As filed with the Securities and Exchange Commission on April 2, 1997,
Registration No. 333-19423
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
KIDS STUFF, INC.
(Name of small business issuer in its charter)
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DELAWARE 5961 34-1843520
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
organization) Classification Code No.)
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4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Address and telephone number of principal executive offices and
principal place of business.)
William L. Miller, Chief Executive Officer
Kids Stuff, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Name, address and telephone number of agent for service)
Copies to:
Michael T. Greif, Esq. Steven F. Wasserman, Esq.
Hornsby, Sacher, Zelman, Bernstein & Wasserman, LLP
Stanton, Paul & Beiley, P.A. 950 Third Avenue
1401 Brickell Avenue, Suite 700 New York, New York 10022
Miami, Florida 33131 (212) 826-0730
(305) 371-8797 (212) 371-4730 (Fax)
(305) 374-2605 (Fax)
-----------------
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form
are to be offered on a delayed or continuous basis, pursuant
to Rule 415 under the Securities Act of 1933, check the following box: [ X ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box: [ ]
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Calculation of Registration Fee
================================================================================================================================
TITLE OF EACH AMOUNT PROPOSED PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PRICE PER UNIT PRICE(1) FEE
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Units, each consisting of two shares of Common
Stock, $.001 par value per share, and one Class
A Warrant to purchase one share of Common
Stock(2) 287,500 $12.00 $3,450,000 $1,045
per Unit
Shares of Common Stock included in the Units 575,000 - - -
Class A Warrants included in the Units 287,500 - - -
Shares of Common Stock underlying Class A
Warrants(3) 287,500 $5.00 per $1,437,500 436
share
Class A Warrants of Selling Securityholders 1,500,000 - - (4)
Common Stock underlying Class A Warrants of
Securityholders(5) 1,500,000 $5.00 per $7,500,000 2,273
share
Underwriters' Unit Purchase Option
("Underwriters' Option"), each Unit
consisting of two shares of Common Stock,
and one Class A Warrant to purchase one share
of Common Stock 25,000 $14.40 $360,000 109
per Unit
Shares of Common Stock included in the
Underwriters' Option 50,000 - - -
Class A Warrants included in the
Underwriters' Option 25,000 - - -
Shares of Common Stock underlying Class A
Warrants included in the 25,000 $5.00 per $125,000 38
Underwriters' Option(6) Unit
Total Registration Fee $3,901
================================================================================================================================
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Includes 37,500 Units which the Underwriters have the option to purchase
from the Registrant to cover over-allotments, if any.
(3) Issuable upon the exercise of Class A Warrants to be offered to the
public.
(4) No fee is required under Rule 457(g).
(5) Issuable upon the exercise of the Class A Warrants of Securityholders.
(6) Issuable upon the exercise of the Class A Warrants included in the 25,000
Units included in the Underwriters' Option.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EXPLANATORY NOTE
This registration statement (the "Registration Statement") contains two
prospectuses: one relating to the offering by Kids Stuff, Inc. (the "Company")
of 287,500 Units (including 37,500 Units to cover over-allotments, if any), each
Unit consisting of two shares of Common Stock and one Class A Warrant (the
"Company's Prospectus"); and, one relating to the offering by three bridge
lenders (the "Selling Securityholders") of up to 1,500,000 Class A Warrants held
by them (the "Selling Securityholders' Prospectus"). Following the Company's
Prospectus are certain substitute pages of the Selling Securityholders'
Prospectus, including alternate front outside and back cover pages, an alternate
"The Offering" section of the "Prospectus Summary" and sections entitled
"Concurrent Offering" and "Selling Securityholders; Plan of Distribution." Each
of the alternate pages for the Selling Securityholders' Prospectus included
herein is labeled "Alternate Page for Selling Securityholders' Prospectus." All
other sections of the Company's Prospectus, other than "Selling Securityholders"
and "Underwriting", are to be used in the Selling Securityholders' Prospectus.
In addition, cross-references in the Company's Prospectus will be adjusted in
the Selling Securityholders' Prospectus to refer to the appropriate sections,
and references to "the Offering" or "this Offering" in the Company's Prospectus
will be referenced in the Selling Securityholders' Prospectus as "the Concurrent
Offering" where appropriate.
<PAGE>
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KIDS STUFF, INC.
Cross-Reference Sheet
Showing Location in Prospectus of
Information Required by Items in Part I of Form SB-2
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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1. Front of Registration Statement and
Outside Front Cover of Prospectus.......... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Bank
Cover Pages of Prospectus.................. Inside Front and Outside Bank Cover Pages of
Prospectus; Additional Information
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution................................... Dilution
7. Selling Securityholders.................... Selling Securityholders
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus; Selling
Securityholders; Underwriting
9. Legal Proceedings ......................... Business - Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons............... Management
11. Security Ownership of Certain
Beneficial Owners and Management........... Principal Stockholders
12. Description of Securities.................. Description of Securities; Dividends
13. Interest of Named Experts and Counsel...... Legal Matters
14. Disclosure of Commission Position
on Indemnification for Securities Act
Liabilities................................ Underwriting
15. Organization Within Last Five Years........ The Company and its Parent
16. Description of Business.................... Prospectus Summary; The Company and its
Parent; Business
17. Management's Discussion and
Analysis or Plan of Operation.............. Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property.................... Business
19. Certain Relationships and Related
Transactions............................... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters................ Risk Factors; Unregistered Shares Eligible for
Immediate and Future Sale; Description of
Securities
21. Executive Compensation..................... Management - Executive Compensation
22. Financial Statements....................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure....................... Not Applicable
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<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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 2, 1997
PROSPECTUS
KIDS STUFF, INC.
250,000 UNITS
Each Unit Consisting of Two Shares of Common Stock
and One Common Stock Class A Purchase Warrant
Kids Stuff, Inc. (the "Company") is offering for sale 250,000 units
(the "Units"), each Unit consisting of two shares of common stock, $.001 par
value (the "Common Stock") and one redeemable Class A warrant (the "Warrant") to
purchase one share of Common Stock. The Common Stock and the Warrants are
immediately separately transferable as of the date of this Prospectus. Each
Warrant entitles the holder to purchase one share of Common Stock at a price of
$5.00 for a period of four years commencing one year after the date of this
Prospectus. The Company may redeem the Warrants at a price of $.05 per Warrant,
at any time after they become exercisable, upon not less than 30 days' prior
written notice, if the closing bid price of the Common Stock has been at least
$14.40 per share for 20 consecutive trading days ending on the 5th day prior to
the date on which the notice of redemption is given. See "DESCRIPTION OF
SECURITIES."
The registration statement of which this Prospectus forms a part also
contains a separate Prospectus for the sale by three selling bridge lenders (the
"Selling Securityholders") of up to 1,500,000 Warrants, which were purchased at
a price of $.05 per Warrant. The Selling Securityholders are not affiliated with
the Company. No proceeds from the sale of any such securities by the Selling
Securityholders will be received by the Company. These Warrants may be sold from
time to time directly by the Selling Securityholders or, alternatively, through
underwriters, dealers or agents. The distribution of the Warrants by the Selling
Securityholders may be effected in one or more transactions or through sales to
one or more broker-dealers for resale of such Warrants as principals, at prices
prevailing at the time of such sales, at prices related to such prevailing
market price or at negotiated prices. The sale of the Warrants by the Selling
Securityholders are subject to Prospectus delivery and other requirements of the
Security Act of 1933. Sales of the Warrants by the Selling Securityholders or
even the potential of such sales may have an adverse affect on the market price
of the Company's securities should a public trading market develop. See "SELLING
SECURITYHOLDERS."
Prior to this Offering, there has been no public market for the Units
and there can be no assurance that any such market will develop. The initial
public offering price of $12.00 per Unit has been arbitrarily determined by the
Company and VTR Capital, Inc ("VTR Capital" or the "Representative"), the
representative of the underwriters of the Offering (the "Underwriters"). For
information regarding the factors considered in determining the initial public
offering price of the Units and the exercise price of the Warrants, see
"UNDERWRITING." The Units, Common Stock and Warrants are expected to be approved
for quotation on the OTC Bulletin Board under the symbols "KIDSU," "KIDS," and
"KIDW," respectively. See "RISK FACTORS - Certain Implications of Trading
Over-The-Counter; `Penny Stock' Regulations," on page __. There is no assurance,
however, that the Company's securities will be approved for listing on the OTC
Bulletin Board or elsewhere. The Company anticipates that the securities offered
hereby will be qualified for sale by the Company in a limited number of states.
See "RISK FACTORS - Limits on Secondary Trading; Current Prospectus and State
Sky Registration Required to Exercise Warrants," on page ___.
Commencing in October, 1996, the Company sold 1,300,000 unregistered
shares of Common Stock for $.125 per share to eight private investors (the
"Private Investors") in order to obtain equity bridge financing. Assuming that
each of the two shares of Common Stock comprising a $12 Unit is valued at $6.00
per share, and no value is attributed to a Warrant included in a Unit, the
1,300,000 shares held by the eight private investors have a hypothetical value
of $7,800,000 for which they paid a total of $162,500. See "RISK FACTORS -
Unregistered Shares Eligible for Immediate and Future Sale," on page __.
<PAGE>
Upon completion of this Offering, Duncan Hill Co., Ltd., the Company's
parent, will own approximately 80% of the Company's outstanding voting capital
stock. See "RISK FACTORS - Control by Parent and Parent's Controlling
Stockholders," on page __.
--------------
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. See "RISK FACTORS" BEGINNING ON PAGE __ AND
"DILUTION."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
----------------------------------------------------
Per Unit................... $12.00 $1.20 $10.80
Total(3)................... $3,000,000 $300,000 $2,700,000
===============================================================================
(1) Does not include additional compensation to be received by the Underwriters
in the form of a non-accountable expense allowance equal to 3% of the
public offering price of the Units, the value of a non-redeemable option
granted to the Underwriters to purchase up to 25,000 Units at an exercise
price of $14.40 per Unit, or a three year financial consulting agreement at
a cost to the Company of $100,000 payable in advance at the Closing of this
Offering. The Company has also agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "UNDERWRITING."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $489,979, including the non-accountable expense allowance in the amount
of $90,000 ($103,500 if the Underwriters' over-allotment option is
exercised in full), and the financial consulting fee referenced in note
(1).
(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date of this Prospectus, to purchase up to 37,500 additional
Units, solely to cover 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 approximately
$3,450,000 and $345,000 and $3,105,000, respectively. See "UNDERWRITING."
The Units being offered for sale by the Company are being offered on a
"firmrcommitment" basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters. The Underwriters reserve the right to withdraw,
cancel or modify the offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Units will be made
against payment therefor on or about _______________, 1997. The Underwriters
have no arrangements, agreements or understandings with any of the Selling
Securityholders or Private Investors with respect to the sale of the 1,500,000
Warrants being offered for sale by the Selling Securityholders or the securities
owned by the Private Investors.
VTR CAPITAL, INC.
The date of this Prospectus is _____________, 1997.
<PAGE>
[INSIDE FRONT COVER]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON STOCK
AND/OR WARRANTS OF THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THE OFFERING MAY BE
SOLD TO CUSTOMERS OF THE UNDERWRITERS. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS AND/OR THE SECURITIES
INCLUDED THEREIN WITH OR THROUGH THE
<PAGE>
UNDERWRITERS. NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST WITH
RESPECT TO THE PURCHASE OR RESALE OF THE SECURITIES TO BE SOLD IN THE OFFERING
THROUGH OR WITH THE UNDERWRITERS AND THEIR AFFILIATES.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE ANY OFFER
OF SUCH SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER IS
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
<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 REFERENCES IN THIS PROSPECTUS TO THE
COMPANY INCLUDE THE COMPANY AND ITS PREDECESSOR, PERFECTLY SAFE, INC.
THE COMPANY
The Company is a specialty direct marketer which currently publishes
two catalogs with an emphasis on children's hardgood products (i.e., products
not primarily made from fabrics) from prenatal to age three. The Company
believes that its first catalog, "Perfectly Safe, The Catalog For Parents Who
Care(R)" is the nation's only catalog devoted to child safety, child-proofing
the home and safety-related products for the family. The Company has published
Perfectly Safe since 1990, and has circulated over 20 million catalogs and
helped to childproof over 350,000 homes to date.
In 1995, the Company introduced its "Jeannie's Kids Club" catalog to
broaden its market and to introduce a new direct marketing concept in children's
products. Jeannie's Kids Club offers parents of young children who become
members the opportunity of saving up to 60% compared to the price charged for
the same products in other popular children's catalogs. The current annual
membership fee is $18.00 per year.
The Company incurred a net loss of $521,640 and $536,992 for fiscal
year 1996 and 1995, respectively. Upon the completion of the Offering, the
Company intends to acquire The Natural Baby Catalog, which specializes in
children's and products made from natural fiber from prenatal to age three, and
consolidate its operations with the operations of the Company. On a pro forma
basis, the combined operations of the Company and The Natural Baby Catalog would
have resulted in revenues of $13,090,210 and pre-tax profit of $37,009 for the
year ended December 31, 1996, and revenues of $10,952,806 and a pre-tax loss of
$324,259 for the year ended December 31, 1995.
The Company believes that its expertise in the marketing and
merchandising of children's products, the recent introduction of its Jeannie's
Kids Club concept, and the intended acquisition of The Natural Baby Catalog will
provide the basis for future growth by the use of the following strategies:
CONSOLIDATION OF THE NATURAL BABY'S OPERATIONS. The Company plans to
consolidate the warehouse, telemarketing, data processing and administrative
functions of The Natural Baby Catalog into the operations of the Company. The
Company believes that such consolidations will result in approximately $200,000
in direct labor savings and $450,000 in general and administrative savings, on
an annualized basis, exclusive of additional annual expenses which the Company
will incur and as a public entity, estimated to be $200,000 and $50,000 of
additional annual payroll expense relating to the salaries of the Company's two
executive officers, as well as any additional compensation that may be awarded
under any incentive compensation plan.
EXPAND JEANNIE'S KIDS CLUB. Because Jeannie's Kids Club offers popular
children's products for up to 60% less than other children's catalogs, the
Company believes that there is substantial opportunity to increase the
membership of Jeannie's Kids Club, which went from inception in July 1995 to
over 34,000 current members.
MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG. Revenues of The
Natural Baby Catalog have increased from $1.7 million in 1992 to $6.5 million in
1996. The Company is satisfied with the performance of The Natural Baby Catalog
and will endeavor to maintain continuity in the merchandising and marketing of
the catalog.
- 1 -
<PAGE>
NEW CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied
upon catalog circulation as the sole method to acquire new customers. Because of
the relatively short life of the acquired customer (prenatal to age three) and
the increasing costs of catalog mailings, the Company intends to pursue the
development of less costly alternative customer acquisition programs, such as
magazine solicitations, promotional inserts, and marketing joint ventures with
mass marketers of baby formula, baby food and health care products. The Company
has not yet entered into any agreements to commence any such new acquisition
program.
REFINE CATALOG MAILING STRATEGIES. The Company's catalog circulation is
determined by statistical models and analysis which targets prospective buyers
and timing of purchasers. The Company's statistical modeling system is outdated.
In February, 1997 the Company began to develop a statistical modeling system
with the assistance of a new outside vendor. The Company anticipates that this
system will be ready for testing in June 1997. The cost of developing this new
software should not exceed $10,000 and will be paid for from the Company's cash
flow or working capital. See "USE OF PROCEEDS."
REPLACE OUTDATED DATA PROCESSING SYSTEM. The Company intends to acquire
state-of-the-art computer hardware and system software, at an annualized cost of
approximately $75,000 per year, on a leased basis, to improve the efficiencies
of its operations and financial reports. Lease payments will be made monthly and
will be paid for from the Company's cash flow or working capital.
CATALOG ACQUISITIONS. Any catalog acquisitions subsequent to The
Natural Baby Catalog will depend upon the Company's ability to obtain suitable
financing. Although the Company believes that there may be additional
opportunities to acquire other children's niche catalogs, it does not intend to
pursue any other such opportunities in the near future unless it is able to
obtain suitable financing.
The Company is a subsidiary of Duncan Hill Co., Ltd. ("Duncan Hill").
Duncan Hill also operates a pipe, tobacco and cigar mail order catalog called
"Carey's Smoke Shop," through two other wholly owned subsidiaries, E.A. Carey of
Ohio, Inc. and Highland Pipe Company. The Company succeeded to the Jeannie's
Kids Club and Perfectly Safe Catalog business of Perfectly Safe, Inc., another
subsidiary of Duncan Hill, as a result of a reorganization in which The Company
acquired the assets and liabilities of Perfectly Safe, Inc. and Perfectly Safe,
Inc. was dissolved. This reorganization was effective June 30, 1996. See "THE
COMPANY AND ITS PARENT."
Prior to the reorganization, the telemarketing, order fulfillment, data
processing and administrative functions of Perfectly Safe, Inc. were provided by
Duncan Hill, which also provided those services as applicable, to its other
operating subsidiaries. As part of the reorganization, the Company also acquired
from Duncan Hill the assets used by Duncan to perform those functions itself.
The purchase price of the Perfectly Safe and Duncan Hill assets acquired by the
Company is $2,613,404 payable in the issuance of stock, a promissory note and
the assumption of liabilities. See "THE COMPANY AND ITS PARENT."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, OH 44718, and the Company's telephone number is
(330) 492-8090.
- 2 -
<PAGE>
THE OFFERING
Securities Offered 250,000 Units, each Unit
by the Company........................ consisting of two shares of Common
Stock and one Class A warrant (the
"Warrants"). The Common Stock and
Warrants are immediately separately
transferable as of the date of this
Prospectus. Each Warrant entitles the
holder to purchase one share of Common
Stock at an exercise price of $5.00 for
a period of four years commencing one
year after the date of this Prospectus.
The Company may redeem the Warrants at
a price of $.05 per Warrant at any time
after they become exercisable upon not
less than 30 days' prior written notice
if the closing bid price of the Common
Stock has been at least $14.40 per
share for the 20 consecutive trading
days ending on the 5th day prior to the
date on which the notice of redemption
is given. See "DESCRIPTION OF
SECURITIES."
Common Stock Outstanding
Prior to this Offering.............. 3,700,000 Shares
Common Stock to be
Outstanding
after this Offering(1).............. 4,200,000 Shares
Additional Securities
Being Registered.................... 1,500,000 Warrants held by the Selling
Securityholders, and 1,500,000 shares
of Common Stock underlying these
Warrants. See "SELLING
SECURITYHOLDERS."
Proposed OTC
Symbols
Units.......................... KIDSU
Common Stock................... KIDS
Warrants....................... KIDW
_____________________
(1) Does not include: up to 75,000 shares of Common Stock subject to the
Underwriters' over-allotment option; up to 250,000 shares of Common Stock
issuable upon the exercise of the Warrants attributable to the 250,000
Units offered hereby; up to 37,500 shares of Common Stock issuable upon the
exercise of the Warrants attributable to the Underwriters' over-allotment
option; up to 75,000 shares of Common Stock subject to the non-redeemable
option granted to the Underwriters to purchase up to 25,000 Units; and, up
to 1,500,000 shares of Common Stock issuable upon the exercise of the
1,500,000 Warrants held by the Selling Securityholders. See "UNDERWRITING."
Also does not include up to 200,000 shares of Common Stock issuable upon
the exercise of stock purchase options granted under two executive
employment agreements. See "MANAGEMENT - Employment Agreements." Also does
not include up to 50,000 shares of Common Stock issuable upon the exercise
of a convertible note to be issued to the seller of The Natural Baby
Catalog. See "CERTAIN TRANSACTIONS - Acquisition of The Natural Baby
Catalog."
- 3 -
<PAGE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering primarily
for the acquisition of The Natural Baby Catalog, accounts payable, the repayment
of debt, consolidation of the operations of The Natural Baby Catalog and for
working capital and general corporate purposes. See "USE OF PROCEEDS."
Approximately $225,000 of the debt to be repaid includes the repayment of a
Bridge Loan made to the Company and partial payment on the debt owed by the
Company to its parent, Duncan Hill. See "USE OF PROCEEDS."
RISK FACTORS
The securities offered hereby are speculative, involve a high degree of
risk and should not be purchased by investors who cannot afford the loss of
their investment. See "RISK FACTORS."
SUMMARY FINANCIAL DATA
The summary financial data is derived from the historical financial
statements of the Company, and the pro forma combined financial statements of
the Company which assumes that the acquisition of The Natural Baby Catalog
occurred prior to the date of the Prospectus. The financial statements of the
Company include the financial statements of its predecessor, Perfectly Safe,
Inc. The summary financial data should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" as
well as the Company's historical financial statements and the related notes
thereto, and the Company's pro forma combined financial statements and the
related notes thereto, included elsewhere in the Prospectus.
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------
Statement of Operational Data: PRO FORMA(1)
1995 1996 1996
---- ---- ----
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Total Revenue $5,724,337 $6,638,995 $13,090,210
Income (Loss) from Operations (545,602) (527,125) 26,602
Net Income (Loss) (536,992) (521,640) 37,009
Net Income (Loss) per common share ($0.15) ($0.14) $0.01
Weighted average number of common shares outstanding
during the period 3,700,000 3,700,000 4,200,000(2)
</TABLE>
DECEMBER 31, 1996
-----------------
ACTUAL PRO FORMA(3)
------ ------------
Balance Sheet Data:
Total Assets $1,471,689 $3,658,465
Working Capital (deficit) (803,789) 361,611
Total Liabilities 2,461,869 2,471,548
Stockholder's Equity (990,180) 1,186,917
____________________
(1) Assumes that the Company acquired The Natural Baby Catalog as of January 1,
1996.
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<PAGE>
(2) Gives effect to the sale of 250,000 Units offered hereby.
(3) Gives effect to the sale of 250,000 Units offered hereby and the
application of the net proceeds therefrom in the amount $2,210,021. Also
gives effect to the conversion of $75,000 of the principal amount of the
Bridge Loan into 1,500,000 Warrants. See "CERTAIN TRANSACTIONS - Bridge
Loan." Also assumes that the Company acquired The Natural Baby Catalog as
of December 31, 1996. Also gives effect to the issuance of 5,000,000 shares
of the Company's Series A Preferred Stock to the Company's parent in
January, 1997. See "THE COMPANY AND ITS PARENT - The Reorganization."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD ONLY BE PURCHASED BY
INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN, AND
AFFECTING THE BUSINESS OF, THE COMPANY AND THIS OFFERING, TOGETHER WITH THE
OTHER INFORMATION IN HIS PROSPECTUS, BEFORE MAKING AN INVESTMENT DECISION.
1. HISTORY OF OPERATING AND NET LOSSES. The Company experienced significant
losses for the years ended December 31, 1996 and 1995. For 1996 the Company
incurred an operating loss of $527,125 and a net loss of $521,640. For 1995 the
Company incurred an operating loss of $545,602 and a net loss of $536,992. A
substantial portion of these losses are associated with the establishment and
development of the Jeannie's Kids Club Catalog beginning in July, 1995. See
"MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION." The Company believes that in order to achieve profitability with
respect to its two current children's catalogs, the membership of Jeannie's Kids
Club will need to reach sustainable level of 45,000 members. Currently, there
are approximately 34,000 members. There can be no assurances that the Company
will increase the membership of Jeannie's Kids Club to profitable levels or that
the Company will not continue to incur net losses in the future.
2. DEPENDENCE ON OFFERING PROCEEDS TO PAY TRADE CREDITORS AND TO ACQUIRE
THE NATURAL BABY CATALOG BUSINESS. As a result of its operating losses and lack
of capital, the Company is in arrears to many of its trade creditors. The
Company had a backlog of unshipped orders in excess of $112,000 at February 28,
1997 attributable largely to its inability to timely pay vendors and restock
inventory. Accordingly, the Company, needs the proceeds of this Offering to
continue its operations as well to as finance its planned acquisition of The
Natural Baby Catalog. Upon the closing of this Offering the Company intends to
pay all over due trade creditor balances (other than the printer of the
Company's catalogs) which, based upon 45 days sales, approximated $52,000 at
February 28, 1997. The Company owes the printer of its catalogs $382,000. The
Company intends to pay $200,000 of the outstanding balance to the printer from
the proceeds of this Offering. The Company intends to pay the balance of
$182,000 within sixty days of the date of this Prospectus from cash flow and/or
working capital. See "USE OF PROCEEDS."
3. POSSIBLE LACK OF SAVINGS FROM THE INTEGRATION AND CONSOLIDATION OF THE
NATURAL BABY CATALOG BUSINESS; ADEQUACY OF FINANCING. The Company believes that
the consolidation savings anticipated from the consolidation of the operations
of The Natural Baby Catalog, together with the working capital provided from the
Company's institutional credit facility and the net proceeds of this Offering,
will be sufficient to operate the Company on a profitable basis and to enable
the Company to pursue its short-term growth strategies. In the event, however,
that the Company is unable to achieve the anticipated consolidation savings or
is otherwise unable to operate the Company profitably, and/or the Company's
institutional credit facility is terminated, the Company may find it necessary
to seek additional financing. The Company's parent, Duncan Hill Co., Ltd.
("Duncan Hill"), does not have the financial resources to provide the Company
with additional financing if needed. Thus, there is no assurance that the
Company will be able to obtain additional financing, if needed, on terms
favorable to the Company, or at all.
Upon the acquisition of The Natural Baby Catalog, the Company intends to
consolidate the telemarketing, fulfillment, data processing and administrative
functions with the Company's current operations in Canton, Ohio. The Company
will endeavor to complete the integration and consolidation of The Natural Baby
Catalog within ninety days of the consummation of the acquisition. To the
extent, however, that the Company is unable to timely complete such integration
and consolidation or there is a competitive reaction to the Company's
acquisition of The Natural Baby Catalog (see "RISK FACTORS - Competition"), the
Company's anticipated consolidation savings and profitability will not be
realized short-term resulting in the possibility that the Company may need
additional financing (which there is no assurance that it will be able to
obtain) within twelve months from the date of the Prospectus. See "BUSINESS".
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<PAGE>
4. REQUIREMENT TO COMPLETE THE ESCROW CLOSING OF THE ACQUISITION OF THE
NATURAL BABY CATALOG. Within ten business days prior to the date of this
Prospectus, the Company will have closed, in escrow, its acquisition of The
Natural Baby Catalog. Should this not occur, then this Offering will be
withdrawn. The only conditions upon the release of the acquisition from escrow
is the Company's payment of the purchase price to the escrow agent within the
earlier of fifteen business days from the date of this Prospectus or five
business days from the Underwriters' completion of this Offering; but, in no
event, later than April 30, 1997. See "CERTAIN TRANSACTIONS - Acquisition of The
Natural Baby Catalog." The Company is entirely dependent upon the proceeds of
this Offering to pay the purchase price to the escrow agent for the release of
the acquisition from escrow. Should the Company be unable to obtain the release
of the acquisition from escrow subsequent to the Underwriters' completion of
this Offering as a result of some unforeseen action taken by others -- such as a
lawsuit to enjoin the purchase -- a risk which the Company believes is very
remote, the Company will not be able to complete its acquisition of The Natural
Baby Catalog. Should that occur, the Company will not be able to achieve
profitability through the purchase of a profitable mail order catalog business
unless it was able to purchase another children's mail order catalog with
characteristics similar to that of The Natural Baby Catalog. The Company has not
identified any suitable potential acquisitions to replace The Natural Baby
Catalog should it become necessary to do so. Pending its efforts to effect a
replacement acquisition, should it become necessary to do so, the Company would
apply the proceeds of this Offering to pursuing its other strategies to grow its
business. See "BUSINESS - Strategies." There is no assurance, however, that the
Company will be able to become profitable without acquiring a profitable
children's mail order catalog with characteristics similar to that of The
Natural Baby Catalog.
5. IMMEDIATE AND SUBSTANTIAL DILUTION TO PUBLIC INVESTORS. Upon completion
of the sale of the Company's Units in this Offering, without giving effect to
the exercise of the Underwriters' Option, the net tangible book value per Share
of the Company's Common Stock will be $.24. At the initial public offering price
of $6.00 per share of Common Stock offered hereby (assuming no value
attributable to the Warrants), investors in this Offering will experience an
immediate dilution of approximately $5.76 or 96% in net tangible book value per
share and existing investors will experience an increase of approximately $.58
per share. See "DILUTION." The present stockholders of the Company have acquired
their respective equity interest at costs substantially below the public
offering price. Accordingly, to the extent that the Company incurs losses, the
public investors will bear a disproportionate risk of such losses.
6. UNCERTAINTY AS TO FUTURE OPERATING RESULTS. The Company's revenue growth
and future profitability will depend on its ability to increase catalog sales,
to expand the membership of Jeannie's Kids Club and to effectively monitor and
control costs. See "BUSINESS - Strategies; and Marketing." Accordingly, there
can be no assurance that the Company will operate profitably in the future.
Furthermore, future operating results depend upon many factors, including
general economic conditions, the level of competition and the ability of the
Company to continue to attract and retain customers successfully.
7. COSTS INCREASES IN POSTAGE AND PAPER. Postal rates and paper costs
affect the cost of the Company's order fulfillment and catalog and promotional
mailings. The Company relies heavily on the rate structure of the United States
Postal Service ("USPS") and strives for discounts for bulk mailings. Like others
in the catalog industry, the Company passes along a significant portion of its
shipping and handling expense, but does not pass along costs of preparing and
mailing catalogs and other promotional materials. In recent years, the USPS has
increased its rate for both the mailing of catalogs and packages. In January
1995, the USPS increased the postage rate paid by the Company by 14%. Although
there has been no rate increase since then, there is a belief, as reflected in a
recent major mail order catalog trade publication, that the USPS will raise its
rates sometime in 1998. United Parcel Service has also increased its rates, with
increases occurring in February of 1994, 1995 and 1996. The price of paper is
dependent upon supply and demand in the marketplace. From January 1993 through
December 1995, the price of paper available to the Company increased 95%,
resulting in increased catalog production costs and contributing to operating
loses in 1995. Although paper prices decreased in 1996, any future significant
increases in postal rates or paper costs could have a material adverse effect on
the Company's business, financial condition and results of operation, unless
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<PAGE>
the Company is successful in developing new methods for acquiring new customers
so that it need not rely upon catalog circulation as the sole method to acquire
new customers.
8. NEED TO DEVELOP NEW METHODS FOR ACQUIRING NEW CUSTOMERS. Historically,
the Company has relied upon catalog circulation as the sole method to acquire
new customers. Because of the relatively short life of the acquired customer
(prenatal to age three) and the increasing costs of catalog mailings, the
Company believes that its future growth and profitability will be largely
dependent upon the Company's ability to develop alternative customer acquisition
programs. See "BUSINESS - Strategies."
9. FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may
vary from quarter-to-quarter depending on the number of catalogs mailed during
the quarter and the relative profitability of the mailing lists used for the
catalog mailings. The relative profitability of the mailing lists used for a
particular mailing is determined by the mailing list mix between the Company's
existing in-house lists and lists rented from outside sources. Some rental lists
turn-out to be profitable (or more profitable) and others do not. On occasion, a
rental lists which has proven to be profitable in the past may experience an
inexplicable short-term unsatisfactory result. See "BUSINESS - Marketing."
10. COMPETITION. The mail order catalog business is highly competitive. The
Company's catalogs compete with other mail order catalogs and retail stores,
including department stores, specialty stores, discount stores and mass
merchants. Many of the Company's competitors have greater financial,
distribution and marketing resources than the Company. Three can be no assurance
that the Company will be able to compete effectively with existing or potential
competitors. See "BUSINESS - Competition."
Upon its introduction of Jeannie's Kids Club Catalog in July, 1995, the
Company experienced a competitive reaction which resulted in three other
children's catalogs refusing to exchange with, or rent their mailing lists to,
the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION." There can be no assurance that such a competitive
reaction will not occur with respect to children's catalogs from which The
Natural Baby Catalog rents mailing lists, or that such an occurrence would not
have an adverse effect upon the profitability of The Natural Baby Catalog.
11. DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The
success of the Company is highly dependent upon the continued services of
William L. Miller, the Company's Chairman of the Board and Chief Executive
Officer, and Jeanne E. Miller, the Company's Executive Vice President. Mr.
Miller, one of the co-founders of the Company's parent, is principally
responsible for the strategic planning and development of the Company. Mr.
Miller, however, will not be required to devote his full time attention to
managing the affairs of the Company. See "RISK FACTORS - The Company's Chief
Executive Officer Will Not Be Required to Work Full Time; Potential Conflict of
Interest." Mrs. Miller, the other co-founder of the Company's parent, is
primarily responsible for the merchandise selection, design and production of
the catalog. Both Mr. and Mrs. Miller have enter into a five-year employment
agreement with the Company. However, if the employment by the Company of either
Mr. or Mrs. Miller is either terminated or not renewed, or if either of them is
unable to perform his or her duties, there could be a material adverse effect
upon the business of the Company until a suitable replacement was found. The
Company will attempt to obtain a $1 million key man life insurance policy on
each of Mr. and Mrs. Miller, who are husband and wife. See "MANAGEMENT."
The Natural Baby Catalog was founded by Jane Martin and reflects her
beliefs and philosophy. Mrs. Martin will continue to be primarily responsible
for the merchandise selection, design and production of The Natural Baby Catalog
pursuant to a two year consulting agreement with the Company. If her consulting
engagement with the Company is either terminated or not renewed, or if she is
unable to perform her duties, there could be a material adverse effect upon the
business of the Company until a suitable replacement was found. See "MANAGEMENT
- -Employment Agreements."
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<PAGE>
The success of the Company's future growth and profitability will depend,
in part, on the Company's ability to recruit and retain additional qualified
personnel over time, including a suitable candidate to succeed Mr. Miller, who
is 60 years of age, as Chief Executive Officer. There can be no assurance,
however, that the Company will be able to retain such additional qualified
personnel, once recruited, or recruit other qualified personnel.
12. LACK OF INDEPENDENT APPRAISER. The Company did not engage an
independent appraiser in connection with its intended acquisition of The Natural
Baby Catalog. Since independent valuations of such business was not conducted,
the Company may pay upon the closing of the acquisition of The Natural Baby
Catalog a purchase price in excess of its fair value. See "CERTAIN TRANSACTIONS
- - Acquisition of The Natural Baby Catalog."
13. POTENTIAL PRODUCT LIABILITY. While the Company endeavors to sell safe
products, there is a possibility that someone could claim personal injury or
property damage resulting from the use of products purchased from the Company.
Although the Company does not manufacture its products, as a seller of products,
the Company is exposed to potential liability. Since 1990, the Company's parent,
Duncan Hill, has maintained, for itself and its subsidiaries, product liability
insurance. Currently, the amount of coverage is $1 million per occurrence, $2
million in the aggregate and an umbrella with identical limits of coverage. The
Company intends to attempt to procure the same coverages in its name, alone,
after the completion of this Offering. Although the Company believes that its
present insurance coverage is sufficient for its current level of business
operations, there is no assurance that such insurance will be sufficient to
cover potential claims, or that adequate, affordable insurance coverage will be
available to the Company in the future. A partially or completely uninsured
successful claim against the Company or a successful claim in excess of the
liability limits or relating to an injury excluded under the policy could have a
material adverse effect on the Company. See "BUSINESS - Product Liability
Insurance."
14. THE COMPANY'S CHIEF EXECUTIVE OFFICER WILL NOT BE REQUIRED TO WORK FULL
TIME; POTENTIAL CONFLICT OF INTEREST. William L. Miller, is a co-founder of the
Company's parent, Duncan Hill, which has other operating subsidiaries. See "THE
COMPANY AND ITS PARENT." Mr. Miller is currently the President of Duncan and its
other subsidiaries, as well as Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Miller's employment agreement with the
Company provides that he shall be permitted to devote such time to managing the
various other Duncan Hill entities as he deems appropriate. Accordingly, Mr.
Miller will not be devoting his full-time attention to managing the operations
of the Company Thus, a conflict of interest could potentially develop to the
extent that Mr. Miller is not able to devote his full time attention to a matter
that would otherwise require the full time attention of a business' chief
executive officer. Because the businesses of Duncan Hill's other subsidiaries in
no way relate to the children's catalog business of the Company, the Company
does not believe that there is a reasonable potential for any other type of
conflicts of interest, such as competition for business opportunities. Thus the
Company and Duncan Hill have not adopted any procedure for dealing with
conflicts of interest. See "MANAGEMENT - Employment Agreements."
15. LIMITED NUMBER OF MANAGEMENT PERSONNEL. There are currently only two
executive officers of the Company, who are husband and wife. In addition, one of
those two officers, the Chief Executive Officer, will not be devoting his full
time attention to the management of the Company. Thus, following this Offering,
there can be no assurance that, if the Company grows, the current management
team will be able to continue to properly manage the Company's affairs. Further,
there can be no assurance that the Company will be able to identify additional
qualified managers on terms economically feasible to the Company.
16. POTENTIAL ADVERSE EFFECT OF THE SEVERANCE COMPENSATION APPLICABLE TO
THE COMPANY'S TWO EXECUTIVE OFFICERS. Each of the employment agreements for the
Company's two executive officers provides for severance compensation to be paid
to them in all instances other than the executive's termination for cause. The
minimum amount of such severance will be equal to the sum of the executive's
salary and bonus paid in the year preceding the year when such severance is to
be paid ("base severance"). The maximum amount of such severance is equal to the
base severance multiplied by 2.99. See "MANAGEMENT -Employment
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<PAGE>
Agreements." The payment of any severance compensation under any of the two
employment agreements within the foreseeable future would likely have a
materially adverse impact upon the Company. There can be no assurance that the
payment of any such severance compensation at any time in the future would not
have a materially adverse impact upon the Company.
17. CONTROL BY PARENT AND PARENT'S CONTROLLING STOCKHOLDERS. Upon
completion of this Offering, Duncan Hill, the Company's parent, will own
approximately 57% of the Company's outstanding Common Stock (approximately 56%
if the Underwriters' over-allotment option is exercised in full) and 100% of the
Company's outstanding Series A Preferred Stock (5,000,000 shares) which has the
same voting privileges as the Common Stock. Accordingly, while the new investors
in this Offering will have provided approximately 87% of the total consideration
paid for the Company's outstanding Common Stock, they will only own
approximately 5% of the Company's outstanding voting capital stock (also
approximately 5% if the Underwriters' over-allotment option is exercised in
full). Duncan Hill, on the other hand, will own approximately 80% of the
Company's outstanding voting capital stock (also approximately 80% if the
Underwriters' over-allotment option is exercised in full) for which Duncan Hill
will have provided approximately 9% of the total consideration paid for the
Company's outstanding Common Stock. As a result, Duncan Hill will remain in a
position to effectively elect all of the directors of the Company and control
its affairs and policies. William L. Miller and Jeanne E. Miller, his wife, the
Company's respective Chief Executive Officer and Executive Vice President, each
respectively own 53.9% and 9.7% of the shares of the outstanding common stock of
Duncan Hill, and thus are in a position to exercise effective control over the
affairs of the Company through their effective control over the affairs of
Duncan Hill. See "PRINCIPAL SHAREHOLDERS." Ultimate voting control by the
Millers may discourage certain types of transactions involving an actual or
potential control of the Company, including transactions in which the public
holders of the Common Stock might receive a premium for their shares over
prevailing market prices.
18. THE BOARD OF DIRECTORS CONSISTS OF ONE OUTSIDE DIRECTOR. The Board of
Directors consists of three members, two of which (William L. Miller and Jeanne
E. Miller) are insiders and principal stockholders. Mr. and Mrs. Miller are also
husband and wife. Accordingly, such individuals will be in a position to control
the actions and decisions of the Board of Directors.
19. LIMITATION ON DIRECTOR LIABILITY. As permitted by Delaware law, the
Company's certificate of incorporation limits the liability of directors of the
Company from monetary damages from a breach of a director's fiduciary duty
except for liability in certain instances. As a result of the Company's charter
provision and Delaware law, stockholders may have limited rights to recover
against directors for breach of fiduciary duty. See "MANAGEMENT - Limitation of
Liability and Indemnification Matters."
20. DATA PROCESSING AND/OR TELEPHONE SYSTEMS MAY ADVERSELY EFFECT THE
COMPANY'S BUSINESS. The Company's ability to effectively promote products,
manage inventory, efficiently purchase, sell and ship products, and maintain
cost-effective operations are each dependent upon the accuracy, capability and
proper utilization of the Company's data processing and telephone systems. The
Company will need to enhance the capacity and capabilities of these systems from
time to time to support its anticipated growth and remain competitive,
commencing with the intended replacement of the Company's current computer
hardware and system software. The Company's telemarketing, customer service and
management information systems functions are housed in a single facility located
at its headquarters. The Company has a disaster recovery program through its
computer and telephone systems vendors. The Company also creates a back-up tape
for off-site storage of its customer list and computer information. However, a
significant disruption or loss affecting the telephone or computer systems or
any significant damage to the Company's headquarters could have a material
adverse effect on the Company's business. See "BUSINESS - Data Processing."
21. NEED TO KEEP CURRENT WITH TECHNOLOGICAL CHANGES. The direct marketing
industry may be affected by ongoing technological developments in distribution
and marketing methods such as on-line catalogs and Internet shopping. As a
result, the Company's future success will depend on its ability to keep pace
with
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<PAGE>
technological developments and respond to new customer requirements. There can
be no assurance that the Company's current marketing methods will remain
competitive in light of future technological innovations.
22. ANTI-TAKEOVER MEASURES. The Company is subject to a Delaware statute
regulating business combinations that may serve to hinder or delay a change in
control of the Company, in addition to those matters relating to control of the
Company discussed immediately, above. Also, pursuant to the Company's
certificate of incorporation, the Company's Board of Directors may from time to
time authorize the issuance of up to an additional 5,000,000 shares preferred
stock in one or more series having such preferences, rights and other provisions
as the Board of Directors may decide. Any such issuances of preferred stock
could, under certain circumstances, have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of the
holders of the Company's Common Stock and the market for those shares. There are
no other provisions, however, in the Company's certificate of incorporation or
bylaws which would serve to delay, defer, or prevent a takeover of the Company.
23. NO CASH DIVIDENDS. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company intends to retain future earnings, if any, to finance its
growth. See "DIVIDEND POLICY."
24. POSSIBLE CHANGE OF STATE SALES TAX LAWS. Under current law, catalog
retailers are permitted to make sales in states where they do not have a
physical presence (e.g. offices) without collecting sales tax. Congress,
however, has the power to change these laws. Since 1987, legislation has been
introduced periodically in the U.S. Congress which would permit states to
require sales tax collection by mail order companies. To date, this proposed
legislation has not been passed. Should Congress, however, pass such legislation
in the future, most states could be expected to require sales tax collection by
out-of-state mail order companies. This would increase the cost of purchasing
the Company's products in those states and eliminate whatever competitive
advantage that the Company may currently enjoy with respect to in-state
competitors in terms of sales taxation, as well as increasing the administrative
and overhead costs to the company in connection with the collection of such
sales tax.
25. ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public offering
price of $12 per Unit (or $6.00 for each of the two shares of Common Stock
comprising a $12 Unit assuming no value is attributable to a Warrant included in
a Unit), as well as the exercise price and other terms of the Warrants have been
arbitrarily determined by the Company and the Underwriters and do not necessary
bear any relationship to the assets, book value or net worth of the Company or
any other recognized criteria of value. Accordingly, such prices should not be
considered an indication of the Company's actual value. See "UNDERWRITING." In
that regard, prior to this Offering, the Company issued a total of 3.7 million
shares of its Common Stock at a value of $.125 per share.
26. NO PRIOR PUBLIC MARKET; MARKET VOLATILITY. Prior to this Offering,
there has been no public market for the Company's Units, Common Stock or
Warrants. There is no assurance that following the Offering an active public
trading market will develop or be sustained or that the Units, Common Stock or
Warrants will be resold at or above the initial public offering price.
Additionally, the market price of the Company's securities may trade below the
initial public offering price in response to changes in the general condition of
the economy or the retail and catalog business, as a whole, as well as the
Company's periodic financial results which may fluctuate quarterly as a result
of several factors, including the timing of catalog mailings and changes in the
selection of merchandise offered and sold.
27. CERTAIN IMPLICATIONS OF TRADING-OVER-THE-COUNTER; "PENNY STOCK"
REGULATIONS. The Company expects to receive approval for the quotation of its
Units, Common Stock and Warrants over-the-counter on the NASD OTC Electronic
Bulletin Board. An investor may find it more difficult to dispose of, or to
obtain quotations as to the price of, the Company's securities trading
over-the-counter than had the Company sought approval for its securities to be
listed for quotation on national securities exchange.
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<PAGE>
The Securities and Exchange Commission has adopted "penny stock"
regulations which applies to securities traded over-the-counter. These
regulations generally define "penny stock" to be any equity security that has a
market price of less than $5.00 per share or a warrant that has an exercise
price of less than $5.00 per share. Subject to certain limited exceptions, the
rules for any transaction involving a "penny stock" require the delivery, prior
to the transaction, of a risk disclosure document prepared by the Commission
that contains certain information describing the nature and level of risk
associated with investments in the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
account statements must be sent by the broker-dealer disclosing the estimated
market value of each penny stock held in the account or indicating that the
estimated market value cannot be determined because of the unavailability of
firm quotes. In addition, the rules impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and institutional credited investors (generally
institutions with assets in excess of $5,000,000). These practices require that,
prior to the purchase, the broker-dealer determined that transactions in penny
stocks were suitable for the purchaser and obtained the purchaser's written
consent to the transaction. Consequently, the "penny stock" rules may restrict
the ability of broker-dealers to sell the Company's securities and may affect
the ability of purchasers in the Offering to sell the Company's securities in
the secondary market.
28. UNDERWRITERS' INFLUENCE ON THE MARKET; RESTRICTIONS ON MARKET MAKING
ACTIVITIES DURING WARRANT SOLICITATION. The Underwriters intend to make a market
in the Company's Units, Common Stock and Warrants following this Offering,
although it is not obligated to do so. The Representative has advised the
Company that it anticipates that other securities dealers also will make a
market in the Company's securities, although no assurance can be given that this
will be the case. To the extent that the Underwriters act as market maker in the
Company's securities there may be dominating influences in that market. The
price and liquidity of the securities may be affected by the degree, if any, of
the underwriters participation in the market, because a significant portion of
those securities may be sold to customers of the Underwriters. Such customers
may subsequently engage in transactions for the sale or purchase of the
Company's securities through or with the Underwriters. In the event that market
making activities are commenced by the Underwriters, there is no obligation for
them to continue those activities. The Underwriters have no arrangements,
agreements or understandings with any of the Selling Securityholders or Private
Investors with respect to the sale of the 1,500,000 Warrants being offered for
sale by the Selling Securityholders or the securities owned by the Private
Investors.
The Underwriters' Representative, VTR Capital, Inc. (the "Representative")
has the right to act as the Company's sole agent in connection with any future
solicitation of warrantholders to exercise their Warrants. Unless granted an
exemption by the Securities and Exchange Commission from Regulation M (formerly
Rule 10b-6) promulgated under the Securities Exchange Act of 1934, as amended,
the Representative will be prohibited from engaging in any market-making
activities with regard to the Company's securities until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Representative may have to receive a fee for
soliciting the exercise of the Warrants. Such limitation could impair the
liquidity and market prices of the Common Stock and Warrants. See
"UNDERWRITING."
29. LIMITS ON SECONDARY TRADING. The Company will make application to
register or has or will seek to obtain an exception from registration to offer
the Units and intends to conduct its selling efforts in California, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois,
Kansas, Louisiana, Maryland, Nevada, New York, Rhode Island, Utah and Virginia
(the "Primary Distribution States"). Purchasers of the Units in this Offering
must be residents of such jurisdictions. In addition, the Units, Common Stock
and Warrants will be immediately eligible for resale in the secondary market in
each of the Primary Distribution States and in the states of Iowa and
Pennsylvania. Purchasers of any of these securities in any secondary trading
market which may develop must be residents of such jurisdictions. Several
additional states will permit secondary market sales of these securities (i)
once or after certain financial and other information with respect to the
Company is published in a recognized securities manual such as Standard &
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<PAGE>
Poor's Records Corporation; (ii) after a certain period has elapsed from the
date hereof; or (iii) pursuant to exemptions applicable to certain institutional
investors. The Company intends to apply for listing in a recognized securities
manual on or about the date of this Prospectus. Purchasers in this Offering and
future purchasers of the Company's securities in the secondary market may be
restricted or prohibited from re-selling the securities in particular states as
a result of applicable blue sky laws. These restrictions may reduce the
liquidity of the securities and including their market price.
30. UNDERWRITERS' PURCHASE OPTION. In connection with this Offering, the
Company will sell the Underwriters an option to purchase an aggregate of up to
25,000 Units (the "Underwriters' Purchase Option"). The Underwriters' Purchase
Option will be exercisable commencing one year from the date of this Prospectus
and for four years thereafter at an exercise price of $14.40 per Unit. For the
life of the Underwriters' Purchase Option, the holders thereof will have the
opportunity to profit from a rise in the market price of the Units, Common Stock
and/or the Warrants without assuming the risk of ownership. The Company may find
it more difficult to raise additional capital if it should be needed for the
business of the Company while the Underwriters' Purchase Option is outstanding.
At any time when the holders thereof might be expected to exercise them, the
Company would probably be able to obtain additional capital on terms more
favorable than those provided by the Underwriters' Purchase Option. See
"UNDERWRITING."
The Company has also agreed to register the Underwriters' Purchase Option
and/or the underlying securities covered thereunder in any future registration
statement that the Company may file during the life of the Underwriters'
Purchase Option. This obligation could interfere with the Company's ability to
obtain financing under any future registration statement filing. See
"UNDERWRITING."
31. POTENTIAL ADVERSE EFFECT OF REDEMPTION OR EXERCISE OF WARRANTS. The
Warrants may be redeemed by the Company under certain circumstances. Should the
Company provide a notice of redemption of the Warrants, the holders thereof
would be forced to either exercise the Warrants at a time when it may be
disadvantageous for them to do so, sell the Warrants at the then current market
price, or accept the redemption price, which will likely be substantially less
than the market value of the Warrants. In addition, the exercise of the
Warrants, may have an adverse effect on the market price of the Company's
securities should a public trading market develop. Also, while the Warrants are
outstanding, the Company may find it more difficult to raise additional capital
upon favorable terms because of the potential for the exercise of the Warrants
to be dilutive to future investors. See "DESCRIPTION OF SECURITIES - Warrants."
32. UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FOR FUTURE SALE. In
connection with obtaining equity bridge financing, the Company issued 1,300,000
shares of Common Stock under Rule 504 (the "Rule 504 Shares") of the Securities
Act of 1933, as amended (the "1933 Act"). 100,000 of the Rule 504 Shares are
subject to "lock-up" by the Representative and cannot be sold or transferred
within 24 months of the date of the Prospectus, unless otherwise permitted by
the Representative, at which time these shares will be freely tradeable without
any necessity for their registration under the 1933 Act. The balance of the Rule
504 Shares, I.E., 1,200,000 shares, are not subject to a Representative's
"lock-up" and are freely tradeable without any necessity for their registration
under the 1933 Act. The sale of the Rule 504 Shares by each of the holders
thereof may be effected in one or more transactions that may take place
over-the-counter, including ordinary broker's transactions, previously
negotiated transactions or through sales to one or more dealers for resale of
such shares as principals at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Rule 504 Stockholders in connection with sales of such securities.
The holders of the Rule 504 Shares have paid significantly less for their shares
of Common Stock ($.125 per share) than the offering price of each of the two
shares of Common Stock comprising a $12 Unit and may elect to sell their Rule
504 Stock at prices below the market value of the Common Stock on the date of
sale. Such sales (or the potential therefor) may have an adverse effect on the
market price of the Company's securities.
- 13 -
<PAGE>
In addition, the Company's parent, Duncan Hill, holds 2,400,000
unregistered shares of the Company's Common Stock and 5,000,000 unregistered
shares of the Company's Series A Preferred Stock (collectively the "Restricted
Securities"). Those securities held by Duncan Hill are "restricted securities"
as that term is defined by Rule 144 of the 1933 Act, and may only be sold in
compliance with the provision of Rule 144 unless otherwise registered by the
Company. Furthermore, Duncan Hill has agreed with the Representative not to sell
or transfer the Restricted Securities within 24 months of the date of this
Prospectus unless earlier permitted by the Representative. There are no
agreements, arrangements or understandings with any of the Company's
Securityholders with respect to the early release of the lock up. In previous
offerings, the Representative has released the lock-up prior to the end of the
lock-up period. In making its decision to release the lock-up, the
Representative evaluates the totality of the facts and circumstances that exist
at the time the decision is made, including, without limitation, market demand
for the securities and trading volume. The possible or actual future sales of
the Restricted Securities under Rule 144 may have an adverse effect on the
market price of the Company's Common Stock should a public trading market
develop for such shares. See "SHARES ELIGIBLE FOR FUTURE SALE."
33. 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
the shares of Common Stock issuable upon the exercise of the Warrants under an
effective registration statement filed with the Securities and Exchange
Commission, and only if such shares of Common Stock are qualified for sale or
exempt from qualification under applicable state securities laws of the
jurisdiction in which the various holders of the Warrants reside. Although the
Company has agreed to use its best efforts to meet such regulatory requirements,
there can be no assurance that the Company will be able to do so. The Warrants
may be deprived of any value if a prospectus covering the shares of Common Stock
issuable upon their exercise is not kept effective or replaced or if such shares
of Common Stock are not or cannot be qualified or exempt from qualification in
the jurisdictions in which the holders of the Warrants reside. See "DESCRIPTION
OF SECURITIES - Warrants." As of the date of this Prospectus, the Company
anticipates that its securities will be qualified for sale or exempt from
qualification only in a limited number of states. See "RISK FACTORS - Limits on
Secondary Trading."
34. POTENTIAL ADVERSE EFFECT ON SALES SELLING SECURITYHOLDERS. The Sales of
up 1,500,000 Warrants by the Selling Securityholders, or even the potential of
such sales, may have an adverse effect on the market price of the Company's
securities, should a public trading market develop. See "SELLING
SECURITYHOLDERS."
35. BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $223,462 or
10% of the net proceeds of this Offering has been allocated to working capital
of the Company, which funds will be utilized for general corporate purposes. The
allocation of proceeds described in "Use of Proceeds" represents the Company's
best estimate of its allocation based upon the current state of its business,
operations and plans, current business conditions and the Company's evaluation
of its industry. Future events, including problems, delays, expenses and
complications which may be encountered, changes in economic or competitive
conditions and the result of the company's sales and marketing activities may
make shifts in the allocation of funds necessarily desirable. Management of the
Company will have broad discretion in the application of such proceeds. See "USE
OF PROCEEDS."
36. INEXPERIENCE OF REPRESENTATIVE. This is the tenth public offering
underwritten by VTR Capital, Inc. There can be no assurance that the
Representative's limited experience as an underwriter of public offerings will
not adversely affect the proposed public offering of the Company's securities.
Therefore, purchasers of the securities offered hereby may suffer a lack of
liquidity in their investment or a material diminution of the value of their
investment.
- 14 -
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the 250,000 Units offered
by the Company (after deducting underwriting discounts, a 3% non-accountable
expense allowance and other estimated offering expenses) will be approximately
$2,210,021 ($2,601,521 if the Underwriters' over-allotment option is exercised
in full). The Company intends to use the net proceeds of this Offering
approximately as follows:
APPROXIMATE APPROXIMATE
AMOUNT OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
------------ -------------
Acquisition of The Natural Baby
Catalog(1)............................ $1,310,777 59%
Accounts Payable(2)................... 350,000 16%
Repayment of Indebtedness(3).......... 225,782 10%
Consolidation of the Operations
of The Natural Baby Catalog(4)........ 100,000 5%
Working Capital(5).................... 223,462 10%
----------- ----
TOTAL............................ $2,210,021 100%
______________________
(1) Represents the remaining cash portion of the purchase price in the amount
of $1,075,000 to be paid to the Seller of The Natural Baby Catalog, I.E.,
The Natural Baby Company, Inc. (the "Seller"), a cash payment in the amount
of $210,777 in payment of a note owed by the Seller and the repayment to
Duncan Hill of a down payment on the purchase price in the amount of
$25,000 made by Duncan Hill to the Seller. In addition to the cash payment
referenced above, the Company will issue to the Seller a Promissory Note in
the amount of $250,000 convertible at any time at the election of the
holder into unregistered shares of the Company's Common Stock at a
conversion rate of $5.00 per share, and assume the obligation to pay
certain liabilities of the Seller, which is approximately $311,458 as of
December 31, 1996. The purchase price of The Natural Baby Catalog is
subject to adjustment. See "CERTAIN TRANSACTIONS - Acquisition of The
Natural Baby Catalog."
(2) Includes the payment of $52,000 owed to all suppliers of merchandise
purchased by the Company, which is overdue at February 28, 1997 based upon
the Company's 45 days sales. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION - Liquidity and Capital
Resources." Also includes the payment of approximately $79,000 in
professional fees incurred in connection with: the reorganization involving
the Company, its parent and Perfectly Safe, Inc.; and, the Company's
intended acquisition of The Natural Baby Catalog. Also includes the payment
of $200,000 to the printer of the Company's catalogs, which will reduce the
balance outstanding owed to the printer to $182,000. The Company intends to
pay the balance of $182,000 within sixty days of the date of the Prospectus
from cash flow and/or working capital.
(3) Includes the repayment of a Bridge Loan in the aggregate principal amount
of $125,000, which bears interest at the rate of 8% per annum and is
payable upon the earlier of October 16, 1996 and the closing of the
Offering. Also includes the payment of accrued interest on the Bridge Loan
through March 31, 1997 in the amount of $4,575. See "CERTAIN TRANSACTIONS -
Bridge Loan." Also includes the payment of the first installment payment
due June 30, 1997 to the Company's parent, Duncan Hill, in the amount of
$96,207, of which $66,858 constitutes the repayment of principal and
$29,349 constitutes accrued interest through June 30, 1997. See "THE
COMPANY AND ITS PARENT - The Reorganization."
(4) Estimated costs associated with the consolidation of the warehouse,
telemarketing and data processing functions of The Natural Baby Catalog
into the operations of the Company. See "CERTAIN TRANSACTIONS - Acquisition
of The Natural Baby Catalog."
(5) The Company intends to use such funds, as well as the consolidation savings
anticipated from the consolidation of the operations of The Natural Baby
Catalog, for general working capital purposes. In that regard, the Company
intends to replace its outdated data processing system software and
hardware at an annualized cost of approximately $75,000 per year, on a
leased basis. Lease payments will be made monthly and paid for from the
Company's cash flow or working capital. The Company also anticipates
spending no more than $10,000 to develop new statistical modeling software,
which will be paid for by the Company's cash flow or working capital. The
Company also intends to spend up to $150,000 per year to develop new
customer acquisition and other marketing programs. See "BUSINESS -
Strategies." In the event that the Company is unable to achieve the
anticipated consolidation savings from the consolidation of the operation
of The Natural Baby Catalog on a timely basis, the Company may need
additional financing within twelve months from the date of the Prospectus.
See "RISK FACTORS - Possible Lack of Savings from the Integration and
- 15 -
<PAGE>
Consolidation of The Natural Baby Catalog Business; Adequacy of
Financing." There is no assurance that the Company will be able to obtain
additional financing, if needed, on terms favorable to the Company or at
all.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion. Although
the Company does not intend to utilize any portion of the proceeds for payment
of officers' salaries, it is possible that portions of working capital may be
utilized for that purpose dependent upon revenues.
To the extent that the Company's expenditures are less than projected, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions, although there can be no assurance that such additional financing,
if available, will be on terms acceptable to the Company. See "RISK FACTORS
- -Dependence on Offering Proceeds to Pay Trade Creditors and to Acquire The
Natural Baby Catalog Business." The net proceeds of this Offering which are not
expended immediately may be deposited in interest-bearing accounts or invested
in government obligations or certificates of deposit.
DIVIDEND POLICY
The Company currently intends to retain any earnings to finance the
development and expansion of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future. The declaration and payment
of dividends by the Company are subject to the discretion of the Board of
Directors of the Company. Any future determination to pay dividends will depend
on the Company's results of operations, financial condition, capital
requirements, contractual restrictions and other factors deemed relevant at the
time by the Board of Directors. The Company is not subject to any contractual
arrangements which restrict its ability to pay dividends.
- 16 -
<PAGE>
DILUTION
The adjusted net tangible book value of the Company as of December 31, 1996
was ($1,267,649) or ($0.34) per share of Common Stock. Net tangible book value
per share is determined by dividing the tangible net worth of the Company
(tangible assets less all liabilities) by the total number of outstanding shares
of Common Stock (3,700,000 at December 31, 1996). The Company's tangible assets
consists of all of its balance sheet assets less deferred catalog expense. After
giving effect to the sale by the Company of 250,000 Units and the receipt of the
net proceeds therefrom, and the conversion of $75,000 of the Bridge Loan into
1,500,000 Warrants (See "CERTAIN TRANSACTIONS Bridge Loan"), the adjusted net
tangible book value of the Company as of December 31, 1996 would have been
$1,017,372 or $0.24 per share of Common Stock. This represents an immediate
increase in the adjusted net tangible book value of $.58 per share of Common
Stock to existing stockholders and an immediate dilution (the difference between
the price to the public per share of Common Stock and the adjusted net tangible
book value per share of Common Stock after the Offering) in the adjusted
tangible book value of $5.76 per share (96%) of Common Stock to new investors
(assuming for this discussion that each of the two shares of Common Stock
comprising a $12.00 Unit is valued at $6.00 per share, and no value is
attributed to the Warrant included in a Unit).
The following table illustrates this per share of Common Stock dilution:
The initial price of a share of Common
Stock paid by new investors...................... $6.00
Adjusted net tangible book value per
share of Common Stock before this
Offering.................................... ($0.34)
Increase in adjusted net tangible book
value per share of Common Stock
attributable to new investors............... $0.58
Adjusted net tangible book value per
share of Common Stock after this
Offering......................................... $0.24
Dilution in adjusted net tangible book
value per share of Common Stock to new
investors........................................ $5.76
- 17 -
<PAGE>
The following table summarizes, as of the completion of this Offering, the
differences between existing stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company and the total and
average consideration paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- -------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders 3,700,000 88% $ 462,500 13% $ .125
New Investors(1) 500,000 12% $3,000,000 87% $6.00
--------- --- --------- ---
Totals 4,200,000 100% $3,462,500 100% $ .82
=== ========= ===
</TABLE>
_______________________
(1) Based upon the sale of 250,000 Units.
The foregoing discussions do not give effect to the issuance of any
additional shares of Common Stock upon the exercise of the Underwriters'
over-allotment option, the Underwriters' Purchase Option, the Warrants
underlying each of the foregoing, the Warrants owned by the Selling
Securityholders, the Warrants underlying the sale of 250,000 Units in this
Offering, the convertible note to be issued to the seller of The Natural Baby
Catalog and the 200,000 stock purchase options granted under two executive
employment agreements. If shares of Common Stock are issued by the Company
pursuant to any or all of the foregoing when the Company's net tangible book
value per share exceeds the applicable price, then the net tangible book value
per share of the then outstanding shares of Common Stock will be further
diluted.
- 18 -
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company, as
adjusted to reflect issuance of 5,000,000 shares of Series A Preferred Stock in
January, 1997 to the Company's parent (see "THE COMPANY AND ITS PARENT - The
Reorganization") and the sale of 250,000 Units offered hereby and the receipt of
the estimated net proceeds therefrom. The table below should be read in
conjunction with the financial statements of the Company and notes thereto
included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
ACTUAL AS ADJUSTED(1)
-------------------------------------
<S> <C> <C>
Long Term Debt obligations, less current maturities $ 300,000(2) $ 300,000
Stockholder's Equity:
Common Stock, $.001 par value, 35,000,000 shares
authorized, 3,700,000 shares issued and
outstanding; and, 4,200,000 issued
and outstanding as adjusted............................. 3,700 4,200
Series A Preferred Stock, $.001 par value,
10,000,000 shares authorized, 5,000,000 shares
issued and outstanding as adjusted...................... -- 5,000
Warrants, 1,500,000 issued and outstanding as
adjusted(3)............................................. -- 75,000
Additional Paid-in-capital.............................. 458,800 2,668,321
Retained Earnings (Accumulated Deficit)................. (1,452,680) (1,452,680)
----------- ----------
Total stockholders' equity (deficit)................. ( 990,180) 1,299,841
----------- ----------
Total Capitalization $( 690,180) $1,559,241
=========== ==========
</TABLE>
(1) Does not include: any of the Units which the Underwriters have the option
to purchase to cover over- allotments; or any Common Stock underlying the
Warrants included in the Units, the Selling Securityholders' Warrants, the
Underwriters' Purchase Option, or stock options granted under two executive
employment agreements, or the convertible note to be issued to the seller
of the Natural Baby Catalog.
(2) Includes the promissory note issued by the Company to its parent, Duncan
Hill, as part of the reorganization effective June 30, 1996 in the
principal amount of $366,858 less $66,858 of current maturities. See "THE
COMPANY AND ITS PARENT - The Reorganization."
(3) Issued upon the conversion of the convertible portion of the $200,000
Bridge Loan. See "CERTAIN TRANSACTIONS - Bridge Loan."
- 19 -
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are the selected financial data of the Company as of
and for the years ended December 31, 1995 and 1996 This selected financial data
has been derived from the historical financial statements of the Company, which
include the financial statements of its predecessor, Perfectly Safe, Inc., and
which have been audited by Hausser + Taylor, whose report with respect to such
financial statements appears elsewhere in the Prospectus. Also set forth below
are pro forma selected financial data for the year ended December 31, 1996,
which data has been derived from the Company's pro forma combined financial
statements (unaudited), included elsewhere in the Prospectus. The pro forma
combined financial statements assume that the Company acquired The Natural Baby
Catalog at the beginning of the fiscal year ended December 31, 1996 for the
unaudited pro forma combined statements of income and as of December 31, 1996
for the unaudited pro forma combined balance sheet, and include, in the opinion
of management, all adjustments necessary to present fairly the combined results
of the operations of the Company and The Natural Baby Catalog for the periods
contained therein. The pro forma results of operations are not intended to be
indicative of the results which would have occurred on the dates indicated or
which may be realized in the future. The selected financial data should be read
in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" as well as the Company's historical financial
statements and the related notes thereto and the Company's pro forma combined
financial statements and the related notes thereto, included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
Statement of Operations Data: YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRO FORMA
1995 1996 1996
------ ----- -----
<S> <C> <C> <C>
Total Sales $5,724,337 $6,638,995 $13,090,210
Cost of Sales 3,540,487 4,204,321 7,801,286
---------- ---------- -----------
Gross Profit 2,183,850 2,434,674 5,288,924
Selling Expenses 1,998,502 2,193,219 3,891,965
General and Administration Expenses 730,950 768,580 1,370,357
---------- ---------- -----------
Income (Loss) from Operations (545,602) (527,125) 26,602
Other Income (Expense) 8,610 5,485 10,407
--------- ---------- -----------
Net Income (Loss) ($536,992) ($521,640) $ 37,009
========= ========== ===========
Net Income (Loss) per common share ($0.15) ($0.14) $0.01
Weighted average number of common shares outstanding
during the period 3,700,000 3,700,000 4,200,000(1)
</TABLE>
YEAR ENDED DECEMBER 31, 1996
ACTUAL PRO FORMA(2)
---------- ------------
Balance Sheet Data:
Total Assets $1,471,689 $3,658,465
Working Capital (deficit) (803,789) 361,611
Total Liabilities 2,461,869 2,471,548
Stockholder's equity (deficit) (990,180) 1,186,917
- 20 -
<PAGE>
(1) Gives effect to the sale of 250,000 Units offered hereto.
(2) Gives effect to the sale of 250,000 Units offered hereby and the
application of the net proceeds therefrom in the amount of $2,210,021. Also
gives effect to the conversion of $75,000 of the principal amount of the
Bridge Loan into 1,500,000 Warrants. See "CERTAIN TRANSACTIONS - Bridge
Loan." Also gives effect to the issuance of 5 million shares of Series A
Preferred Stock in January, 1997 to the Company's parent. See "THE COMPANY
AND ITS PARENT - The Reorganization."
- 21 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion should be read in conjunction with the information
contained in the financial statements of the Company and notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company acquired its first catalog, Perfectly Safe in January,
1990. From that point on the Perfectly Safe Catalog has relied upon catalog
circulation to acquire new customers and to provide its revenue base. During the
year 1990 the Perfectly Safe Catalog generated $1,473,000 in net sales from
catalog circulation of approximately 900,000 catalogs. Catalog circulation was
increased each year through 1994, when the Company mailed 3.7 million catalogs
and generated $5.0 million in net sales.
During the first quarter of 1995 the Company created its Jeannie's Kids
Club's Catalog, which offers popular children's products at discounts of up to
60% of the price charged by other children's catalogs for the same product. To
make a purchase at the discounted price, the customer must become a member of
Jeannie's Kids Club which costs $18 per year. Subject to cancellation, expired
credit card or change of address, a renewal is automatically billed to a club
member's credit card prior to the membership's expiration. The Company believes
that its cost of generating a renewal is less than 10% of the renewal fee of $18
and thus will favorably impact the potential profitability of Jeannie's Kids
Club operation.
The first Jeannie's Kids Club Catalog was mailed in July, 1995. In its
first six months of operation (six months ended December 31, 1995), Jeannie's
Kids Club generated just over $1 million in net sales, or 18% of the Company's
net sales for the year 1995. The Perfectly Safe Catalog on the other hand,
experienced a reduction in sales from $5.0 million in 1994 to $4.7 million in
1995. The Company believes that the decrease in sales was attributable to a
competitive reaction caused by the introduction of Jeannie's Kids Club Catalog.
Prior to the introduction of Jeannie's Kids Club Catalog, the Company exchanged
mailing lists with three other children's catalogs, which provided approximately
17% of the catalog circulation and resulting sales for the Perfectly Safe
Catalog. When the Company introduced Jeannie's Kids Club Catalog, the three
children's catalogs referenced above refused to rent or exchange mailing lists
with the Company for competitive reasons, which reduced Perfectly Safe's Catalog
circulation and revenues in this segment of the business. Although the Company
uses statistical modeling and database techniques for identifying potential
customers, the business from these mailing lists cannot be replaced at past
levels of profitability. Accordingly, the Company decided to devote more of its
available resources to building the mailing list and membership base of
Jeannie's Kids Club Catalog, which the Company believes will be the more
profitable segment of its children's catalog business, and began to reduce the
catalog circulation of Perfectly Safe.
RESULT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995.
Total net sales for the year ended December 31, 1996 increased
$914,356, or 16%, to $6,638,995, compared with $5,724,337 during the year 1995.
Net sales include sales from merchandise, Jeannie's Kids Club membership,
shipping and handling charges, and mailing list rentals. The net sales of
Jeannie's Kids Club increased from $1,033,806 in 1995 to $3,921,939 in 1996.
That increase in net sales of Jeannie's Kids Club in 1996 was partially offset
by a decrease in sales of the Perfectly Safe Catalog, which declined $1,973,476
or 42.1%, to $2,717,056, compared with $4,690,532 in 1995.
The Company's total catalog circulation was approximately 3.8 million
in each of 1995 and 1996. The Company introduced Jeannie's Kids Club Catalog in
July 1995 and mailed 708,804 catalogs in the second half of 1995 and 2,372,891
catalogs in 1996, which accounted for 18% and 59.8% of its total catalog
mailings in 1995 and 1996, respectively. The Company reduced the circulation of
its Perfectly Safe Catalog 48.4% from 3.1 million in 1995 to 1.6 million in 1996
consistent with its plan to allocate more of its available resources to
- 22 -
<PAGE>
building Jeannie's Kids Club, as discussed above. Gross revenue per catalog
mailed in 1996 increased 15.9% to $1.75 per book, versus $1.51 for 1995. The
Company attributes the higher revenue per catalog mailed to the relatively
higher Jeannie's Kids Club average order and percentage response rates.
At December 31, 1996 the Company had 147,573 total households available
for purposes of list rental to other catalogs, which are non-competitive or
compete with the Company to a lesser extent. Total households are defined as
those households purchasing from the Company in the past 24 months, and rental
selections may be made on the basis of 24, 12, 6, or three month recency of
purchase. List rental rates charged by the Company are $85.00 per thousand
households for 24 months buyers, and increase to $100.00 per thousand households
for three month "hotline" buyers. The Company pays a 30% brokerage commission on
published rates. For the years ended December 31, 1996 and 1995, the net list
rental income was $79,240 and $84,093 respectively. The decrease in revenue of
5.8% is attributable to the Company changing list brokerage firms in 1996, with
a resulting 30 day period of inactivity during the cross over phase.
Cost of sales, as a percentage of net sales, was 63.3% and 61.8% for
1996 and 1995, respectively. Cost of sales consists of cost of merchandise and
fulfillment. The increase was primarily due to increased costs of merchandise,
which rose from 40.2% of net sales to 42.9% in 1996. Merchandise costs of the
Company's Jeannie's Kids Club Catalog are a relatively higher percentage of net
sales, as merchandise is sold on a discounted basis, while Perfectly Safe's
generally is not. Accordingly, the increase of Jeannie's Kids Club net sales
from 18% of the Company's total net sales in 1995 to 59% in 1996 resulted in the
Company's increased costs of merchandise in 1996, as a percentage of net sales.
The merchandise cost increases were partially offset by a decrease in the
Company's cost of fulfillment equal to 1.2% of net sales, as fulfillment
expenses fell from 21.6% of net sales in 1995 to 20.4% of net sales in 1996.
Fulfillment expense consists of costs of shipping, direct labor, packaging,
order entry and 800 line telephone costs. The Company experienced cost
reductions in this area primarily from a decrease in shipping costs, which fell
.6% from 1995 to 1996. While outbound shipping costs fluctuate with the package
size, number of shipments per order, etc., the decrease was affected by the
reduction of the Company's number of shipments per order which fell from 1.6 in
1995 to 1.4 in 1996.
Selling expenses increased 9.7% from $1,998,502 in 1995 to $2,193,219
in 1996. Selling expenses consist of advertising and other marketing related
expenses. The increase in 1996 is primarily attributable to the Company's
revenue increase of 16% from 1995 to 1996. Selling expenses, as a percentage of
net sales, were 33% and 34.9% for 1996 and 1995, respectively. The Company's
Perfectly Safe Catalog experienced an increase, on a percentage basis, in
advertising expense of 2.5% of net sales from 29.7% of net sales in 1995 to
32.2% in 1996. This increase was primarily attributable to the less profitable
mix of mailing lists in 1996 than 1995. Advertising expense consists of the cost
of producing the catalogs, postage, mailing preparation and outside mailing
lists rented by the Company. Jeannie's Kids Club Catalog recorded advertising
expenses of 28.9% of net sales in 1996 compared with 46.8% 1995. This decrease
is attributable to the fact that 1995 was the initial inception year of
Jeannie's Kids Club Catalog and the Company incurred initial non recurring costs
of developing Jeannie's Kids Club Catalog, such as research and development,
market testing and design of the catalogs in the amount of $392,495.
The Company believes that its general and administrative expenses are
high relative to its revenue base. General and administrative expenses were
$730,950, or 12.8% of net sales, in fiscal 1995 and $768,580, or 11.6% of net
sales, in fiscal 1996. This decrease is attributable to the increase in revenues
in 1996 from 1995. The Company believes that its general and administrative
functions will become more efficient and cost effective upon absorbing the
revenue base of The Natural Baby Catalog, which the Company believes can be
accomplished with significantly less than proportionate increases in general and
administrative expenses. General and administrative expenses for the year ended
December 31, 1995 and for the six month period ended June 30, 1996 were incurred
by the Company's parent, Duncan Hill, and allocated to the Company consistent
with past practices, under which Duncan Hill allocated its general and
administrative expenses to its operating subsidiaries on a pro rata basis
determined by the percentage of total assets of the various operating
subsidiaries, exclusive of the assets of Duncan Hill. See "THE COMPANY AND ITS
PARENT." As a result of the reorganization in which the Company succeeded to the
operations of Perfectly Safe, Inc., the Company began to handle certain of its
own administrative functions, directly, effective June 30, 1996.
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See "THE COMPANY AND ITS PARENT." In 1995 and for the first six months of 1996
the Company's allocation was 69% of Duncan Hill's total general and
administrative expense.
Net losses for the year ended December 31, 1996 were $521,640, or 7.9%
of sales, compared with net losses of $536,992, or 9.4% of sales for the year
ended December 31, 1995. The Company attributes this slight decrease to the
growth in 1996 of Jeannie's Kids Club membership base and the increase in
revenues associated therewith. The Company believes that in order to achieve
profitability with respect to its two current catalogs, the membership of
Jeannie's Kids Club will have to reach a sustainable level of 45,000 members.
Currently, there are approximately 34,000 members.
During 1996, the Company changed its accounting principle utilized
regarding internally generated customer lists and development costs. Prior to
the change, the Company capitalized and amortized these costs over their
estimated useful life. The Company now expenses these costs as incurred. As a
result, the Company has restated the January 1, 1995 retained earnings and the
1995 Statement of Income. The effect on net losses, as previously reported for
1995 in the amount of $163,232, was additional expenses in the amount of
$373,760, for a net loss of $536,992. The effect on net losses through September
30, 1996, was additional expenses of $219,684. See Note 8 to the Company's
financial statements included elsewhere in the Prospectus.
Deferred catalog expenses at December 31, 1996, were $277,469 compared
to $171,525 at December 31, 1995. Deferred catalog expenses are costs of
catalogs mailed to customers that are deferred and amortized over periods
ranging from four to six months. $70,000 of the increase in deferred catalog
expenses from 1995 to 1996 is attributable to an increase in late December
catalog mailings in 1996 from 1995. $30,000 of the increase is attributable to
deferred catalog expenses in 1996 associated with the Company's unshipped order
backlog at December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had a deficit in retained earnings of
$1,452,680, compared with a deficit of $931,040 at December 31, 1995. This
resulted, from a net loss of $521,640 for the 1996 fiscal year.
The impact of the operating loss on the Company's cash position was
lessened by changes in working capital which effected operating activities. The
operating activities consumed $198,090 in cash through increases in accounts
receivable and deferred catalog expense, but provided $459,642 in cash through
decreases in inventory and increases in accounts payable. The net impact of
these changes and non cash charges of $47,455 relating to depreciation and
amortization and loss on disposal of assets, was to offset the Company's net
loss by $309,007, so that net cash used by operating activities was $212,633.
The most significant provider of cash was the increase in accounts payable,
which increased $354,020 during the period.
The Company's financing activities provided $590,490 in cash, with
$582,500 provided from external sources of financing and $7,990 from changes in
obligations to the parent company and prepaid amounts for the public offering.
The Company increased its borrowings on its line of credit by $220,000, issued
$200,000 in promissory notes described herein, and sold $162,500 in common
stock, for an aggregate of $582,500.
The combined effect of net cash used by operating activities of
$212,633 net cash provided by financing activities of $590,490, and investments
in fixed assets and prepaid amounts for the acquisition of The Natural Baby
Catalog totaling $164,928, increased cash by $212,929, from $35,719 at December
31, 1995, to $248,648 at December 31, 1996.
The Company's bank line of credit had a balance of $650,000 at December
31, 1995. The line of credit is for an open term, payable upon demand. The
facility is secured by the assets of the Company, as well as the assets of
Duncan Hill and another Duncan subsidiary, E.A. Carey of Ohio, Inc. The
repayment of the facility is guaranteed by Mr. Miller. The amount outstanding
under the facility at the date of this Prospectus is $_______, with interest
charged at the rate of 1% over prime. It is the policy of the bank to
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review the credit facility, annually, commencing June 30, 1997, and to require
that the Company maintain a zero balance on the credit line for a period of
thirty consecutive days sometime during the course of each year. The bank has
agreed to waive the "zero balance" required for the 1997 loan year ending June
30, 1997, because the Company's current cash flow would not allow it to comply
before then. The Company anticipates that, with the additional cash flow from
the sales generated by The Natural Baby Catalog, it will "zero balance" the
credit line for the 1998 loan year in the fourth quarter of 1997.
Additionally, the Company used extensions of trade credit to finance
its operations during this period. Accounts payable at December 31, 1996 were
$1,102,311, and the Company estimates that approximately $55,000 of this balance
was overdue to trade creditors (other than the printers of the Company's
catalogs), based upon the Company's historical experience with accounts payable,
whose normal working balances have been equivalent to 45 days sales. The amount
due to the printer at December 31, 1996 was $320,000. At December 31, 1996, the
Company had cash balance of $248,648.
Effective June 30, 1996, the Company was recapitalized as Kids Stuff,
Inc. by its parent, Duncan Hill, for the purpose of acquiring the operating
assets of Duncan Hill, as well as the children's catalog business of Perfectly
Safe, Inc. The Company paid for those assets through the assumption of Perfectly
Safe, Inc.'s liabilities and Duncan Hill's bank line of credit, by a promissory
note payable to Duncan Hill and by preferred and common stock of the Company.
See "THE COMPANY AND ITS PARENT - The Reorganization."
In order to finance its most recent operations, the Company entered
into certain private financing agreements commencing in October, 1996. In that
regard, the Company issued 8% promissory notes in the amount of $125,000 to be
repaid with a portion of the proceeds of this Offering, promissory notes in the
amount of $75,000, convertible upon the date of this Prospectus into Warrants to
purchase 1,500,000 shares of common stock, and 1,300,000 shares of the Company's
Common Stock for $162,500. See "CERTAIN TRANSACTIONS - Bridge Loan - Rule 504
Shares." Pending the completion of this Offering, the Company continues to rely
upon its trade creditors for short-term financing, and may be required to seek
additional bridge financing should the policies of its trade creditors change.
For the fiscal year 1997, the Company intends to incur certain capital
expenditures in connection with upgrading its computer technology. See "BUSINESS
- - Data Processing". Specifically, the Company intends to replace its outdated
data processing software and hardware, at an annualized cost of approximately
$75,000 per year, on a leased basis. Lease payments will be made monthly and
will be paid for from cash flow or working capital. Additionally, the Company
intends to spend no more than $10,000 to develop new statistical modeling
software which will also be paid for from cash flow or working capital. See "USE
OF PROCEEDS".
The Company has contracted to purchase the catalog business of The
Natural Baby Company, Inc. ("Baby Co."). The purchase price to be paid by the
Company consists of: a cash payment in the aggregate amount of $1,310,777 (less
a $25,000 down payment previously paid to Baby Co. by Duncan Hill) to be paid
with a portion of the proceeds of this Offering, the assumption of Baby Co.'s
accounts payable incurred in the ordinary course of business, which is estimated
to be approximately $275,958, as of December 31, 1996, the assumption of Baby
Co.'s remaining lease obligations in the approximate amount of $35,500, and a
long-term convertible note to be issued by the Company to Baby Co. in the amount
of $250,000. The unpaid balance of the convertible note is convertible at any
time into unregistered shares of the Company's Common Stock, at the election of
the holder, at a conversion price of $5.00 per share. The convertible note will
have an eight year term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the convertible note, only accrued interest in
arrears will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth, seventh and eight
anniversaries of the execution of the convertible note. The Company intends to
pay these obligations from The Natural Baby Catalog's cash flow. The purchase
price to be paid by the Company to purchase the catalog business of Baby Co. is
also subject to certain adjustments. See "CERTAIN TRANSACTIONS - Acquisition of
The Natural Baby Catalog." The Company will also repay to Duncan Hill with a
portion of the proceeds of this Offering the $25,000 down payment referenced
above.
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The Natural Baby Catalog had 1996 net sales of $6,451,215 and operating
pre-tax profits of $558,649. On a pro forma basis, assuming the Company had
acquired The Natural Baby Catalog at the beginning of the fiscal year ended
December 31, 1996, the combined operations would have resulted in net sales of
$13,090,210, income from operations of $26,602, net income of $37,009, and net
income per share of Common Stock of $.01, for the year ended December 31, 1996.
See the Company's pro forma combined financial statements (unaudited) and the
related notes thereto, included elsewhere in the Prospectus.
The Company believes that by consolidating the operations of The
Natural Baby Catalog with the Company's, that substantial savings can be
realized in direct labor and general and administrative areas. The Company
estimates that $200,000 in direct labor savings and $450,000 in general and
administrative savings can be realized, on an annual basis, exclusive of
additional expenses which the Company will incur as a public entity, estimated
to be $200,000 and $50,000 of additional payroll expense in 1997 related to the
salaries of the Company's two executive officers, as well as any additional
compensation that may be awarded under any incentive compensation plan.
In the event that the Company is unable to achieve the anticipated
consolidated savings from the consolidation of the operations of The Natural
Baby Catalog on a timely basis, the Company may need additional financing within
twelve months of the date of the Prospectus. See "RISK FACTORS - Possible Lack
of Savings from the Integration and Consolidation of The Natural Baby Catalog
Business; Adequacy of Financing."
In October 1995, Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not have any effect
to the Company's financial statement other than to require disclosure of the pro
forma effect on net income of using the fair value-based method of accounting.
Management believes this effect to currently be immaterial.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including
statements regarding, among other things, the Company's growth strategies and
anticipated consolidation savings from the consolidation of the operations of
The Natural Baby Catalog. These forward-looking statements are based largely on
the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements as a result of
changes in the trends in the children's mail order catalog industry and the
factors discussed in "RISK FACTORS." In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
Prospectus will in fact occur.
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THE COMPANY AND ITS PARENT
HISTORY OF DUNCAN HILL
The Company's parent, Duncan Hill, was organized under Ohio law in 1977
for the purpose of developing and marketing a designer line of smoking pipes,
tobacco and accessories. In 1980, a Duncan Hill subsidiary, Highland Pipe
Company, acquired the pipe manufacturing business of the Monarch Pipe Co., of
Bristow, Oklahoma. In 1984, the business of E.A. Carey Co. of Chicago, the
dominant mail order supplier of smoking products, was purchased by Duncan Hill
through its subsidiary, E.A. Carey of Ohio, Inc.
Perfectly Safe, Inc. was formed by Duncan in 1990 under Ohio law for
the purpose of publishing The Perfectly Safe Catalog, which was acquired from
Jeanne E. Miller in January, 1990. Mrs. Miller purchased the Perfectly Safe
Catalog in 1988 from the catalog's creator. In July, 1995, Perfectly Safe, Inc.
began to publish its second catalog, Jeannie's Kids Club.
Prior to June 30, 1996, the telemarketing, order fulfillment, data
processing and administrative function of Perfectly Safe, Inc. were provided by
Duncan Hill, which also provided those services as applicable, to its other
operating subsidiaries. Duncan Hill allocated the cost of its services to its
operating subsidiaries on a direct cost basis, as applicable, or on a pro rata
basis determined by the percentage of total assets of the various operating
subsidiaries, exclusive of the assets of Duncan Hill.
THE REORGANIZATION
Effective June 30, 1996, the Company succeeded to the catalog business
of Jeannie's Kids Club and Perfectly Safe as a result of a reorganization in
which the Company acquired from Duncan Hill the assets and liabilities of
Perfectly Safe, Inc., which was dissolved. The Company was incorporated by
Duncan Hill under Delaware law and had no operations prior the reorganization.
Effective June 30, 1996, the Company also acquired from Duncan Hill the
assets used by Duncan to perform the telemarketing, order fulfillment, data
processing and administrative functions, so that the Company could perform those
functions itself. The Company then entered into a transition period in which
telemarketing, data processing, order fulfillment, and administrative functions
were transferred from Duncan Hill to the Company in a manner consistent with the
operational requirements of the various subsidiaries of Duncan Hill. During this
period certain costs were allocated by Duncan Hill to the Company, and in
return, certain costs were allocated by the Company to Duncan Hill and its other
subsidiaries, depending upon the transition status of the cost area involved. In
either case, the costs were allocated pro rata in a manner consistent with
Duncan Hill's practices in existence prior to June 30, 1996. The Company has
completed the transition period as of December 31, 1996.
Subsequent to December 31, 1996, the Company will provide services to
Duncan Hill and Duncan Hill's other subsidiaries, as requested, on an actual
cost basis. Actual costs are those direct costs that can be charged on a per
order or per hour basis, plus fixed costs allocated on a pro rata basis by
dividing the total assets of the operating entity requesting services by the sum
of the total assets of all operating entities of Duncan Hill and the operating
entity requesting services.
The purchase price of the Perfectly Safe and Duncan Hill assets
acquired by the Company is $2,613,404, payable as follows: The Company has
issued Duncan Hill a Promissory Note in the principal amount of $366,858 payable
in four annual installments commencing June 30, 1997 and bearing interest at the
rate of 8% per annum. The principal amount of the first installment is $66,858
and is $100,000 for each ensuing installment. In addition, the Company issued
Duncan 2,400,000 shares of Common Stock valued at $.125 per share and 5,000,000
shares of Series A Preferred Stock valued at $.001 per share. Further, the
Company agreed to assume all of the liabilities of Perfectly Safe, Inc. as of
June 30, 1996 in the amount of $1,291,546, as well as Duncan's outstanding
obligations under its credit facility in the amount of $650,000 as of June 30,
1996. Almost the entirety of the borrowings under the credit facility were used
to support the Company's operations. See "BUSINESS - Institutional Credit
Facility."
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BUSINESS
GENERAL
The Company is a specialty direct marketer which currently publishes
two catalogs with an emphasis on children's hardgood products (I.E., products
not primarily made from fabrics) from prenatal to age three. Based upon the
Company's review of a mail order catalog trade publication called "SRDS Direct
Marketing List Service," the Company believes that its first catalog, "Perfectly
Safe, The Catalog For Parents Who Care(R)" is the nation's only catalog devoted
to child safety, child-proofing the home, and safety-related products for the
family. The Company has published Perfectly Safe since 1990, during which time
it has circulated over 20 million catalogs and helped to childproof over 350,000
homes. One of the Company's founders authored "The Perfectly Safe Home"
published by Simon & Schuster, and appeared on national television, radio, and
magazines in the name of child safety.
In July, 1995 the Company introduced its "Jeannie's Kids Club" catalog
to broaden its market and to introduce a new direct marketing concept in
children's products. Jeannie's Kids Club offers parents of young children who
become members the opportunity of saving up to 60% compared with the same
products in other popular children's catalogs. The current annual membership fee
is $18.00 per year. Upon the completion of the Offering, the Company intends to
acquire its third catalog, The Natural Baby Catalog, which specializes in
products made of natural fiber for children from prenatal to age three. The
Natural Baby Catalog carries both hardgood products and softgood products (I.E.,
products primarily made from fabrics).
With the addition of The Natural Baby Catalog, the Company believes
that it will be one of the leading direct marketers of quality children's
products from prenatal to age three, a market which is determined by the overall
birth rate in the United States. The birth rate peaked in the United States in
1989 at 4.1 million births per year, and is estimated by the U.S. Census Bureau
to be 3.8 million births in 1997, which is 100,000 less than its estimate for
1996.
The Company's market for children's goods is also affected by the
historical rise of women in the work force, which has risen to 48% of all
households today compared with 27% in 1960. Current estimates indicate that a
family earning $45,000 today will spend $7,610 or 17% of their income on their
baby during the first year of its life. The Company believes that a birth rate
of 3.8 million births per year and the high percentage of women in the work
force will place a continued emphasis on the convenience and value of shopping
by catalog.
The Company is aware of sixteen other children's hardgood-catalog
businesses which the Company estimates each having a revenue base of less that
$10 million per year. Because of increasing overhead requirements, the Company
believes that it will become more difficult for a consumer catalog business with
revenues of less than $10 million to operate profitably and should result in a
consolidation of some of these businesses in the future.
The Company intends to consolidate the operations of The Natural Baby
Catalog with the operations of the Company and anticipates a consolidation
savings, on an annualized basis, in direct labor expenses in the approximate
amount of $200,000 and in general and administrative expense in the approximate
amount of $450,000, exclusive of additional annual expenses which the Company
will incur as a public entity estimated to be $200,000 and $50,000 of additional
annual payroll expense commencing in 1997 relating to the salaries of the
Company's two executive officers, as well as any additional compensation that
may be awarded under any incentive plan. The combined revenues of the Company
and The Natural Baby Catalog were $13,090,210 for the year ended December 31,
1996. Thus, the Company believes that its acquisition and consolidation of The
Natural Baby Catalog will provide the necessary critical mass to operate the
Company profitably in the future, although for the past two years the Company's
operations have not been profitable. The Company incurred a net loss of $521,640
and $536,992 for the years ended December 31, 1996 and 1995, respectively.
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STRATEGIES
The Company believes that its expertise in the marketing and
merchandising of children's products, the recent introduction of its Jeannie's
Kids Club concept, and the intended acquisition of The Natural Baby catalog will
provide the basis for future growth by the use of the following strategies:
CONSOLIDATION OF THE NATURAL BABY'S CATALOG INTO THE OPERATIONS OF THE
COMPANY. The Company plans to consolidate the warehouse, telemarketing, data
processing and administrative functions of The Natural Baby Catalog into the
operations of the Company. The Company will endeavor to complete the
consolidation within ninety days of its acquisition of The Natural Baby Catalog.
EXPAND THE MEMBERSHIP OF JEANNIE'S KIDS CLUB. Because Jeannie's Kids
Club offers popular children's products for up to 60% less than other children's
catalogs, the Company believes that there is a substantial market for this type
of home shopping service and an opportunity to substantially increase the
membership of Jeannie's Kids Club, which went from inception in July 1995 to
over 34,000 current members. Although there are costs associated with acquiring
the initial $18 membership fee, the $18 annual renewal of such membership is
approximately 90% profit to the Company. Under the terms of the Jeannie's Kids
Club membership, renewals are automatically billed to a member's credit card
prior to the expiration of the membership. Because of its potential
profitability, the Company intends to embark upon vigorous marketing efforts to
expand the Jeannie's Kids Club membership. See "BUSINESS - Marketing."
MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG. Revenues of The
Natural Baby Catalog have increased from $1.7 million in 1992 to $6.5 million in
1996. The Company is satisfied with the performance of The Natural Baby Catalog
and will endeavor to maintain continuity in the merchandising and marketing of
the catalog.
CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied
upon catalog circulation as the sole method to acquire new customers. Because of
the relatively short life of the acquired customer (prenatal to age three) and
the increasing costs of catalog mailings, the Company intends to test and
develop new methods of new customer acquisition. See "BUSINESS - Marketing." The
Company believes that its future growth and profitability (apart from the
addition of The Natural Baby Catalog) will be largely dependent upon the
Company's ability to develop alternative customer acquisition programs.
REFINE CATALOG MAILING STRATEGIES. The Company's catalog circulation is
determined by statistical models and analysis which targets prospective buyers
and timing of purchasers. The Company's statistical modeling system, which was
originally purchased and developed between 1990 and 1993, is outdated. In
February, 1997, the Company began to develop a statistical modeling system with
the assistance of an outside vendor for the purposes of increasing its catalog
response rates and lower its cost per catalog mailed. The Company anticipates
that this system will be ready for testing in June 1997. The cost of developing
this new software should not exceed $10,000 and will be paid for from the
Company's cash flow or working capital. See "USE OF PROCEEDS."
REPLACE OUTDATED DATA PROCESSING SYSTEM. The Company intends to acquire
state-of-the-art computer hardware and system software, at an annualized cost of
approximately $75,000 per year, on a leased basis, to improve the efficiencies
of its operations and financial reports. Lease payments will be made monthly and
will be paid for from the Company's cash flow or working capital.
CATALOG ACQUISITIONS. The Company believes that, because of the cost
driven pressures to consolidate, there may be opportunities to acquire other
children's niche catalogs. The Company, however, has no short term plans to make
any such acquisitions other than The Natural Baby Catalog unless it is able to
obtain suitable financing.
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STABILIZE THE PERFORMANCE OF PERFECTLY SAFE. In the past, many of the
safety products carried by the Perfectly Safe Catalog were generally hard to
find and were not well stocked by retail stores. That is no longer the case. See
"BUSINESS - Competition." As a consequence of this competitive impact, the
inability of the Company to access certain profitable mailing lists following
the Company's introduction of Jeannie's Kids Club, and the decision of the
Company to devote more of its available resources to building the mailing list
and membership base of Jeannie's Kids Club, the future performance of the
Perfectly Safe Catalog will be highly dependent upon the Company's ability to
more efficiently obtain new customers through substantially reduced catalog
mailings in the immediate short term and alternative acquisition programs on a
long-range basis. In addition, the Company may consider expanding the product
age range by including more general home safety products, if the Company has
sufficient funds to test market this concept.
MERCHANDISING
Through its Perfectly Safe Catalog, the Company emphasizes quality and
safety and provides full price merchandise tested by the Company and backed by a
full satisfaction warranty. The Perfectly Safe Catalog currently consists of 48
pages containing 235 products, principally hardgoods, approximately 61% of which
directly relates to child safety and child proofing the home, with the balance
consisting of safety tested convenience products and toys. Unlike fashion
catalogs which change their mix of products offered based upon trends and
seasonality, Perfectly Safe retains proven products. The merchandising function
for Perfectly Safe is handled by one of the Company's founders, Jeanne E.
Miller, the author of "The Perfectly Safe Home."
During the year 1995 the Company used its merchandise expertise in
children's products to launch its Jeannie's Kids Club Catalog. The target market
selected by the Company is upper income parents who want quality, value and
convenience in products for their children. The Jeannie's Kids Club Catalog
selects popular quality hardgoods products from other children's catalogs and
then offers them at discounts of up to 60%. The Jeannie's Kids Club Catalog
currently consists of 48 pages containing 289 products.
The Natural Baby Catalog emphasizes alternative hard and softgood
products for babies and their parents. The catalog is eighty pages and contains
approximately 446 products, all of which are natural fiber, non-toxic and
environmentally safe. Approximately 26% of The Natural Baby Catalog product line
is exclusive or private label products. The merchandising function for The
Natural Baby Catalog has been done by the catalog's founder, Jane Martin, since
inception, and is a reflection of her beliefs and philosophy. Mrs. Martin will
continue to handle this function for the Company under a two-year consulting
agreement. See "MANAGEMENT - Employment Agreements."
Inclusive of The Natural Baby Catalog, the ratio between hardgoods to
softgoods contained in the Company's catalogs is approximately 3:1. Exclusive of
The Natural Baby Catalog, over 95% of the products contained in The Perfectly
Safe and Jeannie's Kids Club Catalogs are hardgoods. The Company continually
identifies and tests new product categories that are natural extensions of the
core business of its catalogs. Each product and product category is measured for
its revenue and profitability, with advertising costs allocated to the product
based upon the number of square inches of paper consumed in its presentation.
Products are then rated by performance in profitability, with weaker products
either removed or altered in their presentation. Test products are selected
based upon the data contained in the analysis of similar or related products, or
sales and feature benefits that the Company's merchandising team feels will
appeal to the demographics of the intended catalog customer.
MARKETING
The Company serves the children's market at an age where the child
changes rapidly and many of the products become functionally obsolete within
months of the date of purchase. The Company's market for its catalog is
primarily from prenatal to age three. The Company maintains proprietary mailing
lists of households with an average income in excess of $50,000 per year, a
proven history of mail order purchases and a newborn in the house. The number of
customers who purchased in the last twelve months are 53,780 for Perfectly Safe,
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and 42,744 member and non-member buyers for Jeannie's Kids Club (non-member
buyers are not entitled to purchase Jeannie's Kids Club merchandise at a
discount). The Company also rents mailing lists which meet the Company's
criteria from outside sources, which consist of independent list compilers, as
well as directly from other children's catalogs. The Company's present cost of
renting mailing lists is $.09 per household per use. The Company believes that
The Natural Baby Catalog's mailing list rentals are primarily from certain other
children's catalogs based upon a proven history of recent mail order purchases.
In order to select those households most likely to purchase, the
Company uses a statistical modeling system developed in-house, called REZIP.
REZIP is a compilation of zip codes derived from the zip codes of prior
customers, and has a database of approximately five million names. The REZIP
database is used as a filter to select specific households for catalog mailings.
The Company believes that its REZIP statistical modeling system which it
developed between 1990 and 1993 is outdated and needs to be replaced with
state-of-the-art data bases containing various additional demographic
information, which would enable the Company to more accurately predict
profitable zip codes. As discussed previously, the Company is in the process of
developing that software. At the present time, The Natural Baby Catalog does not
use a statistical modeling system. The Company believes that the application of
a statistical modeling systems will increase the rate of percentage response and
profitability of The Natural Baby Catalog.
The Company uses a selling strategy built around two basic selling
seasons: fall/winter and spring/summer. Each season requires changes of products
appropriate to the time period for the life of the catalog. Catalogs are mailed
on a monthly basis in approximately equal quantities, with clearance sales
advertised on wrappers of selected catalog mailings. Monthly mailing quantities,
however, are subject to significant variations due to changes in timing and
availability of rental mailing lists. In 1996, the catalog mailings for
Perfectly Safe and Jeannie's Kids Club were 1,595,890 and 2,372,891
respectively.
The Company believes that The Natural Baby Catalog uses a selling
strategy based upon three basic selling seasons: spring, summer and fall/winter.
While catalogs are mailed monthly, lessor quantities are mailed monthly in the
period February-June, with quantities increasing to the fall/winter season. The
Natural Baby Catalog mailed approximately 2.1 million catalogs in 1996.
Because of a continuing increase in catalog advertising costs and the
relatively short customer life, the Company believes that it can no longer
afford to use catalog mailings as the sole method of customer name acquisition.
Accordingly, the Company intends to pursue a balanced customer acquisition
program, which will include magazine solicitations, promotional inserts, and
marketing joint ventures with mass marketers of baby formula, baby food and
health care, as alternative marketing methods for the acquisition of customer
names. The Company has not yet entered into any agreements to commence any such
new acquisitions program.
CUSTOMER SERVICE AND TELEMARKETING
The Company derives approximately 80% of its revenue through orders
placed over the telephone and emphasizes superior customer service and
friendliness in its sales representatives. The Company's payment terms have been
major credit cards or checks. The Company's return policy is unconditional, and
provides that if a customer is not satisfied with his or her purchase for any
reason, it may be returned within 30 days for a full refund or exchange. If a
shipping error has occurred the Company will issue call tags to pick up
merchandise shipped in error and will send a corrected shipment.
The Company's telemarketing facilities are open seven days a week from
8:00 am to 11:00 p.m. and employ the equivalent of approximately 13 full time
telemarketing and customer service representatives. During the year 1996 the
Company handled over 200,000 telephonic customer orders, catalog requests and
service requirements.
The Company is developing a new order taking and customer service
system to improve its efficiency in processing customer requirements. During
October 1996 the Company installed an advanced telephone
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system for the monitoring and distribution of telephone calls to its sales
representatives. Additionally, the Company expects to automate its routine
catalog requests, and lower its cost per call in this segment of its
telemarketing business.
Upon the Company's acquisition of The Natural Baby Catalog, the Company
anticipates the need to add the equivalent of approximately 10 additional full
time telemarketing and customer service representatives to its current staff.
The Company believes that the Natural Baby Catalog employed approximately 18
full time equivalents to handle its telemarketing and customer service at
December 31, 1996.
FULFILLMENT AND DELIVERY
The Company's fulfillment and delivery objective is to provide
excellent customer service within a low cost structure. Its fulfillment
operations consist of 12,000 square feet of leased facilities in North Canton,
Ohio. The facility is designed to process incoming shipments on a palletized or
boxed basis, and to process outgoing shipments on an individualized cost
effective basis. Orders shipped are individually recorded and posted through the
use of barcode scanners, so that sales records and credit card deposits are
electronically posted. The Company's fulfillment center processed over 230,000
shipments in 1996 and is currently operating at or near capacity from the
standpoint of square footage. Upon the acquisition of The Natural Baby Catalog,
the Company intends to relocate into a larger warehouse facility, for a term not
to exceed three years, of between approximately 20,000 and 25,000 square feet in
the Canton, Ohio area and move The Natural Baby Catalog from its current
location in Trenton, NJ to the Company's new facility. The Company believes that
such space is readily available in the Canton area at very affordable rates. The
Company has not yet determined a specific location and consequently negotiations
for the terms of a lease have not begun.
INVENTORY/PURCHASING
The Company conducts its purchasing operations at its general offices
in Canton, Ohio. Each catalog contains approximately 300 products or stock
keeping units (SKU's). Each product is reviewed weekly through the use of
computerized reports that provide detailed information regarding inventory
value, unit sales, and purchasing delivery times. Products are ordered as
required for "just in time" arrival into the Company's inventory.
The Company believes that its inventory and purchasing efficiency can
be improved through the use of improved systems and working capital management
to minimize out-of-stock conditions. At December 31, 1996, the Company had a
backlog of unshipped orders in excess of $115,000 (approximately $112,000 at
February 28, 1997) attributable largely to its inability to timely pay vendors
and re-stock inventory. The Company intends to use a portion of the proceeds of
this Offering to resolve this problem. See "USE OF PROCEEDS."
PRODUCT SOURCING
The Company acquires products for resale in its catalogs from numerous
domestic vendors. No single source supplied more than 10% of the Company's
products in 1996. The Company believes that no single source likewise supplied
more than 10% of The Natural Baby Catalog products in 1996.
SEASONALITY
Perfectly Safe's revenues are not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The
Perfectly Safe customer is believed to be generally the end user of the product
so purchases are spread throughout the year, rather than being concentrated
between October and December, as are traditional gift purchases. The Company's
limited experience does not indicate that Jeannie's Kids Club's revenues are
subject to significant seasonal fluctuation. The Natural Baby Catalog, however,
appears to the Company to have a seasonal increase in the fourth quarter. During
the year 1996, The Natural Baby Catalog sales in the fourth quarter were 32.6%
of total 1996 sales.
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<PAGE>
INSTITUTIONAL CREDIT FACILITY
Effective June 30, 1996, the Company assumed Duncan Hill's liability
under Duncan Hill's $800,000 working line of credit facility provided by the
United National Bank and Trust Company to the Company (the "Bank"). The Bank
opened a $800,000 line of credit in the Company's name effective December 31,
1996, and simultaneously terminated Duncan Hill's line of credit. The $650,000
amount outstanding under Duncan Hill's line of credit was transferred upon
termination to the line of credit opened in the Company's name. Almost the
entirety of those borrowings were used to finance the Company's operations. The
line of credit is for an open term, payable upon demand. The facility is secured
by the assets of the Company, as well as the assets of Duncan Hill and another
Duncan subsidiary, E.A. Carey of Ohio, Inc. The repayment of the facility is
guaranteed by Mr. Miller. The amount outstanding under the facility at the date
of this Prospectus is $___________, with interest charged at the rate of 1% over
prime.
It is the policy of the Bank to review the credit facility, annually,
commencing June 30, 1997, and to require that the Company maintain a zero
balance on the credit line for a period of thirty consecutive days sometime
during the course of each year. The Bank has agreed to waive the "zero balance"
required for the 1997 loan year ending June 30, 1997, because the Company's
current cash flow would not allow it to comply before then. The Company
anticipates that, with the additional cash flow from the sales generated by The
Natural Baby Catalog, it will "zero balance" the credit line for the 1998 loan
year in the fourth quarter of 1997.
DATA PROCESSING
The Company's data processing facilities were installed in June 1991.
The software system is marginally adequate with respect to processing,
inventory, shipping, and financial records. However, the Company believes that
the management information which can be generated from the system software is
inadequate and should be upgraded to current state-of-the-art technology.
Although the Company believes that its hardware system is marginally adequate,
the hardware is outdated and costly to maintain. It is the intent of the Company
to upgrade or replace its system software, as well as the hardware, during the
year 1997.
COMPETITION
The mail order catalog is highly competitive. The Company's catalogs
compete generally with other mail order catalogs and retail stores, including
department stores, specialty stores, discount stores and mass merchants. Many
general and specialty catalog competitors, as well as retail stores, have
substantially greater financial, distribution and marketing resources than the
Company. There are numerous general and specialty catalogs selling infants' and
children's items. However, based upon type of goods offered, the Company
considers its primary hardgood catalog competition, to be "The Right Start
Catalog," "One Step Ahead," "Sensational Beginnings," and "Hand in Hand," of
which "The Right Start" and "One Step Ahead" have substantially larger revenues
than the Company, even with the inclusion of the revenues of The Natural Baby
Catalog with the revenues of the Company.
Other mail order catalogs for children's hardgood products which the
Company believes are competitors to a lesser extent are "Current Children's
Products," "Troll Learn and Play," "Just for Kids," "Childcraft," "Toys to Grow
On," "Hearthsong," "Constructive Playthings," "Music for Little People," "Great
Kids," "The Great Kids Company," "Ultimate Baby Catalog," "San Francisco Music
Box," "Stork Kit/Bundle of Joy," "Play Fair Toys," "Animal Town," "Alvin and the
Chipmunks," "Livonia Catalog," "Plus and Company," "Disney Catalog," "Storybook
Heirlooms," and "F.A.O. Schwartz." Ten of those catalogs have substantially
higher revenues than the Company, even with the inclusion of the revenues of The
Natural Baby with the revenues of the Company.
While competitive catalogs may offer certain items contained in the
Company's catalogs, the Company believes that it is unique at the present time
in having the only catalog devoted to child safety, and the only catalog of
children's quality merchandise discounted on a club membership basis. The
Company also believes
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that The Natural Baby Catalog is the leading catalog offering alternative
products for children and their parents.
Certain other catalogs, such as "Hanna Andersson" and "Biobottoms,"
compete with The Natural Baby Catalog in selected product areas, but do not
compete across the entire product line. Other mail order catalogs for children's
softgoods products which the Company believes are competitors of The Natural
Baby Catalog to a lessor extent are "Playclothes," "After the Stork," "Talbot's
Kids," "Spiegel Children's Clothing," "Brights Creek," "Gymboree," "Eddie Bauer
Children's Fashions," and "Spiegel Kids." The Company believes that six of these
catalogs have substantially higher revenues than The Natural Baby Catalog.
In the past, many of the safety products carried by the Perfectly Safe
Catalog were generally hard-to-find, lower price items, such as electrical
outlet guards, appliance cord shorteners and appliance door latches. Many of
these items are now stocked by retail stores, discount stores and mass
merchants.
The Company experienced a competitive reaction to its introduction of
Jeannie's Kids Club Catalog which resulted in three other children's catalogs
refusing to exchange with, or rent their mailing lists to, the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION." The Company does not anticipate such a reaction from its acquisition
of The Natural Baby Catalog because the Company does not believe that Jeannie's
Kids Club Catalog is a substantial competitor of the children's catalogs from
which The Natural Baby Catalog rents mailing lists. There can be no assurance,
however, that such a competitive reaction will not occur, or that such an
occurrence would not have an adverse effect upon the profitability of The
Natural Baby Catalog.
TRADEMARKS AND TRADE NAMES
The Company owns four federally registered trademarks: "Perfectly
Safe"; "Perfectly Safe, The Catalog For Parents Who Care" with logo; "Perfectly
Safe Guarantee" with logo; and, logo. The Company plans to register its mark,
"Jeannie's Kids Club," as a unique identification of its Jeannie's Kids Club
Catalog. With the acquisition of The Natural Baby Catalog, the Company will
acquire the ownership of the trademark "The Natural Baby Catalog" which is a
federally registered trademark.
EMPLOYEES
As of December 31, 1996, the Company had 33 full time employees and 14
part time employees. Of this total, eight employees or 20% of total, hold
positions of managers; 30.5 employees or 77% of total, hold hourly paid
positions. The largest single segment of the Company's employment is in direct
labor involving order entry, customer service, and distribution, where 24
employees or 61% of total Company employment is involved. The work force is
non-union, and the Company does not anticipate a union presence in the
foreseeable future.
At the conclusion of the Offering, the Company anticipates that its
acquisition of The Natural Baby Catalog will require an immediate increase in
direct hourly labor with minimal increases in indirect labor. The Company does
not anticipate difficulties in local labor supply for its requirements in this
area.
PROPERTIES
The Company's principal offices and telemarketing center are located in
Canton, Ohio. The facility consist of 5,600 square feet and is leased through
September 30, 1998 with options to renew for a period of two years. The
Company's warehouse and distribution center is located in North Canton, Ohio and
consists of approximately 12,000 square feet, which is leased for a one year
term expiring September 30, 1997, and subject to earlier termination without
penalty at the option of the lessee upon sixty days written notice to the
landlord. The Company anticipates that, upon the conclusion of the Offering and
acquisition of Natural Baby Catalog, the Company will consolidate its warehouse,
distribution, and telemarketing facilities into one location
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in the Canton, Ohio area. All leases are in the name of Duncan Hill and the
rent is charged to its subsidiaries consistent with past practices. See "THE
COMPANY AND ITS PARENT."
REGULATORY MATTERS
The Company's business, and the catalog industry in general, is subject
to regulation by a variety of state and federal laws relating to, among other
things, advertising and sales taxes. The Federal Trade Commission regulates the
Company's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which the
Company sells in its catalogs. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
without collecting sales tax. The Company believes that it collects sales in
states where it is required to do so. The Company has no claims or regulatory
matters in process or pending as of the date of this Prospectus. See "RISK
FACTORS - State Sales Tax."
PRODUCT LIABILITY INSURANCE
Since 1990, the Company's parent, Duncan Hill, has carried product
liability insurance. The current coverage is $1 million per occurrence with an
aggregate limit of $2 million. The policy is supplemented by an umbrella
liability policy providing coverage of an additional $1 million per occurrence,
$2 million aggregate. The policies are carried by Duncan Hill, with the Company
and Duncan Hill's other subsidiaries as named insureds. The policies are issued
for a period of one year and are currently in effect through September 17, 1997.
The Company intends to attempt to procure the same coverage in its name, alone,
after the completion of this Offering. See "RISK FACTORS - Potential Product
Liability."
LEGAL PROCEEDINGS
In the normal course of business, the Company may be involved in
various legal proceedings from time to time. Presently, however, the Company is
not a party to any litigation, whether routine or incidental to its business, or
otherwise.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the
Company are set forth below:
NAME AGE POSITION
---- --- --------
William L. Miller........ 60 Chairman of the Board of Directors, Chief
Executive Officer and Principal Financial
Officer
Jeanne E. Miller......... 49 Executive Vice President and Director
Clark D. Swisher......... 45 Director
The term of office for each of the Company's directors and executive
officers is one year. William L. Miller and Jeanne E. Miller are husband and
wife.
WILLIAM L. MILLER has been Chairman of the Board of Directors of the
Company, and its Chief Executive Officer, since its recent formation. Prior to
the Reorganization, Mr. Miller had been a director of Perfectly Safe, Inc., and
its Vice President since it was formed by Duncan Hill in 1990. Mr. Miller
founded Duncan Hill in 1977 and has been a director and its President and Chief
Executive Officer since then. He holds a Bachelor's Degree in Mechanical
Engineering from Perdue University and a Master's Degree in Business
Administration from Indiana University. Mr. Miller is also the President and a
director of E.A. Carey of Ohio, and Highland Pipe Company, both of which are
wholly owned subsidiaries of Duncan Hill.
JEANNE E. MILLER has been a director of the Company, and its Executive
Vice President since its recent formation. Prior to the reorganization, Mrs.
Miller had been a director of Perfectly Safe, Inc., and its President since its
formation in 1990. Mrs. Miller co-founded Duncan Hill in 1977 and has been a
director and its Vice President ever since. Between 1974 and 1978, Mrs. Miller
was the owner/operator of Jeanne Eggers, Ltd., an advertising and public
relations firm with offices in Chicago and London. Mrs. Miller is the author of
the child safety book THE PERFECTLY SAFE HOME, published by Simon and Schuster
in 1991 and has appeared on network television to speak on that subject. Mrs.
Miller is also the Vice President and a director of E.A. Carey of Ohio and
Highland Pipe Company, both of which are wholly owned subsidiaries of Duncan
Hill.
CLARK D. SWISHER is a director of the Company since its recent
formation. Mr. Swisher has been Vice President of the Employee Benefits Division
of the Leonard-McCormick Agency, a general insurance agency, since 1984. Mr.
Swisher's professional background includes membership in the National
Association of Life Underwriters and the University of Akron Business Advisory
Council. Mr. Swisher has been a director of Duncan Hill since 1995.
Following the completion of this Offering, the Company will attempt to
identify and appoint two individuals who are not affiliated with the Company or
the Underwriters as the fourth and fifth directors. There is no assurance,
however, that the Company will be able to attract suitable candidates at this
stage of its development.
Upon the appointment of two additional unaffiliated directors, the
Board of Directors intends to establish a Compensation Committee and an Audit
Committee. The Audit Committee, which will consist of at least a majority of
directors who are not affiliated with the Company, will among other things, make
recommendations to the Board of Directors regarding the independent auditors for
the Company, approve the
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scope of the annual audit activities of the independent auditors and review
audit results and have general responsibility for all auditing related matters.
The Compensation Committee will consist entirely of directors who are not
affiliated with the Company. The Compensation Committee will review and
recommend to the Board of Directors the compensation structure for the Company's
officers and other management personnel, including salary rates, participation
in incentive compensation and benefit plans, fringe benefits, non-cash
perquisites and other forms of compensation. The Committee will also administer
the Company's 1997 Long-Term Stock Incentive Plan.
The Company pays its directors who are not also employees of the
Company $100 for each meeting attended and reimburses such directors for travel
and other expenses incurred by them in connection with attending Board of
Directors meetings. Directors will be eligible to participate in 1997 Stock
Incentive Plan.
The Representative has been granted by the Company the right to
designate one director to serve on the Company's Board of Directors for a period
of three years from the date of this Prospectus. As of the date hereof, no such
person has been designated.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to the named
Executive Officers for the fiscal years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL LONG-TERM
COMPENSATION AWARDS(1) COMPENSATION
---------------------- ------------
(a) (b) (c) (d) (e) (f)
OTHER ANNUAL RESTRICTED STOCK OPTION
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION AWARD GRANTS
- --------------------------- ---- ------ ------------ ----- ------
<S> <C> <C> <C> <C> <C>
William L. Miller, Chief Executive 1996 $100,000 - - -
Officer and Principal Financial 1995 $100,000 - - -
Officer(2) 1994 $100,000 - - -
Jeanne E. Miller, Executive Vice 1996 $ 65,000 - - -
President(3) 1995 $ 65,000 - - -
1994 $ 65,000 - - -
</TABLE>
____________________________
(1) Compensation was paid by Duncan Hill which, prior to the reorganization,
provided management and general and administrative services to the Company,
and which after the reorganization continued to maintain the named
Executive Officers on its payroll through December 31, 1996. Approximately
69%, 69% and 49% of the compensation paid by Duncan Hill to the named
Executive Officers were expensed to the Company in 1996, 1995 and 1994,
respectively. See "THE COMPANY AND ITS PARENT."
(2) Mr. Miller served as the Vice President of Perfectly Safe, Inc. until the
reorganization effective June 30, 1996 when he became Chief
Executive Officer and Principal Financial Officer of the Company.
(3) Mrs. Miller served as the President of Perfectly Safe, Inc. until the
reorganization effective June 30, 1996 when she became Executive
Vice President of the Company.
INCENTIVE COMPENSATION PLAN. The Company's Incentive Compensation Plan (the
"Plan") is designed to motivate employee participants to achieve the Company's
annual strategic goals. Eligibility for participation in the Plan is limited to
the Chief Executive Officer and the Executive Vice President of the Company, and
such other employees of the Company as may be designated by the Board of
Directors from time to time. For each fiscal year of the Company, the Board will
establish a bonus pool not to exceed 10% of the Company's operating income. The
amount of such pool with respect to any year shall be determined subsequent to
the end of that year upon the determination of the Company's operating income
for that year. Each participant in the Plan is eligible to receive from the
bonus pool an annual award of up to 50% of the participant's base salary. Upon
its establishment, the Compensation Committee shall be responsible for
recommending to the Board of Directors performance objectives and awards for
participants. Until the Compensation Committee is established, these
determinations will be made solely by the Board of Directors. The Board of
Directors is currently controlled by Mr. and Mrs. Miller, the Company's
respective Chief Executive Officer and Executive Vice President, who are also
the only two current participants in the Plan.
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<PAGE>
Payouts are to be determined annually following determination of the Company's
fiscal year-end results. The Plan is subject to amendment of termination at any
time, but no such action may adversely affect any rights or obligations with
respect to any awards theretofore made under the Plan.
1997 STOCK INCENTIVE PLAN. In March 1997, the Company's stockholders
approved, the adoption of the Company's 1997 Long-Term Incentive Plan (the
"Incentive Plan"). Under the Incentive Plan, the Compensation Committee of the
Board of Directors may grant stock incentives to key employees and the directors
of the Company pursuant to which a total of 400,000 shares of Common Stock may
be issued; provided, however, that the maximum amount of Common Stock with
respect to which stock incentives may be granted to any person during any
calendar year shall be 20,000 shares, except for a grant made to a recipient
upon the recipients initial hiring by the Company, in which case the number
shall be a maximum of 40,000 shares. These numbers are subject to adjustment in
the event of a stock split and similar events. Stock incentive grants may be in
the form of options, stock appreciation rights, stock awards or a combination
thereof.
Options granted under the Incentive Plan may be either "incentive stock
options," which qualify for special tax treatment under Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options, which do not
qualify. Incentive stock options may only be granted to persons who are
employees of the Company. Options will expire at such time as the Compensation
Committee determines, provided that no stock option may be exercisable later
than ten years from its grant, except that the maximum term of any incentive
stock option granted to a person who owns, directly or indirectly, 10% or more
of the combined voting power of the Company's capital stock (a "10%
Shareholder") shall be five years. If an optionee ceases to be an employee or
director by reason of death, incapacity of retirement, the option shall
terminate fifteen months after the optionee ceases to be an employee. If an
optionee ceases to be an employee because of resignation with the consent of the
Compensation Committee, the option will terminate three months after the
optionee ceases to be an employee. If an optionee ceases to be an employee or
director for any other reason, the option will expire thirty days after the
optionee ceases to be an employee.
The option price per share is determined by the Compensation Committee,
except for incentive stock options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less than
110% of such fair market value if the optionee is a 10% shareholder. Payment of
the exercise price may be made in cash, or unless otherwise provided by the
Compensation Committee in shares of Common Stock delivered to the Company by the
optionee or by the withholding of shares issuable upon exercise of the option or
in a combination thereof. Options cannot be exercised until six months after the
date that the option is granted or such later time determined by the
Compensation Committee. Each option shall be exercised in full or in part.
Options are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the life of the employee or director
only by him or her. No options may be granted under the Incentive Plan after
March 27, 2007. However, any options outstanding on March 27 , 2007 will remain
in effect in accordance with their terms.
The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common Stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation Committee, provided however, that such expiration date shall not be
later than ten years from the date of the grant. SARS are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee's cessation of employment or
directorship, as pertains to options, discussed above.
The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the Committee may determine. All shares of Common
Stock subject to a stock award will be valued at not less than 100% of the fair
market
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<PAGE>
value of such shares on the date the stock award is granted. The number of
shares of Common Stock which may be granted as a stock award in any calendar
year may not exceed 80,000.
The Incentive Plan will be administered by the Compensation Committee,
which has the authority to prescribe, amend and rescind rules and regulations
relating to the Plan, to accelerate the exercise date of any option, to
interpret the Plan and to make all necessary determinations in administering the
Plan.
The Incentive Plan will remain in effect until such time as it is
terminated by the Board of Directors. The Incentive Plan may be amended by the
Board of Directors upon the recommendation of the Compensation Committee, except
that, without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to issuance under the Plan; change the class of persons
eligible to participate under the Plan; withdraw the administration of the Plan
from the Compensation Committee; or, to permit any option to be exercised more
than ten years after the date it was granted.
As of the date of the Prospectus, the Compensation Committee has yet to be
formed, and accordingly, no stock incentives have been granted under the
Incentive Plan.
EMPLOYMENT AGREEMENTS
The Company has entered into separate five-year employment agreements
with William L. Miller and Jeanne E. Miller, effective January 1, 1997, pursuant
to which Mr. Miller is to serve as Chief Executive Officer of the Company and
Mrs. Miller is to serve as its Executive Vice President. The employment
agreements provide for an annual base salary of $125,000 for Mr. Miller and
$90,000 for Mrs. Miller, subject to annual review for increase by the Company.
The employment agreements also provide for the eligibility of these executives
to receive annual cash bonuses under the Company's Incentive Compensation Plan
discussed above. Each of these executives is also to be provided with
automobiles, at the Company's expense, for their exclusive use, the make and
model of which is to be mutually agreed upon by the executive and the Company,
from time to time. Each of these executives is also to be reimbursed for certain
personal expenses up to $7,500, which amount shall be subject to increase to pay
for any personal income tax liability should such reimbursements be deemed
taxable to the executive. Each of these executive is also entitled to
participate in any employee benefit plan which the Company may create in the
future. The Company has also agreed to maintain in force, at its expense, during
the term of the employment agreements, life insurance for the benefit of each of
the executives in an amount equal to twice the base salary of Mr. Miller and
five times the base salary of Mrs. Miller. Pursuant to the employment
agreements, each of these executives has agreed not to compete with the Company
during employment and for a period of one year following termination of
employment and has further agreed to maintain as confidential, the Company's
proprietary information.
Each of the employment agreements provide for severance compensation to
be paid in all instances other than the executive's termination for cause. In
the event that the executive becomes disabled or dies, the Company, in the case
of Mr. Miller, is required to pay an amount equal to the product of (x) and (y)
where (x) is the sum of the executive's salary and bonus paid in the prior year
multiplied by 2.99 and (y) the percentage of the employment agreement's five
year term remaining from the date of death of disability; provided, however,
that such severance compensation will not be less than the officer's salary and
bonus paid in the year prior to the year in which the officer dies or becomes
disabled. The foregoing benefit is provided in the employment agreement of Mrs.
Miller, but only in the event of disability. Each executive is also entitled to
be paid severance compensation in an amount equal to the sum of the executive's
salary and bonus paid in the prior year multiplied by 2.99 in the event that the
executive elects to terminate the employment agreement upon the Company's
material breach of the employment agreement or upon the Company's reduction of
the executive's responsibilities, duties, functions or dignity of position
resulting from a change of control, or otherwise. Assuming that severance
payments were due to each of the executive officers as of the date of the
Prospectus under the immediately preceding sentence, the amount of the severance
payment to each of Mr. Miller and Mrs. Miller would be $299,000 and $194,350,
respectively. Each executive is further entitled to be paid severance
compensation in the amount equal to the sum of the
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executive's salary and bonus paid in the last year of the executive's employment
agreement in the event that the executive is not rehired upon terms acceptable
to him or her or, in the case of Mr. Miller, a successor chief executive officer
is hired with Mr. Miller's consent to replace Mr. Miller prior to the expiration
of the term of his employment agreement. Additionally, any executive entitled to
severance compensation, above, will also be entitled to participate in any
Company-sponsored employee health benefit plan at the Company's expense, for a
maximum of eighteen months from the date of termination.
Each of Mr. Miller and Mrs. Miller was granted under their respective
employment agreements an option to purchase 100,000 shares of the Company's
Common Stock, which will vest 25% on each of the first four anniversary dates
commencing January 1, 1998, regardless of whether the executive is employed on
such dates by the Company. The vested options will be immediately exercisable
and will expire ten years from the date of the agreement. The exercise price of
the options shall be $5.00 per share, subject to downward adjustments in the
exercise price if the Company meets certain performance goals.
Mr. Miller is permitted under his agreement to devote such time to
managing the affairs of the various other Duncan Hill entities as he deems
appropriate, and to retain any compensation that he receives from those entities
for providing those services.
The Company will enter into a two-year consulting agreement with Jane
Martin, effective the date of the Company's acquisition of The Natural Baby
Catalog, pursuant to which Mrs. Martin will continue to be primarily responsible
for the merchandise selections design and production of The Natural Baby
Catalog. The agreement provides for an annual consulting fee of $65,000.
The Company intends to provide its executive officers and employees
with certain fringe benefits (e.g., health insurance) and may, in the future,
offer additional stock or cash incentive bonus plans, and other employer
benefits on such amounts and upon such conditions as the Company's Board of
Directors may, in its sole discretion, determine.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation contains a provision
eliminating the personal monetary liability of directors to the extent allowed
under the General Corporation Law of the State of Delaware. Under the provision,
a stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as a director or not, if he is also an officer, his role
as an officer or in any other capacity or to his responsibilities under any
other law, such as the federal securities laws. The provision, however, does not
affect the availability of seeking equitable relief against a director of the
Company. In addition, the Company's Bylaws provide that the Company will
indemnify its directors, officers, employees and other agents to the fullest
extent permitted by Delaware law. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 8, 1997, certain information
with respect to the beneficial ownership of Common Stock and Series A Preferred
Stock by each person or entity known by the Company to be the beneficial owner
of 5% or more of such shares, each officer and director of the Company, and all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
SHARES OF
SHARES OF SERIES A
COMMON STOCK PREFERRED STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------ ------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER(1) NUMBER PERCENT(2) NUMBER PERCENT(3)
- ---------------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Duncan Hill Co., Ltd. 2,400,000(4) 65%(4) 5,000,000(4) 100%(4)
4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
William L. Miller(5) 2,400,000(6) 65%(6) 5,000,000(7) 100%(7)
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
Jeanne E. Miller(8) -0- -0- -0- -0-
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
Clark D. Swisher(9) -0- -0- -0- -0-
c/o 4450 Belden Village Street,
N.W., Suite 406
Canton, OH 44718
All Officers and Directors as a 2,400,000(6) 65%(6) 5,000,000(7) 100%(7)
Group (3 Persons)
</TABLE>
__________________________
(1) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act. Accordingly,
except as noted, all of the Company's securities over which the officers
and directors and nominees named, or as a group, directly or indirectly
have, or share voting or investment power, have been deemed beneficially
owned.
(2) Calculated based upon 3,700,000 shares of Common Stock outstanding.
(3) Calculated based upon 5,000,000 shares of Series A Preferred Stock
outstanding.
(4) William L. Miller will be deemed to beneficially own all such shares for
purposes of Rule 13d-3 of the Securities Exchange Act based upon his 53.9%
ownership of Duncan Hill's common stock.
(5) Chief Executive Officer and Director of the Company.
(6) Represents Mr. Miller's deemed beneficial ownership of 2,400,000 shares of
Common Stock.
(7) Represents Mr. Miller's deemed beneficial ownership of 5,000,000 shares of
Series A Preferred Stock, the record holder of which is Duncan Hill.
(8) Executive Vice President and Director of the Company.
(9) Director of the Company.
- 41 -
<PAGE>
SELLING SECURITYHOLDERS
Up to 1,500,000 Warrants may be offered by three Selling Securityholders
who provided bridge financing to the Company. See "CERTAIN TRANSACTIONS - Bridge
Loan." Two of the Selling Securityholders are customers of the Representative .
The third Selling Securityholder was introduced to the Company by the
Representative. There are no other affiliations or relationships between any of
the Selling Securityholders and either the Company or the Representative. The
Company has agreed to bear all expense (other than underwriting or selling
commissions or any fees or disbursements of such Selling Securityholders'
respective counsel) in connection with the registration of the resale of the
Warrants.
The following table sets forth certain information with respect to holders
for whom the Company is registering the possible resale to the public of
Warrants. Except as set forth herein, none of such holders has held any position
or office or has had a material relationship with the Company or any of its
affiliates within the past three years. Except as set forth below, the Company
believes that none of the holders listed below owns any other securities of the
Company. The Company will not receive any of the proceeds from the sale of the
Warrants. Sales of the Warrants by the Selling Securityholders, or even the
potential of such sales, may have an adverse effect on the market price of the
Company's securities, should a public trading market develop. See "DESCRIPTION
OF SECURITIES - Warrants." The Underwriters have no arrangements, agreements, or
understandings with any of the Selling Securityholders to sell their Warrants.
WARRANTS
SECURITIES TO BE OWNED
BEING OFFERED AFTER THE OFFERING
---------------------------------------------------
NUMBER OF
WARRANTS OWNED
NAME PRIOR TO THE NUMBER PERCENT(1)
OFFERING
- -------------------------------------------------------------------------------
Clinthill Investments, Ltd. 500,000 ---- ----
Kurt 15,000 ---- ----
Campbell
M&M Specialties, 985,000 ---- ----
Ltd.(2)
(1) Such percentage assumes that all securities offered hereby by such Selling
Securityholder are sold.
(2) Holds 171,428 shares of the Company's Rule 504 Shares. See "CERTAIN
TRANSACTIONS - Rules 504 Shares."
The Warrants may be sold from time to time directly by the Selling
Securityholders. Alternatively, the Selling Securityholders may from time to
time offer the Warrants through underwriters, dealers or agents. The
distribution of the Warrants may be effected in one or more transactions that
may take place over-the-counter, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such Warrants as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders in connection with
such sales of the Warrants. The Warrants offered by the Selling Securityholders
may be sold by one of the following methods, without limitations: (a) a block
trade in which a broker or dealer so engaged will attempt to sell the shares as
agent but may position and resell a portion of the block as principal and resale
by such
- 42 -
<PAGE>
broker or dealer for its account pursuant to this Prospectus; (b) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (c) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Securityholders may arrange for other brokers or dealers to participate.
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Warrants in the distribution of
the Warrants may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended (the "Act") and any profits
realized may be deemed to be underwriting commissions or discounts under the
Act.
At the time a particular offer to sell the Warrants is made by or on
behalf of a Selling Securityholder, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
CERTAIN TRANSACTIONS
RULE 504 SHARES
In connection with its initial capitalization, the Company sold,
commencing October 1996, an aggregate of 1,300,000 shares of Common Stock to
eight private investors at a purchase price of $.125 per share. Seven of these
investors are customers of the Representative. There are no other affiliations
or relationships between the seven private investors and either the Company or
the Representative. The eighth investor, who is not a customer of the
Representative and who had no relationship or affiliation with the
Representative, had once been engaged to provide financial consulting services
to the Company's parent, Duncan Hill. This investor has no other relationships
or affiliations with the Company. The Company issued those shares under Rule 504
of the 1933 Act (the "504 Shares") and are freely tradeable except for 100,000
of the Rule 504 Shares which are subject to a "lock-up" by the Representative.
See "Underwriting." Any actual future sales of the Rule 504 Shares (or the
potential thereof) may have an adverse effect on the market price of the
Company's securities, should a public trading market develop. See "RISK FACTORS
- -Unregistered Securities Eligible for Immediate and Future Sale." The
Underwriters have no arrangements, agreements or understandings with any of
these eight private investors to sell their Rule 504 Shares.
BRIDGE LOAN
In October 1996, the Company borrowed an aggregate of $200,000 (the
"Bridge Loan") from three private investors, two of whom are customers of the
Representative, and the third of whom was introduced by the Representative to
the Company. These three private investors are Clinthill Investments, Ltd., Kurt
Campbell and M&M Specialties, Inc. The Bridge Loan bears interest at the rate of
8% per annum and is payable upon the earlier of October 1996 and the closing of
this Offering.
$75,000 of the aggregate outstanding balance of the Bridge Loan will be
applied by the Bridge Lenders to the purchase of 1,500,000 Warrants, at a
purchase price of $.05 per Warrant, upon the date of the Prospectus. These
Warrants are identical to the Warrants underlying the Units being offered to the
public in this Offering. See "DESCRIPTION OF SECURITIES - Warrants." The
1,500,000 Warrants have been registered for possible resale by the Bridge
Lenders under the Registration Statement of which this Prospectus forms a part.
See "SELLING SECURITYHOLDERS." These Warrants while outstanding may have an
adverse effect upon the market price of the Companies securities, should a
public trading market develop and
- 43 -
<PAGE>
may also make it more difficult for the Company to raise additional capital.
See "RISK FACTORS - Potential Adverse Effect of Redemption or Exercise of
Warrants."
ACQUISITION OF THE NATURAL BABY CATALOG
In May, 1996, The Natural Baby Company, Inc. ("Baby Co.") contracted to
sell its catalog business, The Natural Baby Catalog, to Duncan Hill, at which
time Duncan Hill paid Baby Co. $25,000 towards the purchase price. The Company
will repay the $25,000 advanced by Duncan Hill upon the closing of this
Offering. Duncan Hill has assigned its rights to acquire The Natural Baby
Catalog to the Company, with Baby Co.'s approval. The remaining purchase price
to be paid by the Company for The Natural Baby Catalog consists of: a cash
payment in the amount of $1,075,000 to be made by the Company to the seller upon
the closing of the Offering; a cash payment in the amount of $210,777 in payment
of a note owed by Baby Co. in the principal amount of $197,603 together with
accrued interest in the amount of $13,174 through April 30, 1997; the assumption
by the Company of Baby Co.'s accounts payable incurred in the ordinary course of
business, which is approximately $275,958 as of December 31, 1996; the
assumption of Baby Co.'s remaining lease obligations in the approximate amount
of $35,500; and, a convertible promissory note to be issued by the Company to
Baby Co. in the amount of $250,000 (the "Convertible Note"). The Company intends
to pay the assumed accounts payable and assumed lease obligations out of The
Natural Baby Catalog's cash flow.
The unpaid balance of the Convertible Note is convertible at any time
into unregistered shares of the Company's Common Stock, at the election of the
holder, at a conversion price of $5.00 per share. The Convertible Note will have
an eight year term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the Convertible Note, only accrued interest in
arrears will be payable. Thereafter, five annual payments of $50,000, plus
accrued interest, will be payable on the fourth, fifth, sixth, seventh and eight
anniversaries of the execution of the Convertible Note.
The purchase price is based upon Baby Co.'s tangible net worth at
December 31, 1995, and is subject to adjustment in the event that Baby Co.'s
tangible net worth at closing is higher or lower than at year end 1995. Any
adjustment in the purchase price will be made as an adjustment to the
Convertible Note.
The Company did not engage an independent appraiser to evaluate whether
or not the Company has agreed to pay a purchase price in excess of The Natural
Baby Catalog's fair value. In addition, because the Company did not complete the
acquisition on or before January 3, 1997, as initially agreed to, the Company
agreed to pay an additional $350,000 (the "Additional Amount") for the
acquisition in order to obtain an extension until no later than April 30, 1997
to complete the acquisition. $250,000 of the Additional Amount is reflected in
the Convertible Note and $100,000 of the Additional Amount is reflected in the
$1,278,358 cash payment to be made upon the completion of this Offering. Baby
Co.'s demands for the increase in the purchase price was predicated upon the
strong growth of The Natural Baby Catalog's business since Baby Co. initially
agreed to sell its catalog business in May, 1996.
The parties have provided for an escrow closing to take place within
ten business days prior to the date of this Prospectus. Upon payment of the
purchase price, which must occur no later than April 30, 1997, the acquisition
will become final. See "RISK FACTORS - Acquisition Escrow Closing of The Natural
Baby Catalog."
The foregoing is a summary of the material provisions of the Asset
Purchase Agreement, as amended, and the Escrow Agreement, for the Company's
acquisition of The Natural Baby Catalog. The Asset Purchasing Agreement, as
amended, and the Escrow Agreement, have been filed as an Exhibit to the
Registration Statement of which the Prospectus is a part.
GENERAL
It is the policy of the Company that future transactions with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated parties.
- 44 -
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
The securities that are offered hereby are being offered and will be
sold only in units ("Units"). Each Unit consists of two shares of common stock,
$.001 par value (the "Common Stock") and one Class A warrant (the "Warrant").
The Warrants will be in registered form and immediately separately transferable,
detachable, and exercisable.
COMMON STOCK
The Company has 25,000,000 shares of authorized Common Stock. As of the
date of this Prospectus, 3,700,000 shares of Common Stock were issued and
outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Subject to preferences that may be applicable to
any then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. See "DIVIDEND POLICY." In
the event of a dissolution, liquidation or winding-up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of this Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock other
than the Series A Preferred Stock discussed below.
SERIES A PREFERRED STOCK
As of the date of this Prospectus, the Company has issued and
outstanding 5,000,000 shares of Series A Preferred Stock, $.001 par value. The
holders of the Series A Preferred Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. As of the
date of this Prospectus, all of the issued and outstanding shares of the Series
A Preferred Stock is held by Duncan Hill. The Series A Preferred Stock and the
Common Stock held by Duncan Hill will enable it and the Millers to maintain
control of the Company subsequent to the completion of this Offering. See "RISK
FACTORS Control by Parent and Parent's Controlling Stockholders."
The Series A Preferred Stock is not subject to redemption and has no
conversion rights or rights to participate in dividend payments. In the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company, each share of Series A Preferred Stock has a liquidation
preference of $.001 per share.
- 46 -
<PAGE>
WARRANTS
During the four-year period commencing one year from the date of this
Prospectus, each Warrant will entitle the registered holder to purchase one
share of Common Stock at an exercise price of $5.00 per share. Warrants may be
exercised by surrendering to the warrant agent the Warrants and the payment of
the exercise price in United States funds by cash or certified or bank check. No
fractional shares of Common Stock will be issued in connection with the exercise
of Warrants. Upon exercise, the Company will pay to the holder the value of any
such fractional shares based upon the market value of the Common Stock at such
time. The Company is required to keep available a sufficient number of
authorized shares of Common Stock for issuance to permit exercise of the
Warrants.
The Company may redeem the Warrants at a price of $.05 per Warrant at
any time after they become exercisable and prior to their expiration by giving
not less than 30 days' written notice mailed to the record holders if the
closing bid price of the Common Stock has been at least $14.40 on each of the 20
consecutive trading days ending on the 5th day prior to the date on which the
notice of redemption is given.
The Warrants will expire at 4:00 P.M., New York time, on the sixth
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. In the event of the liquidation,
dissolution or winding up of the Company, holders of the Warrants are not
entitled to participate in the distribution of the Company's assets.
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 stock dividends, stock splits, combinations,
subdivisions and reclassifications. 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.
Purchasers of the Warrants will have the right to exercise the Warrants
to purchase shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if the shares are qualified for sale under the
securities laws of the jurisdictions in which the various holders of the
Warrants reside. The Company has undertaken to maintain the effectiveness of the
Registration Statement of which this Prospectus is a part or to file and
maintain the effectiveness of another registration statement so as to permit the
purchase of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. The Warrants may be deprived
of any value if this Prospectus or another prospectus covering the shares
issuable upon the exercise thereof is not kept effective or if such Common Stock
is not qualified or exempt from qualification in the jurisdictions in which the
holders of the Warrants reside.
For the life of the Warrants, a holder thereof is given the opportunity
to profit from a rise in the market price of the Common Stock that may result in
a dilution of the interest of other stockholders. In addition, the Company may
find it more difficult to raise capital if it should be needed for the business
of the Company while the Warrants are outstanding. At any time when the holders
of Warrants might be expected to exercise them, the Company would, in all
likelihood, be able to obtain additional capital on terms more favorable than
those provided in the Warrants.
The foregoing is a summary of certain provisions of Warrant Agreement
under which each Warrant will be issued. The Warrant Agreement has been filed as
an Exhibit to the Registration Statement of which the Prospectus is a part.
- 47 -
<PAGE>
UNDERWRITERS' PURCHASE OPTION
In connection with this Offering, the Company has agreed to sell to the
Underwriters, for an aggregate purchase price of $25, the Underwriters' Purchase
Option which entitles the Underwriters to purchase 25,000 Units. See
"UNDERWRITING."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and
Warrants is American Stock Transfer & Trust Company.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,200,000 shares of Common Stock (4,275,000 if the Underwriters' over-allotment
option is exercised in full). Of such shares, 1,800,000 shares of Common Stock
will be freely transferable without restriction or further registration under
the 1933 Act (the "Unrestricted Shares"), other than any of such shares acquired
by persons who are currently "affiliates" of the Company as defined by Rule 144
under the Act, which will be subject to limitations under Rule 144 for so long
as such persons are affiliates. Only 500,000 of the 1,800,000 Unrestricted Share
have been registered in this Offering. The balance (1,300,000 shares) were
issued under Rule 504 of the 1933 Act and are freely tradeable except for
100,000 of the Rule 504 shares which are subject to a "lock-up" by the
Representative. See "UNDERWRITING." Any future sales of the Rule 504 Shares (or
the potential therefor) may have an adverse effect on the market price of the
Company's securities, should a public trading market develop. See "RISK FACTORS
- - Unregistered Shares Eligible for Immediate and Future Sale."
The Company's parent, Duncan Hill, holds 2,400,000 unregistered shares
of the Company's Common Stock and 5,000,000 unregistered shares of the Company's
Series A Preferred Stock. These shares of Common and Preferred Stock held by
Duncan Hill are "restricted securities" within the meaning of Rule 144, and may
not be sold in the absence of registration other than in accordance with Rule
144 described below or another exemption from regulation under the Act. These
restricted shares are also subject to a "lock-up" by the Representative. See
"UNDERWRITING."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the 1933 Act, is
entitled to sell within any three-month period a number of shares beneficially
owned for at least one year that does not exceed the greater of (i) one percent
of the then-outstanding shares of Common Stock or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not an affiliate and has beneficially
owned such shares for at least two years is entitled to sell such shares without
regard to the volume, manner of sale or notice requirements.
No predictions can be made as to the effect, if any, that future sales
of shares under Rule 144 or the availability of shares for sale will have on the
then-prevailing market, if any. Sales of substantial amounts of Common or
Preferred Stock pursuant to Rule 144 may adversely affect the then-prevailing
market price of the Units, Common Stock or the Warrants, should a public trading
market for such securities develop.
UNDERWRITING
The Underwriters, as set forth below and for whom VTR Capital, Inc. is
the representative (the "Representative"), have agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 250,000 Units on a "firm commitment basis." The Underwriting
- 48 -
<PAGE>
Agreement provides that the obligations of the Underwriters to purchase the
Units are subject to certain conditions and that the Underwriters are obligated
to purchase all of the 250,000 Units, if any are purchased.
UNDERWRITERS NUMBER OF UNITS
VTR Capital, Inc............................................. _______________
............................... _______________
- ------------------------------
Total...............................................
===============
The Representative has advised the Company that they propose to offer
the Units to the public at the offering price set forth on the cover page of
this Prospectus and that they may allow to certain dealers concessions not in
excess of $ _____ per Unit, of which a sum not in excess of $ _______ per Unit
may, in turn, be reallowed by such dealer to other dealers. After the initial
public offering, the offering price, discount and reallowance may be changed.
The Underwriters do not intend to sell any of the securities offered hereby to
accounts for which they have discretionary authority.
The Company has granted to the Underwriters an option, exercisable
during the 30- day period from the date of this Prospectus, to purchase from the
Company at the offering price, less the underwriting discount, up to a maximum
of 37,500 additional Units for the sole purpose of covering over-allotments, if
any.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Company's securities in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the securities originally sold by such syndicate
member are purchased in a syndicate covering transaction to cover syndicate
short positions. Such stabilizing transactions, syndicate covering transactions
and penalty bids may cause the price of the securities to be higher than they
would otherwise be in the absence of such transactions. These transactions may
be effected on the OTC Bulletin Board.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain liabilities in
connection with the Registration Statement, including liabilities under the 1933
Act. Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to officers, directors or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
The Company has agreed to pay the Underwriters an expense allowance on
a non- accountable basis equal to 3% of the gross proceeds from the sale of the
Units offered hereby (including the sale of any Units pursuant to the
Underwriters' over-allotment option), $0 which has been paid to date. The
Company also has agreed to pay all expenses in connection with qualifying the
Units offered hereby for sale under the laws of such states as the Underwriters
may designate, and the fees, costs and disbursements in connection with
registering this Offering with the National Association of Securities Dealers,
Inc. (the "NASD"), including fees and expenses of counsel retained for such
purposes by the Underwriters.
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<PAGE>
The Company has also agreed to sell to the Underwriters, for an
aggregate purchase price of $25, the Underwriters' Purchase Option, which
entitles the Underwriters to purchase up to 25,000 Units at an exercise price of
$14.40 per Unit. The Underwriters' Purchase Option is exercisable for four years
commencing one year from the date of the Prospectus. The Underwriters' Purchase
Option may not be assigned, transferred, sold or hypothecated by the
Underwriters until 12 months after the date of this Prospectus, except to
officers or partners of the Underwriters and selling group members in this
Offering. Any profits realized by the Underwriters upon the sale of the Units
issuable upon exercise of the Underwriters' Purchase Option may be deemed to be
additional underwriting compensation. The exercise price and the number of Units
underlying the Underwriters' Purchase Option are subject to adjustment in
certain events to prevent dilution. For the life of the Underwriters' Purchase
Option, the holders thereof are given, at a nominal cost, the opportunity to
profit from a rise in the market price of the Units and Warrants with a
resulting dilution in the interest of other stockholders. The Company may find
it more difficult to raise capital for its business if the need should arise
while the Underwriters' Purchase Option is outstanding. At any time when the
holders of the Underwriters' Purchase Option might be expected to exercise it,
the Company would probably be able to obtain additional capital on more
favorable terms.
The Company has agreed to register, at its expense, under the 1933 Act,
on one occasion, the Underwriters' Purchase Option and/or the underlying
securities covered by the Underwriters' Purchase Option at the request of the
holders of 50% of the Underwriters' Purchase Option. Such request may be made at
any time during a period of four years beginning one year from the date of this
Prospectus. The Company has also agreed to certain "piggyback" registration
rights for the holders of the Underwriters' Purchase Option or securities
issuable upon the exercise of the Underwriters' Purchase Option. Any exercise of
such registration rights by the Underwriters or the sale of any Units by the
holders thereof may be dilutive to the then present shareholders and may also
have an adverse effect upon either the Company's ability to obtain additional
capital, or the market price of the Company's securities should a public trading
market develop.
The Company has agreed with the Representative that, commencing one (1)
year from the date hereof, the Company will pay to the Representative a warrant
solicitation fee (the "Warrant solicitation Fee") equal to four percent (4%) of
the exercise price of the Warrants exercised, a portion of which may be
re-allowed to any dealer who solicited the exercise to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Securities and Exchange Commission. Such Warrant Solicitation Fee will be
paid to the Representative if (a) the market price of the Common Stock on the
date that any Warrants are exercised is greater than the exercise price of the
Warrant; (b) the exercise of such Warrant was solicited by the Representative or
other NASD members; (c) prior specific written approval for exercise is received
from the customer if the Warrant is held in a discretionary account; (d)
disclosure of this compensation agreement is made prior to or upon the exercise
of such Warrant; (e) solicitation of the exercise is not in violation of
Regulation M (formerly Rule 10b-6 of the Exchange Act); and (f) solicitation of
the exercise is in compliance with NASD Notice to Members 81-38. Unless granted
an exemption by the Securities and Exchange Commission from Regulation M
(formerly Rule 10b-6 ), the Underwriters and any solicitation broker-dealers are
prohibited from engaging in any market-making activities with regard to the
issuer's securities for the period from one or five business days prior to any
solicitation of the exercise of Warrants until the later of termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
that the Underwriters and soliciting broker-dealers may have to receive a fee
for the exercise of Warrants following such solicitation. As a result, the
Underwriters and soliciting broker-dealers may
- 50 -
<PAGE>
be unable to continue to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
If the Company enters into a transaction (including a merger, joint
venture, or the acquisition of another entity) introduced to the Company by the
Representative, the Company has agreed to pay the Representative a finder's fee
equal to 5% of the first $4,000,000 of consideration involved in the
transaction, ranging in $1,000,000 increments down to 2% of the excess, if any,
over $6,000,000.
Duncan Hill and the holder of 100,000 Rule 504 Shares have each agreed
not to sell, transfer, or otherwise dispose of any securities of the Company
owned by them within 24 months from the date of this Prospectus, unless released
earlier by the Representative.
The Company has agreed to enter into a three-year consulting agreement
(the "Consulting Agreement") with the Representative. Such agreement provides
that the Representative will render consulting services on investment banking
and other financial matters to be determined by the Company. Such services will
be provided upon dates requested by the Company and reasonably acceptable to the
Representative, not to exceed two business days per month. The services to be
provided by the Representative shall include: assistance in formulating plans
and presenting financial reports; analyzing third party proposals for the
provision of additional financing to the Company; assistance in dealing with
brokers and institutions; assistance in obtaining financial management,
technical and advisory services; and, assistance in obtaining financial and
corporate public relations. The aggregate fee due to the Representative for such
consulting services will be $100,000 and shall be paid in full in the closing of
this Offering.
The Representative has been granted by the Company the option to
designate one individual to serve on the Company's Board of Directors for a
period of three years from the date of this Prospectus. That individual must be
reasonably satisfactory to the Company's Board of Director. As of the date
hereof, no such person has been designated. The Company has been advised by the
Representative that any individual appointed by the Representative will not be
an officer, director or affiliate of the Representative or any member of the
NASD. In lieu of nominating a director, the Representative may designate a
non-director observer to attend meetings of the Company's Board of Directors for
a period of three years from the date of the Prospectus.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units offered
hereby and the terms of the Warrants, including the exercise price of the
Warrants, were determined by negotiations between the Company and the
Representative and do not necessarily bear any relationship to the Company's
assets, results of operations or other generally accepted criteria of value.
Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of and the prospects of the
industry in which the Company competes, an assessment of the Company's
management, the results of operations of the Company in recent periods, the
prospects of the Company, its capital structure and such other factors as were
deemed relevant.
The offering price set forth on the cover page of this Prospectus
should not be considered an indication of the actual value of the Units. Such
price is subject to change as a result of market conditions and other factors
and no assurance can be given that the Units can be resold at the offering
price.
The Representative has limited experience as an underwriter of public
offerings. The Representative has been the underwriter or co-underwriter in the
nine firm commitment offerings listed below: Superior Supplements, Inc., U.S.
Opportunity Search, Inc., Interiors, Inc., Conolog, Inc., New Day Beverage,
Inc., Perry's Majestic Beer, Inc., Micro-Energy, Inc., Compare Generiks, Inc.
and Decor Group, Inc. The Company's offering is expected to be the
Representative's tenth firm commitment offering. There can be no assurance that
the Representative's limited experience as an underwriter of public offerings
will not adversely affect the proposed offering of the Units, the subsequent
development of a trading market, if any, or the
- 51 -
<PAGE>
market for and liquidity of the Company's securities. Therefore, purchasers of
the securities offered hereby may suffer a lack of liquidity in their investment
or a material diminution of the value of their investment.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriters' Purchase Option which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon
for the Company by Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A., Miami,
Florida. Certain legal matters will be passed upon for the Underwriters by
Bernstein & Wasserman, LLP, New York, New York.
EXPERTS
The financial statements of Kids Stuff, Inc. as of December 31, 1996
and for the years ended December 31, 1996 and 1995 and the financial statements
of The Natural Baby Company, Inc., as of December 31, 1996 and for the years
ended December 31, 1996 and 1995 appearing in this Prospectus, have been audited
by Hausser + Taylor, independent auditors, and are included herein in reliance
upon the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the 1933 Act with
respect to the securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which are omitted as permitted by the rules and regulations of the Commission.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified by such
reference.
The Company does not presently file reports or other information with
the Commission. Upon completion of the Offering, the Company will be subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended, and, in accordance therewith, will file reports and other information
with the Commission. Such reports and other information, as well as the
Registration Statement and the exhibits and schedules thereto, may be inspected,
without charge, at the public reference facility maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Commission maintains a Web site on the Internet
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding issuers which file electronically with the
Commission through the Electronic Data Gathering, Analysis, and Retrieval System
(EDGAR). The Company's Registration Statement on Form SB-2 has been filed
through EDGAR.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined and reported upon by its
independent certified public accountants, and quarterly reports containing
unaudited financial information for its first three quarters of each year.
- 51 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
KIDS STUFF, INC.
Report of Independent Auditors ........................................... F-
Balance Sheet as of December 31, 1996..................................... F-
Statements of Income for the Years ended
December 31, 1996 and 1995.............................................F-
Statements of Stockholders' Equity
for the Year ended December 31, 1996...................................F-
Statements of Cash Flows for the Years
ended December 31, 1996 and 1995.......................................F-
Notes to Financial Statements..............................................F-
THE NATURAL BABY COMPANY, INC.
Report of Independent Auditors.............................................F-
Balance Sheet as of December 31, 1996......................................F-
Statements of Income for the Years ended December 31, 1996
and 1995...............................................................F-
Statements of Stockholders' Equity for the Years ended
December 31, 1996 and 1995.............................................F-
Statements of Cash Flows for the Years ended December 31, 1996
and 1995...............................................................F-
Note to Financial Statements...............................................F-
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction...............................................................P-
Unaudited Pro Forma Combined Balance Sheet as of December 31, 1996.........P-
Unaudited Pro Forma Combined Statements of Income
for the Year ended December 31, 1996...................................P-
Notes to Unaudited Pro Forma Combined Financial Statements.................P-
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Kids Stuff, Inc.
North Canton, Ohio
We have audited the accompanying balance sheet of Kids Stuff, Inc. as
of December 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1995. 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 Kids Stuff, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles.
As discussed in Note A to the financial statements, Kids Stuff, Inc.
was incorporated during 1996 and prior to June 30, 1996, had no operations. The
financial position, results of operations, and cash flows prior to June 30, 1996
presented in the accompanying financial statements are those of the predecessor
company, Perfectly Safe, Inc., and certain assets of Duncan Hill Company, Ltd.,
the parent company of both Perfectly Safe, Inc. and Kids Stuff, Inc. As
discussed in Note 8 to the financial statements, the Company changed its method
of accounting for certain intangible assets.
HAUSSER + TAYLOR
Canton, Ohio
February 21, 1997
F-2
<PAGE>
KIDS STUFF, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
- ------
CURRENT ASSETS
Cash $ 248,648
Accounts receivable 165,779
Inventories 496,395
Deferred catalog expense 277,469
Prepaid expenses 169,789
------------
Total current assets 1,358,080
PROPERTY AND EQUIPMENT
Data processing equipment 95,894
Machinery and equipment 83,360
Furniture and fixtures 98,448
------------
277,702
Less accumulated depreciation 164,093
------------
113,609
------------
$ 1,471,689
============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
KIDS STUFF, INC.
BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt-related parties $ 266,858
Accounts payable 1,102,311
Line of credit 650,000
Due to affiliates 137,070
Customer advances and other 5,630
-----------
Total current liabilities 2,161,869
LONG-TERM DEBT-RELATED PARTIES,
NET OF CURRENT PORTION 300,000
STOCKHOLDERS' EQUITY
Common stock 3,700
Additional paid-in capital 458,800
Retained earnings (deficit) (1,452,680)
-----------
Total stockholders' equity (990,180)
-----------
$1,471,689
===========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
KIDS STUFF, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
SALES $ 6,638,995 $ 5,724,337
COST OF SALES 4,204,321 3,540,487
----------- -----------
GROSS PROFIT 2,434,674 2,183,850
SELLING EXPENSES 2,193,219 1,998,502
GENERAL AND
ADMINISTRATIVE EXPENSES 768,580 730,950
----------- -----------
(LOSS) FROM OPERATIONS (527,125) (545,602)
NET OTHER INCOME 5,485 8,610
----------- -----------
NET (LOSS) $ (521,640) $ (536,992)
=========== ===========
(LOSS) PER SHARE $ (.14) $ (.15)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
KIDS STUFF, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- --------- ---------- --------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 $2,400 $297,600 $ 234,503 $534,503
PRIOR PERIOD ADJUSTMENT - - (628,551) (628,551)
------- --------- ---------- --------
BALANCE - DECEMBER 31, 1994
As restated 2,400 297,600 (394,048) (94,048)
DEDUCTION
Net loss - - (536,992) (536,992)
------- --------- ---------- --------
BALANCE - DECEMBER 31, 1995 2,400 297,600 (931,040) (631,040)
ADDITION
Sale of common stock 1,300 161,200 - 162,500
DEDUCTION
Net loss - - (521,640) (521,640)
------- --------- ---------- --------
BALANCE - DECEMBER 31, 1996 $3,700 $458,800 $(1,452,680) $(990,180)
======= ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
KIDS STUFF, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (521,640) $ (536,992)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 17,005 25,991
Loss on disposal of assets 30,450 -
(Increase) decrease in accounts receivable (92,146) 21,705
Decrease (increase) in inventories 105,622 (237,747)
(Increase) in deferred catalog expense (105,944) (34,072)
Increase in accounts payable, customer advances and other 354,020 250,974
---------- ----------
Net cash (used) by operating activities (212,633) (510,141)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (38,921) (28,016)
Prepaid amounts for acquisition of Natural Baby Catalog business (126,007) -
---------- ----------
Net cash (used) by investing activities (164,928) (28,016)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit 220,000 255,000
Sale of common stock 162,500 -
Borrowings on long-term debt - related parties 566,858 -
Prepaid amounts for public offering (43,782) -
(Decrease) increase in due to affiliates (315,086) 281,726
---------- ----------
Net cash provided by financing activities 590,490 536,726
---------- ----------
NET INCREASE (DECREASE) IN CASH 212,929 (1,431)
CASH - BEGINNING 35,719 37,150
---------- ----------
CASH - ENDING $ 248,648 $ 35,719
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 50,554 $ 46,336
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
Summary of Significant Accounting Policies and Reorganization
A. Reorganization - Kids Stuff, Inc. ("Kids Stuff" or the "Company") was
incorporated during 1996 as a wholly-owned subsidiary of Duncan Hill
Company, Ltd. ("Duncan Hill"). Prior to a reorganization occurring June
30, 1996, Kids Stuff had no operations. The operations shown in the
accompanying financial statements prior to June 30, 1996 are those of
Perfectly Safe, Inc., which was dissolved as part of the reorganization
and is sometimes referred to as "Predecessor" in these financial
statements.
Perfectly Safe, Inc. was also a wholly-owned subsidiary of Duncan Hill.
Effective June 30, 1996, the assets and liabilities of Perfectly Safe,
Inc., reverted to Duncan Hill, and Perfectly Save, Inc. was dissolved.
As part of the reorganization, the Company acquired the assets and
liabilities of its Predecessor. The Company also acquired, as part of
the reorganization, certain fixed assets formerly belonging to Duncan
Hill at a net book value of $122,143 at December 31, 1995. The
combination of the Company's acquisition of the assets of its
Predecessor and the Company's acquisition of certain assets of Duncan
Hill were accounted for at historical cost as a reorganization of
companies under common control. The operations of the Predecessor are
currently operated as the Perfectly Safe Division and Jeanne's Kids
Club Division of the Company.
B. Business Description - The Company is in the mail order business and
sells to customers throughout the United States. Perfectly Safe, a
division of the Company, primarily sells children's safety products for
use up to age 3. Jeanne's Kids Club, a division of the Company, sells
hard good products for children primarily up to the age of 3. Products
are purchased from a variety of vendors.
C. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and other short-term obligations
approximate their carrying values because of the short maturities of
those financial instruments. The carrying values of the Company's
long-term obligations approximate their fair value. In accordance with
Statement of Accounting Standards No. 107, "Disclosure About Fair Value
of Financial Instruments," rates available at balance sheet dates to
the Company are used to estimate the fair value of existing debt.
E. Trade Receivables - It is the Company's policy to record accounts
receivable net of an allowance for doubtful accounts. Management has
determined that no allowance is necessary as of December 31, 1996. Bad
debt expense was $34,752 and $18,742 for the years ended December 31,
1996 and 1995, respectively.
F. Inventories consist of finished goods held for resale and are stated at
the lower of cost or market with cost being determined by the first-in,
first-out (FIFO) method.
F-8
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Summary of Significant Accounting Policies and Reorganization (continued)
G. Deferred catalog expenses are costs of catalogs mailed to customers
which are deferred and amortized over periods ranging from four weeks
to six months, the estimated length of time customers utilize catalogs
and other mail order mailings from the Company. Catalog expense was
$1,936,094 and $1,772,770 for the years ended December 31, 1996 and
1995, respectively.
H. Prepaid expenses include $43,782 relative to the public offering (see
Note 9) and $126,007 relative to the acquisition of the Natural Baby
Catalog (see Note 5).
I. Property and equipment are carried at cost and depreciated using the
straight-line method over their estimated useful lives ranging from
five to ten years. Depreciation expense amounted to $17,005 and $25,991
for the years ended December 31, 1996 and 1995, respectively.
Maintenance, repairs, and minor renewals are charged against earnings
when incurred. Additions and major renewals are capitalized.
J. The Company developed and maintains a mailing list of customers who
have purchased merchandise in the recent past. The cost of developing,
maintaining, and updating this list is expensed in the period incurred.
K. New Authoritative Pronouncements - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS 121). SFAS 121
requires the Company to review long-lived assets and certain
identifiable intangibles, including goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment of impairment is based
on the estimated undiscounted future cash flows from operating
activities compared with the carrying value of the assets. If the
undiscounted future cash flows of an asset are less than the carrying
value, a write-down would be recorded measured by the amount of the
difference between the carrying value of the asset and the fair value
of the asset. The adoption of SFAS 121 did not have a material effect
on the financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes
accounting and reporting standards for stock-based compensation plans.
This standard encourages the adoption of the fair value-based method of
accounting for employee stock options or similar equity instruments,
but continues to allow the Company to measure compensation cost for
those equity instruments using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Under the fair value-based
method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount
the employee must pay to acquire the stock. The Company uses the
intrinsic value-based method for stock-based compensation to employees.
As a result, this standard does not have any effect to the Company's
financial statement other than to require disclosure of the pro forma
effect on net income of using the fair value-based method of
accounting. Management believes this effect to currently be immaterial.
F-9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 1. Parent Corporation
Prior to June 30, 1996, the telemarketing, order fulfillment,
data processing, and administrative function of Perfectly
Safe, Inc. were provided by Duncan Hill, which also provided
those services, as applicable, to its other operating
subsidiaries. Duncan Hill allocated the cost of its services,
including rent, to its operating subsidiaries on a direct cost
basis, as applicable, or on a pro rata basis determined by the
percentage of total assets of the various operating
subsidiaries, exclusive of the assets of Duncan Hill.
Management believes this is a reasonable basis of cost
allocation and that these expenses would not have been
materially different had the Company been on a stand-alone
basis.
As of June 30, 1996, the Company purchased from Duncan Hill
the assets used by Duncan Hill to perform the telemarketing,
order fulfillment, data processing, and administrative
functions. The Company commenced the performance of these
functions as of June 30, 1996, except for the payroll and
accounting functions, which Duncan Hill continued to provide
through December 31, 1996. Duncan Hill charged the Company for
its allocated portion of these expenses on the basis of total
assets, which management believes to be a reasonable basis of
cost allocation. Management believes that, had the Company
been on a stand-alone basis, these expenses would not be
materially different. Amounts due to affiliate are a result of
the unpaid portion of these charges.
Subsequent to December 31, 1996, the Company will provide
services to Duncan Hill and Duncan Hill's other subsidiaries,
as requested, on an actual cost basis. Actual costs are those
direct costs that can be charged on a per order or per hour
basis, plus fixed costs allocated on a pro rata basis by
dividing the total assets of the operating entity requesting
services by the sum of the total assets of all operating
entities of Duncan Hill and the operating entity requesting
services.
The accounts receivable and inventory of the Company and
Duncan Hill's other subsidiaries are pledged as collateral
against an $800,000 line of credit held by Duncan Hill prior
to December 31, 1996. The balance on the line of credit was
$650,000 at December 31, 1996. As a part of the reorganization
of the Company, the responsibility for the repayment of the
line of credit was assumed by the Company from Duncan Hill in
exchange for a reduction of the intercompany indebtedness owed
by the Company to Duncan Hill. Effective December 31, 1996,
the Company obtained an $800,000 line of credit in its name
and the Duncan Hill line of credit, with the same institution,
was simultaneously terminated and the outstanding balance of
$650,000 at December 31, 1996 was transferred to the Company's
line of credit. (See Note 3.)
All of the assets of the Company have been pledged to secure
the Company's obligation under its line of credit. Due to the
current nature of the liability, the carrying amount of the
line approximates fair value.
Interest expense was $56,065 and $46,336 for the years ended
December 31, 1996 and 1995, respectively.
F-10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2. Capital Stock
A. Common
Prior to the reorganization, Perfectly Safe, Inc. had common
stock at December 31, 1995 with no par value, 750 shares were
authorized, 100 shares issued and outstanding. At December 31,
1996, the Company has common stock of $.001 par value,
25,000,000 shares authorized, 3,700,000 shares issued and
outstanding.
Stockholders' equity reflects the reorganization for all
periods presented. Additionally, earnings per share were
calculated based on the 3,700,000 shares of common stock
issued in the reorganization for all periods presented.
B. Preferred
The Board of Directors has the authority, without further
action by the stockholders, to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix the
rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences, and the number
of shares constituting any series or the designation of such
series.
Note 3. Note Payable - Line of Credit
Kids Stuff, Inc. has an $800,000 line of credit from United
Bank with an open term which is payable on demand, bearing
interest payable monthly at the bank's prime lending rate
(8.25% at December 31, 1996) plus 1% and had a balance of
$650,000 at December 31, 1996. The line is secured by assets
of the Company, as well as the assets of Duncan Hill and
another Duncan subsidiary, E. A. Carey of Ohio, Inc. The
repayment of the facility is guaranteed by Mr. Miller, the
Company's Chief Executive Officer. It is the policy of the
bank to review the credit facility, annually, commencing June
30, 1997, and to require that the Company
F-11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 3. Note Payable - Line of Credit (continued)
maintain a zero balance on the credit line for a period of
thirty consecutive days sometime during the course of each
year. The bank has agreed to waive the "zero balance" required
for the 1997 loan year ending June 30, 1997. The weighted
average interest rate for the years ended December 31, 1996
and 1995 was 9.3% and 9.7%, respectively.
<TABLE>
Note 4. Long-Term Debt - Related Parties
<S> <C>
A. Long-term debt - related parties consists of the following at
December 31, 1996:
Note Payable - Duncan Hill Company, Ltd. (parent company),
unsecured and payable in four annual principal payments plus
interest at 8.0%, matures June 2000. The first installment is for
$66,858 and the three remaining installments are for $100,000. $ 366,858
Note Payable - (bridge lenders - see Note 6), the entire
principal plus interest at 8.0%, payable on the earlier of
September 27, 1997 or the closing date of the initial public
offering of Company's securities. 125,000
Note Payable - (bridge lenders - see Note 6), the entire
principal plus interest at 8%, payable on September 27, 1997
or convertible, at the option of the holder into 1,500,000
Class A Warrants of the Company. 75,000
---------
566,858
Less current portion 266,858
---------
$ 300,000
=========
</TABLE>
B. Principal payments required to be made for the next five years
ending December 31 are as follows:
Year
----
1997 $ 266,858
1998 100,000
1999 100,000
2000 100,000
---------
$ 566,858
=========
F-12
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 5. Acquisition of The Natural Baby Catalog
In May, 1996, The Natural Baby Company, Inc. (Baby Co.)
contracted to sell the assets of its catalog business, The
Natural Baby Catalog, to Duncan Hill, at which time Duncan
Hill paid Baby Co. $25,000 towards the purchase price. The
Company will repay the $25,000 advanced by Duncan Hill upon
the closing of a public offering. The Company filed the
registration statement on January 8, 1997. Duncan Hill has
assigned its rights to acquire The Natural Baby Catalog to the
Company, with Baby Co.'s approval. The remaining purchase
price to be paid, upon the closing of a public offering, by
the Company for The Natural Baby Catalog consists of: a cash
payment in the amount of $1,075,000 to be made to the seller;
a cash payment in the amount of $210,777 in payment of a note
owed by Baby Co. in the principal amount of $197,603 together
with accrued interest in the amount of $13,174 through April
30, 1997; the assumption by the Company of Baby Co.'s accounts
payable incurred in the ordinary course of business which is
approximately $275,958 as of December 31, 1996; assumption of
Baby Co.'s remaining lease obligations in the approximate
amount of $35,500 as of December 31, 1996; and, a convertible
promissory note issued by the Company to Baby Co. in the
amount of $250,000 (Convertible Note). The Company intends to
pay the assumed accounts payable and assumed lease obligations
out of The Natural Baby Catalog's cash flow.
The unpaid balance of the Convertible Note is convertible at
any time into unregistered shares of the Company's Common
Stock, at the election of the holder, at a conversion price of
$5.00 per share. The Convertible Note will have an eight-year
term and bear interest at 8% per annum. Upon the first three
anniversaries of the execution of the Convertible Note, only
accrued interest in arrears will be payable. Thereafter, five
annual payments of $50,000, plus accrued interest, will be
payable on the fourth, fifth, sixth, seventh and eighth
anniversaries of the execution of the Convertible Note.
The purchase price is based upon Baby Co.'s tangible net worth
at December 31, 1995, and is subject to adjustment in the
event that Baby Co.'s tangible net worth at closing is higher
or lower than at year end 1995. Any adjustment in the purchase
price will be made as an adjustment to the Convertible Note.
The Company did not engage an independent appraiser to
evaluate whether or not the Company has agreed to pay a
purchase price in excess of The Natural Baby Catalog's fair
value. In addition, because the Company did not complete the
acquisition on or before January 3, 1997, as initially agreed
to, the Company agreed to pay an additional $350,000
(Additional Amount) for the acquisition in order to obtain an
extension until no later than April 30, 1997 to complete the
acquisition. $250,000 of the Additional Amount is reflected in
the Convertible Note and $100,000 of the Additional Amount is
reflected in the $1,278,358 cash payment to be made upon the
completion of this Offering. Baby Co.'s demands for the
increase in the purchase price was predicated upon the strong
growth of The Natural Baby Catalog's business since Baby Co.
initially agreed to sell its catalog business in May, 1996.
F-13
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 6. Recent Sales of Unregistered Securities
The following shares of unregistered securities have been
issued by the Company since its inception. There were no
underwriting discounts and commissions paid in connection with
the issuance of any said securities.
In connection with the reorganization effective June 30, 1996,
the Company issued to its parent, Duncan Hill Co., Ltd.,
2,400,000 shares of Common Stock at a value of $.125 per
share.
Commencing October, 1996, the Company sold an aggregate of
1,300,000 shares of Common Stock to seven private investors
for the aggregate purchase price of $162,500.
In October, 1996, the Company borrowed an aggregate of
$200,000 (bridge loan) from three private investors, $75,000
of which is convertible upon its terms into 1,500,000 Class A
Warrants upon the effective date of the registration statement
described in Note 9. The 1,500,000 Warrants, as well as the
shares of Common Stock underlying those warrants are included
as securities being registered under the registration
statement.
Note 7. Income Tax
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, Accounting
for Income Taxes. The Company does not anticipate filing as
part of a consolidated group.
The Company had net operating loss carryforwards of
approximately $210,000 as of December 31, 1996 for tax
purposes, which represents activity from July 1, 1996 through
December 31, 1996. They expire in the year 2011 and are fully
reserved for book purposes. Tax net operating losses of the
Predecessor incurred prior to July 1996 reverted to the parent
company in the reorganization.
F-14
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 8. Prior Period Adjustment
During 1996, the Company changed its accounting principle
utilized regarding internally-generated customer lists and
development costs. Prior to the change, the Company
capitalized and amortized these costs over their estimated
useful life. The Company now expenses these costs as incurred.
Additionally, the Company has adjusted its financial
statements to eliminate goodwill associated with its 1990
acquisition of the Perfectly Safe Catalog business because the
transaction would be deemed to have been between affiliated
parties. The January 1, 1995 retained earnings and the related
1995 Statement of Income have been restated for the effect of
the following adjustments:
<TABLE>
<CAPTION>
RETAINED 1995 NET INCOME (LOSS)
EARNINGS AMOUNT PER SHARE
-------- --------------------------
<S> <C> <C> <C>
As previously reported $ 234,503 $ (163,232) $ (.05)
Elimination of internally-generated
customer lists and development
costs (765,521) (336,660) (.09)
Elimination of the related deferred
tax liability 136,700 (37,100) (.01)
---------- ---------- ------
As adjusted $ (394,048) $ (536,992) $ (.15)
========== ========== ======
</TABLE>
Note 9. Public Offering- Subsequent Event
The Company filed a registration statement in January, 1997,
as amended, containing two prospectuses: one relating to the
offering by the Company of 287,500 units at an offering price
of $12 per unit (including 37,500 units to cover
over-allotments, if any), each unit consisting of two shares
of common stock, $.001 par value, and one Class A Warrant; and
one relating to the offering by three bridge lenders of up to
1,500,000 Class A Warrants. The common stock and warrants are
immediately separately transferable as of the date of the
prospectus. Each warrant entitles the holder to purchase one
share of common stock at a price of $5.00 for a period of four
years commencing one year after the date of this prospectus.
The Company may redeem the Warrants at a price of $.05 per
Warrant, at any time after they become exercisable, upon not
less than 30 days' prior written notice, if the closing bid
price of the Common Stock has been at least $14.40 per share
for 20 consecutive trading days ending on the fifth day prior
to the date on which the notice of redemption is given.
F-15
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 10. Subsequent Event
During January 1997, the Company issued to its parent, Duncan
Hill Co., Ltd., 5,000,000 shares of Series A Preferred Stock,
at par value of $.001 per share, as a part of the
reorganization (See Note A). The holders of the Series A
Preferred Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the
stockholders.
The Series A Preferred Stock is not subject to redemption and
has no conversion rights or rights to participate in dividend
payments. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Company, each share of Series A Preferred Stock has a
liquidation preference of $.001 per share.
Note 11. Employment Agreement
The Company has entered into separate five-year employment
agreements with William L. Miller and Jeanne E. Miller,
effective January 1, 1997, pursuant to which Mr. Miller is to
serve as Chief Executive Officer of the Company and Mrs.
Miller is to serve as its Executive Vice President. The
employment agreements provide for an annual base salary of
$125,000 for Mr. Miller and $90,000 for Mrs. Miller, subject
to annual review for increase by the Company. The employment
agreements also provide for the eligibility of these
executives to receive annual cash bonuses under the Company's
Incentive Compensation Plan.
Each of Mr. Miller and Mrs. Miller was granted under their
respective employment agreements an option to purchase 100,000
shares of the Company's Common Stock, which will vest 25% on
each of the first four anniversary dates commencing January 1,
1998, regardless of whether the executive is employed on such
dates by the Company. The vested options will be immediately
exercisable and will expire ten years from the date of the
agreement. The exercise price of the options shall be $5.00
per share, subject to downward adjustments in the exercise
price if the Company meets certain performance goals.
F-16
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 12. Incentive Plans
A. Incentive Compensation Plan
The Company's Incentive Compensation Plan (the "Plan") is
designed to motivate employee participants to achieve the
Company's annual strategic goals. Eligibility for
participation in the Plan is limited to the Chief Executive
Officer and the Executive Vice President of the Company, and
such other employees of the Company as may be designated by
the Board of Directors from time to time. For each fiscal year
of the Company, the Board will establish a bonus pool not to
exceed 10% of the Company's operating income. The amount of
such pool with respect to any year shall be determined
subsequent to the end of that year upon the determination of
the Company's operating income for that year. Each participant
in the Plan is eligible to receive from the bonus pool an
annual award of up to 50% of the participant's base salary.
B. 1997 Stock Incentive Plan
In March 1997, the Board of Directors recommended the adoption
of the Company's 1997 Long-Term Incentive Plan (Incentive
Plan), which will be shortly submitted to the stockholders for
approval. Under the Incentive Plan, the Compensation Committee
of the Board of Directors may grant stock incentives to key
employees and the directors of the Company pursuant to which a
total of 400,000 shares of Common Stock may be issued;
provided, however, that the maximum amount of Common Stock
with respect to which stock incentives may be granted to any
person during any calendar year shall be 20,000 shares, except
for a grant made to a recipient upon the recipients initial
hiring by the Company, in which case the number shall be a
maximum of 40,000 shares. These numbers are subject to
adjustment in the event of a stock split and similar events.
Stock incentive grants may be in the form of options, stock
appreciation rights, stock awards or a combination thereof.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio
We have audited the accompanying balance sheet of The Natural Baby
Company, Inc. as of December 31, 1996, and the related statements of income,
retained earnings, and cash flows for the years ended December 31, 1996 and
1995. 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 Natural Baby
Company, Inc. as of December 31, 1996, and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
HAUSSER + TAYLOR
Canton, Ohio
January 22, 1997
F-18
<PAGE>
THE NATURAL BABY COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
- ------
CURRENT ASSETS
Cash $ 81,140
Accounts receivable - trade 36,463
Inventories 475,843
Deferred catalog expense 262,694
Prepaid expenses 15,266
---------
Total current assets 871,406
PROPERTY AND EQUIPMENT
Computer equipment 69,394
Vehicle 16,936
Furniture and fixtures 10,053
---------
96,383
Less accumulated depreciation 54,293
---------
42,090
OTHER ASSETS
Deposit 1,779
---------
$ 915,275
=========
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
THE NATURAL BABY COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Notes payable - related parties $ 197,603
Accounts payable 275,958
Accrued distributions
to stockholders 140,000
Accrued bonus to stockholders 41,265
Accrued expenses 29,096
---------
Total current liabilities 683,922
STOCKHOLDERS' EQUITY
Common stock, no par value,
10 shares authorized,
issued and outstanding 100
Additional paid-in capital 10,000
Retained earnings 221,253
---------
Total stockholders' equity $ 231,353
---------
$ 915,275
=========
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
SALES $ 6,451,215 $ 5,228,469
COST OF SALES 3,596,965 2,828,165
----------- -----------
GROSS PROFIT 2,854,250 2,400,304
SELLING EXPENSES 1,698,746 1,664,664
GENERAL AND
ADMINISTRATIVE
EXPENSES 601,777 507,348
----------- -----------
INCOME FROM
OPERATIONS 553,727 228,292
OTHER INCOME
(EXPENSE)
Interest (11,725) (14,499)
Miscellaneous 16,647 (1,060)
----------- -----------
4,922 (15,559)
----------- -----------
NET INCOME $ 558,649 $ 212,733
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
BALANCE - BEGINNING $340,025 $127,292
ADDITION
Net income 558,649 212,733
-------- --------
898,674 340,025
DEDUCTION
Distributions 677,421 -
-------- --------
BALANCE - ENDING $221,253 $340,025
======== ========
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
<TABLE>
<CAPTION>
THE NATURAL BABY COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 558,649 $ 212,733
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 12,782 9,558
(Increase) decrease in
accounts receivable - trade (6,545) 5,920
Decrease (increase) in inventories 45,410 (165,329)
(Increase) decrease in deferred
catalog expense (76,429) 72,648
(Increase) decrease in prepaid expenses (7,966) 19,574
Increase (decrease) in accounts payable
and accrued expenses 21,010 (51,983)
--------- ---------
Net cash provided by operating activities 546,911 103,121
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (4,397) (40,686)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term debt - (26,648)
Proceeds from long-term borrowings - 40,000
Distributions to stockholders (537,421) -
--------- ---------
Net cash (used) provided by financing activities (537,421) 13,352
--------- ---------
NET INCREASE IN CASH 5,093 75,787
CASH - BEGINNING 76,047 260
--------- ---------
CASH - ENDING $ 81,140 $ 76,047
========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for interest $ - $ 8,744
Non-cash financing activity -
accrued distributions to stockholders 140,000 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Summary of Significant Accounting Policies
A. Business Description - The Natural Baby Company, Inc. (Company) is in the
mail order business and sells children's clothes and toys to customers
throughout the United States. Products are purchased from a variety of
vendors.
B. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
C. Accounts Receivable - In management's opinion, accounts receivable as of
December 31, 1996 were collectible and no material uncollectible accounts
existed. As such, any allowance would be immaterial. Bad debt expense was
$6,578 and $32,386 for 1996 and 1995, respectively.
D. Inventories consist of finished goods held for resale and are stated at
the lower of cost or market with cost being determined by current
purchases applied on an average cost method.
E. Deferred catalog expenses are costs of catalogs mailed to customers which
are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers utilize catalogs and other
mail order mailings from the Company. Catalog expense was $1,080,210 and
$1,058,976 for 1996 and 1995, respectively.
F. Property and equipment are carried at cost and depreciated using
straight-line and accelerated methods over their estimated useful lives,
ranging from five to ten years. Depreciation expense amounted to $12,782
and $9,558 for the years ended December 31, 1996 and 1995, respectively.
Maintenance, repairs and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.
G. Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and other short-term obligations approximate
their carrying value because of the short maturities of those financial
instruments.
H. The Corporation has elected to be treated as a Subchapter S corporation.
No provision for income taxes is necessary because any income or loss is
includible in the tax returns of the individual stockholders.
F-24
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
Summary of Significant Accounting Policies (continued)
Note 1. Notes Payable - Related Parties
Notes payable totaling $197,603 at December 31, 1996 consist of
amounts due to a stockholder and several individuals related to the
stockholders. The notes are unsecured, bear interest at 5%, and have
no repayment terms.
The loan agreements do not specify payment requirements. However, it
is management's intention to repay the loans during 1997. Therefore,
the total balance of all loans is considered current as of December
31, 1996. Due to the short maturities of the notes, carrying value
approximates fair value.
Note 2. Lease Commitments
The Company leases facilities for office and warehouse operations
under noncancellable operating leases. The following is a schedule
of minimum future lease payments under noncancellable operating
leases for the years ending December 31:
1997 $21,344
1998 14,229
-------
$35,573
=======
Rental expense was $52,245 and $33,775 for the years ended December
31, 1996 and 1995, respectively.
F-25
<PAGE>
THE NATURAL BABY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
Note 3. Catalog Sale Contract
In May, 1996, the Company contracted to sell its catalog business to
Duncan Hill Co., Ltd., at which time Duncan Hill paid the Company
$25,000 towards the purchase price. Duncan Hill has assigned its
rights under that contract to Kids Stuff, Inc., a subsidiary of
Duncan Hill. The remaining purchase price to be paid by Kids Stuff,
Inc. for the Company's catalog business consists of: a cash payment
to the Company in the amount of $1,075,000; a cash payment in the
amount of $210,777 in payment of a note owed by the Company in the
principal amount of $197,603 together with accrued interest in the
amount of $13,174 through April 30, 1997; the assumption by Kids
Stuff, Inc. of the Company's accounts payable incurred in the
ordinary course of business which is $275,958 as of December 31,
1996; assumption of the Company's remaining lease obligations in the
approximate amount of $35,500 as of December 31, 1996; and, a
convertible promissory note issued by Kids Stuff, Inc. to the
Company in the amount of $250,000.
The unpaid balance of the Convertible Note is convertible at any
time into unregistered shares of the Kids Stuff, Inc.'s Common
Stock, at the election of the holder, at a conversion price of $5.00
per share. The Convertible Note will have an eight-year term and
bear interest at 8% per annum. Upon the first three anniversaries of
the execution of the Convertible Note, only accrued interest in
arrears will be payable. Thereafter, five annual payments of
$50,000, plus accrued interest, will be payable on the fourth,
fifth, sixth, seventh and eighth anniversaries of the execution of
the Convertible Note.
The purchase price is based upon the Company's tangible net worth at
December 31, 1995 which was $350,125, and is subject to adjustment
in the event that the Company's tangible net worth at closing is
higher or lower than at year end 1995. Any adjustment in the
purchase price will be made as an adjustment to the Convertible
Note.
Unless the acquisition is completed on or before April 30, 1997, the
Company's contract to sell its catalog business to Kids Stuff, Inc.
will expire.
F-26
<PAGE>
KIDS STUFF, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following Unaudited Pro Forma Combined Financial Statements of Kids
Stuff, Inc. give effect to (i) the acquisition of the Natural Baby Co., Inc.,
(ii) the sale of common stock to the public and (iii) the sale of common stock
and common stock warrants to private investors and a bridge loan from these
private investors.
The Unaudited Pro Forma Combined Financial Statements assume that these
transactions occurred at the beginning of the fiscal year ending December 31,
1996 for the Unaudited Pro Forma Combined Statements of Income and as of
December 31, 1996 for the Unaudited Pro Forma Combined Balance Sheet. In the
opinion of management of the Company, all adjustments necessary to present
fairly such Unaudited Pro Forma Combined Financial Statements have been made.
The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical financial statements and the notes thereto
included elsewhere in this prospectus. The Unaudited Pro Forma Combined
Statements of Income are not necessarily indicative of what actual results of
operations would have been had these transactions occurred at the beginning of
the respective period nor do they purport to indicate the results of future
operations of the Company.
P-1
<PAGE>
<TABLE>
<CAPTION>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
DECEMBER 31, 1996
KIDS STUFF NATURAL BABY PRO FORMA
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 248,648 $ 81,140 $ 329,788 (1,310,777) (1) $ 553,250
(100,000) (1)
2,210,021 (2)
(575,782) (3)
Accounts receivable 165,779 36,463 202,242 202,242
Inventories 496,395 475,842 972,238 972,238
Deferred catalog expense 277,469 262,694 540,163 540,163
Prepaid expenses 169,789 15,266 185,055 (169,789) (5) 15,266
---------- ---------- ---------- -------- ----------
Total Current Assets 1,358,080 871,406 2,229,486 2,283,159
Property and Equipment, Net of
Accumulated Depreciation 113,609 42,090 155,699 155,699
Other Assets, Net of
Accumulated Amortization
Customer lists 0 0 0 505,000 (1) 505,000
Goodwill 0 0 0 586,821 (1) 712,828
126,007 (5)
Other 0 1,779 1,779 1,779
---------- ---------- ---------- ----------
0 1,779 1,779 1,219,607
---------- ---------- ---------- ----------
Total Assets $1,471,689 $ 915,275 $2,386,964 $3,658,465
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
P-2
<PAGE>
<TABLE>
<CAPTION>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
DECEMBER 31, 1996 (CONTINUED)
KIDS STUFF NATURAL BABY PRO FORMA
HISTORICAL HISTORICAL COMBINED ADJUSTMENTS PRO FORMA
---------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable $1,102,311 $ 275,958 $1,378,269 (350,000) (3) $1,063,487
35,218 (5)
Current Portion of
Long-Term
Debt-Related Parties 266,858 197,603 464,461 (197,603) (1) 75,000
(66,858) (3)
(125,000) (3)
Line of Credit 650,000 0 650,000 650,000
Due to affiliates 137,070 0 137,070 (5,000) (4) 132,070
Accrued Distribution to
Stockholders 0 140,000 140,000 (140,000) (1) 0
Customer advances and other 5,630 70,361 75,991 75,991
---------- ----------- ---------- ----------
Total Current Liabilities 2,161,869 683,922 2,845,791 1,996,548
Long-Term Debt Payable to
Related Parties, net of
current portion 300,000 300,000 250,000 (1) 550,000
Stockholders' Equity
Common stock, $0.001 par value,
25,000,000 shares authorized,
4,200,000 issued and
outstanding 3,700 100 3,800 (100) (1) 4,200
500 (2)
Preferred Stock, $0.001 par value,
10,000,000 shares authorized,
5,000,000 issued and
outstanding 0 0 0 5,000 (4) $ 5,000
Additional paid-in capital 458,800 10,000 468,800 (10,000) (1) $2,555,397
2,209,521 (2)
(33,924) (3)
(79,000) (5)
Retained earnings (1,452,680) 221,253 (1,231,427) (221,253) (1) (1,452,680)
---------- ----------- ---------- --------- ----------
Total Stockholders'
Equity (990,180) 231,353 (758,827) 1,111,917
---------- ----------- ---------- ----------
Total Liabilities and
Stockholders' Equity $1,471,689 $ 915,275 $2,386,964 $3,658,465
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
P-3
<PAGE>
<TABLE>
<CAPTION>
KIDS STUFF, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FISCAL YEAR ENDED DECEMBER 31, 1996
KIDS STUFF NATURAL BABY
HISTORICAL HISTORICAL PRO FORMA
---------- ------------ ------------
<S> <C> <C> <C>
Sales $6,638,995 $ 6,451,215 $13,090,210
Cost of Sales 4,204,321 3,596,965 7,801,286
---------- ----------- ------------
Gross Profit $2,434,674 $ 2,854,250 $ 5,288,924
Selling Expenses 2,193,219 1,698,746 3,891,965
General and Administrative Expenses 768,580 601,777 1,370,357
---------- ----------- ------------
Income (Loss) from Operations (527,125) $ 553,727 $ 26,602
Other Income 5,485 4,922 10,407
---------- ----------- ------------
Net (Loss) Income ($521,640) $ 558,649 $ 37,009
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
P-4
<PAGE>
KIDS STUFF, INC.
NOTES TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
(1) Adjustment for the acquisition of The Natural Baby Catalog., Inc. with a
cash payment of $1,310,777 and a note payable of $250,000. The Company
will acquire the assets of Natural Baby Catalog and the accounts payable.
The current notes payable and line of credit will be liquidated at the
time of the purchase. This acquisition will be accounted for using the
purchase method, with assets valued at fair market value and the customer
list being valued at $505,000 as calculated by management. The balance is
attributed to goodwill in the amount of $586,821, and a note payable to
the seller of The Natural Baby Catalog, of $250,000, the principal of
which is due in five equal annual installments with the first installment
due four years from the date of purchase. Prior thereto, only accrued
interest will be payable. Also includes expenses of $100,000 for the
consolidation of the operations of The Natural Baby Catalog.
(2) Adjustment for the sale of 250,000 units to the public at $12 per unit,
less estimated commissions of $300,000 and less estimated offering costs
of $489,979.
(3) Adjustment for the repayment of bridge loan of $125,000, plus interest at
8%, payment of $350,000 towards accounts payable, and payment of note
payable to Duncan Hill of $66,858 plus interest at 8% to be paid on June
30, 1997.
(4) Adjustment for the issuance of 5,000,000 shares of Series A Preferred
Stock in January, 1997 to the Company's parent.
(5) Adjustment for the payment of expenses for the reorganization of Kids
Stuff, Inc. in the amount of $79,000, of which $43,782 is included in
prepaid expenses, and an adjustment of $126,007 of prepaid expenses
attributable to the purchase of The Natural Baby Catalog which will be
capitalized as goodwill upon the completion of the acquisition.
Management believes the Company's historical financial statements reflect
its historical costs of doing business. As a public entity the Company
will likely incur additional costs estimated to be approximately $50,000
on a quarterly basis which are not reflected in the Unaudited Pro Forma
Combined Financial Statements of Income. Also not reflected in the
Unaudited Pro Forma Combined Financial Statements are $50,000 of
additional annual payroll expense relating to the salaries of the
Company's two executive officers, as well as any additional compensation
that may be awarded under any incentive compensation plan.
P-5
<PAGE>
=========================================================
No dealer, salesperson or other person is 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 the Underwriter. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy the shares of Common Stock and
Warrants offered hereby by anyone 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
PAGE
----
Prospectus Summary..................................
Risk Factors........................................
Use of Proceeds.....................................
Dividend Policy.....................................
Dilution............................................
Capitalization......................................
Selected Financial Data.............................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................................
The Company and Its Parent..........................
Business............................................
Management..........................................
Principal Stockholders..............................
Selling Securityholders.............................
Certain Transactions................................
Description of Securities...........................
Unregistered Shares Eligible for Immediate and
Future Sale......................................
Underwriting........................................
Legal Matters.......................................
Experts.............................................
Available Information...............................
Index to Financial Statements.......................
Until______, 1997 (90 days after the date of this Prospectus), all dealers
effecting transactions in the shares of Units, Common Stock and Warrants offered
hereby, 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.
======================================================
======================================================
250,000 UNITS
Each Unit Consisting of Two Shares of
Common Stock and One Common Stock
Class A Purchase Warrant
KIDS STUFF, INC.
----------
PROSPECTUS
----------
VTR CAPITAL, INC.
______________________, 1997
======================================================
<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.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 2, 1997
PROSPECTUS
KIDS STUFF, INC.
UP TO 1,500,000 REDEEMABLE CLASS A PURCHASE WARRANTS
Up to 1,500,000 Common Stock Class A Purchase Warrants (the "Warrants") of
Kids Stuff, Inc., a Delaware corporation (the "Company") are being offered for
sale by three bridge lenders of the Company (the "Selling Securityholders") who
were issued the Warrants by the Company in connection with a certain bridge
loan. See "CERTAIN TRANSACTION - Bridge Loan." Each Warrant entitles the holder
to purchase one share of the Company's common stock, $.001 par value (the
"Common Stock") at a price of $5.00 for a period of four years commencing one
year after the date of the Prospectus. The Company may redeem the Warrants at a
price of $.05 per Warrant, at any time after they become exercisable, upon not
less than 30 days' prior written notice, if the closing bid price of the Common
Stock has been at least $14.40 per share for 20 consecutive trading days ending
on the 5th day prior to the date on which the notice of redemption is given. See
"DESCRIPTION OF SECURITIES." The Selling Securityholders are not affiliated with
the Company.
The Warrants being offered hereby may be sold from time to time by the
Selling Securityholders, provided a current registration statement with respect
to such securities is then in effect. The distribution of the Warrants by the
Selling Securityholders may be effected in one or more transactions that may
take place over-the-counter, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more dealers for
resale of such securities as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commission may be paid by the Selling Securityholders. The Selling
Securityholders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities offered, and any
profits realized or commissions received may be deemed underwriting
compensation. See "SELLING SECURITYHOLDERS; PLAN OF DISTRIBUTION."
The Company will not receive any of the proceeds from the sale of the
Warrants by the Selling Securityholders. Expenses of this Offering, other than
fees and expenses of counsel to the Selling Securityholders and selling
commissions, will be paid by the Company. See "SELLING SECURITYHOLDERS; PLAN OF
DISTRIBUTION."
On the date of this Prospectus, a registration statement, filed under the
Securities Act with respect to an underwritten public offering by the Company of
250,000 Units, each Unit consisting of two shares of Common Stock and one
Warrant which is identical to the Warrants being offered by the Selling
Securityholders, and up to 37,500 additional Units to cover over-allotments, if
any, was declared effective by the Securities and Exchange Commission. The
initial public offering will be $12.00 per Unit. The Company will receive net
proceeds of approximately $2,210,021 from the sale of the 250,000 Units included
in the underwritten public offering ($2,601,521 if the over-allotment option is
exercised in full) after payment of underwriting discounts and commissions and
estimated expenses of the underwritten public offering. Sales of the Warrants by
the Selling Securityholders or even the potential of such sales may have an
adverse effect on the market price of the Company's securities, should a public
trading market develop.
Commencing in October, 1996, the Company sold 1,300,000 unregistered shares
of Common Stock for $.125 per share to eight private investors in order to
obtain equity bridge financing. Assuming that each of the two shares of Common
Stock comprising a $12 Unit is offered in the Company's public underwritten
offering is valued at $6.00 per share, and no value is attributed to a Warrant
included in a Unit,
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
the 1,300,000 shares held by the eight private investors have a hypothetical
value of $7,800,000 for which they paid a total of $162,500. See "RISK FACTORS -
Unregistered Shares Eligible for Immediate and Future Sale," on page ___.
Upon completion of the Company's underwritten public offering, the Company's
parent, Duncan Hill Co., Ltd., will own approximately 80% of the Company's
outstanding voting stock. See "RISK FACTORS - Control by Parent and Parent's
Controlling Stockholders," on page ____.
Prior to this Offering and the Company's public underwritten offering, there
has been no public market for the Company's securities and there can be no
assurance that any such market will develop. The Units, Common Stock and
Warrants are expected to be approved for quotation on the OTC Bulletin Board
under the symbols "KIDSU," "KIDS," and "KIDW," respectively. See "RISK FACTORS -
Certain Implications of Trading Over-The-Counter; `Penny Stock' Regulations," on
page ______. This is no assurance, however, that the Company's securities will
be approved for listing on the OTC Bulletin Board or elsewhere. It is
anticipated that the securities offered by the Selling Securityholders and by
the Company in its public underwritten offering will be qualified for sale in a
limited number of states. See "RISK FACTORS - Limits on Secondary Trading;
Current Prospectus and State Sky Registration Required to Exercise Warrants," on
page _____.
Two of the three Selling Securityholders are customers of one of the
Underwriters in the Company's public underwritten offering. None of the
Underwriters in the Company's public underwritten offering have any
arrangements, agreements or understandings with any of the Selling
Securityholders with respect to the sale of up to 1,500,000 Warrants being
offered by them.
----------
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. See "RISK FACTORS," BEGINNING ON PAGE _____ AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _________, 1997.
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
THE OFFERING
Securities Offered
by Selling Securityholders ...... 1,500,000 Warrants
Common Stock Outstanding
Prior to this Offering........... 3,700,000 Shares
Common Stock to be Outstanding
after this Offering(1)(2)........ 4,200,000 Shares
Warrants to be Outstanding after
this Offering(2)(3).............. 1,750,000 Warrants.
Proposed OTC
Symbols
Units....................... KIDSU
Common Stock................ KIDS
Warrants.................... KIDW
Use of Proceeds..................... None of the proceeds from the Offering
will go to the Company.
Risk Factors........................ The securities offered hereby are
speculative, involving a high degree of
risk and should not be purchased by
investors who cannot afford the loss of
their investment. See "RISK FACTORS."
- ----------
(1) Assumes that the shares of the Company's Common Stock which are being
offered by the Company in the Company's concurrent underwritten public
offering (the "Concurrent Offering") have been sold.
(2) Does not include the following under the Company's Concurrent Offering: up
to 75,000 shares of Common Stock subject to the Underwriters'
over-allotment option; up to 250,000 shares of Common Stock issuable upon
the exercise of the Warrants attributable to the 250,000 Units offered
therein; up to 37,500 shares of Common Stock issuable upon the exercise of
the Warrants attributable to the Underwriter's over-allotment option; and,
up to 75,000 shares of Common Stock subject to the non-redeemable option
granted to the Underwriters to purchase up to 25,000 Units. Also does not
include up to 200,000 shares of Common Stock issuable upon the exercise of
stock purchase options granted under two executive employment agreements.
See "MANAGEMENT - Employment Agreements." Also does not include up to
50,000 shares of common Stock issuable upon the exercise of a convertible
note t be issued to the seller of The Natural Baby Catalog. See "CWETAIN
TRANSACTIONS - Acquisition of The Natural Baby Catalog."
(3) Assumes that the 250,000 Warrants which are being offered by the Company in
the Company's Concurrent Offering have been sold.
[THIS SPACE INTENTIONALLY LEFT BLANK]
Alt - 1
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company of
250,000 Units and up to an additional 37,500 Units to cover over-allotments, if
any, was declared effective by the Commission. Sales of up to 1,500,000 Warrants
by the Selling Securityholders or upon the potential of such sales may have an
adverse effect on the market price of the Company's securities, should a public
trading market develop.
[THIS SPACE INTENTIONALLY LEFT BLANK]
Alt - 2
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
SELLING SECURITYHOLDERS; PLAN OF DISTRIBUTION
Up to 1,500,000 Warrants are offered by three Selling Securityholders who
provided bridge financing to the Company. See "CERTAIN TRANSACTIONS - Bridge
Loan." The Company has agreed to bear all expense (other than underwriting or
selling commissions or any fees or disbursements of counsel to such Selling
Securityholders) in connection with the registration of the resale of the
Warrants.
The following table sets forth certain information with respect to each of
the Selling Securityholders. Except as set forth herein, none of such holders
has held any position or office or has had a material relationship with the
Company or any of its affiliates within the past three years. Except as set
forth below, the Company believes that none of the holders listed below owns any
other securities of the Company. The Company will not receive any of the
proceeds from the sale of the Warrants. Sales of the Warrants by the Selling
Securityholders, or even the potential of such sales, may have an adverse effect
on the market price of the Company's securities, should a public trading market
develop. See "DESCRIPTION OF SECURITIES - Warrants."
WARRANTS
SECURITIES TO BE OWNED
BEING OFFERED AFTER THE OFFERING
------------------------------------------------
NUMBER OF
WARRANTS OWNED
NAME PRIOR TO THE OFFERING NUMBER PERCENT(1)
- -----------------------------------------------------------------------------
Clinthill Investments, Ltd. 500,000 ---- ----
Kurt Campbell 15,000 ---- ----
M&M Specialties, Ltd. 985,000 ---- ----
______________________
(1) Such percentage assumes that all Warrants offered hereby by such Selling
Securityholder are sold.
The Warrants offered hereby may be sold from time to time directly by
the Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer the Warrants through underwriters, dealers or agents. The
distribution of the Warrants may be effected in one or more transactions that
may take place over-the-counter, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more broker-dealers
for resale of such Warrants as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders in connection with
such sales of the Warrants. The Warrants offered by the Selling Securityholders
may be sold by one or more of the following methods, without limitations: (a) a
block trade in which a broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(b) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (c) face-to-face transactions between sellers and
purchasers without a broker-dealer. In effecting sales, brokers or dealers
engaged by the Selling Securityholders may arrange for other brokers or dealers
to participate.
Alt - 3
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
In order to comply with the securities laws of certain states, if
applicable, the Warrants will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Securityholders.
The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Warrants in the distribution of
the Warrants may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended (the "Act") and any profits
realized or commissions received by them may be deemed to be underwriting
commissions or discounts under the Act.
Under applicable rules and regulations under the Securities Exchange
Act of 1934, as amended ("the Exchange Act"), any person engaged in the
distribution of the securities may not simultaneously engage in
market-making-activities with respect to the securities for a period of two
business days prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which
provisions may limit the timing of the purchases and sales of securities by the
Selling Securityholders.
The Company has agreed to pay all fees and expenses incident to the
registration of the Warrants, except selling commissions and fees and expenses
of counsel or any other professionals or other advisors, if any, to the Selling
Securityholders.
[THIS SPACE INTENTIONALLY LEFT BLANK]
Alt - 4
<PAGE>
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
======================================================
No underwriter, dealer, salesperson or other
person is 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.
This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy the Warrants offered hereby
by anyone 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
PAGE
Prospectus Summary..................................
Risk Factors........................................
Concurrent Offering.................................
Plan of Distribution................................
Selling Securityholders.............................
Use of Proceeds.....................................
Dividend Policy.....................................
Dilution............................................
Capitalization......................................
Selected Financial Data.............................
Management's Discussion
and Analysis of Financial
Condition and Results
of Operations....................................
The Company and Its Parent..........................
Business............................................
Management..........................................
Principal Stockholders..............................
Certain Transactions................................
Description of Securities...........................
Unregistered Shares Eligible
for Immediate and Future
Sale.............................................
Underwriting........................................
Legal Matters.......................................
Experts.............................................
Available Information...............................
Index to Financial Statements.......................
Until ________, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Warrants offered hereby, may be
required to deliver a Prospectus.
======================================================
UP TO 1,500,000 REDEEMABLE
CLASS A PURCHASE WARRANTS
KIDS STUFF, INC.
----------
PROSPECTUS
----------
_______________________, 1997
======================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General corporation Law, as amended,
provides that 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 an action by or in the right of the corporation) by reason of the
fact that the person 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 attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in good faith and in a manner the person 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. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such capacity
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, against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner the person
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 Delaware Court
of chancery or such other 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 indemnify for such expenses which the Court of Chancery or such
other court shall deem proper.
Article VII, Section 7, of the By-Laws of the Company provides for
indemnification of officers, directors, employees and agents to the extent
permitted under the Delaware General Corporation Law.
The employment agreements with William L. Miller and Jeanne E. Miller
each provide for their indemnification to the full extent permitted by law.
The Company's Certificate of Incorporation contains a provision
eliminating the personal monetary liability of directors to the extent allowed
under the General Corporation Law of the State of Delaware. Under the provision,
a stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. The provision, however, does no affect the availability of seeking
equitable relief against a director of the Company. In addition, the provision
applies only to claims against a director arising out of his role as a director
and not, if he is also an officer, his role, as an officer or in any other
capacity or to his responsibilities under any other law, such as federal
securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this offering, other than
underwriting discounts and commissions, are as follows:
SEC filing fee.................................... $ 3,901
NASD Fees......................................... 2,000
Accounting fees and expenses* .................... 29,000
II-1
<PAGE>
Legal fees and expenses*.......................... 131,000
Blue Sky fees and expenses*....................... 60,000
Printing and engraving*........................... 60,000
Miscellaneous expenses*........................... 5,578
Transfer Agent*................................... 3,500
Underwriters' 3% Non-Accountable 90,000
Expense Allowance on 250,000 Units................
100,000
Representative's Financial Consulting Fee......... 5,000
Standards & Poors Listing Fee.....................
-------
TOTAL.................. $489,979
=======
- ----------
* Estimated.
The Company will bear all expenses shown above.
[THIS SPACE INTENTIONALLY LEFT BLANK]
II-2
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following shares of unregistered securities have been issued by the
Registrant since its inception. there were no underwriting discounts and
commissions paid in connection with the issuance of any of said securities.
In connection with the reorganization effective June 30, 1996, the
Company issued to its parent, Duncan Hill Co., Ltd. 2,400,000 shares of Common
Stock at a value of $.125 per share, and 5,000,000 shares of Series A Preferred
Stock at a value of $.001 per share.
Commencing October, 1996, the Company sold an aggregate of 1,300,000
shares of Common Stock to eight private investors for the aggregate purchase
price of $162,500.
In of October, 1996, the Company borrowed an aggregate of $200,000 from
three private investors, $75,000 of which is convertible upon its terms into
1,500,000 Class A Warrants upon the effective date of the Registration
Statement. The 1,500,000 Warrants, as well as the shares of Common Stock
underlying those warrants are included as securities being registered under this
Registration Statement.
In each of the foregoing cases, the Company issued the above securities
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving any public offering. In addition, with respect to the second
transaction listed above, I.E., the issuance of 1,300,000 shares of Common
Stock, the Company relied upon Rule 504 promulgated under the Securities Act of
1933. The Company is not an issuer that is precluded from relying upon Rule 504
under paragraph (a) thereof and, in addition, has satisfied the terms and
conditions of Rules 501 and 502(a) by virtue of the fact that it has not offered
in excess of $1,000,000 of securities within the 12 months before the start of
and during the offering of securities under Rule 504, in reliance on any
exemption under Section 3(b), or in violation of Section 5(a) of the Securities
Act.
[THIS SPACE INTENTIONALLY LEFT BLANK]
II-3
<PAGE>
ITEM 27. EXHIBITS.
1.01 Revised Form Underwriting Agreement
1.02 Revised Form of Selected Dealers Agreement
1.03 Revised Form Warrant Exercise Fee Agreement
+ 3.01 Certificate of Incorporation of the Company
+ 3.02 Certificate of Amendment of Certificate of Incorporation of the
Company
+ 3.03 By-Laws of the Company
* 3.04 Certificate of Designation of Series A Preferred Stock
* 4.01 Specimen Certificate for Shares of Common Stock
* 4.02 Specimen Certificate for Shares of Series A Preferred Stock
4.03 Revised Form of Warrant Agreement
4.04 Revised Specimen Certificate for Warrants
4.05 Revised Form of Underwriters' Purchase Option
* 4.06 Form of Representative's Lock-up Letter
** 5.01 Opinion of Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A.
+ 10.01 Agreement to Acquire the Assets of The Natural Baby Company, Inc.,
(the "Acquisition Agreement")
+ 10.02 Addendum to Acquisition Agreement
+ 10.03 Escrow Agreement under the Acquisition Agreement
+ 10.04 Form of Consulting Agreement with Jane Martin
+ 10.05 Asset Purchase Agreement between the Company and its Parent
+ 10.06 Promissory Note from the Company and its Parent
+ 10.07 Form of Bridge Loan Agreement
+ 10.08 Form of Financial Consulting Agreement with VTR Capital, Inc.
* 10.09 Credit Facility with United National Bank and Trust Company
* 10.10 Lease for Company's principal offices and telemarketing center
* 10.11 Employment Agreement with William L. Miller
* 10.12 Employment Agreement with Jeanne E. Miller
* 10.13 Incentive Compensation Plan
* 10.14 Form of 1997 Long-Term Stock Incentive Plan
II-4
<PAGE>
* 10.15 Amendment to Asset Purchase Agreement between the Company and its
Parent
23.01 Consent of Hausser + Taylor
23.02 Consent of Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A.
[included in Exhibit 5.01]
* 27.00 Revised Financial Data Schedule
- ----------
+ Incorporated by reference to Form SB-2 filed with the Securities and
Exchange Commission on January 8, 1997.
* Incorporated by reference to amendment no. 1 to Form SB-2 filed withe the
Securities and Exchange Commission on March 14, 1997
** To be filed by amendment.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) RULE 415 OFFERING
The Company will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act");
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) Include any additional or changed material information on
the plan of distribution;
2. For determining liability under the 1933 Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) EQUITY OFFERINGS OF NONREPORTING SMALL BUSINESS ISSUERS
The Company will provide to the Underwriters 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.
(c) INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the Company
pursuant to the provisions referred to in Item 14 of this Registration Statement
or otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suite or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
(d) RULE 430A
The Company will:
1. For determining any liability under the 1933 Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the Company issuer under Rule 424(b)(1) or (4) or 497(h)
under the 1933 Act as part of this Registration Statement as of the time the
Commission declared it effective.
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<PAGE>
2. For any liability under the 1933 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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Canton, State of Ohio, on this 2nd day of April, 1997.
KIDS STUFF, INC.
By: /s/ WILLIAM L. MILLER
-------------------------------------------------
William L. Miller, Chairman of the Board and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ WILLIAM L. MILLER Chairman of the Board, Chief Executive April 2, 1997
- --------------------- Officer and Treasurer
William L. Miller (Principal Executive and Financial
Officer)
/S/ JEANNE E. MILLER Executive Vice President and Director April 2, 1997
- ---------------------
Jeanne E. Miller
/S/ CLARK D. SWISHER Director April 2, 1997
- ---------------------
Clark D. Swisher
/S/ CHRISTOPHER A. WEBER Controller April 2, 1997
- ---------------------
Christopher A. Weber
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.01 Revised Form of Underwriting Agreement
1.02 Revised Form of Selected Dealers Agreement
1.03 Revised Form of Warrant Exercise Fee Agreement
4.03 Revised Form of Warrant Agreement
4.04 Revised Specimen Certificate for Warrants
4.05 Revised Form of Underwriters' Purchase Option
23.01 Consent of Hausser + Taylor
EXHIBIT 1.01
KIDS STUFF, INC.
4450 BELDEN VILLAGE, N.W.
SUITE 406
CANTON, OH 44718
UNDERWRITING AGREEMENT
VTR Capital Inc. __________, 1997
99 Wall Street
New York, NY 10005
Gentlemen:
Kids Stuff, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to VTR Capital Inc. ("VTR" or the "Representative") and to each
of the other underwriters named in Schedule I hereto (the "Underwriters"), for
each of whom you are acting as Representative, an aggregate of 250,000 Units
(the "Units"), each Unit consisting of two (2) shares of Common Stock, par value
$.001 ("Common Stock"), and one (1) Redeemable Class A Common Stock Purchase
Warrant (the "Warrants") of the Company at a public offering price of $12.00 per
Unit.
Each Warrant shall entitle the holder to purchase one share of Common
Stock for a four year period commencing one year from the Effective Date
(hereinafter defined) at a price of $5.00 per share. The Unit Warrants will be
immediately detachable from the Common Stock on the Effective Date. The Warrants
may be called by the Company commencing one year from the Effective Date upon at
least thirty days prior written notice at a price of $.05 per Warrant at any
time provided the closing bid for the Common Stock is at least $14.40 during
each day of the twenty (20) trading day period ending on the fifth day preceding
the date of the written notice. The Warrant Agreement will provide that no such
notice will be given until there is a current Registration Statement and
Prospectus on file with the Securities and Exchange Commission at the time such
notice is given to Warrant Holders and that the notice may not be mailed to
Warrant Holders during the aforesaid one-year period from the Effective Date.
The Units are hereinafter sometimes referred to as the "Firm Units." Upon the
request of the Representative, and as provided in Section 3 hereof, the Company
will also issue and sell to the Underwriters up to a maximum of an additional
37,500 Units for the purpose of covering over-allotments. Such additional Units
are hereinafter sometimes referred to as the "Optional Units." Both the Firm
Units and the Optional Units are sometimes collectively referred to herein as
the "Units." All of the securities which are the subject of this Agreement are
more fully described in the Prospectus of the Company described below. In the
event that the Representative does not form an underwriting group but decides to
act as the sole Underwriter, then all references to VTR herein as Representative
shall be deemed to be to it as such sole Underwriter and Section 14 hereof shall
be deemed deleted in its entirety.
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<PAGE>
The Company understands that the Underwriters propose to make a public
offering of the Units as soon as the Representative deems advisable after the
Registration Statement hereinafter referred to becomes effective. The Company
hereby confirms its agreement with the Representative and the other Underwriters
as follows:
SECTION 1. DESCRIPTION OF SECURITIES. The Company's authorized and
outstanding capitalization when the public offering of securities contemplated
hereby is permitted to commence, under the Securities Act of 1933, as amended
(the "Act"), and at the Closing Date (hereinafter defined) and the terms of the
Warrants and other securities will be as set forth in the Prospectus
(hereinafter defined).
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to, and agrees with, the Underwriters as follows:
(a) A Registration Statement on Form SB-2 and amendments
thereto (No. 333-19423) with respect to the Units, including a form of
prospectus relating thereto, copies of which have been previously delivered to
you, have been prepared by the Company in conformity with the requirements of
the Act, and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission under the Act. The Company, subject to the provisions
of Section 6(a) hereof, may file one or more amendments to such Registration
Statement and Prospectus. The Underwriters will receive copies of each such
amendment.
The date on which such Registration Statement is
declared effective under the Act and the public offering of the Units as
contemplated by this Agreement is therefore authorized to commence, is herein
called the "Effective Date." The Registration Statement and Prospectus, as
finally amended and revised immediately prior to the Effective Date, are herein
called respectively the "Registration Statement" and the "Prospectus." If,
however, a prospectus is filed by the Company pursuant to Rule 424(b) of the
Rules and Regulations which differs from the Prospectus, the term "Prospectus"
shall also include the prospectus filed pursuant to Rule 424(b).
(b) The Registration Statement (and Prospectus), at the time
it becomes effective under the Act, (as thereafter amended or as supplemented if
the Company shall have filed with the Commission an amendment or supplement),
and, with respect to all such documents, on the Closing Date (hereinafter
defined), will in all material respects comply with the provisions of the Act
and the Rules and Regulations, and will not contain an untrue statement of a
material fact and will not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subsection (b)
shall extend to the Underwriters in respect of any statements in or omissions
from the Registration Statement and/or the Prospectus, based upon information
furnished in writing to the Company by the
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<PAGE>
Underwriters specifically for use in connection with the preparation thereof.
(c) The Company has been duly incorporated and is now, and on
the Closing Date will be, validly existing as a corporation in good standing
under the laws of the State of Delaware, having all required corporate power and
authority to own its properties and conduct its business as described in the
Prospectus. The Company is now, and on the Closing Date will be, duly qualified
to do business as a foreign corporation in good standing in all of the
jurisdictions in which the conducts of its business or the character or location
of its properties requires such qualifications except where the failure to so
qualify would not materially adversely affect the Company's business, properties
or financial condition. The Company has no subsidiaries, except as are set forth
in the Prospectus.
(d) The financial statements of the Company (audited and
unaudited) included in the Registration Statement and Prospectus present fairly
the financial position and results of operations and changes in financial
condition of the Company at the respective dates and for the respective 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 are in accordance with the books and
records of the Company.
(e) To the best of the Company's knowledge, Hausser & Taylor,
independent auditors, who have given their report on certain financial
statements which are included as a part of the Registration Statement and the
Prospectus are independent public accountants as required under the Act and the
Rules and Regulations.
(f) Subsequent to the respective dates as of which information
is given in the Prospectus and prior to the Closing Date and, except as set
forth in or contemplated in the Prospectus, (i) the Company has not incurred,
nor will it incur, any material liabilities or obligations, direct or
contingent, nor has it, nor will it have entered into any material transactions,
in each case not in the ordinary course of business; (ii) there has not been,
and will not have been, any material change in the Company's Certificate of
Incorporation or in its capital stock or funded debt; and (iii) there has not
been, and will not have been, any material adverse change in the business, net
worth or properties or condition (financial or otherwise) of the Company whether
or not arising from transactions in the ordinary course of business.
(g) Except as otherwise set forth in the Prospectus, the real
and personal properties of the Company as shown in the Prospectus and
Registration Statement to be owned by the Company are owned by the Company by
good and marketable title free and clear of all liens and encumbrances, except
those specifically referred to in the Prospectus, and except those which do not
materially adversely affect the use or value of such assets and except the lien
for current taxes not now due, or are held by the Company by valid leases, none
of which is in default. Except as
3
<PAGE>
disclosed in the Prospectus and Registration Statement, the Company in all
material respects has full right and licenses, permits and governmental
authorizations required to maintain and operate its business and properties as
the same are now operated and, to its best knowledge, none of the activities or
business of the Company is in material violation of, or causes the Company to
violate any laws, ordinances and regulations applicable thereto, the violation
of which would have a material adverse impact on the condition (financial or
otherwise), business, properties or net worth of the Company.
(h) The Company has no material contingent obligations, nor
are its properties or business subject to any material risks, which may be
reasonably anticipated, which are not disclosed in the Prospectus.
(i) Except as disclosed in the Prospectus and Registration
Statement, there are no material actions, suits or proceedings at law or in
equity of a material nature pending, or to the Company's knowledge, threatened
against the Company which are not adequately covered by insurance, which might
result in a material adverse change in the condition (financial or otherwise),
properties or net worth of the Company, and there are no proceedings pending or,
to the knowledge of the Company, threatened against the Company before or by any
Federal or State Commission, regulatory body, or administrative agency or other
governmental body, wherein an unfavorable ruling, decision or finding would
materially adversely affect the business, properties or net worth or financial
condition or income of the Company, which are not disclosed in the Prospectus.
(j) All of the outstanding shares of Common Stock and Series A
Preferred Stock are duly authorized and validly issued and outstanding, fully
paid, and non-assessable, and are free of preemptive rights (the "Preferred
Stock"). The Common Stock and the shares of Common Stock issuable upon exercise
of the Warrants, when paid for, issued and delivered in accordance with this
Agreement and the Warrant Agreement between the Company and American Stock
Transfer & Trust Company, dated as of _______________, will be duly authorized,
validly issued, fully paid and non-assessable and will not be issued in
violation of any preemptive rights. The Underwriters will receive good and
marketable title to the Units purchased by them from the Company, free and clear
of all liens, encumbrances, claims, security interests, restrictions,
stockholders' agreements and voting trusts whatsoever. Except as set forth in
the Prospectus, there are no outstanding options, warrants, or other rights,
providing for the issuance of, and no commitments, plans or arrangements to
issue, any shares of any class of capital stock of the Company, or any security
convertible into, or exchangeable for, any shares of any class of capital stock
of the Company. All of the securities of the Company to which this Agreement
relates conform to the statements relating to them that are contained in the
Registration Statement and Prospectus.
4
<PAGE>
(k) The certificate or certificates required to be
furnished to the Underwriters pursuant to the provisions of Section
11 hereof will be true and correct.
(l) The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and it is a
valid and binding obligation of the Company, enforceable against it in
accordance with its terms except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws pertaining to
creditors rights generally.
(m) No default exists, and no event has occurred which, with
notice or lapse of time, or both, would constitute a default in the due
performance and observance of any material term, covenant or condition by the
Company or any other party, of any material indenture, mortgage, deed of trust,
note or any other material agreement or instrument to which the Company is a
party or by which it or its business or its properties may be bound or affected,
except (i) as disclosed in the Prospectus, (ii) such defaults as have been
waived by all parties who would otherwise have a remedy or right with respect
thereto or (iii) such defaults which will not cause any material adverse change
in the business, net worth, properties or conditions (financial or otherwise),
of the Company. The Company has full power and lawful authority to authorize,
issue and sell the Units to be sold by it hereunder on the terms and conditions
set forth herein and in the Registration Statement and in the Prospectus. No
consent, approval, authorization or other order of any regulatory authority is
required for such authorization, issue or sale, except as may be required under
the Act or State securities laws. The execution and delivery of this Agreement,
the consummation of the transactions herein contemplated, and compliance with
the terms hereof will not conflict with, or constitute a default under any
indenture, mortgage, deed of trust, note or any other agreement or instrument to
which the Company is now a party or by which it or its business or its
properties may be bound or affected; the Certificate of Incorporation and any
amendments thereto; the by-laws of the Company, as amended; or any law, order,
rule or regulation, writ, injunction or decree of any government, governmental
instrumentality, or court, domestic or foreign, having jurisdiction over the
Company or its business or properties, except for the SEC's position on
indemnification of officers, directors or persons controlling the Company.
(n) No officer or director of the Company has taken, and each
officer and director has agreed that he will not take, directly or indirectly,
any action designed to stabilize or manipulate the price of the Units, the
Common Stock or the Warrants in the open market following the Closing Date or
any other type of action designed to, or that may reasonably be expected to
cause or result in such stabilization or manipulation, or that may reasonably be
expected to facilitate the initial sale, or resale, of any of the securities
which are the subject of this Agreement.
(o) The Warrants to be issued to the Representative (the
"Underwriters' Unit Purchase Option") hereunder will be, when issued, duly and
validly authorized and executed by the Company and will constitute valid and
binding obligations of the Company, legally enforceable in accordance with their
terms (except as
5
<PAGE>
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws pertaining to creditors rights
generally), and the Company will have duly authorized, reserved and set aside
the shares of its Common Stock issuable upon exercise of the Underwriters' Unit
Purchase Option, and such stock, when issued and paid for upon exercise of the
Underwriters' Unit Purchase Option in accordance with the provisions thereof,
will be duly authorized and validly issued, fully-paid and non-assessable.
(p) All of the aforesaid representations, agreements,
and warranties shall survive delivery of, and payment for, the Units.
SECTION 3. ISSUANCE, SALE AND DELIVERY OF THE FIRM UNITS, THE OPTIONAL
UNITS AND THE UNDERWRITERS' UNIT PURCHASE OPTION.
(a) Upon the basis of the representations, warranties,
covenants and agreements of the Company herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and sell the
Units, and the Underwriters, severally and not jointly, agree to purchase from
the Company, the number of the Firm Units set forth opposite the respective
names of the Underwriters in Schedule I hereto, plus any additional Units which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 14 hereof.
The purchase price of the Units to be paid by the
several Underwriters shall be $10.80 per Unit ($12.00 per Unit less a ten
percent discount equal to $1.20 per Unit).
In addition, and upon the same basis, and subject to
the same terms and conditions, the Company hereby grants an option to you to
purchase, but only for the purpose of covering over-allotments, upon not less
than two days' notice from the Representative, the Optional Units, or any
portion thereof, at the same price per Unit as that set forth in the preceding
sentence; and each Underwriter agrees, severally and not jointly, to purchase
Optional Units in the same proportion in which it has agreed to purchase Firm
Units. Notwithstanding anything contained herein to the contrary, you
individually and not as Representative may purchase all or any part of the
Optional Units and are not obligated to offer the Optional Units to the other
Underwriters. The Optional Units may be exercised at any time, and from time to
time, thereafter within a period of 30 calendar days following the Effective
Date. The time(s) and date(s) (if any) so designated for delivery and payment
for the Optional Units shall be set forth in the notice to the Company. Such
dates are herein defined as the Additional Closing Date(s).
(b) Payment for the Firm Units shall be made by certified or
official bank checks in New York Clearing House funds, payable to the order of
the Company, at the offices of the Representative, or its clearing agent, or at
such other place as shall be agreed upon by the Representative and the Company,
upon delivery of the Firm Units to the Representative for the respective
accounts of the Underwriters. In making payment to the Company with respect to
the Units, the Representative may first deduct all sums due to it for the
balance of the non-accountable expense
6
<PAGE>
allowance and under the Financial Consulting Agreement (as hereinafter defined).
Such delivery and payment shall be made at 9:30 A.M., New York City Time on the
third business day after the Effective Date which may be extended by the
Representative to not later than the fifth business day, following the Effective
Date (unless postponed in accordance with the provisions of Section 14 hereof)
or at such other time as shall be agreed upon by the Representative and the
Company. The time and date of such delivery and payment are hereby defined as
the Closing Date. It is understood that each Underwriter has authorized the
Representative, for the account of such Underwriter, to accept delivery of,
receipt for, and make payment of the purchase price for, the Firm Units which it
has agreed to purchase. You, individually, and not as Representative may (but
shall not be obligated to) make payment of the purchase price for the Firm Units
to be purchased by any Underwriter whose check shall not have been received by
the Closing Date, for the account of such Underwriter, but any such payment
shall not relieve such Underwriter from its obligations hereunder.
(c) Payment for the Optional Units shall be made at the
offices of the Representative, or its clearing agent or at such other place as
shall be agreed upon by the Representative and the Company, in accordance with
the notice delivered pursuant to Section 3(a) which shall be no later than seven
business days from the expiration of the 30-day option period.
(d) Certificates for the Firm Units and for the Optional Units
shall be registered in such name or names and in such authorized denominations
as the Representative may request in writing at least two business days prior to
the Closing Date, and the Additional Closing Date(s) (if any). The Company shall
permit the Representative to examine and package said certificates for delivery
at least one full business day prior to the Closing Date and prior to the
Additional Closing Date(s). The Company shall not be obligated to sell or
deliver any of the Firm Units except upon tender of payment by the Underwriters
for all of the Firm Units agreed to be purchased by them hereunder. The
Representative, however, shall have the sole discretion to determine the number
of Optional Units, if any, to be purchased.
(e) At the time of making payment for the Firm Units, the
Company also hereby agrees to sell to the Representative, Warrants to purchase
25,000 Units for an aggregate purchase price of $25 (hereinafter referred to as
the "Underwriters' Unit Purchase Option"). The 25,000 Units underlying the
Underwriters' Unit Purchase Option shall be identical to the Units sold to the
public. Each Underwriters' Warrant shall entitle the owner thereof to purchase
one Unit of the Company at an exercise price of $14.40 per Unit. Such
Underwriters' Unit Purchase Option are to become exercisable one year from the
Effective Date, and shall remain exercisable for a period of four years
thereafter. From the Effective Date and until one (1) year thereafter, such
warrants may be transferred only to officers or partners of the Underwriters and
selling group members and their officers or partners.
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<PAGE>
The Underwriters' Unit Purchase Option shall contain
customary clauses protecting the holders thereof in the event the Company pays
stock dividends, effects stock splits, or effects a sale of assets, merger or
consolidation.
(f) On and subject to the Closing Date, the Company will give
irrevocable instructions to its transfer agent and Depository Trust Company to
deliver to the Representative (at the Company's expense) for a period of five
years from the Closing Date, daily transfer sheets showing any transfers of the
Securities and in the case of the transfer agent, from time to time during the
aforesaid period a complete stockholders' list will be promptly furnished by the
Company when requested by the Representative on not more than two occasions per
year.
SECTION 4. PUBLIC OFFERING. The several Underwriters agree, subject to
the terms and provisions of this Agreement, to offer the Units to the public as
soon as practicable after the Effective Date, at the initial offering price of
$12.00 per Unit and upon the terms described in the Prospectus. The
Representative may, from time to time, decrease the public offering price, after
the initial public offering, to such extent as the Representative may determine,
however, such decreases will not affect the price payable to the Company
hereunder.
SECTION 5. REGISTRATION STATEMENT AND PROSPECTUS. The Company will
furnish the Representative, without charge, two signed copies of the
Registration Statement and of each amendment thereto, including all exhibits
thereto and such amount of conformed copies of the Registration Statement and
Amendments as may be reasonably requested by the Representative for distribution
to each of the Underwriters and Selected Dealers.
The Company will furnish, at its expense, as many
printed copies of a Preliminary Prospectus and of the Prospectus as the
Representative may request for the purposes contemplated by this Agreement. If,
while the Prospectus is required to be delivered under the Act or the Rules and
Regulations, any event known to the Company relating to or affecting the Company
shall occur which should be set forth in a supplement to or an amendment of the
Prospectus in order to comply with the Act (or other applicable law) or with the
Rules and Regulations, the Company will forthwith prepare, furnish and deliver
to the Representative and to each of the other Underwriters and to others whose
names and addresses are designated by the Representative, in each case at the
Company's expense, a reasonable number of copies of such supplement or
supplements to or amendment or amendments of, the Prospectus.
The Company authorizes the Underwriters and the
selected dealers, if any, in connection with the distribution of the Units and
all dealers to whom any of the Units may be sold by the Underwriters, or by any
Selected Dealer, to use the Prospectus, as from time to time amended or
supplemented, in connection with the offering and sale of the Units and in
accordance with the applicable provisions of the Act and the applicable Rules
and Regulations and applicable State Securities Laws.
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<PAGE>
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
with each Underwriter that:
(a) After the date hereof, the Company will not at any time,
whether before or after the Effective Date, file any amendment to the
Registration Statement or the Prospectus, or any supplement to the Prospectus,
of which the Representative shall not previously have been advised and furnished
with a copy, or to which the Representative or the Underwriters' counsel shall
have reasonably objected in writing on the ground that it is not in compliance
with the Act or the Rules and Regulations.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective (provided, however, the Company shall
not cause the Registration Statement to become effective without the written
consent of VTR) and will advise the Representative, (i) when the Registration
Statement shall have become effective and when any amendment thereto shall have
become effective, and when any amendment of or supplement to the Prospectus
shall be filed with the Commission, (ii) when the Commission shall make request
or suggestion for any amendment to the Registration Statement or the Prospectus
or for additional information and the nature and substance thereof, and (iii) of
the issuance by the Commission of an order suspending the effectiveness of the
Registration Statement or of the initiation of any proceedings for that purpose,
and will use its best efforts to prevent the issuance of such an order, or if
such an order shall be issued, to obtain the withdrawal thereof at the earliest
possible moment.
(c) The Company will prepare and file with the Commission,
promptly upon the request of the Representative, such amendments, or supplements
to the Registration Statement or Prospectus, in form and substance satisfactory
to counsel to the Company, as in the reasonable opinion of Bernstein &
Wasserman, LLP, as counsel to the Underwriters, may be necessary or advisable in
connection with the offering or distribution of the Units, and will diligently
use its best efforts to cause the same to become effective.
(d) The Company will, at its expense, when and as requested by
the Representative, supply all necessary documents, exhibits and information,
and execute all such applications, instruments and papers as may be required, in
the opinion of the Underwriters' counsel, to qualify the Units or such part
thereof as the Representative may determine, for sale under the so-called "Blue
Sky" Laws of such states as the Representative shall designate, and to continue
such qualification in effect so long as required for the purposes of the
distribution of the Units, provided, however, that the Company shall not be
required to qualify as a foreign corporation or dealer in securities or to file
a consent to service of process in any state in any action other than one
arising out of the offering or sale of the Units.
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<PAGE>
(e) The Company will, at its own expense, file and provide,
and continue to file and provide, such reports, financial statements and other
information as may be required by the Commission, or the proper public bodies of
the States in which the Units may be qualified for sale, for so long as required
by applicable law, rule or regulation and will provide the Representative with
copies of all such registrations, filings and reports on a timely basis.
(f) During the period of five years from the Effective Date,
the Company will deliver to the Underwriter a copy of each annual report of the
Company, and will deliver to the Underwriter (i) within 50 days after the end of
each of the Company's first three quarter-yearly fiscal periods, a balance sheet
of the Company as at the end of such quarter-yearly period, together with a
statement of its income and a statement of changes in its cash flow for such
period (Form 10-Q or 10-QSB), all in reasonable detail, signed by its principal
financial or accounting officer, (ii) within 105 days after the end of each
fiscal year, a balance sheet of the Company as at the end of such fiscal year,
together with a statement of its income and statement of cash flow for such
fiscal year (Form 10-K or 10-KSB), such balance sheet and statement of cash flow
for such fiscal year to be in reasonable detail and to be accompanied by a
certificate or report of independent public accountants, (who may be the regular
accountants for the Company), (iii) as soon as available a copy of every other
report (financial or other) mailed to the stockholders, and (iv) as soon as
available a copy of every non-confidential report and financial statement
furnished to or filed with the Commission or with any securities exchange
pursuant to requirements by or agreement with such exchange or the Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), or
any regulations of the Commission thereunder. If and for so long as the Company
has one or more active subsidiaries, the financial statements required by (i)
and (ii) above shall be furnished on a consolidated basis in respect of the
Company and all of the Company's subsidiaries. The financial statements referred
to in (ii) shall also be furnished to all of the stockholders of the Company as
soon as practicable after the 105 days referred to therein.
(g) The Company represents that with respect to the Warrants
and the shares of Common Stock, it will prepare and file a Registration
Statement with the Commission pursuant to Section 12 of the 1934 Act, prior to
the Effective Date with a request that such Registration Statement will become
effective on the Effective Date. The Company understands that, to register, it
must prepare and file with the Securities and Exchange Commission a General Form
of Registration of Securities (Form 8-A or Form 10). In addition, the Company
agrees to qualify its Units, Common Stock and the Warrants for listing on the
OTC Bulletin Board on the Effective Date and will take all reasonable and
necessary and appropriate action so that the securities continue to be listed
for trading on the OTC Bulletin Board for at least ten years from the Effective
Date provided the Company otherwise complies with the prevailing maintenance
requirements. In addition, at such time as the Company
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qualifies for listing its securities on the National Market System of NASDAQ,
the Company will use its best efforts to have the Company's Units and components
thereof listed on the National Market System of NASDAQ in lieu of both listing
as Small-Cap Issues on NASDAQ and on the _________ Exchange. For so long as the
Company is a reporting company under the 1934 Act, the Company shall comply with
all periodic reporting and proxy solicitation requirements imposed by the
Commission pursuant to the 1934 Act.
(h) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than 15 months after the
Effective Date, an earnings statement of the Company (which need not be audited)
in reasonable detail, covering a period of at least twelve months beginning
after the Effective Date, which earnings statement shall satisfy the provisions
of Section 11(a) of the Act.
(i) The Company will, on or about the Effective Date, apply
for listing in Standard and Poor's Corporation Records and Standard & Poor's
Monthly Stock Guide and shall use its best efforts to have the Company listed in
such reports for a period of not less than ten (10) years from the Closing Date.
The Company will request accelerated treatment in the Daily News Supplement of
Standard and Poor's Corporation Records.
(j) The Company shall cause the Board of Directors to meet, at
least quarterly, upon proper notice; and, the Representative shall receive
notice of any regular or special meetings of the Company's Board of Directors
concurrently with the sending of such notice to the Company's directors and
shall have the right to have a representative attend such meeting as an
observer, but this right shall be suspended (i) three years after the Effective
Date or (ii) at any time a designee of the Underwriter is a member of or advisor
to the Company's Board of Directors as more fully set forth in Section 17 below.
(k) The Company shall employ the services of an auditing firm
acceptable to the Representative in connection with the preparation of the
financial statements required to be included in the Registration Statement and
shall continue to appoint such auditors or such other auditors as are reasonably
acceptable to the Representative for a period of five (5) years following the
Effective Date of the Registration Statement. Said financial statements shall be
prepared in accordance with Item 310 of Regulation S-B under the Rules and
Regulations. The Company shall appoint American Stock Transfer & Trust Co., New
York, New York as transfer agent for the Common Stock (the "Transfer Agent") and
as warrant agent for the Warrants.
(l) Prior to the Effective Date, the Company will enter
into employment contracts with William L. Miller and Jeanne E.
Miller satisfactory to the Representative.
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(m) Within ninety (90) days subsequent to the Effective Date,
the Company will furnish "Key Man" Life Insurance in the amount of $1,000,000 on
the life of William L. Miller with the Company as the beneficiary thereof and
the Company shall pay the annual premiums, therefore, for a period of not less
than five years from the Effective Date.
(n) The Company will for a period of five years:
(i) Furnish to the Representative and to the
Company's shareholders annual audited financial statements contained in an
annual report and unaudited financial statements contained in quarterly reports
for each of the Company's first three quarters.
(ii) [intentionally deleted]
(iii) At its expense, shall cause its regularly
engaged independent certified public accountants to review (but not audit) the
Company's financial statements for each of the first three (3) fiscal quarters
prior to the announcement of quarterly financial information, the filing of the
Company's Form 10-Q or 10-QSB quarterly report and the mailing of quarterly
financial information to security holders.
(o) Unless and until such time as the securities of the
Company are listed on the New York Stock Exchange, the American Stock Exchange
or NASDAQ/NMS, the Company shall cause its legal counsel to provide the
Representative with a survey, to be updated at least annually, for 5 years, of
those states in which the securities of the Company may be traded in non-issuer
transactions under the Blue Sky laws of the states and the basis for such
authority. At closing, the first such survey shall be delivered by the
Underwriter's legal counsel, Bernstein & Wasserman, LLP.
(p) As soon as practicable after the Closing Date, the Company
will deliver to the Representative and its counsel a total of three bound
volumes of copies of all documents relating to the public offering which is the
subject of this Agreement.
(q) The Company, for a period of at least three years
following the public offering, shall retain the services of a financial public
relations firm(s) satisfactory to the Representative, said agreement(s) to
commence no later than 30 days after the Closing of the public offering.
(r) Stock certificates and Warrant certificates shall be first
submitted to the Representative for approval prior to printing. The Company
shall, as promptly as possible, after filing the Registration Statement with the
Commission, obtain a CUSIP number for the Units, shares and Unit Warrants and
have each of the securities eligible for closing through Depository Trust
Company.
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(s) The Company will not issue and sell any of its securities
not contemplated by the Registration Statement for twenty four months from the
date of this agreement.
SECTION 7. EXPENSES OF THE COMPANY.
The Company shall be responsible for and shall bear all expenses
directly and necessarily incurred in connection with the proposed financing,
including: (i) the preparation, printing and filing of the Offering Documents
and amendments thereto, including NASD, SEC, filing and/or application fees,
preliminary and final Prospectus and the printing of the Underwriting Agreement,
the Agreement Among Underwriters and the Selected Dealers' Agreement, a Blue Sky
Memorandum, material to be circulated to the Underwriters by us and other
incidental material; (ii) the issuance and delivery of certificates representing
the shares and Unit Warrants, including original issue and transfer taxes, if
any; (iii) the qualifications of the Company's Units covered by the "firm
commitment" offering under State Securities or Blue Sky Laws, including counsel
fees of the Representative relating thereto in the sum of $35,000.00 Dollars
(the "Blue Sky Legal Fees"), together with appropriate state filing fees plus
disbursements (estimated to be $25,000) relating to, but not limited to,
long-distance telephone calls, photocopying, messengers, excess postage,
overnight mail and courier services; and (iv) the fees and disbursements of
counsel for the Company and the accountants for the Company. The Blue Sky Legal
Fees payment shall not include fees of special counsel if same is required to be
incurred in a merit review state which may require local counsel.
After closing of the public offering, the Company shall bear the costs
of tombstone announcements not to exceed $______________.
SECTION 8. PAYMENT OF UNDERWRITERS' EXPENSES.
(a) On the Closing Date and Additional Closing Date(s) (if
any) the Company will pay to VTR an expense allowance equal to three (3%)
percent of the total gross proceeds derived from the sale of the 250,000 Units
and Optional Units, as an advance against reasonable out-of-pocket expenses
anticipated to be incurred by, or on behalf of, VTR, including the fees and
disbursements of counsel to the Underwriters and for costs of otherwise
unreimbursed advertising, traveling, postage, telephone and telegraph expenses
and other miscellaneous expenses incurred by or on behalf of the Representative
and the Underwriters in preparation for, or in connection with the offering and
sale and distribution of the Units; and VTR shall not be obligated to account to
the Company for such disbursements and expenses. In the event, however, that the
Representative terminates this Agreement pursuant to the provisions of Section
12 hereof, the Representative shall be reimbursed for its actual accountable
out-of-pocket expenses and shall be obligated to account for expenditures of any
advance payment to VTR and to refund to the Company any portion of the advance
not expended. In the event that the Representative terminates this agreement
pursuant to the provisions of Section 12(b), the Representative shall be
entitled to reimbursement of expenses on an accountable basis.
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(b) On the Effective Date, the Company will enter into an
agreement retaining VTR, as a management and financial consultant for a
three-year period, commencing as of the Effective Date at a fee equal to
$100,000 payable in full in advance on the Closing Date.
SECTION 9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
and all losses, claims, damages and liabilities, joint or several (including any
reasonable investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein such fact required to be stated therein or
necessary to make such statements therein not misleading. Such indemnity shall
not inure to the benefit of any Underwriter (or any person controlling such
Underwriter) on account of any losses, claims, damages or liabilities arising
from the sale of the Units to any person by such Underwriter if such untrue
statement or alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with information furnished in
writing to the Company by the Representatives on behalf of any Underwriter
specifically for use therein. In no event shall the indemnification agreement
contained in this Section 9(a) inure to the benefit of any Underwriter on
account of any losses, claims, damages, liabilities or actions arising from the
sale of the Units upon the public offering to any person by such Underwriter if
such losses, claims, damages, liabilities or actions arise out of, or are based
upon, a statement or omission or alleged omission in a preliminary prospectus
and if, in respect to such statement, omission or alleged omission, the
Prospectus differs in a material respect from such preliminary prospectus and a
copy of the Prospectus has not been sent or given to such person at or prior to
the confirmation of such sale to such person. This indemnity agreement will be
in addition to any liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company who
signs the Registration Statement, to the same extent as the foregoing indemnity
from the
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Company to each Underwriter, but only insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which was made in any Preliminary
Prospectus, any Rule 430A Prospectus, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, which were made in
reliance upon and in conformity with information furnished in writing to the
Company by the Representatives on behalf of any Underwriter for specific use
therein; provided, however, that the obligation of each Underwriter to indemnify
the Company (including any controlling person, director or officer thereof)
shall be limited to the net proceeds received by the Company from such
Underwriter. For all purposes of this Agreement, the amounts of the selling
concession and reallowance set forth in the Prospectus constitute the only
information furnished in writing by or on behalf of any Underwriter expressly
for inclusion in any Preliminary Prospectus, any Rule 430A Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto.
(c) Any party that proposes to assert the right to be
indemnified under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim is to be made against an indemnifying party or parties under this
Section, notify each such indemnifying party of the commencement of such action,
suit or proceeding, enclosing a copy of all papers served. No indemnification
provided for in Section 9(a) or 9(b) shall be available to any party who shall
fail to give notice as provided in this Section 9(c) if the party to whom notice
was not given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice but the omission
so to notify such indemnifying party of any such action, suit or proceeding
shall not relieve it from any liability that it may have to any indemnified
party for contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and, to the extent that
it shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and the
approval by the indemnified party of such counsel, the indemnifying party shall
not be liable to such indemnified party for any legal or other expenses, except
as provided below and except for the reasonable costs of investigation
subsequently incurred by such indemnified party in connection with the defense
thereof. The indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the employment of counsel by such
indemnified party has been authorized in writing by the indemnifying parties,
(ii) the indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the indemnified party
in the
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conduct of the defense of such action (in which case the indemnifying parties
shall not have the right to direct the defense of such action on behalf of the
indemnified party, or (iii) the indemnifying parties shall not have employed
counsel to assume the defense of such action within a reasonable time after
notice of the commencement thereof, in each of which cases the reasonable fees
and expenses of counsel shall be at the expense of the indemnifying parties. An
indemnifying party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Sections 9(a) and (b)
is due in accordance with its terms but for any reason is held to be unavailable
from the Company, or the Underwriters, the Company, and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, persons who control the
company within the meaning of the Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may also be liable for
contribution) to which the Company and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriters on the other from
the offering of the Units or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided herein in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company, and the
Underwriters shall be deemed to be in the same proportion as (x) the total
proceeds from the Offering (net of underwriting discounts but before deducting
expenses) received by the Company or from the sale of the Units, as set forth in
the table on the cover page of the Prospectus (but not taking into account the
use of the proceeds of such sale of Units by the Company), bear to (y) the
underwriting discount received by the Underwriters, as set forth in the table on
the cover page of the Prospectus. The relative fault of the Company, and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to information
supplied by the Company, or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, and the
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Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable consideration
referred to above. Notwithstanding the provisions of this Section 9, in no case
shall any Underwriter (except as may be provided in the Agreement Among
Underwriters) be liable or responsible for any amount in excess of the
underwriting discount applicable to the Units purchased by such Underwriter
hereunder. For purposes of this Section 9, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject to the
immediately preceding sentence of this Section 9. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The Underwriters'
obligations to contribute pursuant to this Section 9 are several in proportion
to their respective underwriting commitments and not joint.
SECTION 10. EFFECTIVENESS OF AGREEMENT. This Agreement shall become
effective (i) at 10:00 A.M., New York Time, on the first full business day after
the Effective Date, or (ii) at the time of the initial public offering by the
Underwriters of the Units, whichever shall first occur. The time of the initial
public offering by the Underwriters of the Units for the purposes of this
Section 10, shall mean the time, after the Registration Statement becomes
effective, of the release by the Representative for publication of the first
newspaper advertisement which is subsequently published relating to the Units,
or the time, after the Registration Statement becomes effective, when the Units
are first released by the Representative for offering by the Underwriters or
dealers by letter or telegram, whichever shall first occur. The Representative
agrees to notify the Company immediately after it shall have taken any action,
by release or otherwise, whereby this Agreement shall have become effective.
This Agreement shall, nevertheless, become effective at such time earlier than
the time specified above, after the Effective Date, as the Representative may
determine by notice to the Company.
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SECTION 11. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The
obligations of the several Underwriters to purchase and pay for the Units which
the Underwriters have agreed to purchase hereunder are subject to: the accuracy,
as of the date hereof and as of the Closing Dates, of all of the representations
and warranties of the Company and contained in this Agreement; the Company's
compliance with, or performance of, all of its covenants, undertakings and
agreements contained in this Agreement that are required to be complied with or
performed on or prior to each of the Closing Dates and to the following
additional conditions:
(a) On or prior to the Closing Date, no order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or be pending or, to the
knowledge of the Company, shall be threatened by the Commission; any request for
additional information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of the Commission; and neither the Registration
Statement nor any amendment thereto shall have been filed to which counsel to
the Underwriters shall have reasonably objected, in writing.
(b) The Representative shall not have disclosed in writing to
the Company that the Registration Statement or Prospectus or any amendment or
supplement thereto contained, as of the date thereof, an untrue statement of a
fact which, in the opinion of counsel to the Underwriters, is material, or omits
to state a fact which, in the opinion of such counsel, is material and is
required to be stated therein, or is necessary to make the statements therein
not materially misleading.
(c) Between the date hereof and the Closing Date, the Company
shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or other cause, of such character as materially adversely
affects its business or property, whether or not such loss is covered by
insurance.
(d) Between the date hereof and the Closing Date, there shall
be no litigation instituted or threatened against the Company, and there shall
be no proceeding instituted or threatened against the Company before or by any
federal or state commission, regulatory body or administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially adversely affect the business, licenses, permits,
operations or financial condition or income of the Company.
(e) Except as contemplated herein or as set forth in the
Registration Statement and Prospectus, during the period subsequent to the
Effective Date and prior to the Closing Date, (A) the Company shall have
conducted its business in the usual and ordinary manner as the same was being
conducted on the date of the filing of the initial Registration Statement and
(B) except in the ordinary course of its business, the Company shall not have
incurred any
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material liabilities or obligations (direct or contingent), or disposed of any
of its assets, or entered into any material transaction, and (C) the Company
shall not have suffered or experienced any material adverse change in its
business, affairs or in its condition, financial or otherwise. On the Closing
Date, the capital stock and surplus accounts of the Company shall be
substantially as great as at its last financial report without considering the
proceeds from the sale of the Units except to the extent that any decrease is
disclosed in or contemplated by the Prospectus.
(f) The authorization of the Units, the Common Stock and the
Warrants, the Registration Statement, the Prospectus and all corporate
proceedings and other legal matters incident thereto and to this Agreement,
shall be reasonably satisfactory in all respects to counsel to the Underwriters.
(g) The Company shall have furnished to the Representative the
opinions, dated the Closing Date, and Additional Closing Date(s), addressed to
you, of Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A., counsel for the
Company, that:
(i) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of Delaware
with full corporate power and authority to own and operate its properties and to
carry on its business as set forth in the Registration Statement and Prospectus;
it has authorized and outstanding capital as set forth in the Registration
Statement and Prospectus; and the Company is duly licensed or qualified as a
foreign corporation in all jurisdictions in which the ownership or leasing of
its properties requires such qualification or license, except where failure to
be so qualified or licensed would have no material adverse effect on the
business of the Company.
(ii) The Company has an authorized, issued and outstanding
capital stock as set forth under the caption "Capitalization" in the Prospectus.
All of the outstanding shares of Common Stock and Preferred Stock are duly
authorized, validly issued, fully paid, and non-assessable, and do not have any
preemptive rights. The Company will have duly authorized, reserved and set aside
shares of Common Stock issuable upon exercise of the Warrants and any other
outstanding options, warrants or stock option plans and when issued in
accordance with the terms contained therein against payment therefor, will be
duly and validly issued, fully paid and non-assessable.
(iii) The Common Stock, Warrants and the Underwriters' Warrant
conform to descriptions thereof under "Description of Securities" contained in
the Prospectus.
(iv) The Underwriters will receive good and marketable title
to the Units purchased by them from the Company in accordance with the terms and
provisions of this Agreement, to the best of such counsel's knowledge, free and
clear of all liens,
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encumbrances, claims, security interests, restrictions, stockholders' agreements
and voting trusts whatsoever.
(v) Except as set forth in the Prospectus, there
are no outstanding options, warrants, or other rights, providing for the
issuance of, and, to the best of the knowledge of such counsel, no commitments,
plans or arrangements to issue, any shares of any class of capital stock of the
Company, or any security convertible into, or exchangeable for, any shares of
any class of capital stock of the Company.
(vi) To the best of such counsel's knowledge, no
consents, approvals, authorizations or orders of agencies, officers or other
regulatory authorities are necessary for the valid authorization, issue or sale
of the Units hereunder, except such as may be required under the Act or state
securities or Blue Sky Laws.
(vii) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for that purpose have been instituted or are pending before or
threatened by, the Commission;
(viii) To the best of such counsel's knowledge and
based upon the investigation described below, the Registration Statement and
Prospectus, and each amendment thereof and supplement thereto, comply as to form
in all material respects with the applicable requirements of the Act and the
Rules and Regulations (except that no opinion need be expressed as to financial
statements, notes thereto, and financial data contained in the Registration
Statement or Prospectus). Such counsel has participated in conferences with
officers and representatives of the Company and with its certified public
accountants in the preparation of the Registration Statement and the Prospectus.
At such conferences counsel has made inquiries of such officers, representatives
and accountants, and discussed the contents of the Registration Statement and
the Prospectus. Such counsel has not independently verified, and, accordingly,
does not assume any responsibility for, the accuracy, completeness or fairness
of the information contained in the Registration Statement or the Prospectus,
other than as set forth the Prospectus insofar as such statements relate to the
contents of particular documents therein described, except for documents
prepared by counsel for Underwriter. On the basis of the foregoing, nothing has
come to the attention of such counsel to cause such counsel to believe that the
Registration Statement, the Prospectus or any amendment or supplement thereto
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make statements therein, in light of the
circumstances under which they were made, not misleading (except, in the case of
both the Registration Statement and any amendment thereto and the Prospectus and
any supplement thereto, for the financial statements, notes thereto and other
financial and statistical data and schedules contained therein, as to which such
counsel need express no opinion); and such counsel is familiar with all
contracts referred
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to in the Registration Statement or in the Prospectus and such contracts are
sufficiently summarized or disclosed therein, except for contracts prepared on
behalf of the Underwriter, or filed as exhibits thereto, as required, and such
counsel does not know of any other contracts required to be summarized or
disclosed or filed; and such counsel does not know of any legal or governmental
proceedings to which the Company is a party, or in which property of the Company
is the subject, of a character required to be disclosed in the Registration
Statement or the Prospectus which are not so disclosed therein.
(ix) The statements in the Registration Statement
under the caption "Business" have been reviewed by such counsel and insofar as
they refer to descriptions of agreements, statutes, licenses, certifications,
rules or regulations or legal conclusions, are correct in all material respects.
(x) This Agreement has been duly authorized and
executed by the Company and is a valid and binding agreement of the Company
enforceable in accordance with its terms subject to bankruptcy, insolvency,
reorganization, moratorium and other laws affecting creditors rights generally
and except that no opinion need be given with regard to the enforceability of
Section 9 hereof or the availability of equitable relief.
(xi) To the best knowledge of such counsel: (a) no
default exists, and no event has occurred which, with notice or lapse of time,
or both, would constitute a default in the due performance and observance of any
material term, covenant or condition by the Company of any indenture, mortgage,
deed of trust, note or any other agreement or instrument to which the Company is
a party or by which it or its business or its properties may be bound or
affected, except where such default would not have a material adverse effect on
the business of the Company and except as disclosed in the Prospectus; (b) the
Company has full power and lawful authority to authorize, issue and sell the
Units on the terms and conditions set forth herein and in the Registration
Statement and in the Prospectus; (c) no consent, approval, authorization or
other order of any regulatory authority is required for such authorization,
issue or sale, except as may be required under the Act or State securities laws,
clearance with the NASD and such other consent, approval, authorization or order
as has been obtained and is in full force and effect; and (d) the execution and
delivery of this Agreement, the consummation of the transactions herein
contemplated, and compliance with the terms hereof will not conflict with, or
constitute a default under, any material indenture, mortgage, deed of trust,
note or any other agreement or instrument to which the Company is now a party or
by which it or its business or its properties may be bound or affected, the
Certificate of Incorporation and any amendments thereto, the by-laws of the
Company or any order, rule or regulation, writ, injunction or decree of any
government, governmental instrumentality, or court, domestic or foreign, having
jurisdiction over the Company or its business or properties, except
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<PAGE>
for the SEC's position on indemnification of officers and
directors.
(xi) Except as disclosed in the Registration
Statement and Prospectus, to the best knowledge of such counsel, there are no
material actions, suits or proceedings at law or in equity of a material nature
pending, or to such counsel's knowledge, threatened against the Company which
are not adequately covered by insurance and there are no proceedings pending or,
to the knowledge of such counsel, threatened against the Company before or by
any Federal or State Commission, regulatory body, or administrative agency or
other governmental body, wherein an unfavorable ruling, decision or finding
would materially and adversely affect the business, operation or condition
(financial or otherwise) of the Company, which are not disclosed in the
Prospectus.
(xii) The Underwriters' Unit Purchase Option to be
issued to the Representative hereunder will be, when issued, duly and validly
authorized and executed by the Company and will constitute valid and binding
obligations of the Company, legally enforceable in accordance with their terms
except as enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws pertaining to creditors rights
generally and the Company will have duly authorized, reserved and set aside the
shares of its Common Stock issuable upon exercise of the Underwriters' Unit
Purchase Option and such stock, when issued and paid for upon exercise of the
Underwriters' Unit Purchase Option in accordance with the provisions thereof,
will be duly and validly issued, fully-paid and non-assessable.
Such opinion shall also cover such other matters incident to
the transactions contemplated by this Agreement as the Representative shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact.
(h) The Company shall have furnished to the Representative
certificates of the Chief Executive Officer and an Executive Vice-President of
the Company, dated as of the Closing Date, and Additional Closing Date(s), to
the effect that:
(i) Each of the representations and warranties
of the Company contained in Section 2 hereof is true and correct in all material
respects at and as of such Closing Date, and the Company has performed or
complied with all of its agreements, covenants and undertakings contained in
this Agreement and has performed or satisfied all the conditions contained in
this Agreement on its part to be performed or satisfied at the Closing Date;
(ii) The Registration Statement has become
effective and no order suspending the effectiveness of the Registration
Statement has been issued, and, to the best of the knowledge of the
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<PAGE>
respective signers, no proceeding for that purpose has been
initiated or is threatened by the Commission;
(iii) The respective signers have each carefully
examined the Registration Statement and the Prospectus and any amendments and
supplements thereto, and to the best of their knowledge the Registration
Statement and the Prospectus and any amendments and supplements thereto and all
statements contained therein are true and correct in all material respects, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes 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 not misleading and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set forth except
changes which the Registration Statement and Prospectus indicate might occur.
(iv) Except as set forth or contemplated in the
Registration Statement and Prospectus, since the respective dates as of which,
or periods for which, information is given in the Registration Statement and
Prospectus and prior to the date of such certificate (A) there has not been any
material adverse change, financial or otherwise, in the business, business
prospects, earnings, general affairs or condition (financial or otherwise), of
the Company (in each case whether or not arising in the ordinary course of
business), and (B) the Company has not incurred any material liabilities, direct
or contingent, or entered into any material transactions, otherwise than in the
ordinary course of business other than as referred to in the Registration
Statement or Prospectus and except changes which the Registration Statement and
Prospectus indicate might occur.
(i) The Company shall have furnished to the Representative on
the Closing Date, such other certificates of executive officers of the Company
additional to those specifically mentioned herein, as the Representative may
have reasonably requested, as to: the accuracy and completeness of any statement
in the Registration Statement or the Prospectus, or in any amendment or
supplement thereto; the representations and warranties of the Company herein;
the performance by the Company of its obligations hereunder; or the fulfillment
of the conditions concurrent and precedent to the obligations of the
Underwriters hereunder, which are required to be performed or fulfilled on or
prior to the Closing Date.
(j) At the time this Agreement is executed, and on each
Closing Date you shall have received a letter from Hausser & Taylor, addressed
to the Representative, as Representative of the Underwriters, and dated,
respectively, as of the date of this Agreement and as of each Closing Date in
form and substance reasonably satisfactory to the Representative, to the effect
that:
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<PAGE>
(i) They are independent public accountants
within the meaning of the Act and the applicable published Rules and
Regulations of the Commission;
(ii) In their opinion, the financial statements and
related schedules of the Company included in the Registration Statement and
Prospectus and covered by their reports comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations of the Commission issued thereunder;
(iii) On the basis of LIMITED PROCEDURES in
accordance with standards established by the American Institute of Certified
Public Accountants, including (1) a reading of the latest available financial
statements of the Company (a copy of which shall be attached to such letter),
(2) a reading of the latest available minutes of the meetings of the
stockholders and the Board of Directors of the Company as set forth in the
minute books of the Company, officials of the Company having advised you and
them that the minutes of all such meetings through that date were set forth
therein, (3) consultations with officials of the Company responsible for
financial and accounting matters of the Company, which procedures do not
constitute an examination in accordance with generally accepted accounting
standards, and would not necessarily reveal material adverse changes in the
financial position or results of operations or inconsistencies in the
application of generally accepted accounting principles, nothing has come to
their attention which in their judgment would lead them to believe that (a) the
unaudited financial statements and related schedules of the Company included in
the Registration Statement and Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
published Rules and Regulations of the Commission issued thereunder, or were not
prepared in accordance with generally accepted accounting principles and
practices consistent in all material respects with those followed in the
preparation of the comparable financial statements and schedules covered by
their reports included in the Registration Statement and Prospectus, or would
require any material adjustments for a fair presentation of the information
purported to be shown thereby or (b) during the period from the date of the
Capitalization table included in the Prospectus to a specified date not more
than four business days prior to the date of such letter, there has been any
material change in the capital stock or debt of the Company, or (c) during the
period from the date of the latest balance sheet and related statements of
operations, changes in stockholders' equity and changes in financial position
included in the Prospectus and covered by their reports contained therein to the
date of the letter, there has been any material adverse change in the financial
condition, or results of operations, of the Company; and
(iv) In addition to the examination referred to in
their reports included in the Registration Statement and the Prospectus and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not
24
<PAGE>
constituting an audit, with respect to certain amounts, percentages and
financial information which are derived from the general accounting records of
the Company which appear in the Prospectus under the captions "Capitalization",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Executive Compensation", "Certain Transactions", "Selected
Financial Data," "Dilution," and "Risk Factors," as well as such other financial
information as may be specified by the Representative, and that they have
compared such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
(k) All the opinions, letters, certificates and evidence mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel to the Underwriters, whose approval shall not be
reasonably withheld, conditioned or delayed.
If any of the conditions specified in this Section shall not
have been fulfilled when and as required by this Agreement and all obligations
of the Underwriters hereunder may be terminated and canceled by the
Representative by notifying the Company of such termination and cancellation in
writing or by telegram at any time prior to, or on, the Closing Date and any
such termination and cancellation shall be without liability of any party hereto
any other party, except with respect to the provisions of Sections 7 and 8
hereof. The Representative may, of course, waive, in writing, any conditions
which have not been fulfilled or extend the time for their fulfillment.
SECTION 12. TERMINATION.
(a) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time before it becomes
effective pursuant to Section 10.
(b) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company, at any time after it becomes
effective, in the event that the Company, after notice from the Representative
and an opportunity to cure, shall have failed or been unable to comply with any
of the terms, conditions or provisions of this Agreement on the part of the
Company to be performed, complied with or fulfilled within the respective times
herein provided for, including without limitation Section 6(g) hereof, unless
compliance therewith or performance or satisfaction thereof shall have been
expressly waived by the Representative in writing. This Agreement may also be
terminated if (i) qualifications are received or provided by the Company's
independent public accountants or attorneys to the effect of either inabilities
in furnishing certifications as to material items including, without limitation,
information contained within the footnotes to the financial statements, or as
affecting matters incident to the issuance and sale of the securities
contemplated or as to corporate proceedings or other matters or (ii) there is
any
25
<PAGE>
action, suit or proceeding, threatened or pending, at law or equity against the
Company, or by any Federal, State or other commission, board or agency wherein
any unfavorable result or decision could materially adversely affect the
business, property, or financial condition of the Company which was not
disclosed in the Prospectus.
(c) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time after it becomes
effective, if the offering of, or the sale of, or the payment for, or the
delivery of, the Units is rendered impracticable or inadvisable because (i)
additional material governmental restriction, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or trading in securities generally on such exchange shall have
been suspended or a general banking moratorium shall have been established by
Federal or New York State authorities or (ii) a war or other national calamity
shall have occurred involving the United States or (iii) the condition of the
market for securities in general shall have materially and adversely changed, or
(iv) the condition of any matter materially affecting the Company or its
business or business prospects, is such that it would be undesirable,
impractical or inadvisable to proceed with, or consummate, this Agreement or the
public offering of the Units.
(d) Any termination of this Agreement pursuant to this Section
12 shall be without liability of any character (including, but not limited to,
loss of anticipated profits or consequential damages) on the part of any party
hereto, except that the Company shall remain obligated to pay the costs and
expenses provided to be paid by it specified in Sections 6, 7 and 8, to the
extent therein provided. In addition, the Underwriter shall account to the
Company for any advance and shall reimburse the Company for any portion of the
advance not expended for actual out-of-pocket expenses. In the event that the
Representative terminates this agreement pursuant to the provisions of Section
12(b), the Representative shall be entitled to reimbursement of expenses on an
accountable basis.
SECTION 13. FINDER. The Company, and the Underwriters mutually
represent that they know of no person who rendered any service in connection
with the introduction of the Company to the Underwriters and that they know of
no outstanding claim by anyone for a "finder's fee" or similar type of fee, in
connection with the public offering which is the subject of this Agreement. Each
party hereby indemnifies the other against any such claims by any person known
to it, and not known to the other party hereto, who shall claim to have rendered
services in connection with the introduction of the Company to the Underwriters
and/or to have such a claim.
SECTION 14. SUBSTITUTION OF UNDERWRITERS.
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<PAGE>
(a) If one or more Underwriters default in its or their
obligations to purchase and pay for Units hereunder and if the aggregate amount
of such Units which all Underwriters so defaulting have agreed to purchase does
not exceed 10% of the aggregate number of Units constituting the Units, the
non-defaulting Underwriters shall have the right and shall be obligated
severally to purchase and pay for (in addition to the Units set forth opposite
their names in Schedule I) the full amount of the Units agreed to be purchased
by all such defaulting Underwriters and not so purchased, in proportion to their
respective commitments hereunder. In such event the Representative, for the
accounts of the several non-defaulting Underwriters, may take up and pay for all
or any part of such additional Units to be purchased by each such Underwriter
under this subsection (a), and may postpone the Closing Date for seven business
days; or
(b) If one or more Underwriters (other than the
Representative) default in its or their obligations to purchase and pay for the
Units hereunder and if the aggregate amount of such Units which all Underwriters
so defaulting shall have agreed to purchase shall exceed 10% of the aggregate
number of Units, or if one or more Underwriters for any reason permitted
hereunder cancel its or their obligations to purchase and pay for Units
hereunder, the non-canceling and non-defaulting Underwriters (hereinafter called
the "Remaining Underwriters") shall have the right, but shall not be obligated
to purchase such Units in such proportion as may be agreed among them, at the
Closing Date. If the Remaining Underwriters do not purchase and pay for such
Units at such Closing Date, the Closing Date shall be postponed for one business
day and the remaining Underwriters shall have the right to purchase such Units,
or to substitute another person or persons to purchase the same or both, at such
postponed Closing Date. If purchasers shall not have been found for such Units
by such postponed Closing Date, the Closing Date shall be postponed for a
further two business days and the Company shall have the right to substitute
another person or persons, satisfactory to you to purchase such Units at such
second postponed Closing Date. If the Company shall not have found such
purchasers for such Units by such second postponed Closing Date, then this
Agreement shall automatically terminate and neither the Company nor the
remaining Underwriters (including the Representative) shall be under any
obligation under this Agreement (except that the Company shall remain liable to
the extent provided in Paragraph 7 hereof). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 14. Nothing in this subparagraph (b) will relieve a defaulting
Underwriter from its liability, if any, to the other Underwriters or the Company
for damages occasioned by its default hereunder (and such damages shall be
deemed to include, without limitation, all expenses reasonably incurred by each
Underwriter in connection with the proposed purchase and sale of the Units) or
obligate any Underwriter to purchase or find purchasers for any Units in excess
of those agreed to be purchased by such Underwriter under the terms of Sections
3 and 14 hereof.
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<PAGE>
SECTION 15. REGISTRATION OF THE WARRANTS AND/OR SECURITIES
UNDERLYING THE UNDERWRITERS' UNIT PURCHASE OPTION. The Company agrees that it
will, upon request by the Representative or the holders of a majority of the
Underwriters' Unit Purchase Option and Underlying Securities within the period
commencing one year after the Effective Date, and for a period of five years
from the Effective Date, on one occasion only at the Company's sole expense,
cause the Underwriters' Unit Purchase Option and/or the Underlying Securities
issuable upon exercise of the Underwriters' Unit Purchase Option, to be the
subject of a post-effective amendment, a new Registration Statement, if
appropriate (hereinafter referred to as the "demand Registration Statement"), so
as to enable the Representative and/or its assigns to offer publicly the
Underwriters' Unit Purchase Option and/or the underlying securities. The Company
agrees to register such securities expeditiously and, where possible, within
forty-five (45) business days after receipt of such requests. The Company agrees
to use its "best efforts" to cause the post-effective amendment, new
Registration Statement to become effective and for a period of nine (9) months
thereafter to reflect in the post-effective amendment, new Registration
Statement, financial statements which are prepared in accordance with Section
10(a)(3) of the Act and any facts or events arising which, individually or in
the aggregate, represent a fundamental and/or material change in the information
set forth in such post-effective amendment or new Registration Statement. The
holders of the Underwriters' Unit Purchase Option may demand registration
without exercising such Warrants and, in fact, are never required to exercise
same.
The Company understands and will agree that if, at
any time within the period commencing one year after the Effective Date and
ending seven years after the Effective Date of the Company's Registration
Statement, it should file a Registration Statement with the Securities and
Exchange Commission pursuant to the Securities Act, regardless of whether some
of the holders of the Underwriters' Unit Purchase Option and Underlying
Securities shall have theretofore availed themselves of the right provided
above, the Company, at its own expense, will offer to said holders the
opportunity to register the Underwriters' Unit Purchase Option and Underlying
Securities. This paragraph is not applicable to a Registration Statement filed
by the Company with the SEC on Form S-8 or any other inappropriate form.
In addition to the rights above provided, the
Company will cooperate with the then majority holders of the Underwriters' Unit
Purchase Option and Underlying Securities in preparing and signing a
Registration Statement, on one occasion only in addition to the Registration
Statements discussed above, required in order to sell or transfer the aforesaid
Underwriters' Unit Purchase Option and underlying securities and will supply all
information required therefor, but such additional Registration Statement shall
be at the then holders' cost and expense unless the Company elects to register
additional shares of the Company's Common Stock in which case the cost and
expense of such Registration Statement will be prorated between the Company and
the
28
<PAGE>
holders of the Underwriters' Unit Purchase Option and underlying securities
according to the aggregate sales price of the securities being issued. The
holders of the Underwriters' Unit Purchase Option may include such Warrants in
any such filing without exercising the Underwriters' Unit Purchase Option, and
in fact, are never required to exercise same. The Company can, at any time for
any reason, withdraw any such registration except in connection with a
Registration Statement filed pursuant to the Company's demand Registration
Statement.
SECTION 16. WARRANT EXERCISE FEE AGREEMENT. Commencing twelve months
after the Effective Date, the Company will pay VTR an amount equal to four (4%)
percent of the aggregate exercise price of each Warrant exercised (except for
those Warrants exercised by an Underwriter)of which a portion may be allowed to
the dealer who solicited the exercise (which may also be VTR); provided: (1) the
market price of the Common Stock on the date the Warrant was exercised was
greater than the Warrant exercise price on that date; (2) exercise of the
Warrant was solicited by a member of the NASD which was designated in writing as
the soliciting broker; (3) the Warrant was not held in a discretionary account;
(4) disclosure of compensation arrangements was made both at the time of the
offering and at the time of exercise of the Warrant; (5) the solicitation of the
exercise of the Warrant was not in violation of Regulation M promulgated under
the Securities Exchange Act of 1934; and (6) solicitation of the exercise is in
compliance with NASD Notice to Members 81-38. The Warrant Exercise Fee shall be
paid in accordance with the provisions of this paragraph and the Warrant
Exercise Fee Agreement filed as an exhibit to the Registration Statement (the
"Warrant Exercise Fee Agreement"). The Company also agrees to execute and
deliver the Warrant Exercise Fee Agreement to VTR on the Closing Date.
SECTION 17. DESIGNATION OF A DIRECTOR OR NON-VOTING ADVISOR TO THE
BOARD: Unless waived by its, the Representative shall have the right to
designate a director or a non-voting advisor to the Board, such person being
reasonably acceptable to the Company, for a period of five years after the
Effective Date. Said designee, shall attend meetings of the Board and receive no
more or less compensation than is paid to other non-management directors of the
Company and shall be entitled to receive reimbursement for all reasonable costs
incurred in attending such meetings, including but not limited to, food, lodging
and transportation. Moreover, to the extent permitted by law, the Company will
agree to indemnify the Representative and its designee for the actions of such
designee as director or as an advisor of the Company. In the event the
Representative designates a director, then the Company will utilize its best
efforts to obtain officer and director liability insurance of at least
$1,000,000 dollars prior to such person serving as a director and if obtained,
to maintain such policy in effect until five years from the Effective Date. To
the extent permitted under the policy, it will also include each of the
Representative and its designee as an insured under such policy.
SECTION 18. FINDER'S FEE: If the Company shall within five (5) years
from the Effective Date, enter into any agreement or understanding with any
person or entity introduced by the
29
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Representative involving (i) the sale of all or substantially all of the assets
and properties of the Company, (ii) the merger or consolidation of the Company
(other than a merger or consolidation effected for the purpose of changing the
Company's domicile) or (iii) the acquisition by the Company of the assets or
stock of another business entity, which agreement or understanding is thereafter
consummated, whether or not during such five (5) year period, the Company, upon
such consummation, shall pay to the Representative an amount equal to the
following percentages of the consideration paid by the Company in connection
with such transaction:
5% of the first $4,000,000 or portion thereof, of such
consideration;
4% of the next $1,000,000 or portion thereof, of such
consideration;
3% of the next $1,000,000 or portion thereof of such
consideration; and
2% of such consideration in excess of the first
$6,000,000 of such consideration.
The fee payable to the Representative will be in the same form of
consideration and payable at the same time as that paid by or to the Company, as
the case may be, in any such transactions.
SECTION 19. RESTRICTION ON SECURITIES All officers and directors of
the Company, Duncan Hill Co., Ltd., and Milton H. Barbarosh, as of the Effective
Date, have agreed not to sell, transfer, hypothecate or convey any capital stock
or derivative securities (except for those securities acquired pursuant to the
Company's Regulation D, Rule 504 offering, which shall remain free of any
restrictions, subject to compliance with applicable securities laws)by
registration or otherwise for a "Lock-Up" period of two years from the Effective
Date without the prior written consent of the Representative (except that,
subject to compliance with applicable securities laws, any such officer,
director or stockholder may transfer his or her stock to a member of his family
or in the event of death, by will or operation of law, provided that any such
transferee shall agree, as a condition to such transfer, to be bound by the
restrictions set forth herein). An appropriate legend shall be marked on the
face of stock certificates representing all of such securities.
SECTION 20. OTHER AGREEMENTS The Alternate Prospectus included in the
Registration Statement covers the sale of 1,500,000 Class A Warrants and
1,500,000 shares of Common Stock issuable upon exercise of the Class A Warrants.
The aforesaid securities are not underwritten by the Underwriters and are not
covered by this Underwriting Agreement.
SECTION 21. NOTICE. Except as otherwise expressly provided in this
Agreement, (A) whenever notice is required by the provisions hereof to be given
to the Company, such notice shall be given in writing, by certified mail, return
receipt requested, addressed to the Company at 4450 Belden Village Street, N.W.,
Canton, OH, 44718, and copy to Michael T. Greif, Esq., Hornsby,
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<PAGE>
Sacher, Zelman, Stanton, Paul & Beiley, P.A., 1401 Brickell Ave., Suite 700,
Miami, FL 33131, and (B) whenever notice is required by the provisions hereof to
be given to the Underwriters, such notice shall be in writing addressed to the
Representative at 99 Wall Street, New York, NY 10005, copy to Steve Wasserman,
Esq., Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022. Any
party may change the address for notices to be sent by giving written notice to
the other persons.
SECTION 22. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except
as the context otherwise requires, all representations, warranties, covenants,
and agreements contained in this Agreement shall be deemed to be
representations, warranties, covenants, and agreements as at the date hereof and
as at the Closing Date and the Additional Closing Date(s), and all
representations, warranties, covenants, and agreements of the several
Underwriters and the Company, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any of the
Underwriters or the Company or any of their respective controlling persons, and
shall survive any termination of this Agreement (whensoever made) and/or
delivery of the Firm Units and the Optional Units to the several Underwriters.
SECTION 23. MISCELLANEOUS. This Agreement is made solely for the
benefit of the Underwriters and the Company and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successor" or the term "successors and assigns" as
used in this Agreement shall not include any purchaser, as such, of any of the
Units.
This Agreement shall not be assignable by any party
without the other party's prior written consent. This Agreement shall be binding
upon, and shall inure to the benefit of, our respective successors and permitted
assigns. The foregoing represents the sole and entire agreement between us with
respect to the subject matter hereof and supersedes any prior agreements between
us with respect thereto. This Agreement may not be modified, amended or waived
except by a written instrument signed by the party to be charged. The validity,
interpretation and construction of this Agreement, and of each part hereof,
shall be governed by the internal laws of the State of New York, without giving
effect to the conflict of laws provisions thereof.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall be deemed to
be one and the same instrument.
If a party signs this Agreement and transmits an electronic facsimile
of the signature page to the other party, the party who receives the
transmission may rely upon the electronic facsimile as a signed original of this
Agreement.
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If the foregoing is in accordance with your
understanding of our agreement, kindly sign and return to us a counterpart
hereof, whereupon this instrument along with all counterparts will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
KIDS STUFF, INC.
By:
--------------------------------------
William L. Miller, Chief Executive Officer
CONFIRMED AND ACCEPTED, as of the
date first above written:
VTR CAPITAL, INC.
By:
-----------------------------------------------
For itself and as the Representative of the
other Underwriters named in Schedule I hereto.
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SCHEDULE I
NUMBER OF UNITS TO BE
UNDERWRITERS PURCHASED
------------ ---------------------
VTR Capital Inc.
-------
Total 250,000
=======
33
EXHIBIT 1.02
VTR CAPITAL INC.
99 WALL STREET
NEW YORK, NY 10005
KIDS STUFF, INC.
250,000 UNITS
SELECTED DEALER AGREEMENT
Dear Sirs: ____________, 1997
We, as the Underwriter named in the below referred to Prospectus (the
"Underwriter") have agreed, subject to the terms and conditions of the
Underwriting Agreement dated this date (the "Underwriting Agreement") to
purchase from Kids Stuff, Inc. (the "Company"), at the price set forth on the
cover of such Prospectus, 250,000 Units and up to an additional 37,500 Units
from the Company (being called the "Units"). The Units and certain of the terms
on which they are being purchased and offered are more fully described in the
enclosed Prospectus (the "Prospectus"). Additional copies of the Prospectus will
be supplied to you, in reasonable quantities upon request.
We, as the Underwriter, are offering to certain dealers ("Selected
Dealers"), among whom we are pleased to include you, part of the Units, at the
public offering price less a concession of $___ per Unit. The offering to
Selected Dealers is made subject to the issuance and delivery of the Units to us
and their acceptance by us, to the approval of legal matters by our counsel, and
to the terms and conditions hereof, and may be made by us on the basis of the
reservation of Units or an allotment against subscription, or otherwise in our
discretion.
The initial public offering price of the Units is set forth in the
Prospectus. With our consent, Selected Dealers may allow a discount of not in
excess of $___ per Unit in selling the Units to other dealers meeting the
requirements of the specifications set forth in the affirmation of dealers
contained in the attached Acceptance and Order. Upon our request, you will
notify us of the identity of any dealer to whom you allow such a discount and
any Selected Dealer from whom you receive such a discount.
All orders will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part, to
accept or reject orders in the order of their receipt or otherwise, and to
allot. You are not authorized to give any information or make any representation
other than as set forth in the Prospectus in connection with the sale of any of
the Units. No dealer is authorized to act as agent for the Underwriter, or for
the Company, when offering any of the Units. Nothing contained herein shall
constitute the Selected Dealers partners with us or with one another.
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Upon release by us, you may offer the Units at the public offering
price, subject to the terms and conditions hereof. We may, and the Selected
Dealers may, with our consent, purchase Units from and sell Units to each other
at the public offering price less a concession not in excess of the concession
to Selected Dealers.
Payment for Units purchased by you is to be made at our office (or at
such other place as instructed) at the public offering price, on such date as we
may advise, on one day's notice to you, by certified or official bank check in
New York Clearing House funds payable to our order. Delivery to you of
certificates for Units will be made as soon as is practicable thereafter. Unless
specifically authorized by us, payment by you may not be deferred until delivery
of certificates to you. The concession payable to you will be paid as soon as
practicable after the closing.
This Agreement shall terminate at the close of business on the 45th day
after the effective date of the Registration Statement. We may terminate this
Agreement at any time prior thereto by notice to you. Notwithstanding the
termination of this Agreement, you shall remain liable for your proportionate
share of any transfer tax or any liability which may be asserted or assessed
against us or Selected Dealers based upon the claim that the Underwriter and the
Selected Dealers, or any of them, constitute a partnership, association,
unincorporated business or other entity, including in each case your
proportionate share of expenses incurred in defending against any such claim or
liability.
In the event that, prior to the termination of this Agreement we
purchase in the open market or otherwise any Units delivered to you, you agree
to repay to us for the account of the Underwriter the amount of the above
concession to Selected Dealers plus brokerage commissions and any transfer taxes
paid in connection with such purchase; which amounts can be withheld from the
concession otherwise payable to you hereunder. Certificates for Units delivered
on any such purchase need not be the identical certificates originally issued to
you.
At any time prior to the termination of this Agreement, you will, upon
our request, report to us the number of Units purchased by you under this
Agreement which then remain unsold and will, upon our request, sell to us for
the account of the Underwriter the number of such unsold Units that we may
designate, at the public offering price less an amount to be determined by us
not in excess of the concession allowed you.
We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the offering, including,
without limitation, stabilization and over-allotment. We shall be under no
liability to you except for our lack of good faith and for obligations assumed
by us in this Agreement, except that you do not waive any rights that you may
have under the Securities Act of 1933 (the "1933 Act") or the rules and
regulations thereunder.
2
<PAGE>
Upon application to us, we will inform you of the states and other
jurisdictions of the United States in which it is believed that the Units are
qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell Units in any jurisdiction. We have filed a Further State Notice
with respect to the Units with the Department of State of the State of New York.
You confirm that you are familiar with Rule 15c2-8 under the Securities
Exchange Act of 1934 (the "1934 Act"), relating to the distribution of
preliminary and final prospectuses, and confirm that you have complied and will
comply therewith (whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the 1934 Act). We will make available to
you, to the extent made available to us by the Company such number of copies of
the Prospectus as you may reasonably request for purposes contemplated by the
1933 Act, the 1934 Act, and the rules and regulations thereunder.
Your attention is directed to Regulation M under the 1934 Act, which
contains certain prohibitions against trading by a person interested in a
distribution until such person has completed its participation in the
distribution. You confirm that you will at all times comply with the provisions
of such Rule in connection with this offering.
Any notice from us shall be deemed to have been duly given if
telephoned, and subsequently mailed or transmitted by any standard form of
written tele-communication to you at the address to which this Agreement is
mailed, or if so mailed or transmitted in the first instance.
Please advise us promptly by telephone or any standard form of written
tele-communication of the principal amount of Units ordered by you and confirm
your agreement hereto by signing the Acceptance and Order on the enclosed
duplicate hereof and returning promptly such signed duplicate copy to VTR
Capital Inc., 99 Wall Street, New York, NY 10005. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
VTR CAPITAL INC.
By:_________________________________
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<PAGE>
ACCEPTANCE AND ORDER
VTR Capital Inc.
99 Wall Street
New York, NY 10005
Dear Sirs:
We hereby enter our order for ______ Units of Kids Stuff, Inc. under the
terms and conditions of the foregoing Agreement.
We agree to all the terms and conditions stated in the foregoing
Agreement. We acknowledge receipt of the Prospectus relating to the above Units
and we further state that in entering this order we have relied upon said
Prospectus and no other statements whatsoever, written or oral. We affirm that
we are either (i) a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place
of business located outside the United States, its territories, or possessions
and not registered under the Securities Exchange Act of 1934 and not eligible
for membership in the NASD, who hereby agrees to make no sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein, and in making any sales, to comply with the NASD's
interpretation with respect to free-riding and withholding, as well as all other
pertinent interpretations of the NASD that may be applicable to us. We also
affirm and agree that we will promptly re-offer any Units purchased by us in
conformity with the terms of the offering and in conformity with the Rules of
Fair Practice of the NASD, (including, without limitation, Sections 8, 24, 25
and 36 Article III thereof) and all applicable Rules and Regulations promulgated
under the Securities Exchange Act of 1934.
Date: , 1997
____________________________________
(Name of Selected Dealer)
BY:
_________________________________
(Authorized Signature)
ADDRESS: __________________________
__________________________
4
EXHIBIT 1.03
WARRANT EXERCISE FEE AGREEMENT
AGREEMENT dated as of the ____ day of _________, 1997, by and among VTC
Capital, Inc. ("VTR"), Kids Stuff, Inc. (the "Company") and American Stock
Transfer & Trust Co. (the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, in connection with a public offering of 250,000 Units, (a
maximum of 287,500 Units including the over-allotment option), each Unit
consisting of two shares of the Company's Common Stock ("Common Stock"), and one
Class A Common Stock Purchase Warrant (the "Warrants"), the Company proposes to
issue, in accordance with an agreement dated as of __________, 1997 by and
between the Company and the Warrant Agent (the "Warrant Agreement"), Warrants to
purchase shares of Common Stock; and
WHEREAS, the Company also will be issuing an additional 1,500,000 Class
A Warrants to certain Selling Securityholders; and
WHEREAS, the parties hereto wish to provide VTR, a member of the
National Association of Securities Dealers, Inc. ("NASD") with certain rights on
an exclusive basis in connection with the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
Section 1. DESCRIPTION OF THE WARRANTS. The Company's Warrants may be
exercised on or after ___________, 1998 and expire at 5:00 p.m. New York time on
__________, 2002 (the "Expiration Date"), subject to (i) the Company's right to
extend the Expiration Date, at which time all rights evidenced by the Warrants
shall cease and the Warrants shall become void and (ii) certain redemption
rights commencing on or after ____________, 1998. In accordance with the
provisions of the Warrant Agreement, the holder of each Warrant shall have the
right to purchase from the Company, and the Company shall issue and sell to such
holders of Warrants, one fully paid and non-assessable share of the Company's
Common Stock for every Warrant exercised at an Exercise Price of $5.00 per
share, subject to adjustment as provided in the Warrant Agreement.
Section 2. NOTIFICATION OF EXERCISE. Within five (5) days of the last
day of each month commencing __________, 1998 (one year from the date of the
Company's Prospectus), the Warrant Agent or the Company will notify VTR of each
Warrant certificate which has been properly completed and delivered for exercise
by holders of Warrants during each such month, the determination of the proper
completion to be in the sole and absolute reasonable discretion of the Company
and the Warrant Agent. The Company or the Warrant
<PAGE>
Agent will provide VTR with such information, in connection with the exercise
of each Warrant, as VTR shall reasonably request.
Section 3. PAYMENT TO VTR. The Company hereby agrees to pay to VTR an
amount equal to four (4%) percent of the exercise price (i.e. $.20 per share
based on the initial exercise price of the Warrants which is $5.00 per share)
for each Warrant exercised, except for those Warrants exercised by VTR (the
"Exercise Fee") a portion of which may be allowed by VTR to the dealer who
solicited the exercise (which may also be VTR) provided that:
(a) such Warrant is exercised on or after __________, 1998, which
represents one year from the effective date of the Company's Registration
Statement;
(b) at the time of exercise, the market price of the Company's Common
Stock is higher than the applicable Exercise Price of the Warrant being
exercised;
(c) the holders of Warrants being exercised have indicated in writing,
either in the Form of Election contained on the specimen Warrant Certificate
attached hereto as Exhibit A, or by written documents signed and dated by the
holders and specifically stating that the exercise of such Warrants were
solicited by VTR or another member of the NASD; and
(d) VTR, and/or the member of the NASD which solicited the exercise of
Warrants delivers a certificate to the Company within five (5) business days of
receipt of information relating to such exercised Warrants from the Company or
the Warrant Agent in the form attached hereto as Exhibit B, stating that:
(1) the Warrants exercised were not held in a discretionary
account;
(2) VTR or the member of the NASD which solicited the
exercise of Warrants did not, (unless granted an exemption by the Securities and
Exchange Commission from the provisions thereof), within the applicable number
of business days under Regulation M immediately preceding the date of exercise
of the Warrant bid for or purchase the Common Stock of the Company or any
securities of the Company immediately convertible into or exchangeable for the
Common Stock (including the Warrants) or otherwise engage in any activity that
would be prohibited by Regulation M under the Securities Exchange Act of 1934,
as amended, with one engaged in a distribution of the Company's securities; and
(3) in connection with the solicitation, it disclosed the
compensation it would receive upon exercise of the Warrant.
Section 4. PAYMENT OF THE EXERCISE FEE. The Company hereby agrees to pay
over to VTR within two (2) business days after receipt by the Company of the
certificate described in Section 3(d) above, the Exercise Fee out of the
proceeds it received from the
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<PAGE>
applicable Exercise Price paid for the Warrants to which the certificate
relates.
Section 5. INSPECTION OF RECORDS. VTR may at any time during business
hours, at its expense, examine the records of the Company and the Warrant Agent
which relate to the exercise of the Warrants.
Section 6. TERMINATION. VTR shall be entitled to terminate this
Agreement prior to the exercise of all Warrants at any time upon five (5)
business days' prior notice to the Company and the Warrant Agent.
Notwithstanding any such termination notice, VTR shall be entitled to receive an
Exercise Fee for the exercise of any Warrant for which it has already delivered
to the Company prior to any such termination the certificate required by Section
3(d) of this Agreement.
Section 7. NOTICES. Any notice or other communication required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed sufficiently given if sent by first class certified mail, return
receipt requested, postage prepaid, addressed as follows: if to the Company at
4450 Belden Village Street, N.W., Suite 406, Canton, OH 44718, copy to Michael
T. Greif, Esq., Hornsby, Sacher, Zelman, Stanton, Paul & Beiley, P.A., 1401
Brickell Avenue, Suite 700, Miami, FL 33131; if to VTR at 99 Wall Street, New
York, NY 10005; and if to the Warrant Agent at American Transfer & Trust
Company, 40 Wall Street, New York, New York 10005 or such other address as such
party shall have given notice to other parties hereto in accordance with this
Section. All such notices or other communications shall be deemed given three
(3) business days after mailing, as aforesaid.
Section 8. SUPPLEMENTS AND AMENDMENTS. The Company, the Warrant Agent
and VTR may from time-to-time supplement or amend this Agreement by a written
instrument signed by the party to be charged, without the approval of any
holders of Warrants in order to cure any ambiguity or to correct or supplement
any provisions contained herein or to make any other provisions in regard to
matters or questions arising hereunder which the Company, the Warrant Agent and
VTR may deem necessary or desirable and which do not adversely affect the
interests of the holders of Warrants.
Section 9. ASSIGNMENT. This Agreement may not be assigned by any party
without the express written approval of all other parties, except that VTR may
assign this Agreement to its successors.
Section 10. GOVERNING LAW. This Agreement will be deemed made under the
laws of the State of New York with respect to matters of contract law and for
all purposes shall be governed by and construed in accordance with the internal
laws of said State, without regard to the conflicts of laws provisions thereof.
Section 11. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give any person or corporation
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<PAGE>
other than the Company, the Warrant Agent and VTR any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the sole
and exclusive benefit of, and be binding upon, the Company, the Warrant Agent
and VTR and their respective successors and permitted assigns.
Section 12. DESCRIPTIVE HEADINGS. The descriptive headings of the
sections of this Agreement are inserted for convenience only and shall not
control or affect the meanings or construction of any of the provisions hereof.
Section 13. SUPERSEDING AGREEMENT. This Agreement supersedes any and all
prior agreements between the parties with respect to the subject matter hereof.
Section 14. EXCLUSIVE AGREEMENT. It is understood that this agreement is
on an exclusive basis to solicit the exercise of the Warrants and that the
Company may not engage other broker-dealers to solicit the exercise of Warrants
without the consent of VTR.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
KIDS STUFF, INC.
By:_______________________________________
VTR CAPITAL, INC.
By:_______________________________________
AMERICAN STOCK TRANSFER & TRUST CO.
By:_______________________________________
4
<PAGE>
CERTIFICATE
The undersigned, being the ________________ of VTR Capital, Inc. ("VTR")
pursuant to Section 3(d) of the Warrant Exercise Fee Agreement relating to the
exercise of Warrants dated ____________, 1997 between Kids Stuff, Inc. (the
"Company") and American Stock Transfer & Trust Co. (the "Warrant Agent") hereby
certifies that:
1. The Company or the Warrant Agent has notified VTR that ______________
Warrants (as defined in the Agreement) have been exercised during _____________,
199___.
2. The exercise of ______________ of such Warrants was solicited by
VTR.
3. Such Warrants were not held in a discretionary account.
4. ______________ did not, within _____ business days immediately
preceding _______________ 199___, bid for or purchase the Common Stock of the
Company or any securities of the Company immediately convertible into or
exchangeable for the Common Stock (including Warrants) or otherwise engage in
any activity that would be prohibited by Regulation M under the Securities
Exchange Act of 1934, as amended, to one engaged in a distribution of the
Company's securities.
5. In connection with the solicitation of the exercise of the
Warrants, _____________ disclosed the compensation it will receive to holders
of the Warrants.
DATED: __________________, 199___
VTR CAPITAL, INC.
By:_______________________________________
5
EXHIBIT 4.03
WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of _______ 1997, by and between
KIDS STUFF, INC., a Delaware corporation ("Company"), and American Stock
Transfer & Trust Company, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with the offering of up to 287,500 Units
("Units"), each Unit consisting of two (2) shares of Common Stock, $.001 par
value per share, and one (1) Class A Redeemable Common Stock Purchase Warrant
(the "Class A Warrant" or the "Warrant") pursuant to an Underwriting Agreement
(the "Underwriting Agreement") dated _______, 1997 between the Company and VTR
Capital, Inc. ("VTR"), and the issuance to VTR or its designees of a Unit
Purchase Option to purchase 25,000 additional Units (the "Unit Purchase Option")
and the offering of 1,500,000 warrants for resale by certain warrant holders(the
"Warrant Holders"), the Company will issue up to 1,812,500 Warrants;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
1. DEFINITIONS. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the Company of
which at the date hereof consists of 35,000,000 authorized shares, $.001 par
value, and shall also include any capital stock of any class of the Company
thereafter authorized which shall not be limited to a fixed sum or percentage in
respect to the rights of the holders thereof to participate in dividends and in
the distribution of assets upon the voluntary liquidation, dissolution or
winding up of the Company; provided, however, that
<PAGE>
the shares issuable upon exercise of the Warrants shall include (i) only shares
of such class designated in the Company's Certificate of Incorporation as Common
Stock on the date of the original issue of the Warrants, or (ii) in the case of
any reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section; or (iii) in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or a change in par value,
or from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located at the date hereof at 40 Wall Street,
New York, NY 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder (as defined below) thereof or his attorney duly authorized in
writing, and (b) payment in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price (as defined below).
(d) "Initial Warrant Exercise Date" shall mean _______
__, 1998.
(e) "Purchase Price" shall mean the purchase price per share to
be paid upon exercise of each Warrant in accordance with the terms hereof, which
price shall be $5.00 per share for the Warrants, subject to adjustment from time
to time pursuant to the provisions of Section 9 hereof, and subject to the
Company's right, in its sole discretion, upon thirty (30) days' written notice,
to reduce the Purchase Price upon notice to all warrantholders.
(f) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $0.05 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of
any particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
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<PAGE>
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on _________ __, 2002 or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of New York
be a holiday or a day on which banks are authorized or required to close, then
5:00 P.M. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized or required to
close. Upon thirty (30) days' written notice to all warrantholders, the Company
shall have the right to extend the warrant expiration date.
2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Warrant initially shall entitle the Registered Holder of
the Warrant representing such Warrant to purchase one share of Common Stock upon
the exercise thereof, in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold shall be executed by the Company and
delivered to the Warrant Agent. Upon written order of the Company signed by its
Chief Executive Officer or an Executive Vice President and by its Secretary or
an Assistant Secretary, the Warrant Certificates shall be countersigned, issued,
and delivered by the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 1,812,500 shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants represented by any Warrant Certificate,
to evidence any unexercised warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; and (vii) those issued at the option of the
Company, in such form as may be approved by the its Board of Directors, to
reflect any adjustment or change in the Purchase Price, the number of shares of
Common Stock
3
<PAGE>
purchasable upon exercise of the Warrants or the Redemption Price therefor made
pursuant to Section 9 hereof.
3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Class A Warrant Certificates shall be substantially in
the forms annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage or to the requirements of Section
2(b). The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen or destroyed Warrant Certificates) and issued in registered form.
Class A Warrant Certificates shall be numbered serially with the letters WA.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chief Executive Officer, or any Executive Vice President and by
its Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4 hereof.
4. EXERCISE. Each Warrant may be exercised by the Registered Holder
thereof at any time on or after the Initial Warrant Exercise Date, but not after
the Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the holder of those
securities upon the exercise of the
4
<PAGE>
Warrant as of the close of business on the Exercise Date. As soon as practicable
on or after the Exercise Date, the Warrant Agent shall deposit the proceeds
received from the exercise of a Warrant and shall notify the Company in writing
of the exercise of the Warrants. Promptly following, and in any event within
five (5) business days after the date of such notice from the Warrant Agent, the
Warrant Agent, on behalf of the Company, shall cause to be issued and delivered
by the Transfer Agent, to the person or persons entitled to receive the same, a
certificate or certificates for the securities deliverable upon such exercise
(plus a certificate for any remaining unexercised Warrants of the Registered
Holder), unless prior to the date of issuance of such certificates the Company
shall instruct the Warrant Agent to refrain from causing such issuance of
certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Upon the exercise of any Warrant and clearance
of the funds received, the Warrant Agent shall promptly remit the payment
received for the Warrant (the "Warrant Proceeds") to the Company or as the
Company may direct in writing.
5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES, ETC.
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon exercise of Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable and free from all taxes, liens and charges with
respect to the issue thereof (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Common Stock
of the Company are then listed or eligible for inclusion.
(b) The Company covenants that if any securities to be reserved
for the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will, to the extent the Purchase Price is less than the Market Price (as
hereinafter defined), in good faith and as expeditiously as reasonably possible,
endeavor to secure such registration or approval and will use its reasonable
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws. With respect to any such securities, however, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
5
<PAGE>
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Warrants, or the issuance, or delivery of any shares upon
exercise of the Warrants; provided, however, that if the shares of Common Stock
are to be delivered in a name other than the name of the Registered Holder of
the Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized for such
time as it is acting as such to requisition the Company's Transfer Agent from
time to time for certificates representing shares of Common Stock issuable upon
exercise of the Warrants, and the Company will authorize the Transfer Agent to
comply with all such proper requisitions. The Company will file with the Warrant
Agent a statement setting forth the name and address of the Transfer Agent of
the Company for shares of Common Stock issuable upon exercise of the Warrants.
6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form
on the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such
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holder of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement or resignation as Warrant Agent, or disposed of or destroyed,
at the direction of the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary. The Warrants which are being publicly offered in Units
with shares of Common Stock pursuant to the Underwriting Agreement will be
immediately detachable from the Common Stock and transferable separately
therefrom.
7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent
of evidence satisfactory to them of the ownership of and loss, theft,
destruction or mutilation of any Warrant Certificate and (in case of loss, theft
or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
8. REDEMPTION.
(a) Subject to the provision of paragraph 2(e) hereof, on not
less than thirty (30) days' notice given at any time after the Initial Warrant
Exercise Date, the Warrants may be redeemed, at the option of the Company, at a
redemption price of $0.05 per Warrant, provided the market price, as hereinafter
defined, of the Common Stock, equals or exceeds $14.40 per share (the "Class A
Target Price"), subject to adjustment as set forth in Section 8(f) below. Market
Price for the purpose of this Section 8 shall mean (i) the average closing bid
price for any twenty (20) consecutive trading days within a period of thirty
(30) consecutive trading days ending within five (5) days prior to the date of
the notice of redemption, which notice shall be mailed no later than five (5)
days thereafter, of the Common Stock as reported by the National
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Association of Securities Dealers, Inc. Automatic Quotation System or OTC
Bulletin Board, or(ii) the last reported sale price, for twenty (20) consecutive
trading days within a period of thirty (30) consecutive trading days ending
within five (5) days of the date of the notice of redemption, which notice shall
be mailed no later than five (5) days thereafter, on the primary exchange on
which the Common Stock is traded, if the Common Stock is traded on a national
securities exchange.
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall mail a
notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at their last address as shall appear on the
records maintained pursuant to Section 6(b). Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given whether
or not the Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrant shall be the Redemption Date. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective and then only to the extent that the Registered Holder is prejudiced
thereby. An affidavit of the Warrant Agent or of the Secretary or an Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M.
(New York time) on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, Registered Holders of the Warrants shall have
no further rights except to receive, upon surrender of the Warrant, the
Redemption Price.
(e) From and after the Redemption Date specified for, the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants
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called for redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the redemption price, shall cease.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Class A
Target Price shall be proportionally adjusted by the ratio which the total
number of shares of Common Stock outstanding immediately prior to such event
bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF
COMMON STOCK OR WARRANTS.
(a) Subject to the exceptions referred to in Section 9(g) below,
in the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price of the Common Stock (as defined in Section 8) on the date of
the sale or issue any shares of Common Stock as a stock dividend to the holders
of Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price in effect immediately
prior to such Change of Shares shall be changed to a price (including any
applicable fraction of a cent) determined by multiplying the Purchase Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in subsection
9(f) below) for the issuance of such additional shares would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
Upon each adjustment of the Purchase Price pursuant
to this Section 9, the total number of shares of Common Stock purchasable upon
the exercise of each Warrant shall (subject to the provisions contained in
Section 9(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price in effect immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the
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Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu
of the adjustment in the number of shares of Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Common Stock. Each Warrant held of record prior to such adjustment of
the number of Warrants shall become that number of Warrants (calculated to the
nearest tenth) determined by multiplying the number one by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10 hereof, the number of additional Warrants to which such
Holder shall be entitled as a result of such adjustment or, at the option of the
Company, cause to be distributed to such Holder in substitution and replacement
for the Warrant Certificates held by him prior to the date of adjustment (and
upon surrender thereof, if required by the Company) new Warrant Certificates
evidencing the number of Warrants to which such Holder shall be entitled after
such adjustment.
(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or
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<PAGE>
entity shall assume, by written instrument executed and delivered to the Warrant
Agent, the obligation to deliver to the holder of each Warrant such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holders may be entitled to purchase and the other obligations under this
Agreement. The foregoing provisions shall similarly apply to successive
reclassification, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder and the Redemption Price
therefor as the Purchase Price per share, the number of shares purchasable and
the Redemption Price therefor were expressed in the Warrant Certificates when
the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
President or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such certificate with the Warrant Agent and cause a brief summary thereof
to be sent by ordinary first class mail to VTR and to each registered holder of
Warrants at his last address as it shall appear on the registry books of the
Warrant Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the holder to
whom the Company failed to mail such notice, or except as to the holder
whose notice was defective. The affidavit of an officer of the Warrant Agent or
the Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock
outstanding at any given time shall include shares of Common Stock owned or held
by or for the account of the Company and the sale or issuance of such treasury
shares or the distribution of any such
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<PAGE>
treasury shares shall not be considered a Change of Shares for purposes of said
sections.
(ii) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or decrease of at least
$.10 in such price; provided that any adjustments which by reason of this
subsection (ii) are not required to be made shall be carried forward and shall
be made at the time of and together with the next subsequent adjustment which,
together with any adjustment(s) so carried forward, shall require an increase or
decrease of at least $.10 in the Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for
cash of any rights or warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or any securities convertible into or exchangeable
for Common Stock without the payment of any further consideration other than
cash, if any (such convertible or exchangeable securities being herein called
"Convertible Securities"), or (2) the issuance by the Company, without the
receipt by the Company of any consideration therefor, of any rights or warrants
to subscribe for or purchase, or any options for the purchase of, Common Stock
or Convertible Securities, in each case, if (and only if) the consideration
payable to the Company upon the exercise of such rights, warrants, or options
shall consist of cash, whether or not such rights, warrants or options, or the
right to convert or exchange such Convertible Securities, are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such rights, warrants or options or upon the conversion or exchange
of such Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants
or options, plus the consideration received by the Company for the issuance or
sale of such rights, warrants or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of such
rights, warrants or options) is less than the fair market value of the Common
Stock on the date of the issuance or sale of such rights, warrants or options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such rights, warrants or options or upon the conversion or exchange
of such Convertible Securities (as of the date of the issuance or sale of such
rights, warrants or options) shall be deemed to be outstanding shares of Common
Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have
been sold for cash in an amount equal to such price per share.
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<PAGE>
(iv) In case of the sale by the Company for cash
of any Convertible Securities, whether or not the right of conversion or
exchange thereunder is immediately exercisable, and the price per share for
which Common Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the total amount of
consideration received by the Company for the sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, other than such Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of such Convertible Securities) is less
than the fair market value of the Common Stock on the date of the sale of such
Convertible Securities, then the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of such Convertible Securities (as of
the date of the sale of such Convertible Securities) shall be deemed to be
outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof
and shall be deemed to have been sold for cash in an amount equal to such price
per share.
(v) In case the Company shall modify the rights
of conversion, exchange or exercise of any of the securities referred to in
subsection (iii) above or any other securities of the Company convertible,
exchangeable, or exercisable for shares of Common Stock, for any reason other
than an event that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is less
than the market price on the date prior to such modification, the Purchase Price
to be in effect after such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Common Stock outstanding
multiplied by the market price on the date prior to the modification plus the
number of shares of Common Stock which the aggregate consideration receivable by
the Company for the securities affected by the modification would purchase at
the market price and of which the denominator shall be the number of shares of
Common Stock outstanding on such date plus the number of shares of Common Stock
to be issued upon conversion, exchange, or exercise of the modified securities
at the modified rate. Such adjustment shall become effective as of the date upon
which such modification shall take effect.
(vi) On the expiration of any such right, warrant
or option or the termination of any such right to convert or exchange any such
Convertible Securities, the Purchase Price then in effect hereunder shall
forthwith be readjusted to such Purchase Price as would have obtained (a) had
the adjustments made upon the issuance or sale of such rights, warrants, options
or Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually delivered
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<PAGE>
(and the total consideration received therefor) upon the exercise of such
rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities and (b) had adjustments been made on the basis of the
Purchase Price as adjusted under clause (a) for all transactions (which would
have affected such adjusted Purchase Price) made after the issuance or sale of
such rights, warrants, options or Convertible Securities.
(vii) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefor shall be deemed
to be the gross sales price therefor without deducting therefrom any expense
paid or incurred by the Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
(i) upon the sale or exercise of the Warrants,
including without limitation, the sale or exercise of any of the
Warrants or Common Stock comprising the Purchase Option; or
(ii) upon the sale of any shares of Common Stock
in the Company's initial public offering, including, without limitation, shares
sold upon the exercise of any over-allotment option granted to the Underwriters
in connection with such offering; or
(iii) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants or options were outstanding on
the date of the original sale of the Warrants or were thereafter issued or sold;
or
(iv) upon the issuance or sale of Common Stock
upon conversion or exchange of any Convertible Securities, whether or not any
adjustment in the Purchase Price was made or required to be made upon the
issuance or sale of such Convertible Securities and whether or not such
Convertible Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(v) upon the issuance or sale of Common Stock or
Convertible Securities in an exempt transaction unless the issuance or sale
price is less than 50% of the fair market value of the Common Stock on the date
of issuance, in which case the adjustment shall only be for the difference
between 50% of the fair market value and the issue or sale price; or
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<PAGE>
(vi) upon the issuance or sale of Common Stock or
Convertible Securities to shareholders of any corporation which merges and/or
consolidates into or is acquired by the Company or from which the Company
acquires assets and some or all of the consideration consists of equity
securities of the Company, in proportion to their stock holdings of such
corporation immediately prior to the acquisition but only if no adjustment is
required pursuant to any other provision of this Section 9.
(vii) upon the issuance or exercise of options or
upon the issuance or grant of stock awards granted to the Company's directors,
employees or consultants under a plan or plans adopted by the Company's Board of
Directors and approved by its stockholders (but only to the extent that the
aggregate number of shares excluded hereby and issued after the date hereof
shall not exceed ten percent (10%) of the Company's Common Stock at the time of
issuance). For the purposes of determining whether the consideration received by
the Company is less than the Market Price in connection with any issuance of
stock to the Company's directors, employees or consultants under plans adopted
by the Company's Board of Directors and approved by its stockholders, the
consideration received shall be deemed to be the amount of compensation to the
director, employee or consultant reported by the Company in connection with such
issuances.
(viii) upon the issuance of Common Stock to the
Company's directors, employees or consultants under a plan or plans which are
qualified under the Internal Revenue Code; or
(ix) upon the issuance of Common Stock in a bona
fide public offering pursuant to a firm commitment underwriting.
(h) As used in this Section 9, the term "Common Stock" shall mean
and include the Company's Common Stock authorized on the date of the original
issue of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include (i) only shares of such
class designated in the Company's Certificate of Incorporation as Common Stock
on the date of the original issue of the Units or (ii) in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
provided for in such section or (iii) in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or a change in par value,
or from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
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(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of
Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. In such event, the Company may at its option elect to round
up the number of shares to which the Holder is entitled to the nearest whole
share or to pay cash in respect of fractional shares in accordance with the
following: With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the NASDAQ Quotation System, the current value shall be
the last reported sale price of the Common Stock on such exchange on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average of the closing bid and asked prices for such day
on such exchange; or
(ii) If the Common Stock is not listed or admitted
to unlisted trading privileges, the current value shall be the mean
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<PAGE>
of the last reported bid and asked prices reported by the National Quotation
Bureau, Inc. on the last business day prior to the date of the exercise of this
Warrant; or
(iii) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors of the Company.
11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants
shall, as such, be entitled to vote or to receive dividends or be deemed the
holder of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained herein be
construed to confer upon the holder of Warrants, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
Holder shall have exercised such Warrants and been issued shares of Common Stock
in accordance with the provisions hereof.
12. RIGHTS OF ACTION. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificate and
this Agreement.
13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant,
by his acceptance thereof, consents and agrees with the Company, the Warrant
Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of
the Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Warrant Agent, duly endorsed
or accompanied by a proper instrument of transfer satisfactory to the Warrant
Agent and the Company in their mutual discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the
person in whose name the Warrant Certificate is registered as the holder and as
the absolute, true and lawful owner of the
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Warrants represented thereby for all purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice or knowledge to the contrary,
except as otherwise expressly provided in Section 7 hereof.
14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase
or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and canceled by it and retired. The Warrant Agent shall also cancel Common
Stock following exercise of any or all of the Warrants represented thereby or
delivered to it for transfer, split up, combination or exchange.
15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts hereunder as
agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value or authorization of
the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered or omitted by it in reliance on any warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
its President, any Vice President, its
18
<PAGE>
Secretary, or Assistant Secretary, (unless other evidence in respect thereof is
herein specifically prescribed). The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand reasonably believed
by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after giving
thirty (30) days' prior written notice to the Company. At least fifteen (15)
days prior to the date such resignation is to become effective, the Warrant
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of fifteen (15) days
after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may apply
to any court of competent jurisdiction in the State of New York for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new
19
<PAGE>
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not the Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company if so authorized by the Company or for any other legal
entity.
16. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; PROVIDED,
HOWEVER, that this Agreement shall not otherwise be modified, supplemented or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than fifty percent (50%)
of the Warrants then outstanding; and PROVIDED, FURTHER, that no change in the
number or nature of the securities purchasable upon the exercise of any Warrant,
or the Purchase Price therefor, or the acceleration of the Warrant Expiration
Date, shall be made without the consent in writing of the Registered Holder of
the Warrant Certificate representing such Warrant, other than such changes as
are specifically prescribed by this Agreement as originally executed or are made
in compliance with applicable law.
17. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Registered Holder of a Warrant Certificate, at the address of
such holder as shown on the registry books maintained by the Warrant Agent; if
to the Company,4450 Belden Village Street, N.W., Suite 406, Canton, OH 44718 or
at such other address as may have been furnished to the Warrant Agent in writing
by the Company; and if to the Warrant Agent, at its corporate office.
20
<PAGE>
18. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
19. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the Company and the Warrant Agent, and their respective
successors and assigns, and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
20. TERMINATION. This Agreement shall terminate at the close of business
on the Warrant Expiration Date of all the Warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
21. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
KIDS STUFF, INC.
By: ______________________________
Its
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: ______________________________
Its
Authorized Officer
22
<PAGE>
EXHIBIT A
[Form of Face of Class A Warrant Certificate]
No. WA Class A Warrants
VOID AFTER __________, 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
KIDS STUFF, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, $.001 par value ("Common Stock"), of KIDS STUFF, INC., a Delaware
corporation (the "Company"), at any time after ______, 1998 and the Expiration
Date (as hereinafter defined), upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer and Trust Company,
as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment
of $5.00, times the number of warrants exercised (the "Purchase Price"), in
lawful money of the United States of America in cash or by official bank or
certified check made payable to Kids Stuff, Inc.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated _____, 1997, by
and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
_______, 2002, or such earlier date as the Warrants shall be redeemed. If such
date shall in the State of New York be a holiday or a day on which the banks are
authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) the next following day which in the State of New York is not a holiday or
a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding and the exercise price of the Warrants is less than the
market price of the Common Stock. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant, at any time after one (1) year from the
Effective Date, provided the Market Price (as defined in the Warrant Agreement)
for the Common Stock issuable upon exercise of such Warrant shall equal or
exceed $14.40 per share. Notice of redemption shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.05 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented
2
<PAGE>
hereby (notwithstanding any notations of ownership or writing hereon made by
anyone other than a duly authorized officer of the Company or the Warrant Agent)
for all purposes and shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
KIDS STUFF, INC.
By: ______________________________
Its
Date: ______________________________
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
- ---------------------------------------
as Warrant Agent
By: ______________________________
Its
Authorized Officer
4
<PAGE>
[Form of Reverse of Class A Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
--------------------------------------------
(please insert taxpayer identification or other identifying number)
and be delivered to
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
--------------------------------------------
--------------------------------------------
--------------------------------------------
(Address)
---------------------------------
(Date)
---------------------------------
(Taxpayer Identification Number)
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
<PAGE>
--------------------------------------------
(please insert taxpayer identification or other identifying number)
--------------------------------------------
--------------------------------------------
--------------------------------------------
--------------------------------------------
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _________________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
---------------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
2
EXHIBIT 4.04
VOID AFTER , 2002
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
NUMBER CLASS A WARRANTS
WA KIDS STUFF, INC.
CUSIP 49380U 11 8
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, $.001 par value ("Common Stock"), of KIDS STUFF, INC., a Delaware
corporation (the "Company"), at any time after _________________, 1998 and the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer and Trust Company,
as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment
of $5.00, times the number of warrants exercised (the "Purchase Price"), in
lawful money of the United States of America in cash or by official bank or
certified check made payable to Kids Stuff, Inc.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated ________________,
1997, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and/or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modifications or adjustment.
Each warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
____________, 2002, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding and the exercise price of the Warrants is less than the
market price of the Common Stock. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.05 per Warrant, at any time after one (1) year from the Effective
Date, provided the Market Price (as defined in the Warrant Agreement) for the
Common Stock issuable upon exercise of such Warrant shall equal or exceed $14.40
per share. Notice of redemption shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.05 per Warrant upon
surrender of this Certicate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Date:
KIDS STUFF, INC
CORPORATE SEAL
DELAWARE 1996
EXECUTIVE VICE PRESIDENT CHIEF EXECUTIVE OFFICER
[LANDSCAPED]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
AS WARRANT AGENT
By
AUTHORIZED OFFICER
(SEE REVERSE SIDE)
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
________________________ Warrants represented by this Warrant Certificate, and
to purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
---------------------------------------------------------
(please insert taxpayer identification
or other identyifying number
and be delivered to
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warrants be registered in the name of; and delivered to, the Registered
Holder at the address stated below.
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
(Address)
---------------------------------------------------------
(Date)
---------------------------------------------------------
(Taxpayer Identification Number)
SIGNATURE GUARANTEED
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns and transfer unto
---------------------------------------------------------
(please insert taxpayer identification
or other identyifying number
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints
- ---------------------------------------------------------------------Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution in the premises.
---------------------------------------------------------
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THIS ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST
BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
EXHIBIT 4.05
Option to Purchase
25,000 Units
KIDS STUFF, INC.
UNIT PURCHASE OPTION
Dated: , 1997
THIS CERTIFIES that ________________ (hereinafter sometimes referred to
as the "Holder"), is entitled to purchase from KIDS STUFF, INC., a Delaware
corporation (hereinafter referred to as the "Company"), at the prices and during
the periods as hereinafter specified, up to 25,000 Units ("Units") consisting of
the Company's Common Stock and Warrants to purchase the Company's Common Stock.
Each Unit consists of two (2) shares of the Company's Common Stock, $.001 par
value, as now constituted ("Common Stock"),and one (1) Class A Redeemable Common
Stock Purchase Warrant to purchase one (1) share of Common Stock as now
constituted at an exercise price of $5.00 per share ("Class A Warrants" or
"Warrants"). The Class A Warrants are exercisable until ______________, 2002.
The Units have been registered under a Registration Statement on Form
SB-2 (File No. 333-19423) declared effective by the Securities and Exchange
Commission on __________, 1997 (the "Registration Statement"). This Option (the
"Option") to purchase 25,000 Units (the "Option Units") was originally issued
pursuant to an underwriting agreement between the Company and VTR Capital, Inc.,
as Representative of the Underwriters (the "Representative"), in connection with
a public offering of up to 287,500 Units (the "Public Units") through the
Underwriter, in consideration of $.001 per Option Unit.
Except as specifically otherwise provided herein, the Common Stock and
the Warrants issued pursuant to this Option shall bear the same terms and
conditions as described under the caption "Description of Securities" in the
Registration Statement, and the Warrants shall be governed by the terms of the
Warrant Agreement dated as of ______________, 1997 executed in connection with
such public offering (the "Warrant Agreement"), and except that (i) the holder
shall have registration rights under the Securities Act of 1933, as amended (the
"Act"), for the Option, the Common Stock and the Warrants included in the Units,
and the shares of Common Stock underlying the Warrants, as more fully described
in paragraph 6 of this Option, and (ii) the exercise price for the Class A
Warrants included in this Option are $5.00. In the event of any reduction of the
exercise price of the Warrants included in the Public Units,
<PAGE>
the same changes to the Warrants included in the Option Units shall be
simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option, and
during the periods as follows:
(a) Between _____________, 1998 and ____________, 2002,
inclusive, the Holder shall have the option to purchase Units hereunder at a
price of $14.40 per Unit (subject to adjustment pursuant to paragraph 8 hereof)
(the "Exercise Price").
(b) After _____________, 2002 (five (5) years from the Effective
Date), the Holder shall have no right to purchase any Units hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the Exercise Price then in effect for the number of Units specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any; and (iii) delivery to the Company of a duly executed agreement signed by
the person(s)' designated in the purchase form to the effect that such person(s)
agree(s) to be bound by the provisions of paragraph 6 and subparagraphs (b), (c)
and (d) of paragraph 7 hereof. This Option shall be deemed to have been
exercised, in whole or in part to the extent specified, immediately prior to the
close of business on the date this Option is surrendered and payment is made in
accordance with the foregoing provisions of this paragraph 2, and the person or
persons in whose name or names the certificates for shares of Common Stock and
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Common Stock and Warrants at that time and date. The Common
Stock and Warrants and the certificates for the Common Stock and Warrants so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) days, after the rights represented by this Option shall have
been so exercised.
3. For a period of one (1) year from the Effective Date, this Option
shall not be transferred, sold, assigned, or hypothecated, except that it may be
transferred to successors of the Holder, and may be assigned in whole or in part
to any person who is an officer of the Holder during such period. Any such
assignment shall be effected by the Holder (i) executing the form of assignment
at the end hereof and (ii) surrendering this Option for cancellation at the
office or agency of the Company referred to in paragraph 2 hereof, accompanied
by a certificate (signed by an
2
<PAGE>
officer of the Holder if the Holder is a corporation), stating that each
transferee is a permitted transferee under this paragraph 3 hereof; whereupon
the Company shall issue, in the name or names specified by the Holder
(including the Holder) a new Option or Options of like tenor and representing in
the aggregate rights to purchase the same number of Units as are purchasable
hereunder.
4. The Company covenants and agrees that all shares of Common Stock
which may be issued as part of the Units purchased hereunder and the Common
Stock which may be issued upon exercise of the Warrants will, upon issuance, be
duly and validly issued, fully paid and nonassessable, and no personal liability
will attach to the holder thereof. The Company further covenants and agrees that
during the periods within which this Option may be exercised, the Company will
at all times have authorized and reserved a sufficient number of shares of its
Common Stock to provide for the exercise of this Option and that it will have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Units.
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
6. (a) During the period set forth in paragraph l(a) hereof, the Company
shall advise the Holder or its transferee, whether the Holder holds the Option
or has exercised the Option and holds Units or any of the securities underlying
the Units, by written notice at least 30 days prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Act
covering any securities of the Company, for its own account or for the account
of others (other than a registration statement on Form S-4 or S-8 or any
successor forms thereto), and will for a period of seven (7) years from the
effective date of the Registration Statement, upon the request of the Holder,
include in any such post-effective amendment or registration statement, such
information as may be required to permit a public offering of the Option, all or
any of the Units underlying the Option, the Common Stock, or Warrants included
in the Units or the Common Stock issuable upon the exercise of the Warrants (the
"Registrable Securities"). The Company shall supply prospectuses and such other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Registrable Securities, use its reasonable efforts to
register and qualify any of the Registrable Securities for sale in such states
as such Holder designates provided that the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or execute a general
consent to service of process in any jurisdiction in any action and do any and
all other acts and things which may be reasonably necessary or desirable to
enable such Holders to consummate the public sale or other disposition of the
Registrable Securities, and furnish indemnification in the manner provided in
paragraph 7 hereof. The Holder shall furnish information and indemnification as
set forth in paragraph 7 except that the maximum
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<PAGE>
amount which may be recovered from the Holder shall be limited to the amount of
proceeds received by the Holder from the sale of the Registrable Securities. The
Company shall use its best efforts to cause the managing underwriter or
underwriters of a proposed underwritten offering to permit the holders of
Registrable Securities requested to be included in the registration to include
such securities in such underwritten offering on the same terms and conditions
as any similar securities of the Company included therein. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering advises
the holders of Registrable Securities that the total amount of securities which
they intend to include in such offering is such as to materially and adversely
affect the success of such offering, then the amount of securities to be offered
for the accounts of holders of Registrable Securities shall be eliminated,
reduced, or limited to the extent necessary to reduce the total amount of
securities to be included in such offering to the amount, if any, recommended by
such managing underwriter or underwriters (any such reduction or limitation in
the total amount of Registrable Securities to be included in such offering to be
borne by the holders of Registrable Securities proposed to be included therein
pro rata). The Holder will pay its own legal fees and expenses and any
underwriting discounts and commissions on the securities sold by such Holder and
shall not be responsible for any other expenses of such registration.
(b) If any 50% holder (as defined below) shall give notice to the
Company at any time during the period set forth in paragraph l(a) hereof to the
effect that such holder desires to register under the Act this Option, the
Units, or any of the underlying securities contained in the Units underlying the
Option under such circumstances that a public distribution (within the meaning
of the Act) of any such securities will be involved, then the Company will
promptly, but no later than 45 days after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, to the end that the Option, the
Units and/or any of the securities underlying the Units may be publicly sold
under the Act as promptly as practicable thereafter and the Company will use its
best efforts to cause such registration to become and remain effective for a
period of 120 days (including the taking of such steps as are reasonably
necessary to obtain the removal of any stop order); provided that such holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request in writing. The 50% holder (which for
purposes hereof shall mean any direct or indirect transferee of such holder)
may, at its option, request the filing of a post-effective amendment to the
current Registration Statement or a new registration statement under the Act
with respect to the Registrable Securities on only one occasion during the term
of this Option. The Holder may at its option request the registration of the
Option and/or any of the securities underlying the Option in a registration
statement made by the Company as contemplated by Section 6(a) or in connection
with a request made pursuant to this
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Section 6(b) prior to acquisition of the Units issuable upon exercise of
the Option and even though the Holder has not given notice of exercise of the
Option. The 50% holder may, at its option, request such post-effective amendment
or new registration statement during the described period with respect to the
Option, the Units as a unit, or separately as to the Common Stock and/or
Warrants included in the Units and/or the Common Stock issuable upon the
exercise of the Warrants, and such registration rights may be exercised by the
50% holder prior to or subsequent to the exercise of the Option. Within ten
business days after receiving any such notice pursuant to this subsection (b) of
paragraph 6, the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities underlying
the Options of the other holders. Each holder electing to include its
Registrable Securities in any such offering shall provide written notice to the
Company within twenty (20) days after receipt of notice from the Company. The
failure to provide such notice to the Company shall be deemed conclusive
evidence of such holder's election not to include its Registrable Securities in
such offering. Each holder electing to include its Registrable Securities shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the first such
post-effective amendment or new registration statement shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them.
In addition to the rights granted to 50% holders pursuant to this
section 6(b), any holder(s) shall have such rights, however, all expenses shall
be borne by such holder(s).
The Company shall be entitled to postpone the filing of any
registration statement pursuant to this Section 6(b) otherwise required
to be prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Regulation M under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing that such a registration
statement would have a material adverse effect on the consummation of such
offering or (iv) the Company is subject to an underwriter's lock-up as a result
of an underwritten public offering and such underwriter has refused in writing,
the Company's request to waive such lock-up. In the event of such postponement,
the Company shall be required to file the registration statement pursuant to
this Section 6(b), within 60 days of the consummation of the event requiring
such postponement.
The Company will use its best efforts to maintain such
registration statement or post-effective amendment current
5
<PAGE>
under the Act for a period of at least six months (and for up to an additional
three months if requested by the Holder) from the effective date thereof. The
Company shall supply prospectuses, and such other documents as the Holder may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities, use its best efforts to register and qualify any
of the Registrable Securities for sale in such states as such holder designates,
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action and furnish indemnification in the
manner provided in paragraph 7 hereof. The demand registration rights granted
hereunder will expire no later than five (5) years from the effective date of
this offering.
(c) The term "50% holder" as used in this paragraph 6 shall mean
the holder of more than 50% of the Common Stock and the Warrants underlying the
Option (considered in the aggregate) and shall include any owner or combination
of owners of such securities, which ownership shall be calculated by determining
the number of shares of Common Stock held by such owner or owners as well as the
number of shares then issuable upon exercise of the Warrants.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares or warrants issued or issuable upon the
exercise of any Options, is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the securities covered
by such registration statement, amendment, or supplement (such holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter,
against any losses, claims, damages, or liabilities, joint or several, to which
the Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) which arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any such registration statement or any preliminary prospectus
or final prospectus constituting a part thereof or any amendment or supplement
thereto, or which arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and will reimburse the Distributing Holder and each such
controlling person and underwriter for any legal or other expenses reasonably
incurred by the Distributing Holder or such controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged
6
<PAGE>
untrue statement or omission or alleged omission made in said registration
statement, said preliminary prospectus, said final prospectus, or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder or any other Distributing Holder, for use
in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in said registration statement, said preliminary prospectus,
said final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer, or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 7.
(d) In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
7
<PAGE>
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Notwithstanding anything to the contrary contained in the
Warrant Agreement, in the event an adjustment to the Exercise Price is effected
pursuant to this Subsection (a) (and a corresponding adjustment to the number of
Option Units is made pursuant to Subsection (d) below), the exercise price of
the Warrants shall be adjusted so that it shall equal the price determined by
multiplying the exercise price of the Warrants by a fraction, the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after giving effect to such action and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
In such event, there shall be no adjustment to the number of shares of Common
Stock or other securities issuable upon exercise of the Warrants. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall fix a record date for the issuance
of rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price of the Common Stock (as
defined in Subsection (e) below) on the record date mentioned below, the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the number of shares then comprising an Option Unit by
the product of the Exercise Price in effect immediately prior to the date of
such issuance multiplied by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional shares
8
<PAGE>
of Common Stock offered for subscription or purchase (or into which the
convertible securities so offered are convertible). Such adjustment shall be
made successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the holders
of its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and-dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of shares
then comprising an Option Unit by the product of the Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of which shall
be the total number of shares of Common Stock outstanding multiplied by the
current market price per share of Common Stock (as defined in Subsection (e)
below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) Whenever the Exercise Price payable upon exercise of this
Option is adjusted pursuant to Subsections (a), (b) or (c) above, the number of
Option Units purchasable upon exercise of this Option shall simultaneously be
adjusted by multiplying the number of Option Units initially issuable upon
exercise of this Option by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsections (b) or
(c)above, the current market price per share of Common Stock at any date shall
be deemed to be the average of the daily closing prices for 20 consecutive
business days before such date. The closing price for each day shall be the last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices regular way, in
9
<PAGE>
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least ten cents
($0.10) in such price; provided, however, that any adjustments which by reason
of this Subsection (f) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 8 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 8 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Exercise Price, in addition
to those required by this Section 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into Common
Stock (including Warrants issuable upon exercise of this Option).
(g) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly, but no later than 10 days after any request for such
an adjustment by the Holder, cause a notice setting forth the adjusted Exercise
Price and adjusted number of Option Units issuable upon exercise of this Option
and, if requested, information describing the transactions giving rise to such
adjustments, to be mailed to the Holder, at the address set forth herein, and
shall cause a certified copy thereof to be mailed to its transfer agent, if any.
The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(h) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (a) above, the Holder thereafter shall
become entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of this
Option shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the Common
Stock contained in Subsections (a) to (f), inclusive above.
9. This Agreement shall be governed by and in accordance
with the laws of the State of New York.
10
<PAGE>
IN WITNESS WHEREOF, Kids Stuff, Inc. has caused this Option to be signed
by its duly authorized officers under its corporate seal, and this Option to be
dated _____________________, 1997.
KIDS STUFF, INC.
By: ______________________________
Its
(Corporate Seal)
11
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder,
Units of Kids Stuff, Inc., each Unit consisting of two shares of $.001
Par Value Common Stock and one Class A Redeemable Common Stock Purchase Warrant,
and herewith makes payment of $______________ therefor, and requests that the
Warrants and certificates for shares of Common Stock be issued in the name(s)
of, and delivered to ________________________ whose address(es) is
(are)_________________________________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto _________________________________ the right to purchase Units represented
by the foregoing Option to the extent of _____ Units, and appoints
_________________________________ attorney to transfer such rights on the books
of Kids Stuff, Inc., with full power of substitution in the premises.
Dated:
By: ______________________________
Address:
------------------------------
------------------------------
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In the presence of:
HAUSSER+TAYLOR
- --------------------------------------------------------------------------------
United Bank Plaza, 220 Market Avenue South, Canton, Ohio 44702-2180
330/455-1120 - FAX: 330/455-3136
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kids Stuff, Inc.
Canton, Ohio 44718
As independent certified public accountants for Kids Stuff, Inc., we
hereby consent to the use in this Form SB-2 Registration Statement Amendment #2
for Kids Stuff, Inc., of our report included herein, which has a date of
February 21, 1997 relating to the balance sheet of Kids Stuff, Inc. as of
December 31, 1996, and the related statements of income, cash flows, and
stockholders' equity for the years ended December 31, 1996 and 1995, and of our
report included herein, which has a date of January 22, 1997 relating to the
balance sheet of The Natural Baby Company, Inc. as of December 31, 1996 and the
related statements of income, cash flows, and stockholders' equity for the years
ended December 31, 1996 and 1995, and to the reference to our firm under the
caption "Experts" in the Prospectus.
/s/ HAUSSER+TAYLOR
------------------
Hausser+Taylor
Canton, Ohio
April 2, 1997
