decrease in cash.......................................................... (352,000) (34,000)
Cash at beginning of period....................................................... 538,000 134,000
------------- -------------
Cash at end of period............................................................. $ 186,000 $ 100,000
------------- -------------
------------- -------------
Supplemental disclosures:
Interest paid..................................................................... $ 47,000 $ 74,000
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The Unaudited financial statements of The Millbrook Press Inc. ("Company")
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows. The results of the October 31, 1995 and October 31, 1996 interim
periods are not necessarily indicative of the results that may be expected for
the full year.
The interim financial statements should be read in conjunction with the
annual financial statements and notes included elsewhere in this Prospectus.
(2) CAPITAL STOCK
In August 1996, the Company effected a reverse stock split of common stock
on the basis of .3976 shares of common stock for each share of common stock.
Common stock outstanding and earnings (loss) per share data reflect the reverse
stock split for all periods presented.
On October 16, 1996, the Company increased the number of authorized shares
of common stock from 5,000,000 shares to 12,000,000 shares and increased the
number of authorized shares of preferred stock from 10,000 shares to 1,000,000
shares. The preferred stock may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board may
determine without any vote of the stockholders.
(3) OTHER ASSETS
Included in other assets are deferred financing costs of $279,000, net of
accumulated amortization, relating to the bridge financing and deferred initial
public offering costs of $101,000.
(4) NOTE PAYABLE TO BANKS
In November 1996, the bank increased the available line of credit to
$2,875,000. The additional line of $175,000 expires December 31, 1996. At
October 31, 1996, the amount outstanding under this credit agreement was
$2,628,000.
(5) INCOME TAXES
No Federal or state income taxes have been provided for the three months
ended October 31, 1995 and 1996, due to the Company's net operating losses. The
actual income tax expense differs from the "expected" income tax benefit
computed by applying the U.S. Federal corporate income tax rate to loss before
income taxes for the three months ended October 31, 1995 and 1996 primarily due
to the increase in the valuation allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which temporary differences or net operating loss carryforwards become
deductible. Based on the Company's net operating losses to date, the Company has
established a valuation allowance for the full amount of the deferred tax assets
at October 31, 1996.
F-20
<PAGE>
THE MILLBROOK PRESS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1996
(UNAUDITED)
(6) STOCK OPTION PLAN
The Company has reserved 475,000 shares of common stock under its
non-qualified 1994 Stock Option Plan ("Option Plan") which provides that a
Committee, appointed by the Board of Directors, may grant stock options to
eligible employees, officers of the Company or its affiliates. The number of
shares reserved for issuance is adjusted in accordance with the provisions of
the Plan. All stock options granted by the Company expire seven years after the
grant date and are issued at exercise prices which are not less than the
estimated fair value of the stock as determined by the Company on the date of
grant. Stock options vest in 20% increments in each of the five years after the
date of grant. In the event the Company has an initial public offering, all
non-vested options on the effective date of the initial public offering will
vest 50% one year from that date and an additional 50% two years from that date.
During October 1996, the Stock Option and Compensation Committee of the
Board of Directors were given the authority to set vesting provisions at the
time of grant for future stock options granted.
F-21
<PAGE>
AWARDS _________________________________________________________________________
AMERICAN ASSOCIATION FOR THE
ADVANCEMENT OF SCIENCE--BEST CHILDREN'S SCIENCE BOOK LIST
CATS IN THE ZOO (1994)
CHICO MENDES: DEFENDER OF THE RAIN FOREST (1994) THE NEZ PERCES: PEOPLE OF THE
FAR
WEST (1994)
THE OJIBWAS: PEOPLE OF THE
NORTHERN FORESTS (1994)
PERFORMING DOGS: STARS OF STAGE, SCREEN,
AND TELEVISION (1994) RANCH AND FARM DOGS: HERDERS
AND GUARDS (1994) SEARCH AND RESCUE DOGS (1994)
AMERICAN BOOKSELLER--PICK OF THE LISTS
THE CROCODILE AND THE DENTIST (1995)
EVERY DAY IS EARTH DAY (1995)
ONE DAY WE HAD TO RUN! (1995)
SHARKS (1996)
WITCHES (1996)
AMERICAN LIBRARY ASSOCIATION
BEST BOOKS FOR YOUNG ADULTS
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
AMERICAN LIBRARY ASSOCIATION--PICKS FOR RELUCTANT YOUNG ADULT READERS
JIM ABBOTT: STAR PITCHER (1993)
MARIO LEMIEUX: WIZARD WITH A PUCK (1993)
AMERICAN LIBRARY ASSOCIATION-- OUTSTANDING BOOKS FOR MIDDLE SCHOOL READERS
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
BOOKLIST TOP BLACK HISTORY PICKS FOR YOUTH
AFRICAN-AMERICAN VOICES (1995)
CHILD STUDY ASSOCIATION--
CHILDREN'S BOOKS OF THE YEAR
AFRICAN-AMERICAN INVENTORS (1995)
AFRICAN-AMERICAN SCIENTISTS (1995)
AL GORE (1995)
CHICO MENDES: DEFENDER OF THE RAIN
FOREST (1995)
CHILDREN OF THE SWASTIKA:
THE HITLER YOUTH (1994)
THE CHILDREN'S ATLAS OF EXPLORATION (1994)
CHURCH AND STATE: GOVERNMENT AND
RELIGION IN THE UNITED STATES (1994) DAVID ROBINSON: NBA SUPER CENTER (1994)
DROUGHT (1994)
ELIE WIESEL: BEARING WITNESS (1995)
FREEDOM OF EXPRESSION: THE RIGHT TO SPEAK
OUT IN AMERICA (1994)
GARDENS FROM GARBAGE (1994)
HENRY DAVID THOREAU: IN STEP WITH
NATURE (1994)
THE IRISH-AMERICAN EXPERIENCE (1994)
THE IROQUOIS: PEOPLE OF THE NORTHEAST (1994)
MOHANDAS GANDHI (1995)
MOTHER JONES AND THE MARCH OF THE MILL
CHILDREN (1995)
THE ORCHESTRA: AN INTRODUCTION TO THE
WORLD OF CLASSICAL MUSIC (1994)
OUR GREAT RIVERS AND WATERWAYS (1995)
OUR SONG, OUR TOIL (1995)
OUR SUPREME COURT (1995)
THE PULLMAN STRIKE OF 1894 (1995)
THE RIGHT TO DIE: PUBLIC CONTROVERSY,
PRIVATE MATTER (1994)
RUTH BADER GINSBURG (1995)
THE SCOPES TRIAL (1995)
SONGS AND STORIES FROM THE AMERICAN
REVOLUTION (1995)
SPACES (1994)
THURGOOD MARSHALL AND EQUAL RIGHTS (1994)
THE WEST INDIAN-AMERICAN
EXPERIENCE (1995)
WOUNDED KNEE: THE DEATH OF
A DREAM (1994)
NATIONAL COUNCIL FOR SOCIAL STUDIES/ CHILDREN'S BOOK COUNCIL--NOTABLE CHILDREN'S
TRADE BOOKS IN THE FIELD OF SOCIAL STUDIES
THE AMERICAN REVOLUTION: HOW WE FOUGHT
THE WAR OF INDEPENDENCE (1996)
GROWING UP IN AMERICA: 1830-1860 (1996)
MOTHER JONES AND THE MARCH OF THE
MILL CHILDREN (1995)
OUR SONG, OUR TOIL: THE STORY OF AMERICAN
SLAVERY AS TOLD BY SLAVES (1995)
STRIKE! THE BITTER STRUGGLE OF AMERICAN WORKERS FROM COLONIAL TIMES TO THE
PRESENT (1996)
NATIONAL SCIENCE TEACHERS
ASSOCIATION/CHILDREN'S BOOK
COUNCIL--OUTSTANDING SCIENCE
TRADE BOOKS FOR CHILDREN
BONES (1996)
THE CHILDREN'S ATLAS OF NATURAL
WONDERS (1996)
LUCKY MOUSE (1996)
NATURE IN YOUR BACKYARD (1996)
SCIENTIFIC AMERICAN YOUNG
READERS BOOK AWARD
THE CROCODILE AND THE DENTIST (1995)
THE CHILDREN'S LITERATURE CHOICE LIST
LAUNCH DAY (1995)
INTERNATIONAL READING
ASSOCIATION/CHILDREN'S BOOK
COUNCIL CHILDREN'S CHOICES
DAVID ROBINSON: NBA SUPER CENTER (1994)
DRACULA (1995)
53 1/2 THINGS THAT CHANGED THE WORLD (1995)
FRANKENSTEIN (1995)
THE LOS ANGELES RIOTS: AMERICA'S CITIES
IN CRISIS (1994)
THE WINTER SOLSTICE (1995)
INTERNATIONAL READING
ASSOCIATION YOUNG ADULTS
CHOICES
VIOLENCE ON AMERICA'S STREETS (1994)
NATIONAL PARENTING CENTER SEAL OF APPROVAL
THE CHILDREN'S ATLAS OF THE HUMAN
BODY (1994)
NEW YORK PUBLIC LIBRARY BOOKS FOR THE TEEN AGE
ADOLF HITLER (1996)
AMERICAN INDIAN VOICES (1996)
ANIMAL RIGHTS: A HANDBOOK
FOR YOUNG ADULTS (1994)
BELLES OF THE BALLPARK (1994)
CAMPAIGN FINANCING (1995)
THE CATHEDRAL BUILDERS (1994)
CHILDREN OF THE SWASTIKA: THE HITLER
YOUTH (1994)
CHINA UNDER COMMUNISM (1996)
CHURCH AND STATE: GOVERNMENT AND RELIGION
IN THE UNITED STATES (1994)
COLLECTING BASEBALL CARDS (1994)
CULTS (1995)
FOOD RISKS AND CONTROVERSIES: MINIMIZING
THE DANGERS IN YOUR DIET (1994)
FREEDOM OF EXPRESSION: THE RIGHT TO SPEAK OUT IN AMERICA (1994)
GAMBLING (1996)
HIT ME WITH MUSIC (1996)
THE HUNT FOR HIDDEN KILLERS (1995)
JAPAN AND THE UNITED STATES: ECONOMIC
COMPETITORS (1994)
KNOW ABOUT GAYS AND LESBIANS (1995)
LATINO VOICES (1995)
LIBYA (1995)
THE MAGIC SHOW (1996)
MALCOLM X: HIS LIFE AND LEGACY (1996)
THE MIND AT WORK: HOW TO MAKE IT WORK
BETTER FOR YOU (1994)
MOHANDAS GANDHI (1995)
PROPHETS OF DOOM (1994)
QUINCEANERA (1995)
RIGHTS AND RESPECT (1996)
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
SCIENCE ON ICE (1996)
THOSE INCREDIBLE WOMEN OF
WORLD WAR II (1995)
THE WELFARE SYSTEM (1996)
THE WHITE POWER MOVEMENT: AMERICA'S
RACIST HATE GROUPS (1994)
SCHOOL LIBRARY JOURNAL BEST BOOKS
FOR YA'S
SAY IT LOUD! THE STORY OF RAP MUSIC (1995)
SKIPPING STONES 1996 HONOR AWARD
ONE DAY WE HAD TO RUN (1995)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 6
Risk Factors.............................................................. 6
Dilution.................................................................. 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 24
Management................................................................ 34
Principal Stockholders.................................................... 39
Certain Transactions...................................................... 43
Description of Securities................................................. 44
Shares Eligible For Future Sale........................................... 46
Selling Securityholders................................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 52
Available Information..................................................... 52
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL JANUARY , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK AND THE WARRANTS, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THE MILLBROOK PRESS INC.
[LOGO]
1,500,000 SHARES OF COMMON STOCK
AND
1,500,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
--------------
PROSPECTUS
--------------
[LOGO]
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except as hereinafter set forth, there is no statute, charter provision,
by-law, contract or other arrangement under which any controlling person,
director or officer of The Millbrook Press Inc. ("Company") is insured or
indemnified in any manner against liability which he may incur in his capacity
as such.
The Certificate of Incorporation, as amended ("Certificate of
Incorporation"), of the Company provides that the Company shall indemnify to the
fullest extent permitted by Delaware law any person whom it may indemnify
thereunder, including directors, officers, employees and agents of the Company.
The pertinent section of Delaware law is set forth below in full. Such
indemnification (other than as ordered by a court) shall be made by the Company
only upon a determination that indemnification is proper in the circumstances
because the individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination shall
be made by a majority vote of a quorum consisting of disinterested directors, or
by independent legal counsel or by the stockholders. In addition, the
Certificate of Incorporation provides for the elimination, to the extent
permitted by Delaware law, of personal liability of directors to the Company and
its stockholders for monetary damages for breach of fiduciary duty as directors.
The Company obtained a directors and officers insurance and company
reimbursement policy in the amount of $3,000,000. The policy insures directors
and officers against unindemnified loss arising from certain wrongful acts in
their capacities and would reimburse the Company for such loss for which the
Company has lawfully indemnified the directors and officers.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act").
Section 145 of the General Corporation Law provides as follows:
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
II-1
<PAGE>
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this section.
Such expenses incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
II-2
<PAGE>
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to any employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Company has also agreed to indemnify each director and executive officer
pursuant to an Indemnification Agreement with each such director and executive
officer from and against any and all expenses, losses, claims, damages and
liability incurred by such director or executive officer for or as a result of
action taken or not taken while such director or executive officer was acting in
his capacity as a director, officer, employee or agent of the Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement, other than underwriting commissions and discounts.
<TABLE>
<S> <C>
Registration Fee................................................ 6,442.45
National Association of Securities Dealers, Inc. Fee............ 2,626.01
Nasdaq SmallCap Market and The Boston Stock Exchange Filing
Fee........................................................... 25,000.00
Legal Fees and Expenses......................................... 125,000.00
Accounting Fees and Expenses.................................... 50,000.00
Printing and Engraving Expenses................................. 65,000.00
Blue Sky Fees and Expenses...................................... 50,000.00
Transfer Agent's and Registrar's Fees........................... 5,000.00
Miscellaneous Expenses.......................................... 1,431.54
---------
Total........................................................... 330,500.00
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following securities were sold by the
Company without registration under the Securities Act. Except as otherwise
indicated, the securities were sold by the Company in reliance upon the
exemption provided by Section 4(2) of the Securities Act. With respect to such
transactions, each purchaser of securities represented to the Company that such
purchaser (i) had sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the risks and merits of the
transaction and was capable of bearing the economic risks of such investment
including a complete loss of its investment, (ii) had an opportunity to discuss
the business, management and financial affairs of the Company with the Company's
representatives, (iii) acquired the securities for his own account for the
purpose of investment and not with a view to or for resale in connection with
any distribution thereof and (iv) understood that (a) the securities had not
been registered under the Securities Act by reason of their issuance in a
transaction exempt from the registration requirements of the Securities
II-3
<PAGE>
Act pursuant to Section 4(2) thereof, (b) the securities must be held
indefinitely unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from such registration, (c) the securities would
bear a legend to such effect and (d) the Company will make a notation on its
transfer books to such effect. With respect to all transactions prior to August
1996, all share numbers in this section have been adjusted to reflect (i) the
reverse stock split of the Company's Common Stock, $.01 par value ("Common
Stock") on the basis of .3976 shares of Common Stock for each share of Common
Stock ("Reverse Stock Split") or (ii) the conversion of all of its outstanding
Series A Redeemable Voting Preferred Stock, $.01 par value ("Preferred Stock")
and all accrued and unpaid dividends into 473,692 shares of Common Stock in
accordance with the Company's Articles of Incorporation after giving effect to
the Reverse Stock Split.
In February 1994, the Company was incorporated and acquired substantially
all of the assets of The Millbrook Press Inc. In connection with such merger the
following persons received the following shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF COMMON STOCK
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Frank Farrell.................................................................................. 69,779
Howard Graham.................................................................................. 69,779
Jean Reynolds.................................................................................. 15,506
Applewood Associates, L.P...................................................................... 517,154
Barry Fingerhut................................................................................ 25,858
Woodland Partners.............................................................................. 25,858
Irwin Lieber................................................................................... 25,858
Jonathan Lieber................................................................................ 4,310
Seth Lieber.................................................................................... 4,310
Sandler Capital Management..................................................................... 344,769
Harvey Sandler................................................................................. 27,583
John Kornriech................................................................................. 17,239
Michael Marocco................................................................................ 17,239
Barry Lewis.................................................................................... 17,239
Andrew Sandler................................................................................. 4,310
Hannah Stone................................................................................... 2,586
-----------------
Total...................................................................................... 1,189,376
-----------------
-----------------
</TABLE>
In June 1994, Sandler Capital Management transferred 344,769 shares of
Common Stock to 21st Century Investments ("21st Investments"), which in turn
transferred such shares of Common Stock to its affiliates, 21st Century Foreign
Partners ("21st Foreign"), 21st Century Communications Partners, L.P. ("21st
Partners") and 21st Century Communications T-E Partners, L.P. ("21st T-E"), PRO
RATA according to such entity's interest in 21st Investments.
In June 1994, Applewood Associates, L.P. ("Applewood") transferred 344,767
shares of Common Stock to 21st Investments, which in turn transferred such
shares of Common Stock to its affiliates, 21st Foreign, 21st Partners and 21st
T-E, pro rata according to such entity's interest in 21st Investments.
In June 1994, the Company issued 77,656 shares of its Common Stock to 21st
Investments for an aggregate purchase price of $500,000.
In October 1994, the Company issued 31,063 shares of its Common Stock to
Archon Press for an aggregate purchase price of $200,000.
In December 1994, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
II-4
<PAGE>
In February 1995, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
In April 1995, the Company issued 15,531 shares of its Common Stock to
Archon Press for an aggregate purchase price of $100,000.
In June 1995, the Company issued 78,979, 26,872, 10,633, 38,828 shares of
its Common Stock to 21st Partners, 21st T-E, 21st Foreign and Applewood,
respectively for aggregate purchase prices of $508,520, $173,020, $68,460 and
$250,000, respectively.
In August 1996, in connection with the Bridge Financing, the Company issued
the following Bridge Notes and Bridge Warrants to the following persons:
<TABLE>
<CAPTION>
NUMBER OF
NAME NOTE AMOUNT WARRANTS
- -------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Leon Abramson and Lorraine Abramson....................................... $ 25,000 12,500
Richard Ackerman.......................................................... 25,000 12,500
David Alexander........................................................... 25,000 12,500
Alsa, Inc................................................................. 50,000 25,000
Applewood Associates LP................................................... 250,000 125,000
Neil Bellett.............................................................. 25,000 12,500
Robert Bender............................................................. 25,000 12,500
Daniel Berger and Carolyn Berger.......................................... 25,000 12,500
Kenneth D. Cole........................................................... 25,000 12,500
Damerel Trading S.A....................................................... 50,000 25,000
Drew Effron............................................................... 25,000 12,500
Chris Engel............................................................... 25,000 12,500
Richard Etra and Kenneth Etra............................................. 25,000 12,500
Steven Etra............................................................... 62,500 31,250
Andrew Feiner............................................................. 25,000 12,500
Gordon M. Freeman......................................................... 200,000 100,000
Ernest Gottdiener......................................................... 25,000 12,500
Paula Graff............................................................... 25,000 12,500
Peter Hunt................................................................ 25,000 12,500
Daniel A. Kaplan.......................................................... 25,000 12,500
Richard C. Kaufman and Elaine J. Lenart................................... 25,000 12,500
Norman Kurtz.............................................................. 25,000 12,500
Mariwood Investments...................................................... 25,000 12,500
Anthony Peyser............................................................ 25,000 12,500
RJB Partners, L.P......................................................... 25,000 12,500
Steven Rosen.............................................................. 12,500 6,250
Rebecca Rubenstein........................................................ 50,000 25,000
Alan J. Rubin............................................................. 25,000 12,500
Jeffrey Rubinstein........................................................ 50,000 25,000
Chana Sasha Foundation.................................................... 33,333.34 16,667
Curtis Schenker........................................................... 25,000 12,500
Alan and Nancy Shapiro.................................................... 25,000 12,500
Carl E. Siegel............................................................ 25,000 12,500
Gregory Trubowitsch....................................................... 12,500 6,250
21st Century Communications Foreign Partners, L.P. 23,000 11,500
21st Century Communications T-E Partners, L.P. 57,000 28,500
21st Century Communications Partners, L.P. 170,000 85,000
Charles Warshaw........................................................... 12,500 6,250
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NAME NOTE AMOUNT WARRANTS
- -------------------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
Aaron Wolfson............................................................. 33,333.33 16,666
Abraham Wolfson........................................................... 33,333.33 16,667
William Wolfson........................................................... 50,000 25,000
Total................................................................. 1,750,000 875,000
</TABLE>
II-6
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Company, as amended.
*3.2 By-laws of the Company, as amended.
**4.1 Form of Common Stock Certificate.
**4.2 Form of Warrant Certificate.
*4.3 Form of Underwriter's Purchase Option granted to GKN Securities.
*4.4 Warrant Agreement between Continental Stock Transfer and Trust Company and the Company.
**5 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
*10.1 Employment Agreement, dated as of September 27, 1996, by and between the Company and Jeffrey Conrad,
as amended.
**10.2 Employment Agreement, dated as of , 1996, by and between the Company and Jean E. Reynolds.
**10.3 Consulting Agreement, dated as of , 1996, by and between the Company and Frank J. Farrell.
**10.4 Consulting Agreement, dated as of , 1996, by and between the Company and Howard Graham.
***10.5 Form of Indemnification Agreement between each of the Officers and Directors of the Company and the
Company.
***10.6 Agreement of Lease, dated September 27, 1994, by and between the Company and Arnold S. Paster.
*10.7 Agreement of Lease, dated March 26, 1996, by and between the Company and Land First II Group.
***10.8 Agreement of Lease and rider attached thereto, dated February 15, 1996, by and between the Company and
Ninety-Five Madison Company.
***10.9 1994 Stock Option Plan, as amended
***10.10 Loan and Security Agreement, dated as of December 14, 1995, between People's Bank and the Company.
***10.11 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Jean Reynolds.
***10.12 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Frank Farrell.
***10.13 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Howard Graham.
***10.14 Contribution Agreement, dated as of December 14, 1995, entered into among the
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
stockholders of the Company named therein.
<C> <S>
***10.15 Agreement made effective as of August 1, 1996 by and between Aladdin Books Limited and the Company.
***10.16 Heads of Option Agreement, dated July 27, 1993, as amended, among Groupe de la Cite International,
Antia Corporation and SMG Associates.
***10.17 Standardized Adoption Agreement, dated March 20, 1996, for the Company's 401K Plan.
***10.18 Fidelity Guarantee/Guaranty of Validity of Accounts, dated as of December 14, 1995, among Frank
Farrell, Howard Graham, Jean Reynolds and People's Bank.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
***24 Power of Attorney (included in Part II, page II-9).
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) File, during any period in which it offers or sales securities, a
post-effective amendment to this registration statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and in the offering of such securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
The undersigned small business issuer will provide to the Representative at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director,
II-8
<PAGE>
officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and the offering of the securities at that time as the initial bona fide
offering of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement, to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
6th day of December 1996.
THE MILLBROOK PRESS INC.
By: /s/ FRANK J. FARRELL
-----------------------------------------
Name: Frank J. Farrell
Title: VICE PRESIDENT AND SECRETARY
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ------------------------------ ---------------------------
* Chief Executive Officer and December 6, 1996
- ------------------------------ President
Jeffrey Conrad
* Vice President and Director December 6, 1996
- ------------------------------
Howard Graham
/s/ FRANK J. FARRELL Vice President, Secretary December 6, 1996
- ------------------------------ and Director
Frank J. Farrell
* Director, Chairman December 6, 1996
- ------------------------------
Barry Fingerhut
* Director December 6, 1996
- ------------------------------
Barry Rubinstein
* Director December 6, 1996
- ------------------------------
Michael Marocco
* Vice President and Chief December 6, 1996
- ------------------------------ Financial Officer
Donald D'Angelo
*
/s/ FRANK J. FARRELL
- ------------------------------
By: Frank J. Farrell,
Attorney-in-Fact
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Company, as amended.
*3.2 By-laws of the Company, as amended.
*4.1 Form of Common Stock Certificate.
*4.2 Form of Warrant Certificate.
*4.3 Form of Underwriter's Purchase Option granted to GKN Securities.
*4.4 Warrant Agreement between Continental Stock Transfer and Trust Company and the Company.
**5 Opinion of Olshan Grundman Frome & Rosenzweig LLP.
*10.1 Employment Agreement, dated as of September 27, 1996, by and between the Company and Jeffrey Conrad,
as amended.
**10.2 Employment Agreement, dated as of , 1996, by and between the Company and Jean E. Reynolds.
**10.3 Consulting Agreement, dated as of , 1996, by and between the Company and Frank J. Farrell.
**10.4 Consulting Agreement, dated as of , 1996, by and between the Company and Howard Graham.
***10.5 Form of Indemnification Agreement between each of the Officers and Directors of the Company and the
Company.
***10.6 Agreement of Lease, dated September 27, 1994, by and between the Company and Arnold S. Paster.
*10.7 Agreement of Lease, dated March 26, 1996, by and between the Company and Land First II Group.
***10.8 Agreement of Lease and rider attached thereto, dated February 15, 1996, by and between the Company and
Ninety-Five Madison Company.
***10.9 1994 Stock Option Plan, as amended
***10.10 Loan and Security Agreement, dated as of December 14, 1995, between People's Bank and the Company.
***10.11 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Jean Reynolds.
***10.12 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Frank Farrell.
***10.13 Debt Subordination Agreement, dated as of December 14, 1995, between People's Bank and Howard Graham.
***10.14 Contribution Agreement, dated as of December 14, 1995, entered into among the stockholders of the
Company named therein.
***10.15 Agreement made effective as of August 1, 1996 by and between Aladdin Books Limited and the Company.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
***10.16 Heads of Option Agreement, dated July 27, 1993, as amended, among Groupe de la Cite International,
Antia Corporation and SMG Associates.
***10.17 Standardized Adoption Agreement, dated March 20, 1996, for the Company's 401K Plan.
***10.18 Fidelity Guarantee/Guaranty of Validity of Accounts, dated as of December 14, 1995, among Frank
Farrell, Howard Graham, Jean Reynolds and People's Bank.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP, included in Exhibit 5.
***24 Power of Attorney (included in Part II, page II-9).
</TABLE>
- ------------------------
* Filed herewith
** To be filed by amendment
*** Previously filed
<PAGE>
UNDERWRITING AGREEMENT
BETWEEN
THE MILLBROOK PRESS INC.
AND
GKN SECURITIES CORP.
DATED: DECEMBER __, 1996
<PAGE>
THE MILLBROOK PRESS INC.
1,500,000 SHARES OF COMMON STOCK
AND
1,500,000 COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
New York, New York
December ___, 1996
GKN Securities Corp.
61 Broadway, 12th Floor
New York, New York 10006
Ladies and Gentlemen:
The undersigned The Millbrook Press Inc., a Delaware corporation
("Company"), hereby confirms its agreement with GKN Securities Corp. (being
referred to herein variously as "you" or the "Underwriter") as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 FIRM SECURITIES.
1.1.1 PURCHASE OF FIRM SECURITIES. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriter and the Underwriter agrees to purchase from the Company 1,500,000
shares of the Company's Common Stock, par value $.01 per share ("Common Stock"),
at a purchase price of $4.50 per share, and 1,500,000 of Redeemable Common Stock
Purchase Warrants ("Warrant(s)"), at a purchase price of $.09 per Warrant, each
Warrant to purchase one share of Common Stock at a purchase price of $4.50 per
share commencing one year after the Effective Date (as hereinafter defined)
until the fifth anniversary of the Effective Date (these shares of Common Stock
and Warrants being referred to herein as "Firm Securities").
1.1.2 PAYMENT AND DELIVERY. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or at
such earlier time as the Underwriter shall determine, or at such other time as
shall be agreed upon by the Underwriter and the Company at the offices of the
Underwriter or at such other place as shall be agreed upon by the Underwriter
and the Company. The hour and date of delivery and payment for the Firm
Securities are called the "Closing Date." Payment for the Firm Securities shall
be made on the Closing Date at the
<PAGE>
Underwriter's election by certified or bank cashier's check(s) in New York
Clearing House funds, payable to the order of the Company upon delivery to you
of certificates (in form and substance satisfactory to the Underwriter)
representing the Firm Securities for the account of the Underwriter. The Firm
Securities shall be registered in such name or names and in such authorized
denominations as the Underwriter may request in writing at least two full
business days prior to the Closing Date. The Company will permit the
Underwriter to examine and package the Firm Securities for delivery, at least
one full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Securities except upon tender of payment
by the Underwriter for all the Firm Securities.
1.2 OVER-ALLOTMENT OPTION.
1.2.1 OPTION SECURITIES. For the purposes of covering any over-
allotments in connection with the distribution and sale of the Firm Securities,
the Underwriter is hereby granted an option to purchase up to an additional
225,000 shares of Common Stock and/or 225,000 Warrants from the Company
("Over-allotment Option"). Such additional 225,000 shares of Common Stock and
225,000 Warrants are hereinafter referred to as the "Option Securities." The
Firm Securities and the Option Securities are together with the shares of Common
Stock issuable upon exercise of the Warrants, hereinafter referred to
collectively as the "Public Securities." The purchase price to be paid for the
Option Securities will be the same price per Option Security as the price per
Firm Security set forth in Section 1.1.1 hereof.
1.2.2 EXERCISE OF OPTION. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriter as to all
or any part of the Option Securities at any time, from time to time, within
forty-five days after the effective date ("Effective Date") of the Registration
Statement (as hereinafter defined). The Underwriter will not be under any
obligation to purchase any Option Securities prior to the exercise of the
Over-allotment Option. The Over-allotment Option granted hereby may be
exercised by the giving of oral notice to the Company from the Underwriter,
which must be confirmed by a letter or telecopy setting forth the number of
Option Securities to be purchased, the date and time for delivery of and payment
for the Option Securities and stating that the Option Securities referred to
therein are to be used for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Securities. If such notice is given
at least two full business days prior to the Closing Date, the date set forth
therein for such delivery and payment will be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and payment
will not be earlier than five full business days after the date of the notice.
If such delivery and payment for the Option Securities does not occur on the
Closing Date, the date and time of the closing for such Option Securities will
be as set forth in the notice (hereinafter the "Option Closing Date"). Upon
exercise of the Over-allotment Option, the Company will become obligated to
convey to the Underwriter, and, subject to the terms and conditions set forth
herein, the Underwriter will become obligated to purchase, the number of Option
Securities specified in such notice.
1.2.3 PAYMENT AND DELIVERY. Payment for the Option Securities
will be at the Underwriter's election by certified or bank cashier's check(s) in
New York Clearing House funds, payable to the order of the Company at the
offices of the Underwriter or at such other place as shall be agreed upon by the
Underwriter and the Company upon delivery to you of certificates
2
<PAGE>
representing such securities for the Underwriter. The certificates representing
the Option Securities to be delivered will be in such denominations and
registered in such names as the Underwriter requests not less than two full
business days prior to the Closing Date or the Option Closing Date, as the case
may be, and will be made available to the Underwriter for inspection, checking
and packaging at the aforesaid office of the Company's transfer agent or
correspondent not less than one full business day prior to such Closing Date.
1.3 UNDERWRITER'S PURCHASE OPTION.
1.3.1 PURCHASE OPTION. The Company hereby agrees to issue and
sell to the Underwriter (and/or its designees) on the Effective Date an option
("Underwriter's Purchase Option") for the purchase of an aggregate of 150,000
shares of Common Stock at an initial exercise price of ___% of the initial
offering price of a share of common stock, i.e., $_____ per share of Common
Stock ("Underwriter's Shares"), and/or 150,000 Warrants ("Underwriter's
Warrants") at an initial exercise price of ____ % of the initial offering price
of a Warrant, i.e., $.__ per Warrant. Each of the Underwriter's Shares and the
Underwriter's Warrants is identical to the Firm Securities. The Underwriter's
Purchase Option, the Underwriter's Shares, the Underwriter's Warrants and the
shares of Common Stock issuable upon exercise of the Underwriter's Warrants are
hereinafter referred to collectively as the "Underwriter's Securities." The
Public Securities and the Underwriter's Securities are hereinafter referred to
collectively as the "Securities."
1.3.2 PAYMENT AND DELIVERY. Delivery and payment for the
Underwriter's Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriter, upon payment therefor, certificates for the
Underwriter's Purchase Option in the name or names and in such authorized
denominations as the Underwriter may request.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to the Underwriter as follows:
2.1 FILING OF REGISTRATION STATEMENT.
2.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 Registration No. 333-14631
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Public Securities under the Securities Act of 1933, as
amended ("Act"), which registration statement and amendment or amendments have
been prepared by the Company in conformity with the requirements of the Act, and
the rules and regulations ("Regulations") of the Commission under the Act.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration statement
becomes effective (including the prospectus, financial statements, schedules,
exhibits and all other documents filed as a part thereof or incorporated therein
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430A of the Regulations), is hereinafter called the
"Registration Statement," and the form of the final prospectus dated the
Effective Date (or, if applicable, the form of final prospectus filed with the
Commission pursuant to Rule 424 of the Regulations), is hereinafter called
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the "Prospectus." The Registration Statement has been declared effective by the
Commission on the date hereof.
2.1.2 PURSUANT TO THE EXCHANGE ACT. The Company has filed with
the Commission a registration statement on Form 8-A No. _______ providing for
the registration under the Securities Exchange Act of 1934, as amended,
("Exchange Act") of the Public Securities. Such registration of the Securities
has been declared effective by the Commission on the date hereof.
2.2 NO STOP ORDERS, ETC. Neither the Commission nor, to the best of
the Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus, Prospectus or
has instituted or, to the best of the Company's knowledge, threatened to
institute any proceedings with respect to such an order.
2.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.3.1 SECURITIES ACT AND EXCHANGE ACT REPRESENTATION. At the
time the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date and the Option Closing Date, if
any, the Registration Statement and the Prospectus and any amendment or
supplement thereto contained and will contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations,
and conformed and will conform in all material respects to the requirements of
the Act and the Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, during such time period and
on such dates, contained or will contain any untrue statement of a material fact
or omitted or will omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, nor did they or will
they contain any untrue statement of a material fact or did they or will they
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto at the time such filing was made
complied in all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter by the Underwriter expressly for use in the Registration Statement
or Prospectus or any amendment thereof or supplement thereto.
2.3.2 DISCLOSURE OF CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement, which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
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effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None
of the material provisions of such contracts or instruments violates or will
result in a violation of any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its respective assets or businesses,
including, without limitation, those relating to environmental laws and
regulations.
2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
2.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, including, but not
limited to, a material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, whether or
not arising in the ordinary course of business, and (ii) there have been no
transactions entered into by the Company, other than those in the ordinary
course of business, which are material with respect to the condition, financial
or otherwise, or to the results of operations, business or business prospects of
the Company.
2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or
(ii) declared or paid any dividend or made any other distribution on or in
respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. KPMG Peat Marwick LLP whose report is
filed with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 FINANCIAL STATEMENTS. The financial statements, including the
notes thereto and supporting schedules included in the Registration Statement
and Prospectus, fairly present the financial position and the results of
operations of the Company at the dates and for the periods to which they apply;
and such financial statements have been prepared in conformity with generally
accepted accounting principles, consistently applied throughout the periods
involved; and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein.
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2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms. The authorized
Common Stock and outstanding options and warrants to purchase shares of Common
Stock conform to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriter's Purchase Option, the Underwriter's
Warrants and the Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and the
Underwriter's Purchase Option, the Underwriter's Warrants and the Warrants will
be enforceable against the Company in accordance with their respective terms,
except (i) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (ii) as
enforceability of any indemnification provision may be limited under the federal
and state securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
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2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement, the
employment agreements with Jean E. Reynolds and Jeffrey Conrad ("Employment
Agreements"), the Underwriters' Purchase Option and the Warrant Agreement (as
hereinafter defined) have been duly and validly authorized by the Company and
constitute, or when executed and delivered, will constitute, the valid and
binding agreements of the Company, enforceable against the Company in accordance
with their respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 NO CONFLICTS, ETC. The execution, delivery, and performance by the
Company of this Agreement, the Underwriter's Purchase Option and the Warrant
Agreement, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof and
thereof have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time or both,
(i) result in a breach of, or conflict with any of the terms and provisions of,
or constitute a default under, or result in the creation, modification,
termination or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to the terms of any indenture, mortgage, deed
of trust, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which any of the property or assets of the Company is subject; (ii) result
in any violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company; (iii) violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business; or (iv) have a material adverse effect on any permit,
license, certificate, registration, approval, consent, license or franchise
concerning the Company.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. The Company is not
in violation of any term or provision of its Certificate of Incorporation or
By-Laws or in violation of any franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties or
business, except as described in the Prospectus.
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2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 CONDUCT OF BUSINESS. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such material authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery, of the
Securities pursuant to this Agreement, the Warrant Agreement and the
Underwriter's Purchase Option, and as contemplated by the Prospectus, except
with respect to applicable federal and state securities laws.
2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar business.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business is bound or subject.
2.16 GOOD STANDING. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
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2.17 TAXES. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriter, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any interest and any penalties, additions to
tax, or additional amounts with respect thereto. The term "returns" means all
returns, declarations, reports, statements, and other documents required to be
filed in respect to taxes.
2.18 EMPLOYEES' OPTIONS. No more than ________ shares of Common Stock
are eligible for sale pursuant to Rule 701 promulgated under the Act in the
12-month period following the Effective Date.
2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.19.1 FINDER'S FEES. There are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or any
other arrangements, agreements, understandings, payments or issuance with
respect to the Company that may affect the Underwriter's compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. The Company has not made
any direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in consideration of such
person raising capital for the Company or introducing to the Company persons who
provided capital to the Company, (ii) to any NASD member, or (iii) to any person
or entity that has any direct or indirect affiliation or association with any
NASD member within the twelve month period prior to the date on which the
Registration Statement was filed with the Commission ("Filing Date") or
thereafter, other than payments to the Underwriter and except as disclosed on
Schedule 2.19.2 attached hereto.
2.19.3 USE OF PROCEEDS. None of the net proceeds of the offering
will be paid by the Company to any participating NASD member or any affiliate or
associate of any participating NASD member, except as specifically authorized
herein.
2.19.4 INSIDERS' NASD AFFILIATION. No officer or director of the
Company or owner of any of the Company's unregistered securities has any direct
or indirect affiliation or association
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with any NASD member. The Company will advise the Underwriter and the NASD if
any stockholder of the Company is or becomes an affiliate or associated person
of an NASD member participating in the offering.
2.20 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of its
officers, directors, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
with the Foreign Corrupt Practices Act of 1977, as amended.
2.21 NASDAQ AND THE BOSTON STOCK EXCHANGE ELIGIBILITY. As of the
Effective Date, the Public Securities have been approved for quotation on the
Nasdaq SmallCap Market ("Nasdaq") and for listing on the Boston Stock Exchange
("BSE").
2.22 INTANGIBLES. The Company owns or possesses the requisite licenses
or rights to use all trademarks, service marks, service names, trade names,
patents and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the United
States Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to, or
proceeding pending or threatened and the Company has not received any notice of
conflict with the asserted rights of others which challenges the exclusive right
of the Company with respect to any Intangibles used in the conduct of the
Company's business except as described in the Prospectus. The Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.
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2.23 RELATIONS WITH EMPLOYEES.
2.23.1 EMPLOYEE MATTERS. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.
2.23.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a,
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not, and has at no time,
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA. If the Company does maintain or contribute to a defined benefit plan,
any termination of the plan on the date hereof would not give rise to liability
under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), which
could subject the Company to any tax penalty for prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multi-employer plan".
2.24 OFFICERS' CERTIFICATE. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel shall
be deemed a representation and warranty by the Company to the Underwriter as to
the matters covered thereby.
2.25 WARRANT AGREEMENT. The Company has entered into a warrant
agreement with respect to the Warrants and the Underwriter's Warrants
substantially in the form filed as an exhibit to the Registration Statement
("Warrant Agreement") with Continental Stock Transfer & Trust Company, in form
and substance satisfactory to the Underwriter, providing for among other things,
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no redemption of the Warrants without the prior written consent of the
Underwriter and for the payment of a warrant solicitation fee, if applicable, as
contemplated by Section 3.9 hereof.
2.26 AGREEMENTS WITH INSIDERS.
2.26.1 LOCK-UP AGREEMENTS. The Company has caused to be duly
executed a legally binding and enforceable agreement pursuant to which all of
the officers, directors and shareholders of the Company on the date hereof
(including their family members and affiliates) and persons (including their
family members and affiliates), or by any option holder who would have the
ability to sell the share underlying his option under Rule 701 under the Act
(collectively, "Insiders", agree not to sell any shares of Common Stock owned by
them (either pursuant to Rule 144 of the Regulations or otherwise) for a period
of 24 months following the Effective Date except with the prior written consent
of the Underwriter and, if required by applicable state blue sky laws, the
securities commissions in any such states.
2.26.2 EMPLOYMENT AGREEMENTS. The Company has entered into an
Employment Agreement with each of Jean E. Reynolds and Jeffrey Conrad in
substantially the same form as set forth in an exhibit to the Registration
Statement, for a term ending on December ___, 1998 and ending on October ___,
1999, respectively.
2.26.3 UNDERWRITER'S PURCHASE OPTION. The Company has executed
and delivered the Underwriter's Purchase Option to the Underwriter substantially
in the form filed as an exhibit to the Registration Statement.
2.27 SUBSIDIARIES. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)"), also apply and be true with respect to each
subsidiary, individually and taken as a whole with the Company and all other
subsidiaries, as if each representation and warranty contained herein made
specific reference to the subsidiary each time the term "Company" was used.
2.28 UNAUDITED FINANCIALS. The Company has furnished to the Underwriter
prior to the date hereof a copy of the latest available unaudited interim
financial statements ("Unaudited Financials") of the Company (which in no event
shall be as of a date more than thirty days prior to the Effective Date) which
have been read by the Company's independent accountants, as stated in their
letter to be furnished pursuant to Section 4.3 hereof.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to
the Underwriter, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Underwriter
shall reasonably object.
3.2 FEDERAL SECURITIES LAWS.
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3.2.1 COMPLIANCE. During the time when a Prospectus is required
to be delivered under the Act and for at least 270 days from the Effective Date
the Company will use all reasonable efforts to comply with all requirements
imposed upon it by the Act, the Regulations and the Exchange Act and by the
regulations under the Exchange Act, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Public
Securities and the Bridge Warrants (as defined in the Prospectus) in accordance
with the provisions hereof, the Prospectus and the Subscription Agreement
between the Company and each investor in the Bridge Financing which requires the
Company to keep the Registration Statement effective for a period of 270 days
from the Effective Date. If at any time when a Prospectus relating to the
Public Securities and the Bridge Warrants (as defined in the Prospectus) is
required to be delivered under the Act and, in any event, for a period of 270
days from the Effective Date, any event shall have occurred as a result of
which, in the opinion of counsel for the Company or counsel for the Underwriter,
the Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriter) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of the
Exchange Act.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective, to qualify the Public Securities and the Bridge
Warrants (as defined in the Prospectus) for offering and sale under the
securities laws of such jurisdictions as the Underwriter may reasonably
designate, provided that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Company would be subject to service
of general process or to taxation as a foreign corporation doing business in
such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may be required by the
laws of such jurisdiction.
3.4 DELIVERY TO THE UNDERWRITER OF PROSPECTUSES. The Company will
deliver to the Underwriter, without charge, from time to time during the period
when the Prospectus is required to be delivered under the Act and, in any event,
for at least 270 days from the Effective Date, or the Exchange Act such number
of copies of each Preliminary Prospectus and the Prospectus as the Underwriter
may reasonably request and, as soon as the Registration Statement or any
amendment or supplement thereto becomes effective, deliver to you two original
executed Registration Statements, including exhibits, and all post-effective
amendments thereto and copies
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of all exhibits filed therewith or incorporated therein by reference and all
original executed consents of certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE UNDERWRITER. The Company will
notify the Underwriter immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the mailing and delivery to the Commission for filing of any amendment
or supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from
the Effective Date, the Company, at its expense, shall cause its regularly
engaged independent certified public accountants to review (but not audit) the
Company's financial statements for each of the first three fiscal quarters prior
to the announcement of quarterly financial information, the filing of the
Company's Form 10-Q quarterly report and the mailing of quarterly financial
information to stockholders.
3.7 SECONDARY MARKET TRADING AND STANDARD & POOR'S. The Company will
take all necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions (within 30 days
after the Effective Date) and to maintain such publication with updated
quarterly information for a period of five years from the Effective Date,
including the payment of any necessary fees and expenses. The Company shall
take such action as may be reasonably requested by the Underwriter to obtain a
secondary market trading exemption in such States as may be requested by the
Underwriter, including the payment of any necessary fees and expenses and the
filing of a Form (e.g. 25101(b)) for secondary market trading in the State of
California on the Effective Date.
3.8 NASDAQ MAINTENANCE. For a period of five years from the date
hereof, the Company will use its best efforts to maintain the quotation by
Nasdaq SmallCap Market and the listing by the BSE of the Common Stock, and, if
outstanding, the Warrants and, if the Company satisfies the inclusion standards
of the Nasdaq National Market, to apply for and maintain quotations by the
Nasdaq National Market of such securities during such period.
3.9 WARRANT SOLICITATION AND REGISTRATION OF COMMON STOCK UNDERLYING
THE WARRANTS.
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3.9.1 WARRANT SOLICITATION FEES. The Company hereby engages the
Underwriter, on a non-exclusive basis, as its agent for the solicitation of the
exercise of the Warrants. The Underwriter hereby accepts such engagement to
solicit the exercise of the Warrants at such times, and from time to time, that
the Company and the Underwriter may deem appropriate. The Company, at its cost,
will (i) assist the Underwriter with respect to such solicitation, if requested
by the Underwriter and will (ii) provide the Underwriter, and direct the
Company's transfer and warrant agent to provide to the Underwriter, lists of the
record and, to the extent known, beneficial owners of the Company's Warrants.
Commencing one year from the Effective Date, the Company will pay to the
Underwriter a commission of five percent of the Warrant exercise price for each
Warrant exercised, payable on the date of such exercise, on the terms provided
for in the Warrant Agreement, if allowed under the rules and regulations of the
NASD and only if the Underwriter has provided bona fide services in connection
with the exercise of Warrants. In addition to soliciting either orally or in
writing, the exercise of Warrants, such services may also include disseminating
information, either orally or in writing to Warrantholders about the Company or
the market for the Company's securities, and the assisting in the processing of
Warrants. The Underwriter may engage sub-agents in its solicitation efforts.
The Company will disclose the arrangement to pay such solicitation fees to the
Underwriter in any prospectus used by the Company in connection with the
registration of the shares of Common Stock underlying the Warrants.
3.9.2 REGISTRATION OF COMMON STOCK. The Company agrees that
prior to the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if possible
or a new registration statement, for the registration, under the Act, of the
Common Stock issuable upon exercise of the Warrants. In either case, the
Company shall cause the same to become effective at or prior to the date that
the Warrants become exercisable, and to maintain the effectiveness of such
registration statement and keep current a prospectus thereunder until the
expiration of the Warrants in accordance with the provisions of the Warrant
Agreement.
3.10 REPORTS TO THE UNDERWRITER.
3.10.1 PERIODIC REPORTS, ETC. For a period of five years from
the Effective Date, the Company will promptly furnish to the Underwriter and its
counsel copies of such financial statements and other periodic and special
reports as the Company from time to time files with any governmental authority
or furnishes generally to holders of any class of its securities, and promptly
furnish to the Underwriter and its counsel (i) a copy of each periodic report
the Company shall be required to file with the Commission, (ii) a copy of every
press release and every news item and article with respect to the Company or its
affairs which was released by the Company, (iii) copies of each Form SR, (iv) a
copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared
by the Company, (v) a copy of monthly statements setting forth such information
regarding the Company's results of operations and financial position (including
balance sheet, profit and loss statements and data regarding outstanding
purchase orders) as is regularly prepared by management of the Company, and (vi)
such additional documents and information with respect to the Company and the
affairs of any future subsidiaries of the Company as the Underwriter may from
time to time reasonably request.
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3.10.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS. For a
period of five years from the Closing Date, the Company will furnish to the
Underwriter at the Company's sole expense such transfer sheets and position
listings of the Company's securities as the Underwriter may request, including
the daily, weekly and monthly consolidated transfer sheets of the transfer agent
of the Company and the weekly position listings of the Depository Trust Company.
3.10.3 SECONDARY MARKET TRADING MEMORANDUM. Until such time as
the Public Securities are listed or quoted, as the case may be, on one of the
following: the New York Stock Exchange, the American Stock Exchange or Nasdaq
National Market, the Company shall cause the Underwriter's legal counsel to
update and deliver to the Underwriter a written memorandum detailing those
states in which Public Securities may be traded in non-issuer transactions under
the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum")
and to update such memorandum and deliver same to the Underwriter on a timely
basis, but in any event on the Effective Date, and on the first day of every
calendar quarter thereafter. The Company shall pay to the Underwriter's legal
counsel a one-time fee of $5,000 for such services at the Closing.
3.11 [Reserved.]
3.12 DISQUALIFICATION OF FORM S-1 (OR OTHER APPROPRIATE FORM). For a
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration of the Warrants and the
Underwriter's Warrants and the securities issuable upon exercise of those
securities under the Act.
3.13 PAYMENT OF EXPENSES.
3.13.1 GENERAL EXPENSES. The Company hereby agrees to pay on
each of the Closing Date and the Option Closing Date, if any, to the extent not
paid at Closing Date, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration Statement,
the Prospectus and the Preliminary Prospectuses and the printing and mailing of
this Agreement and related documents, including the cost of all copies thereof
and any amendments thereof or supplements thereto supplied to the Underwriter in
quantities as may be required by the Underwriter, (ii) the printing, engraving,
issuance and delivery of the shares of Common Stock, the Warrants and the
Underwriter's Purchase Option, including any transfer or other taxes payable
thereon, (iii) the qualification of the Public Securities under state or foreign
securities or Blue Sky laws, including the filing fees under such Blue Sky laws,
the costs of printing and mailing the "Preliminary Blue Sky Memorandum," and all
amendments and supplements thereto, fees up to an aggregate of $35,000 and
disbursements of the Underwriter's counsel, and fees and disbursements of local
counsel, if any, retained for such purpose, and a one-time fee of $5,000 payable
to the Underwriter's counsel for the preparation of the Secondary Market Trading
Memorandum, (v) costs associated with applications for assignments of a rating
of the Public Securities by qualified rating agencies, (v) filing fees, costs
and expenses (including fees and disbursements for the Underwriter's counsel)
incurred in registering the offering with the NASD, (vi) costs of placing
"tombstone" advertisements in THE WALL STREET JOURNAL, THE NEW YORK TIMES and
BARRON'S and a third publication which may
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be selected by the Underwriter, (vii) fees and disbursements of the transfer and
warrant agent, (viii) the reasonable costs associated with holding "due
diligence" meetings arranged by the Underwriter; (ix) the preparation, binding
and delivery of five sets of transaction "bibles," in form and style
satisfactory to the Underwriter and transaction lucite cubes or similar
commemorative items in a style and quantity as reasonably requested by the
Underwriter, (x) any listing of the Public Securities on Nasdaq SmallCap or
Nasdaq National Market, as the case may be, and any securities exchange or any
listing in Standard & Poor's, and (xi) all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section 3.15.1. Since an important part of
the public offering process is for the Company to appropriately and accurately
describe both the background of the principals of the Company and the Company's
competitive position in its industry, the Company has engaged and will pay for
an investigative search firm of the Underwriter's choice to conduct an
investigation of principals of the Company mutually selected by the Underwriter
and the Company the fees of which shall not exceed $15,000. The Underwriter may
deduct from the net proceeds of the offering payable to the Company on the
Closing Date, or the Option Closing Date, if any, the expenses set forth herein
to be paid by the Company to the Underwriter and/or to third parties.
3.13.2 NON-ACCOUNTABLE EXPENSES. The Company further agrees
that, in addition to the expenses payable pursuant to Section 3.15.1, it will
pay to the Underwriter a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Public Securities, of which $50,000 has been paid to date, and the Company will
pay the balance on the Closing Date and any additional monies owed attributable
to the Option Securities or otherwise on the Option Closing Date by certified or
bank cashier's check or, at the election of the Underwriter, by deduction from
the proceeds of the offering contemplated herein. If the offering contemplated
by this Agreement is not consummated for any reason whatsoever then the
following provisions shall apply: The Company's liability for payment to the
Underwriter of the non-accountable expense allowance shall be equal to the sum
of the Underwriter's actual out-of-pocket expenses (including, but not limited
to, counsel fees, "road-show" and due diligence expenses). The Underwriter
shall retain such part of the non-accountable expense allowance previously paid
as shall equal such actual out-of-pocket expenses. If the amount previously
paid is insufficient to cover such actual out-of-pocket expenses, the Company
shall remain liable for and promptly pay any other actual out-of-pocket
expenses. If the amount previously paid exceeds the amount of actual
out-of-pocket expenses, the Underwriter shall promptly remit to the Company any
such excess.
3.14 APPLICATION OF NET PROCEEDS. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "USE OF PROCEEDS" in the Prospectus.
The Company hereby agrees that, without the express prior written consent of the
Underwriter, the Company will not apply any net proceeds from the offering to
pay (i) any debt for borrowed funds, (ii) any debt or obligation owed to any
Insider.
3.15 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section
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11(a) of the Act) covering a period of at least twelve consecutive months
beginning after the Effective Date.
3.16 KEY PERSON LIFE INSURANCE. The Company will maintain key person
life insurance in an amount no less than $1 million on the life of Jeffrey
Conrad and pay the annual premium naming the Company as the sole beneficiary
thereof for at least three years following the Effective Date.
3.17 STABILIZATION. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.18 INTERNAL CONTROLS. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.19 [Reserved.]
3.20 TRANSFER AGENT. For a period of five years from the Effective
Date, the Company shall retain a transfer agent for the Common Stock and
Warrants acceptable to the Underwriter. Continental Stock Transfer & Trust
Company is acceptable to the Company.
3.21 SALE OF SECURITIES. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of 24 months following the Effective
Date without obtaining the prior written consent of the Underwriter.
3.22 EXERCISE PRICE OF OPTIONS/WARRANTS. The Company will not grant any
option pursuant to the Company's 1994 Stock Option Plan at an exercise price
less than the greater of $5.00 per share or the fair market value of the Common
Stock on the date of the grant.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:
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4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriter.
4.1.2 NASD CLEARANCE. By the Effective Date, the Underwriter
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriter as described in the Registration
Statement.
4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 CLOSING DATE OPINION OF COUNSEL. On the Closing Date, the
Underwriter shall have received the favorable opinion of Olshan Grundman Frome &
Rosenzweig, L.L.P., counsel to the Company, dated the Closing Date, addressed to
the Underwriter and in form and substance satisfactory to Graubard Mollen &
Miller, counsel to the Underwriter, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which it owns or leases any
real property or the character of its operations requires such qualification or
licensing, except where the failure to qualify would not have a material adverse
effect on the Company.
(ii) The Company has all requisite corporate power and
authority, and has all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental or regulatory officials
and bodies to own or lease its properties and conduct its business as described
in the Prospectus, and the Company is and has been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates and
permits and all federal, state and local laws, rules and regulations. The
Company has all corporate power and authority to enter into this Agreement and
to carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained. No consents, approvals, authorizations or orders of, and no filing
with any court or governmental agency or body (other than such as may be
required under the Act and applicable Blue Sky laws), is required for the valid
authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement,
the Warrant Agreement, the Warrants, the Employment Agreements with Jean E.
Reynolds and Jeffrey
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Conrad, the Underwriter's Purchase Option, and as contemplated by the Prospectus
or if so required, all such authorizations, approvals, consents, orders,
registrations, licenses and permits have been duly obtained and are in full
force and effect and have been disclosed to the Underwriter.
(iii) All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the statutory
preemptive rights of any holders of any security of the Company or, to the best
of such counsel's knowledge, similar contractual rights granted by the Company.
The outstanding options and warrants to purchase shares of Common Stock
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms. The offers and sales of the outstanding Common
Stock and options and warrants to purchase shares of Common Stock were at all
relevant times either registered under the Act and the applicable state
securities or Blue Sky Laws or exempt from such registration requirements. The
authorized and outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when
issued and paid for, will be validly issued, fully paid and non-assessable; the
holders thereof are not and will not be subject to personal liability by reason
of being such holders. The Securities are not and will not be subject to the
preemptive rights of any holders of any security of the Company or, to the best
of such counsel's knowledge after due inquiry, similar contractual rights
granted by the Company. All corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriter's Purchase Option, the Underwriter's
Warrants and the Warrants will constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and payment therefor, the
number and type of securities of the Company called for thereby and such
Warrants, the Underwriter's Purchase Option, and the Underwriter's Warrants,
when issued, in each case, will be enforceable against the Company in accordance
with their respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
(v) To the best of such counsel's knowledge, after due
inquiry, except as set forth in the Prospectus, no holders of any securities of
the Company or of any options, warrants or securities of the Company exercisable
for or convertible or exchangeable into securities of the Company have the right
to require the Company to register any such securities of the Company under the
Act or to include any such securities in a registration statement to be filed by
the Company.
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(vi) To the best of such counsel's knowledge, after due
inquiry, the shares of Common Stock and the Warrants are eligible for quotation
on Nasdaq SmallCap Market and have been approved for listing on the BSE.
(vii) This Agreement, the Underwriter's Purchase Option, the
Warrants and the Warrant Agreement, have each been duly and validly authorized
and, when executed and delivered by the Company, will constitute valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except (a) as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (b) as enforceability of any indemnification
provisions may be limited under the federal and state securities laws, and (c)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the Company
of this Agreement, the Underwriter's Purchase Option, the Warrants and the
Warrant Agreement, the issuance and sale of the Securities, the consummation of
the transactions contemplated hereby and thereby and the compliance by the
Company with the terms and provisions hereof and thereof, do not and will not,
with or without the giving of notice or the lapse of time, or both, (a) conflict
with, or result in a breach of, any of the terms or provisions of, or constitute
a default under, or result in the creation or modification of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company pursuant to the terms of, any material mortgage, deed of trust, note,
indenture, loan, contract, commitment or other material agreement or instrument,
to which the Company is a party or by which the Company or any of its properties
or assets may be bound, (b) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company, (c) violate any
statute or any judgment, order or decree, rule or regulation applicable to the
Company of any court, domestic or foreign, or of any federal, state or other
regulatory authority or other governmental body having jurisdiction over the
Company, its properties or assets, or (d) have a material effect on any permit,
certification, registration, approval, consent, license or franchise of the
Company.
(ix) The Registration Statement, each Preliminary Prospectus
and the Prospectus and any post-effective amendments or supplements thereto
(other than the financial statements included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other
securities issued or issuable by the Company conform in all respects to the
description thereof contained in the Registration Statement and the Prospectus.
The statements in the Prospectus under "Business," "Management," "Certain
Transactions," "Risk Factors," Principal Stockholders," "Selling Security
Holders," "Description of Securities" and "Shares Eligible for Future Sale,"
have been reviewed by such counsel, and insofar as they refer to statements of
law, descriptions of statutes, licenses, rules or regulations or legal
conclusions are correct in all material respects. No statute or regulation or
legal or governmental proceeding required to be described in the Prospectus is
not described as required, nor are any contracts or documents of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement not so described or filed as
required.
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(x) Counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Underwriter at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed and although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise set
forth in this opinion), no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or the
Prospectus nor any amendment or supplement thereto, as of the date of such
opinion, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act,
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the Act
or applicable state securities laws.
(xii) To the best of such counsel's knowledge, the Company has
good and marketable title to, or valid and enforceable leasehold estates in, all
items of real and personal property (tangible and intangible) stated in the
Prospectus to be owned or leased by it, free and clear of all liens,
encumbrances, claims, security interests, defects and restrictions of any
material nature whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable.
(xiii) To the best of such counsel's knowledge, no default
exists in the due performance and observance of any term, covenant or condition
of any license, contract, indenture, mortgage, deed of trust, note, loan or
credit agreement, or any other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which any of the
properties or assets of the Company is subject, except for such defaults which,
singly or in the aggregate, would not have a material adverse effect on the
Company. To the best of such counsel's knowledge, the Company is not in
violation of any term or provision of its Certificate of Incorporation or
By-Laws or of any franchise, license, permit, or of any applicable law, rule or
regulation, or of any judgment or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business, except for such violations which, singly or in the
aggregate, would not have a material adverse effect on the Company.
(xiv) To the best of such counsel's knowledge after due
inquiry, the Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, other than as
described in the Prospectus, the requisite licenses or other rights to use all
Intangibles and other rights necessary to conduct its business (including,
without limitation, any such licenses or rights described in the Prospectus as
being licensed to, owned or possessed by the Company), and there is no claim or
action by any person pertaining to, or proceeding, pending or to the best of
such counsel's knowledge after due inquiry threatened, which challenges the
exclusive rights of the Company with respect to any Intangibles used in the
conduct of the its
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business (including without limitation any such licenses or rights described in
the Prospectus as being owned or possessed by the Company); to the best of such
counsel's knowledge after due inquiry, the Company's current products, services
and processes do not infringe on any Intangibles held by third parties except as
discussed in the Prospectus; and the Company's Intangibles which have been
registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect.
(xv) To the best of such counsel's knowledge, after due
inquiry, except as described in the Prospectus, the Company does not own an
interest in any corporation, partnership, joint venture, trust or other business
entity.
(xvi) To the best of such counsel's knowledge, after due
inquiry except as set forth in the Prospectus, there is no action, suit or
proceeding before or by any court of governmental agency or body, domestic or
foreign, now pending, or threatened against the Company, which might result in
any material and adverse change in the condition (financial or otherwise),
business or prospects of the Company, or might materially and adversely affect
the properties or assets thereof.
Unless the context clearly indicates otherwise, the term
"Company" as used in this Section 4.2.1 shall include each subsidiary of the
Company. The opinion of counsel for the Company and any opinion relied upon by
such counsel for the Company shall include a statement to the effect that it may
be relied upon by counsel for the Underwriter in its opinion delivered to the
Underwriter.
4.2.2 OPTION CLOSING DATE OPINION OF COUNSEL. On the Option
Closing Date, if any, the Underwriter shall have received the favorable opinion
of Olshan Grundman Frome & Rosenzweig, L.L.P., counsel to the Company, dated
the Option Closing Date, addressed to the Underwriter and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Underwriter, confirming
as of the Option Closing Date, the statements made by Olshan Grundman Frome &
Rosenzweig, L.L.P. in their opinion delivered on the Effective Date.
4.2.3 RELIANCE. In rendering such opinion, such counsel may
rely (i) as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the extent
such counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably satisfactory
to Underwriter's counsel) of other counsel reasonably acceptable to
Underwriter's counsel, familiar with the applicable laws, and (ii) as to matters
of fact, to the extent they deem proper, on certificates or other written
statements of officers of departments of various jurisdiction having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to Underwriter's counsel if requested. The opinion of counsel for the Company
shall include a statement to the effect that it may be relied upon by counsel
for the Underwriter in its opinion delivered to the Underwriter.
4.2.4 SECONDARY MARKET TRADING MEMORANDUM. On the Effective
Date the Underwriter shall have received the written Secondary Market Trading
Memorandum.
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4.3 COLD COMFORT LETTER. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriter and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the Underwriter, from KPMG Peat Marwick LLP dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:
(i) Confirming that they are independent accountants with respect
to the Company within the meaning of the Act and the applicable Regulations;
(ii) Stating that in their opinion the financial statements of the
Company included in the Registration Statement and Prospectus comply as to form
in all material respects with the applicable accounting requirements of the Act
and the published Regulations thereunder;
(iii) Stating that, based on the performance of procedures
specified by the American Institute of Certified Public Accountants for a review
of the latest available unaudited interim financial statements of the Company
(as described in SAS No.71 Interim Financial Information), with an indication of
the date of the latest available unaudited interim financial statements, a
reading of the latest available minutes of the stockholders and board of
directors and the various committees of the board of directors, consultations
with officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (a) the unaudited
financial statements of the Company included in the Registration Statement do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Regulations or any material modification should
be made to the unaudited interim financial statements included in the
Registration Statement for them to be in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the Registration
Statement, (b) at a date not later than five days prior to the Effective Date,
Closing Date or Option Closing Date, as the case may be, there was any change in
the capital stock or long-term debt of the Company, or any decrease in the
stockholders' equity of the Company as compared with amounts shown in the July
31, 1996 balance sheet included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there was any
decrease, setting forth the amount of such decrease, and (c) during the period
from August 1, 1996 to a specified date not later than five days prior to the
Effective Date, Closing Date or Option Closing Date, as the case may be, there
was any decrease in revenues, net earnings or net earnings per share of Common
Stock, in each case as compared with the corresponding period in the preceding
year and as compared with the corresponding period in the preceding quarter,
other than as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
(iv) Setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of the Company (including a break-down
of commercial papers and notes payable to banks);
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(v) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, and work sheets,
of the Company with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) Stating that they have not during the immediately preceding
five year period brought to the attention of the Company's management any
reportable condition related to internal structure, design or operation as
defined in the Statement on Auditing Standards No. 60 -- "Communication of
Internal Control Structure Related Matters Noted in an Audit," in the Company's
internal controls; and
(vii) Statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 OFFICERS' CERTIFICATES.
4.4.1 OFFICERS' CERTIFICATE. At each of the Closing Date and
the Option Closing Date, if any, the Underwriter shall have received a
certificate of the Company signed by the Chairman of the Board or the President
and the Secretary of the Company, dated the Closing Date or the Option Closing
Date, as the case may be, respectively, to the effect that the Company has
performed all covenants and complied with all conditions required by this
Agreement to be performed or complied with by the Company prior to and as of the
Closing Date, or the Option Closing Date, as the case may be, and that the
conditions set forth in Section 4.5 hereof have been satisfied as of such date
and that, as of Closing Date and the Option Closing Date, as the case may be,
the representations and warranties of the Company set forth in Section 2 hereof
are true and correct. In addition, the Underwriter will have received such
other and further certificates of officers of the Company as the Underwriter may
reasonably request, including but not limited to a certificate confirming the
responses to state examiners made in connection with the state blue sky filings.
4.4.2 SECRETARY'S CERTIFICATE. At each of the Closing Date and
the Option Closing Date, if any, the Underwriter shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and the NASD concerning
inclusion on Nasdaq, (v) all correspondence between the Company or its counsel
and the BSE concerning listing on the BSE, and (vi) as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
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4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and the
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.6 DELIVERY OF AGREEMENTS. The Company has delivered to the Underwriter
an executed copy of the Underwriter's Purchase Option.
4.7 OPINION OF COUNSEL FOR THE UNDERWRITER. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the Underwriter, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
5. INDEMNIFICATION.
5.1 INDEMNIFICATION OF THE UNDERWRITER.
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5.1.1 GENERAL. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriter, its directors,
officers, agents and employees and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, whether arising out
of any action between the Underwriter and the Company or between the Underwriter
and any third-party or otherwise) to which they or any of them may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
(i) any Preliminary Prospectus, the Registration Statement or the Prospectus (as
from time to time each may be amended and supplemented); (ii) in any
post-effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or issuable
upon exercise of the Underwriter's Purchase Option; or (iii) any application or
other document or written communication (in this Section 5 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, Nasdaq or any securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in any application, as the case may be. The Company agrees promptly to notify
the Underwriter of the commencement of any litigation or proceedings against the
Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus.
5.1.2 PROCEDURE. If any action is brought against the
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, the Underwriter shall promptly
notify the Company in writing of the institution of such action and the Company
shall assume the defense of such action, including the employment and fees of
counsel (subject to the approval of the Underwriter) and payment of actual
expenses. The Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of the Underwriter or such controlling person
unless (i) the employment of such counsel shall have been authorized in writing
by the Company in connection with the defense of such action, or (ii) the
Company shall not have employed counsel to have charge of the defense of such
action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to the Company (in which case the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys selected by the Underwriter
and/or controlling person shall be borne by the Company. Notwithstanding
anything to the contrary contained herein, if the Underwriter or controlling
person shall assume the defense of such action as provided above, the Company
shall have the right to
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approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.
5.2 INDEMNIFICATION OF THE COMPANY. The Underwriter agrees to indemnify
and hold harmless the Company against any and all loss, liability, claim, damage
and expense described in the foregoing indemnity from the Company to the
Underwriter, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions directly relating to the
transactions effected by the Underwriter in connection with this offering made
in any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any application in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based on
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the Underwriter by the
provisions of Section 5.1.2.
5.3 CONTRIBUTION.
5.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriter shall
contribute to the aggregate losses, liabilities, claims, damages and expenses of
the nature contemplated by said indemnity agreement incurred by the Company and
the Underwriter, as incurred, in such proportions that the Underwriter is
responsible for that portion represented by the percentage that the underwriting
discount appearing on the cover page of the Prospectus bears to the initial
offering price appearing thereon and the Company is responsible for the balance;
provided, that, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 5.3, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Public Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of the Underwriter, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as the Underwriter.
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5.3.2 CONTRIBUTION PROCEDURE. Within fifteen days after receipt
by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by such party without the written consent of such
contributing party. The contribution provisions contained in this Section are
intended to supersede, to the extent permitted by law, any right to contribution
under the Act, the Exchange Act or otherwise available.
6.
6.0.1 OUTSTANDING WARRANTS ONLY. The Company understands that
the redemption rights provided for by this Section 6 apply only to outstanding
Warrants. To the extent a person holds rights to purchase Warrants, such
purchase rights shall not be extinguished by redemption. However, once such
purchase rights are exercised, the Company may redeem the Warrants issued upon
such exercise provided that the criteria for redemption is met. The provisions
of this Section 6.4 may not be modified, amended or deleted without the prior
written consent of the Underwriter.
7. ADDITIONAL COVENANTS.
7.1 BOARD DESIGNEE. For a period of three (3) years from the Effective
Date, the Underwriter shall have the right to designate a person to serve on the
Company's Board of Directors, such person to be subject to the Company's
approval, which shall not be unreasonably withheld. The Company will appoint
such designee to the Board promptly after the Underwriter designates such person
and shall recommend and use its best efforts to have such designee elected at
each annual meeting held after such appointment during the three-year period.
Such designee shall receive no more or less compensation than is paid to other
non-management directors of the Company. To the extent permitted by law, the
Company will agree to indemnify the Underwriter and its designee for the actions
of such designee as a director of the Company. In the event the Company
maintains a liability insurance policy affording coverage for the acts of its
officers and directors, it will, if possible, include each of the Underwriter
and its designee as an insured under such policy. If the Underwriter does not
exercise its option to designate a member for election to the Company's Board of
Directors, the Underwriter shall nevertheless have the right to send a
representative (who need not be the same individual from meeting to meeting) to
observe each meeting of the Board of Directors. Such designee or
representative, as the case may be, shall be entitled to receive reimbursement
for all reasonable costs incurred in attending such meetings, including, but not
limited to, food, lodging and transportation. The Company agrees
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to give the Underwriter written notice of each such meeting and to provide the
Underwriter with an agenda and minutes of the meeting no later than it gives
such notice and provides such items to the other directors.
7.2 [Reserved.]
7.3 RULE 144 SALES. During the three-year period following the
Effective Date, the Underwriter shall have the right to purchase for the
Underwriter's account or to sell for the account of the Insiders any securities
sold pursuant to Rule 144 under the Act. Each of the Insiders ("144 Sellers")
will agree to consult with the Underwriter with regard to any such sales and
will offer the Underwriter the exclusive opportunity to purchase or sell such
securities on terms at least as favorable to the 144 Sellers as they can secure
elsewhere. If the Underwriter fails to accept in writing any such proposal for
sale by the 144 Sellers within one business day after receipt of a notice
containing such proposal, then the Underwriter shall have no claim or right with
respect to any such sales contained in any such notice. If, thereafter, such
proposal is modified in any material respect, the 144 Sellers shall adopt the
same procedure as with respect to the original proposal.
7.4 PRESS RELEASES. The Company will not issue a press release or
engage in any other publicity until 25 days after the Effective Date without the
Underwriter's prior written consent.
7.5 FORM S-8 OR ANY SIMILAR FORM. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without the Underwriter's written consent.
7.6 COMPENSATION AND OTHER ARRANGEMENTS. The Company hereby agrees
that as of the Effective Date, (i) it shall have no less than two directors who
have no affiliation or relationship with the Company other than as directors;
and (ii) all compensation and other arrangements between the Company and its
officers, directors and affiliates shall be approved by the Audit Committee of
the Company's Board of Directors, a majority of the members of which shall have
no affiliation or other relationship with the Company other than as directors.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriter and Company, including the indemnity agreements contained in Section
5 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriter until the earlier of
the expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if any,
at which time the representations, warranties and agreements shall terminate and
be of no further force and effect.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
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9.1 EFFECTIVE DATE. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 TERMINATION. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will in
the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the American
Stock Exchange, The Boston Stock Exchange or in the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been fixed,
or maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction, or (iii) if the United States shall
have become involved in a war or major hostilities, or (iv) if a banking
moratorium has been declared by a New York State or federal authority, or (v) if
a moratorium on foreign exchange trading has been declared which materially
adversely impacts the United States securities market, or (vi) if the Company
shall have sustained a material loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in your opinion, make it
inadvisable to proceed with the delivery of the Securities, or (vii) if Jean E.
Reynolds or Jeffrey Conrad shall no longer serve the Company in her/his present
capacity, or (viii) if the Company has breached any of its representations,
warranties or obligations hereunder, or (ix) if the Underwriter shall have
become aware after the date hereof of such a material adverse change in the
condition (financial or otherwise), business, or prospects of the Company, or
such adverse material change in general market conditions as in the
Underwriter's judgment would make it impracticable to proceed with the offering,
sale and/or delivery of the Securities or to enforce contracts made by the
Underwriter for the sale of the Securities.
9.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 EXPENSES. In the event that this Agreement shall not be carried
out for any reason whatsoever, within the time specified herein or any
extensions thereof pursuant to the terms herein, the obligations of the Company
to pay the expenses related to the transactions contemplated herein shall be
governed by Section 3.15 hereof.
9.5 INDEMNIFICATION. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. MISCELLANEOUS.
10.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed:
If to the Underwriter: GKN Securities Corp.
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61 Broadway
New York, New York 10006
Telephone: (212) 509-3800
Telefax: (212) 425-5861
Att: David M. Nussbaum
Chairman
With a copy to: Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Telefax: (212) 818-8881
Att: David Alan Miller, Esq.
If to the Company: The Millbrook Press, Inc.
2 Old New Milford Road
Brookfield, CT 06804
Telephone: (203) 740-2220
Telefax: (203) 740-2526
Att: Mr. Jeffrey Conrad
President
With a copy to: Olshan Grundman Frome & Rosenzweig, L.L.P.
505 Park Avenue
New York, New York 10022
Telephone: (212) 753-7200
Telefax: (212) 755-1467
Att: Kenneth A. Schlesinger, Esq.
10.2 HEADINGS. The headings contained herein are for the sole purpose
of convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 AMENDMENT. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this
Agreement and the Agency Agreement, dated July 26, 1996, between the Underwriter
and the Company), constitute the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersede all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
10.5 BINDING EFFECT. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns,
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and no other person shall have or be construed to have any legal or equitable
right, remedy or claim under or in respect of or by virtue of this Agreement or
any provisions herein contained.
10.6 GOVERNING LAW, JURISDICTION. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out of, relating in any way to
this Agreement shall be brought and enforced in the courts of the State of New
York or the United States District Court for the Southern District of New York,
and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenient forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from the
other party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
10.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement, and shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
10.8 WAIVER, ETC. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this Agreement.
No waiver of any breach, non-compliance or non-fulfillment of any of the
provisions of this Agreement shall be effective unless set forth in a written
instrument executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
THE MILLBROOK PRESS INC.
By: _____________________________
33
<PAGE>
Name: Jeffrey Conrad
Title: President
Accepted as of the date first
above written.
New York, New York
GKN SECURITIES CORP.
By:___________________________________
Name: Deborah Schondorf Novick
Title: Executive Vice President
34
<PAGE>
EXHIBIT 3.1
State of Delaware
Office of the Secretary of State
--------------------------------
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "MILLBROOK ACQUISITION CORP.", CHANGING ITS NAME FROM "MILLBROOK
ACQUISITION CORP." TO "THE MILLBROOK PRESS INC.", FILED IN THIS OFFICE ON THE
EIGHTH DAY OF MARCH, A.D. 1994, AT 4:01 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL] William T. Quillen
--------------------------------------
William T. Quillen, Secretary of State
2375531 8100 AUTHENTICATION: 7051851
944036351 DATE: 03-09-94
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
MILLBROOK ACQUISITION CORP.
Millbrook Acquisition Corp. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"GCL"), certifies as follows:
1. Name. The name of the corporation is MILLBROOK ACQUISITION CORP.
2. The date of filing of the Corporation's certificate of incorporation
(the "Certificate of Incorporation") with the Secretary of State of the State of
Delaware was February 3, 1994.
3. Address; Registered Agent. The address of the Corporation's registered
office is 1209 Orange Street, Wilmington, Delaware 19801; and its registered
agent at such address is The Corporation Trust Company.
4. Purpose. The purpose of the Corporation is to engage in, carry on, and
conduct any lawful act or activity for which corporations may be organized under
the GCL.
5. The Certificate of Incorporation is amended as follows:
(a) Paragraph 1 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
<PAGE>
"1. The name of the Corporation is The Millbrook Press Inc.
(the "Corporation")"
(b) Paragraph 4 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
"4. Authorized Capital Stock. The total number of shares of
stock which the Corporation shall have the authority to issue is
five million and ten thousand (5,010,000), five million (5,000,000)
of which shall be shares of common stock, $.01 par value per share
(the "Common Stock"), and ten thousand (10,000) of which shall be
shares of preferred stock, $.01 par value per share (the "Preferred
Stock")."
(c) Paragraph 6 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
"6. Certificate Provision Authorizing Preferred Stock. The
Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of Paragraph 4 hereof, to provide for the
issuance of the shares of Preferred Stock in series, and by filing a
certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included
in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and the
qualifications, limitations, or restrictions thereof.
2
<PAGE>
The authority of the Board of Directors with respect to each
series shall include, but shall not be limited to, the determination
of the following
(a) The number of shares constituting each series and the
distinctive designation of each series;
(b) The dividend rate on the shares of each series, the manner
in which dividends shall be paid, whether dividends shall be
cumulative, and if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends
on shares of each series;
(c) Whether each series shall have voting rights in addition
to the voting rights provided by law, and if so, the terms of
such voting rights;
(d) Whether each series shall have conversion privileges, and
if so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events
as the Board of Directors shall determine;
(e) Whether or not the shares of each series shall be
redeemable, and if so, the terms and conditions of such
redemption, including the date or dates upon or after which
they shall be redeemable, and the amount per share payable in
case of
3
<PAGE>
redemption, which amount may vary under different conditions
and at different redemption dates;
(f) Whether each series shall have a sinking fund for the
redemption or purchase of shares of each such series, and if
so, the terms and amount of such sinking fund;
(g) The rights of the shares of each series in the event of
voluntary or involuntary liquidation, dissolution, or winding
up of the Corporation, and the relative rights or priority, if
any, of payment of shares of each such series; and
(h) Any other relative rights, preferences, and limitations of
each such series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be
paid or declared and set apart for payment on the shares of Common
Stock with respect to the same dividend period."
(d) Paragraph 7 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
"7. No Preemptive Rights; Rights to Purchase Certain
Securities. No holder of shares of Common Stock or Preferred
Stock of the Corporation shall be entitled as of right to
subscribe for, purchase, or receive any new or additional
shares of any class, whether now or hereafter authorized, or
nay notes, bonds, debentures, or other securities convertible
into, or
4
<PAGE>
carrying options or warrants to purchase, shares of any class;
provided, however, all such new or additional shares of any
class, or notes, bonds, debentures, or other securities
convertible into, or carrying options or warrants to purchase,
shares of any class may be issued or disposed of by the Board
of Directors to such persons and on such terms as it, in its
absolute discretion, may deem advisable.
(e) Paragraph 8 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that is shall now read as follows:
"8. Personal Liability. A director of the Corporation shall
not be personally liable to the Corporation or its stock
holders for monetary damages for breach of fiduciary duty as a
director; provided, however, the foregoing shall not eliminate
or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Corporation or its
stockholders, (b) for any act or omission not in good faith or
which involves intentional misconduct or a knowing violation
of law, (c) under Section 174 of the GCL, or (d) for any
transaction from which the director derived an improper
personal benefit. Any repeal or modification of this Paragraph
8 by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the
Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior
to such repeal or modification."
5
<PAGE>
(f) Paragraph 9 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
"9. Indemnification. The Corporation shall have the power to
indemnify its officers, directors, employees and agents, and
such other persons as may be designated by the Board of
Directors of the Corporation or as may be provided in its
By-laws, to the fullest extent permitted by the laws of the
State of Delaware."
(g) Paragraph 13 of the Certificate of Incorporation is hereby
amended and substituted in its entirety so that it shall now read as follows:
"13. Amendment to By-laws. In furtherance of and not in
limitation of the powers conferred by the GCL, the Board of
Directors is expressly authorized to adopt, make, alter,
amend, or repeal the By-laws of the Corporation."
(h) New Paragraphs 14 and 15 are hereby added to the end of the
Certificate of Incorporation and shall read as follows:
"14. Construction of Terms. The objects, purposes and powers
specified in any clause or paragraph of this Certificate of
Incorporation shall be in no way limited or restricted by
reference to or inference from the terms of any other clause
or paragraph of this Certificate of
6
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "MILLBROOK ACQUISITION CORP.", FILED IN THIS OFFICE ON THE
THIRD DAY OF FEBRUARY, A.D. 1994, AT 4 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL] /s/ William T. Quillen
--------------------------------------
William T. Quillen, Secretary of State
2375531 8100 AUTHENTICATION: 7019874
944014254 DATE: 02-04-94
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MILLBROOK ACQUISITION CORP.
The undersigned incorporator, a natural person, in order to form a
corporation under the General Corporation Law of the State of Delaware (the
"GCL"), certifies as follows:
1. Name. The name of the corporation is MILLBROOK ACQUISITION CORP. (the
"Corporation").
2. Address; Registered Agent. The address of the Corporation's registered
office is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801;
and its registered agent at such address is The Corporation Trust Company.
3. Purpose. The purpose of the Corporation is to engage in, carry on, and
conduct any lawful act or activity for which corporations may be organized under
the GCL.
4. Authorized Capital Stock. The total number of shares of stock which the
Corporation shall have authority to issue is two million and sixty thousand
(2,060,000), two million and fifty thousand (2,050,000) of which shall be shares
of common stock, $.01 par value per share (the "Common Stock"), and ten thousand
(10,000) of which shall be shares of blank check preferred stock, $.01 par value
per share (the "Blank Check Preferred Stock").
5. Name and Address of Incorporator. The name and mailing address of the
incorporator is: Robert Londin, Morrison Cohen Singer & Weinstein, 750 Lexington
Avenue, New York, New York 10022.
6. Certificate Provision Authorizing "Blank Check" Preferred Stock. The
Board of Directors is authorized, subject to limitations prescribed by law and
the provisions of
<PAGE>
Paragraph 4 hereof, to provide for the issuance of the shares of preferred stock
(the "Preferred Stock") in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences, and rights of the shares of each such series and the
qualifications, limitations, or restrictions thereof.
The authority of the Board with respect to each series shall include, but
shall not be limited to, the determination of the following:
(a) The number of shares constituting each series and the distinctive
designation of each series;
(b) The dividend rate on the shares of each series, the manner in which
dividends shall be paid, whether dividends shall be cumulative, and if so, from
which date or dates, and the relative rights of priority, if any, of payment of
dividends on shares of each series;
(c) Whether each series shall have voting rights in addition to the voting
rights provided by law, and if so, the terms of such voting rights;
(d) Whether each series shall have conversion privileges, and if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of each series shall be redeemable, and if
so, the terms and conditions of such redemption, including the date or date upon
or after which they shall be redeemable, and the amount per share payable in
case of redemption, which amount may vary under different conditions and at
different redemption dates;
2
<PAGE>
(f) Whether each series shall have a sinking fund for the redemption or
purchase of each such series, and if so, the terms and amount of such sinking
fund;
(g) The rights of the shares of each series in the event of voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation, and the
relative rights or priority, if any, of payment of shares of each such series;
(h) Any other relative rights, preferences, and limitations of each such
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the shares of Common Stock with respect to
the same dividends period.
If upon any voluntary or involuntary liquidation, dissolution, or winding
up of the Corporation, the assets available for distribution to holders of
shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
7. No Preemptive Rights; Rights to Purchase Certain Securities. No holder
of shares of Common Stock or Blank Check Preferred Stock of the Corporation
shall be entitled as of right to subscribe for, purchase, or receive any new or
additional shares of any class, whether now or hereafter authorized, or any
notes, bonds, debentures, or other securities convertible into, or carrying
options to warrants to purchase, shares of any class may
3
<PAGE>
be issued or disposed of by the Board of Directors to such persons and on such
terms as it, in its absolute discretion, may deem advisable.
8. Personal Liability. The personal liability of the directors of the
Corporation is hereby eliminated to the fullest extent permitted by Paragraph
(7) of subsection (b) of Section 102 of the GCL, as the same may be amended and
supplemented.
9. Indemnification. The Corporation shall be obligated to indemnify in
accordance with the provisions of this Paragraph 9:
(a) Obligations to Indemnify. To the fullest extent authorized by the
GCL, the Corporation shall indemnify, hold harmless, and advance expenses to
each person (and, where applicable, and whether the person died testate or
intestate, the personal representative of the person, the estate of such person,
and such person's legatees and heirs) who is or has served as director of or
officer of (i) the Corporation; (ii) any predecessor of the Corporation; or
(iii) any other enterprise at the request of the Corporation or of any
predecessor of the Corporation, who was or is made a party to, or is threatened
to by made a party to, or is involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (collectively, a
"Proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director or officer of the
Corporation or, at the request of the Corporation, is or was serving as a
director, officer, employee, or agent of another corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as a director, officer, employee, or
agent or in any other capacity while serving as a director, officer, employee,
or agent. Such obligation to indemnify and hold
4
<PAGE>
harmless shall cover all recoverable expenses, liabilities, and losses
(including, without limitation, attorneys' fees and disbursements, judgments,
fines, ERISA excise taxes, costs of investigation or penalties and amounts paid
or to be paid in settlement) incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be an officer, director, employee, or agent shall inure to the benefit of his
or her heirs, executors, and administrators; provided, however, except as
provided in subparagraph 9(a) of this Paragraph 9, the Corporation shall
indemnify any such person seeking indemnification in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred by the Paragraph 9 shall include the
right to be paid by the Corporation the expenses incurred in defending any such
Proceeding in advance of its final disposition; provided, however, if the GCL
requires, the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer of the Corporation
(and not in any other capacity in which service was rendered by such person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a Proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this subparagraph 9(a) or otherwise.
(b) Construction and Presumption Favoring Indemnification. In
connection with each claim for indemnification, this Paragraph 9 shall be
liberally construed in favor of indemnification and there shall be a rebuttable
presumption that the Corporation shall
5
<PAGE>
bear the burden of proving by a preponderance of the evidence that the claimant
is not so entitled to indemnification.
(c) Right of Claimant to Bring Suit. If a claim under this Paragraph 9
is not paid in full by the Corporation within (30) days after a written claim
has been received by the Corporation, the claimant, at any time thereafter, may
bring suit to recover the unpaid amount of the claim, and if successful, in
whole or in part, the claimant also shall be entitled to be paid for any and all
expenses incurred in prosecuting such claim. The failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper shall not be a defense to
any such action or create a presumption that the claimant has not met the
applicable standard of conduct.
(d) Defense to Enforcement. It shall be a defense to any such action
that the claimant has not met the standards of conduct which make it permissible
for the Corporation to indemnify the claimant for the amount claimed. The burden
of proving such defense shall be on the Corporation. The defense referred to in
the first sentence of this subparagraph 9(d) shall not be available in any
action brought to enforce a claim for expense incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation.
(e) Confidentiality. Any finding by the Board of Directors,
independent legal counsel, or the shareholders that a person asserting a claim
for indemnification pursuant to this Paragraph 9 is not entitled to such
indemnification, and any information which may support such finding, shall be
held by the Board of Directors, independent legal counsel,
6
<PAGE>
and the shareholders in confidence to the extent permitted by law and shall not
be disclosed to any third party. If the Corporation, the Board of Directors, or
the shareholders are requested or required (by questions, interrogatories,
subpoena, civil investigative demand, or other process) to disclose any such
confidential information, the person or entity so requested or required shall
provide the claimant with prompt notice of each such request and shall use its
best efforts to lawfully not disclose any such confidential information,
including, without limitation, seeking a protective order at the Corporation's
expense.
(f) Contract Right. The foregoing provisions of this Paragraph 9 shall
be deemed to be a contract between the Corporation and each director and officer
who serves in such capacity at any time while this Paragraph 9 is in effect. Any
repeal or modification of this Paragraph 9 shall not impair or otherwise affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any Proceeding theretofore or thereafter brought
based, in whole or in part, upon any such state of facts.
(g) Indemnity of Others. The Board of Directors, in its discretion,
shall have the power, on behalf of the Corporation, to enter into agreements to
indemnify any person, other than a director or officer, made a party to any
Proceeding by reason of the fact that he or she or his or her testate or
intestate personal representative, legatees, or heirs is or was an employee or
agent, or otherwise acting on behalf of the Corporation or a predecessor of the
Corporation, or serving at the request of the Corporation or its predecessor, as
a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise.
7
<PAGE>
(h) Non-Exclusivity. The rights of indemnification and advancement of
expenses provided by this Paragraph 9 shall not be deemed exclusive of any
rights not provided by this Paragraph 9 to which any director or officer may
otherwise be entitled.
(i) Severability. If for any reason a provision of this Paragraph 9
shall be deemed invalid or unenforceable, the Corporation shall remain obligated
to indemnify and advance expenses pursuant to all those provisions of this
Paragraph 9 which are valid and enforceable.
(j) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust, or other
enterprise against any expense, liability, or loss, whether or not the
Corporation would have the power to indemnify such person against such person
against such expense, liability, or loss under the GCL.
10. Amendment; Repeal. From time to time, any of the provisions of this
Certificate may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate are granted subject to the provisions of this Paragraph 10.
11. Compromises and Arrangements. Whenever a compromise or arrangement is
proposed between the Corporation and its creditors or any class of them and/or
between the Corporation and its stockholders or any class of them, an court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for
8
<PAGE>
the Corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for the Corporation under the provisions of Section 279 of
Title 8 of the Delaware Code, order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation , as the case
may be, and also on the Corporation.
12. Election of Directors. Election of directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
13. Amendment to By-laws. In furtherance of and not in limitation of the
powers conferred by the GCL, the Board of Directors is expressly authorized to
make, alter or repeal the By-laws of the Corporation.
9
<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed on this 2nd day of
February, 1994, and the signature of the undersigned shall constitute the
affirmation and acknowledgement of the undersigned, under penalties of perjury,
that this Certificate is the act and deed of the undersigned and that the facts
stated in the Certificate are true.
/s/ Robert Londin
---------------------------
Robert Londin, Incorporator
<PAGE>
BY-LAWS
OF
MILLBROOK ACQUISITION CORP.
(A Delaware Corporation)
----------
ARTICLE 1
DEFINITIONS
As used in these By-laws, unless the context otherwise requires, the
term:
1.1 "Assistant Secretary" means an Assistant Secretary of the
Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the
Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as
amended from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Corporation" means Millbrook Acquisition Corp.
1.7 "Directors" means the directors of the Corporation.
<PAGE>
1.8 "General Corporation law" means the General Corporation Law of
the State of Delaware, as amended from time to time.
1.9 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.10 "President" means the President of the Corporation.
1.11 "Secretary" means the Secretary of the Corporation.
1.12 "Stockholders" means the stockholders of the Corporation.
1.13 "Stockholders' Agreement" means that certain Stockholders'
Agreement among the Corporation and its Stockholders.
1.14 "Treasurer" means the Treasurer of the Corporation.
1.15 Certain other capitalized terms used in these By-laws without
definitions have the meanings set forth in the Stockholders' Agreement.
ARTICLE 2
STOCKHOLDERS
2.1 Place of Meetings. Every meeting of the stockholders shall be
held at the office of the Corporation or at such other place within or without
the State of Delaware as shall be specified or fixed pursuant to the direction
of the Board in the notice of such meeting or in the waiver of notice thereof.
2
<PAGE>
2.2 Annual Meeting. A meeting of stockholders shall be held annually
for the election of directors or the transaction of other business at such hour
and on such business day in April or May as may be determined by the Board and
designated in the notice of meeting.
2.3 Deferred Meeting for Election of Directors. Etc. If the annual
meeting of stockholders for the election of directors and the transaction of
other business is not held on the date fixed in Section 2.2, the Board shall
call a meeting of stockholders for the election of directors and the transaction
of other business as soon thereafter as convenient.
2.4 Other Special Meetings. A special meeting of stockholders (other
than a special meeting for the election of directors), unless otherwise
prescribed by statute, may be called at any time by the Board. At any special
meeting of stockholders only such business may be transacted which is related to
the purpose or purposes of such meeting set forth in the notice thereof given
pursuant to Section 2.6 of the By-laws or in any waiver of notice thereof given
pursuant to Section 2.7 of the By-laws.
2.5 Fixing Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or the allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board may fix, in advance, a
date as the record date for any such determination of stockholders. Such date
shall not be more than
3
<PAGE>
sixty nor less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. If no such record date is fixed:
2.5.1 The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held;
2.5.2 The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board is necessary, shall be the day on which the first written
consent to such action is expressed;
2.5.3 The record date for determining stockholders for any purpose
other than that specified in Sections 2.5.1 and 2.5.2 shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.5, such
determination shall apply to any adjournment thereof unless the Board fixes a
mew record date for the adjourned meeting.
2.6 Notice of Meetings of Stockholders. Except as otherwise provided
in Sections 2.5 and 2.7 of the By-laws, whenever under the General Corporation
Law or the Certificate of Incorporation or the By-laws, stockholders are
required or permitted to take any action at a meeting, written notice shall be
given stating the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. A copy
of the notice of any meeting shall be given, personally or by mail, not less
than ten nor more than sixty days before the date of the meeting, to each
stockholder entitled
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to notice of or to vote at such meeting. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, with postage prepaid,
directed to the stockholder at his or her address as it appears on the records
of the Corporation. An affidavit of the Secretary or an Assistant Secretary or
of the transfer agent of the Corporation that the notice required by this
section has been given shall, in the absence of fraud, be prima facie evidence
of the facts stated therein. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken, and at
the adjourned meeting any business may be transacted that might have been
transacted at the meeting as originally called. If, however, the adjournment is
for more than thirty days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.7 Waivers of Notice. Whenever notice is required to be given to
any stockholder under any provision of the General Corporation Law or of the
certificate of incorporation or the By-laws, a written waiver thereof, signed by
the stockholder entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a stockholder at a
meeting shall constitute a waiver of notice of such meeting, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice.
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2.8 List of Stockholders. The Secretary shall prepare and make, or
cause to be prepared and made, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
2.9 Quorum of Stockholders; Adjournment. The holders of a majority
of the shares of stock entitled to vote at any meeting of stockholders, present
in person or represented by proxy, shall constitute a quorum for the transaction
of any business at such meeting. When a quorum is once present to organize a
meeting of stockholders, it shall be broken for purposes of such meeting by the
subsequent withdrawal of any stockholders necessary to constitute such quorum
prior to the adjournment of such meeting. The holders of a majority of the
shares of stock present in person or represented by proxy at any meeting of
stockholders, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place.
2.10 Voting; Proxies. Unless otherwise provided in the Certificate
of Incorporation, every stockholder of record shall be entitled at every meeting
of stockholders
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to one vote for each share of capital stock standing in his or her name on the
record of stockholders determined in accordance with Section 2.5 of the By-laws.
If the Certificate of Incorporation provides for more or less than one vote for
any share on any matter, every reference in the By-laws or the General
Corporation law to a majority or other proportion of Stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Sections 212 and 217 of the General Corporation law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in treating
the persons in whose names shares of capital stock stand on the record of
stockholders as owners thereof for all purposes. At any meeting of stockholders
at which a quorum is present, all matters, except as otherwise provided by law
or by the Certificate of Incorporation or by these By-laws or by the
Stockholders' Agreement, shall be decided by a majority of the votes cast at
such meeting by the holders of shares present in person or represented by proxy
and entitled to vote thereon. All elections of directors shall be by written
ballot unless otherwise provided in the Certificate of Incorporation. In voting
on any other question on which a vote by ballot is required by law, the voting
shall be by ballot. Each ballot shall be signed by the stockholder voting or by
his proxy, and shall state the number of shares voted. On all other questions,
the voting may be viva voce. Every stockholder entitled to vote at a meeting of
stockholders or to consent or dissent without a meeting may authorize another
person or persons to act for him by proxy. The validity and enforceability of
any proxy shall be determined in accordance with Section 212 of the General
Corporation Law.
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2.11 Selection and Duties of the Inspectors at Meetings of
Stockholders. The Board, in advance of any meeting of stockholders, may appoint
one or more inspectors to act at the meeting or any adjournment thereof. If
inspectors are not so appointed, the person presiding at such meeting may, and
on the request of any stockholder entitled to vote thereat shall, appoint one or
more inspectors. In case any person appointed fails to appear or act, the
vacancy may be filled by appointment made by the Board in advance of the meeting
or at the meeting by the person presiding thereat. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of such inspector's ability. The
inspector or inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents, and
determine the result. On request of the person presiding at the meeting or any
stockholder entitled to vote thereat, the inspector or inspectors shall make a
report in writing of any challenge, question or matter determined by such
inspector(s) and execute a certificate of any fact found by such inspector(s).
Any report or certificate made by the inspector(s) shall be prima facie evidence
of the facts stated and of the vote as certified by such inspector(s).
2.12 Organization. At every meeting of stockholders an officer or
Director of the Corporation chosen by the majority of the Board of Directors
shall act as chairperson of the meeting. The Secretary or in his or her absence
one of the Assistant Secretaries,
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shall act as secretary of the meeting. In case none of the officers above
designated to act as chairperson or secretary of the meeting, respectively,
shall be present, a chairperson or secretary of the meeting, as the case may be,
shall be chosen by a majority of the votes cast at such meeting by the holders
of shares of capital stock present in person or represented by proxy and
entitled to vote at the meeting.
2.13 Order of Business. The order of business at all meetings of
stockholders shall be determined by the chairperson of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.14 Written Consent of Stockholders Without a Meeting. Unless
otherwise provided in the Certificate of Incorporation, any action required by
the General Corporation Law to be taken at any annual or special meeting of
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
2.15 Certain Actions Requiring Management Group Vote.
Notwithstanding the foregoing, any vote of stockholders on a matter which
requires the consent of a
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Management Director under the Stockholders' Agreement shall not be valid unless
a majority of the shares of common stock owned of record and beneficially by the
Management Group is voted in favor of the action determined by the majority vote
of stockholders.
ARTICLE 3
DIRECTORS
3.1 General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board. The Board may adopt
such rules and regulations, not inconsistent with the Certificate of
Incorporation or the By-laws or applicable laws, as it may deem proper for the
conduct of its meetings and the management of the Corporation. In addition to
the powers expressly conferred by the By-laws, the Board may exercise all powers
and perform all acts which are not required, by the By-laws or the Certificate
of Incorporation or by law, to be exercised and performed by the stockholders.
3.2 Number; Qualification; Term of Office. The Board shall consist
of one or more members. The number of directors initially shall be less than two
nor more than five; and may thereafter be changed from time to time by action of
the stockholders or of the Board. Directors need not be stockholders. Each
director shall hold office until his or her successor is elected and qualified
or until his or her earlier death, resignation or removal.
3.3 Election. Directors shall, except as otherwise required by law
or by the Certificate of Incorporation, be elected by a plurality of the votes
cast at a meeting of stockholders by the holders of shares entitled to vote in
the election.
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3.4 New Created Directorships and Vacancies. Unless otherwise
provided in the Certificate of Incorporation and subject to the provisions of
the Stockholders' Agreement, newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the Board for any
reason, including the removal of directors without cause, may be filled by vote
of a majority of the directors then in office, although less than a quorum, or
by a sole remaining director, at any meeting of the Board or may be elected by a
plurality of the votes cast by the holders of shares of capital stock entitled
to vote in the election at a special meeting of stockholders called for that
purpose. A director elected to fill a vacancy shall be elected to hold office
until his or her successor is elected arid qualified, or until his or her
earlier death, resignation or removal.
3.5 Resignations. Any director may resign at any time by written
notice to the Corporation. Such resignation shall take effect at the time
therein specified, and, unless otherwise specified, the acceptance of such
resignation shall not be necessary to make it effective.
3.6 Removal of Directors. Except as otherwise provided by law or by
the provisions of the Stockholders' Agreement, any or all of the directors may
be removed with or without cause, by vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
3.7 Compensation. Each director, in consideration of his or her
service as such, shall be entitled to receive from the Corporation such amount
per annum (or other compensation, including options to acquire shares of the
Corporation's capital stock) or such fees for attendance at directors' meetings,
or both, as the Board may from time to time
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determine, together with reimbursement for the reasonable expenses incurred by
him or her in connection with the performance of such director's duties. Each
director who shall serve as a member of any committee of directors in
consideration of his or her serving as such shall be entitled to such additional
amount per annum or such fees for attendance at committee meetings, or both, as
the Board may from time to time determine, together with reimbursement for the
reasonable expenses incurred by him or her in the performance of such director's
duties. Nothing contained in this section shall preclude any director from
serving the Corporation or its subsidiaries in any other capacity and receiving
proper compensation therefor.
3.8 Place and Time of Meetings of the Board. Meetings of the Board,
regular or may be held at any place within or without the State of Delaware. The
times and places for holding meetings of the Board may be fixed from time to
time by resolution of the Board or (unless contrary to resolution of the Board)
in the notice of the meeting.
3.9 Annual Meetings. On the day when and at the place where the
annual meeting of stockholders for the election of directors is held, and as
soon as practicable thereafter, the Board may hold its annual meeting, without
notice of such meeting, for the purpose of organization, the election of
officers and the transaction of other business. The annual meeting of the Board
may be held at any other time and place specified in a notice given as provided
in Section 3.11 of the By-laws for special meetings of the Board or in a waiver
of notice thereof.
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3.10 Regular Meetings. Regular meetings of the Board may be held at
such times and places as may be fixed from time to time by the Board. Unless
otherwise required bY the Board, regular meetings of the Board may be held
without notice. If any day fixed for a regular meeting of the Board be a
Saturday or Sunday or a legal holiday at the place where such meeting is to be
held, then such meeting shall be held at the same hour at the same place on the
first business day thereafter which is not a Saturday, Sunday or legal holiday.
3.11 Special Meetings. Special meetings of the Board shall be held
whenever called by the President or the Secretary or by any two or more
directors. Notice of each special meeting of the Board shall, if mailed, be
addressed to each director at the address designated by him or her for that
purpose or, if none is designated, at such director's last known address at
least five (5) days before the date on which the meeting is to be held; or such
notice shall be sent to each director at such address by telegraph, cable, or
telecopier (with confirmation of receipt), or be delivered to him or her
personally, at least two (2) days before the date on which such meeting is to be
held. Every such notice shall state the time and place of the meeting but need
not state the purposes of the meeting, except to the extent required by law. If
mailed, each notice shall be deemed given when deposited, with postage thereon
prepaid, in a post office or official depository under the exclusive care and
custody of the United States Posta1 Service. Such mailing shall be by first
class mail.
3.12 Adjourned Meetings. A majority of the directors present at any
meeting of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. Notice of any
adjourned meeting of
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the Board need not be given to any director whether or not present at the time
of the adjournment. Any business may be transacted at any adjourned meeting that
might have been transacted at the meeting as originally called.
3.13 Waiver of Notice. Whenever notice is required to be given to
any director or member of a committee of directors under any provision of the
General Corporation Law or the Certificate of Incorporation or By-laws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors, or members of a committee of directors, need be specified in any
written waiver of notice.
3.14 Organization. At each meeting of the Board, a chairperson
designated by the majority of the directors present, or, in the absence of such
designation, the President of the Corporation shall preside. The Secretary shall
act as secretary at each meeting of the Board. In case the Secretary shall be
absent from any meeting of the Board, an Assistant Secretary shall perform the
duties of secretary at such meeting; and in the absence from any such meeting of
the Secretary and Assistant secretaries, the person presiding at the meeting may
appoint any person to act as secretary of the meeting.
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3.15 Quorum of Directors. Three directors then in office shall
constitute a quorum for the transaction of business or of any specified item of
business at any meeting of the Board.
3.16 Action by the Board. All corporate action taken by the Board or
any committee thereof shall be taken at a meeting of the Board, or of such
committee, as the case may be, except that any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee. Members of the Board, or any
committee designated by the Board, may participate in a meeting of the Board, or
of such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 3.16 shall constitute presence in person at such meeting. Except as set
forth in Section 5.6 of the Stockholders' Agreement and except as otherwise
provided by the Certificate of Incorporation or by law, the vote of a majority
of the directors present (including those who participate by means of conference
telephone or similar communications equipment) at the time of the vote, if a
quorum is present at such time, shall be the act of the Board.
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ARTICLE 4
COMMITTEES OF THE BOARD
The Board may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. Subject to the Stockholders'
Agreement, the Board may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. Subject to the Stockholders' Agreement, in the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member(s) constitute a quorum, may unanimously appoint another member of the
Board to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to amending
the Certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or revocation of a
dissolution, or amending the By-laws of the Corporation; and unless the
resolution designating it expressly so provides, no such
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committee shall have the power or authority to declare a dividend or to
authorize the of stock.
ARTICLE 5
OFFICERS
5.1 Officers. The Board shall elect a President, a Secretary and a
Treasurer, and may elect or appoint one or more Vice Presidents and such other
officers as it may determine. The Board may designate one or more Vice
Presidents as Executive Vice Presidents, and may use descriptive words or
phrases to designate the standing, seniority or area of special competence of
the Vice Presidents elected by appointed by it. Each officer shall hold his
office until his or her successor is elected and qualified or until such
officer's earlier death, resignation or removal in the manner provided in
Section 5.2 of the By-laws. Any two or more offices may be held in the same.
person. The Board may require any officer to give a bond or other security for
the faithful performance of his or her duties, in such amount and with such
sureties as the Board may determine. All officers, as between themselves and the
Corporation, shall have such authority and perform such duties in the management
of the Corporation as may be provided in the By-laws or as the Board may from
time to time determine.
5.2 Removal of Officers. Any officers elected or appointed by the
Board may be removed by the Board with or without cause. The removal of an
officer without
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cause shall be without prejudice to such officer's contract rights, if any. The
election or appointment of an officer shall not of itself create contract
rights.
5.3 Resignations. Any officer may resign at any time in writing by
notifying the Board or the President or the Secretary. Such resignation shall
take effect at the date of receipt of such notice or at such later time as is
therein specified, and, unless otherwise specified, the acceptance of such
resignation shall not be necessary to make it effective. The resignation of an
officer shall be without prejudice to the contract rights of Corporation, if
any.
5.4 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in the By-laws for
the regular election or appointment to such office.
5.5 Compensation. Salaries or other compensation of the officers may
be fixed from time to time by the Board. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that such officer
is also a director.
5.6 President. The President shall have general supervision over the
business of the Corporation, subject, however, to the control of the Board and
of any duly authorized committee of directors. The President may, with the
Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer,
sign certificates for shares of capital stock of the Corporation. The President
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts and other instruments authorized by the Board, except in cases where
the signing and execution thereof shall be expressly delegated
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by the Board or by the By-laws to some other officer or agent of the
Corporation, or shall be required by law otherwise to be signed or executed;
and, in general the President shall perform all duties incident to the office of
President and such other duties as from time to time may be assigned to the
President by the Board.
5.7 Vice Presidents. At the request of the President, or in the
President's at the request of the Board, the Vice Presidents shall (in such
order as may be designated by the Board or in the absence of any such
designation in order of seniority based on age) perform all of the duties of the
President and so acting shall have all the powers of arid be subject to all
restrictions upon the President. Any Vice President may also, with the Secretary
or Treasurer or an Assistant Secretary or an Assistant Treasurer, sign
certificates for shares of capital stock of the Corporation; may sign and
execute in the name of the Corporation deeds, mortgages, bonds, contracts, and
other instruments authorized by the Board, except in cases where the signing and
execution thereof shall be expressly delegated by the Board or by the By-laws to
some other officer or agent of the Corporation, or shall be required by law
otherwise to be signed or executed; and shall perform such other duties as from
time to time may be assigned to him or her by the Board or by the President.
5.8 Secretary. The Secretary, if present, shall act as secretary of
all meetings of the stockholders and of the Board, and shall keep the minutes
thereof in the proper book or books to be provided for that purpose; the
secretary shall see that all notices required to be given by the Corporation are
duly given and served; the secretary may, with the President or Vice President,
sign certificates for shares of capital stock of the Corporation; the Secretary
shall be custodian of the seal of the Corporation, or facsimile
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thereof, all certificates for shares of capital stock of the Corporation and all
documents the execution of which on behalf of the Corporation under its
corporate seal is authorized in accordance with the provisions of the By-laws;
the Secretary shall have charge of the stock ledger and also of the other books,
records and papers of the Corporation relating to its organization and
management as a Corporation, and shall see that the reports, statements and
other documents required by law are properly kept and filed; and shall, in
general, perform all the duties incident to the office of Secretary and such
other duties as from time to time may be assigned to the Secretary by the Board
or by the President.
5.9 Treasurer. The Treasurer shall have charge and custody of, and
be responsible for, all funds, securities and notes of the Corporation; receive
and give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositaries as shall be selected in accordance
with these By-laws; against proper vouchers, cause such funds to be disbursed by
checks or drafts on the authorized depositaries of the Corporation signed in
such manner as shall be determined in accordance with any provisions of the
By-laws, and be responsible for the accuracy of the amounts of all moneys so
disbursed; regularly enter or cause to be entered in books to be kept by the
Treasurer or under the Treasurer's direction full and adequate account of all
moneys received or paid by the Treasurer for the account of the Corporation;
have the right to require, from time to time, reports or statements giving such
information as the Treasurer may desire with respect to any and all financial
transactions of the Corporation from the officers or agents transacting the
same; render to the President or the Board, whenever the President or the Board,
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respectively, shall require the Treasurer to do so, an account of the financial
condition of the Corporation and of all his or her transactions as Treasurer;
exhibit at all reasonable times his or her books of account and other records to
any of the directors upon application at the office of the Corporation where
such books and records are kept; and in general, perform all the duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to the Treasurer by the Board or by the President; and the Treasurer
may sign, with the President, or a Vice President certificates for shares of
capital stock of the corporation.
5.10 Assistant Secretaries and Assistant Treasurers. Assistant
Secretaries and Assistant Treasurers shall perform such duties as shall be
assigned to them by the Secretary or by the Treasurer, respectively, or by the
Board or by the President. Assistant Secretaries and Assistant Treasurers may,
with the President or a Vice President, sign certificates for shares of capital
stock of the Corporation.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
6.1 Execution of Contracts. The Board may authorize any officer,
employee or agent, in the name and on behalf of the Corporation, to enter into
any contract or execute and satisfy any instruments, and any such authority may
be general or confined to Specific instances, or otherwise limited.
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6.2 Loans. Upon the authorization of the Board, the President or any
other officer, employee or agent authorized by the By-laws or by the Board may
effect loans and advances at any time for the Corporation from any bank, trust
company or other institution or from any firm, corporation or individual and for
such loans and advances may make, execute and deliver promissory notes, bonds or
other certificates or evidences of indebtedness of the Corporation, and when
authorized by the Board to do so may pledge and hypothecate or transfer any
securities or other property of the Corporation as security for any such loans
or advances. Such authority conferred by the Board may be general or confined to
specific instances or otherwise limited.
6.3 Checks, Drafts, Etc. All checks, drafts and other orders for the
payment of money out of the funds of the Corporation and all notes or other
evidences of indebtedness of the Corporation shall be signed on behalf of the
Corporation in such manner as shall from time to time be determined by
resolution of the Board.
6.4 Deposits. The funds of the Corporation not otherwise employed
shall be deposited from time to time to the order of the Corporation in such
banks, trust companies or other depositaries as the Board may select or as may
be selected by an officer, employee or agent of the Corporation to whom such
power may from time to time be delegated by the Board.
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ARTICLE 7
STOCK AND DIVIDENDS
7.1 Certificates Representing Shares. The shares of capital stock of
the Corporation shall be represented by certificates in such form (consistent
with the provisions of section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the President or a
Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer, and may be sealed with the seal of the Corporation or
a facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles, if the certificate is countersigned by a transfer agent or registrar
other than the Corporation itself or its officers or employee. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon any certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, such certificate
may, unless otherwise ordered by the Board, be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or registrar
at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
Corporation shall be made only on the books of the Corporation by the holder
thereof or by such holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent or
registrar of the Corporation, and on surrender of the certificate or
certificates representing such shares of capital stock properly endorsed for
transfer and upon payment of all necessary transfer taxes. Every certificate
exchanged,
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or surrendered to the Corporation shall be marked "Canceled," with the date of
cancellation, by the Secretary or an Assistant Secretary or the transfer agent
or registrar of the Corporation. A person in whose name shares of capital stock
shall stand on the books of the Corporation shall be deemed the owner thereof to
receive dividends, to vote as such owner and for all other purposes as respects
the Corporation. No transfer of shares of capital stock shall be valid as
against the Corporation, its stockholders and creditors for any purpose, except
to render the transferee liable for the debts of the Corporation to the extent
provided by law, until such transfer shall have been entered on the books of the
Corporation by an entry showing from and to whom transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to
time maintain one or more transfer offices or agent and registry offices or
agents at such place or places as may be determined from time to time by the
Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder
of any shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, stolen or mutilated. The
Board may, in its discretion, as a condition to the issue of any such new
certificate require the owner of the loss, stolen or mutilated certificate, or
such owner's legal representatives, to make proof satisfactory to the Board of
such loss, destruction, theft or mutilation and to advertise such fact in such
manner as the Board may require, and to give the Corporation and its transfer
agents and registrars, or such of them as the Board may require, a bond in such
form, in such sum and with such surety or sureties as the Board may
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direct, to indemnify the Corporation and its transfer agents and registrars
against any claims that may be made against any of them on account of the
continued existence of any such certificate so alleged to have been lost,
destroyed, stolen or mutilated and against any expense in connection with such
claim.
7.5 Regulations. The Board may make such rules and regulations as it
may deem expedient, not inconsistent with the By-laws or with the Certificate of
Incorporation, concerning the issue, transfer and registration of certificates
representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the
transfer or registration of transfer of capital stock of the Corporation, if
permitted by Section 202 of the General Corporation Law and noted conspicuously
on the certificate representing such capital stock, may be enforced against the
holder of the restricted capital stock or any successor or transferee of the
holder including an executor, administrator, trustee, guardian or other
fiduciary entrusted with like responsibility for the person or estate of the
holder. Unless noted conspicuously on the certificate representing such capital
stock, a restriction, even though permitted by Section 202 of the General
Corporation Law, shall be ineffective except against a person with actual
knowledge of the restriction. A restriction on the transfer or registration of
transfer of capital stock of the Corporation may be imposed either by the
Certificate of Incorporation, by the provisions of the Stockholders' Agreement
or by any other agreement among any number of stockholders or among such
stockholders and the Corporation. No restriction so imposed shall be binding
with respect to capital stock issued
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prior to the adoption of the restriction unless the holders of such capital
stock are parties to an agreement or voted in favor of the restriction.
7.7 Dividends, Surplus, Etc. Subject to the provisions of the
Certificate of Incorporation and of law, the Board:
7.7.1 May declare and pay dividends or make other
distributions on the outstanding shares of capital stock in such amounts and at
such time or times as, in its discretion, the condition of the affairs of the
Corporation shall render advisable;
7.7.2 May use and apply, in its discretion, any of the surplus
of the Corporation in purchasing or acquiring any shares of capital stock of the
Corporation, or purchase warrants therefor, in accordance with law, or any of
its bonds, debentures, notes, scrip or other securities or evidences of
indebtedness;
7.7.3 May set aside from time to time out of such surplus or
net profits such sum or sums as, in its discretion, it may think proper, as a
reserve fund to meet contingencies, or for equalizing dividends or for the
purpose of maintaining or increasing the property or business of the
Corporation, or for any purpose it may think conducive to the best interests of
the Corporation.
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ARTICLE 8
INDEMNIFICATION
The Corporation shall have the power to indemnify its officers,
directors, employees, and agents, and such other persons as may be designated by
the Board or as may be provided in its By-laws, to the full extent permitted by
the laws of the State of Delaware.
ARTICLE 9
BOOKS AND RECORDS
9.1 Books and Records. The Corporation shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of the stockholders, the Board and any committee of the Board. The Corporation
shall keep at the office designated in the Certificate of Incorporation or at
the office of the transfer agent or registrar of the Corporation in Delaware, a
record containing the names and addresses of all stockholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in
the regular course of its business including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, diskettes, magnetic
tape, photographs, microphotographs, or any other information storage device,
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation
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shall so convert any records so kept upon the request of any person entitled to
inspect the same.
9.3 Inspection of Books and Records. Except as otherwise provided by
law, the Board shall determine from time to time whether, and, if allowed, when
and under what conditions and regulations the accounts, books, minutes and other
records of the Corporation shall be open to the inspection of any stockholder or
director.
ARTICLE 10
SEAL
The Board may adopt a corporate seal which shall be in the form of a
circle and shall bear the full name of the Corporation, the year of its
incorporation and the word "Delaware."
ARTICLE 11
FISCAL YEAR
The fiscal year of the Corporation shall be determined, and may be
changed, by resolution of the Board.
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ARTICLE 12
VOTING OF SHARES HELD
To the extent expressly authorized to do so by resolution of the
Board, the president may, from time to time, appoint one or more attorneys or
agents of the Corporation, in the name and on behalf of the Corporation, to cast
the votes which the Corporation may be entitled to cast as a stockholder or
otherwise in any other corporation, any of whose shares or securities may be
held by the Corporation, at meetings of the holders of stock or other securities
of such other corporation, or to consent in writing to any action by any such
other corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed on behalf of the Corporation and under its corporate seal, or
otherwise, such written proxies, consents, waivers or other instruments as the
President may deem necessary or proper in the premises; or to the extent
expressly authorized to do so by the Board, the President may attend in person
any meeting of the holders of the stock or other securities of any such other
corporation and thereat vote or exercise any or all other powers of the
Corporation as the holder of such stock or other securities of such other
corporation.
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ARTICLE 13
AMENDMENTS
The By-laws may be altered, amended, supplemented or repealed, or
new By-laws may be adopted, by vote of the holders of the shares entitled to
vote in the election of directors. The By-laws may be altered, amended,
supplemented, repealed, or new By-laws may be adopted, by the Board, provided
that the vote of a majority of the entire Board shall be required to change the
number of authorized directors. Any By-laws adopted, altered, amended or
supplemented by the Board may be altered, amended or supplemented or repealed by
the stockholders entitled to vote thereon. Notwithstanding the foregoing, the
By-laws may not be amended in a manner which violates the provisions of the
Stockholders' Agreement.
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THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.
NOT EXERCISABLE PRIOR TO ______________, 1997. VOID AFTER 5:00 P.M. EASTERN
TIME, ______________, 2001.
PURCHASE OPTION
For The Purchase Of
150,000 Shares Of Common Stock
and/or
150,000 Common Stock Purchase Warrants
of
THE MILLBROOK PRESS INC.
(A DELAWARE CORPORATION)
1. PURCHASE OPTION.
THIS CERTIFIES THAT, in consideration of $_____________ duly paid by
or on behalf of GKN Securities Corp. ("Holder"), as registered owner of this
Purchase Option, to The Millbrook Press Inc. ("Company"), Holder is entitled, at
any time or from time to time at or after __________, 1997 ("Commencement
Date"), and at or before 5:00 p.m., Eastern Time, ___________, 2001 ("Expiration
Date"), but not thereafter, to subscribe for, purchase and receive, in whole or
in part, up to one hundred-fifty thousand (150,000) shares of Common Stock of
the Company, $0.01 par value ("Common Stock") and/or one hundred-fifty thousand
(150,000) Common Stock Purchase Warrants, each to purchase one share of Common
Stock ("Warrants") during the period commencing one year and expiring five years
from the effective date of the registration statement on Form SB-2 No. 333-14631
("Registration Statement") pursuant to which the Company has registered shares
of Common Stock and warrants to purchase Common Stock ("Effective Date"). Each
Warrant is the same as the warrants that have been registered for sale to the
public pursuant to the Registration Statement ("Public Warrants"). The shares
of Common Stock and Warrants are sometimes collectively referred to herein as
the "Securities." The Holder can purchase, upon exercise of the Purchase
Option, either shares of Common Stock or Warrants or both. If the Expiration
Date is a day on which banking institutions are authorized by law to close, then
this Purchase Option may be exercised on the next succeeding day which is not
such a day in accordance with the terms herein. During the period ending on the
Expiration Date, the Company agrees not to take any action that would terminate
the Purchase Option. This Purchase Option is initially exercisable at $____ per
share of Common Stock and $0.__ per Warrant purchased; provided, however, that
upon the occurrence of any of the events specified in Section 6 hereof, the
rights granted by this Purchase Option, including the exercise price and the
number
<PAGE>
of shares of Common Stock and Warrants to be received upon such exercise, shall
be adjusted as therein specified. The term "Exercise Price" shall mean the
initial exercise price or the adjusted exercise price, depending on the context
of a share of Common Stock or a Warrant.
2. EXERCISE.
2.1 EXERCISE FORM. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and delivered
to the Company, together with this Purchase Option and payment of the Exercise
Price in cash or by certified check or official bank check for the Securities
being purchased. If the subscription rights represented hereby shall not be
exercised at or before 5:00 p.m., Eastern time, on the Expiration Date this
Purchase Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 LEGEND. Each certificate for Securities purchased under this Purchase
Option shall bear a legend as follows unless such Securities have been
registered under the Securities Act of 1933, as amended:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act") or
applicable state law. The securities may not be offered for sale,
sold or otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an exemption from
registration under the Act and applicable state law."
2.3 CASHLESS EXERCISE.
2.3.1 DETERMINATION OF AMOUNT. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to pay the Exercise Price for the Securities
being purchased with this Purchase Option by the surrender to the Company of any
exercisable but unexercised portion of this Purchase Option having a "Stock
Value" or "Warrant Value" (as defined below), as the case may be, at the close
of trading on the last trading day immediately preceding the exercise of this
Purchase Option, equal to the Exercise Price multiplied by the number of
Securities being purchased upon exercise ("Conversion Right").
(i) COMMON STOCK. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any of the
Exercise Price in cash) that number of shares of Common Stock equal to the
quotient obtained by dividing (x) the "Stock Value" (as defined below) of the
portion of the Purchase Option being converted at the time the Conversion Right
is exercised by (y) the Exercise Price. The "Stock Value" of the portion of the
Purchase Option being converted shall equal the remainder derived from
subtracting (a) the Exercise Price multiplied by the number of shares of Common
Stock being converted from (b) the Market Price of the Common Stock multiplied
by the number of shares of Common Stock being converted. As used herein, the
term "Market Price" at any date shall be deemed to be the last reported sale
price of the Common Stock on such date, or, in case no such reported sale takes
place on such day, the average of the last reported sale prices for the
immediately preceding three trading days, in either case as officially reported
by the principal securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or if any such exchange on which the
Common Stock is listed is not its principal trading market, the last reported
sale price as furnished by the National Association of Securities Dealers, Inc.
("NASD') through the Nasdaq National Market or SmallCap Market, or, if
applicable, the OTC Bulletin Board, or if the Common Stock is not listed or
admitted
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to trading on any of the foregoing markets, or similar organization, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
(ii) WARRANTS. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the Holder of any of the
Exercise Price in cash) that number of Warrants equal to the quotient obtained
by dividing (x) the "Warrant Value" (as defined below) of the portion of the
Purchase Option being converted at the time the Conversion Right is exercised by
(y) the Exercise Price. The "Warrant Value" of the portion of the Purchase
Option being converted shall equal the remainder derived from subtracting (a)
the Exercise Price multiplied by the number of Warrants being converted from (b)
the Market Price of the Warrants multiplied by the number of Warrants being
converted. As used herein, the term "Market Price" at any date shall be deemed
to be the last reported sale price of the Warrants on such date, or, in case no
such reported sale takes place on such day, the average of the last reported
sale prices for the immediately preceding three trading days, in either case as
officially reported by the principal securities exchange on which the Warrants
are listed or admitted to trading, or, if the Warrants are not listed or
admitted to trading on any national securities exchange or if any such exchange
on which the Warrants are listed is not its principal trading market, the last
reported sale price as furnished by the NASD through the Nasdaq National Market
or SmallCap Market, or, if applicable, the OTC Bulletin Board, or if the
Warrants are not listed or admitted to trading on any of the foregoing markets,
or similar organization, as determined in good faith by resolution of the Board
of Directors of the Company, based on the best information available to it.
2.3.2 MECHANICS OF CASHLESS EXERCISE. The Cashless Exercise Right
may be exercised by the Holder on any business day on or after the Commencement
Date and not later than the Expiration Date by delivering the Purchase Option
with a duly executed exercise form attached hereto with the cashless exercise
section completed to the Company, exercising the Cashless Exercise Right and
specifying the total number of Securities will purchase pursuant to such
Cashless Exercise Right.
3. TRANSFER.
3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase Option,
by its acceptance hereof, agrees that it will not sell, transfer or assign or
hypothecate this Purchase Option prior to the Commencement Date to anyone other
than (i) an officer of GKN Securities Corp. ("Underwriter") or an officer or
partner of any Selected Dealer or member of the underwriting syndicate in
connection with the Company's public offering with respect to which this
Purchase Option has been issued, or (ii) any Selected Dealer or member of the
underwriting syndicate. On and after the Commencement Date, transfers to others
may be made subject to compliance with or exemptions from applicable securities
laws. In order to make any permitted assignment, the Holder must deliver to the
Company the assignment form attached hereto duly executed and completed,
together with the Purchase Option and payment of all transfer taxes, if any,
payable in connection therewith. The Company shall immediately transfer this
Purchase Option on the books of the Company and shall execute and deliver a new
Purchase Option or Purchase Options of like tenor to the appropriate assignee(s)
expressly evidencing the right to purchase the aggregate number of shares of
Common Stock and Warrants purchasable hereunder or such portion of such number
as shall be contemplated by any such assignment.
3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless and
until (i) the Company has received the opinion of counsel for the Holder that
this Purchase Option or the Securities, as the case may be, may be transferred
pursuant to an exemption from registration under the Act and applicable state
law, the availability of which is established to the reasonable satisfaction of
the
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Company (the Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase Option or
Securities, as the case may be, has been filed by the Company and declared
effective by the Securities and Exchange Commission and compliance with
applicable state law.
4. NEW PURCHASE OPTIONS TO BE ISSUED.
4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in Section
3 hereof, this Purchase Option may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Purchase Option for cancellation, together with the duly executed
exercise or assignment form and funds sufficient to pay any Exercise Price
and/or transfer tax, the Company shall cause to be delivered to the Holder
without charge a new Purchase Option of like tenor to this Purchase Option in
the name of the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock and Warrants purchasable hereunder as
to which this Purchase Option has not been exercised or assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory indemnification, the Company
shall execute and deliver a new Purchase Option of like tenor and date. Any
such new Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation
on the part of the Company.
5. REGISTRATION RIGHTS.
5.1 DEMAND REGISTRATION.
5.1.1 GRANT OF RIGHT. The Company, upon written demand ("Initial
Demand Notice") of the Holder(s) of at least 51% of the Purchase Options and/or
the underlying shares of Common Stock and Warrants ("Majority Holders"), agrees
to register on one occasion, all or any portion of the Purchase Options
requested by the Majority Holders in the Initial Demand Notice and all of the
Securities underlying such Purchase Options, including the Common Stock, the
Warrants and the Common Stock underlying the Warrants (collectively the
"Registrable Securities"). On such occasion, the Company will file a
Registration Statement covering the Registrable Securities within sixty days
after receipt of the Initial Demand Notice and use its best efforts to have such
registration statement declared effective promptly thereafter. Should this
registration or the effectiveness thereof be delayed by the Company, the
exercisability of the Purchase Options shall be extended for a period of time
equal to the delay in registering the Registrable Securities provided, however,
that such extension date shall not extend beyond five years from the Effective
Date. Moreover, if the Company fails to comply with the provisions of this
Section 5.1.1, the Company shall, in addition to any other equitable or other
relief available to the Holder(s), be liable for any and all incidental, special
and consequential damages sustained by the Holder(s). The demand for
registration may be made at any time during a period of four years beginning one
year from the Effective Date. The Company covenants and agrees to give written
notice of its receipt of any Initial Demand Notice by any Holder(s) to all other
registered Holders of the Purchase Options and/or the Registrable Securities
within ten days from the date of the receipt of any such Initial Demand Notice.
5.1.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in
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<PAGE>
connection with the sale of the Registrable Securities. The Company agrees to
use its best efforts to cause the filing required herein to become effective
promptly and to qualify or register the Registrable Securities in such States as
are reasonably requested by the Holder(s); provided, however, that in no event
shall the Company be required to register the Registrable Securities in a State
in which such registration would cause (i) the Company to be obligated to
register or license to do business in such State, or (ii) the principal
stockholders of the Company to be obligated to escrow their shares of capital
stock of the Company. The Company shall cause any registration statement filed
pursuant to the demand rights granted under Section 5.1.1 to remain effective
for a period of at least nine consecutive months from the date that the Holders
of the Registrable Securities covered by such registration statement are first
given the opportunity to sell all of such securities.
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 GRANT OF RIGHT. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right for a
period of six years commencing one year from the Effective Date, to include the
Registrable Securities as part of any other registration of securities filed by
the Company (other than in connection with a transaction contemplated by Rule
145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form)
provided, however, that if, in the written opinion of the Company's managing
underwriter or underwriters, if any, for such offering, the inclusion of the
Registrable Securities, when added to the securities being registered by the
Company or the selling stockholder(s), will exceed the maximum amount of the
Company's securities which can be marketed (i) at a price reasonably related to
their then current market value, or (ii) without materially and adversely
affecting the entire offering, the Company shall nevertheless register all or
any portion of the Registrable Securities required to be so registered but such
Registrable Securities shall not be sold by the Holders until 180 days after the
registration statement for such offering has become effective and provided
further that, if any securities are registered for sale on behalf of other
stockholders in such offering and such stockholders have not agreed to defer
such sale until the expiration of such 180 day period, the number of securities
to be sold by all stockholders in such public offering during such 180 day
period shall be apportioned PRO RATA among all such selling stockholders,
including all holders of the Registrable Securities, according to the total
amount of securities of the Company owned by said selling stockholders,
including all holders of the Registrable Securities.
5.2.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed registration, the
Company shall furnish the then Holders of outstanding Registrable Securities
with not less than thirty days written notice prior to the proposed date of
filing of such registration statement. Such notice to the Holders shall
continue to be given for each registration statement filed by the Company until
such time as all of the Registrable Securities have been sold by the Holder.
The holders of the Registrable Securities shall exercise the "piggy-back" rights
provided for herein by giving written notice, within twenty days of the receipt
of the Company's notice of its intention to file a registration statement. The
Company shall cause any registration statement filed pursuant to the above
"piggyback" rights to remain effective for at least nine months from the date
that the Holders of the Registrable Securities are first given the opportunity
to sell all of such securities.
5.3 GENERAL TERMS.
5.3.1 INDEMNIFICATION. The Company shall indemnify the Holder(s)
of the Registrable Securities to be sold pursuant to any registration statement
hereunder and each
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person, if any, who controls such Holders within the meaning of Section 15 of
the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all reasonable attorneys' fees and other expenses reasonably incurred
in investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever whether arising out of any action between
the Underwriter and the company or between the Underwriter and any third party
or otherwise) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter contained in Section 5 of the
Underwriting Agreement between the Underwriter and the Company, dated the
Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant
to such registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, against all loss, claim,
damage, expense or liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf of
such Holders, or their successors or assigns, in writing, for specific inclusion
in such registration statement to the same extent and with the same effect as
the provisions contained in Section 5 of the Underwriting Agreement pursuant to
which the Underwriter has agreed to indemnify the Company.
5.3.2 EXERCISE OF WARRANTS. Nothing contained in this Purchase
Option shall be construed as requiring the Holder(s) to exercise their Purchase
Options or Warrants prior to or after the initial filing of any registration
statement or the effectiveness thereof.
5.3.3 EXCLUSIVITY. The Company shall not permit the inclusion of
any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Registrable Securities.
5.3.4 DOCUMENTS DELIVERED TO HOLDERS. The Company shall furnish
to each Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under any underwriting agreement related thereto), and (ii) a "cold
comfort" letter dated the effective date of such registration statement (and, if
such registration includes an underwritten public offering, a letter dated the
date of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and inde-
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pendent auditors, all to such reasonable extent and at such reasonable times and
as often as any such Holder shall reasonably request.
5.3.5 UNDERWRITING AGREEMENT. The Company shall enter into an
underwriting agreement with the managing underwriter(s) selected by any Holders
whose Registrable Securities are being registered pursuant to this Section 5.
Such agreement shall be reasonably satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Registrable Securities and may, at
their option, require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such underwriters shall also
be made to and for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such Holders, their
shares and their intended methods of distribution.
5.3.6 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to the
Company a completed and executed questionnaire provided by the Company
requesting information customarily sought of selling security holders.
6. ADJUSTMENTS.
6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The Exercise
Price and the number of shares of Common Stock underlying the Purchase Option
and underlying the Warrants underlying the Purchase Option shall be subject to
adjustment from time to time as hereinafter set forth:
6.1.1 STOCK DIVIDENDS - RECAPITALIZATION, RECLASSIFICATION,
SPLIT-UPS. If after the date hereof, and subject to the provisions of
Section 6.3 below, the number of outstanding shares of Common Stock is increased
by a stock dividend payable in shares of Common Stock or by a split-up,
recapitalization or reclassification of shares of Common Stock or other similar
event, then, on the effective date thereof, the number of shares of Common Stock
issuable on exercise of the Purchase Option and the Warrants underlying the
Purchase Option shall be increased in proportion to such increase in outstanding
shares.
6.1.2 AGGREGATION OF SHARES. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date
thereof, the number of shares of Common Stock issuable on exercise of the
Purchase Option and the Warrants underlying the Purchase Option shall be
decreased in proportion to such decrease in outstanding shares.
6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option is
adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted
(to the nearest cent) by multiplying such Exercise Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Purchase Option
immediately prior to such adjustment, and (y) the denominator of which shall be
the number of shares of Common Stock so purchasable immediately thereafter. If
it is determined that such Exercise Price and number of shares of Common Stock
must be adjusted, then the Exercise Price
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<PAGE>
of the Purchase Option with respect to the underlying Warrants and the number of
Warrants purchasable hereunder shall also be adjusted pro rata.
6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. In case
of any reclassification or reorganization of the outstanding shares of Common
Stock other than a change covered by Section 6.1.1 hereof or which solely
affects the par value of such shares of Common Stock, or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or reorganization
of the outstanding shares of Common Stock), or in the case of any sale or
conveyance to another corporation or entity of the property of the Company as an
entirety or substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Purchase Option shall have the right thereafter
(until the expiration of the right of exercise of this Purchase Option) to
receive upon the exercise hereof, for the same aggregate Exercise Price payable
hereunder immediately prior to such event, the kind and amount of shares of
stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution
following any such sale or other transfer, by a Holder of the number of shares
of Common Stock of the Company obtainable upon exercise of this Purchase Option
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Section 6.1.1, then such adjustment
shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The
provisions of this Section 6.1.4 shall similarly apply to successive
reclassifications, reorganizations, mergers or consolidations, sales or other
transfers.
6.1.5 CHANGES IN FORM OF PURCHASE OPTION. This form of Purchase
Option need not be changed because of any change pursuant to this Section, and
Purchase Options issued after such change may state the same Exercise Price and
the same number of shares of Common Stock and Warrants as are stated in the
Purchase Options initially issued pursuant to this Agreement. The acceptance by
any Holder of the issuance of new Purchase Options reflecting a required or
permissive change shall not be deemed to waive any rights to a prior adjustment
or the computation thereof.
6.2 [Intentionally Omitted]
6.3 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
or Warrants upon the exercise or transfer of the Purchase Option, nor shall it
be required to issue scrip or pay cash in lieu of any fractional interests, it
being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up or down to the nearest whole number of
Warrants, shares of Common Stock or other securities, properties or rights.
7. RESERVATION AND LISTING. The Company shall at all times reserve and keep
available out of its authorized shares of Common Stock, solely for the purpose
of issuance upon exercise of the Purchase Options or the Warrants, such number
of shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Purchase Options and payment of the Exercise Price therefor, all
shares of Common Stock and other securities issuable upon such exercise shall be
duly and validly issued, fully paid and non-assessable and not subject to
preemptive rights of any stockholder. The Company further covenants and agrees
that upon exercise of the Warrants underlying the Purchase Options and payment
of the respective Warrant exercise price therefor, all shares of Common Stock
and other securities issuable upon such exercises shall be duly and validly
issued, fully paid and non-assessable and not subject to preemptive rights of
any stockholder. As long as the Purchase Options shall be outstanding, the
Company shall use its best
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<PAGE>
efforts to cause all (i) shares of Common Stock issuable upon exercise of the
Purchase Options and the Warrants, and (ii) the Warrants underlying the Purchase
Options to be listed (subject to official notice of issuance) on all securities
exchanges (or, if applicable on Nasdaq) on which the Common Stock or the Public
Warrants issued to the public in connection herewith are then listed and/or
quoted.
8. CERTAIN NOTICE REQUIREMENTS.
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Purchase Options and their exercise, any of the
events described in Section 8.2 shall occur, then, in one or more of said
events, the Company shall give written notice of such event at least fifteen
days prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to such
dividend, distribution, conversion or exchange of securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of the
closing of the transfer books, as the case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events:
(i) if the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company, or
(ii) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor, or (iii) a dissolution,
liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its
property, assets and business shall be proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly after
an event requiring a change in the Exercise Price pursuant to Section 6 hereof,
send notice to the Holders of such event and change ("Price Notice"). The Price
Notice shall describe the event causing the change and the method of calculating
same and shall be certified as being true and accurate by the Company's
President and Chief Financial Officer.
8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally or
sent by overnight courier, with acknowledgment of receipt to the party to which
notice is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of the Purchase Option, to the address of such Holder as shown
on the books of the Company, or (ii) if to the Company, to its principal
executive office.
9. MISCELLANEOUS.
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9.1 AMENDMENTS. The Company and the Underwriter may from time to time
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Purchase Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with this
Purchase Option) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Purchase Option or any provisions
herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase Option shall
be governed by and construed and enforced in accordance with the laws of the
State of New York, without giving effect to conflict of laws. The Company
hereby agrees that any action, proceeding or claim against it arising out of, or
relating in any way to this Purchase Option shall be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
8 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be entitled to recover
from the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
9.6 WAIVER, ETC. The failure of the Company or the Holder to at any time
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company or any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of
any of the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of
any other or subsequent breach, non-compliance or non-fulfillment.
9.7 EXECUTION IN COUNTERPARTS. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be
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<PAGE>
deemed to be an original, but all of which taken together shall constitute one
and the same agreement, and shall become effective when one or more counterparts
has been signed by each of the parties hereto and delivered to each of the other
parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the ____ day of December, 1996.
THE MILLBROOK PRESS INC.
By:__________________________
Name: Jeffrey Conrad
Title: President
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<PAGE>
Form to be used to exercise Purchase Option:
THE MILLBROOK PRESS INC.
Date:_________________, 1996
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ____ shares of Common Stock and ____ Warrants to
purchase _______ shares of Common Stock of The Millbrook Press Inc. and hereby
makes payment of $____________ (at the rate of $_______ per share of Common
Stock and $ ________ per Warrant) in payment of the Exercise Price pursuant
thereto. Please issue the Common Stock and Warrants as to which this Purchase
Option is exercised in accordance with the instructions given below.
OR
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase _________ shares of Common Stock and ____
Warrants of The Millbrook Press Inc. by surrender of the unexercised portion of
the within Purchase Option (with a "Value" of $__________ based on a "Market
Price" of $___________ per share of Common Stock and $__________ per Warrant).
Please issue the Common Stock and Warrants in accordance with the instructions
given below.
______________________________
Signature
______________________________
Print Name
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name ________________________________________________________
(Print in Block Letters)
Address ________________________________________________________
<PAGE>
Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the
within Purchase Option):
FOR VALUE RECEIVED, ___________________________________________
does hereby sell, assign and transfer
unto__________________________________________ the right to purchase
______________ shares of Common Stock and/or Warrants to purchase
______________ shares of Common Stock of The Millbrook Press Inc. ("Company")
evidenced by the within Purchase Option and does hereby authorize the Company to
transfer such right on the books of the Company.
Dated: ___________________, 1996
______________________________
Signature
______________________________
Print Name
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
<PAGE>
WARRANT AGREEMENT
Agreement made as of ___________ __, 1996, between The Millbrook Press
Inc., a Delaware corporation with offices at 2 Old New Milford Road, Brookfield,
Connecticut 06804 ("Company"), and Continental Stock Transfer & Trust Company, a
New York corporation with offices at 2 Broadway, New York, New York 10004
("Warrant Agent").
WHEREAS, the Company is engaged in a public offering of Common Stock
and Warrants ("Public Offering") and in connection therewith, has determined to
issue and deliver up to (i) 2,600,000 Redeemable Common Stock Purchase Warrants
("Public Warrants") to the public investors which includes 875,000 Warrants
("Bridge Warrants") issuable to certain investors in the Company's August 1996
bridge financing and (ii) 150,000 Warrants to GKN Securities Corp.
("Underwriter") or its designees ("Underwriter's Warrants") and together with
the Public Warrants, the "Warrant(s)"), each of such Warrants evidencing the
right of the holder thereof to purchase one share of common stock, $.01 par
value per share, of the Company's Common Stock ("Common Stock") for $4.50; and
WHEREAS, the Company has filed with the Securities and Exchange Commission
("Commission") a Registration Statement, No. 333-14631 on Form SB-2
("Registration Statement") for the registration, under the Securities Act of
1933, as amended ("Act"), of, among others, the Warrants and the Common Stock
issuable upon exercise of the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange, redemption and exercise of the
Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf of the Warrant Agent, as provided herein, the
valid, binding and legal obligations of the Company, and to authorize the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows (capitalized terms not defined herein, shall
have the same meaning as set forth in the Registration Statement):
1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant
Agent to act as agent for the Company for the Warrants, and the Warrant Agent
hereby accepts such appointment and agrees to perform the same in accordance
with the terms and conditions set forth in this Agreement.
2. WARRANTS.
2.1. FORM OF WARRANT. Each Warrant certificate shall be issued in
registered form only, shall be in substantially the form of EXHIBIT A hereto,
the provisions of which are incorporated
<PAGE>
herein, and shall be signed by, or bear the facsimile signature of, the Chairman
of the Board or President and Secretary or Assistant Secretary of the Company
and shall bear a facsimile of the Company's seal. In the event that the person
whose facsimile signature has been placed upon any Warrant certificate shall
have ceased to be Chairman of the Board or President and Secretary or Assistant
Secretary of the Company, as the case may be, before such Warrant certificate is
issued, it may be issued with the same effect as if the named person had not
ceased to be such at the date of issuance. The Warrants represented by a
Warrant certificate may not be exercised until such certificate has been
countersigned by the Warrant Agent as provided in Section 2.3 hereof.
2.2. EFFECT OF COUNTERSIGNATURE. Unless and until countersigned by the
Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid
and of no effect.
2.3. EVENTS FOR COUNTERSIGNATURE. The Warrant Agent shall countersign a
Warrant certificate only upon the occurrence of either of the following events:
(i) if the Warrant certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant certificates, as
hereinafter provided, or
(ii) if the Company instructs the Warrant Agent to do so.
2.4. REGISTRATION.
2.4.1. WARRANT REGISTER. The Warrant Agent shall maintain books
("Warrant Register"), for the registration of original issuance and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.4.2. REGISTERED HOLDER. Prior to due presentment for
registration of transfer of any Warrant certificate, the Company and the Warrant
Agent may deem and treat the person in whose name such Warrant certificate shall
be registered upon the Warrant Register ("registered holder"), as the absolute
owner of such Warrant and of each Warrant represented thereby (notwithstanding
any notation of ownership or other writing on the Warrant certificate made by
anyone other than the Company or the Warrant Agent), for the purpose of any
exercise thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
3. TERMS AND EXERCISE OF WARRANTS
3.1. WARRANT PRICE. Each Warrant certificate, when countersigned by the
Warrant Agent, shall entitle the registered holder thereof, subject to the
provisions of such Warrant certificate and of this Warrant Agreement, to
purchase from the Company the number of shares of Common Stock stated therein,
at the price of $4.50 per whole share, subject to the adjustments provided in
Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement
refers to the price per share at which Common Stock may be purchased at the time
a Warrant is exercised.
3.2. DURATION OF WARRANTS. Subject to Section 3.3.6 hereof, a Warrant may
be exercised only during the period ("Exercise Period") commencing on December
___, 1997, and terminating
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<PAGE>
on the earlier of December ___, 2001 or the date fixed for redemption of the
Warrant as provided in Section 6 of this Agreement ("Expiration Date"). Each
Warrant not exercised on or before its expiration date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease at the close of business on its Expiration Date. The Company in its
sole discretion may extend the duration of the Warrants by extending the
Expiration Date. The Company in its sole discretion may extend the duration of
the Warrants by delaying the Expiration Date.
3.3. EXERCISE OF WARRANTS.
3.3.1. PAYMENT. A Warrant, when countersigned by the Warrant
Agent, may be exercised by the registered holder thereof by surrendering the
certificate representing such Warrant, at the office of the Warrant Agent, or at
the office of its successor as Warrant Agent, in the Borough of Manhattan, City
and State of New York, with the subscription form, as set forth on the Warrant
certificate and in substantially the form of EXHIBIT A hereto, duly executed,
and by paying in full, in lawful money of the United States, in cash, or by good
certified check or bank draft payable to the order of the Company, the Warrant
Price for each full share of Common Stock as to which the Warrant is exercised
and any and all applicable taxes due in connection with the exercise of the
Warrant, the exchange of the Warrant for the Common Stock, and the issuance of
the Common Stock.
3.3.2. ISSUANCE OF CERTIFICATES. As soon as practicable after the
exercise of any Warrant and the clearance of the funds in payment of the Warrant
Price, the Company shall issue to the registered holder of such Warrant a
certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and if such Warrant shall not have been exercised in full, a new
countersigned Warrant certificate for the number of shares as to which such
Warrant shall not have been exercised. Notwithstanding the foregoing, the
Company shall not be obligated to deliver any securities pursuant to the
exercise of a Warrant unless a registration statement under the Securities Act
of 1933 with respect to the securities is effective. Warrants may not be
exercised by, or securities issued to, any registered holder in any state in
which such exercise would be unlawful.
3.3.3. VALID ISSUANCE. All shares of Common Stock issued upon the
proper exercise of a Warrant in conformity with this Agreement shall be validly
issued.
3.3.4. DATE OF ISSUANCE. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant certificate was surrendered (with the subscription form duly
executed) and payment of the Warrant Price was made, irrespective of the date of
delivery of such certificate, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are open.
3.4. WARRANT SOLICITATION AND WARRANT SOLICITATION FEE.
3.4.1. ENGAGEMENT. The Company has engaged the Underwriter, on a
non-exclusive basis, as its agent for the solicitation of the exercise of the
Warrants. The Company, at
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<PAGE>
its cost, will (i) assist the Underwriter with respect to such solicitation, if
requested by the Underwriter and (ii) provide the Underwriter, and direct the
Company's transfer and warrant agent to deliver to the Underwriter, lists of the
record, and to the extent known, beneficial owners of the Company's Warrants.
Accordingly, the Company hereby instructs the Warrant Agent to cooperate with
the Underwriter in every respect in connection with the Underwriter's
solicitation activities, including, but not limited to, providing to the
Underwriter, at the Company's cost, a list of record and beneficial holders of
the Warrants and circulating a prospectus or offering circular disclosing the
compensation arrangements referenced in Section 3.4.2 to holders of the Warrants
at the time of exercise of the Warrants. In addition to the conditions set
forth in Section 3.4.2, the Underwriter shall only accept payment of the warrant
solicitation fee provided in Section 3.4.2 if it has provided bona fide services
in connection with the exercise of the Warrants. In addition to soliciting,
either orally or in writing, the exercise of Warrants by a Warrantholder, such
services may also include disseminating information, either orally or in
writing, to Warrantholders about the Company or the market for the Company's
securities, or assisting in the processing of the exercise of Warrants.
3.4.2. WARRANT AGENT EXERCISE NOTICE AND PAYMENT. In each instance
in which a Warrant is exercised, the Warrant Agent shall promptly give written
notice of such exercise to the Company and the Underwriter ("Warrant Agent's
Exercise Notice"). If, upon the exercise of any Warrant more than one year from
the Effective Date, (i) the market price of the Company's Common Stock is
greater than the Warrant Price, (ii) disclosure of compensation arrangements was
made both at the time of the original offering and at the time of exercise (by
delivery of the Prospectus or as otherwise required by applicable law, rule or
regulation), (iii) the exercise of the Warrant was solicited by the Underwriter,
(iv) the Warrant was not held in a discretionary account, and (v) the
solicitation of the exercise of the Warrant was not in violation of Rule 10b-6
(as such rule or any successor rule may be in effect as of such time of
exercise) promulgated under the Securities Exchange Act of 1934, then the
Warrant Agent, simultaneously with the distribution of proceeds to the Company
received upon exercise of the Warrant(s) so exercised, shall, on behalf of the
Company, pay from the proceeds received upon exercise of the Warrant(s), a fee
of 5% of the Warrant Price to the Underwriter, provided that the Underwriter
delivers to the Warrant Agent within ten (10) business days from the date on
which the Underwriter has received the Warrant Agent's Exercise Notice, a
certificate that the conditions set forth in the preceding clauses (iii), (iv)
and (v) have been satisfied. The Underwriter and the Company may at any time
during business hours, examine the records of the Warrant Agent, including its
ledger of original Warrant certificates returned to the Warrant Agent upon
exercise of Warrants.
3.4.3. CONSENT OF UNDERWRITER. The provisions of this Section 3.4
may not be modified, amended or deleted without the prior written consent of the
Underwriter.
4. ADJUSTMENTS.
4.1. STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and subject to
the provisions of Section 4.5 below, the number of outstanding shares of Common
Stock is increased by a stock dividend payable in shares of Common Stock or by a
split-up of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
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<PAGE>
4.2. AGGREGATION OF SHARES. If after the date hereof, and subject to the
provisions of Section 4.5, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4.3. REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If after the date
hereof any capital reorganization or reclassification of the Common Stock of the
Company, or consolidation or merger of the Company with another corporation, or
the sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful and
fair provision shall be made whereby the Warrant holders shall thereafter have
the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase.
4.4. NOTICES OF CHANGES IN WARRANT. Upon every adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such price upon the exercise of a
Warrant, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Upon the occurrence of any event
specified in Sections 4.1., 4.2., or 4.3., the Company shall give written notice
in the manner set forth above of the record date for such dividend,
distribution, or subscription rights, or the effective date of such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Such notice shall also specify the date as
of which the holders of Common Stock of record shall participate in such
dividend, distribution, or subscription rights, or shall be entitled to exchange
their Common Stock for stock, securities, or other assets deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or issuance. Failure to give such notice, or any defect
therein, shall not affect the legality or validity of such event.
4.5. NO FRACTIONAL SHARES. Notwithstanding any provision contained in this
Warrant Agreement to the contrary, the Company shall not issue fractional shares
upon exercise of
5
<PAGE>
Warrants. If, by reason of any adjustment made pursuant to this Section 4, the
holder of any Warrant would be entitled, upon the exercise of such Warrant, to
receive a fractional interest in a share, the number of shares of Common Stock
to be received shall be rounded off to the nearest whole number.
4.6. FORM OF WARRANT. The form of Warrant need not be changed because of
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the same Warrant Price and the same number of shares as is
stated in the Warrants initially issued pursuant to this Agreement. However,
the Company may at any time in its sole discretion make any change in the form
of Warrant that the Company may deem appropriate and that does not affect the
substance thereof, and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
5. TRANSFER AND EXCHANGE OF WARRANTS.
5.1. REGISTRATION OF TRANSFER. The Warrant Agent shall register the
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of a Warrant certificate for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant certificate
representing an equal aggregate number of Warrants shall be issued and the old
Warrant certificate shall be cancelled by the Warrant Agent. The Warrant
certificate so cancelled shall be delivered by the Warrant Agent to the Company
from time to time upon request.
5.2. PROCEDURE FOR SURRENDER OF WARRANTS. Warrant certificates may be
surrendered to the Warrant Agent, together with a written request for exchange
or transfer, and thereupon the Warrant Agent shall issue in exchange therefor
one or more new Warrant certificates as requested by the registered holder of
the Warrant certificates so surrendered, representing an equal aggregate number
of Warrants; provided, however, that in the event that a Warrant certificate
surrendered for transfer bears a restrictive legend, the Warrant Agent shall not
cancel such Warrant certificate and issue new Warrant certificates in exchange
therefor until the Warrant Agent has received an opinion of counsel for the
Company stating that such transfer may be made and indicating whether the new
Warrant certificates must also bear a restrictive legend.
5.3. FRACTIONAL WARRANTS. The Warrant Agent shall not be required to
effect any registration of transfer or exchange which will result in the
issuance of a warrant certificate for a fraction of a warrant. The number of
Warrants to be delivered shall be rounded off to the nearest whole number.
5.4. SERVICE CHARGES. No service charge shall be made for any exchange or
registration of transfer of Warrants.
5.5. WARRANT EXECUTION AND COUNTERSIGNATURE. The Warrant Agent is hereby
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant certificates duly executed on behalf of the Company for such
purpose.
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6. REDEMPTION.
6.1. REDEMPTION. The outstanding Warrants may be redeemed, at the option
of the Company, as a whole at any time or in part from time to time, after they
become exercisable and prior to the Expiration Date, on a pro rata basis as the
Company in its sole discretion may determine, at the office of the Warrant
Agent, upon the notice referred to in Section 6.2., at the price of $.01 per
Warrant ("Redemption Price"), provided that (a) the last sale price of the
Common Stock has been at least one hundred and fifty-five percent (155%) of the
then effective exercise price of the Public Warrants on twenty (20) of the
twenty-five (25) trading days ending on the third business day prior to the date
on which notice of redemption is given, the satisfaction of which condition
shall be certified by the Company and (b) the Company has obtained the prior
written consent of the Underwriter. The provisions of this Section 6 may not be
modified, amended or deleted without the prior written consent of the
Underwriter.
6.2. DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the Company
shall elect to redeem all or any part of the outstanding Warrants, the Company
shall fix a date for the redemption. Notice of redemption shall be mailed by
first class mail, postage prepaid, by the Company or the Company's agent at its
direction not less than 30 days from the date fixed for redemption to the
registered holders of the outstanding Warrants to be redeemed at their last
address as they shall appear on the registration books. Any notice mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the registered holder received such notice.
6.3. EXERCISE AFTER NOTICE OF REDEMPTION. The Warrants may be exercised in
accordance with Section 3 of this Agreement at any time after notice of
redemption shall have been given by the Company pursuant to Section 6.2 hereof
and prior to the time and date fixed for redemption. On and after the
redemption date, the record holder of the Warrants shall have no further rights
except to receive, upon surrender of the Warrants, the redemption price.
7. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.
7.1. NO RIGHTS AS SHAREHOLDER. A Warrant does not entitle the registered
holder thereof to any of the rights of a shareholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.
7.2. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If any Warrant
certificate is lost, stolen, mutilated, or destroyed, the Company and the
Warrant Agent may on such terms as to indemnity or otherwise as they may in
their discretion impose (which shall, in the case of a mutilated Warrant
certificate, include the surrender thereof), issue a new Warrant certificate of
like denomination, tenor, and date as the Warrant certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant certificate shall constitute a
substitute contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time
enforceable by anyone.
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7.3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement.
7.4. REGISTRATION OF COMMON STOCK. The Company agrees that prior to the
commencement of the Exercise Period it shall file with the Securities and
Exchange Commission a post-effective amendment to the Registration Statement, if
possible or a new registration statement, for the registration, under the
Securities Act of 1933, of the Common Stock issuable upon exercise of the
Warrants. In either case, the Company shall cause the same to become effective
at or prior to the commencement of the Exercise Period and to maintain the
effectiveness of such registration statement and keep current a prospectus
thereunder until the expiration of the Public Warrants, Bridge Warrants and the
Underwriter's Warrants in accordance with the provisions of this Agreement. The
provisions of this Section 7.4 may not be modified, amended or deleted without
the prior written consent of the Underwriter.
8. CONCERNING THE WARRANT AGENT AND OTHER MATTERS.
8.1. PAYMENT OF TAXES. The Company will from time to time promptly pay all
taxes and charges that may be imposed upon the Company or the Warrant Agent in
respect of the issuance or delivery of shares of Common Stock upon the exercise
of Warrants, but the Company shall not be obligated to pay any transfer taxes in
respect of the Warrants or such shares.
8.2. RESIGNATION, CONSOLIDATION, OR MERGER OF WARRANT AGENT.
8.2.1. APPOINTMENT OF SUCCESSOR WARRANT AGENT. The Warrant Agent,
or any successor to it hereafter appointed, may resign its duties and be
discharged from all further duties and liabilities (other than those incurred
prior to such resignation or discharge) hereunder after giving sixty (60) days'
notice in writing to the Company. If the office of the Warrant Agent becomes
vacant by resignation or incapacity to act or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or incapacity by the Warrant
Agent or by a holder of Warrants (who shall, with such notice, submit his
Warrant for inspection by the Company), then the holder of any Warrant may apply
to the Supreme Court of the State of New York for the County of New York for the
appointment of a successor Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such court, shall be a corporation organized,
existing and in good standing and authorized under the laws of the state in
which it was incorporated to exercise corporate trust powers, shall maintain an
office in the Borough of Manhattan, City and State of New York for the transfer
of the Warrants and, if not incorporated in the State of New York, shall be
authorized to do business in the State of New York as a foreign corporation, and
subject to supervision or examination by federal or state authority and shall be
authorized to serve as Warrant Agent for the Warrants under the Securities
Exchange Act of 1934, as amended. After appointment, any successor Warrant
Agent shall be vested with all the authority, powers, rights, immunities,
duties, and obligations of its predecessor Warrant Agent with like effect as if
originally named as Warrant Agent hereunder, without any further act or deed;
but if for any reason it becomes necessary or appropriate, the predecessor
Warrant Agent shall execute and deliver, at the expense of the Company, an
instrument transferring to such successor Warrant Agent all the authority,
powers, and rights of such predecessor Warrant Agent hereunder; and upon request
of any successor Warrant Agent the
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Company shall make, execute, acknowledge, and deliver any and all instruments in
writing for more fully and effectually vesting in and confirming to such
successor Warrant Agent all such authority, powers, rights, immunities, duties,
and obligations.
8.2.2. NOTICE OF SUCCESSOR WARRANT AGENT. In the event a successor
Warrant Agent shall be appointed, the Company shall give notice thereof to the
predecessor Warrant Agent and the transfer agent for the Common Stock not later
than the effective date of any such appointment.
8.2.3. MERGER OR CONSOLIDATION OF WARRANT AGENT. Any corporation
into which the Warrant Agent may be merged or with which it may be consolidated
or any corporation resulting from any merger or consolidation to which the
Warrant Agent shall be a party, if it shall be eligible to serve as Warrant
Agent under Section 8.2.1, shall be the successor Warrant Agent under this
Agreement without any further act.
8.3. FEES AND EXPENSES OF WARRANT AGENT.
8.3.1. REMUNERATION. The Company agrees to pay the Warrant Agent
reasonable remuneration for its services as such Warrant Agent hereunder and
will reimburse the Warrant Agent upon demand for all expenditures that the
Warrant Agent may reasonably incur in the execution of its duties hereunder.
8.3.2. FURTHER ASSURANCES. The Company agrees to perform, execute,
acknowledge, and deliver or cause to be performed, executed, acknowledged, and
delivered all such further and other acts, instruments, and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
of the provisions of this Agreement.
8.4. LIABILITY OF WARRANT AGENT.
8.4.1. RELIANCE ON COMPANY STATEMENT. Whenever in the performance
of its duties under this Warrant Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a statement signed by the
President of the Company and delivered to the Warrant Agent. The Warrant Agent
may rely upon such statement for any action taken or suffered in good faith by
it pursuant to the provisions of this Agreement.
8.4.2. INDEMNITY. The Warrant Agent shall be liable hereunder only
for its own negligence or willful misconduct. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and reasonable counsel fees, for anything done or
omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct, or bad faith.
8.4.3. EXCLUSIONS. The Warrant Agent shall have no responsibility
with respect to the validity of this Agreement or with respect to the validity
or execution of any Warrant (except its countersignature thereof); nor shall it
be responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Warrant; nor shall it be responsible to
make any adjustments required under the provisions of Section 4. hereof or
responsible for the
9
<PAGE>
manner, method, or amount of any such adjustment or the ascertaining of the
existence of facts that would require any such adjustment; nor shall it by any
act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock to be issued pursuant
to this Agreement or any Warrant or as to whether any shares of Common Stock
will when issued be valid and fully paid and nonassessable.
8.5. ACCEPTANCE OF AGENCY. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
pay to the Company, all moneys received by the Warrant Agent for the purchase of
shares of the Company's Common Stock through the exercise of Warrants.
9. MISCELLANEOUS PROVISIONS.
9.1. SUCCESSORS. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns.
9.2. NOTICES. Any notice, statement or demand authorized by this Agreement
to be given or made by the Warrant Agent or by the holder of any Warrant to or
by the Company shall be sufficiently given or made if sent by certified mail, or
private courier service, postage prepaid, addressed (until another address is
filed in writing by the Company with the Warrant Agent), as follows:
To the Company: The Millbrook Press Inc.
2 Old New Milford Road
Brookfield, Connecticut 06804
Telephone: (203) 740-2220
Telefax: (203) 740-2526
Att: Mr. Jeffrey Conrad
President
With a copy to: Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Telephone: (212) 753-7200
Telefax: (212) 755-1467
Att: Kenneth A. Schlesinger, Esq.
To the Warrant Agent: Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Telephone: (212) 509-4000
Telefax: (212) 509-5150
Att: Steven G. Nelson, Chairman
To GKN: GKN Securities Corp.
10
<PAGE>
61 Broadway
New York, New York 10006
Telephone: (212) 509-3800
Telefax: (212) 425-5861
Att: David M. Nussbaum
Chairman
With a copy to: Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Telefax: (212) 818-8881
Att: David Alan Miller, Esq.
9.3. APPLICABLE LAW; JURISDICTION. The validity, interpretation, and
performance of this Agreement and of the Warrants shall be governed in all
respects by the law of the State of New York, without giving effect to
principles of conflicts of law. The Company hereby agrees that any action,
proceeding or claim against it arising out of or relating in any way to this
Agreement shall be brought and enforced in the courts of the State of New York
or the United States District Court for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive.
The Company hereby waives any objection to such exclusive jurisdiction and that
such courts represent an inconvenient forum. Any process or summons to be
served upon the Company may be served by transmitting a copy thereof by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 9.2 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the Company
in any action, proceeding or claim.
9.4. PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the registered holders of the
Warrants and, for the purposes of Sections 3.4, 6.1 through 6.3 and 7.4 hereof,
the Underwriter, any right, remedy, or claim under or by reason of this Warrant
Agreement or of any covenant, condition, stipulation, promise, or agreement
hereof. Underwriter shall be deemed to be a third-party beneficiary of this
Agreement with respect to such Sections. All covenants, conditions,
stipulations, promises, and agreements contained in this Agreement shall be for
the sole and exclusive benefit of the parties hereto (and the Underwriter to the
extent set forth above) and their successors and assigns and of the registered
holders of the Warrants.
9.5. EXAMINATION OF THE WARRANT AGREEMENT. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent in the
Borough of Manhattan, City and State of New York, for inspection by the
registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his or her Warrant for inspection by it.
9.6. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
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9.7. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and are not part of this Agreement and shall not affect the interpretation
thereof.
12
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective corporate seals as of the day and year first above
written.
Attest: THE MILLBROOK PRESS INC.
___________________ By:_____________________________
Name: Name: Jeffrey Conrad
Title: Title: President
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
Attest:
____________________ By:_____________________________
Name: Name:
Title: Title:
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<PAGE>
THE MILLBROOK PRESS INCORPORATED
2 Old New Milford Road
Brookfield, Connecticut 06804
September 27, 1996
Mr. Jeff Conrad
8 Mary Austin Place
Norwalk, Conn. 06859
Dear Mr. Conrad:
Upon the terms and subject to the conditions set forth below, this
letter shall constitute the agreement pursuant to which The Millbrook Press
Incorporated ("Millbrook") agrees to employ you as Chief Executive Officer.
1. TERM OF EMPLOYMENT.
1.1 TERM. Millbrook hereby employs you, and you hereby accept
employment with Millbrook, for a period of two years commencing October 7, 1996
unless sooner terminated in accordance with the provisions of Section 8 hereof.
1.2 DEFINITION. As used herein, "Employment Term" means the
entire period of your employment by Millbrook hereunder, whether for the period
provided above, or whether sooner terminated in accordance with the provisions
of Section 8 hereof.
2. DUTIES.
2.1 DESCRIPTION OF DUTIES. In your capacity as Chief Executive
Officer, you shall perform such duties and exercise such authority, consistent
with your position, as may from time to time be given to you by the Board of
Directors of Millbrook (the "Directors"). You shall have the responsibility for
the supervision of the day-to-day operations of Millbrook.
2.2 DEVOTION OF ENTIRE TIME. During the Employment Term, you
agree that you will loyally and conscientiously devote your entire productive
time, efforts, ability and attention to the duties of your office and to promote
the interests of Millbrook, and that you will not engage in any other business
duties or pursuits whatsoever. Notwithstanding any of the foregoing, you will
not be prohibited from
<PAGE>
making passive personal investments or being involved in the private business
affairs of your immediate family to the extent that such activities do not
interfere with the performance of your duties hereunder and are not in any way
competitive with the business of Millbrook.
3. COMPENSATION.
3.1 ANNUAL SALARY. During the Employment term, you will be
compensated at a base salary at the rate of $200,000 per annum, payable in
accordance with the customary payroll policies of Millbrook; provided however,
that if, pursuant to section 8.1, 8.2, or 8.3 hereof, your employment is
terminated prior to the end of the Employment Term, you will receive the
appropriate pro rata portion of your annual salary for the period during which
you are actually employed by Millbrook.
3.2 INCENTIVE COMPENSATION. You will be eligible annually to
earn incentive compensation equal to fifteen percent (15%) of your annual salary
in the event Millbrook meets its budget which will be agreed upon each fiscal
year in advance by the Board of Directors. Such incentive compensation shall be
available only upon your completion of each full year's employment hereunder.
3.3 REIMBURSEMENT FOR BUSINESS EXPENSES. Millbrook will
reimburse you, upon presentation of proper expense statements or such other
supporting information as Millbrook may reasonably require, for your reasonable
and necessary business expenses (including, without limitation, telephone,
travel and entertainment expenses) incurred or paid by you in connection with
the performance of your duties hereunder.
4. FRINGE BENEFITS. You shall be entitled to participate on the
same basis and subject to the same qualifications as all other regular full time
executive employees of Millbrook in any fringe benefit plans Millbrook makes
available from time to time for all its employees, including those benefits
available, if any, under any vacation, retirement, disability, medical insurance
and life insurance plans as the same may be placed into effect from time to
time. In addition, you shall be entitled to participate in such other benefit
plans, if any, as Millbrook makes generally available from time to time to
members of its executive staff.
5. STOCK OPTIONS. You will be granted as of the commencement of
your employ a stock option (the "Option") to purchase 80,000 shares of
Millbrook's common stock ("Stock") upon taking of any necessary action by the
Compensation Committee of the Board. The exercise price with respect to each
share of Stock subject to the Option will be $5.00. The Option will become
exercisable as to one-half of the shares of Stock subject thereto on the first
anniversary of the date of grant, and as to an additional one-half of such
shares on the second anniversary of the date of grant.
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The option will have a term of two years (the "Option Term"). Upon the
termination of your employment:
(i) by reason of death, the Option shall terminate and be no
longer exercisable;
(ii) by the Company for "cause", the Option shall terminate and
no longer be exercisable on the date you are advised by the Board that
you are being terminated for cause; or
(iii) by the Company without cause or by you voluntarily, the
Option shall terminate and be no longer exercisable, on the date you
are advised by the Board that you are being terminated, or the date on
which you voluntarily terminate your employ.
Other than as stated above, the Option will be governed by the terms
and conditions of Millbrook's Stock Option Plan and the Standard Stock Option
Agreement thereunder to be executed by you and Millbrook.
6. CONFIDENTIALITY.
6.1 TRADE SECRETS. You and Millbrook acknowledge and agree that
during the Employment Term and in the course of the discharge of your duties
hereunder, you will have access to an become acquainted with information
concerning the operation of Millbrook and other valuable information regularly
used in Millbrook's business and not generally known to others. You acknowledge
and agree that it is Millbrook's policy to maintain such information as secret
and confidential, whether relating to Millbrook's business as heretofore or
hereafter conducted, or relating to Millbrook's customers, clients, suppliers,
employees and other business associates (all such information being referred to
hereinafter as "Confidential Information"). You acknowledge and agree that all
Confidential Information is owned by Millbrook and constitutes Millbrook's trade
secrets.
6.2 NON-DISCLOSURE. You specifically agree that you shall not
use, publish, disseminate, misappropriate or otherwise disclose any Confidential
Information, whether directly or indirectly, either during the term of this
Agreement or at any other time thereafter, except as is required by law or in
the course of your employment hereunder. This provision shall not apply to
Confidential Information which becomes generally known to the public by means
other than your breach of this Section.
6.3 UNFAIR COMPETITION. You acknowledge and agree that the
sale, unauthorized use or disclosure of any Confidential Information obtained by
you
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<PAGE>
during the course of your employment under this Agreement, including but not
limited to (a) information concerning Millbrook's current, future or proposed
work, services, or products, (b) the fact that any such work, services or
products are planned, under consideration, or in production, as well as, (c) any
descriptions thereof, constitute unfair competition. You promise and agree not
to engage in any unfair competition with Millbrook, either during the term of
this Agreement or at any other time thereafter.
6.4 PRECAUTIONS; RETURN OF MATERIALS. You agree to take all
reasonable precautions to protect the integrity of all Confidential Information,
including all documents and other material entrusted to you containing or
embodying Confidential Information. You further agree that all files, records,
documents, and similar items relating to Millbrook's business, whether prepared
by you or by others, are and shall remain exclusively the property of Millbrook,
and that upon the expiration or termination of your employment hereunder you
shall return to Millbrook all such material and all copies thereof in your
possession or control.
6.5 COPYRIGHTABLE AND PATENTABLE MATERIALS. You agree that
during the Employment Term you will take any and all business developments,
opportunities and potentially profitable situations relating to Millbrook's
business to the Directors for exploitation by Millbrook. You agree promptly to
disclose to Millbrook (and only to Millbrook) any and all knowledge possessed or
acquired by you by any means whatsoever during the Employment Term which relates
in any way to any developments, concepts, ideas or innovations, whether
copyrightable or patentable or not, relating to the business of Millbrook. For
the compensation and benefits received hereunder, you hereby assign and agree to
assign to Millbrook your entire right, title and interest in and to any of the
aforedescribed materials, discoveries, developments, concepts, ideas or
innovations. All such materials, discoveries, developments, concepts, ideas and
innovations shall be the property of Millbrook, and you shall, without further
compensation, do all things necessary to enable Millbrook to perfect title in
such materials, discoveries, concepts, ideas and innovations and to obtain and
maintain effective patent or copyright protection in the United States and
foreign countries thereon, including, without limitation, rendering assistance
and executing necessary documents.
7. COMPETITIVE ACTIVITIES.
7.1 NON-COMPETITION. During the Employment Term and for a
period of two (2) years after the expiration or earlier termination thereof for
whatever reason, you shall not within the United States:
(a) Consult with, be employed by, render services to, or
engage in any business activity with (whether as owner, controller, employee,
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<PAGE>
employer, consultant, partner, officer, director, agent or otherwise) any
business or business entity competing in any way with the business of Millbrook;
(b) Without the prior written consent of the Directors,
personally solicit or cause to be solicited or authorize, directly or
indirectly, for or on behalf of yourself or any third party, any business
competitive with Millbrook, from others who are or were at any time within 12
months prior to the expiration or termination of your employment hereunder
customers, suppliers, clients, authors, agents or other business associates of
Millbrook.
7.2 SOLICITATION OF EMPLOYEES AND OTHERS. You acknowledge and
agree that Millbrook's directors, officers and employees possess special
knowledge of Millbrook's operations and are vitally important to the continued
success of Millbrook's business. You shall not, without the prior written
consent of the Directors, directly or indirectly seek to persuade any director,
officer or employee of Millbrook either to discontinue his or her position with
Millbrook or to become employed or engaged in any activity competitive with the
activities of Millbrook.
7.3 SCOPE. If any court determines that any of the covenants
set forth herein, or any part or parts thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall then be enforceable and shall be
enforced.
8. TERMINATION.
8.1 BY NOTICE OR DEATH. Prior to the end of the Employment
Term, your employment hereunder: (a) may be terminated hereunder by either party
hereto without cause upon one hundred and eighty (180) days' prior written
notice; and (b) shall be terminated in the event of your death.
8.2 PERMANENT DISABILITY. Your employment hereunder may be
terminated by Millbrook upon thirty (30) days' prior written notice to you in
the event of your permanent disability. As used herein, "permanent disability"
shall mean any illness, injury or other physical or mental disability that shall
prevent you from performing a substantial portion of your duties hereunder for
any period of either 90 consecutive days or an aggregate of 120 days during any
consecutive twelve (12) month period.
8.3 TERMINATION FOR CAUSE. Millbrook reserves the right to
terminate this Agreement at any time and without notice for "cause" as defined
below. As used in this Agreement, the term "cause" shall mean (i) the
commission by you of any act which would constitute a felony under state or
federal law, or the equivalent
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<PAGE>
under foreign law, if prosecuted; (ii) the commission by you of any act of moral
turpitude; (iii) the material breach by you of the provisions of this Agreement;
(iv) your failure or refusal to perform your obligations under this Agreement,
or other acts or omissions constituting neglect or dereliction of duties
hereunder; (v) fraud, dishonesty or other acts or omissions by you that amount
to a willful breach of your fiduciary duty to Millbrook; (vi) your personal
bankruptcy; or (vii) the happening of any other event which, under the
provisions of any laws applicable to Millbrook or its activities, disqualifies
you from acting in any or all capacities provided for herein. Millbrook may, at
its option, terminate this Agreement for the reasons stated in this Section by
giving written notice of termination to you without prejudice to any other
remedy to which Millbrook may be entitled either by law, in equity, or under
this Agreement. Upon any such termination under this Section, and upon
Millbrook's request, you agree to resign from all directorships and positions as
an executive officer you may then hold with Millbrook or any of its affiliates.
8.4 SEVERANCE PAY. Whether and to what extent you are entitled
to severance pay upon termination of your employment with Millbrook will be
determined according to Millbrook's severance policies, if any, at the time of
such termination.
9. MISCELLANEOUS.
9.1 NOTICES. Notices hereunder shall be in writing and shall be
delivered by hand or sent by registered or certified mail, return receipt
requested, if to you, at the address set forth above, and if to Millbrook Press,
at 27A Main Street, Southampton, New York 11968, or at such other address as to
which notice has been given in the manner herein provided.
9.2 ENTIRE AGREEMENT. This Agreement sets forth your and
Millbrook's complete understanding with respect to the matters set forth herein.
This Agreement may be modified or amended only by an agreement in writing signed
by the parties hereto.
9.3 SEVERABILITY. If any term, provision, covenant, or
condition of this Agreement, or the application thereof to any person, place or
circumstance, shall be held by a court of competent jurisdiction to be invalid,
unenforceable, or void, the remainder of this Agreement and such term,
provision, covenant, or condition as applied to other persons, places and
circumstances shall remain in full force and effect.
9.4 HEADINGS. The headings and captions of this Agreement are
provided for convenience only and are intended to have no effect in construing
or interpreting this Agreement.
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<PAGE>
9.5 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to the conflict of laws, principles thereunder.
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<PAGE>
If the foregoing accurately reflects your understanding of our
agreement and is acceptable to you, please sign the enclosed copy of this letter
and return it to the undersigned.
Very truly yours,
THE MILLBROOK PRESS INCORPORATED
By /S/ BARRY FINGERHUT
----------------------------------
Barry Fingerhut, Chairman of the
Board of Directors
Accepted and Agreed:
By: /S/ JEFF CONRAD
--------------------------
Jeff Conrad
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<PAGE>
THIS LEASE, made by this agreement between LAND FIRST II GROUP, a general
partnership, having its office and principal place of business at P.O. Box 5113,
Brookfield, CT 06804, acting herein by CRAIG L. FROEHLICH, Partner, duly
authorized, LANDLORD and FRANK FARRELL and JEAN REYNOLDS, acting as principals
on behalf of THE MILLBROOK PRESS, INC., a corporation formed under the laws of
the State of Delaware, TENANT,
WITNESSETH:
Whenever used herein, the singular number shall include the plural, and
plural the singular, and the use of gender shall be applicable to all genders.
The Landlord does hereby lease to the Tenant and the Tenant does hereby
hire from the Landlord the following:
All those five (5) certain Condominium Units being Nos. 3A 3B 3C, 3D & 3F
in Landmark Office Center, 2 Old New Milford Road, Brookfield, CT 06804,
together with an interest in the common area and facilities of said unit being
more specifically designated and described in the Declaration establishing the
Plan for Unit Ownership under the "Unit Ownership Act" of the General Statues of
the State of Connecticut, which Declaration is entitled, "Declaration of Land
First II Group and is dated March 21, 1988 and to be recorded in the Brookfield
Land Records, reference thereto being hereby made. The land covered by said
Declaration of Condominium is known and designated as "Parcel 'B' 4,008 Acres",
on a certain map entitled "Map Prepared for Brookfield Office Park Inc. Old
Route 7, Brookfield, Connecticut Scale 1" = 50' February 26, 1974, Certified
Substantially Correct C. James Osborne, Jr., R.L.S., Charles J. Osborne
Associates, New Milford Connecticut", which map is on file in the office of the
Town Clerk of the Town of Brookfield.
<PAGE>
for the term rent payable as follows: Commencing March 1, 1996 through December
31, 1996, the sum of $64,339.50 shall be payable at the rate of $6,433.95 per
month, in advance, triple net; thereafter the first full year of the term
commencing January 1, 1997 the sum of $93,955.08 per year payable at the rate of
$7,829.59 per month, in advance, triple net; the second year of the term the sum
of $97,326.60 payable at the rate of $8,110.55 per month, in advance, triple
net; the third year of the term the sum of $96,762.00 payable at the rate of
$8,063.50 per month, in advance, triple net; the fourth year of the term the sum
of $100,133.52 payable at the rate of $8,344.46 per month, in advance, triple
net; the fifth year of the term the sum of $103,050.00 payable at the rate of
$8,587.50 per month, in advance, triple net; and the sixth year of the term the
sum of $106,876.56 payable at the rate of $8,906.38 per month, in advance,
triple net.
AND THE SAID LANDLORD covenants with the said Tenant that it has good right
to lease said premises in manner aforesaid, and that Landlord will suffer and
permit said Tenant (it keeping all the Covenants on its part, as hereinafter
contained) to occupy, possess and enjoy said premises during the term aforesaid,
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without hindrance or molestation from Landlord or any person claiming by, from
or under Landlord.
AND THE SAID TENANT covenants with the said Landlord to hire said premises
and to pay the rent therefor as aforesaid, that Tenant will commit no waste, nor
suffer the same to be committed thereon, nor injure nor misuse the same; and
also that Tenant will not without written permission from said Landlord, which
permission will not be unreasonably withheld, assign this lease nor underlet a
part or the whole of said premises, nor make alterations therein, nor use the
same for any purpose but that hereinbefore authorized, but will deliver up the
same at the expiration or sooner determination of this tenancy, in as good
condition as they are now in, ordinary wear and tear excepted.
PROVIDED, HOWEVER, and it is further agreed that if said rent shall remain
unpaid ten (10) days after the same shall become payable as aforesaid, or if the
said Tenant shall assign this Lease, or underlet or otherwise dispose of the
whole or any part of said demised premises, or use the same for any purpose but
that hereinbefore authorized, or make any alterations therein without consent of
the Landlord in writing, which consent shall not be unreasonably withheld, or
shall commit waste or suffer the same to be committed on said premises, or
injure or misuse the
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same, or shall otherwise violate any of the agreements herein by the Tenant to
be performed, then this Lease shall thereupon, by virtue of this express
stipulation therein, expire and terminate, and the Landlord may recover
possession thereof in the manner prescribed by the statute relating to summary
process.
AND IT IS FURTHER AGREED, that in case the said Tenant shall, with the
written consent of the said Landlord endorsed hereon, or on the duplicate
hereof, at any time hold over the said premises, beyond the period above
specified as the termination of this Lease, then the said Tenant shall hold said
premises upon the same terms, and under the same stipulations and agreements as
are in this Instrument contained, and no holding over by said Tenant shall
operate to renew this Lease without such written consent of said Landlord.
AND IT IS FURTHER AGREED between the parties hereto, that Landlord
represents that at the commencement of this Lease they are in compliance with,
and conform to all the Laws of the State of Connecticut, and the by-laws, rules
and regulations of the City and Town within which the premises hereby leased are
situated, relating to Health, Nuisance, Fire, Highways and Sidewalks, so far as
the premises hereby leased are, or may be concerned and the Tenant agrees TO
MAINTAIN ITS DEMISED PREMISES
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in compliance with said regulations and to save the Landlord harmless from all
fines, penalties and costs for violation of or non-compliance with the same with
the sole exception of new fire code regulations subsequently passed and
affecting the premises.
AND IT IS FURTHER AGREED that said premises shall at all reasonable times
during normal business hours be open to the inspection of the Landlord and its
agents and for necessary repairs by either party. Upon reasonable notice, said
premises shall also be open at all reasonable times during normal business hours
to the Landlord and its agents to show for purchase, mortgage or lease, provided
such activity shall not unreasonably interfere with the Tenant's business
operations.
AND IT IS FURTHER AGREED between the parties to these presents, that in
case the building or buildings erected on the premises hereby leased shall be
partially damaged by fire or otherwise, the same shall be repaired as speedily
as possible at the expense of the said Landlord and the Tenant shall pay a
proportionate amount of the rental for the area of said units not affected; that
in case the damage shall be so extensive as to render the building or demised
premises untenantable the rent shall cease until such time as the building shall
be put in complete repair; but in the case of the total destruction of the
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premises/ by fire or otherwise/ the rent shall be paid up to the time of such
destruction and then and from thenceforth this Lease shall cease and come to an
end at the option of the Tenant who shall in consideration thereof release
Landlord from any and all claims for losses he might otherwise make against the
Landlord.
AND TENANT further covenants and agrees that no refuse or garbage shall be
allowed to accumulate or remain in or upon the leased premises.
AND IT IS FURTHER AGREED that this Lease shall cease and terminate at the
option of the Landlord if the Tenant shall be adjudicated bankrupt or shall
compound Tenant's debts or assign Tenant's estate or effects contained in the
Leased premises for payment thereof, or if a receiver of the Tenant's property
shall be appointed, or if this Lease shall, by operation of law, devolve upon or
pass to anyone other than the Tenant, or if an execution shall be levied against
the estate of the Tenant contained in leased premises, and shall not be
satisfied within five (5) business days thereof. Upon such termination all
future installments of rent and other SUMS DUE or to become due hereunder shall
immediately become due and payable and acceptance by the Landlord of any sum
from other than the Tenant shall not
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be deemed to be a waiver of any of the Landlord's rights and remedies hereunder.
AND IT IS FURTHER AGREED that the failure of the Landlord or Tenant to
insist upon a strict performance of any of the terms, conditions and covenants
herein shall not be deemed a waiver of any rights or remedies that the Landlord
or Tenant may have, and shall not be deemed a waiver of any subsequent breach or
default in the terms, conditions and covenants herein contained.
AND IT IS FURTHER AGREED that this Lease contains the entire agreement
between the parties that all representations relating to said premises and to
this Lease are included herein.
IT IS FURTHER AGREED by and between the parties hereto as follows:
1. The Tenant shall be responsible for all maintenance to the demised
premises including the ventilating, heating, air conditioning, plumbing and
electrical systems.
2. As additional rent, for the term of this Lease and any renewal, the
Tenant shall pay to the Landlord the real estate taxes due to the Town of
Brookfield for said Units 3A, 3s, 3C, 3D & 3F. Said payment shall be made
semi-annually on time so as to enable the Landlord to pay the Town of Brookfield
the real estate taxes as they become due. Any prepayment of said taxes shall be
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pro rated to the date of the termination or expiration of said lease. Landlord
will furnish copies of said tax bills to the Tenant 30 days prior to the
expected date of payment.
3. Throughout the term of the Lease, Tenant shall at its sole costs and
expense maintain a policy of general public liability insurance covering claims
for personal injury or property damage, with limits in respect of personal
injury of not less than $1,000,000.00 for any one person and $1,000,000.00 for
any one action with limits in respect of property damage of not less than
$250,000.00. Such policy shall name the Landlord as an additional insured but
only with respect to Tenant's use and occupancy of the premises. Tenant need not
maintain a separate policy of public liability insurance for the demised
premises, if Tenant has a blanket policy in force and effect. The Tenant, upon
the request of the Landlord, shall supply Landlord satisfactory confirmation of
the existence of such insurance which contains a ten (10) day prior written
notice provision for policy changes or cancellation.
4. The Tenant agrees to carry insurance in the nature of a hazard and
peril policy on the contents and fixtures of the demised unit which policy shall
be for the benefit and protection
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of both the Landlord and the Tenant as their interests may appear in accordance
with good insurance practices as same may apply.
5. The Tenant shall pay its own utility expenses including electric and
telephone and shall provide annual service to the heating/Ac equipment.
6. As additional rent, during the term of the Lease, the Tenant shall pay
its full percentage share of all normal common expenses having to do with the
building, including but not limited to casualty and fire insurance, garbage
removal, snow removal, lawn and landscaping maintenance being all of the units'
applicable condominium common charges.
7. Following commencement of the Lease, the Tenant hereby agrees that all
alterations to the units will be at its own expense and must be approved in
writing by the Landlord prior to the commencement thereof. The Landlord hereby
agrees that he will not unreasonably withhold such approval.
8. The Tenant will use the demised premises as a proofreading, editing
and publishing center and this Lease is expressly contingent upon the issuance
of a certificate of Occupancy, Zoning Compliance Certificate and the Tenant's
obtaining a permit, if necessary, to perform such services.
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<PAGE>
9. Landlord shall be responsible for all structural and roof repairs to
the demised unit during the term of the Lease or any renewal thereof.
10. The Landlord represents that the demised unit is serviced by adequate
sewer and well systems to be owned and maintained by the Landlord including the
repair or replacement thereof unless said repair or replacement results from the
negligence of the Tenant or its agents or employees.
11. The Landlord shall not be held responsible for and is hereby expressly
relieved from any and all liability by reason of any injury, death, loss or
damage to any person or property in or about the leased premises and the ways
immediately adjoining, however caused, except for that caused by Landlord's
negligence, whether the loss, injury, death or damage be to the person or
property of the Tenant or any other person. The Tenant agrees to indemnify and
save the Landlord harmless from any claims caused by Tenant's negligence,
including expenses and liability for losses of, or damage to property or
injuries or death to persons occurring in or about the leased premises including
such claims by employees or Tenant in or about the premises of the Landlord
which the demised premises are a part, and further agrees to pay the reasonable
costs of any legal defense provided by counsel of
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Landlord's choice in any action covered by this paragraph. The Landlord shall
not be liable to the Tenant and the Tenant shall not be liable to the Landlord
for any loss or damage caused by any of the perils or casualties enumerated in
standard fire, extended coverage, boiler and machinery policies or multiple
peril physical damage policies and any recovery by the insured party from its
insurers, even if such fire or other casualty or peril resulted from the
negligence of the other party; and to the extent of such recovery, each party
hereto releases and waives all rights and claims against the other.
12. If the subject property or any part thereof wherein the demised
premises are located shall be taken-by public or quasipublic authority under any
power of eminent domain or condemnation, and by such the demised premises are
rendered unusable for tenant's purposes, this Lease shall forthwith terminate
and the Tenant shall have no claim or interest in or to any award of damages for
such taking except to the extent that any part of such condemnation award is
attributable to the loss of business earnings or income derived from the demised
units or any of Tenant's improvements.
13. This Lease and all rights of Tenant hereunder are and shall be subject
and subordinate to the lien of any first
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mortgage which may hereafter affect the fee title of the demised premises and to
any modifications, renewals, extensions or replacements thereof. Said mortgage
may contain a provision that notwithstanding any default in the mortgage and any
foreclosure thereof or the enforcement by the holder thereof of any rights or
remedies thereunder or otherwise, said Tenant shall remain in full possession of
the demised premises throughout the term thereof and any extension or renewal
thereof; provided that at the time of the commencement of action against
Landlord to recover possession in any such foreclosure proceedings, the
following conditions shall have been complied with:
(i) The Tenant shall not be in default under this Lease; and;
(ii) The Tenant shall not have paid any installment of rent in advance
other than for the then current month and the last month s rent and the security
deposit, and there shall be no offsets against future installments of rent,
except as set forth herein; and
(iii) The net rent remaining to accrue shall not have been decreased, the
term of this Lease shall not have been extended except in accordance with the
option contained herein and this
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Lease shall not have been modified in any way which would adversely affect the
security of the holder of the mortgage; and
(iv) The Tenant shall have furnished to the then holder of the mortgage a
sworn statement in writing as to the status of this Lease in respect to the
above conditions (i), (ii) and (iii) within thirty (30) days after such holder
shall have made written demand for the same.
The Tenant shall, upon demand, at any time or times, execute, acknowledge
and deliver to Landlord, without expense to Landlord, any and all instruments
that may be necessary or proper to subordinate this Lease and all rights
hereunder to the replacement and extension, and if Tenant shall fail at any time
to execute, acknowledge, and deliver any such subordination instrument, within
seven (7) business days of the demand or request, Landlord, in addition to any
other remedies available to Landlord in consequence thereof, may execute,
acknowledge and deliver the same as the attorney in fact of Tenant and in
Tenant's name, place and stead, and Tenant hereby irrevocably makes, constitutes
and appoints Landlord, Landlord s heirs and assigns, such attorney in fact for
that purpose.
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14. The term of this Lease shall be six (6) years and ten (10) months
commencing on March 1, 1996 and terminating December 31, 2002.
15. The Landlord represents and guarantees to Tenant that the Tenant s use
of said premises as herein stated has been approved by Landlord acting in his
capacity as Declarant and further that Tenant shall have the right and authority
to apply in its own name for all permits necessary to accomplish Tenant s
proposed work hereunder without the necessity of any applications for same being
made in the name of the condominium association.
16. The Tenant shall have the right, by appropriate proceedings, to
protest or contest any assessment or assessments for real estate taxes, or any
special assessment, or the validity of either, or of any changes in assessments
or the tax rate. In any such contest or proceedings the Tenant may act in its
own name and or the name of the Landlord and the Landlord will, at the Tenant s
request, cooperate with Tenant in any way the Tenant may reasonably require in
connection with such contest or proceedings. The Landlord shall sign such
reasonable consents or other documents as the Tenant may request. Any contest or
proceedings conducted by the Tenant shall be at the Tenant's expense and in the
event any penalties, interest or late charges
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become payable with respect to the real estate taxes as a result of such
contest, the Tenant shall pay the same. However, the Landlord shall be solely
responsible for any penalties, interest or late charges imposed on the Landlord
through no fault of the Tenant. The Tenant shall be entitled to receive any tax
refunds properly allocable to the term of this lease, as it may be extended, and
relating to taxes paid by the Tenant, as a result of any such contests or
proceedings and Landlord agrees to promptly endorse such checks or vouchers that
may be issued in the joint names of Landlord or Tenant.
17. The Tenant represents to the Landlord that there is no broker
instrumental in bringing about this Lease. The Tenant hereby agrees to indemnify
and hold harmless the Landlord against the claim of any broker or agent for a
commission due by reason of this Lease, where it is judicially proven that said
broker or agent called the Premises to the Tenant s attention or interested
Tenant therein, or otherwise rendered services for which a commission might be
due, said indemnity to include all costs of defending any such claim, including
reasonable attorney's fees.
18. The Tenant shall be entitled and the Landlord shall provide the same
amount of standard signage as the other unit owners/tenants in said building.
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19. If Declarant or Association should establish assigned parking for the
Landmark Office Building, the Tenant shall be provided such assigned spaces
equivalent to the other unit owners/tenants in said building.
20. It is agreed by the parties hereto that for the purposes of this
agreement the term triple net shall mean the Tenant shall pay in addition to the
rent, the taxes, insurance and common charges attributable to the demised units.
21. It is agreed by the parties hereto that this lease supersedes and
terminates all prior leases and addendum heretofore made by the parties herein.
22. It is agreed by the parties hereto that the Tenant is responsible for
all reasonable legal fees, costs and expenses incurred by the Landlord in the
enforcement of any of the terms of this Lease which might be occasioned by acts
of the Tenant.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals, and to a duplicate of the same tenor and date, this 26th day of March,
1996.
Signed, Sealed and Delivered
in the Presence of: LAND FIRST II GROUP
BY:
- --------------------------- ------------------------------
DENNIS K. STONE, a Partner
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BY:
- --------------------------- -------------------------------
CRAIG L. FROEHLICH, a Partner
THE MILLBROOK PRESS, INC.
BY:
- --------------------------- -------------------------------
FRANK FARRELL, Its
hereunto duly authorized
BY:
- --------------------------- -------------------------------
JEAN REYNOLDS, Its
hereunto duly authorized
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EXHIBIT 23.1
AUDITOR'S CONSENT
The Board of Directors
The Millbrook Press Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/S/ KPMG PEAT MARWICK LLP
New York, New York
December 6, 1996
