<PAGE>
As filed with the Securities and Exchange Commission on October , 1998
===============================================================================
Registration No. 333-61463
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KIDS STUFF, INC.
(Name of small business issuer in its charter)
Delaware 5961 34-1843520
- -------------------------- ---------------------------- ----------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of organization) Classification Code No.) Identification
No.)
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:
Steven Morse, Esq. Michael Ference, Esq.
Lester Morse P.C. Lampert & Ference
111 Great Neck Road 10 East 40th Street
Suite 420 New York, NY 10016
Great Neck, NY 11021 (212) 889-7300
(516) 487-1446 (212) 889-5732
(516) 487-1452 (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: | |
<PAGE>
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.
Pursuant to Rule 429, this Registration Statement is a Post-Effective
Amendment to Form SB-2 Registration Statement, File No. 333-19423 with respect
to 2,400,000 shares of Common Stock issuable upon exercise of a like number of
Class A Warrants and 60,000 shares of Common Stock issuable upon exercise of an
Underwriters' Purchase Option. However, the Prospectus does not include the
aforesaid 60,000 shares at the present time since there is no current intent to
exercise the Underwriters' Purchase Option at the date of the filing of this
Registration Statement although it may do so in a subsequent post-effective
amendment.
ii
<PAGE>
Calculation of Registration Fee
<TABLE>
<CAPTION>
============================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Offering Registration
Being Registered Registered Per Unit Price (1) Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each Unit consisting of one
share of Series 1 Preferred Stock
and two Series 1 Preferred Stock
Purchase Warrants (4) 460,000 $5.50 2,530,000 $746.35
Series 1 Preferred Stock included
in the Units 460,000 -- -- --(3)
Preferred Warrants included in the
Units 920,000 -- -- --
Series 1 Preferred Stock underlying
Preferred Warrants 920,000 6.00 5,520,000 1,628.40
Underwriters' Warrants to
purchase Units 40,000 .001 40 .01
Units underlying Underwriters'
Warrant 40,000 7.70 308,000 90.86
Series 1 Preferred Stock issuable
upon exercise of Preferred Warrants
underlying Underwriters'
Warrants 80,000 8.40 672,000 198.24
------- ------
Total $9,030,040 $2,663.86
(2)
============================================================================================================================
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
(2) Previously paid $295; $2,368.86 paid with this filing.
(3) No fee is required under Rule 457(g).
(4) Includes 60,000 Units subject to an Over-Allotment option.
iii
<PAGE>
KIDS STUFF, INC.
Cross-Reference Sheet Showing Location in Prospectus of Information Required by
Items in Part I of Form SB-2
<TABLE>
<CAPTION>
Registration Statement
Item Number and Caption Location in Prospectus
----------------------- ----------------------
<S> <C>
1. Front of Registration Statement and Outside Front Cover Page of Prospectus
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus;
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 Not Applicable
7. Selling Securityholders Not Applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
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 Experts and Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Not Applicable
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of Financial Condition
of Operation and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Certain Transactions
20. Market for Common Equity and Related Risk Factors; Unregistered Shares Eligible for Immediate and
Stockholder Matters 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
</TABLE>
iv
<PAGE>
PRELIMINARY PROSPECTUS DATED OCTOBER __, 1998
PROSPECTUS
400,000 Units
KIDS STUFF, INC.
Kids Stuff, Inc. (the "Company") is offering (the "Offering") for sale
400,000 Units, each Unit consisting of one share of Series 1 Preferred Stock
(the "Series 1 Preferred Stock" or the "Shares") and two Series 1 Preferred
Stock Purchase Warrants (the "Preferred Warrants"). The estimated offering price
will range from $5.00 to $5.50 per Unit. This Prospectus contains an assumed and
estimated offering price of $5.00 per Unit. The Shares and Preferred Warrants
shall be immediately detachable and separately transferable from each other at
any time commencing on the date of this Prospectus. Commencing April 30, 1999,
each share of Series 1 Preferred Share is entitled to receive a cumulative
annual dividend of $.45 per share in cash or Common Stock on April 30th of each
year. Commencing 18 months from the date of this Prospectus, the Series 1
Preferred Stock is redeemable at the option of the Company at $7.20 per share
and is convertible into _____ shares of the Company's Common Stock. Each
Preferred Warrant entitles the holder to purchase one share of Series 1
Preferred Stock at a price of $6.00, commencing ______, 2000 (18 months from the
date of this Prospectus) and expiring _______, 2001 (36 months from the date of
this Prospectus). If the Company elects to redeem the Series 1 Preferred Stock ,
the Preferred Warrants shall be contemporaneously redeemed at $1.20 per Warrant.
See "Description of Securities."
(continued on next page)
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AS DESCRIBED HEREIN. FOR
A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Proceeds
Price to Underwriting to the
Public Discounts (1) Company (2)
- ------------------------------------------------------------------------------
Per Unit $ 5.00 $ .50 $4.50
Total (3) $2,000,000 $200,000 $1,800,000
==============================================================================
<PAGE>
(1) Does not include additional compensation to the Underwriters in the
form of (a) a non-accountable expense allowance of three (3%) percent
of the gross proceeds of this Offering, (b) a consulting fee of 2% of
the gross proceeds of this offering and (c) Warrants, purchasable at a
nominal price, giving the holders the right to acquire 40,000 Units at
an initial exercise price of $___ per Unit, equal to 140% of the
initial offering price of the Units (the "Underwriters' Warrant"). See
"Underwriting."
(2) Before deducting estimated expenses of $300,000 payable by the Company,
inclusive of the Underwriters' non-accountable expense allowance.
(3) Solely for the purpose of covering over-allotments, if any, the Company
has granted to the Underwriters options (the "Over-Allotment Option"),
exercisable within 45 days of the date hereof, to purchase an
additional 60,000 Units upon the same terms and conditions as the Units
offered hereby. If such Over- Allotment Option is exercised in full,
the Total Price to Public will be $2,300,000; the Total Underwriting
Discount will be $230,000; and the Total Proceeds to the Company will
be $2,070,000. See "Underwriting."
The Units included in the underwritten offering are being offered by
the Underwriters on a "firm commitment" basis subject to prior sale, when, as
and if delivered to and accepted by the several Underwriters and subject to
certain conditions. 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 evidencing the Units will be made at the offices
of the Representative in New York, New York or through the facilities of The
Depository Trust Company, against payment therefor on or about __________, 1998.
Fairchild Financial Group, Inc.
The date of the Prospectus is ____________, 1998
The following legend belongs on left side of cover page in red:
"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."
2
<PAGE>
This Prospectus also relates to the exercise of publicly held Class A
Common Stock Purchase Warrants (the "Class A Warrants") to purchase 2,400,000
shares of the Company's Common Stock. Each Class A Warrant entitles the holder
to purchase one share of Common Stock at a price of $5.00 at any time commencing
on or after June 26, 1998 and expiring June 26, 2002. A description of the terms
of the Class A Warrants, including without limitation certain redemption rights,
may be found under "Description of Securities."
The offering price of the Units, the conversion ratio of the Series 1
Preferred Stock and the exercise price of the Preferred Warrants and other terms
of such securities were established by negotiation between the Company and
Fairchild Financial Group, Inc., the representative (the "Representative") of
the underwriters of the Offering (collectively, including the Representative,
the "Underwriters"), and do not necessarily bear any direct relationship to the
Company's assets, earnings, book value per share or other generally accepted
criteria of value. See "Risk Factors" and "Underwriting." The Units, Series 1
Preferred Stock and Preferred Warrants are expected to trade on the OTC
Electronic Bulletin Board under the symbols "______," "______" and "_____." The
Company's Common Stock and Class A Warrants are quoted on the OTC Electronic
Bulletin Board under the symbols "KDST"and "KDSTW," respectively. On October __,
1998, the closing sales prices of the Company's Common Stock and Class A
Warrants were $___ and $__, respectively. See "Risk Factors."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF
THE COMPANY'S SECURITIES INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Duncan Hill, Inc. ("Duncan Hill"), the Company's parent, and William L.
Miller, the Company's Chief Executive Officer, will beneficially own
approximately 82% of the Company's outstanding voting capital stock after the
Offering and will be able to control the affairs of the Company. See "Risk
Factors" and "Principal Stockholders."
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission" or "SEC"). The Company has filed with the
Commission a registration statement on Form SB-2, File No. 333- 61463, which
registration statement is also a post-effective amendment to the Company's
Registration Statement on Form SB-2, File No. 333-19423 (herein together with
all amendments and exhibits referred to as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), of which this
Prospectus forms a part. See "Available Information."
3
<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 indicated otherwise, this Prospectus assumes no exercise of the
Underwriters' Over-Allotment Option and an offering price of $5.00 per Unit.
This Prospectus contains forward looking statements which reflect
management's current views and estimates of future economic circumstances,
industry conditions, company performance and the financial results. 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, including, without limitation, competition and possible
future changes to state sales tax laws. 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, competition, availability and price
of goods and other factors. Any changes in such assumptions or factors could
produce significantly different results.
The Company
Kids Stuff, Inc. (the "Company") is a specialty direct marketer which
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," 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 second catalog, "Jeannie's Kids Club," 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. In July 1997, the Company acquired a third catalog, The
Natural Baby Catalog, from The Natural Baby Company, Inc. ("Baby Co."), which
specializes in children's products made from natural fiber for children ages
prenatal to age three, and consolidated its operations with those of the
Company. The Company intends to use the proceeds of the Offering to establish
and develop a website to advertise and sell its products and to open a retail
outlet store in Canton, Ohio to sell its merchandise. See "Use of Proceeds" and
"Business."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, Ohio 44718, and its telephone number is (330)
492-8090.
4
<PAGE>
The Offering
Securities Offered
by the Company 400,000 Units, each Unit consisting of one share of
one share of Series 1 Preferred Stock and two
Preferred Warrants. The Shares and Preferred
Warrants shall be immediately detachable and
separately transferable from each other at any time
commencing on the date of this Prospectus.
Commencing April 30, 1999, each share of Series 1
Preferred Share is entitled to receive a cumulative
annual dividend of $.45 per share in cash or Common
Stock on April 30th of each year. Commencing 18
months from the date of this Prospectus, the Series
1 Preferred Stock is redeemable at the option of
the Company at $7.20 per share and is convertible
into _____ shares of the Company's Common Stock.
Each Preferred Warrant entitles the holder to
purchase one share of Series 1 Preferred Stock at a
price of $6.00, commencing ______, 2000 and
expiring _______, 2001. If the Company elects to
redeem the Series 1 Preferred Stock, the Preferred
Warrants shall be contemporaneously redeemed at
$1.20 per Warrant. See "Description of Securities."
Class A Warrants This Prospectus also relates to the exercise of
publicly-held 2,400,000 Class A Warrants to
purchase 2,400,000 shares of the Company's Common
Stock. Each Class A Warrant entitles the holder to
purchase one share of Common Stock at a price of
$5.00 at any time commencing on or after June 26,
1998 and expiring June 26, 2002. See "Description
of Securities."
Capitalization
Common Stock prior
to the Offering (1) 3,512,856 Shares
Common Stock to be
Outstanding after
exercise of Class A
Warrants (2)(3) 5,912,856 Shares
Class A Warrants
outstanding prior to
Offering 2,400,000 Class A Warrants
Series A Non-Convertible
Preferred Stock held
by Duncan Hill (4) 5,000,000 Shares
5
<PAGE>
Series 1 Preferred Stock
prior to Offering (4) -0- Shares
Series 1 Preferred Stock
after Offering (4)(5) 400,000 Shares
Series 1 Preferred Stock
Purchase Warrants
before Offering -0-
Series 1 Preferred Stock
Purchase Warrants
after offering (6) 800,000 Warrants
OTC Electronic
Bulletin Board Symbols
Currently Outstanding:
Common Stock......................KDST
Class A Warrants..................KDSTW
Proposed for Trading:
Units.............................______
Series 1 Preferred Stock..........______
Preferred Warrants................______
Use of Proceeds The Company intends to apply the net proceeds of
the Offering to purchase inventory, reduce accounts
payable, to establish and lease a new operations
center, to open a retail outlet store, to establish
a website and for working capital and other general
corporate purposes. See "Use of Proceeds."
Risk Factors The Offering involves a high degree of risk and
immediate and substantial dilution.
6
<PAGE>
- ----------
(1) Does not include the possible exercise of the following: (i) Class A
Warrants to purchase 2,400,000 shares of the Company's Common Stock; (ii)
Options to purchase 440,000 shares of the Company's Common Stock owned by
the Company's executive officers and directors; (iii) Warrants granted to
the Underwriter of the Company's initial public offering to purchase an
aggregate of 60,000 shares of the Company's Common Stock; and (iv) options
to purchase up to 400,000 shares of the Company's Common Stock that may be
granted pursuant to the Company's 1997 Stock Incentive Plan.
(2) Does not include the possible exercise of the following: (i) options to
purchase 440,000 shares of the Company's Common Stock; (ii) Warrants
granted to the Underwriter of the Company's initial public offering to
purchase an aggregate of 60,000 shares of the Company's Common Stock; (iii)
Common Stock issuable upon conversion of the Series 1 Preferred Stock; and
(iv) options to purchase up to 400,000 shares of the Company's Common Stock
that may be granted pursuant to the Company's 1997 Stock Incentive Plan.
(3) Assumes all Class A Warrants are exercised. No assurances can be given that
all or any portion of the outstanding Class A Warrants will be exercised.
(4) Generally, the Holder of the Series A Preferred Stock and Series 1
Preferred Stock each has the right to vote each share of Preferred Stock on
the same basis as each share of Common Stock.
(5) Does not include shares of Series 1 Preferred Stock issuable upon exercise
of the Preferred Warrants or Underwriters' Warrant.
(6) Does not include Preferred Warrants issuable upon exercise of the
Underwriters' Warrant.
7
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data is derived from the historical financial
statements of the Company. 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, included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31, Six Months Ended
June 30, June 30,
1996 1997 1997 1998
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Statement of Operational Data:
Net Sales $6,638,995 $11,016,601 $3,509,881 $6,613,621
Net Income (Loss) (521,640) 50,097 (125,779) 121,557
Net Income (Loss) per common share (.14) .01 (.04) .03
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
Balance Sheet Data: Dec. 31, Dec. 31, June 30,
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
Total Assets $1,471,689 $ 4,548,061 $4,295,940
Working Capital (deficit) (803,789) 162,877 123,148
Total Liabilities 2,461,869 2,725,397 2,351,718
Stockholders' Equity (deficit) (990,180) 1,822,664 1,944,222
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and
involves a high degree of risk and substantial dilution. Securities offered
hereby 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 the
Offering, together with the other information in this prospectus, before making
an investment decision.
HISTORY OF OPERATING AND NET LOSSES. Although the Company had net
income of $121,557 for the six months ended June 30, 1998 and net income of
$50,097 for the year ended December 31, 1997, the Company incurred net losses of
($521,640) and ($536,992) for fiscal 1996 and 1995, respectively. A substantial
portion of the aforesaid losses was associated with the establishment and
development of the Jeannie's Kids Club Catalog beginning in July, 1995. There
can be no assurances that the Company will not incur net losses in the future.
See "Management's Discussions and Analysis of Financial Condition and Results of
Operations."
LIMITED WORKING CAPITAL/POSSIBLE NEED FOR ADDITIONAL FINANCING. At June
30, 1998, the Company had limited working capital of $123,148. The Company
currently depends upon (i) cash from operations; (ii) loans from an
institutional lender; and (iii) cash received in July 1997 from the completion
of an initial public offering of its securities to fund its operations. In the
event that cash from operations is insufficient to finance its operations or the
Company's institutional credit facility is terminated or the credit limit is
insufficient to provide needed financing for the Company, it will be necessary
for the Company to seek to obtain additional public or private financing. No
assurances can be given that such financing will be available or, if available,
that it can be obtained on terms satisfactory to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements."
LINE-OF-CREDIT - ZERO BALANCE. The Company has a line-of-credit
pursuant to which it is required to have a zero balance between now and June 30,
1999. No assurances can be given that the Company will be successful in this
regard. Although the institutional lender has waived the zero balance
requirement in each of the last two fiscal years, no assurances can be given
that the institutional lender will again waive the zero balance requirement for
fiscal 1999 or in future years.
YEAR 2000 ISSUES. Many existing computer programs use only two digits
to identify a year in the date field. There programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The Company is currently working to correct its computers
and does not believe that the expenditures will materially adversely impact the
Company, although no assurances can be given in this regard. The Company
purchases its materials from numerous vendors. While the Company has not
determined whether all its vendors will be year 2000 compliant before the
problem arises, Management believes that since it is not dependent on any major
vendor, that its
9
<PAGE>
operations will not be materially adversely effected by the failure of a few
vendors to timely correct the problem. However, no assurances can be given that
Management will be correct in its belief.
POSSIBLE LACK OF SAVINGS FROM THE RECENT INTEGRATION AND CONSOLIDATION
OF THE NATURAL BABY CATALOG BUSINESS. The Company believes that its
consolidation of the operations of The Natural Baby Catalog with the Company has
led to savings in direct labor and general and administrative costs during the
12 month period following completion of such transaction. No assurances can be
given that the Company is correct in such belief or that it will be successful
in obtaining the aforesaid savings in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Financial
Statements" and "Business."
COST 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 that the USPS will
raise its rates commencing January 1, 1999. Since 1994, United Parcel Service
has annually increased its rates. 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 losses in 1995. 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. See "Business."
NEED FOR MAILING LISTS. 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. Although the Company has not experienced such a reaction from its
acquisition of The Natural Baby Catalog, there can be no assurance that such a
competitive reaction will not occur in the future, or that such an occurrence
would not have an adverse effect upon the profitability of the Company. See
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
NEED TO OBTAIN NEW CUSTOMERS. Historically, the Company has relied upon
catalog circulation as its sole method of acquiring new customers. Because of
the relatively short life of the 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
obtain new customers. Upon the completion of this Offering, the Company intends
to develop and establish a website and retail outlet store to advertise and sell
its products. No assurance can be given that these actions will be successful,
that the
10
<PAGE>
Company will retain existing customers or obtain new customers, or that the
Company will operate profitably in the future. See "Business."
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 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. See "Business."
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. No assurances can be
given that the Company will comply with all state and federal laws affecting its
business in the future.
NO CURRENT PLANS FOR ADDITIONAL CATALOG ACQUISITIONS. The Company
believes that due to the cost driven pressures to consolidate, there may be
future opportunities to acquire other children's niche catalogs. The Company,
however, has no current plans to make any acquisitions and no assurances can be
given that any acquisitions will be successfully completed in the future. See
"Business."
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. 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, age demographics and the ability of the Company to
continue to attract and retain customers successfully. See "Business."
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 list which has proven to be profitable in the past may experience an
inexplicable short-term unsatisfactory result. See "Business."
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COMPETITION. The mail order catalog and retail clothing outlet
businesses are highly competitive. The Company's catalogs compete and its
proposed retail outlet store intends to 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. There can be
no assurance that the Company will be able to compete effectively with existing
or potential competitors. See "Business."
PRODUCT LIABILITY INSURANCE. Since 1990, the Company's parent, Duncan
Hill, has carried product liability insurance for the Company and Duncan Hill's
subsidiary, The Havana Group, Inc. ("Havana"). 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 Havana as named insureds. The policies are
issued for a period of one year and are currently in effect through September
17, 1999. The Company may, in the future, procure the same coverage in its name,
alone. 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. An 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."
TRADEMARKS AND OTHER PROPRIETARY RIGHTS. The Company believes that its
trademarks and proprietary rights are important to its success and its
competitive position. However, the actions taken by the Company to establish and
protect its trademarks and other proprietary rights may be inadequate to prevent
imitation of its products by others or to prevent others from claiming
violations of their trademarks and proprietary rights by the Company. In
addition, others may assert rights in the Company's trademarks and other
proprietary rights. See "Business."
DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The
success of the Company is highly dependent upon the continued services of
William L. Miller ("W. Miller"), the Company's Chairman of the Board and Chief
Executive Officer, and Jeanne E. Miller, ("J. Miller") the Company's President.
W. Miller, one of the co-founders of the Company's parent, is principally
responsible for the strategic planning and development of the Company. W.
Miller, however, is not required to devote his full-time attention to managing
the affairs of the Company. J. Miller, the other co-founder of the Company's
parent, is primarily responsible for the merchandise selection, design and
production of the catalog. Both W. Miller and J. Miller have entered into
employment agreements with the Company. However, if the employment by the
Company of either W. Miller and J. 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. The Company has
obtained a $1 million key man life insurance policy on each of W. Miller and J.
Miller, who are husband and wife. 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
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<PAGE>
Management personnel over time. There can be no assurance, however, that the
Company will be able to successfully recruit and retain such additional
qualified Management personnel. See "Management."
THE COMPANY'S CHIEF EXECUTIVE OFFICER WILL NOT BE REQUIRED TO WORK FULL
TIME. W. Miller, is a co-founder of the Company's parent, Duncan Hill, which has
other operating subsidiaries. W. Miller, who devotes such time to the affairs of
the Company which are necessary for the performance of his duties, is currently
the President of Duncan Hill and Havana, as well as Chairman of the Board of
Directors and Chief Executive Officer of the Company. W. 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 (including Havana) as he
deems appropriate. Accordingly, W. Miller is not devoting his full-time and
attention to managing the operations of the Company. See "Management."
POTENTIAL CONFLICTS OF INTEREST. Conflicts of interest could
potentially develop (i) to the extent that W. Miller is not able to devote his
full-time and attention to a matter that would otherwise require the full-time
and attention of a business' chief executive officer, (ii) involving competition
for business opportunities, (iii) involving transactions between the Company and
W. Miller, J. Miller and/or their affiliated companies; and (iv) due to the
relationship between W. Miller and J. Miller as husband and wife and as
directors of the Company. The Company has not adopted any procedure for dealing
with such conflicts of interest, except that the Company's Board of Directors
has adopted a policy that all new transactions between the Company and Duncan
Hill, Havana or any other affiliated company must be approved by at least a
majority of the Company's disinterested directors. Currently, the Company has
one disinterested director and Duncan Hill and the Millers control the election
of the directors. See "Management."
LACK OF AT LEAST TWO INDEPENDENT DIRECTORS AND COMMITTEES
THEREOF. The Company has four directors, including W. Miller and J. Miller who
are also executive officers of the Company, one independent director and another
director who is a director of Duncan Hill, an affiliate of the Company. The
absence of at least two outside or disinterested directors and committees
composed of such disinterested directors could result in less objectivity and an
increased risk for conflicts of interest with respect to decisions made by the
Board of Directors. See "Management."
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, namely, W. Miller and J. Miller 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. 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. See "Management."
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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."
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 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. See "Business."
CONTROL BY PARENT AND ITS CONTROLLING STOCKHOLDERS. Duncan Hill
beneficially owns approximately 65% of the Company's outstanding Common Stock
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. As a result,
Duncan Hill, which beneficially owns approximately 86% of the outstanding voting
stock before the Offering and will own approximately 82% of the outstanding
voting stock after the Offering, will remain in a position to effectively elect
all of the directors of the Company and control its affairs and policies. W.
Miller and J. Miller, the Company's respective Chief Executive Officer and
President, own approximately 68% 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
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<PAGE>
effective control over the affairs of Duncan Hill. Ultimate voting control by
the Millers may discourage certain types of transactions involving an actual or
potential change of 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. See "Principal Stockholders."
SEC INVESTIGATION INVOLVING THE REPRESENTATIVE. The Company has been
advised by the Representative that the SEC has issued a formal order directing a
private investigation by the staff of the SEC involving the Representative and
certain other persons. For a description of such SEC investigation, see
"Underwriting." The Representative cannot predict whether this investigation
will result in any type of enforcement action against the Representative. See
"Underwriting."
NASD COMPLAINT AGAINST THE REPRESENTATIVE. The Company has also been
advised by the Representative that during 1996 and 1997, the staff of the NASD
conducted an inquiry into the trading and sales practices of securities of
another company in and around April 1995. In connection with the inquiry, the
NASD staff obtained documents from the Representative and conducted
on-the-record interviews of, among others, the Representative's President-Chief
Executive Officer, Head Trader and Chief Financial Officer. On February 20,
1998, the NASD Department of Enforcement filed an administrative complaint
against the Representative, a principal of the firm and two traders from other
broker-dealers. For a description of such complaint, including the allegations
and prayer for relief, see "Underwriting."
POSSIBLE ADVERSE EFFECT ON LIQUIDITY AND PRICE OF THE COMPANY'S
SECURITIES DUE TO SEC INVESTIGATION AND NASD COMPLAINT. The Company has been
advised that in the event a public market for the Company's Units, Series 1
Preferred Stock and/or Preferred Warrants should develop, of which no assurances
can be given, the Representative intends to make a market in such securities
following the Offering in addition to the Company's Common Stock and Warrants in
the over-the-counter market, subject to compliance with Regulation M of the
Exchange Act. An unfavorable resolution of the SEC investigation and/or NASD
complaint concerning the sales and trading activities and practices
of the Representative could have the effect of limiting or curtailing the
Representative's ability to make a market in the Company's securities in which
case the market for and liquidity of the Company's securities may be adversely
affected. See "Underwriting."
DILUTION. Persons exercising the Class A Warrants will incur immediate
and substantial dilution of their investment. See "Dilution." The amount and
percentage of such dilution will depend upon the amount of Class A Warrants
exercised and the then net tangible book value of the Company, which can not be
accurately estimated at this time.
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
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may have limited rights to recover against directors for breach of fiduciary
duty. See "Management--Limitation of Liability and Indemnification Matters."
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 5,000,000 shares of preferred stock
(including the Series 1 Preferred Stock, but not including the Series A
Preferred Stock owned by Duncan Hill) 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 or
Series 1 Preferred Stock and the market for those shares. See "Description of
Securities."
NO CASH DIVIDENDS. The Company has never paid cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future, except possibly on its Series 1 Preferred Stock. The Company intends to
retain future earnings, if any, to finance its growth and it reserves the right
to pay dividends on the Series 1 Preferred Stock by issuing Common Stock in lieu
of cash dividends. See "Dividend Policy" and "Description of Securities."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $222,000 or
15% 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 substantially all of
such proceeds. See "Use of Proceeds."
ARBITRARY DETERMINATION OF CLASS A WARRANT AND PREFERRED WARRANT
EXERCISE PRICES. The exercise price and other terms of the Class A Warrants have
been arbitrarily determined by the Company and the Representative of the
Company's initial public offering in 1997. Further, the offering price and other
terms of the Units and components thereof have also been arbitrarily determined
by the Company and the Representative. The terms of such securities do not
necessarily bear any relationship to the assets, book value or net worth of the
Company or any other recognized criteria of value. Accordingly, such terms
should not be considered an indication of the Company's actual value. See
"Description of Securities."
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LIMITED PUBLIC MARKET; MARKET VOLATILITY. Prior to the Offering, there
has been a limited public market for the Company's Common Stock and Class A
Warrants which are quoted on the OTC Electronic Bulletin Board under the symbols
"KDST" and "KDSTW," respectively. Before this Offering, there has been no public
market in the Company's Units, Series 1 Preferred Stock and Preferred Warrants.
The Representative intends to apply to the OTC Electronic Bulletin Board to
trade such securities. There is no assurance that an established public trading
market will develop or be sustained in any of the Company's securities.
Additionally, the market price of the Company's securities may be adversely
affected 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. See "Market Information."
CERTAIN IMPLICATIONS OF TRADING OVER-THE-COUNTER; "PENNY STOCK"
REGULATIONS. The Company's Common Stock and Class A Warrants are quoted for sale
in the over-the-counter market on the OTC Electronic Bulletin Board under the
symbols "KDST" and "KDSTW", respectively. Further, the Representative intends to
apply to the OTC Electronic Bulletin Board for the Company's Units and
components thereof to trade on the OTC Bulletin Board. An investor may find it
more difficult to dispose of the Company's securities trading over-the-counter
than had the Company sought approval for its securities to be listed for
quotation on a national securities exchange, or on the Nasdaq SmallCap market.
The Company has not applied for listing on a national securities exchange or the
Nasdaq SmallCap market because of the Company's belief that it would not meet
the listing requirements.
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, a warrant that has an exercise price
of less than $5.00 per share, an equity security of an issuer (assuming the
corporation has been in existence for at least three years) with net tangible
assets of less than $2,000,000 or an equity security of an issuer with average
revenues in the last three fiscal years of less than $6,000,000, as indicated in
audited financial statements. 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 accredited 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
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in the future 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.
RESTRICTIONS ON THE REPRESENTATIVE'S MARKET MAKING ACTIVITIES DURING
WARRANT SOLICITATION AND THE OFFERING. The Representative has the right to act
as the Company's sole agent in connection with any future solicitation of
warrant holders to exercise their Class A 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 for a period of time before and during
the Offering and warrant solicitation period. Such limitation could impair the
liquidity and market prices of the Company's securities. See "Description of
Securities."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OR EXERCISE OF CLASS A WARRANTS.
The Class A Warrants, Preferred Warrants and Series 1 Preferred Stock may be
redeemed by the Company under certain circumstances. Should the Company provide
a notice of redemption, the holders thereof would be forced to either exercise
or convert the applicable security at a time when it may be disadvantageous for
them to do so, sell the applicable security at the then current market price, or
accept the redemption price, which may be substantially less than the market
value of the applicable security. In addition, the exercise of the Class A
Warrants or the conversion of the Preferred Warrants and Series 1 Preferred
Stock may have an adverse effect on the market price of the Company's securities
should a public trading market develop. Also, while the aforesaid securities are
outstanding, the Company may find it more difficult to raise additional capital
upon favorable terms because of the potential for the exercise or conversion of
the Class A Warrants or conversion of the Preferred Warrants and Series 1
Preferred Stock to be dilutive to future investors. See "Description of
Securities."
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FOR FUTURE SALE. Duncan
Hill holds 2,251,075 shares of the Company's Common Stock and 5,000,000 shares
of the Company's Series A Preferred Stock (collectively the "Restricted
Securities"). These securities held by Duncan Hill are "restricted securities"
as that term is defined by Rule 144 of the Securities Act. Such securities may
only be sold in compliance with the provisions of Rule 144 unless otherwise
registered by the Company or exempt under the Act. Furthermore, Duncan Hill has
agreed with the Representative not to sell or otherwise transfer the Restricted
Securities until June 26, 1999 unless earlier permitted by the Representative.
While there are no agreements, arrangements or understandings with Duncan Hill
with respect to the early release of the lock-up, previously the Representative
has released the lock-up for Duncan Hill for a total of 148,925 shares, which
have been sold under Rule 144. 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 securities. See "Unregistered Shares Eligible
for Future Sale."
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CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
CLASS A WARRANTS. The Company will be able to issue shares of its Common Stock
upon exercise of the Class A Warrants only if there is then a current prospectus
relating to the shares of Common Stock issuable upon the exercise of the Class A
Warrants under an effective registration statement filed with the 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 Class A 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 Class A 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 Class A Warrants reside. As of the
date of this Prospectus, the Company anticipates that the exercise of Class A
Warrants will be qualified for sale or exempt from qualification only in a
limited number of states which include Colorado, Connecticut, Delaware, District
of Columbia, Georgia, Hawaii, Illinois, Louisiana, New York, Rhode Island, Utah
and Virginia. See "Description of Securities."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
PREFERRED WARRANTS. The Company will be able to issue shares of its Series 1
Preferred Stock upon exercise of the Preferred Warrants only if there is then a
current prospectus relating to the shares of Series 1 Preferred Stock issuable
upon the exercise of the Preferred Warrants under an effective registration
statement filed with the Commission, and only if the Shares are qualified for
sale or exempt from qualification under applicable state securities laws of the
jurisdiction in which the various holders of the Preferred 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 Preferred Warrants may be deprived of any value if a prospectus covering the
Shares issuable upon their exercise is not kept effective or if such shares of
Series 1 Preferred Stock are not or cannot be qualified or exempt from
qualification in the jurisdictions in which the holders of the Preferred
Warrants reside. As of the date of this Prospectus, the Company anticipates that
the exercise of Preferred Warrants will be qualified for sale or exempt from
qualification only in a limited number of states which include Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois,
Louisiana, New York, Rhode Island, Utah and Virginia. See "Description of
Securities."
NO SINKING FUND. The Company is not required to provide for the
retirement or redemption of the Series 1 Preferred Stock through the operation
of a sinking fund.
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USE OF PROCEEDS
The net proceeds to be received from the sale of 400,000 Units after
deduction of offering expenses estimated at a maximum of $500,000 will be
approximately $1,500,000. The Company intends to use the net proceeds of the
Offering, over at least the next twelve months approximately as follows:
Approximate Approximate
Amount of Percentage of
Net Proceeds Net Proceeds
------------ ------------
Purchase Inventory(1) $ 600,000 40%
Reduction of Accounts Payable(2) 400,000 27
Establishment of New
Operation Center(3) 205,000 14
Leasehold and Improvements for
"Kids Catalog Outlet" retail
store(4) 33,000 2
Website Production and
Development(5) 40,000 2
Working Capital (6) 222,000 15
----------- ----
Total $ 1,500,000 100%
=========== ====
________________
(1) The purchase of additional inventory is to help the Company eliminate
back orders and cancellations of merchandise due to inventory being out
of stock.
(2) Reduction of accounts payable by $400,000 will satisfy many of the
Company's invoices that are over 90 days old.
(3) The Company intends to establish a new operations center of
approximately 34,000 square feet in early 1999. This operation center,
which is expected to be located in or about Canton, Ohio, will include
customer relations, order entry and warehouse and distribution
operations and will replace its existing warehouse facility. Moving
costs are estimated at $35,000.
(4) The Company intends to open a retail outlet store in Canton, Ohio to
sell merchandise that has not been sold through its catalogs.
(5) The Company is seeking to establish a website for advertising and sales
of its products.
(6) The Company intends to use such funds for general corporate purposes.
In the event any Class A Warrants or Preferred Warrants are exercised,
of which no assurances can be given in this regard, such funds would be
added to working capital. See "Risk Factors."
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.
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Management of the Company will have broad discretion in the application of
substantially all of such proceeds. See "Risk Factors."
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, except possibly on its
Series 1 Preferred Stock. The declaration and payment of cash dividends by the
Company are subject to the discretion of the Board of Directors of the Company.
Any future determination to pay cash 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 currently subject to any contractual arrangements
which restricts its ability to pay cash dividends. The Company reserves the
right to pay dividends on its Series 1 Preferred Stock by issuing Common Stock
in lieu of cash dividends.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information 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. Since 1990, the Perfectly Safe Catalog has relied upon catalog circulation
to acquire new customers and to provide its revenue base. During 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 favorably impacts 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. During 1997, the
Company has identified other mailing lists which have helped to increase the
circulation and revenues of The Perfectly Safe Catalog.
In July 1997, the Company acquired from Baby Co., The Natural Baby
Catalog utilizing the proceeds of the Company's initial public offering. The
Natural Baby Catalog offers children's clothing and toys made of natural
materials. During the second half of 1997, The Natural Baby Catalog generated
$3.8 million in net sales on orders of 55,188, (an average order of
approximately $68). The Company is seeking to increase circulation while
generating the same, or a higher, average order.
22
<PAGE>
RESULTS OF OPERATIONS
Six months ended June 30, 1998 compared to the six months ended June 30, 1997.
Revenues for the six months ended June 30, 1998 increased 88% to
$6,613,621, compared with $3,509,881 for the same period of 1997. Net income for
the first half of 1998 improved to $121,557 compared with a net loss of
($125,779) for the same period in 1997. Approximately 85% of the Company's
increased revenues were attributed to The Natural Baby Catalog. Combined
revenues from the Company's Perfectly Safe and Kids Club catalogs increased 15%
compared with 1997, producing the remainder of its overall revenue increase.
Cost of sales increased from 57.5% of net sales in 1997 to 59.7% in
1998. The change is attributable to post holiday returns and the shipping rate
increase imposed by United Parcel Service during February 1998. The Company
increased shipping charges to customers in the second quarter of 1998 to offset
this increase.
Selling expenses, consisting of advertising and marketing costs, were
26.6% of net sales in the first half of 1998, compared with 34.3% in the first
half of 1997. This 22.4% reduction in selling expense as a percentage of net
sales, reflects the impact of The Natural Baby Catalog, whose selling expenses
are less than those of the Company's other catalogs because of the higher
average order. Additionally, the Company improved the productivity of its
Perfectly Safe and Kids Club catalog mailings during the first half of 1998,
which resulted in lower selling expenses compared with the first half of 1997.
General and Administrative expenses increased by $375,065, from 10.9%
of net sales in 1997 to 11.5% in 1998. As a result of the Natural Baby
acquisition, the Company's growth of its operation has given rise to higher
support costs. Costs of outside legal and accounting services have increased
because of the compliance requirements associated with being a public company.
General and administrative costs are also affected by services the Company has
provided to Havana, an affiliated company. During the six months ended June 30,
1998, the Company has charged Havana $141,710, including order fulfillment
costs, as compared to approximately $205,000 allocated last year.
Net income improved from $(125,779) for the six months ended June 30,
1997 to $121,557 for the six months ended June 30, 1998. For the six months
ended June 30, 1997, the Company's net loss amounted to approximately 4% of
sales as compared to the Company's net income for the six months ended June 30,
1998 amounting to approximately 2% of sales.
23
<PAGE>
Year ended December 31, 1997 compared to the year ended December 31, 1996.
Total net sales for the year ended December 31, 1997 increased
$4,377,606, or 65.9%, to $11,016,601, compared with $6,638,995 for the year
ended December 31, 1996. Net sales include sales from merchandise, Jeannie's
Kids Club memberships, shipping and handling charges, and mailing list rentals.
This increase is mainly attributable to the acquisition from Baby Co. of The
Natural Baby Catalog on July 2, 1997, and the resulting net sales of $3,811,894
for the six months ended December 31, 1997. The net sales of the Perfectly Safe
Catalog increased from $2,717,056 for the year ended December 31, 1996 to
$3,937,809 for the year ended December 31, 1997. This increase is attributable
to a 26.9% increase in catalog circulation from 1,595,890 catalogs mailed to
2,025,375 catalogs mailed during 1996 and 1997, respectively, and also to an
increase in net revenue per book mailed of 14%, from $1.70 per book during 1996
to $1.94 per book in 1997. This increase was offset by a decrease in net sales
of Jeannie's Kids Club, which decreased from $3,921,434 to $3,202,238 for the
years ended December 31, 1996 and 1997, respectively. The circulation of
Jeannie's Kids Club was reduced from 2,372,891 to 1,432,716 for the years ended
December 31, 1996 and 1997, respectively.
Cost of sales, as a percentage of net sales, decreased 1.5% from 63.3%
for the year ended December 31, 1996 to 61.8% for the year ended December 31,
1997. The Company attributes this decrease to increased fulfillment efficiencies
resulting from the addition from Baby Co. of The Natural Baby Catalog. During
the fourth quarter, the Company recorded a charge to earnings of $105,000 for
obsolete inventory.
Selling expenses, which consists of advertising and other marketing
related expenses, decreased 6.1% as a percentage of net sales, from 33.0% to
26.9% for the years ended December 31, 1996 and 1997, respectively. This
decrease is due to the Perfectly Safe net revenue per catalog increasing from
$1.70 to $1.94 for the years ended December 31, 1996 and 1997, respectively,
Jeannie's Kids Club net revenue per catalog increasing from $1.65 to $2.24, for
the same periods, and the addition of The Natural Baby Catalog.
General and administrative expenses were $1,077,041, or 9.8% of net
sales, for the year ended December 31, 1997, and $712,515, or 10.7% of net
sales, for the same period of 1996. This dollar increase is attributable to
increased legal, accounting and consulting fees relating to the Company becoming
public, increased wages and expenses for the relocation of The Natural Baby
Catalog operations from Trenton, New Jersey, to the Company's Canton, Ohio
facility. The Company believes that its general and administrative functions
have become more efficient and cost effective since the integration of The
Natural Baby Catalog operations and the completion of the learning curve
relating to the new product line is complete. General and administrative
expenses for 1996 were incurred substantially by 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. For 1996, the Company's
allocation was 69% of Duncan Hill's total general and administrative expenses.
Effective June 30, 1996, the Company began a six month transition period to
handle certain of its own administrative
24
<PAGE>
functions, directly. Effective January 1, 1997, the Company began handling
administrative functions for Havana. General and administrative expenses
incurred by the Company are allocated to Havana, on a pro rata basis determined
by the percentage of total assets of Havana and the operating divisions of the
Company. For the six months ended June 30, 1997, Havana's allocation was 33% of
the Company's total general and administrative expenses. For the year ended
December 31, 1997, Havana's allocation was 21% of the Company's total general
and administrative expenses, due to the acquisition of The Natural Baby Catalog.
Net income for the year ended December 31, 1997 was $50,097, or .5% of
net sales, compared to a net loss of $521,640, or 7.9% of net sales for the same
period of 1996. The Company attributes this increase to the increase in
revenues, the acquisition of The Natural Baby Catalog, and decreased selling
expenses as a percentage of net sales.
Selected financial information for Baby Co. relating to The Natural
Baby Catalog for the six months ended June 30, 1997 and the year ended December
31, 1996 are as follows:
Six months ended Year ended
June 30, 1997 December 31, 1996
------------- -----------------
Total revenues $2,938,276 $6,451,215
Net income 248,738 558,649
Total assets 760,065 915,275
On a pro forma basis, assuming the Company had acquired The Natural
Baby Catalog from Baby Co. at the beginning of fiscal year 1996, the combined
operations would have resulted in combined net sales of $13,954,877, net income
of $298,835, and net income per share of common stock of $.08, for the year
ended December 31, 1997 and combined net sales of $13,090,210, net income of
$37,009, and net income per share of common stock of $.01, for the year ended
December 31, 1996.
The Company believes that its consolidation of the operations of The
Natural Baby Catalog with the Company has realized savings 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
is incurring as a public entity, estimated to be $250,000 annually. No
assurances can be given that the Company will be successful in obtaining the
aforesaid savings on an annual basis.
In July 1997, the operations of The Natural Baby Catalog were relocated
to the Company's Canton, Ohio facilities, including inventories, telemarketing,
customer service and fulfillment. The cost of this relocation resulted in a
charge to earnings of $50,000.
25
<PAGE>
Year ended December 31, 1996 compared to the year ended December 31, 1995.
Total net sales for the year ended December 31, 1996 increased
$914,658, 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 $1,033,805 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 51.2% from 3.2 million in 1995 to 1.6 million in 1996
consistent with its plan to allocate more of its available resources to 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 180,124 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 purchases within 24, 12, 6, or 3 months.
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
4.6% from 1995 to 1996. While outbound
26
<PAGE>
shipping costs fluctuate with the package size and number of shipments per
order, 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% in 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
$684,615, or 12.0% of net sales, in fiscal 1995 and $712,515, or 10.7% of net
sales, in fiscal 1996. This increase 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 1995 and for
1996 were substantially all incurred by 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. As a result of the
reorganization in which the Company succeeded to the operations of Perfectly
Safe and acquired certain assets of Duncan Hill, the Company began to directly
handle certain of its own administrative functions during a six month transition
period ended December 31, 1996. In 1995 and for 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
Liquidity and Capital Resources
For the six months ended June 30, 1998, the Company used $173,692 of
cash in its operating activities. The Company's net income of $121,557 was
reduced by working capital
27
<PAGE>
changes of $384,097 primarily due to increased deferred catalog expense of
$202,539. Higher volume mailings of the Company's Spring catalogs in the six
months ended June 30, 1998 as compared to the comparable period of the prior
year accounts for the increase deferred expense. During the six months ended
June 30, 1998, the Company used cash from investing activities of $50,135 to
purchase property and equipment. During the six months ended June 30, 1998, cash
($293,364) was provided by financing activities from borrowings under the
Company's line-of-credit ($61,000) and increases in loans due from affiliated
parties.
For the six months ended June 30, 1997, cash of $208,358 was provided
from operating activities primarily due to an increase in accounts payable and
other liabilities of $486,850 and a decrease in deferred catalog expense of
$74,196 partially offset by the Company's net loss of $125,779, increases in
accounts receivable of $65,343, increases in inventories of $64,281 and
increases in prepaid expenses of $106,126. During the six months ended June 30,
1997, net cash of $92,928 was used in investing activities due to purchases of
property of $70,082 and decreases in prepaid amounts for acquisition from Baby
Co. of The Natural Baby Catalog business of $22,846. During the six months ended
June 30, 1997, cash of $364,078 was used in financing activities due to
increases in prepaid offering costs of $198,078 and decreases in amounts due to
affiliates of $137,070.
At October 12, 1998, the balance of the Company's credit line was
$762,000. The Company's current credit line is $800,000, payable on demand. The
line is secured by the assets of the Company and its affiliated companies,
Havana and Duncan Hill, and is guaranteed by W. Miller, the Company' Chief
Executive Officer. The interest rate is 1% over prime. It is the policy of the
bank to review the credit facility annually, 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 fiscal 1997 and 1998 loan years because the
Company's current cash flow would not allow it to comply before then.
At December 31, 1997, the Company had a deficit in retained earnings of
$1,402,583, compared with a deficit of $1,452,680 at December 31, 1996. This
increase resulted from a net profit of $50,097 for the year ended December 31,
1997.
For the year ended December 31, 1997, the operating activities consumed
$576,038 in cash through increases in accounts receivable, inventories and
prepaid expenses , but provided $553,709 in cash through a decrease in deferred
catalog expense, and an increase in accounts payable, customer advances and
other. The net effect of these changes and non cash charges of $80,687 relating
to depreciation and amortization, when added to the net profit was a decrease in
the Company's cash position, so that net cash provided by operating activities
was $108,455.
For the year ended December 31, 1997, the Company's financing
activities provided $1,497,636 in cash, with $2,619,890 from the sale of common
stock, $21,000 from borrowings on the Company's bank credit line, $43,782 from a
decrease in prepaid amounts for the public offering and $5,000 from the sale of
preferred stock, while using $718,035 from changes in
28
<PAGE>
current obligations to/from affiliates, $107,143 for the repurchase of the
Company's Common Stock from bridge lenders relating to the Company's initial
public offering and $366,858 from the repayment of debt, $266,858 which was paid
to related parties.
For the year ended December 31, 1997, the combined effect of net cash
provided by operating activities of $108,455, net cash provided by financing
activities of $1,497,636, and investments in fixed assets and the acquisition of
The Natural Baby Catalog totaling $1,752,845, decreased cash from $248,648 to
$108,894 at December 31, 1997.
Effective June 30, 1996, the Company was formed by Duncan Hill for the
purpose of acquiring certain operating assets of Duncan Hill and the children's
catalog business of Perfectly Safe. The Company paid for those assets through
the assumption of Perfectly Safe 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. The first installment of the promissory note to Duncan
Hill in the principal amount of $66,858, plus accrued interest, was paid on July
7, 1997 with the next installment in the amount of $100,000 due on June 30,
1998, together with accrued interest.
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 from its initial public offering, 8%
promissory notes in the amount of $75,000, convertible upon the effective date
of the Company's initial public offering into Warrants to purchase 1,500,000
shares of Common Stock (the "8% Convertible Notes") and 1,300,000 shares of the
Company's Common Stock for $162,500. Subsequently, the holders of the 8%
Convertible Notes, at the request of the Representative agreed to accept a cash
payment at the closing of the initial public offering in the face amount of
$75,000, plus accrued interest at 8% per annum, in lieu of the conversion of
their notes into 1,500,000 Warrants. Also, in July 1997, the Company repurchased
857,144 shares of the Common Stock previously issued in the private financings
at a repurchase price of $.125 per share. On July 2, 1997, the Company repaid
the 8% promissory notes in the principal amount of $125,000, plus accrued
interest, the 8% Convertible Notes in the principal amount of $75,000, plus
accrued interest, and the payment of notes in the principal amount of $107,143,
plus accrued interest for the repurchase of the 857,144 shares of Common Stock
of the Company mentioned above, out of the proceeds of its initial public
offering:
The Company filed a registration statement in 1997 relating to the
offering by the Company of 300,000 units at an offering price of $12 per unit,
each unit consisting of two shares of Common Stock, $.001 par value, and eight
Class A Warrants. The Company's initial public offering was declared effective
by the Commission on June 26, 1997, and the proceeds were distributed to the
Company on July 2, 1997. See "Notes To Financial Statements Note 7. Public
Offering."
On July 2, 1997, the Company completed its acquisition of The Natural
Baby Catalog from Baby Co. The Company paid the following: a cash payment of
$1,225,000 to the seller; a cash payment in the amount of $219,831 in payment of
a note owed by Baby Co. in the
29
<PAGE>
principal amount of $197,603 together with accrued interest in the amount of
$22,228 through July 2, 1997; a cash payment of $50,134 to Core States Bank to
pay off Baby Co's line of credit in the principal amount of $50,000 plus
interest of $134; the assumption by the Company of Baby Co.'s accounts payable
incurred in the ordinary course of business which was approximately $266,287 as
of June 30, 1997; assumption of Baby Co.'s remaining lease obligations in the
approximate amount of $24,000 as of June 30, 1997; a convertible promissory note
issued by the Company to Baby Co. in the amount of $250,000 (Convertible Note);
a second promissory note in an amount which reflects the pre-tax profits of Baby
Co. in excess of $300,000 from the date of completion of the acquisition through
December 31, 1997 (the "Excess Profit Note"); 70,000 shares of the unregistered
Common Stock of the Company issued to Baby Co., valued at $3.50 per share, which
are subject to a two year lock-up until June 26, 1999; and, the agreement on the
part of W. Miller to guarantee the payments to be made by the Company under the
convertible note on the first and second anniversary dates.
Effective December 31, 1997, the Company paid $100,000 in exchange for
the cancellation of both the $250,000 Convertible Note and the Excess Profit
Note mentioned above. The Company also signed a four year non-compete agreement
with the sellers at a cost of $130,000, payable over two years.
In June, 1997, the Company replaced its data processing hardware. The
Company is leasing the hardware at an annualized cost of approximately $24,000.
Lease payments will be paid out of the Company's cash flow or working capital.
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 statements other than to require disclosure of the
pro forma effect on net income (loss) of using the fair value-based method of
accounting.
Effective January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company expects that comprehensive
income (loss) will not be materially different from net income (loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure About Segments of an Enterprise and Related Information." SFAS
No. 131 changes the standards for reporting financial results by operating
segments, related products and services, geographic areas and major customers.
The Company must adopt SFAS No. 131 for the fiscal year ended December 31, 1998.
The Company believes that the effect of adoption will not be material.
The Company intends to meet its cash requirements over the next 12-15
months from operations and the proceeds of the Offering. The Company intends to
establish a new operations center, retail outlet store and develop and establish
a website as discussed under "Use of Proceeds."
30
<PAGE>
Year 2000 Issues
Many existing computer programs use only two digits to identify a year
in the date field. There programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The Company is currently working to correct its computers and does
not believe that the expenditures will materially adversely impact the Company,
although no assurances can be given in this regard. The Company purchases its
materials from numerous vendors. While the Company has not determined whether
all its vendors will be year 2000 compliant before the problem arises,
Management believes that since it is not dependent on any major vendor, that its
operations will not be materially adversely effected by the failure of a few
vendors to timely correct the problem. However, no assurances can be given that
Management will be correct in its belief.
MARKET INFORMATION
In June 1997, the Company sold Units to the public consisting of two
shares of Common Stock and eight Class A Warrants (the "1997 Units"). The 1997
Units were quoted from June 1997 to November 1997 and the Company's Common Stock
and Class A Common Stock Purchase Warrants ("Class A Warrants") have been quoted
since June 1997 on the OTC Electronic Bulletin Board of the National Association
of Securities Dealers, Inc. ("NASD") under the symbols "KDST" and "KDSTW,
respectively." As of October __, 1998 at 4:00 P.M. Eastern Standard Time, the
last sale price of the Common Stock and Class A Warrants in the over-the-counter
market were $__ and $__, respectively.
The following table reflects the high and low sales prices for the
Company's 1997 Units, Common Stock and Class A Warrants for the periods
indicated as reported by the NASD.
<TABLE>
<CAPTION>
1997 Units
----------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1997: HIGH LOW
------------------------------------ ---- ---
June 1997 $62.00............................ $14.00
Third Quarter 62.00............................ 54.00
October through November 1997 50.00............................ 35.00
Common Stock
------------
Fiscal Year Ended December 31, 1997:
------------------------------------
June 1997 $11.25............................ $ 5.00
Third Quarter 10.00............................ 4.00
Fourth Quarter 7.50............................ 5.25
Fiscal Year Ended December 31, 1998:
------------------------------------
First Quarter $ 6.50............................ $3.625
Second Quarter 5.125............................ 2.375
Third Quarter 4.50............................ 2.125
Class A Warrants
----------------
Fiscal Year Ended December 31, 1997:
------------------------------------
June 1997 $ 6.00............................$ 5.00
Third Quarter 6.53............................ 5.00
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fourth Quarter 5.47............................ 63
Fiscal Year Ended December 31, 1998:
First Quarter $ 2.25............................ $ 0.25
Second Quarter 1.75............................ 0.50
Third Quarter .813............................ .094
</TABLE>
The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.
The Company had 12 record holders as of October 16, 1998 as reported
by its transfer agent (American Stock Transfer & Trust Company). The foregoing
does not include beneficial holders of the Company's Common Stock which are held
in "street name" (i.e. nominee accounts such as Depository Trust Company).
32
<PAGE>
BUSINESS
THE COMPANY
The Company is a specialty direct marketer which 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," 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 second catalog,
"Jeannie's Kids Club," 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. In July 1997, the
Company acquired The Natural Baby Catalog from The Natural Baby Company, Inc.
("Baby Co.") which specializes in children's products made from natural fiber
for children ages prenatal to age three, and consolidated its operations with
those of the Company.
HISTORY OF DUNCAN HILL
The Company's principal stockholder, 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. Duncan Hill is a publicly-held
corporation controlled (approximately 68%) by William Miller, the Company's
Chief Executive Officer ("W. Miller") and Jeanne E. Miller, President of the
Company ("J. Miller"). In 1980, a Duncan Hill subsidiary, Highland Pipe Company,
acquired the pipe manufacturing business of the Monarch Pipe Co., of Bristow,
Oklahoma, and subsequently changed its name to Monarch Pipe Co. ("Monarch"). In
1984, the business of E.A. Carey Co. of Chicago, a mail order supplier of
smoking products, was purchased by Duncan Hill through its subsidiary, E.A.
Carey of Ohio, Inc. ("Carey"). Subsequently Carey acquired Monarch from Duncan
Hill. In December 1997, Carey reincorporated in Delaware through a merger with
its then newly formed wholly-owned subsidiary, The Havana Group, Inc.
("Havana"), with Havana as the Surviving Corporation. Havana filed a Form SB-2
Registration Statement (File No. 333-45863) and completed an initial public
offering of its securities on May 22, 1998 with Fairchild Financial Group, Inc.
as the Managing Underwriter. All references to Havana include the operations of
its predecessor, Carey and its subsidiary, Monarch.
Perfectly Safe, Inc. ("Perfectly Safe") was formed by Duncan Hill in
1990 under Ohio law for the purpose of publishing The Perfectly Safe Catalog,
which was acquired from J. Miller in January 1990. J. Miller purchased the
Perfectly Safe Catalog in 1988 from the catalog's creator. In July, 1995,
Perfectly Safe began to publish its second catalog, Jeannie's Kids Club.
Prior to January 1, 1997, all fulfillment and administrative services
of Perfectly Safe were performed and paid for by Duncan Hill which also provided
similar services to its
33
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subsidiary, Havana. Fulfillment services included order taking, order
processing, customer service, warehouse packing and delivery, telephone
contracts and shipping contracts. Fulfillment services were charged to Perfectly
Safe and Havana based on the actual cost. Administrative services included wages
and salaries of officers, accounting, purchasing, executive and
creative/marketing personnel. It also included all leases, contracts, equipment
rentals and purchases, audit, legal, data processing, insurance and building
rent and maintenance. The administrative costs were allocated by Duncan Hill to
Perfectly Safe and Havana based upon the percentage of assets of each operating
subsidiary to the total assets of all operating subsidiaries.
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, which was dissolved. The Company was incorporated by Duncan Hill
under Delaware law on July 26, 1996 and had no operations prior to the
reorganization.
Effective June 30, 1996, the Company also acquired from Duncan Hill the
assets used by Duncan Hill 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 six-month transition period
ended December 31, 1996 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 purchase price of Perfectly Safe and the aforementioned Duncan Hill
assets acquired by the Company was $2,613,404, payable as follows: The Company
issued to 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 was $66,858 (which has been paid) and is $100,000 for each ensuing
installment. In addition, the Company issued to Duncan Hill 2,400,000 shares of
the Company's Common Stock valued at $.125 per share and 5,000,000 shares of the
Company's Series A Preferred Stock valued at $.001 per share. Further, the
Company agreed to assume all of the liabilities of Perfectly Safe as of June 30,
1996 in the amount of $1,291,546, as well as Duncan Hill's outstanding
obligations as of June 30, 1996 under its credit facility in the amount of
$650,000. Almost all of the borrowings under the credit facility were used to
support the Company's operations.
SERVICES PROVIDED TO HAVANA
Since 1997, the Company has provided administrative and fulfillment
services to Havana. During 1997, all fulfillment services were contracted and
paid by the Company and
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charged to Havana based on the actual cost. All administrative costs were
allocated between the Company and Havana based upon the percentage of assets for
each respective operating company to the total assets of both operating
companies with 33% charged to Havana for the period January 1, 1997 through June
30, 1997 and 21% charged to Havana for the period July 1, 1997 through December
31, 1997. Duncan Hill incurred certain other costs, including legal and outside
accounting/auditing expenses, which were allocated by Duncan Hill to the Company
and Havana based on the same method and percentages as described above.
Effective January 1, 1998, Havana entered into an agreement with the
Company whereby the Company will provide administrative functions to Havana at
an annual cost of $206,100 consisting of: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management, $34,900 for
data processing, $32,200 for office equipment and facilities use, $38,100 for
merchandising and marketing services and $15,300 for purchasing services. The
Company will also provide fulfillment services to Havana at a cost of $2.40 per
order processed. The Company calculated these fees based on actual 1997 costs.
Management believes these fees would represent actual costs should Havana
undertake to provide these services itself. Havana is also obligated to pay the
Company an amount equal to 5% of Havana's 1998 pre-tax profits as additional
consideration for the Company providing administrative and fulfillment services
to Havana. See "Certain Transactions."
ACQUISITION OF THE NATURAL BABY CATALOG
In July 1997, the Company acquired the net assets and operations of The
Natural Baby Catalog from Baby Co., a mail order retailer of children's clothing
and toys. This acquisition was funded with the net proceeds of the Company's
initial public offering and has been accounted for as a purchase. The aggregate
purchase price consists of the following:
Cash $1,444,831
Acquisition costs 276,998
Issuance of 70,000 Kids Stuff unregistered
common shares to the former owners of
Baby Co. 245,000
Note Payable 100,000
----------
Total purchase price $2,066,829
==========
See "Certain Transactions" and "Notes to Financial Statements." All references
to the Company include the operations acquired by it from Perfectly Safe, Duncan
Hill and Baby Co. unless the context indicates otherwise.
Company's Operations
The Company is a specialty direct marketer which 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 a review of the
catalog trade publication called "SRDS Direct Marketing List Service," the
Company believes that its first catalog, "Perfectly Safe, The Catalog For
Parents Who Care," is the nation's only catalog devoted to child safety,
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child-proofing the home, and safety-related products for the family. Since 1990,
the Company has published over 20 million Perfectly Safe catalogs and helped
childproof over 350,000 homes.
During July, 1995 the Company introduced "Jeannie's Kids Club" catalog
to broaden its market through a new direct marketing concept in children's
products. Jeannie's Kids Club offers parents who become club 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.
In July 1997, the Company acquired from Baby Co. 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).
KIDS CATALOG OUTLET
The Company has recently leased a retail store in Canton, Ohio
consisting of approximately 3,300 square feet of space. The Company is in the
process of installing leasehold improvements and furniture in order to open the
store in or about November 1998. The retail store, which is expected to be named
"Kids Catalog Outlet," will feature the Company's children's clothing and other
merchandise which have not been sold through the Company's catalogs.
MARKET
The Company's market for children's goods is affected by the number of
births as well as women in the work force . The Company believes that a birth
rate of an estimated 3.8 million births per year and the high percentage of
women in the work force place an emphasis on the convenience and value of
shopping by catalog. There can be no assurance that the Company is correct in
such belief.
STRATEGIES
The Company believes that its expertise in the marketing and
merchandising of children's products and its recent acquisition of The Natural
Baby catalog provides 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. In 1997, the Company consolidated the warehouse, telemarketing, data
processing and administrative functions of The Natural Baby Catalog into the
operations of the Company.
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
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went from inception in July 1995 to over 39,000 ;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. The Company intends to embark upon vigorous marketing efforts to
expand 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 $6.7 million in
1997. The Company is satisfied with the performance of The Natural Baby Catalog
and will endeavor to maintain continuity in the merchandising and marketing of
this catalog.
CUSTOMER ACQUISITION PROGRAMS. Historically, the Company has relied
upon catalog circulation as the sole method to acquire new customers. Due to 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 "Marketing." 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 "Risk Factors."
RECENTLY REPLACED OUTDATED DATA PROCESSING SYSTEM. During 1997, the
Company replaced its computer hardware at an annual lease cost of $24,000. The
Company expects this upgrade to improve the efficiencies of its operations. The
Company intends to periodically review software upgrade or replacement
anticipated to cost approximately $25,000 annually, on a leased basis, but does
not expect to replace or upgrade the software until future periods.
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 further acquisitions and no assurances can be given that any acquisitions
will be successfully completed in the future. See "Risk Factors."
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 competition, 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.
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
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warranty. The Perfectly Safe Catalog currently consists of 48 pages containing
approximately 250 products, principally hardgoods, approximately 52% 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, J. Miller, the
author of "The Perfectly Safe Home."
During 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. Jeannie's Kids Club Catalog consists of selected
popular quality hardgoods products from other children's catalogs offered at
discounts of up to 60%. Jeannie's Kids Club Catalog currently consists of 48
pages containing approximately 300 products.
The Natural Baby Catalog emphasizes alternative hard and softgood
products for babies and their parents. The catalog is 80 pages and contains
approximately 400 products, all of which are natural fiber, non-toxic and
environmentally safe. Approximately 28% of The Natural Baby Catalog product line
is exclusive or private label products.
The ratio between hardgoods to softgoods contained in the Company's
three catalogs is approximately 3:1. Substantially all 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 catalog pages
consumed in its presentation. Products are then rated by profitability
performance 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 1997 was over 53,000 for Perfectly Safe, and over
33,000 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.
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In order to select those households most likely to purchase, the
Company uses a statistical modeling system . The Company believes that the
application of a statistical modeling systems increases the rate of percentage
response and profitability of The Natural Baby Catalog, although there can be no
assurance that the Company is correct in such belief.
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 1997, the catalog mailings for
Perfectly Safe and Jeannie's Kids Club were 2,025,375 and 1,432,716,
respectively.
The Natural Baby Catalog uses a selling strategy based upon three basic
selling seasons: spring, summer and fall/winter. While catalogs are mailed
monthly, lesser quantities are mailed monthly in the period February-June, with
quantities increasing during the fall/winter season. The Natural Baby Catalog
mailed approximately 1,242,000 catalogs during the second half of 1997.
Due to 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.
After the completion of the Offering, the Company intends to establish and
develop a website to advertise and sell its products. See "Use of Proceeds."
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 method of receipt of
payment includes major credit cards and 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 employs 29 full-time and 8 part-time warehouse customer
service and telemarketing employees at October 12, 1998. During 1996 and 1997,
the Company processed over 708,497 telephone orders, catalog requests and
service requirements. The Company also processes orders, catalog requests and
service requests for Havana. The Company charges Havana $2.40 per order
processed. See "Certain Transactions."
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 23,000 square feet of leased facilities in North Canton,
Ohio. Orders shipped are individually recorded and posted through the use of
barcode scanners, so that sales records and credit card deposits are
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electronically posted. The Company's fulfillment center processed approximately
286,000 shipments in 1996, approximately 302,000 shipments in 1997 and
approximately 216,000 shipments in the eight months ended August 31, 1998.
INVENTORY/PURCHASING
The Company conducts its purchasing operations at its general offices
in Canton, Ohio. Each catalog contains approximately 300 products. 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.
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 1997. The Company believes that no single source likewise supplied
more than 10% of The Natural Baby Catalog products in 1997.
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 will be
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 1997, The Natural Baby Catalog sales in the fourth quarter were
approximately 34% of The Natural Baby Catalog total 1997 sales.
INSTITUTIONAL CREDIT FACILITY
Effective June 30, 1996, the Company assumed Duncan Hill's liability
under Duncan Hill's $800,000 line of credit facility provided by the United
National Bank and Trust Company to the Company (the "Bank"). The Bank opened an
$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 and is secured by the assets of the
Company, Duncan Hill and Havana. The repayment of the line of credit is
guaranteed by W. Miller and Havana. The amount outstanding under the line of
credit as of October 12, 1998 is approximately $762,000. Interest is charged at
the rate of 1% over prime.
It is the policy of the Bank to review the credit facility annually,
and to require that the Company maintain a zero balance on the credit line for a
period of thirty consecutive days
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sometime during the course of each year. The Bank agreed to waive the "zero
balance" required for the fiscal 1997 and 1998 . See "Risk Factors."
COMPETITION
The mail order catalog and retail clothing outlet industries are highly
competitive. The Company's catalogs compete and its proposed retail clothing
outlet store intends to 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." "The Right Start Catalog" and "One Step Ahead" have substantially
larger revenues than the Company, even as adjusted to reflect consolidation of
the revenues of The Natural Baby Catalog .
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." Many of those catalogs have substantially
higher revenues than the Company.
Certain catalogs, such as "Hanna Anderson" 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 many 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. The
Company has not experienced such a reaction from its acquisition of The Natural
Baby Catalog , although there can be no assurance that such a competitive
reaction will not occur in the future, or that such an occurrence would not have
an adverse effect upon the profitability of The Natural Baby Catalog. See "Risk
Factors."
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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 recent acquisition of The Natural Baby Catalog, the Company
acquired the ownership of the trademark "The Natural Baby Co., Inc." with logo,
which is a federally registered trademark. There can be no assurance as to the
extent of the protection that will be provided to the Company as a result of
having such trademarks and trade names or that the Company will be able to
afford the expenses of any complex litigation which may be necessary to enforce
the proprietary rights.
EMPLOYEES
As of September 30, 1998, the Company had 54 full time employees and 19
part time employees. Of this total, 9 employees or 12% of total full-time
employees, hold positions of managers; 50 employees or 68% of the 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
50 employees or 68% 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.
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. No assurances can be given that the Company will
comply with all state and federal laws affecting its business in the future.
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 taxes in states where it is required
to do so. However, 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. There can be no assurances
given that these state sales tax laws will not be changed in the future to the
detriment of the Company. The Company has no claims or regulatory matters in
process or pending as of September 30, 1998. See "Risk Factors."
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PRODUCT LIABILITY INSURANCE
Since 1990, the Company's parent, Duncan Hill, has carried product
liability insurance for the Company and Havana. 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 Havana as named insureds. The policies are
issued for a period of one year and are currently in effect through September
17, 1999. The Company may, in the future, procure the same coverage in its name,
alone. 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. An 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 "Risk Factors."
DESCRIPTION OF PROPERTY
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, 1999 with an option to renew for a period of one year. The
Company's warehouse and distribution center is located in North Canton, Ohio and
consists of approximately 23,000 square feet, which is leased at the monthly
rate of $13,329 through September 30, 1999, and subject to earlier termination
without penalty at the option of the lessee upon 90 days written notice to the
landlord. All leases are in the name of Duncan Hill and the rent is charged to
the Company and Havana consistent with past practices.
In August 1998, the Company entered into a lease for retail space at
4418 Belden Village Street, Canton, OH, containing approximately 3,400 square
feet of space. This lease, which amends an earlier lease, has a term expiring
December 31, 2002. The Company will pay a monthly rent of approximately $2,250
commencing 30 days after the Company takes possession of the premises and the
landlord notifies the Company that the space is ready for occupancy.
The Company intends to establish and lease a new operations center of
approximately 34,000 square feet in early 1999. This operation center, which is
expected to be located in or about Canton, Ohio, will include customer
relations, order entry and warehouse and distribution operations and will
replace its existing warehouse facility. Moving costs are estimated at $35,000.
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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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 (1) 62 Chairman of the Board of Directors,
Chief Executive Officer, Principal
Financial and Accounting Officer,
Secretary
Jeanne E. Miller (1) 51 President, Director
William T. Evans 46 Vice President of Finance
and Operations
Clark D. Swisher 46 Director
Alfred M. Schmidt 65 Director
- ------------------
(1) W. Miller and J. Miller are husband and wife.
The term of office for each of the Company's directors is one year
until their respective successors are elected and shall qualify. Executive
officers serve at the pleasure of the Board of Directors.
WILLIAM L. MILLER, Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting Officer, Treasurer and Secretary of the
Company since its formation in July 1996. Mr. Miller serves as Chairman of the
Board, President and Chief Executive Officer of Havana since December 1997.
Previously, he was the sole director and an executive officer of E.A. Carey of
Ohio, Inc. from 1984 to December 1997. Mr. Miller had been a director of
Perfectly Safe, Inc. and its vice President since it was formed by Duncan Hill
in 1990 until July 1996. Mr. Miller is President, Founder and a director of
Duncan Hill, a company he formed in 1977, Mr. Miller founded the MBI
Corporation, which designed and developed packaging machinery (1975-78). Mr.
Miller served in executive capacities in the direct marketing industry from 1971
to 1975. He holds a Bachelors Degree. in Mechanical Engineering from Purdue
University and a Masters Degree in Business Administration from Indiana
University
JEANNE E. MILLER has been a director of the Company since July 1996,
and its President since January 1998. Previously, she served as Executive Vice
President of the Company from July 1996 until January 1998. Since July 1996,
Mrs. Miller had been a director of Perfectly Safe, Inc., and its President since
its formation in 1990 until July 1996. Mrs.
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Miller co-founded Duncan Hill in 1977 and has been a director and its Vice
President since 1977. 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 served as Vice
President and a director of Carey and Highland Pipe Company, both of which are
subsidiaries of Duncan Hill, from 1984 to 1996.
WILLIAM T. EVANS, Vice President of Finance and Operations since
December 9, 1997. Previously he helped form and served as Treasurer of Premier
Plastic Recyclers, Inc. (1994-1997), which reprocessed plastics for use as raw
material. He served in senior management positions with Bridgestone/Firestone,
Inc. from 1989 to 1994, including Chief Financial Officer of South American
operations. As a CPA with the accounting firm of Deloitte & Touche, he served as
a Senior Manager from 1977 through 1988. Mr. Evans holds a Bachelors degree in
accounting from the University of Akron. Mr. Evans is currently on a leave of
absence due to medical and health reasons.
CLARK D. SWISHER is a director of the Company since July 1996. 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.
ALFRED M. SCHMIDT, JR., a director of the Company since September 1998
is President of The Schmidt Group International, Inc., direct
marketing/management consultants. Mr. Schmidt was the entrepreneur owner of New
Hampton General Store, a consumer catalog company. Mr. Schmidt was a Vice
President of Hanover House, then the first Vice President of Brooks Brothers, a
national chain of apparel specialty stores with 65 stores in the U.S. and six in
Japan. Mr. Schmidt subsequently was the first Vice President of Direct Marketing
of Bergdorf Goodman, N.Y., a designer apparel retailer, and Senior vice
President in charge of catalogs at the Franklin Mint, Franklin Center,
Pennsylvania. Mr. Schmidt finished his public career as President of Myron
Manufacturing Company, a direct marketing firm selling advertising specialty
products by catalog, direct mail, and telemarketing. For the past twelve years,
Mr. Schmidt has led his company in catalog consulting with clients from Europe
to the Pacific Rim. Mr. Schmidt is a member of the Direct Marketing Association,
the 1982 winner of the prestigious Henry Hoke Award and the DMA Echo Leader
Award. He was a founder of the Catalog Leader's Group. Mr. Schmidt has served on
the DMA Catalog Council, The Direct Marketing Educational Council, and the
Direct Marketing Idea Exchange. Mr. Schmidt has been a contributing writer to
Catalog Age Magazine, Catalog Business, Direct Marketing Magazine and D.M. News.
Mr. Schmidt has addressed audiences extensively in the U.S. as well as Europe
and the Far East.
Alfred M. Schmidt, Jr. is an independent director and the Company
intends to appoint a second independent director as the fifth director. There is
no assurance, however, that the Company will be able to attract a suitable
candidate at this stage of its development.
Upon the appointment of one additional unaffiliated director, the Board
of Directors intends to establish a Compensation Committee and an Audit
Committee. The Audit
45
<PAGE>
Committee, which would 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 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 would consist entirely of directors who are
not affiliated with the Company. The Compensation Committee would 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 would also administer
the Company's 1997 Long-Term 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 June 26, 1997. As of the date of this Prospectus, no such
person has been designated.
Compensation of Directors
The Company pays its directors who are not also employees of the
Company $100 for each meeting attended and reimburses such directors for travel
and other expenses incurred by them in connection with attending Board of
Directors meetings. Directors are eligible to participate in 1997 Stock
Incentive Plan.
46
<PAGE>
Executive Compensation
The following table provides a summary compensation table with respect
to the compensation of W. Miller, the Company's Chief Executive Officer (CEO),
and J. Miller, the Company's President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Number of Payouts sation
Position Year Salary ($) Bonus ($) ($) (1) ($) (2) Options (3) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Miller, 1997 125,000 -0- 4,000 -0- 100,000 -0- -0-
Chief Executive 1996 100,000 -0- -0- -0- -0- -0- -0-
Officer 1995 100,000 -0- -0- -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------------
J. Miller, 1997 90,000 -0- 4,000 -0- 100,000 -0- -0-
President 1996 65,000 -0- -0- -0- -0- -0- -0-
1995 65,000 -0- -0- -0- -0- -0- -0-
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include the value of leased automobiles used almost
exclusively for the Company's business or key man life insurance on the
lives of each of W. Miller and J. Miller in the amount of $1,000,000,
payable to the Company in the event of death. W. Miller is provided
with a leased automobile by Havana with a monthly cost of approximately
$1,100 and J. Miller is provided with a leased automobile by the
Company at a monthly cost of approximately $800. The foregoing table
does not include the value of any personal use of such automobiles.
(2) Does not include 2,400,000 shares of the Company's Common Stock and
5,000,000 shares of the Company's Series A Preferred Stock issued to
Duncan Hill in connection with a reorganization.
(3) See "Employment Contracts" for a description of these options.
47
<PAGE>
OPTION GRANTS TABLE
The information provided in the table below provides information with
respect to individual grants of the Company's stock options during fiscal 1997
of each of the executive officers named in the summary compensation table above.
The Company did not grant any stock appreciation rights during 1997 and/or the
first nine months of 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual
Individual Grants Rates of Stock Price
Appreciation
for Option Term (2)
- ------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
Granted to
Options Employees Exercise Expira-
Granted in Fiscal Price tion
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
W. Miller 100,000 50% 5.00 1/1/07 314,000 797,000
- ------------------------------------------------------------------------------------------------------------------------------
J. Miller 100,000 50% 5.00 1/1/07 314,000 797,000
==============================================================================================================================
</TABLE>
(1) The percentage of total options granted to the Company's employees in
fiscal year is based upon options granted to officers, directors and
employees.
(2) The potential realizable value of each grant of the Company's options
assumes that the market price of its Common Stock appreciates in value
from the date of grant to the end of the option term at annualized
rates of 5% and 10%, respectively, and after subtracting the exercise
price from the potential realizable value.
48
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
The information provided in the table below provides information with
respect to each exercise of the Company's stock option during fiscal 1997 by
each of the executive officers named in the summary compensation table and the
fiscal year end value of the Company's unexercised options.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Shares Unexercised In-the-Money
Acquired Options at Options
on Value FY-End (#) at Fy-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable(1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William L.. Miller -0- -0- -0- / 100,000 -0- / 100,000
- ---------------------------------------------------------------------------------------------------------------
Jeanne E. Miller -0- -0- -0- / 100,000 -0- / 100,000
===============================================================================================================
</TABLE>
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the Company's
options at exercise or fiscal year end, respectively. In calculating
the dollar value realized upon exercise, the value of any payment of
the exercise price is not included.
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 executive officers 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 Board intends to establish
its first bonus pool for 1999. 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 and includes at least two outside directors, no compensation will be
awarded under the Plan. W. Miller and J. Miller are expected to be the principal
participants in the Plan and they control the election of all directors. 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. As of the date of this
Prospectus, no compensation has been paid under the Plan.
49
<PAGE>
1997 STOCK INCENTIVE PLAN. In March 1997, the Company's majority
stockholder 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, which the Company intends to establish after it has two
outside 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
50
<PAGE>
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 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 this Prospectus, the Compensation Committee has not
been 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 W. Miller and J. Miller, effective January 1, 1997, pursuant to which W.
Miller is serving as Chief Executive Officer of the Company and J. Miller served
as its Executive Vice President. In January 1998, the Company elected J. Miller
President of the Company. In October 1998, the Company and J. Miller entered
into an amended agreement. The employment agreements. as amended, provide for an
annual base salary of $125,000 for W. Miller and $105,000 for J. 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 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. These automobiles are used almost
exclusively for business purposes. Each of these executives is also to be
reimbursed for certain personal expenses up to $6,500, which amount shall be
subject to increase to pay for any personal income tax liability should such
reimbursements be deemed taxable to the executive. (No such personal
51
<PAGE>
expenses were incurred in 1997.) Each of these executives 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 W. Miller and five
times the base salary of J. Miller. (As of September 30, 1998, the Company has
not been requested by W. Miller and/or J. Miller to take out such insurance.)
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 W. 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 J.
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 W. Miller and J. 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 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 W. Miller, a successor chief executive officer is hired with W. Miller's
consent to replace W. 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. See "Risk Factors."
Each of W. Miller and J. Miller was granted under their respective
employment agreements an option to purchase 100,000 shares of the Company's
Common Stock, which option vests 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 on January 1, 2007. 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. J. Miller also received options to
purchase an additional 100,000 shares at a purchase price of $2.50 per share in
October 1998. These options have a term of ten years and are immediately
exercisable.
52
<PAGE>
W. 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. See "Risk Factors."
The Company also provides W. Miller and J. Miller and all other
employees with health insurance on a non-discriminatory basis. The Company
intends to provide its executive officers and employees with certain fringe
benefits 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.
POTENTIAL CONFLICTS OF INTEREST
W. Miller is a co-founder, Chairman of the Board of Directors and Chief
Executive Officer of Havana, Duncan Hill and the Company. W. Miller's employment
agreement with the Company provides that he shall be permitted to devote such
time to managing Duncan Hill and Havana as he deems appropriate. Accordingly, W.
Miller will not be devoting his full-time attention to managing the operations
of the Company. Thus, conflicts of interest could potentially develop (i) to the
extent that W. Miller is not able to devote his full-time and attention to a
matter that would otherwise require the full-time and attention of a business
chief executive officer, (ii) involving competition for business opportunities,
(iii) involving transactions between the Company and its affiliated companies;
and (iv) due to the relationship between W. Miller and J. Miller as husband and
wife and as directors and officers of the Company. The Company has not adopted
any procedure for dealing with such conflicts of interest, except that the
Company's Board of Directors has adopted a policy that all new transactions
between the Company and Duncan Hill, Havana or any other affiliated company must
be approved by at least a majority of the Company's disinterested directors, if
any. Currently, the Company has no disinterested directors and Duncan Hill and
W. Miller control the election of the directors. See "Risk Factors."
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 of 1933, as amended (the "Securities Act") may
be permitted to directors, officers and controlling persons
53
<PAGE>
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. See "Risk Factors."
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 15, 1998, 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
------------------------------ ---------------------------------
NAME AND ADDRESS OF Beneficially Owned Beneficially Owned
BENEFICIAL OWNER(1)(7) NUMBER PERCENT(2) NUMBER PERCENT(3)
- ---------------------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Duncan Hill Co., Ltd. 2,251,075(4) 64.1% 5,000,000(4) 100%
William L. Miller and Jeanne E. Miller(4) 2,401,075(5) 65.6 5,000,000(6) 100
William Evans (8)
20,000 .6 -0- -0-
Clark D. Swisher (9) 7,500 .2 -0- -0-
Alfred M. Schmidt (9) 7,500 .2 -0- .2
All Officers and Directors
as a Group ( 5 Persons) 2,416,075(7) 65.7% 5,000,000(6) 100%
</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 3,512,856 shares of Common Stock outstanding
without giving effect to the possible exercise of outstanding Class A
Warrants.
(3) Calculated based upon 5,000,000 shares of Series A Preferred Stock
outstanding. 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 has no
conversion rights or rights to participate in dividend payments.
(4) The Millers will be deemed to beneficially own all of Duncan Hill's
shares for purposes of Rule 13d-3 of the Exchange Act based upon his
controlling ownership of its common stock. The Millers together control
approximately 68% of Duncan Hill.
(5) Includes the Miller's deemed beneficial ownership of 2,251,075 shares
of Common Stock and options to purchase 50,000 shares.
(6) Represents the Miller's deemed beneficial ownership of 5,000,000 shares
of Series A Preferred Stock, the record holder of which is Duncan Hill.
(7) All addresses are c/o Kids Stuff, Inc., 4450 Belden Village Street,
N.W., Suite 406, Canton, Ohio 44718.
55
<PAGE>
(8) Mr. Evan has options to purchase 80,000 shares which vest in four equal
annual installments beginning in 1999. The table includes only options
vesting in 1999.
(9) Messrs. Swisher and Schmidt have options to purchase 30,000 shares
each, which options vest in four equal annual installments beginning in
1999. The table includes only options vesting in 1999.
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 were customers of the Representative, the Managing Underwriter of the
Company's initial public offering and this offering. There were no other
affiliations or relationships between the seven private investors and either the
Company or the Representative. The eighth investor, who was not a customer of
the Representative and has never had any relationship or affiliation with the
Representative, had once been engaged to provide financial consulting services
to Duncan Hill. This investor has no other relationships or affiliations with
the Company.
In June 1997, the Company repurchased an aggregate of 857,144 shares of
Common Stock from five of the customers of the Representative at a repurchase
price of $.125 per share. This repurchase was required by the National
Association of Securities Dealers (the "NASD") as a condition to approving the
compensation to be received by the Representative in connection with the
Company's initial public offering. The Company's repurchase payment was
evidenced by five promissory notes issued by it in the aggregate amount of
$107,143, which notes have been paid. The notes bore interest at the rate of 8%
per annum commencing the date that each investor initially subscribed for his
Rule 504 Shares.
The remaining 442,856 shares which were not required to be repurchased
are still outstanding. Such 442,856 shares were issued under Rule 504 of
Securities Act (the "504 Shares") and are freely tradeable except for 100,000 of
the Rule 504 Shares which are subject to a "lock-up" agreement with the
Representative until June 26, 1999. 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.
BRIDGE LOAN
In October 1996, the Company borrowed an aggregate of $200,000 (the
"Bridge Loan") from three private investors, two of whom were 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, which has been paid, bore
interest at the rate of 8% per annum.
As originally structured, $75,000 of the face amount of the Bridge Loan
was convertible into 1,500,000 Warrants upon the effective date of the public
offering.
56
<PAGE>
Subsequently, the Bridge Loan was restructured, at the request of the
Representative so that the Bridge Lenders would be paid the entire $200,000 face
amount of the Bridge Loan, in cash, plus accrued interest at 8% per annum, at
the closing of the Company's initial public offering in July 1997, and would
waive the right to convert $75,000 of the face amount of the loan into 1,500,000
Warrants.
ACQUISITION OF THE NATURAL BABY CATALOG
In May, 1996, Baby Co. contracted to sell its catalog business, The
Natural Baby Catalog, to Duncan Hill on behalf of the Company, at which time
Duncan Hill paid Baby Co. $25,000 towards the purchase price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding a description of the terms and conditions of the Company's acquisition
of The Natural Baby Catalog from Baby Co. In connection with this transaction,
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 was reflected in
the $250,000 Convertible Note described in "Management's Discussion and Analysis
and Results of Operations" and $100,000 of the Additional Amount is reflected in
the cash payments made in July 1997 described in "Management's Discussion and
Analysis and Results of Operations." 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.
GENERAL
Reference is made to "Business" and "Management's Discussion and
Analysis and Results of Operations" for a description of various related party
transactions involving the Company, Havana and Duncan Hill.
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.
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Series 1 Preferred Stock and two
Preferred Warrants.
57
<PAGE>
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 and Series 1 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, all
of which are owned by Duncan Hill. 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 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. 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. See
"Risk Factors."
SERIES 1 PREFERRED STOCK
The Board of Directors intends to file before the date of this
Prospectus, a Certificate of Designation designating 1,500,000 shares of
Preferred Stock as "Series 1 Preferred Stock" (the "Series 1 Preferred Stock" or
"Preferred Shares") with the following rights, preferences and privileges:
Dividends. Each Preferred Share is entitled to cumulative annual
dividends of $.45 payable on April 30 of each year commencing April 30, 1999
with a record date to be fixed annually by the Board of Directors. The first
dividend payment shall be pro rated for the period from the date of issuance
until December 31, 1998. Unpaid dividends will accumulate and be payable before
payment of dividends on the Common Stock. The Company may, at its option, pay
dividends in shares of Common Stock, in lieu of cash. Shares used for such
purpose will be valued at the average closing sales price of the Common Stock on
the OTC Electronic Bulletin Board, NASDAQ or an Exchange during the ten trading
days ending on the tenth day before the dividend payment date.
Conversion. Commencing 18 months from the date of this Prospectus, each
share of Series 1 Preferred Stock is convertible into ________ shares of Common
Stock. In lieu of the issuance of fractional shares, all amounts will be
rounded-up to the nearest whole number.
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Redemption. Commencing 18 months from the date of this Prospectus, the
Preferred Shares are redeemable at the option of the Company, on not less than
30 days' prior written notice to registered holders at the redemption price of
$7.20 per share plus accumulated dividends.
Voting Rights. Preferred Shares are entitled to one vote per share
voting together with the Common Stock as one class, except as otherwise provided
by the Delaware Corporation Law.
Preference on Liquidation. The Series 1 Preferred Stock will be
entitled to a preference on liquidation equal to $___ per share plus accumulated
unpaid dividends.
No Sinking Fund. The Company is not required to provide for the
retirement or redemption of the Series 1 Preferred Stock through the operation
of a sinking fund.
The foregoing is a summary of the material terms of a Preferred Stock
Agency Agreement between the Company and American Stock Transfer & Trust
Company.
PREFERRED WARRANTS
Commencing ______, 2000 and expiring _______, 2001, (the "Expiration
Date") each Preferred Warrant entitles the registered holder to purchase one
share of Series 1 Preferred Stock at an exercise price of $6.00 per share.
Preferred Warrants may be exercised by surrendering to the warrant agent the
Preferred Warrants and the payment of the exercise price in United States funds
by cash or certified or bank check. No fractional shares of Series 1 Preferred
Stock will be issued in connection with the exercise of Preferred Warrants. Upon
exercise, the Company will pay to the holder the value of any such fractional
shares based upon the market value of the Series 1 Preferred Stock at such time.
The Company is required to keep available a sufficient number of authorized
shares of Series 1 Preferred Stock for issuance to permit exercise of the
Preferred Warrants.
In the event that the Company notifies the holders of Series 1
Preferred Stock of its intention to redeem the Series 1 Preferred Stock, it
shall after giving the holders of the Preferred Warrants at least 30 days prior
written notice, contemporaneously redeem the Preferred Warrants at $1.20 per
Warrant, subject to the holders right to exercise the Preferred Warrants and
convert the underlying Series 1 Preferred Stock during such notice period. See
"Risk Factors."
In the event a holder of Preferred Warrants fails to exercise the
Preferred Warrants prior to the Expiration Date, the Preferred Warrants will
expire and the holder thereof will have no further rights with respect to the
Preferred Warrants. A holder of Preferred 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 Preferred
Warrants are not entitled to participate in the distribution of the Company's
assets.
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The exercise price of the Preferred Warrants and the number of shares
issuable upon exercise of the Preferred Warrants will be subject to adjustment
to protect against dilution in the event of Preferred Stock dividends, Preferred
Stock splits, combinations, subdivisions and reclassifications. No assurance can
be given that the market price of the Company's Series 1 Preferred Stock will
exceed the exercise price of the Preferred Warrants at any time during the
exercise period.
Purchasers of the Preferred Warrants will have the right to exercise
the Preferred Warrants to purchase shares of Series 1 Preferred 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 Preferred 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 Series 1 Preferred
Stock underlying the Preferred Warrants, but there can be no assurance that the
Company will be able to do so. The Preferred 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 Series 1 Preferred Stock
is not qualified or exempt from qualification in the jurisdictions in which the
holders of the Preferred Warrants reside.
For the life of the Preferred Warrants, a holder thereof is given the
opportunity to profit from a rise in the market price of the Series 1 Preferred
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 Preferred Warrants are
outstanding. At any time when the holders of Preferred 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
Preferred Warrants.
Commencing on or after _______, 2000, persons who desire to exercise
their Preferred Warrants must complete the subscription form on the reverse side
of their warrant certificate(s) and forward same together with the exercise
price to American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10005. Series 1 Preferred Stock certificates will be issued as soon as
practicable after the funds have cleared but no later than the fifth business
day after exercise of their Warrants.
The foregoing is a summary of certain provisions of the Preferred
Warrant Agreement under which each Preferred Warrant will be issued. The
Preferred Warrant Agreement dated _________, 1998 between American Stock
Transfer & Trust Company and the Company has been filed as an Exhibit to the
Registration Statement of which the Prospectus is a part.
COMMON STOCK
The Company has 25,000,000 shares of authorized Common Stock. As of the
date of this Prospectus, 3,512,856 shares of Common Stock were issued and
outstanding.
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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 duly authorized,
validly issued, fully paid and nonassessable.
CLASS A WARRANTS
Commencing June 26, 1998 and expiring June 26, 2002, (the "Expiration
Date") each Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $5.00 per share. Class A Warrants may be
exercised by surrendering to the warrant agent the Class A 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 Class A 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 Class A Warrants.
The Company may redeem the Class A Warrants at a price of $.05 per
Warrant at any time after they become exercisable and prior to the Expiration
Date 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.
In the event a holder of Class A Warrants fails to exercise the Class
A Warrants prior to the Expiration Date, the Class A Warrants will expire and
the holder thereof will have no further rights with respect to the Class A
Warrants. A holder of Class A 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 Class A Warrants are
not entitled to participate in the distribution of the Company's assets.
The exercise price of the Class A Warrants and the number of shares
issuable upon exercise of the Class A 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 Class A Warrants at any time during the exercise period.
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The Company has agreed with the Representative that, commencing June
26, 1998, 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 exercise of such Warrant;
(e) solicitation of the exercise is not in violation of Regulation M 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, the Representative 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 Representative and soliciting broker-dealers
may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, the Representative and soliciting broker-dealers may
be unable to continue to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
Purchasers of the Class A Warrants will have the right to exercise the
Class A 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 Class A 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 Class A
Warrants, but there can be no assurance that the Company will be able to do so.
The Class A 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 Class A Warrants reside.
For the life of the Class A 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 Class A Warrants are outstanding. At any
time when the holders of Class A 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 Class A Warrants.
Persons who desire to exercise their Class A Warrants must complete the
subscription form on the reverse side of their warrant certificate(s) and
forward same together with the
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exercise price to American Stock Transfer & Trust Company, 40 Wall Street, New
York, NY 10005. Common Stock certificates will be issued as soon as practicable
after the funds have cleared but no later than the fifth business day after
exercise of their Warrants.
The foregoing is a summary of certain provisions of a Warrant Agreement
under which each Warrant will be issued. The Warrant Agreement dated June 26,
1997 between American Stock Transfer & Trust Company and the Company has been
filed as an Exhibit to the Registration Statement of which the Prospectus is a
part.
UNDERWRITERS' PURCHASE OPTION
In connection with the Company's initial public offering, the Company
sold to the Underwriters, for an aggregate purchase price of $25, the
Underwriters' Purchase Option which entitles the holders to purchase 60,000
shares of Common Stock at an exercise price of $9.90 per share. The
Underwriters' Purchase Option is exercisable for four years commencing June 26,
1998 and expiring June 26, 2002. 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 shares 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 Common Stock
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 Registration Statement of which this Prospectus is a part
includes the registration of the 60,000 shares of Common Stock underlying the
Underwriters' Purchase Option. However, this Prospectus does not include the
exercise of the Underwriters' Purchase Option or the resale of the underlying
shares since there is no present intent to exercise the Underwriters' Purchase
Option or to resell the underlying Shares. The Company will file a
post-effective amendment to include the exercise of the Underwriters' Purchase
Option and the resale of the Underlying Shares at such time as there is a
present intention to exercise the Underwriters' Purchase Option.
Transfer Agent and Registrar
The transfer agent, registrar and Warrant Agent for the Company's
Common Stock, Class A Warrants, Series 1 Preferred Stock and Preferred Warrants
is American Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10005.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
In connection with obtaining equity bridge financing, the Company has
outstanding 442,856 shares of Common Stock under Rule 504 (the "Rule 504
Shares") of the Securities Act. Of the 442,856 shares, 100,000 of the Rule 504
Shares are subject to "lock-up" by the Representative and cannot be sold or
transferred until June 26, 1999, unless otherwise
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permitted by the Representative, at which time these shares will be freely
tradeable without any necessity for their registration under the Securities Act.
The balance of the Rule 504 Shares, i.e., 342,856 shares, are not subject to the
Representative's "lock-up" and are freely tradeable without any necessity for
their registration under the Securities 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 June 1997 initial
public offering price of each of the two shares of Common Stock and eight Class
A Warrants 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.
In addition, Duncan Hill, holds 2,251,075 shares of the Company's
Common Stock and 5,000,000 shares of the Company's Series A Preferred Stock
(collectively the "Restricted Securities"). These securities held by Duncan Hill
are "restricted securities" as that term is defined by Rule 144 of the
Securities Act. Such securities 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 until June 26, 1999 unless earlier permitted by the
Representative. While there are no agreements, arrangements or understandings
with Duncan Hill with respect to the early release of the lock-up, previously
the Representative has released the lock-up for Duncan Hill for a total of
148,925 shares, which have been sold. 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.
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 Stock pursuant to Rule 144 or
otherwise
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may adversely affect the then-prevailing market price of the Units, Common Stock
and the Class A Warrants, should a public trading market for such securities
develop.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriters named below, for which
Fairchild Financial Group, Inc. is acting as Representative, (the "Underwriting
Agreement", a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus forms a part), the Company has agreed to sell to each
of the Underwriters named below, and each of such Underwriters has severally
agreed to purchase, the number of Units set forth opposite its name.
Underwriters Number of Units
- ------------ ---------------
Fairchild Financial
Group, Inc.
TOTAL 400,000
=======
The Underwriters are committed, subject to certain conditions
precedent, to purchase all of the Units offered hereby if any such Units are
purchased. The Units are being offered by the Underwriter subject to prior sale,
when, as and if delivered to, and accepted by, the Underwriters and subject to
the approval of certain conditions.
The Representative has advised the Company that the Underwriters
propose to offer the Units to the public at the offering price set forth on the
cover page of this Prospectus and that the Underwriters may allow certain
dealers who are members in good standing of the National Association of
Securities Dealers, Inc. ("NASD") concessions of $___ per Unit. After the
initial public distribution is completed, the offering price and concessions may
be changed by the Representative.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under 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 Units 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 Units 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 Units to be higher than they would
otherwise be in the absence of such transactions. These transactions may be
effected on the OTC Electronic Bulletin Board assuming the Company is successful
in listing the Units on such system. See "Risk Factors."
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The Company has granted the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 60,000 Units at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriters may exercise this option solely to cover
over-allotments in the sale of the Units.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 3% of the gross proceeds of the Units sold in the offering
(including the Over-Allotment Option).
In connection with the Company's Initial Public Offering which was
completed in July 1997 with the Representative, the Company entered into an
agreement with the Representative to retain it as a financial consultant for a
period of three years expiring in June 2000. At the closing of the Offering, the
Company has agreed to enter into a one year extension to the financial
consulting agreement with the Representative and to compensate the
Representative with a fee payable in full in advance at the closing of the
Offering in an amount equal to 2% of the gross proceeds of the Offering
(including the Over-Allotment Option).
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933.
The Company has agreed to sell to the Representative or its designees,
at a price of $.001 per warrant, a total of 40,000 warrants (the "Underwriters'
Warrants") to purchase 40,000 Units identical to the Units sold in the Offering,
except that the exercise price of the Preferred Warrants included in the Units
is at $8.40 per share. The Underwriters' Warrants will be exercisable at a price
of $___ per Unit (i.e., 140% of the initial public offering price per Unit) for
a maximum period of four years commencing one year after the date hereof, and
they will not be transferable for one year after the date hereof except to
Underwriters, selected dealers and officers and partners thereof. Any profit
realized upon any resale of the Underwriters' Warrants and underlying securities
may be deemed to be additional underwriters' compensation. The Company has
agreed to register (or file a post-effective amendment with respect to any
registration statement registering) the Underwriters' Warrants and their
underlying securities under the Securities Act at its expense on one occasion,
and at the expense of the holders thereof on another occasion, upon the request
of a majority of the holders thereof. The Company has also agreed to certain
"piggy-back" registration rights for the holders of the Underwriters' Warrants
and their underlying securities.
The Underwriters have informed the Company that they do not expect
sales of the Units to be made to discretionary accounts to exceed 2% of the
Units offered hereby.
For a description of the Representative's right to receive a warrant
solicitation fee under certain circumstances in connection with the exercise of
the Company's outstanding Class A Warrants, see "Description of Securities -
Class A Warrants."
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Pricing of the Offering
The public offering of the Units has been determined by negotiations
between the Company and the Representative. Among the factors considered in
determining the offering price were the Company's financial condition and
prospects, the industry in which the Company is engaged, certain financial and
operating information of companies engaged in activities similar to those of the
Company and the general market condition of the securities markets. Such price
does not necessarily bear any relationship to any established standard or
criteria of value based upon assets, earnings, book value or other objective
measures.
SEC investigation involving the Representative
The Company has been advised by the Representative that the Securities
and Exchange Commission ("SEC") has issued a formal order directing a private
investigation by the staff of the SEC. Such order empowers the SEC staff to
investigate whether, from June 1995 to the present, the Representative and
certain other persons and/or entities may have engaged in fraudulent acts or
practices in connection with the purchase or sale of securities of certain other
companies in violation of Sections 10(b) and 15(c)(1) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Section 17(a) of the Securities
Act. These acts or practices include whether the Representative and certain
other brokers or dealers effected transactions or induced transactions by making
untrue statements of material fact and whether the Representative and certain
others have engaged in manipulative, deceptive or other fraudulent devices. The
formal order also concerns whether the Representative and certain others who
have agreed to participate in a distribution have violated Rule 10b-6 of the
Exchange Act by having bid for or purchased securities for accounts in which it
had a beneficial interest or which is the subject of such distribution. As of
September 30, 1998, the Representative understands that the SEC investigation is
ongoing. The Representative cannot predict whether this investigation will
result in any type of enforcement action against the Representative. See "Risk
Factors."
NASD Complaint Against the Representative
The Company has also been advised by the Representative that during
1996 and 1997, the staff of the NASD conducted an inquiry into the trading and
sales practices of securities of another company (the "issuer") in and around
April 1995. In connection with the inquiry, the NASD staff obtained documents
from the Representative and conducted on-the-record interviews of, among
others, the Representative's President-Chief Executive Officer, Head Trader and
Chief Financial Officer. On February 20, 1998 the NASD Department of Enforcement
filed an administrative complaint against the Representative, a principal of the
firm and two traders from other broker-dealers. The complaint alleges that the
Representative, acting through its then President-Chief Executive Officer-Sole
Owner, acquired and distributed certain securities of the issuer as "statutory
underwriters" without registration under Section 5 of the Securities Act
representing approximately 28% of the available float in the security in
purported violation of NASD Rule 2110 and failed to provide customers with an
offering prospectus. The complaint further alleges that at the same time the
Representative and its then President-Chief Executive Officer-Sole Owner (the
"Respondents") (i) entered into a consulting agreement with the issuer to
arrange for the sale of certain of its securities at a "designated price"
slightly below the market at the time; (ii)
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sold short to retail customers the issuer's securities at prices substantially
above the designated price; (iii) acquired from five short term investors
securities of the issuer to cover the Representative's large short inventory
position in what had previously been an inactive or thinly traded market for the
issuer's securities; (iv) illegally bidded for, purchased, or induced others to
purchase the issuer's securities in the secondary market while a distribution
was still in progress; and (v) continued to make a market in the corporation's
stock all in purported violation of Section 10(b) of the Exchange Act and Rule
Moreover, the complaint alleges that the Respondents caused the aforementioned
alleged unregistered distribution without filing the necessary documents with
the NASD's Corporate Financing Department and failed to disclose to customers
alleged unfair excessive and unreasonable compensation received from the
distribution in violation of NASD Rules 2110 and 2710. In addition, the
complaint alleged that the Respondents fraudulently manipulated the market for
the issuer's common stock by arbitrarily increasing the share price and by
artificially inflating the reported trade volume through "wash" and "matched" or
circular trading so as to create the appearance of an active market in the stock
in purported violation of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder and NASD Rules 2110 and 2120. According to the complaint, alleged
manipulation resulted in an illicit profit to the Representative of
approximately $402,509. The Complaint contains the following prayer for relief:
(1) findings of fact and conclusions of law that Respondents committed the
violations charged and alleged; (2) an order imposing sanctions upon the
Respondents in accordance with NASD Rule 8310; (3) an order requiring
Respondents to disgorge fully any and all ill gotten gains and/or make full and
complete restitution, together with interest; (4) an order imposing such costs
of any proceeding as are deemed fair and appropriate under the circumstances in
accordance with NASD Rule 8330; and (5) an order imposing any other fitting
sanction. The Respondents have indicated that they intend vigorously to contest
the allegations. A hearing has not yet been scheduled and there have been no
findings of fact or violations of law in this case.
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon
for the Company by Lester Morse P.C., Suite 420, 111 Great Neck Road, Great
Neck, NY 11021. Lester Morse P.C. has represented the Representative in
connection with other matters unrelated to the Offering. Lampert & Ference, 10
East 40th Street, New York, NY 10016, has acted as counsel to the Underwriters
in connection with the Offering.
EXPERTS
The financial statements of Kids Stuff, Inc. as of December 31, 1997
and December 31, 1996 and for the three years ended December 31, 1997, 1996 and
1995 have been audited by Hausser +Taylor LLP, independent auditors, and are
included herein in reliance upon the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and
68
<PAGE>
other information filed by the Company can be inspected and copied (at
prescribed rates) at the Commission's Public Reference section, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the New York Regional Office,
Seven World Trade Center, New York, NY. 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 that file electronically with
the commission through the Electronic Data Gathering, Analysis, and Retrieval
System (EDGAR).
The Company has filed with the Commission a registration statement on
Form SB-2, File No. 333-61463, which registration statement is also a
post-effective amendment to the Company's Registration Statement on Form SB-2,
File No. 333-19423 (herein together with all amendments and exhibits referred to
as the "Registration Statement") under the Securities Act, of which this
Prospectus forms a part. This Prospectus does not contain all of the information
set forth in the registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement. 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.
69
<PAGE>
INDEX
Independent Auditors' Report F-2
Balance Sheets - June 30, 1998 (Unaudited) and December 31, 1997
and 1996. F-3
Statements of Operations - Six Months Ended June 30, 1998 and 1997
(Unaudited) and Years Ended December 31, 1997, 1996 and 1995. F-5
Statements of Stockholders' Equity - Six Months Ended June 30, 1998
(Unaudited) and Years Ended December 31, 1997, 1996 and 1995. F-6
Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997
(Unaudited) and Years Ended December 31, 1997, 1996 and 1995. F-7
Notes to Financial Statements F-9
F-1
<PAGE>
Independent Auditors' Report
To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio
We have audited the accompanying balance sheets of Kids Stuff, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, 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
results of operations and cash flows prior to June 30, 1996 included 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.
HAUSSER + TAYLOR LLP
Canton, Ohio
February 10, 1998
F-2
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------------
June 30, 1998 1997 1996
------------- ---------- ----------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 171,431 $ 101,894 $ 248,648
Accounts receivable 459,248 335,013 165,779
Inventories 1,268,254 1,389,012 496,395
Deferred catalog expense 462,131 259,592 277,469
Due from affiliates 48,601 580,965 --
Prepaid expenses 65,201 21,798 169,789
---------- ---------- ----------
Total Current Assets 2,474,866 2,688,274 1,358,080
PROPERTY & EQUIPMENT
Data processing equipment 231,317 207,378 95,894
Leasehold Improvements 20,013 19,909 --
Vehicles 9,089 9,089 --
Machinery and equipment 101,755 93,366 83,360
Furniture and fixtures 147,018 129,314 98,448
---------- ---------- ----------
509,192 459,056 277,702
Less accumulated depreciation 219,353 193,634 164,093
---------- ---------- ----------
289,839 265,422 113,609
OTHER ASSETS, net of accumulated amortization
Goodwill 1,092,366 1,119,425 --
Customer List 438,869 474,940 --
---------- ---------- ----------
1,531,235 1,594,365 --
---------- ---------- ----------
$4,295,940 $4,548,061 $1,471,689
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Kids Stuff, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------
June 30, 1998 1997 1996
------------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion long-term debt - related parties $ -- $ 100,000 $ 266,858
Accounts payable 1,611,227 1,617,204 1,102,311
Line of credit 732,000 671,000 650,000
Due to affiliates -- -- 137,070
Customer advances and other 8,491 137,193 5,630
----------- ----------- -----------
Total Current Liabilities 2,351,718 2,525,397 2,161,869
LONG-TERM DEBT-RELATED PARTIES,NET OF
CURRENT PORTION -- 200,000 300,000
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value, 10,000,000 shares 5,000 5,000 --
authorized, 5,000,000 issued and outstanding,
voting, without dividend
Common stock - $.001 par value, 25,000,0000
shares authorized, 3,512,856, 3,512,856 and
3,700,000 issued and outstanding in 1998,
1997 and 1996, respectively 3,513 3,513 3,700
Additional paid - in capital 3,216,734 3,216,734 458,800
Retained earnings (deficit) (1,281,025) (1,402,583) (1,452,680)
----------- ----------- -----------
Total Stockholders' Equity 1,944,222 1,822,664 (990,180)
----------- ----------- -----------
$ 4,295,940 $ 4,548,061 $ 1,471,689
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Kids Stuff, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30, Years Ended December 31,
---------------------------- ----------------------------------------------
1998 1997 1997 1996 1995
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales $ 6,613,621 $ 3,509,881 $ 11,016,601 $ 6,638,995 $ 5,724,337
Cost of Sales 3,949,126 2,018,172 6,812,422 4,204,321 3,540,487
------------ ------------ ------------ ------------ ------------
Gross Profit 2,664,495 1,491,709 4,204,179 2,434,674 2,183,850
Selling Expenses 1,760,802 1,204,165 2,966,929 2,193,219 1,998,502
General and Administrative
Expenses 757,585 382,520 1,077,041 712,515 684,615
------------ ------------ ------------ ------------ ------------
Income (Loss) From Operations 146,108 (94,976) 160,209 (471,060) (499,267)
Net Other (Expense) (24,551) (30,803) (110,112) (50,580) (37,725)
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ 121,557 $ (125,779) $ 50,097 $ (521,640) $ (536,992)
============ ============ ============ ============ ============
Basic and Diluted Income (Loss) Per Share $ .03 $ (.04) $ .01 $ (.14) $ (.15)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Kids Stuff, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 $ 2,400 $ -- $ 297,600 $ 234,503 $ 534,503
Prior Period Adjustment -- -- -- (628,551) (628,551)
----------- ----------- ----------- ----------- -----------
Balance - January 1, 1995,
As Restated $ 2,400 $ -- $ 297,600 (394,048) (94,048)
Net Loss -- -- -- (536,992) (536,992)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1995 2,400 -- 297,600 (931,040) (631,040)
Sale of 1,300,000 Common
Shares To Bridge Lenders 1,300 -- 161,200 -- 162,500
Net Loss -- -- -- (521,640) (521,640)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1996 3,700 -- 458,800 (1,452,680) (990,180)
Issuance of 5,000,000 Preferred
Shares to Duncan Hill -- 5,000 -- -- 5,000
Repurchase of 857,144 Common
Shares From Bridge Lenders (857) -- (106,286) -- (107,143)
Net Proceeds From the Issuance
of 600,000 Common Shares in
Public Offering 600 -- 2,619,290 -- 2,619,890
Issuance of 70,000 Unregistered
Common Shares for Purchase
Of Natural Baby 70 -- 244,930 -- 245,000
Net Income -- -- -- 50,097 50,097
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 3,513 5,000 3,216,734 (1,402,583) 1,822,664
Net Income (Unaudited) -- -- -- 121,557 121,557
----------- ----------- ----------- ----------- -----------
Balance - June 30, 1998
(Unaudited) $ 3,513 $ 5,000 $ 3,216,734 $(1,281,025) $ 1,944,222
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
------------------------------- -------------------------------------------
1998 1997 1997 1996 1995
---------------- -------------- -------------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 121,557 $ (125,779) $ 50,097 $ (521,640) $ (536,992)
Adjustments to reconcile net income (loss) to net
cash (used) provided by operating activities:
Depreciation and amortization 88,848 8,841 80,687 17,005 25,991
Loss on disposal of assets -- -- -- 30,450 --
(Increase) decrease in accounts receivable (124,234) (65,343) (139,937) (92,146) 21,705
Decrease (increase) in inventories 120,758 (64,281) (417,847) 105,622 (237,747)
(Increase) decrease in deferred catalog expense (202,539) 74,196 203,464 (105,944) (34,072)
(Increase) in prepaid expenses (43,403) (106,126) (18,254) -- --
(Decrease) increase in accounts payable, customer
advances and other (134,679) 486,850 350,245 354,020 250,974
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by operating activities (173,692) 208,358 108,455 (212,633) (510,141)
Cash Flows From Investing Activities
Investment in property and equipment (50,135) (70,082) (157,023) (38,921) (28,016)
(Increase) decrease in prepaid amounts for
acquisition of Natural Baby Catalog business -- (22,846) 126,007 (126,007) --
Purchase of Natural Baby Catalog business -- -- (1,721,829) -- --
----------- ----------- ----------- ----------- -----------
Net cash (used) by investing activities (50,135) (92,928) (1,752,845) (164,928) (28,016)
Cash Flows From Financing Activities
Borrowings on line of credit - net 61,000 -- 21,000 220,000 255,000
Sale of common stock -- -- 2,619,890 162,500 --
Sale of preferred stock -- 5,000 5,000 -- --
Borrowings or long-term debt - related parties -- -- -- 566,858 --
Payment on long-term debt - related parties -- -- (266,858) -- --
Payment on note payable for acquisition of Natural
Baby Catalog -- -- (100,000) -- --
Purchase of common stock -- -- (107,143) -- --
(Increase) decrease in prepaid amounts for public
offering -- (198,078) 43,782 (43,782) --
(Decrease) increase in due to affiliates -- (137,070) (137,070) (315,086) 281,726
Decrease (increase) in due from affiliates 232,364 (33,930) (580,965) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 293,364 (364,078) 1,497,636 590,490 536,726
Net increase (decrease) in cash 69,537 (248,648) (146,754) 212,929 (1,431)
Cash - Beginning 101,894 248,648 248,648 35,719 37,150
----------- ----------- ----------- ----------- -----------
Cash - Ending $ 171,431 $ -- $ 101,894 $ 248,648 $ 35,719
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Kids Stuff, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash Paid during the period for interest $ 29,961 $ 35,123 $108,778 $ 50,554 $ 42,729
Supplemental Disclosure of Non-Cash Investing Activity
Borrowing on note payable for the purchase
of The Natural Baby Catalog $ -- $ -- $100,000 $ -- $ --
Issuance of 70,000 unregistered common shares
for the purchase of The Natural Baby Catalog -- -- 245,000 -- --
Retirement of long-term debt - related parties through
the elimination of an inter-company debt owed by
Duncan Hill $300,000 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<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 Safe, 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. Natural
Baby, a division of the Company, sells clothing and toys 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.
F-9
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Summary of Significant Accounting Policies and Reorganization (continued)
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, 1997 and
1996. Bad debt expense was $28,336 (unaudited) and $11,336 (unaudited)
for the six months ended June 30, 1998 and 1997, respectively, and
$37,904, $34,752, and $18,742 for the years ended December 31, 1997,
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.
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
$1,416,361 (unaudited) and $957,435 (unaudited) for the six months
ended June 30, 1998 and 1997, respectively, and $2,473,778, $1,936,094,
and $1,772,770 for the years ended December 31, 1997, 1996, and 1995,
respectively.
H. December 31, 1996 prepaid expenses include $43,782 relative to the
public offering (see Note 7) 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 $25,718 (unaudited)
and $8,841 (unaudited) for the six months ended June 30, 1998 and 1997,
respectively, and $29,541, $17,005, and $25,991 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Maintenance, repairs, and minor renewals are charged against earnings
when incurred. Additions and major renewals are capitalized.
F-10
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Summary of Significant Accounting Policies and Reorganization (continued)
J. Intangible Assets - During 1997, the Company purchased the net assets
and operations of The Natural Baby Company as discussed in Note 5.
Management has determined the fair value of the customer list acquired
in that acquisition to be $505,000. The excess purchase price over the
fair value of assets acquired amounted to $1,140,512 and was recorded
as goodwill. The customer list is being amortized using the
straight-line method over seven years. Goodwill is being amortized
using the straight-line method over twenty years. For the customer
list, accumulated amortization was $66,131 (unaudited) as of June 30,
1998 and $30,060 as of December 31, 1997. For goodwill accumulated
amortization was $48,146 (unaudited) as of June 30, 1998 and $21,087 as
of December 31, 1997.
K. 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.
L. Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the year and
additional shares assumed to be outstanding to reflect the dilutive
effect of common stock equivalents. The only common stock equivalents
outstanding were the 2,400,000 Class A Warrants. The number of shares
outstanding in computing basic and diluted earnings per share for 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
(Unaudited)
Six months ended
June 30, Years ended December 31,
-------- ------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Actual weighted average
number of common shares
outstanding 3,512,856 3,590,647 3,551,432 3,700,000 3,700,000
Effect of dilutive warrants -- -- 768,000 -- --
--------- --------- --------- --------- ---------
Weighted average assuming
conversion used for diluted
earnings per share 3,512,856 3,590,647 4,319,432 3,700,000 3,700,000
========= ========= ========= ========= =========
</TABLE>
For the 1996 and 1995 calculation of shares outstanding, the 3,700,000
shares includes the 857,144 shares that the Company bought back from
the private investors in 1997 (see Note 2A).
F-11
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Summary of Significant Accounting Policies and Reorganization (continued)
M. Reclassification - Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
N. New Authoritative Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued.
SFAS 130 established new standards for reporting comprehensive income
and its components and is effective for fiscal years beginning after
December 15, 1997. The Company expects that comprehensive income will
not differ materially from net income.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information."
SFAS 131 changes the standards for reporting financial results by
operating segments, related products and services, geographical areas
and major customers. The Company must adopt SFAS 131 no later than
December 31, 1998. The Company believes that the effect of adoption
will not be material.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
(Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets of liabilities on the balance sheet and
measurement of those instruments at fair value. If certain conditions
are met, a derivative may be designated specifically as (a) a hedge of
the exposure to changes in fair value of a recognized asset or
liability or an unrecognized firm commitment (a fair hedge), (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction (a cash hedge), or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The Company does
not anticipate having each of these types of hedges, but will comply
with requirements of SFAS 133 when adopted.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133
beginning January 1, 2000. The effect of adopting SFAS 133 is not
expected to be material.
F-12
<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.
Subsequent to December 31, 1996, the Company provides services to
Duncan Hill and Duncan Hill's other subsidiary, 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 general and
administrative 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.
F-13
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2. Stockholders' Equity
A. Common Stock
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
eight private investors for the aggregate purchase price of $162,500.
These 3,700,000 shares of unregistered securities were issued by the
Company at its inception. There were no underwriting discounts and
commissions paid in connection with the issuance of any said
securities.
In June 1997, the Company repurchased 857,144 of the shares sold to
five of the eight private investors at a repurchase price of $.125 per
share. The Company's repurchase payment was in the form of promissory
notes totaling $107,143. These notes were paid off in July 1997 with
the proceeds of the public offering.
In July 1997, the Company completed an initial public offering (see
Note 7) in which 600,000 common shares were issued.
In July 1997, the Company issued 70,000 unregistered restricted shares
which represented $245,000 of the $2,066,829 purchase cost of The
Natural Baby Catalog (see Note 5).
B. 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.
During January 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock, $.001 par value to Duncan Hill as 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.
F-14
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 2. Stockholders' Equity (continued)
C. Warrants
In conjunction with the public offering discussed in Note 7, the
Company issued 2,400,000 Class A warrants. 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 the
Company's 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.
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 plus 1%, for an effective rate
of 9.5% at December 31, 1997, and had a balance of $732,000 at June 30,
1998 (unaudited), and $671,000 at December 31, 1997. The line is
secured by assets of the Company, as well as the assets of Duncan Hill
and another Duncan subsidiary, Havana Group, Inc., formerly E. A. Carey
of Ohio, Inc. The repayment of the facility is guaranteed by Mr.
Miller, the Company's Chief Executive Officer. The credit facility
extends through June 30, 1998, and a condition of renewal is 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
weighted average interest rate for the years ended December 31, 1997,
1996, and 1995 was 9.4%, 9.3%, and 9.7%, respectively. Due to the
current nature of the liability, the carrying amount of the line
approximates fair value.
F-15
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 4. Long-Term Debt - Related Parties
A. Long-term debt - related parties consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
--------------- -------------------------------
1998 1997 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Note Payable - Duncan Hill Company (parent company), unsecured and
payable in four annual principal payments plus interest at 8.0%,
matures June 2000. The initial installment was for $66,858 and
the three remaining installments are for $100,000. (Duncan Hill
has retired this note as payment against an inter-company debt
owed to the Company by Duncan Hill.) $ - $300,000 $366,858
Note Payable - (bridge lenders) - The entire principal
plus interest at 8.0%, was paid off during 1997 - - 125,000
Note Payable - (bridge lenders) - The entire principal
plus interest at 8.0%, was paid off during 1997. - - 75,000
--------------- ------------- --------------
- 300,000 566,858
Less current portion - 100,000 266,858
------------- --------------
$ - $200,000 $300,000
=============== ============= ==============
</TABLE>
Note 5. Acquisition of The Natural Baby Catalog
In July 1997, the Company acquired the net assets and operations of The Natural
Baby Catalog, a mail order retailer of children's clothing and toys. The
purchase was funded with the net proceeds of an initial public offering. The
acquisition has been accounted for as a purchase and, accordingly, the operating
results of the acquired company have been included in the Company's financial
statements since the date of acquisition. The aggregate purchase price is
comprised of the following:
F-16
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 5. Acquisition of The Natural Baby Catalog (continued)
Cash paid to former owners and to pay off debt of
The Natural Baby Company $ 1,444,831
Costs of acquisition 276,998
Issuance of 70,000 Kids Stuff unregistered common
shares to the former owners of The Natural Baby
Company 245,000
Note payable 100,000
---------
Total purchase price $ 2,066,829
=========
The purchase price was allocated to the net assets acquired based on
fair values as follows:
Accounts receivable $ 29,297
Inventory 474,769
Deferred catalog costs 185,587
Prepaid expenses 3,544
Property and equipment 24,331
Customer list 505,000
Accounts payable assumed (296,211)
---------
Net assets acquired 926,317
Excess of the purchase price over fair market value
of assets acquired 1,140,512
---------
Total purchase price $ 2,066,829
===========
The excess of the aggregate purchase price over the fair market value of
net assets acquired of $1,140,512 was recorded as goodwill.
F-17
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 5. Acquisition of The Natural Baby Catalog (continued)
The following unaudited pro forma results of operations for the years
ended December 31, 1997, 1996, and 1995 assume the acquisition occurred
as of January 1, 1995:
1997 1996 1995
---- ---- ----
Sales 13,954,877 13,090,210 10,952,806
Net income 298,835 37,009 (324,259)
Earnings per share .08 .01 (.09)
Note 6. Income Tax
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes. Deferred tax assets (liabilities) consisted of the
following at December 31, 1997 and 1996:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforward $ 122,529 $ 174,883
Inventory obsolescence 37,796 --
--------- ---------
Total deferred tax assets 160,325 174,883
Valuation allowance (62,573) (80,544)
--------- ---------
Net deferred tax asset 97,752 94,339
Deferred tax liabilities:
Deferred catalog expense (88,261) (94,339)
Amortization (4,586) --
Depreciation (4,905) --
--------- ---------
Total deferred tax liabilities (97,752) (94,339)
---------
Net deferred income taxes $ -- $ --
========= =========
F-18
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 6. Income Tax (continued)
The Company's ability to recognize deferred tax assets is dependent on
generating future regular taxable income. In accordance with the
provisions of SFAS 109, management has provided a valuation allowance.
The Company had net operating loss carryforwards of approximately
$360,000 as of December 31, 1997 for tax purposes. The loss
carryforwards expire in the year 2011. Tax net operating losses of the
Predecessor incurred prior to July 1996 reverted to the parent company
in the reorganization.
Note 7. Public Offering
In July 1997, the Company completed an initial public offering in which
300,000 units were sold for $2,619,890, net of issuance costs of
$980,110. Each unit consisted of two common shares and eight redeemable
Class A warrants, and sold for $12 per unit. The common stock and
warrants are separately transferable.
The proceeds of the public offering were used to acquire net assets and
operations of The Natural Baby Catalog, to pay on accounts payable, to
repay indebtedness to bridge lenders, to repay indebtedness to the
Company's parent, Duncan Hill, to consolidate the operations of The
Natural Baby Catalog, and for general corporate purposes.
Note 8. 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 were 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-19
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 8. Employment Agreement (continued)
The Company accounts for employee stock options under APB 25 and,
accordingly, no compensation cost has been recognized. If the Company
had elected to recognize compensation cost consistent with the
fair-value based method prescribed by SFAS 123, the Company's net
income would have been reduced by approximately $330,000 or $.09 per
share for the year ended December 31, 1997.
For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted using the Black-Scholes
option pricing model assuming no dividends, 45% volatility, an expected
life of 50% of the ten-year option terms, and a risk-free interest rate
of 6.3%.
Note 9. Incentive Plans
A. Incentive Compensation Plan
During 1997, the Company adopted an Incentive Compensation Plan (the
"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. There were no awards in 1997 or the
first six months of 1998.
B. Stock Incentive Plan
During 1997, the Company adopted a Stock Incentive Plan (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. No stock incentives were granted under the Incentive Plan in
1997 or the first six months of 1998.
F-20
<PAGE>
KIDS STUFF, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Note 10. 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>
1995 Net Income (Loss)
Retained ------------------------
Earnings Amount Per Share
-------- ------------------------
<S> <C> <C> <C>
As previously reported $ 234,503 $(163,232) $(.05)
Elimination of internally-generated
customer lists, development
costs and goodwill (765,251) (336,660) (.09)
Elimination of the related deferred
tax liability 136,700 (37,100) (.01)
--------- --------- -----
As adjusted $(394,048) $(536,992) $(.15)
========= ========= =====
</TABLE>
F-21
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offer made 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 any security
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary .......................
Risk Factors .............................
Use of Proceeds ..........................
Dividend Policy ..........................
Dilution .................................
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................
Market Information .......................
Business .................................
Management ...............................
Principal Stockholders ...................
Certain Transactions .....................
Description of Securities ................
Unregistered Shares Eligible for Immediate
and Future Sale .......................
Underwriting .............................
Legal Matters ............................
Experts ..................................
Index to Financial Statements ............
--------------------
================================================================================
<PAGE>
================================================================================
400,000 UNITS
KIDS STUFF, INC.
UNITS, EACH UNIT CONSISTING OF
ONE SHARE OF SERIES 1 PREFERRED
STOCK AND 2 PREFERRED
WARRANTS
---------------------
Prospectus
--------------------
\
FAIRCHILD FINANCIAL GROUP, INC.
, 1998
================================================================================
<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
II-1
<PAGE>
provision, and not "negligence" or "gross negligence" in satisfying his duty of
care. The provision, however, does not 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................................. $ 2,663.86
NASD Fees ..................................... 1,403.40
Accounting fees and expenses*.................. 25,000.00
Legal fees* ................................... 40,000.00
Blue Sky fees and expenses*.................... 45,000.00
Printing and engraving*........................ 80,000.00
Miscellaneous expenses*........................ 5,933.74
-----------
TOTAL.............................. $200,000.00
- ---------------
* Estimated.
The Company will bear all expenses shown above.
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 June, 1997, the Company repurchased 857,144 of those
shares from five private investors at the same price for which the shares were
originally sold to these investors.
In October, 1996, the Company borrowed an aggregate of $200,000 from
three private investors. As originally structured, $75,000 of the face amount of
the loan was convertible upon its terms into 1,500,000 Class A Warrants.
Subsequently, the loan was restructured so
II-2
<PAGE>
that the lenders' would be repaid the entire face amount of loan in lieu of the
right to convert $75,000 of the face amount into 1,500,000 Class A Warrants.
In July 1997, the Registrant completed its acquisition of the assets of
The Natural Baby Company, Inc. Included in the consideration paid was 70,000
unregistered shares of the Registrant's Common Stock to The Natural Baby
Company, Inc.
As described in the Prospectus, the Company has granted to the officers
and directors the following: options to purchase 100,000 shares to William
Miller, options to purchase 200,000 shares to Jeanne Miller, options to purchase
7,500 shares to Clark D. Swisher, options to purchase 7,500 shares to Alfred M.
Schmidt and options to purchase 80,000 shares to William T. Evans.
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 was not an issuer that was precluded from relying upon Rule
504 under paragraph (a) thereof and, in addition, had satisfied the terms and
conditions of Rules 501 and 502(a) by virtue of the fact that it had 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.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
1.01 Revised Form of Underwriting Agreement - 1997 Offering (5)
1.02 Revised Form of Selected Dealers Agreement - 1997 Offering (5)
1.03 Revised Form of Warrant Exercise Fee Agreement - 1997 Offering (5)
1.04 Form of Underwriting Agreement - Series 1 Preferred Stock (7)
3.01 Certificate of Incorporation of the Company (1)
3.02 Certificate of Amendment of Certificate of Incorporation of the Company(1)
3.03 By-Laws of the Company(1)
3.04 Certificate of Designation of Series A Preferred Stock (2)
3.05 Certificate of Designation (11)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.0 Revised Form of Common Stock Purchase Warrant Agreement (5)
4.04 Revised Specimen Certificate for Common Stock Purchase Warrants (3)
4.05 Revised Form of Underwriters' Purchase Option - 1997 Offering (5)
4.06 Form of Representative's Lock-up Letter (2)
4.07 Form of Representative's Purchase Option Agreement (7)
4.08 Preferred Stock Agency Agreement (7)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.09 Preferred Warrant Agency Agreement (7)
4.10 Specimen of Preferred Warrant (7)
4.11 Specimen of Series 1 Preferred Stock (11)
5.01 Opinion of Lester Morse P.C. (7)
10.01 Agreement to Acquire the Assets of The Natural Baby Company, Inc., (the
"Acquisition Agreement")(1)
10.02 Addendum to Acquisition Agreement (1)
10.03 Escrow Agreement under the Acquisition Agreement (1)
10.04 Form of Consulting Agreement with Jane Martin (1)
10.05 Asset Purchase Agreement between the Company and its Parent (1)
10.06 Promissory Note from the Company and its Parent (1)
10.07 Form of Bridge Loan Agreement (1)
10.08 Form of Financial Consulting Agreement with Fairchild Financial Group, Inc. (1)
10.09 Credit Facility with United National Bank and Trust Company (2)
10.10 Lease for Company's principal offices and telemarketing center (2)
10.11 Employment Agreement with William L. Miller (2)
10.12 Revised Employment Agreement with Jeanne E. Miller ( 7)
10.13 Incentive Compensation Plan (2)
10.14 1997 Long-Term Stock Incentive Plan (2)
10.15 Amendment to Asset Purchase Agreement between the Company and its Parent (2)
10.16 Form of Amendment to Bridge Loan Agreement (4)
10.17 Amended Form of Stock Repurchase Agreement and Note (5)
10.18 Second Addendum to Acquisition Agreement (5)
10.19 First Addendum to Escrow Agreement (6)
10.20 Third Addendum to Acquisition Agreement (6)
10.21 Agreement with The Havana Group, Inc. (9)
10.22 Form of new Financial Consulting Agreement with Fairchild Financial Group, Inc.(7)
10.23 Employment Agreement with William T. Evans (7)
10.24 Other Leases (11)
23.01 Consent of Hausser + Taylor LLP (7)
23.02 Consent of Lester Morse P.C. [included in Exhibit 5.01]
27.00 Revised Financial Data Schedule (8 )
</TABLE>
-----------
(1) Incorporated by reference to the Registrant's Form SB-2 Registration
Statement, file no. 333-19423, filed with the Securities and Exchange
Commission on January 8, 1997.
(2) Incorporated by reference to the Registrant's Amendment No. 1 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on March 14, 1997.
II-4
<PAGE>
(3) Incorporated by reference to the Registrant's Amendment No. 2 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on April 2, 1997.
(4) Incorporated by reference to the Registrant's Amendment No. 3 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on April 14, 1997.
(5) Incorporated by reference to the Registrant's Amendment No. 4 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on June 3, 1997.
(6) Incorporated by reference to the Registrant's Amendment No. 5 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on June 25, 1997.
(7) Filed herewith.
(8) Previously filed in connection with reports under the Securities and
Exchange Act of 1934
(9) Incorporated by reference to the Registrant's Form 10-K filed for its
fiscal year ended December 31, 1997.
(10) Previously filed in prior amendment to this Registration Statement.
(11) To be filed by Amendment.
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.
II-5
<PAGE>
(b) 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.
(c) 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.
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]
II-6
<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 22nd day of October 1998.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- --------------------------- --------------
<S> <C> <C>
/s/ WILLIAM L. MILLER Chairman of the Board, October 22, 1998
- -------------------------------- Chief Executive Officer
William L. Miller Treasurer and Acting
Chief Financial and
Accounting Officer
/s/ JEANNE E. MILLER Executive Vice President October 22, 1998
- --------------------------------- and Director
Jeanne E. Miller
/s/ CLARK D. SWISHER Director October 22, 1998
- ---------------------------------
Clark D. Swisher
/s/ Alfred Schmidt Director October 22, 1998
- ---------------------------------
Alfred Schmidt
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1.01 Revised Form of Underwriting Agreement - 1997 Offering (5)
1.02 Revised Form of Selected Dealers Agreement - 1997 Offering (5)
1.03 Revised Form of Warrant Exercise Fee Agreement - 1997 Offering (5)
1.04 Form of Underwriting Agreement - Series 1 Preferred Stock (7)
3.01 Certificate of Incorporation of the Company (1)
3.02 Certificate of Amendment of Certificate of Incorporation of the Company(1)
3.03 By-Laws of the Company(1)
3.04 Certificate of Designation of Series A Preferred Stock (2)
3.05 Certificate of Designation (11)
4.01 Specimen Certificate for Shares of Common Stock (2)
4.02 Specimen Certificate for Shares of Series A Preferred Stock (2)
4.0 Revised Form of Common Stock Purchase Warrant Agreement (5)
4.04 Revised Specimen Certificate for Common Stock Purchase Warrants (3)
4.05 Revised Form of Underwriters' Purchase Option - 1997 Offering (5)
4.06 Form of Representative's Lock-up Letter (2)
4.07 Form of Representative's Purchase Option Agreement (7)
4.08 Preferred Stock Agency Agreement (7)
4.09 Preferred Warrant Agency Agreement (7)
4.10 Specimen of Preferred Warrant (7)
4.11 Specimen of Series 1 Preferred Stock (11)
5.01 Opinion of Lester Morse P.C. (7)
10.01 Agreement to Acquire the Assets of The Natural Baby Company, Inc., (the
"Acquisition Agreement")(1) 10.02 Addendum to Acquisition Agreement (1)
10.03 Escrow Agreement under the Acquisition Agreement (1)
10.04 Form of Consulting Agreement with Jane Martin (1)
10.05 Asset Purchase Agreement between the Company and its Parent (1)
10.06 Promissory Note from the Company and its Parent (1)
10.07 Form of Bridge Loan Agreement (1)
10.08 Form of Financial Consulting Agreement with Fairchild Financial Group, Inc. (1)
10.09 Credit Facility with United National Bank and Trust Company (2)
10.10 Lease for Company's principal offices and telemarketing center ( 2)
10.11 Employment Agreement with William L. Miller (2)
10.12 Revised Employment Agreement with Jeanne E. Miller (7)
10.13 Incentive Compensation Plan (2)
10.14 1997 Long-Term Stock Incentive Plan (2)
10.15 Amendment to Asset Purchase Agreement between the Company and its Parent (2)
10.16 Form of Amendment to Bridge Loan Agreement (4)
10.17 Amended Form of Stock Repurchase Agreement and Note (5)
10.18 Second Addendum to Acquisition Agreement (5)
10.19 First Addendum to Escrow Agreement (6)
10.20 Third Addendum to Acquisition Agreement (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.21 Agreement with The Havana Group, Inc. (9)
10.22 Form of new Financial Consulting Agreement with Fairchild Financial
Group, Inc. (7)
10.23 Employment Agreement with William T. Evans (7)
10.24 Other Leases (11)
23.01 Consent of Hausser + Taylor LLP (7)
23.02 Consent of Lester Morse P.C. [included in Exhibit 5.01]
27.00 Revised Financial Data Schedule (8)
</TABLE>
-----------
(1) Incorporated by reference to the Registrant's Form SB-2 Registration
Statement, file no. 333-19423, filed with the Securities and Exchange
Commission on January 8, 1997.
(2) Incorporated by reference to the Registrant's Amendment No. 1 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on March 14, 1997.
(3) Incorporated by reference to the Registrant's Amendment No. 2 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on April 2, 1997.
(4) Incorporated by reference to the Registrant's Amendment No. 3 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on April 14, 1997.
(5) Incorporated by reference to the Registrant's Amendment No. 4 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on June 3, 1997.
(6) Incorporated by reference to the Registrant's Amendment No. 5 to Form
SB-2 Registration Statement, file no. 333-19423, filed with the
Securities and Exchange Commission on June 25, 1997.
(7) Filed herewith.
(8) Previously filed in connection with reports under the Securities and
Exchange Act of 1934
(9) Incorporated by reference to the Registrant's Form 10-K filed for its
fiscal year ended December 31, 1997.
(10) Previously filed in prior amendment to this Registration Statement.
(11) To be filed by Amendment.
<PAGE>
EXHIBIT 1.04
400,000 Units
KIDS STUFF, INC.
Each Unit consisting of 1 share of
Redeemable Convertible Series 1 Preferred Stock
$.001 Par Value Per Share and
2 Series 1 Preferred Stock Purchase Warrants
UNDERWRITING AGREEMENT
New York, New York
October , 1998
Fairchild Financial Group, Inc.
99 Wall Street
New York, New York 10005
Ladies and Gentlemen:
Kids Stuff, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Fairchild Financial Group, Inc. (the "Underwriter"), with respect
to the sale by the Company and the purchase by the Underwriter, of 400,000 Units
(the "Units"), each consisting of 1 share of the Company's Redeemable
Convertible Series 1 Preferred Stock, $.001, par value per share ("Preferred
Stock") and 2 Series 1 Preferred Stock Purchase Warrants ("Preferred Warrants"),
and with respect to the grant by the Company to the Underwriter of the option
described in Section 2(b) hereof to purchase all or any part of 60,000
additional Units for the purpose of covering over-allotments, if any. The
aforesaid 400,000 Units (the "Firm Units") and all or any part of the Units
subject to the option described in Section 2(b) hereof (the "Option Units") are
hereinafter collectively referred to as the "Units." The Company also proposes
to issue and sell to the Underwriter, options (the "Underwriter's Options")
pursuant to the Underwriter's warrant agreement (the "Underwriter's Option
Agreement) for the purchase of an aggregate of 40,000 additional Units. The
Units issuable upon exercise of the Underwriters Options are hereinafter
sometimes referred to as the "Option Units." The Units, Underwriters Options and
Option Units are more fully described in the Registration Statement and the
Prospectus referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with the Underwriter as of the date
hereof, and as of the Closing Date and the Option Closing Date, if any, as
follows:
<PAGE>
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an amendment or
amendments thereto, on Form SB-2 (No. 333-61463) including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Units under the Securities Act of 1933, as amended (the "Act"), which
registration statement and any amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations of the Commission under the Act. The Company will promptly file a
further amendment to said registration statement in the form heretofore
delivered to the Underwriter and will not, before the registration statement
becomes effective, file any other amendment thereto unless the Underwriter shall
have consented thereto after having been furnished with a copy thereof. Except
as the context may otherwise require, such registration statement, as amended,
on file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof and all information deemed to be
a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Regulations), is hereinafter called the "Registration Statement" and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Rules and Regulations" mean the rules and regulations adopted by the Commission
under either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or Prospectus or any part thereof and no
proceedings for a stop order have been instituted or are pending or, to the best
knowledge of the Company, threatened. Each of the Preliminary Prospectus, the
Registration Statement and Prospectus at the time of filing thereof conformed in
all material respects with the requirements of the Act and the Rules and
Regulations, neither the Registration Statement nor Prospectus, at the time of
filing thereof, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein and necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that this representation and warranty does not apply to
statements made in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by or on behalf of the
Underwriter expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date and each Option Closing Date
(as defined in Subsection 2(c) hereof), if any, and during such longer period as
the Prospectus may be required to be delivered in connection with sales by the
Underwriter or a dealer, the Registration Statement and the Prospectus will
contain all material statements which are required to be stated therein in
compliance with the Act and the Rules and Regulations, and will in all material
respects conform to the requirements of the Act and the Rules and Regulations;
neither the Registration Statement, nor any amendment thereto, at the time the
Registration Statement or such amendment is declared effective under the Act,
will contain any untrue statement of a material fact or omit to state any
2
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein, not misleading, and the Prospectus at the time the Registration
Statement becomes effective, at the Closing Date and at any Option Closing Date,
will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information supplied
to the Company in writing by or on behalf of the Underwriter expressly for use
in the Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
(d) The Company is validly existing as a corporation in good
standing under the laws of its state of incorporation. The Company is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of properties or the character of
its operations require such qualification or licensing. The Company has all
requisite power and authority (corporate and other), and has obtained any and
all necessary applications, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; the Company has been doing business
in compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and all federal, state, local and foreign
laws, rules and regulations; the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs, position, prospects,
value, operation, properties, business or results of operation of the Company.
The disclosures in the Registration Statement concerning the effects of federal,
state, local, and foreign laws, rules and regulations on the Company's
businesses as currently conducted and as contemplated are correct in all
respects and do not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the circumstances in
which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization", and will
have the adjusted capitalization set forth therein on the Closing Date based
upon the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for the
Company to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Units, the Underwriters Options, and the Option Units and all other securities
issued or issuable by the Company conform or, when issued and paid for will
conform in all respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable; the holders thereof have no rights of rescission with
respect thereto, and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
3
<PAGE>
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The Units to be issued and sold by
the Company hereunder, the Underwriters Options to be issued and sold by the
Company and the Option Units issuable upon exercise of the Underwriters Options
and payment therefor, are not and will not be subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof and thereon, will be
validly issued, fully paid and non-assessable and will conform to the
descriptions thereof contained in the Prospectus; the holders thereof will not
be subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the Units, the
Underwriters Options, and the Option Units has been duly and validly taken; and
the certificates representing the Units, the Underwriters Options, and the
Option Units will be in due and proper form. Upon the issuance and delivery
pursuant to the terms hereof of the Units to be sold by the Company hereunder,
the Underwriter will acquire good and marketable title to such Units free and
clear of any lien, charge, claim, encumbrance, pledge, security interest, defect
or other restriction or equity of any kind whatsoever.
(f) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement, the
Preliminary Prospectus and the Prospectus fairly present the financial position
and the results of operations 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 and the
Rules and Regulations, consistently applied throughout the periods involved.
There has been no material adverse change or development involving a prospective
change in the condition, financial or otherwise, or in the earnings, business
affairs, position, prospects, value, operation, properties, business, or results
of operation of the Company, whether or not arising in the ordinary course of
business, since the dates of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company conforms
in all respects to the descriptions thereof contained in the Registration
Statement and in the Prospectus.
(g) The Company (i) has paid all federal, state, local, and
foreign taxes for which it is liable, including, but not limited to, withholding
taxes and taxes payable under Chapters 21 through 24 of the Internal Revenue
Code of 1986 (the "Code"), (ii) have furnished all information returns required
to furnish pursuant to the Code, and have established adequate reserves for such
taxes which are not due and payable, and (iii) do not have any tax deficiency or
claims outstanding, proposed or assessed against them.
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriter in connection with (i) the issuance
by the Company of the Units, (ii) the purchase by the Underwriter of the Units
or (iii) the consummation by the Company of any of its obligations under this
Agreement.
4
<PAGE>
(i) The Company maintains insurance of the type and in the
amounts which it reasonably believes to be adequate for its business, which
insurance is in full force and effect.
(j) Except as disclosed in the Prospectus, there is no action,
suit, proceeding, inquiry, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties or
businesses of the Company which (i) questions the validity of the capital stock
of the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all respects), or (iii) might materially and adversely affect the
condition, financial or otherwise, or the earnings, business affairs, position,
prospects, value, operation, properties, business or results of operations of
the Company.
(k) The Company has full legal right, power and authority to
enter into this Agreement, the Underwriters Option Agreement and the Consulting
Agreement (as defined in Section 6(p) hereof) and to consummate the transactions
provided for in such agreements; and this Agreement, the Underwriters Option
Agreement and the Consulting Agreement have each been duly and properly
authorized, executed and delivered by the Company. Each of this Agreement, the
Underwriters Option Agreement and the Consulting Agreement, constitutes a legal,
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or equitable,
and except as rights to indemnity or contribution may be limited by applicable
law), and none of the Company's execution or delivery of this Agreement, the
Underwriters Option Agreement and the Consulting Agreement, its performance
hereunder and thereunder, its consummation of the transactions contemplated
herein and therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of, (i) the
articles of incorporation or by-laws of the Company, (ii) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or instrument
to which the Company is a party or by which the Company is bound or to which any
of its properties or assets (tangible or intangible) is or may be subject, or
(iii) any statute, judgment, decree, order, rule or regulation applicable to the
Company of any arbitrator, court, regulatory body or administrative agency or
other governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
5
<PAGE>
(l) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Units pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement and
the transactions contemplated hereby, except such as have been or may be
obtained under the Act or may be required under state securities or Blue Sky
laws in connection with the Underwriter's purchase and distribution of the Units
to be sold by the Company hereunder.
(m) All executed agreements or copies of executed agreements
filed as exhibits to the Registration Statement to which the Company is a party
or by which the Company may be bound or to which any of the Company's assets,
properties or business may be subject have been duly and validly authorized,
executed and delivered by the Company, and constitute the legal, valid and
binding agreements of the Company, enforceable against the Company in accordance
with their respective terms. The descriptions in the Registration Statement of
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by Form SB-2 and there are no
contracts or other documents which are required by the Act to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have been
filed are complete and correct copies of the documents of which they purport to
be copies.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, (ii) entered into any transaction other than in
the ordinary course of business (iii) declared or paid any dividend or made any
other distribution on or in respect of its capital stock; or (iv) any changes in
capital stock, debt (long or short term) or liabilities, material changes in or
affecting the general affairs, management, financial operations, stockholders
equity or results of operations of the Company.
(o) No default exists in the due performance and observance of
any term, covenant or condition of any license, contract, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement, or any other agreement
or instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which any of the property or assets (tangible or intangible)
of the Company is subject or affected.
(p) The Company has generally enjoyed a satisfactory
employer-employee relationship with its employees and is in compliance in all
material respects with all federal, state, local, and foreign laws and
regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours.
6
<PAGE>
(q) Since its inception, the Company has not incurred any
material liability arising under or as a result of the application of the
provisions of the Act.
(r) The Company does not now maintain, sponsor or contribute
to, and never has maintained, sponsored or contributed to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan " or a "multiemployer plan" as such terms are defined in Sections
3(2), 3(1) and 3(37) respectively. of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain
or contribute, now or at any time previously, to a defined benefit plan, as
defined in Section 3(35) of ERISA.
(s) The Company (nor the manner in which the Company conducts
its business or proposes to conduct its business) is not in violation of any
domestic or foreign laws ordinances or governmental rules or regulations to
which it is subject.
(t) No holders of any securities of the Company or of any
options, warrants or other convertible or exchangeable securities of the Company
exercisable for or convertible or exchangeable for securities of the Company has
the right to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company within
eighteen (18) months of the date hereof or to require the Company to file a
registration statement under the Act during such eighteen (18) month period,
except as have been disclosed in the Prospectus.
(u) Neither the Company nor any of its employees, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations)
have taken or will take, directly or indirectly, any action designed to or which
has constituted or which might reasonably be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the Units or
otherwise.
(v) Except as described in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company are in dispute so far as known by the Company or are in any conflict
with the right of any other person or entity. To the best of the Company's
knowledge, the Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, all patents, trademarks,
service marks, trade names and copyrights, technology and licenses and rights
with respect to the foregoing, used in the conduct of its business as now
conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing, and (ii) except as
set forth in the Prospectus, is not obligated or under any liability whatsoever
to make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any patent, trademark, service mark trade
7
<PAGE>
name, copyright, know-how, technology or other intangible asset, with respect to
the use thereof or in connection with the conduct of its business or otherwise.
(w) The Company owns and has the unrestricted right to use all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") required for or
incident to the development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company, free and clear of and
without violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that the
possibility exists that other persons or entities, completely independently of
the Company or its employees or agents, could have developed trade secrets or
items of technical information similar or identical to those of the Company.
(x) The Company has taken reasonable security measures to
protect the secrecy, confidentiality and value of all the intellectual property.
(y) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(z) Hauser + Taylor LLP, whose reports are filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(aa) On or before the effective date of the Registration
Statement, the Company shall cause to be duly executed legally binding and
enforceable agreements ("Lock-up") pursuant to which Duncan Hill and persons
holding 100,000 shares of "Rule 504" stock have agreed not to, directly or
indirectly, offer to sell, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber any of its shares of Common
Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein prior to June 26, 1999 without the
prior written consent of the Underwriter. The Company will cause the Transfer
Agent, as defined below, to mark an appropriate legend on the face of stock
certificates representing all of such shares of Common Stock or other securities
convertible into Common Stock.
(bb) Except as disclosed in the Prospectus, there are no
claims, payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the Units
hereunder or any other arrangements, agreements, understandings, payments or
issuance with respect to the Company or any of its officers, directors,
8
<PAGE>
employees or affiliates that may affect the Underwriter's compensation, as
determined by the National Association of Securities Dealers Inc. ("NASD").
(cc) The Company will apply to list all of its publically held
securities on the Nasdaq SmallCap Stock Market ("NASDAQ") at such time as they
qualify for same.
(dd) Neither the Company nor any of its officers, employees,
agents or any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company or any other such person to any damage or penalty in any civil, criminal
or governmental litigation or proceeding (domestic or foreign), (b) if not given
in the past, might have had a materially adverse effect on the assets, business
or operations of the Company, or (c) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(ee) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any such person or entity or the Company, has or has had, either directly or
indirectly, a beneficiary interest in any contract or agreement to which the
Company is a party or by which any of them may be bound or affected. Except as
set forth in the Prospectus under "Certain Transactions," there are no existing
material agreements, arrangements, understandings or transactions, or proposed
material agreements, arrangements, understandings or transactions, between or
among the Company and any officer, director, or principal stockholder of the
Company, or any affiliate or associate of any such person or entity.
(ff) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to the Underwriter's counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.
(gg) The Company has entered into an employment agreement with
Jeanne Miller and William Miller. The Company has obtained a key-man life
insurance policy in the amount of $1,000,000 on the lifes of Jeanne Miller and
William Miller, which policies are owned by the Company and names the Company as
the sole beneficiary thereunder.
9
<PAGE>
2. Purchase, Sale and Delivery of the Units and Agreement to
Issue Underwriters Options.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company at the price per Unit set forth below,
400,000 Firm Units.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase up to an additional 60,000 Units at the price per share
set forth below. The option granted hereby will expire 45 days after the date of
this Agreement, and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Firm Units upon notice by the Underwriter
to the Company setting forth the number of Option Units as to which the
Underwriter are then exercising the option and the time and date of payment and
delivery for such Option Units. Any such time and date of delivery (an "Option
Closing Date") shall be determined by the Underwriter, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to Closing Date, as hereinafter defined, unless otherwise agreed to
between the Representative and the Company. Nothing herein contained shall
obligate the Underwriter to make any over-allotments. No Option Units shall be
delivered unless the Firm Units shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Units shall be made at the offices of the Underwriter
at 99 Wall Street, New York, New York 10005, or at such other place as shall be
agreed upon by the Underwriter and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York City time) on _____________, 1998 or at such
other time and date as shall be agreed upon by the Underwriter and the Company
but not less than three (3) nor more than thirty (30) business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being hereafter called "Closing Date"). In addition, in the event that
any or all of the Option Units are purchased by the Underwriter, payment of the
purchase price for, and delivery of certificates for such Option Units shall be
made at the above mentioned office of the Underwriter or at such other place as
shall be agreed upon by the Underwriter and the Company on each Option Closing
Date as specified in the notice from the Underwriter to the Company. Delivery of
the certificates for the Firm Units and the Option Units, if any, shall be made
to the Underwriter for the respective accounts of the Underwriter against
payment by the Underwriter of the purchase price for the Firm Units and the
Option Units, if any, to the order of the Company by New York Clearing House
funds, certificates for the Firm Units and the Option Units, if any, shall be in
definitive, fully registered form, shall bear no restrictive legends and shall
be in such denominations and registered in such names as the Representative may
request in writing at least two (2) business days prior to Closing Date or the
relevant Option Closing Date, as the case may be. The certificates for the Firm
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Units and the Option Units, if any, shall be made available to the Underwriter
at such office or such other place as the Underwriter may designate for
inspection, checking and packaging no later than 9:30 a.m. on the last business
day prior to Closing Date or the relevant Option Closing Date, as the case may
be.
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The purchase price per Unit to be paid by the Underwriter, to
the Company for the Units purchased hereunder will be the same for each Unit and
will be $_____ per share. The Company shall not be obligated to sell any Units
hereunder unless all Firm Units to be sold by the Company are purchased
hereunder. The Company agrees to issue and sell 400,000 Firm Units to the
Underwriter.
(d) On Closing Date, the Company shall issue and sell to the
Underwriters Options at a purchase price of $0.001 per warrant, which warrants
shall entitle the holders thereof to purchase an aggregate of 40,000 Units. The
Underwriters Options shall be exercisable for a period of four (4) years
commencing one (1) year from the effective date of the Registration Statement at
an initial exercise price equal to one hundred forty percent (140%) of the
initial public offering price of the Units. The Underwriters Option Agreement
and form of Warrant Certificate shall be substantially in the form filed as an
exhibit to the Registration Statement. Payment for the Underwriters Options
shall be made on Closing Date.
3. Public Offering of the Units. As soon after the Registration
Statement becomes effective, as the Underwriter deems advisable, the Underwriter
shall make a public offering of the Units (other than to residents of or in any
jurisdiction in which qualification of the Units is required and has not become
effective) at the price and upon the other terms set forth in the Prospectus.
The Underwriter may from time to time increase or decrease the public offering
price after distribution of the Units has been completed to such extent as the
Underwriter, in its sole discretion deems advisable.
4. Covenants of the Company. The Company covenants and agrees with the
Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus before termination of the
offering of the Units by the Underwriter of which the Underwriter shall not
previously have been advised and furnished with a copy, or to which the
Underwriter shall have reasonably objected or which is not in compliance with
the Act, or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation or the
threatening of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of any proceeding for that purpose, (iii) of the issuance by any
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state securities commission of any proceedings for the suspension of the
qualification of the Units for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (iv) of the
receipt of any comments from the Commission; and (v) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every effort to obtain promptly
the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Underwriter pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriter in connection with the offering of the Units which differs
from the corresponding prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
is required to be filed pursuant to Rule 424(b) of the Rules and Regulations),
will furnish the Underwriter with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such prospectus to which the Underwriter shall object.
(e) The Company shall endeavor in good faith, in cooperation
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Units for offering and sale under the securities laws
of such jurisdictions as the Underwriter may reasonably designate, and shall
make such applications, file such documents and furnish such information as may
be required for such purpose; provided, however, the Company shall not be
required to qualify as a foreign corporation or file a general or limited
consent to service of process in any such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company will, unless the
Underwriter agrees that such action is not at the time necessary or advisable,
use all reasonable efforts to file and make such statements or reports at such
times as are or may reasonably be required by the laws of such jurisdiction to
continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, as now and hereafter amended
and by the Rules and Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Units in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the Units is
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<PAGE>
required to be delivered under the Act, any event shall have occurred as a
result of which, in the opinion of counsel for the Company or Underwriter's
Counsel, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be reasonably satisfactory to Underwriter's
Counsel, and the Company will furnish to the Underwriter a reasonable number of
copies of such amendment or supplement.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Underwriter, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
(h) During a period of five years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants), and
will deliver to the Underwriter:
(i) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(ii) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, the
NASD or any securities exchange;
(iii) every press release and every material news
item or article of interest to the financial community in respect of the Company
or its affairs which was released or prepared by the Company ; and
(iv) any additional information of a public nature
concerning the Company (and its present or future subsidiaries) or its
respective businesses which the Underwriter may reasonably request.
(i) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent).
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<PAGE>
(j) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Underwriter may reasonably
request.
(k) Except for the offering contemplated by this Agreement for
a period of 12 months (13 months with respect to issuances to any of the
Company's Officers, Directors, principal shareholder, affiliate or associate)
from the effective date of the Registration Statement none of the Company, its
officers or directors, or holders of the 5% of the Company's securities,
including options, warrants and other like rights, prior to the effective date,
or any person or entity deemed to be an affiliate of the Company pursuant to the
Rules and Regulations, will, directly or indirectly, issue, offer to sell, sell,
grant an option for the sale of, assign, transfer, pledge, hypothecate or
otherwise encumber or dispose of any shares of Common Stock or securities
convertible into or exchangeable for or evidencing any right to purchase or
subscribe for any shares of Common Stock (either pursuant to Rule 144 of the
Rules and Regulations or otherwise) or dispose of any beneficial interest
therein without the prior written consent of the Underwriter. On or before the
effective date of the Registration Statement, the Company shall cause to be duly
executed legally binding and enforceable agreements pursuant to which each of
persons enumerated in the preceding sentence who are subject to the Lock-up, has
agreed to be bound by the Lock-up. During the 24 month period commencing with
the effective date of the Registration Statement, the Company shall issue no
shares of capital stock (other than upon exercise of options or warrants
referred to in the Registration Statement or in connection with any acquisition
from, or business combination with, an unaffiliated entity) or securities
convertible into or exchangeable for shares of stock of any class, except in
conformity and compliance with the terms of this Agreement, grant any options or
warrants.
(l) Neither the Company nor any officers or
directors, nor affiliates of any of them (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the
sale of the Units in the manner, and subject to the conditions, set forth under
"Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used
directly or indirectly to acquire any securities issued by the Company.
(n) The Company shall timely file all such reports,
forms or other documents as may be required (including but not limited to any
Form as may be required pursuant to Rule 463 under the Act) from time to time,
under the Act, the Exchange Act, and the Rules and Regulations, and all such
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<PAGE>
reports, forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act, and the Rules and
Regulations.
(o) The Company shall furnish to the Underwriter as
early as practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited consolidated interim financial
statements of the Company (which in no event shall be as of a date more than
thirty (30) days prior to the date of the Registration Statement) which have
been read by the Company's independent public accountants, as stated in their
letters to be furnished pursuant to Section 6(l) hereof.
(p) The Company shall use its best efforts to cause
the Units to be quoted on the NASDAQ as soon as they so qualify.
(q) For a period of four (4) years from the Closing
Date, the Company shall furnish to the Underwriter upon the Underwriter's
requests at the Company's sole expense, (i) daily consolidated transfer sheets;
(ii) a list of holders of the Company's securities; and (iii) a list of the
securities positions of participants in the Depository Trust Company.
(r) Intentionally omitted.
(s) For a period equal to the lesser of (i) seven (7)
years from the date hereof, and (ii) the sale to the public of the Option Units,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Forms S-1 or, if applicable, S-2 and S-3 (or other
appropriate form) for the registration under the Act of the Preferred Units.
(t) Intentionally Omitted.
(u) On or before the effective date of the
Registration Statement, retain or make arrangements to retain a financial public
relations firm reasonably satisfactory to the Underwriter which shall be
continuously engaged from such engagement date to a date twelve months from
Closing Date.
(v) As soon as practicable, but in no event after the
effective date of the Registration Statement, (i) file a Form 8-A with the
Commission providing for the registration under the Exchange Act of the Units
and the securities underlying the Units and (ii) take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and/or Moody's OTC Manual and to continue such inclusion for a
period of not less than five (5) years.
(w) Following the Effective Date of the Registration
Statement, the Company shall, at its sole cost and expense, prepare and file
such blue sky trading applications with such jurisdictions as the Underwriter
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<PAGE>
may reasonably request after consultation with the Company.
(x) The Company shall not amend or alter any term of
any written employment agreement between the Company and any executive officer,
during the term thereof, in a manner more favorable to such employee, without
the express written consent of the Underwriter.
(y) Until the completion of the distribution of the
Units, the Company shall not without the prior written consent of the
Underwriter and Underwriter's Counsel, issue, directly or indirectly, any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent with
past practices with respect to the Company's operations.
5. Payment of Expenses.
(a) The Company hereby agrees to pay all expenses and fees
(other than fees of counsel to the Underwriter, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, including, without limitation, (i) the fees and expenses of
accountants and counsel for the Company, (ii) all costs and expenses incurred in
connection with the preparation, duplication, printing, filing, delivery,
electronic filing and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing and delivery of this Agreement and
the Selected Dealer Agreement and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriter in
quantities as hereinabove stated, (iii) the printing, engraving, issuance and
delivery of the Units including any transfer or other taxes payable thereon,
(iv) the qualification of the Units under state or foreign securities or "Blue
Sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum," and disbursements
and fees of counsel in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and tombstone advertisements, (vi) costs and expenses in connection
with due diligence investigations, including but not limited to the fees of any
independent counsel or consultant retained, (vii) fees and expenses of the
transfer agent, (viii) the fees payable to the NASD, and (ix) the fees and
expenses incurred in connection with the listing of the Units on the NASDAQ and
any other exchange. All fees and expenses payable to the Underwriter or counsel
to the Underwriter shall be payable at the Closing or Option Closing Date, as
applicable.
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(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6, Section 10(a) or Section 11, the
Company shall reimburse and indemnify the Underwriter for all of its
out-of-pocket expenses including the fees and disbursements of counsel for the
Underwriter.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Underwriter a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of the Firm Units,
$_____________ of which has been paid to date to the Underwriter. The Company
will pay the remainder on the Closing Date by certified or bank cashier's check
or, at the election of the Underwriter, by deduction from the proceeds of the
offering contemplated herein. In the event the Underwriter elects to exercise
the over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Underwriter on the Option Closing Date (by certified or
bank cashier's check or, at the Underwriter's election, by deduction from the
proceeds of the offering) a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Option Units.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the Closing Date and
each Option Closing Date, if any, as if they had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements of
officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of each of its or his covenants and obligations hereunder and to
the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M., New York time, on the date of this Agreement or such later
date and time as shall be consented to in writing by the Underwriter, and at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriter's Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Units and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to Closing Date the Company shall
have provided evidence satisfactory to the Underwriter of such timely filing, or
a post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
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(b) The Underwriter shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Underwriter's opinion, is material or omits to
state a fact which, in the Underwriter's opinion, is material and is required to
be stated therein or is necessary to make the statements therein not misleading,
or that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, is material, or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Underwriter's Counsel, such opinion or opinions with respect
to the organization of the Company the validity of the Units, the Registration
Statement, the Prospectus and other related matters as the Underwriter
reasonably may request and such counsel shall have received such papers and
information as they request to enable them to pass upon such matters.
(d) At the Closing Date the Underwriter shall have received
the favorable opinion of Lester Morse, counsel to the Company, dated Closing
Date, addressed to the Underwriter and in form and substance satisfactory to
Underwriter's Counsel, to the effect that:
(i) The Company (A) is and has been duly organized
and validly existing as a corporations in good standing under the laws of its
state of incorporation, (B) is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations requires such qualification
or licensing, except where the failure to so qualify would not have a material
adverse effect on the business of the Company, and (C) has all requisite power
and authority (corporate and other), and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its businesses as
described in the Prospectus; to the best of such counsel's knowledge, the
Company is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal and state laws, rules and regulations; and to the best
of such counsel's knowledge, the Company has not received any notice of
proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit.
The disclosures in the Registration Statement
concerning federal, state, and local laws, rules and regulations on the
Company's businesses as currently conducted and as contemplated are correct in
all respects and do not omit to state a material fact necessary to make the
statements contained therein not misleading in light of the circumstances in
which they were made.
(ii) Except as described in the Prospectus, the
Company does not own an interest in any corporation, partnership, joint venture,
trust or other business entity;
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(iii) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, under
"Capitalization". The Units, the Underwriters Options, and the Option Units
conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and validly
issued and are fully paid and non-assessable; the holders thereof are not
subject to personal liability by reason of being such holders, and none of such
securities were issued in violation of the preemptive rights of any holder of
any security of the Company. The Units to be sold by the Company hereunder, the
Underwriters Options to be sold by the Company under the Underwriters Option
Agreement and the Option Units are not subject to any preemptive or other
similar rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the holders thereof will not be subject to any
liability solely as such holders and the certificates representing the Units and
the Underwriters Options are in due and proper form. Upon the issuance and
delivery pursuant to this Agreement of the Units to be sold by the Company, the
Underwriter will acquire good and marketable title to such Units free and clear
of any pledge, lien, charge, claim, encumbrance, pledge, security interest or
other restriction or equity of any kind whatsoever.
(iv) the Registration Statement is effective under
the Act, and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and, to the best of such counsel's
knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and to the best of such counsel's knowledge, no
proceedings for that purpose have been instituted or are pending or threatened
or contemplated under the Act;
(v) each of the Preliminary Prospectus, the
Registration Statement and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and statistical
data included therein, as to which no opinion need be rendered) comply as to
form in all respects with the requirements of the Act and the Rules and
Regulations.
(vi) (A) there are no contracts or other documents
required to be described in the Registration Statement and the Prospectus and
filed as exhibits to the Registration Statement other than those described in
the Registration Statement and the Prospectus and filed as exhibits thereto, and
the exhibits which have been filed are correct copies of the documents of which
they purport to be copies; (B) the descriptions in the Registration Statement
and the Prospectus and any supplement or amendment thereto of contracts and
other documents to which the Company is a party or by which they are bound, are
accurate and fairly represent the information required to be shown by Form SB-2;
(vii) The Company has full legal right, power and
authority to enter into each of this Agreement, the Underwriters Option
Agreement, the Consulting Agreement, and to consummate the transactions provided
for therein; and each of this Agreement, the Underwriters Option Agreement and
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the Consulting Agreement have been duly authorized, executed and delivered by
the Company. This Agreement, the Underwriters Option Agreement, and the
Consulting Agreement, assuming due authorization, execution and delivery by each
other party thereto and further assuming that it is a valid and binding
agreement of the Underwriter, so as the case may be, constitutes a legal, valid
and binding agreement of the Company enforceable as against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors rights and
the application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable law)
and none of the Company's execution or delivery of this Agreement, the
Underwriters Option Agreement, and the Consulting Agreement, its performance
hereunder or thereunder, its consummation of the transactions contemplated
herein or therein, or the conduct of its business as described in the
Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company pursuant to the terms of, (A) the
articles of incorporation or by-laws of the Company, (B) to the best knowledge
of such counsel, any indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which is or may be bound or to
which properties or assets (tangible or intangible) or subject, or any
indebtedness, or (C) to the best knowledge of such counsel, any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), foreign, having
jurisdiction over the Company or any of its activities or properties.
(viii) no consent, approval, authorization or order,
and no filing with, any court, regulatory body, government agency or other body,
(other than such as may be required under Blue Sky laws, as to which no opinion
need be rendered) is required in connection with the issuance of the Units
pursuant to the Prospectus and the Registration Statement, the performance of
this Agreement and the Consulting Agreement, and the transactions contemplated
hereby or thereby;
(ix) the Company is not in breach of, or in default
under, any term or provision of any indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which any of the property or assets (tangible or intangible) of the
Company is subject or affected; and the Company is not in violation of any term
or provision of its Certificate of Incorporation or By-Laws or in violation of
any franchise, license, permit, judgment, decree, order, statute, rule or
regulation;
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(x) the statements in the Prospectus under "THE
COMPANY," "BUSINESS," "MANAGEMENT," "PRINCIPAL AND SELLING SECURITYHOLDERS,"
"CERTAIN TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," and "Units ELIGIBLE FOR
FUTURE SALE" have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects;
(xi) except as and to the extent set forth in the
Prospectus, the Company is not under any obligation to pay to any third-party
royalties or fees of any kind whatsoever with respect to any technology or
intellectual properties developed, employed or used by the Company;
(xii) assuming due execution by the parties thereto
other than the Company, the Lock-up Agreements hereof are legal, valid and
binding obligations of parties thereto, enforceable against the party and any
subsequent holder of the securities subject thereto in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law);
(xiii) the Company does not (A) maintain, sponsor or
contribute to any ERISA Plans, (B) maintain or contribute, now or at any time
previously, to a defined benefit plan, as defined in Section 3(35) of ERISA, and
(C) has never completely or partially withdrawn from a "multiemployer plan;"
(xiv) except as described in the Prospectus, no
person, corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration statement
or, if filed, to include any security in such registration statement for
eighteen months from the date hereof;
(xv) except as described in the Prospectus, there are
no claims, payments, issuances, arrangements or understandings for services in
the nature of a finder's or origination fee with respect to the sale of the
Units hereunder or financial consulting arrangement or any other arrangements,
agreements understandings, payments or issuances except as described in the
Prospectus;
(xvi) Counsel has participated in the preparation of
the Registration Statement and Prospectus and in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants of the Company and your representatives at which the contents of the
Registration Statement and the Prospectus and related matters were discussed.
Counsel advises you that, on the basis of the foregoing (relying as to
materiality to a large extent on officers and other representatives of the
Company and your representatives), no facts have come to our attention which
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lead us to believe that (A) the Registration Statement and the Prospectus
included therein and any supplement or amendment thereto, at the time the
Registration Statement was declared effective by the Commission (except for the
financial statements (including the notes thereto and the auditor's report
thereon) and schedules (including the auditor's report thereon) and other
financial or statistical data included or incorporated by reference therein, as
to which we express no opinion) contained any untrue statement of material fact
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading, and (B) the Prospectus, as amended or supplemented (except
for the financial statements (including the notes thereto and the auditor's
report thereon) and schedules (including the auditor's report thereon) and other
financial or statistical data included or incorporated by reference therein, as
to which counsel expresses no opinion) contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States,
except patent and trademark laws, the corporate laws of Delaware, and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriter's
Counsel) of other counsel reasonably acceptable to Underwriter's Counsel,
familiar with the applicable laws; (B) as to matters of fact, to the extent they
deem proper, on certificates and written statements of responsible officers of
the Company and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company, provided that copies of any
such statements or certificates shall be delivered to Underwriter's Counsel if
requested. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel and,
in its opinion, the Underwriter and they are justified in relying thereon.
(e) Intentionally omitted.
(f) At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Lester Morse, P.C. counsel to the
Company, each dated the Option Closing Date, addressed to the Underwriter and in
form and substance satisfactory to Underwriter's Counsel confirming as of Option
Closing Date the statements made by such firms, in their opinion, delivered on
the Closing Date.
(g) On or prior to each of the Closing Date and the Option
Closing Date, Underwriter's Counsel shall have been furnished such documents
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (b)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
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(h) On or prior to each of the Closing Date and the Option
Closing Date, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(i) Prior to each of Closing Date and each Option Closing
Date, if any, (i) there shall have been no material adverse change nor
development involving a prospective change in the condition, financial or
otherwise, prospects or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company; (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness;
(iv) no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus; (v)
no action, suit or proceeding, at law or in equity, shall have been pending or
to its knowledge threatened against the Company, or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus; and (vi) no stop order
shall have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(j) At each of the Closing Date and each Option Closing Date,
if any, the Underwriter shall have received a certificate of the Company signed
by the principal executive officer and by the chief financial or chief
accounting officer of the Company, dated the Closing Date or Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best of each of such person's
knowledge, are contemplated or threatened under the Act;
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(iii) The Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto, contain all statements
and information required to be included therein, and the Registration Statement,
and any amendment thereto include 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 the Prospectus and any supplement
thereto does not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent; the
Company has not paid or declared any dividends or other distributions on its
capital stock; the Company has not entered into any transactions not in the
ordinary course of business; and there has not been any change in the capital
stock or long-term debt or any increase in the short-term borrowings (other than
any increase in the short-term borrowings in the ordinary course of business) of
the Company; the Company has not sustained any material loss or damage to its
property or assets, whether or not insured; there is no litigation which is
pending or threatened against the Company which is required to be set forth in
an amended or supplemented Prospectus which has not been set forth; and there
has occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (j) are to such documents as amended and supplemented at the date of
such certificate.
(k) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter, as described in the Registration Statement.
(l) At the time this Agreement is executed, the Underwriter
shall have received letters, dated such date, addressed to the Underwriter in
form and substance satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriter from Hauser + Taylor:
(i) confirming that they are independent public
accountants with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the
financial statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
thereunder and that the Underwriter may rely upon the opinion of Hauser +
Taylor, with respect to the financial statements and-supporting schedules
included in the Registration Statement;
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(iii) stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the boards of directors of the Company, consultations with
officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A) the unaudited
financial statements and supporting schedules of the Company included in the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the Rules and Regulations
or are not fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement, or
(B) at a specified date not more than five (5) days prior to the effective date
of the Registration Statement, there has been any change in the capital stock or
long-term debt of the Company, or any decrease in the stockholders' equity or
net current assets or net assets of the Company as compared with amounts shown
in the June 30, 1998 balance sheet included in the Registration Statement, other
than as set forth in or contemplated by the Registration Statement, or, if there
was any change or decrease, setting forth the amount of such change or decrease,
and (C) during the period from June 30, 1998 to a specified date not more than
five (5) days prior to the effective date of the Registration Statement, there
was any decrease in net revenues, net earnings or increase in net earnings per
common share of the Company, in each case as compared with the corresponding
period beginning June 30, 1997 other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease, setting forth the
amount of such decrease;
(iv) setting forth, at a date not later than five (5)
days prior to the date of the Registration Statement, the amount of liabilities
of the Company;
(v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement; and
(vi) statements as to such other matters incident to
the transaction contemplated hereby as the Underwriter may reasonably request.
(m) At Closing Date, the Underwriter shall have received a
letter from Hauser + Taylor dated as of the Closing Date, to the effect that
they reaffirm that statements made in the letters furnished pursuant to
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Subsection (l) of this Section, except that the specified date referred to shall
be a date not more than five days prior to Closing Date and, if the Company has
elected to rely on Rule 430A of the Rules and Regulations, to the further effect
that they have carried out procedures as specified in clause (v) of subsection
(i) of this Section with respect to certain amounts, percentages and financial
information as specified by the Underwriter and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in such clause (v).
(n) On each of the Closing Date and Option Closing Date, if
any, there shall have been duly tendered to the Underwriter for the several
Underwriter's accounts the appropriate number of Units.
(o) No order suspending the sale of the Units in any
jurisdiction designated by the Underwriter pursuant to subsection (e) of Section
4 hereof shall have been issued on either the Closing Date or the Option Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
to its knowledge or that of the Company shall be contemplated.
(p) On or before the Closing Date, the Company shall have (i)
executed and delivered to the Underwriter the consulting agreement,
substantially in the form filed as an exhibit to the Registration Statement (the
"Consulting Agreement").
If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Underwriter may terminate this
Agreement or, if the Underwriter so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Underwriter, and each person, if any, who controls the Underwriter ("controlling
person") within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), whatsoever
(including but not limited to any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which such Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law arising out of or
based upon any untrue statement or alleged untrue statement of a material fact
contained (i) in any Preliminary Prospectus, (except that the indemnification
contained in this paragraph with respect to any preliminary prospectus shall not
inure to the benefit of the Underwriter or to the benefit of any person
controlling the Underwriter) on account of any loss, claim, damage, liability or
expense arising from the sale of the Units by the Underwriter to any person if a
copy of the Prospectus, as amended or supplemented, shall not have been
delivered or sent to such person within the time required by the Act, and the
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untrue statement or alleged untrue statement or omission or alleged omission of
a material fact contained in such Preliminary Prospectus was corrected in the
Prospectus, as amended and supplemented, and such correction would have
eliminated the loss, claim, damage, liability or expense), the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Underwriters Options; or (iii) in any
application or other document or written communication (in this Section 8
collectively called "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Units under the securities laws thereof or filed with the Commission, any state
securities commission or agency, NASDAQ or any other securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading (in the case
of the Prospectus, in the light of the circumstances under which they were
made), unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case may
be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act to the same extent
as the foregoing indemnity from the Company to the Underwriter but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriter in connection with this Offering;
provided, further, that the liability of each Underwriter to the Company shall
be limited to the product of the Underwriter's discount or commission and the
number of Units sold by such Underwriter hereunder. The Company acknowledges
that the statements with respect to the public offering of the Units set forth
under the heading "Underwriting and Plan of Distribution" and the stabilization
legend in the Prospectus and the statement as to the anticipated date of
delivery of the certificates representing the Units have been furnished by the
Underwriter expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriter for inclusion in the
Prospectus.
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(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with one counsel
reasonably satisfactory to such indemnified party. Notwithstanding the foregoing
the indemnified party or parties shall have the right to employ its or their own
counsel in any such case but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of such action at the expense of the indemnifying
party, (ii) the indemnifying parties shall not have employed counsel reasonably
satisfactory to such indemnified party to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnifying party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (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 parties), in any of
which events such fees and expenses of one additional counsel shall be borne by
the indemnifying parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided however, that such consent was not
unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Units or (B) if the allocation provided by clause (A) above is not permitted
29
<PAGE>
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company is
the contributing party and the Underwriter is the indemnified party the relative
benefits received by the Company on the one hand, and the Underwriter, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Units (before deducting expenses) bear to the total
underwriting discounts received by the Underwriter hereunder, in each case as
set forth in the table on the Cover Page of the Prospectus. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the
Underwriter and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d), the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Units purchased by the Underwriter hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to the extent that such party or
parties were not adversely affected by such omission. The contribution agreement
set forth above shall be in addition to any liabilities which any indemnifying
party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations. warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of the Underwriter, the
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Company, or any controlling person, and shall survive termination of this
Agreement or the issuance and delivery of the Units to the Underwriter.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m., New
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Underwriter, in its discretion, shall release the Units for the sale to the
public, provided, however that the provisions of Sections 5, 7 and 10 of this
Agreement shall at all times be effective. For purposes of this Section 9, the
Units to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Underwriter of telegrams to securities dealers
releasing such Units for offering or the release by the Underwriter for
publication of the first newspaper advertisement which is subsequently published
relating to the Units.
10. Termination.
(a) Subject to subsection (d) of this Section 10, the
Underwriter shall have the right to terminate this Agreement, (i) if any
calamitous domestic or international event or act or occurrence has materially
disrupted, or in the Underwriter's opinion, will in the immediate future
materially disrupt general securities markets in the United States; or (ii) if
trading on the New York Stock Exchange, the American Stock Exchange, or in the
over-the-counter market shall have been suspended or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the over-the-counter market by the NASD or by order
of the Commission or any other government authority having jurisdiction; or
(iii) if the United States shall have become involved in a war or major
hostilities; or (iv) if a banking moratorium has been declared by a New York
State or federal authority; or (v) if a moratorium in foreign exchange trading
has been declared; or (vi) if the Company shall have sustained a loss material
or substantial by fire, flood, accident, hurricane, earthquake, theft, sabotage
or other calamity or malicious act which whether or not such loss shall have
been insured, will, in the Underwriter's opinion, make it inadvisable to proceed
with the delivery of the Units; or (vii) if there shall have been such material
adverse change in the conditions or prospects of the Company, or such material
adverse general market conditions as in the Underwriter's judgment would make it
inadvisable to proceed with the offering, sale and/or delivery of the Units.
(b) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 9 and 10 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
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11. Default by the Company. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the number
of Units which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Units to be purchased on an Option Closing Date, the
Underwriter may at its option, by notice from the Underwriter to the Company,
terminate the Underwriter's obligations to purchase Units from the Company on
such date) without any liability on the part of any non-defaulting party other
than pursuant to Section 5 and Section 7 hereof. No action taken pursuant to
this Section shall relieve the Company from liability, if any, in respect of
such default.
12. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter at Fairchild Financial Group, Inc., 99 Wall Street, New York, New
York 10005, Attention: Syndicate Department, with a copy to Lampert & Ference,
10 East 40th Street, New York, New York 10016. Notices to the Company shall be
directed to the Company at 4450 Belden Village Street, N.W., Suite 406, Canton,
Ohio, Attention: William L. Miller, President, with a copy to Lester Morse, Esq.
111 Great Neck Road, Great Neck, New York 11021, Attention: Steven Morse, Esq.
13. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
successors, legal representatives and assigns, and their respective heirs and
legal representatives and no other person shall have or be construed to have any
legal or equitable right, remedy or claim under or in respect of or by virtue of
this Agreement or any provisions herein contained. No purchaser of Units from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
14. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
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If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
KIDS STUFF, INC.
By:___________________________
William Miller
President
Confirmed and accepted as of the date first above written.
FAIRCHILD FINANCIAL GROUP, INC.
By:_____________________________
Name: __________________________ Title: _______________________
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Exhibit 4.07
KIDS STUFF, INC.
AND
FAIRCHILD FINANCIAL GROUP, INC.
REPRESENTATIVE'S
PURCHASE OPTION AGREEMENT
Dated as of , 1998
<PAGE>
REPRESENTATIVE'S PURCHASE OPTION AGREEMENT dated as of
________________, 1998 among Kids Stuff, Inc., a Delaware corporation (the
"Company") and Fairchild Financial Group, Inc., a Delaware corporation
(hereinafter referred to variously as the "Holder" or the "Representative").
W I T N E S S E T H :
WHEREAS, the Company proposes to issue to the Representative an option
(the "Representative's Purchase Option") to purchase up to an aggregate of
40,000 units (the "Units"), with each Unit comprised of one share of Series 1
Convertible Preferred Stock (the "Preferred Stock") and two Series 1 Convertible
Preferred Stock Warrants (the "Preferred Warrants"); and
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Representative and the Company, to underwrite the Company's proposed public
offering of 400,000 Units, at a public offering price of $5.00 per Unit (the
"Public Offering"); and
WHEREAS, the Representative's Purchase Option to be issued pursuant to
this Agreement will be issued on the Closing Date (as such term is defined in
the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of the compensation in connection with the Public
Offering;
NOW, THEREFORE, in consideration of the premises, the payment
by the Representative to the Company of an aggregate of ten dollars
($10.00), the agreements herein set forth and other good and valuable
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consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Holder is hereby granted the right to purchase, at any
time from ____________________, 1999 until; 5:30 p.m., New York time, on
___________, 2003 up to an aggregate 40,000 Units (subject to adjustment as
provided in Section 8 hereof) at a price of $7.00 (140% of the initial public
offering price), subject to the terms and conditions of this Agreement. Except
as set forth herein, the Units issuable upon exercise of the Representative's
Purchase Options are in all respects identical to the Units being purchased by
the Representative for resale to the public pursuant to the terms and provisions
of the Underwriting Agreement. 2. Purchase Option Certificates. The purchase
option certificates (the "Purchase Option Certificates") delivered and to be
delivered pursuant to this Agreement shall be in the form set forth in Exhibit
A, attached hereto and made a part hereof, with such appropriate insertions,
omissions, substitutions, and other variations as required or permitted by this
Agreement.
3. Exercise of Purchase Option. The Purchase Options initially are
exercisable at an aggregate initial exercise price (subject to adjustment as
provided in Section 8 hereof) as set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender at the Company's
principal offices in Ohio (presently located at 4450 Belden Village Street,
N.W., Suite 406, Canton, Ohio 44718), of a Purchase Option Certificate with
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<PAGE>
the annexed Form of Election to Purchase duly executed, together with payment of
the Purchase Price (as hereinafter defined) for the Units, the registered holder
of a Purchase Option Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the securities comprising the Units so
purchased. The purchase rights represented by each Representative's Purchase
Option Certificate are exercisable at the option of the Holder thereof, in whole
or in part (but not as to fractional Units). In the case of the purchase of less
than all the Units purchasable under any Purchase Option Certificate, the
Company shall cancel the Purchase Option Certificate upon the surrender thereof
and shall execute and deliver a new Purchase Option Certificate of like tenor
for the balance of the securities purchasable thereunder.
4. Issuance of Certificates. Upon the exercise of the Representative's
Purchase Options, the issuance of certificates for the Units shall be made
forthwith (and in any event within three (3) business days thereafter) without
charge to the Holder thereof including, without limitation, any tax which may be
payable in respect of the issuance thereof, and such certificates shall (subject
to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in
such names as may be directed by, the Holder thereof; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name other than that of the Representative and the Company shall not be
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<PAGE>
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
The Representative's Purchase Option Certificates and the certificates
representing the Units issuable upon exercise of the Representative's Purchase
Options shall be executed on behalf of the Company by the manual or facsimile
signature of the then present Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the then
present Secretary or Assistant Secretary of the Company. Representative's
Purchase Option Certificates shall be dated the date of execution by the Company
upon initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of the Representative's Purchase Options.
The Holder of a Representative's Purchase Option Certificate, by its acceptance
thereof, covenants and agrees that the Representative's Purchase Options are
being acquired as an investment and not with a view to the distribution thereof;
and that the Representative's Purchase Options may not be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, for a
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<PAGE>
period of one (1) year from the date of the Public Offering, except to officers
or partners of the Representative or members of the selling group and/or their
officers and partners.
6. Exercise Price.
Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each of the Units
underlying the Representative's Purchase Options shall be $7.00. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 8 hereof.
Section 6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
Section 7.1 Registration Under the Securities Act of 1933. The
Representative's Purchase Options, the Units issuable upon exercise of the
Representative's Purchase Options and the shares of Preferred Stock, the
Preferred Warrants and the shares of Preferred Stock underlying the Preferred
Warrants underlying the Units have been registered pursuant to a registration
statement on form SB-2 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act").
Section 7.2 Piggyback Registration. If, at any time commencing after
__________________, 1999, through and including ________________, 2005 (84
months from the Effective Date), the Company proposes to register any of its
securities under the Act (other than in connection with a merger or pursuant to
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<PAGE>
Form S-8) it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such registration statement, to the
Representative and to all other Holders of the Representative's Purchase Options
and/or the Units underlying same of its intention to do so. If any of the
Representative or other Holders of the Representative's Purchase Options and/or
the Units underlying same notify the Company within twenty (20) days after
receipt of any such notice of its or their desire to include any such securities
in such proposed registration statement, the Company shall afford each of the
Representative and such Holders of the Representative's Purchase Options and/or
the Units underlying same the opportunity to have any such Units underlying same
registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
Section 7.3 Demand Registration.
(a) At any time commencing after ________________, 1999 (12 months from
the Effective Date) through and including ___________________, 2003 (60 months
from the Effective Date), the Holders of the Representative's Purchase Options
and/or Units underlying same representing a "Majority" (as hereinafter defined)
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<PAGE>
of such securities (assuming the exercise of all of the Representative's
Purchase Options) shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Commission, on one
occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Representative and Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale of their
respective Units underlying same for nine (9) consecutive months by such Holders
and any other Holders of the Representative's Purchase Options and/or Units
underlying same who notify the Company within ten (10) days after receiving
notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Representative's Purchase Options and the Units
underlying same within ten (10) days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing after , 1999 (12
months from the Effective Date) through and including , 2003 (60 months from the
Effective Date), any Holder or Holders of a Majority of Representative's
Purchase Options and/or the Units underlying same shall have the right,
7
<PAGE>
exercisable by written request to the Company, to have the Company prepare and
file, on one occasion, with the Commission a registration statement so as to
permit a public offering and sale for nine (9) consecutive months by any such
Holder or Holders, provided, however, that the provisions of Section 7.4(b)
hereof shall not apply to any such registration request and registration and all
costs incident thereto shall be at the expense of the Holder or Holders making
such request.
(d) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Units, the shares
of Preferred Stock, the Preferred Warrants and the shares of Preferred Stock
underlying the Preferred Warrants underlying the Representative's Purchase
Options within the time period specified in Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Representative's Purchase Options and/or Units underlying same, the Company
agrees that upon the written notice of election of a Majority of the Holders of
the Representative's Purchase Options and/or Units underlying same it shall
repurchase (i) any and all Units underlying the Representative's Purchase
Options at the higher of Market Price per Unit of the Units on (x) the date of
the notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a). Such repurchase shall be in immediately available
funds and shall close within two (2) days after the later of (i) the expiration
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<PAGE>
of the period specified in Section 7.4(a) or (ii) the delivery of the written
notice of election specified in this Section 7.3(d).
Section 7.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand therefor, shall
use its best efforts to have any registration statement declared effective at
the earliest possible time, and shall furnish each Holder desiring to sell Units
underlying the Representative's Purchase Options, such number of prospectuses as
shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, and blue sky fees and expenses.
The Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c). If the Company shall
fail to comply with the provisions of Section 7.4(a), the Company shall, in
addition to any other equitable or other relief available to the Holder(s), be
liable for any or all incidental, special and consequential damages and damages
due to loss of profit sustained by the Holder(s) requesting registration of
their securities hereunder.
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<PAGE>
(c) The Company will take all necessary action which may be required in
qualifying or registering the Units (inclusive of the shares of Preferred Stock,
the Preferred Warrants and the shares of Preferred Stock underlying the
Preferred Warrants) underlying the Representative's Purchase Options included in
a registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Units underlying
same to be sold pursuant to any registration statement and each person, if any,
who controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Representative contained in Section 7 of the
Underwriting Agreement.
(e) The Holder(s) of the Units underlying the Representative's Purchase
Options to be sold pursuant to a registration statement, and their successors
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<PAGE>
and assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors 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,
against all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the Underwriting Agreement pursuant to which the
Representative has agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Representative's Purchase Options prior to the
initial filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Units underlying the Representative's Purchase Options to be included
in any registration statement filed pursuant to Section 7.3 hereof, or permit
any other registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section 7.3 hereof,
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<PAGE>
without the prior written consent of the Holders of the Representative's
Purchase Options and Units underlying same representing a Majority of such
securities.
(h) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
have made "generally available to its security holders" (within the meaning of
Rule 158 under the Act) an earnings statement (which need not be audited)
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<PAGE>
complying with Section 11(a) of the Act and covering a period of at least 12
consecutive months beginning after the effective date of the registration
statement.
(j) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below, and
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Units underlying same requested to be included in such
underwriting. Such agreement shall be satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
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<PAGE>
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter.
The Holders shall be parties to any underwriting agreement relating to
an underwritten sale of their Units underlying same and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and for
the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders, their intended methods
of distribution, and except for matters related to disclosures with respect to
such Holders, contained or required to be contained, in such registration
statement under the Act and the rules and regulations thereunder.
(l) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Representative's Purchase Options, shall mean in excess of fifty
percent (50%) of the then outstanding Representative's Purchase Options assuming
full exercise thereof that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their families, persons acting as nominees or in
conjunction therewith or (ii) have not been resold to the public pursuant to
Rule 144 under the Act or a registration statement filed with the Commission
under the Act.
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8. Adjustments to Exercise Price and Number of Securities.
Section 8.1 Intentionally Omitted.
Section 8.2 Intentionally Omitted.
Section 8.3 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Preferred Stock or
Common Stock, the Exercise Price and the conversion ratio of the Preferred Stock
shall forthwith be proportionately adjusted as set forth herein.
Section 8.4 Adjustment in Number of Securities. Upon each adjustment of
the Exercise Price pursuant to the provisions of this Section 8, the number of
Units underlying the Representative's Purchase Options shall be adjusted to the
nearest full amount by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of securities
underlying same issuable upon exercise of the Representative's Purchase Options
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Exercise Price.
Section 8.5 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as amended as
of the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock, consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that the Company shall after the date hereof issue a class
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<PAGE>
of Common Stock with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Warrant either shares of Common Stock or a like number of
such securities with greater or superior voting rights.
Section 8.6 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
each Holder a supplemental Purchase Option agreement providing that each Holder
shall have the right thereafter (until the expiration of such Purchase Option
Agreement) to receive, upon exercise of such Purchase Option, the kind and
amount of shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of Units of the Company for
which such Purchase Option might have been exercised immediately prior to such
consolidation or merger. Such supplemental Purchase Option agreement shall
provide for adjustments which shall be identical to the adjustments provided in
Section 8. The above provision of this subsection shall similarly apply to
successive consolidations or mergers.
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Section 8.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Representative's Purchase
Options or the Units issuable upon the exercise of (i) the
Representative's Purchase Options, (ii) the options and warrants
outstanding on the date hereof and described in the prospectus relating
to the Public Offering or (iii) up to an aggregate of 400,000 shares of
common stock issuable upon the exercise of options granted under the
Company's 1997 Stock Incentive Plan; or
(b) If the amount of such adjustment shall be less than two
cents ($.02) per share, provided, however, that in such case any
adjustment that would otherwise be required then 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 so
carried forward, shall amount to at least two cents ($.02) per share.
Section 8.9 Dividends and Other Distributions. In the event that the
Company shall at any time prior to the exercise of all Representative's Purchase
Options declare a dividend (other than a dividend consisting solely of shares of
Common Stock) or otherwise distribute to its stockholders any assets, property,
rights, evidences of indebtedness, securities (other than shares of Common
Stock), whether issued by the Company or by another, or any other thing of
value, the Holders of the unexercised Representative's Purchase Options shall
thereafter be entitled, in addition to the shares of Common Stock, Warrants or
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other securities and property receivable upon the exercise thereof, to receive,
upon the exercise of such Representative's Purchase Options, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Representative's Purchase Options had been exercised
immediately prior to the record date for such dividend or distribution. At the
time of any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this subsection
8.9.
Section 8.10 Reserved.
9. Exchange and Replacement of Purchase Option Certificates. Each
Purchase Option Certificate is exchangeable without expense, upon the surrender
thereof by the registered Holder at the principal executive office of the
Company, for a new Purchase Option Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of Units
underlying same in such denominations as shall be designated by the Holder
thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Purchase Option
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
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the Representative's Purchase Options, if mutilated, the Company will make and
deliver a new Purchase Option Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of Units, or the
securities underlying same, upon the exercise of the Representative's Purchase
Options, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole
number of Units or other securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Preferred
Stock, solely for the purpose of issuance upon the exercise of the
Representative's Purchase Options, such number of shares of Preferred Stock or
other securities, properties or rights as shall be issuable upon the exercise of
the Purchase Options and the exercise of the Preferred Warrants included
therein. In addition, the Company will reserve for issuance such number of
shares of Common Stock as may issuable upon the conversion of the Preferred
Stock by the Company into shares of Common Stock. The Company covenants and
agrees that, upon exercise of the Representative's Purchase Options and payment
of the exercise prices therefor, all Units shall be duly and validly issued,
fully paid, non-assessable and not subject to the preemptive rights of any
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stockholder. As long as the Representative's Purchase Options shall be
outstanding, the Company shall use its best efforts to cause all securities
issuable upon the exercise of the Representative's Purchase Options to be listed
(subject to official notice of issuance) on all securities exchanges on which
the Units issued to the public in connection herewith may then be listed and/or
quoted on the Bulletin Board.
12. Notices to Purchase Option Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Representative's Purchase Options and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
Units for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of any class of
its outstanding securities any additional shares of
capital stock of the Company or securities convertible into or
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exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property assets and business as an
entirety shall be proposed; then, in any one or more of such events the
Company shall give written notice of such event at least fifteen (15)
days prior to the date fixed as a record date or the date of closing
the transfer books for the determination of the stockholders entitled
to such dividend, distribution, convertible or exchangeable securities
or subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the
declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities, or subscription rights, options
or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices.
All notices requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made when delivered, or
mailed by registered or certified mail, return receipt requested:
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(a) If to the registered Holder of the Representative's
Purchase Options, to the address of such Holder as shown on the books
of the Company; or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may
designate by notice to the Holders.
14. Supplements and Amendments. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Purchase Option Certificates (other than the Representative) in order
to cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Representative may deem necessary or desirable and which the
Company and the Representative deem shall not adversely affect the interests of
the Holders of Purchase Option Certificates.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on ________________, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on ____________________, 2007.
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17. Governing Law: Submission to Jurisdiction. This Agreement and each
Purchase Option Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of such State without giving effect to the
rules of said State governing the conflicts of laws.
The Company, the Representative and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
set forth in Section 3 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Representative and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
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relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
18. Entire Agreement: Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits or this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Purchase Option
Certificates or Units underlying same any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holder(s)
of the Purchase Option Certificates or securities underlying same.
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22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
[SEAL] KIDS STUFF, INC.
By ______________________________
William Miller
President
Attest:
____________________________
Secretary
FAIRCHILD FINANCIAL GROUP, INC.
By ______________________________
Name:
Title:
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EXHIBIT A
[FORM OF PURCHASE OPTION CERTIFICATE]
THE REPRESENTATIVE'S PURCHASE OPTIONS REPRESENTED BY THIS CERTIFICATE AND THE
OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY
SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii)
AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S PURCHASE OPTIONS REPRESENTED BY
THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE PURCHASE OPTION AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME , 2003
No. W-001 40,000 Representative's Purchase Options
PURCHASE OPTION CERTIFICATE
This Purchase Option Certificate certifies that Fairchild Financial
Group, Inc., or registered assigns, is the registered holder of 40,000
Representative's Purchase Options to purchase initially, at any time from , 1999
[one year from the effective date of the Registration Statement] until 5:30 p.m.
New York time on , 2003 ("Expiration Date"), up to 40,000 fully-paid and
non-assessable units (the "Units") comprised of one share of Series 1 Preferred
Stock (the "Preferred Stock") and two Preferred Stock Warrants (the "Preferred
Warrants") of Kids Stuff, Inc., a Delaware corporation (the "Company"), at the
initial exercise prices, subject to adjustment in certain events (the "Exercise
Prices"), of $7.00, upon surrender of this Purchase Option Certificate and
payment of the Exercise Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the Representative's Purchase Option
Agreement dated as of , 1998 between the Company and Fairchild Financial Group,
Inc. (the "Representative's Purchase Option Agreement"). Payment of the Exercise
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Prices shall be made by certified or official bank check in New York Clearing
House funds payable to the order of the Company.
No Representative's Purchase Option may be exercised after 5:30 p.m.,
New York time, on the Expiration Date, at which time all Representative's
Purchase Options evidenced hereby, unless exercised prior thereto, hereby shall
thereafter be void.
The Representative's Purchase Options evidenced by this Purchase Option
Certificate are part of a duly authorized issue of Units pursuant to the
Representative's Purchase Option Agreement, which agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Representative's Purchase Options.
The Representative's Purchase Option Agreement provides that upon the
occurrence of certain events the Exercise Price and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Purchase Option Certificate evidencing the adjustment in the Exercise Price and
the number and/or type of securities issuable upon the exercise of the
Representative's Purchase Options; provided, however, that the failure of the
Company to issue such new Purchase Option Certificates shall not in any way
change, alter or otherwise impair, the rights of the holder as set forth in the
Representative's Purchase Option Agreement.
Upon due presentment for registration of transfer of this Purchase
Option Certificate at an office or agency of the Company, a new Purchase Option
Certificate or Purchase Option Certificates of like tenor and evidencing in the
aggregate a like number of Representative's Purchase Options shall be issued to
the transferee(s) in exchange for this Purchase Option Certificate, subject to
the limitations provided herein and in the Representative's Purchase Option
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's Purchase
Options evidenced by this Certificate, the Company shall forthwith issue to the
holder hereof a new Purchase Option Certificate representing such numbered
unexercised Representative's Purchase Options.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Purchase Option Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
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of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Purchase Option Certificate which are defined in
the Representative's Purchase Option Agreement shall have the meanings assigned
to them in the Representative's Purchase Option Agreement.
IN WITNESS WHEREOF, the Company has caused this Purchase Option
Certificate to be duly executed under its corporate seal.
Dated as of _____________, 1998
KIDS STUFF, INC.
[SEAL] By ______________________________
Name: William Miller
Title: President
Attest:
______________________________
Secretary
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[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Purchase Option Certificate, to purchase
Units underlying the Representative's Purchase Options, and herewith
tenders in payment for such securities a certified or official bank check
payable in New York Clearing House Funds to the order of Kids Stuff, Inc. in the
amount of $______________________, all in accordance with the terms hereof. The
undersigned requests that a certificates for such securities be registered in
the name of Fairchild Financial Group, Inc. whose address is 99 Wall Street, New
York, New York 10005 and that such Certificate be delivered to Fairchild
Financial Group, Inc. whose address is 99 Wall Street, New York, New York 10005.
Dated:
Signature _________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Purchase Option Certificate.)
___________________________________
Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
Exhibit 4.08
PREFERRED STOCK AGENCY AGREEMENT
PREFERRED STOCK AGENCY AGREEMENT, dated as of ________, 1998 between
KIDS STUFF, INC., a Delaware corporation (the "Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, as Preferred Agent (the "Preferred Agent").
W I T N E S S E T H :
WHEREAS, the Company has filed an offering (the "Offering") with the
Securities and Exchange Commission (the "SEC") with respect to the sale of up to
460,000 Units, each Unit consisting of one share of Series 1 Preferred Stock and
two Series 1 Preferred Stock Purchase Warrants (the "Preferred Warrants"),
including 60,000 Units covered by an over-allotment option (the "Offering")
granted to Fairchild Financial Group, Inc. ( the "Representative"); and
WHEREAS, the SEC declared the Registration Statement on Form SB-2 (File
No. 333-61463) effective on ________________, 1998 (the "Effective Date"); and
WHEREAS, the Company desires to provide for the issuance of
certificates of Series 1 Preferred Stock and for the issuance of certificates of
Common Stock if the holders of Series 1 Preferred Stock elect to convert the
Series 1 Preferred Stock into Common Stock initially at the Conversion Ratio as
defined herein; and
WHEREAS, the parties have contemporaneously entered into a Preferred
Warrant Agency Agreement with respect to the issuance of Preferred Warrants and
the exercise of same; and
WHEREAS, the Representative will receive a Warrant to purchase up to
40,000 Units upon the closing of the Offering (the "Representative's Warrant"),
it being understood that such Units are identical to the Units sold to the
public except that the exercise price of the Preferred Warrants included in the
Units shall be at 140% of the exercise price of publicly held Preferred
Warrants; and
WHEREAS, the Company desires the Preferred Agent to act on behalf of
the Company, and the Preferred Agent is willing to so act, in connection with
the issuance, registration, transfer and exchange of certificates representing
the Series 1 Preferred Stock and the possible conversion of the Series 1
Preferred Stock into Common Stock.
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 Series 1 Preferred Stock and the respective rights and
obligations thereunder of the Company, the holders of certificates representing
the Series 1 Preferred Stock and the Preferred Agent, the parties hereto agree
as follows:
<PAGE>
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Certificate" shall mean a certificate representing Series
1 Preferred Stock substantially in the form annexed hereto as Exhibit A.
(b) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
(c) "Conversion Date" shall mean, subject to the provisions
contained herein as to any Series 1 Preferred Stock, the date on which the
Preferred Agent shall have received the Series 1 Preferred Stock Certificate and
a completed notice of conversion of the Series 1 Preferred Stock into Common
Stock signed by the holder of the Series 1 Preferred Stock.
(d) "Conversion Ratio" shall mean, subject to adjustment in
accordance with the provisions contained herein, _____________ shares of Common
Stock for each 1.0 share of Series 1 Preferred Stock. All amounts shall be
rounded up to the nearest whole number and no fractional shares shall be issued.
(e) "Corporate Office" shall mean the office of the Preferred
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located on the date hereof at 40 Wall
Street, New York, NY 10005.
(f) "Initial Conversion Date" shall mean at any time
after___________ 2000 (i.e. eighteen months from the Effective Date) except that
the last day to convert the Series 1 Preferred Stock into Common Stock shall be
the close of business on the day preceding the Redemption Date.
(g) "Initial Redemption Date" shall mean any time
after________, 2000 (i.e. eighteen months from the Effective Date).
(h) "Preferred Agent" or "Transfer Agent" shall mean American
Stock Transfer & Trust Company or its authorized successor.
(i) "Preferred Warrants" shall mean the Series 1 Preferred
Stock Purchase Warrants included in the Units sold to the public in the
Offering.
(j) "Redemption Date" shall mean the day that the Company
redeems and cancels the Series 1 Preferred Stock as a result of the redemption
provisions described herein.
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(k) "Registered Holder" shall mean the person in whose name
any certificate representing the Series 1 Preferred Stock shall be registered on
the books maintained by the Preferred Agent.
(l) "Representative's Warrant Agreement" shall mean the
agreement(s) dated as of _________, 1998 between the Company and the
Representative relating to and governing the terms and provisions of the
Representative's Warrants.
(m) "Series 1 Preferred Stock" shall mean Series 1 Preferred
Stock of the Company as described in a Certificate of Designation filed with the
Secretary of State of the State of Delaware and supplied to the Preferred Agent
together with any amendments thereto authorized by the Board of Directors of the
Company and ratified, adopted and approved, if at all, by the stockholders of
the Company.
(n) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the Board of Directors of such corporation (regardless of
whether or not at the time stock of any other class or classes of such
corporation shall have or may have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by the Company or
by one or more Subsidiaries, or by the Company and one or more Subsidiaries.
(o) "Underwriting Agreement" shall mean the underwriting
agreement dated ________, 1998 between the Company and the Representative,
relating to the purchase for resale of the Series 1 Preferred Stock.
SECTION 2. Appointment of Preferred Agent
The Company hereby appoints the Preferred Agent to act as
agent for the Company in accordance with instructions set forth in this
Agreement, and the Preferred Agent hereby accepts such appointment.
SECTION 3. Issuance of Series 1 Preferred Stock; Form and Execution of
Certificates
(a) Upon execution of this Agreement, Certificates
representing 400,000 shares of Series 1 Preferred Stock shall be executed by the
Company and delivered to the Preferred Agent.
(b) Upon exercise of the Preferred Warrants and/or
Representative's Warrants as provided therein, Certificates representing Series
1 Preferred Stock (subject to any modification and/or adjustment provided in the
Preferred Warrant Agency Agreement and/or Representative's Warrant Agreement, as
the case may be), shall be countersigned, issued and delivered by the Preferred
Agent upon written order of the Company signed by its Chairman of the Board,
Chief Executive Officer, or President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary.
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(c) So long as the Series 1 Preferred Stock is
outstanding, the Preferred Agent shall countersign and deliver Series 1
Preferred Stock Certificates (the "Certificates") in required denominations of
one or whole number multiples thereof to the person entitled thereto in
connection with any transfer or exchange permitted under this Agreement. Except
as provided herein, no Certificates shall be issued except (i) Certificates
initially issued hereunder, (ii) Certificates issued upon any transfer or
exchange of Series 1 Preferred Stock, (iii) Certificates issued in replacement
of lost, stolen, destroyed or mutilated Certificates, (iv) Certificates issued
pursuant to the Preferred Warrant Agency Agreement and/or Representative's
Warrant Agreement and (v) at the option of the Company, Certificates in such
form as may be approved by its Board of Directors, to reflect any adjustment or
change in the Conversion Ratio, the Redemption Price or other terms of the
Series 1 Preferred Stock.
(d) The Certificates evidencing the Series 1
Preferred Stock shall be substantially in the form annexed hereto as Exhibit A
(the provisions of which are hereby incorporated herein), and may have such
letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any rule
or regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Series 1 Preferred Stock may be listed, or to conform to
usage. The Certificates shall be dated the date of issuance thereof (whether
upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen
or destroyed Certificates).
(e) Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, or President and
by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon.
Certificates shall be manually countersigned by the Preferred 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 Certificates shall cease to be such
officer of the Company before the date of issuance of the Certificates or before
countersignature by the Preferred Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Preferred Agent,
issued and delivered with the same force and effect as though the person who
signed such Certificates had not ceased to be such officer of the Company.
SECTION 4. Rights of Series 1 Preferred Stock.
Conversion
(a) Commencing on the Initial Conversion Date and up until the
close of business on the day preceding the Redemption Date, the holders of the
Certificates shall be able to convert their Series 1 Preferred Stock into Common
Stock based upon the applicable Conversion Ratio. The initial Conversion Ratio
shall be ____ shares of
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Common Stock for each 1.0 share of Series 1 Preferred Stock, subject to
adjustment as described in Section 8 hereof.
(b) Series 1 Preferred Stock certificates in
denominations of one or whole number multiples thereof may be converted into
Common Stock at the then applicable Conversion Ratio on terms described herein.
The Series 1 Preferred Stock shall be deemed to have been converted immediately
prior to the close of business on the Conversion Date, provided that the
Certificate representing such Series 1 Preferred Stock, with the conversion form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, has been received by the Preferred Agent. The person
entitled to receive the securities deliverable upon such conversion shall be
treated for all purposes as the holder of such securities as of the close of
business on the Conversion Date. If Series 1 Preferred Stock in denominations
other than one or whole number multiples thereof shall be converted at one time
by the same Registered Holder, the number of full shares of Common Stock which
shall be issuable upon conversion thereof shall be computed on the basis of the
aggregate number of full shares of Common Stock issuable upon such exercise. As
soon as practicable on or after the Conversion Date and in any event within five
business days after such date, if one or more Series 1 Preferred Stock have been
converted, the Preferred Agent on behalf of the Company shall cause to be issued
to the person or persons entitled to receive the same, a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon such
conversion, and the Preferred Agent shall deliver the same to the person or
persons entitled thereto. Upon the conversion of any one or more Series 1
Preferred Stock, the Preferred Agent shall promptly notify the Company in
writing of such fact and of the number of securities delivered upon such
conversion.
(c) The Company shall not be obligated to issue any
fractional share interests upon the conversion of any Series 1 Preferred Stock,
nor shall it be obligated to issue scrip in lieu of fractional interests. All
fractional shares or fractional interests will be rounded up to the nearest
whole share.
Redemption
(d) Commencing on or after the Initial Redemption
Date, the Company may redeem the entire Series 1 Preferred Stock at $7.20 per
share on at least 30 days prior written notice to the Registered Holders of the
Series 1 Preferred Stock, commencing on the Initial Redemption Date. All Series
1 Preferred Stock must be redeemed if any are redeemed. The redemption price
shall be appropriately and proportionably adjusted by the Board of Directors of
the Company by corporate resolution for all stock splits, stock dividends,
recapitalizations and the like of Series 1 Preferred Stock and notice of any
adjustment shall be sent promptly to the holders of Series 1 Preferred Stock.
(e) In the event the Company exercises its right to
redeem all of the Series 1 Preferred Stock, it shall give or cause to be given
notice to the Registered Holders of the
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Series 1 Preferred Stock, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at least by the thirtieth (30th) day
before the date fixed for redemption, at their last address as shall appear on
the records of the Preferred Agent. 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. At the time of the mailing to the
Registered Holders of the Series 1 Preferred Stock of the notice of redemption,
the Company shall deliver or cause to be delivered to the Representative a
similar notice telephonically and confirmed in writing.
(f) The notice of redemption, which may not be mailed
until on or after the Initial Redemption Date, shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the
Certificates shall be delivered and the redemption price shall be paid, and (iv)
that the right to convert the Series 1 Preferred Stock shall terminate at 5:00
p.m. (New York City Time) on the business day immediately preceding the date
fixed for redemption. The date fixed for the redemption of the Series 1
Preferred Stock 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. An affidavit of the
Preferred Agent or the Secretary or 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.
(g) Any right to convert a Series 1 Preferred Stock
shall terminate at 5:00 p.m. (New York City Time) on the business day
immediately preceding the Redemption Date. The redemption price payable to the
Registered Holders shall be paid against cancellation of the certificates
pursuant to instructions given in the notice of redemption.
Dividends
(h) Each share of Series 1 Preferred Stock is
entitled to cumulative annual dividends of $.45 payable on April 30 of each year
commencing April 30, 1999. The first dividend payment shall be pro rated for the
period from the date of issuance until December 31, 1998. The Board of Directors
shall annually fix the record date prior to April 30th of each year. Unpaid
dividends will accumulate and be payable prior to the payment of dividends on
the Common Stock. The Company may, at its option, pay dividends in shares of
Common Stock, in lieu of cash. Shares used for such purpose will be valued at
the average closing sales price of the Common Stock on the OTC Electronic
Bulletin Board, NASDAQ or an Exchange during the ten trading days ending on the
tenth day before the dividend payment date.
Voting Rights
(i) Preferred Shares are entitled to one vote per
share voting together with the Common Stock as one class, except as otherwise
provided by the Delaware Corporation Law.
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Preference on Liquidation
(j) Preferred Shares will be entitled to a preference
on liquidation equal to $ ______ per share plus accumulated and unpaid
dividends.
No Sinking Fund
(k) The Company is not required to provide for the
retirement or redemption of the Preferred Shares through the operation of a
sinking fund.
SECTION 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 issuance upon conversion of Series 1 Preferred Stock, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
outstanding Series 1 Preferred Stock. The Company covenants that all shares of
Common Stock which shall be issuable upon conversion of the Series 1 Preferred
Stock shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to
be reserved for the purpose of conversion of Series 1 Preferred Stock 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 conversion, then the Company will file a registration statement under
the federal securities laws use its best efforts to cause the same to become
effective, keep such registration statement current while any of the Series 1
Preferred Stock are outstanding and deliver a prospectus which complies with
Section 10(a)(3) of the Securities Act of 1933, as amended, to the Registered
Holder exercising the Certificate. The Company will use its best efforts to
maintain appropriate approvals or registrations under state "blue sky"
securities laws in states where the Offering is sold if required by applicable
law. With respect to any such securities, however, Series 1 Preferred Stock may
not be converted by, or shares of Common Stock issued to, any Registered Holder
in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Series 1 Preferred Stock, or the issuance or delivery of any
shares of Common Stock upon conversion of the Series 1 Preferred Stock;
provided, however, that if shares of Common Stock are to be delivered in a name
other than the name of the Registered Holder of the Certificate representing any
Series 1 Preferred Stock being converted, then no such
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delivery shall be made unless the person requesting the same has paid to the
Preferred Agent the amount of transfer taxes or charges incident thereto, if
any.
(d) The Preferred Agent is hereby irrevocably
authorized as the Transfer Preferred Agent to requisition from time to time
certificates representing shares of Common Stock or other securities required
upon conversion of the Series 1 Preferred Stock, and the Company will comply
with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Series 1 Preferred Stock Certificates may be
exchanged for other Certificates representing an equal aggregate number of
Series 1 Preferred Stock or may be transferred in whole or in part. Certificates
to be so exchanged shall be surrendered to the Preferred Agent at its Corporate
Office, and the Company shall execute and the Preferred Agent shall countersign,
issue and deliver in exchange therefor, the Certificate or Certificates which
the Registered Holder making the exchange shall be entitled to receive.
(b) The Preferred Agent shall keep, at such office,
books in which, subject to such reasonable regulations as it may prescribe, it
shall register Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Certificate at such office, the Company shall
execute and the Preferred Agent shall issue and deliver to the transferee or
transferees a new Certificate or Certificates representing an equal aggregate
number of Series 1 Preferred Stock.
(c) With respect to any Series 1 Preferred Stock
Certificates presented for registration of transfer, or for exchange or
conversion, the notice of conversion form, as the case may be, 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 Preferred Agent, duly executed by the Registered Holder thereof or his
attorney duly authorized in writing.
(d) No service charge shall be made for any exchange
or registration of transfer of Certificates. However, the Company may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection therewith.
(e) All Certificates surrendered for exercise or for
exchange shall be promptly canceled by the Preferred Agent.
(f) Before due presentment for registration or
transfer thereof, the Company and the Preferred Agent may deem and treat the
Registered Holder of any Certificate as the absolute owner thereof of each
Series 1 Preferred Stock represented thereby (notwithstanding any notations of
ownership or writing thereon made by anyone other than
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the Company or the Preferred Agent) for all purposes and shall not be affected
by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Preferred
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Preferred
Agent shall countersign and deliver in lieu thereof a new Certificate
representing an equal aggregate number of Series 1 Preferred Stock. Applicants
for a substitute Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Preferred Agent may
prescribe.
SECTION 8. Adjustment of Conversion Ratio and Number of Shares of Common Stock
Deliverable.
(a) In the event the Company shall, at any time or from time
to time after the date hereof, 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 and/or Series 1 Preferred Stock into a greater or lesser
number of shares (any such issuance, subdivision or combination being herein
called a "Change of Shares"), then, and thereafter immediately before the date
of such Series 1 Preferred Stock record date for each Change of Shares, the
Conversion Ratio for the Series 1 Preferred Stock in effect immediately prior to
such Change of Shares shall be changed by the board of directors acting in good
faith to a new Conversion Ratio based upon a proportionate change to the
Conversion Ratio under the then applicable circumstances so that the holder of
the Series 1 Preferred Stock is in the same position as if the holder converted
the Series 1 Preferred into Common Stock immediately before the Change of
Shares.
(b) In case of any reclassification or change of outstanding
shares of Common Stock issuable upon exercise of the Certificates (other than a
change in par value, or from par value to no par value, or as a result of
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification or change of the then outstanding shares of
Common Stock or other capital stock issuable upon exercise of the Series 1
Preferred Stock) or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
then, as a condition of such reclassification, change, consolidation, merger,
sale or conveyance, the Company, or such successor or purchasing corporation, as
the case may be, shall make lawful and adequate provision whereby the Registered
Holder of each Series 1 Preferred Stock then outstanding shall have the right
thereafter to receive on conversion of the Certificate, the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon conversion of immediately prior to such
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reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Preferred Agent, a statement
signed by its Chairman, Chief Executive Officer or President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary
evidencing such provision. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8(a). The above provisions of this Section
8(b) shall similarly apply to successive reclassifications and changes of shares
of Common Stock and to successive consolidations, mergers, sales or conveyances.
(c) Irrespective of any adjustments or changes in the
Conversion Ratio and the number of shares of Common Stock issuable upon
conversion of the Series 1 Preferred Stock, the Certificates theretofore and
thereafter issued shall, unless the Company shall exercise its option to issue
new Certificates, continue to express the Conversion Ratio and the number of
shares purchasable thereunder as expressed in the Certificates when the same
were originally issued.
(d) After each adjustment of the Conversion Ratio pursuant to
this Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Conversion Ratio as so adjusted, (ii) the number of
shares of Common Stock purchasable upon conversion of each share of Series 1
Preferred Stock, after such adjustment, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will promptly file such certificate
with the Preferred Agent and cause a brief summary thereof to be sent by
ordinary first class mail to each Registered Holder at his last address as it
shall appear on the registry books of the Preferred Agent. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect the
validity thereof. The affidavit of an officer of the Preferred 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.
SECTION 9. Concerning the Preferred Agent.
(a) The Preferred Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Representative, and its duties
shall be determined solely by the provisions hereof. The Preferred Agent shall
not, by issuing and delivering Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Certificates or the Series 1 Preferred Stock represented thereby or of
any securities delivered upon conversion of any Series 1 Preferred Stock or
whether any stock issued upon exercise of any Series 1 Preferred Stock is fully
paid and nonassessable.
(b) The Preferred Agent shall not at any time be under any
duty or responsibility to any holder of Certificates to make or cause to be made
any adjustment
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of the Conversion Ratio provided in this Agreement, or to determine whether any
fact exists which may require any such adjustment, 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 fact contained herein or for any action taken, suffered or omitted
by it in reliance on any 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 Certificate, or (iii) be liable for any act or omission in
connection with this Agreement, except for its own gross negligence or willful
misconduct.
(c) The Preferred Agent may at any time consult with counsel
satisfactory to it 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.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, Chief Executive Officer or
President (unless other evidence in respect thereof is herein specifically
prescribed). The Preferred 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.
(e) The Company agrees to pay the Preferred Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Preferred 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
Preferred Agent in the execution of its duties and powers hereunder except
losses, expenses and liabilities arising as a result of the Preferred Agent's
gross negligence or willful misconduct.
(f) The Preferred Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Preferred Agent's own gross negligence or willful
misconduct), after giving 60 days prior written notice to the Company. At least
30 days prior to the date such resignation is to become effective, the Preferred
Agent shall cause a copy of such notice of resignation to be mailed to the
Registered Holder of each Certificate at the Company's expense. Upon such
resignation the Company shall appoint in writing a new Preferred Agent. If the
Company shall fail to make such appointment within a period of 60 days after it
has been notified in writing of such resignation by the resigning Preferred
Agent, then the Registered Holder of any Certificate may apply to any court of
competent jurisdiction for the appointment of a new Preferred Agent. Any new
Preferred 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 doing business in New York, New York. After acceptance in
writing of
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such appointment by the new Preferred Agent is received by the Company, such new
Preferred Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Preferred
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
Preferred Agent. Not later than the effective date of any such appointment the
Company shall file notice thereof with the resigning Preferred Agent and shall
forthwith cause a copy of such notice to be mailed to the Registered Holder of
each Certificate.
(g) Any corporation into which the Preferred Agent or any new
Preferred Agent may be converted or merged, any corporation resulting from any
consolidation to which the Preferred Agent or any new Preferred Agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Preferred Agent or any new Preferred Agent shall be a successor Preferred Agent
under this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Preferred Agent under the
provisions of the preceding paragraph. Any such successor Preferred Agent shall
promptly cause notice of its succession as Preferred Agent to be mailed to the
Company and to the Registered Holders of each Certificate.
(h) The Preferred Agent, its Subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Series 1
Preferred Stock or other securities of the Company and otherwise deal with the
Company in the same manner and to the same extent and with like effect as though
it were not Preferred Agent. Nothing herein shall preclude the Preferred Agent
from acting in any other capacity for the Company or for any other legal entity.
(i) The Preferred Agent shall retain for a period of three
years from the date of conversion any Certificate received by it upon such
exercise, marked to indicate its cancellation thereof.
SECTION 10. Modification of Agreement.
The Preferred Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement without the approval of any holders
of Series 1 Preferred Stock (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; (ii) that they may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Certificates; (iii) that they deem are required to change the Conversion Ratio
or Redemption Price in accordance with the provisions contained herein; or (iv)
which may be required by law; provided, however, that this Agreement shall not
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of
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the Registered Holders representing not less than 50% of the Series 1 Preferred
Stock then outstanding.
SECTION 11. 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 postage prepaid, or delivered to a telegraph office for
transmission if to the Registered Holder of a Series 1 Preferred Stock
Certificate, at the address of such holder as shown on the registry books
maintained by the Preferred Agent; if to the Company at 4450 Belden Village
Street, N.W., Canton, Ohio 44718, Attention: Chief Executive Officer, or at such
other address as may have been furnished to the Preferred Agent in writing by
the Company; and if to the Preferred Agent, at its Corporate Office. Copies of
any notice delivered pursuant to this Agreement shall be delivered to the
Representative at 99 Wall Street, Fourth floor, New York, New York 10005,
Attention: Lorrette Farris, President, or at such other addresses as may have
been furnished to the Company and the Preferred Agent in writing.
SECTION 12. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 13. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Series 1 Preferred Stock Agent and their respective successors and
assigns and the holders from time to time of Series 1 Preferred Stock
Certificates or any of them. Except as hereinafter stated, nothing in this
Agreement is intended or shall be construed to confer upon any other person any
right, remedy or claim or to impose upon any other person any duty, liability or
obligation. The Representative is, and shall at all times irrevocably be deemed
to be, third-party beneficiaries of this Agreement, with full power, authority
and standing to enforce the rights granted to it hereunder.
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<PAGE>
SECTION 14. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the first date first above written.
KIDS STUFF, INC. AMERICAN STOCK TRANSFER &
TRUST COMPANY
By: ________________________________ By: _____________________________
Jeanne Miller, President authorized officer
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Exhibit A
<PAGE>
Exhibit 4.09
PREFERRED WARRANT AGENCY AGREEMENT
AGREEMENT, dated as of __________, 1998 between KIDS STUFF,
INC., a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Preferred Warrant Agent (the "Preferred Warrant Agent").
W I T N E S S E T H :
WHEREAS, the Company has filed an offering (the "Offering") with the
Securities and Exchange Commission (the "SEC") with respect to the sale of up to
460,000 Units, each Unit consisting of one share of Series 1 Preferred Stock and
two Series 1 Preferred Stock Purchase Warrants (the "Preferred Warrants"),
including 60,000 Units covered by an over-allotment option (the "Offering")
granted to Fairchild Financial Group, Inc. ( the "Representative"); and
WHEREAS, the SEC declared the Registration Statement
on Form SB-2 (File No. 333-61463) effective on ________________, 1998 (the
"Effective Date"); and
WHEREAS, the Company desires to provide for the issuance of
certificates of Preferred Warrants and for the issuance of certificates of
Series 1 Preferred Stock if the holders of the Preferred Warrants elect to
exercise the Preferred Warrants into Series 1 Preferred Stock initially at the
exercise price as defined herein; and
WHEREAS, the parties have contemporaneously entered into a Preferred
Stock Agency Agreement with respect to the issuance of Series 1 Preferred Stock
and the conversion of same into Common Stock at the conversion ratio as defined
therein; and
WHEREAS, the Representative will receive a Warrant to purchase up to
40,000 Units upon the closing of the Offering (the "Representative's Warrant"),
it being understood that such Units are identical to the Units sold to the
public except that the exercise price of the Preferred Warrants included in the
Units shall be at 140% of the exercise price of publicly held Preferred
Warrants; and
WHEREAS, the Company desires the Preferred Warrant Agent to act on
behalf of the Company, and the Preferred Warrant Agent is willing to so act, in
connection with the issuance, registration, transfer and exchange of
certificates representing the Preferred Warrants and the possible exercise of
the Preferred Warrants into Series 1 Preferred Stock.
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 Preferred Warrants and the respective rights and obligations
thereunder of the Company,
<PAGE>
the Representative, the holders of certificates representing the Preferred
Warrants and the Preferred Warrant Agent, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
(b) "Corporate Office" shall mean the office of the Preferred
Warrant Agent (or its successor) at which at any particular time its principal
business shall be administered, which office is located on the date hereof at 40
Wall Street, New York, NY 10005.
(c) "Exercise Date" shall mean, subject to the provisions
contained herein, as to any Preferred Warrant, the date on which the Preferred
Warrant Agent shall have received both (i) the Preferred Warrant Certificate
representing such Preferred Warrant, with the exercise form thereon duly
executed by the Registered Holder hereof or his attorney duly authorized in
writing, and (ii) payment in cash or by check made payable to the Preferred
Warrant Agent for the account of the Company, of the amount in lawful money of
the United States of America equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean ___________,
2000.
(e) "Initial Warrant Redemption Date" shall mean _________,
2000.
(f) "Purchase Price" shall mean $6.00 per share for the
Preferred Warrants other than the Preferred Warrants issuable upon exercise of
the Representative's Warrants, whose Purchase Price shall be equal to the lesser
of 140% of the Purchase Price of the Preferred Warrants then in effect and
$8.40, subject in each case to modification and adjustment as provided in
Section 8.
(g) "Registered Holder" shall mean the person in whose name
any certificate representing the Preferred Warrants shall be registered on the
books maintained by the Preferred Warrant Agent pursuant to Section 6.
(h) "Series 1 Preferred Stock" shall mean Series 1 Preferred
Stock of the Company as described in a Certificate of Designation filed with the
Secretary of State of the State of Delaware and supplied to the Preferred Agent
together with any amendments thereto authorized by the Board of Directors of the
Company and ratified, adopted and approved, if at all, by the stockholders of
the Company.
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<PAGE>
(i) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the Board of Directors of such corporation (regardless of
whether or not at the time stock of any other class or classes of such
corporation shall have or may have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by the Company or
by one or more Subsidiaries, or by the Company and one or more Subsidiaries.
(j) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, 99 Wall Street, New York, NY 10005 or its authorized successor.
(k) "Underwriting Agreement" shall mean the underwriting
agreement dated ________, 1998 between the Company and the Representative,
relating to the purchase for resale to the public of the Units.
(l) "Warrant Certificate" shall mean a certificate
representing Preferred Warrants _______, ___ substantially in the form annexed
hereto as Exhibit A.
(m) "Warrant Expiration Date" shall mean, unless the Preferred
Warrants are redeemed as provided herein, 5:00 p.m. (New York City Time) on
_______, 2001, or if such date shall in the State of New York be a Saturday,
Sunday, holiday or a day on which banks are authorized to close, then 5:00 p.m.
(New York City Time) on the next following day which in the State of New York is
not a Saturday, Sunday, holiday or a day on which banks are authorized to close,
subject to the Company's right, prior to the Warrant Expiration Date, in its
sole discretion, to extend such Warrant Expiration Date on five business days
prior written notice to the Registered Holders.
SECTION 2. Preferred Warrants and Issuance of Warrant Certificates.
(a) Each Preferred Warrant shall initially entitle the
registered holder of a Preferred Warrant to purchase at the Purchase Price
therefor from the Initial Warrant Exercise Date until the Warrant Expiration
Date one share of Series 1 Preferred Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing 800,000 Preferred Warrants to purchase up to an aggregate of
800,000 shares of Series 1 Preferred Stock (subject to modification and
adjustment as provided in Section 8) shall be executed by the Company and
delivered to the Preferred Warrant Agent. Upon exercise of the Representative's
Over-Allotment Option, up to an additional 120,000 shares or Series 1 Preferred
Stock (subject to adjustment and modification as provided in Section 8) shall be
executed by the Company and delivered to the Preferred Warrant Agent.
(c) Upon exercise of the Representative's Warrants as
provided therein, Warrant Certificates representing 80,000 Preferred Warrants to
purchase up to an aggregate of 80,000 shares of Series 1 Preferred Stock
(subject to modification and
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<PAGE>
adjustment as provided in Section 8 hereof and in the Representative's Warrant),
shall be countersigned, issued and delivered by the Preferred Warrant Agent upon
written order of the Company signed by its Chairman of the Board, Chief
Executive Officer, or President and by its Treasurer or an Assistant Treasurer
or its Secretary or an Assistant Secretary.
(d) From time to time until the Warrant Expiration Date, the
Preferred Warrant Agent shall countersign and deliver Warrant Certificates in
required denominations of one or whole number multiples thereof to the person
entitled thereto in connection with any transfer or exchange permitted under
this Agreement. Except as provided in Section 7 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder as
described above, (ii) Warrant Certificates issued upon any transfer or exchange
of Preferred Warrants, (iii) Warrant Certificates issued in replacement of lost,
stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv)
Warrant Certificates issued pursuant to the Representative's Warrant and (v) at
the option of the Company, Warrant Certificates in such form as may be approved
by its Board of Directors, to reflect any adjustment or change in the Purchase
Price, the number of shares of Series 1 Preferred Stock purchasable upon
exercise of the Preferred Warrants or the Redemption Price therefor made
pursuant to Sections 8 and 9 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates evidencing the Preferred Warrants
shall be substantially in the form annexed hereto as Exhibit A, the provisions
of which are hereby incorporated herein, and may have such letters, numbers or
other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Preferred Warrants may be listed, or to conform to usage. 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.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, or President and
by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon.
Warrant Certificates shall be manually countersigned by the Preferred 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 such officer of the Company before the date of issuance of the
Warrant Certificates or before countersignature by the Preferred Warrant Agent
and issue and delivery thereof, such Warrant Certificates, nevertheless, may be
countersigned by the Preferred Warrant Agent, issued and delivered with the same
force
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<PAGE>
and effect as though the person who signed such Warrant Certificates had not
ceased to be such officer of the Company.
SECTION 4. Exercise.
(a) Preferred Warrants in denominations of one or whole
number multiples thereof may be exercised commencing 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 (including the
provisions set forth in Sections 5 and 9 hereof) and in the applicable Warrant
Certificate. A Preferred Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, together with payment in cash or by check made payable to
the Preferred Warrant Agent for the account of the Company, of an amount in
lawful money of the United States of America equal to the applicable Purchase
Price has been received in good funds by the Preferred Warrant Agent. The person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the holder of such securities as of the close of
business on the Exercise Date. If Preferred Warrants in denominations other than
one or whole number multiples thereof shall be exercised at one time by the same
Registered Holder, the number of full shares of Series 1 Preferred Stock which
shall be issuable upon exercise thereof shall be computed on the basis of the
aggregate number of full shares of Series 1 Preferred Stock issuable upon such
exercise. As soon as practicable on or after the Exercise Date and in any event
within five business days after such date, if one or more Preferred Warrants
have been exercised, the Preferred Warrant Agent on behalf of the Company shall
cause to be issued to the person or persons entitled to receive the same, a
Series 1 Preferred Stock certificate or certificates for the shares of Series 1
Preferred Stock deliverable upon such exercise, and the Preferred Warrant Agent
shall deliver the same to the person or persons entitled thereto. Upon the
exercise of any one or more Preferred Warrants, the Preferred Warrant Agent
shall promptly notify the Company and the Representative in writing of such fact
and of the number of securities delivered upon such exercise and, subject to
subsection (b) below, shall cause all payments of an amount in cash or by check
made payable to the order of the Company, equal to the Purchase Price, to be
deposited promptly in the Company's bank account.
(b) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any
Preferred Warrants, nor shall it be obligated to issue scrip in lieu of
fractional interests. However, the Company shall pay the Registered Holder of
any fractional warrant interest an amount in cash based upon the average of the
high and low sales prices for the Series 1 Preferred Stock on the NASD
Electronic Bulletin Board (or if applicable The NASDAQ Stock Market or an
Exchange) during the ten day trading period immediately preceding the date of
exercise.
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<PAGE>
SECTION 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 Series 1 Preferred Stock, solely for
the purpose of issuance upon exercise of Preferred Warrants, such number of
shares of Series 1 Preferred Stock as shall then be issuable upon the exercise
of all outstanding Preferred Warrants. The Company covenants that all shares of
Series 1 Preferred Stock which shall be issuable upon exercise of the Preferred
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Series 1 Preferred Stock of the Company
are then listed.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Preferred 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 file a registration statement under the
federal securities laws or a post-effective amendment, use its best efforts to
cause the same to become effective, keep such registration statement current
while any of the Preferred Warrants are outstanding and deliver a prospectus
which complies with Section 10(a)(3) of the Securities Act of 1933, as amended,
to the Registered Holder exercising the Warrant. The Company will use its best
efforts to maintain appropriate approvals or registrations under state "blue
sky" securities laws in states where the Offering is sold. With respect to any
such securities, however, Preferred Warrants may not be exercised by, or shares
of Series 1 Preferred Stock issued to, any Registered Holder in any state in
which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Preferred Warrants, or the issuance or delivery of any shares of
Series 1 Preferred Stock upon exercise of the Preferred Warrants; provided,
however, that if shares of Series 1 Preferred Stock are to be delivered in a
name other than the name of the Registered Holder of the Warrant Certificate
representing any Preferred W arrant being exercised, then no such delivery shall
be made unless the person requesting the same has paid to the Preferred Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Preferred Warrant Agent is hereby irrevocably
authorized as the Transfer Agent to requisition from time to time certificates
representing shares of Series 1 Preferred Stock or other securities required
upon exercise of the Preferred Warrants, and the Company will comply with all
such requisitions.
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<PAGE>
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Preferred Warrants or may
be transferred in whole or in part. Warrant Certificates to be so exchanged
shall be surrendered to the Preferred Warrant Agent at its Corporate Office, and
the Company shall execute and the Preferred 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 Preferred Warrant Agent shall keep, at such office,
books in which, subject to such reasonable regulations as it may prescribe, it
shall register Warrant Certificates and the transfer thereof. Upon due
presentment for registration of transfer of any Warrant Certificate at such
office, the Company shall execute and the Preferred Warrant Agent shall issue
and deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Preferred Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription of
exercise form, as the case may be, 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 Preferred Warrant
Agent, duly executed by the Registered Holder thereof or his attorney duly
authorized in writing.
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment 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 shall be promptly canceled by the Preferred Warrant Agent.
(f) Prior to due presentment for registration or transfer
thereof, the Company and the Preferred Warrant Agent may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner thereof of
each Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than the Company or the Preferred Warrant
Agent) for all purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation.
Upon receipt by the Company and the Preferred Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory
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<PAGE>
to them, and (in case of mutilation) upon surrender and cancellation thereof,
the Company shall execute and the Preferred Warrant Agent shall countersign and
deliver in lieu thereof a new Warrant Certificate representing an equal
aggregate number of Preferred Warrants. Applicants for a substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Preferred Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of Series 1
Preferred Stock Deliverable.
(a) (i) Except as hereinafter provided, in the event the
Company shall, at any time or from time to time after the date hereof, issue any
shares of Series 1 Preferred Stock as a stock dividend to the holders of Series
1 Preferred Stock, or subdivide or combine the outstanding shares of Series 1
Preferred Stock into a greater or lesser number of shares (any such issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter immediately before the date of such sale or the record date for each
Change of Shares, the Purchase Price for the Preferred Warrants (whether or not
the same shall be issued and outstanding) in effect immediately prior to such
Change of Shares shall be changed to a price (including any applicable fraction
of a cent to the nearest cent) determined by dividing (1) the product of (a) the
Purchase Price in effect immediately before such Change of Shares and (b) the
total number of shares of Series 1 Preferred Stock outstanding immediately prior
to such Change of Shares, by (2) the total number of shares of Series 1
Preferred Stock outstanding immediately after such Change of Shares.
(ii) Upon each adjustment of the Purchase Price pursuant
to this Section 8, the number of shares of Series 1 Preferred Stock purchasable
upon the exercise of each Preferred Warrant shall be the number derived by
multiplying the number of shares of Series 1 Preferred Stock purchasable
immediately prior to such adjustment by the Purchase Price in effect prior to
such adjustment and dividing the product so obtained by the applicable adjusted
Purchase Price.
(b) In case of any reclassification or change of outstanding
shares of Series 1 Preferred Stock issuable upon exercise of the Preferred
Warrants (other than a change in par value, or from par value to no par value,
or as a result of subdivision or combination), or in case of any consolidation
or merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation and
which does not result in any reclassification or change of the then outstanding
shares of Series 1 Preferred Stock or other capital stock issuable upon exercise
of the Preferred Warrants) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the Registered Holder of each
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Preferred Warrant then outstanding shall have the right thereafter to receive on
exercise of such Preferred Warrant, the kind and amount of securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance by a holder of the number of securities issuable upon
exercise of such Preferred Warrant immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance and shall forthwith file at
the Corporate Office of the Preferred Warrant Agent, a statement signed by its
Chairman, Chief Executive Officer or President and by its Treasurer or an
Assistant Treasurer or its Secretary or an Assistant Secretary evidencing such
provision. Such provisions shall include provision for adjustments which shall
be as nearly equivalent as may be practicable to the adjustments provided for in
Section 8(a). The above provisions of this Section 8(b) shall similarly apply to
successive reclassifications and changes of shares of Series 1 Preferred Stock
and to successive consolidations, mergers, sales or conveyances.
(c) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Series 1 Preferred Stock purchasable upon
exercise of the Preferred 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 and the number of shares purchasable thereunder as
the Purchase Price per share and the number of shares purchasable thereunder
were expressed in the Warrant Certificates when the same were originally issued.
(d) After each adjustment of the Purchase Price pursuant to
this Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares
of Series 1 Preferred Stock purchasable upon exercise of each Preferred Warrant,
after such adjustment, and (iii) a brief statement of the facts accounting for
such adjustment. The Company will promptly file such certificate with the
Preferred Warrant Agent and cause a brief summary thereof to be sent by ordinary
first class mail to each Registered Holder at his last address as it shall
appear on the registry books of the Preferred Warrant Agent. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect the
validity thereof. The affidavit of an officer of the Preferred 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.
(e) No adjustment of the Purchase Price shall be made as a
result of or in connection with the issuance or sale of shares of Series 1
Preferred Stock if the amount of said adjustment shall be less than $.05 for one
share of Series 1 Preferred Stock; provided, however, that in such case, any
adjustment that would otherwise be required to be made shall be carried forward
and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried
9
<PAGE>
forward, to at least $.05 for one share of Series 1 Preferred Stock. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any Warrant or Preferred Warrants held by them.
SECTION 9. Redemption.
(a) In the event that the Company notifies the holders of
its Series 1 Preferred Stock of its intention to redeem the Series 1 Preferred
Stock, it shall contemporaneously redeem the Preferred Warrants at $1.20 per
Warrant, subject to the holders right to exercise the Preferred Warrants and
convert the underlying Series 1 Preferred Stock into Common Stock during such
notice period.
(b) In the event the Company exercises its right to redeem all
of the Series 1 Preferred Stock, it shall contemporaneously give or cause to be
given notice to the Registered Holders of the Preferred Warrants of its
intention to redeem all Preferred Warrants, by mailing to such Registered
Holders a notice of redemption, first class, postage prepaid, at least by the
thirtieth (30th) day but not later than the 60th day before the date fixed for
redemption, at their last address as shall appear on the records of the
Preferred Warrant Agent. 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. At the time of the mailing to the Registered
Holders of the Preferred Warrants of the notice of redemption, the Company shall
deliver or cause to be delivered to the Representative a similar notice
telephonically and confirmed in writing together with a list of the Registered
Holders (including their respective addresses and number of Preferred Warrants
beneficially owned) to whom such notice of redemption has been or will be given.
(c) The notice of redemption, which may not be mailed until on
or after the Initial Warrant Redemption Date, shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, and (iv)
that the right to exercise the Preferred Warrant shall terminate a 5:00 p.m.
(New York City Time) on the business day immediately preceding the date fixed
for redemption. The date fixed for the redemption of the Preferred Warrants
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. An affidavit of the Preferred Warrant
Agent or the Secretary or 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 Preferred Warrant shall terminate
at 5:00 p.m. (New York City Time) on the business day immediately preceding the
Redemption Date. The redemption price payable to the Registered Holders shall be
mailed to such persons at their addresses of record.
10
<PAGE>
(e) The redemption price of $1.20 per Warrant shall not be
adjusted pursuant to Section 8 unless the Company elects to issue additional
warrants pursuant to Sections 2(d) and 8(c) hereof. In the event, additional
warrants are issued pursuant to Sections 2(d) and 8 hereof, the Board of
Directors shall make a good faith determination of whether or not a
proportionate adjustment shall be made to increase or decrease the redemption
price to put the holders of the Preferred Warrants in the same place as if the
redemption occurred prior to the event under Section 8 that gave rise to an
adjustment under Sections 2(d) and 8(c) herein.
SECTION 10. Concerning the Preferred Warrant Agent.
(a) The Preferred Warrant Agent acts hereunder as agent and in
a ministerial capacity for the Company and the Representative, and its duties
shall be determined solely by the provisions hereof. The Preferred 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 or value or
authorization of the Warrant Certificates or the Preferred Warrants represented
thereby or of any securities delivered upon exercise of any Preferred Warrant or
whether any stock issued upon exercise of any Preferred Warrant is fully paid
and nonassessable.
(b) The Preferred 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 provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustment, 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 fact 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 gross negligence or willful misconduct.
(c) The Preferred 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.
(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, Chief Executive Officer or
President (unless other evidence in respect thereof is herein specifically
prescribed). The Preferred 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.
11
<PAGE>
(e) The Company agrees to pay the Preferred Warrant Agent
reasonable compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; the Company further agrees to indemnify the
Preferred 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 Preferred Warrant Agent in the execution of its
duties and powers hereunder except losses, expenses and liabilities arising as a
result of the Preferred Warrant Agent's gross negligence or willful misconduct.
(f) The Preferred Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Preferred Warrant Agent's own gross negligence or
willful misconduct), after giving 60 days prior written notice to the Company.
At least 30 days prior to the date such resignation is to become effective, the
Preferred 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 the Company shall appoint in writing a new
Preferred Warrant Agent. If the Company shall fail to make such appointment
within a period of 60 days after it has been notified in writing of such
resignation by the resigning Preferred Warrant Agent, then the Registered Holder
of any Warrant Certificate may apply to any court of competent jurisdiction for
the appointment of a new Preferred Warrant Agent. Any new Preferred 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 doing business in New York, New York. After acceptance in writing of
such appointment by the new Preferred Warrant Agent is received by the Company,
such new Preferred Warrant Agent shall be vested with the same powers, rights,
duties and responsibilities as if it had been originally named herein as the
Preferred 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 Preferred Warrant Agent. Not later than the effective date of
any such appointment the Company shall file notice thereof with the resigning
Preferred Warrant Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Preferred Warrant Agent or
any new Preferred Warrant Agent may be converted or merged, any corporation
resulting from any consolidation to which the Preferred Warrant Agent or any new
Preferred Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Preferred Warrant Agent or any new Preferred
Warrant Agent shall be a successor Preferred Warrant Agent under this Agreement
without any further act, provided that such corporation is eligible for
appointment as successor to the Preferred Warrant Agent under the provisions of
the preceding paragraph. Any such successor Preferred Warrant Agent shall
promptly cause notice of its succession as Preferred Warrant Agent to be mailed
to the Company and to the Registered Holders of each Warrant Certificate.
12
<PAGE>
(h) The Preferred Warrant Agent, its Subsidiaries and
affiliates, and any of its or their officers or directors, may buy and hold or
sell Preferred 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 effect
as though it were not Preferred Warrant Agent. Nothing herein shall preclude the
Preferred Warrant Agent from acting in any other capacity for the Company or for
any other legal entity.
(i) The Preferred Warrant Agent shall retain for a period of
three years from the date of exercise any Warrant Certificate received by it
upon such exercise, marked to indicate its cancellation thereof in accordance
with Section 6(e) hereof.
SECTION 11. Modification of Agreement.
The Preferred Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement without
the approval of any holders of Preferred Warrants (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; (ii) that they may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Warrant Certificates; (iii) that they deem necessary or desirable to
decrease the Purchase Price as provided for in Section 1(f) hereof; or (iv)
which may be required by law; 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 representing not less than 50% of
the Preferred Warrants then outstanding; provided, further, that no change in
the number or nature of the securities purchasable upon the exercise of any
Preferred Warrant, or the Purchase Price (other than a decrease in the Purchase
Price as provided in Section l(f) thereof) therefor, shall be made without the
consent in writing of the Registered Holder of the Warrant Certificate, other
than such changes as are specifically permitted or prescribed by this Agreement
as originally executed. In addition, this Agreement may not be modified, amended
or supplemented without the prior written consent of the Representative, other
than (i) to cure any ambiguity or to correct any provision which is inconsistent
or which is a manifest mistake or error; (ii) to make any such change that is
necessary or desirable and which shall not adversely affect the interests of the
Representative; (iii) to decrease the Purchase Price as provided for in Section
1 (f) hereof; or (iv) except as may be required by law.
SECTION 12. 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 postage prepaid, or delivered to a telegraph office for
transmission if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the
Preferred Warrant Agent; if to the Company at 4450 Belden Village Street, N.W.,
Canton, Ohio 44718, Attention: Jeanne Miller, or at such other address as may
have been furnished to the Preferred Warrant Agent in writing by the
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<PAGE>
Company; and if to the Preferred Warrant Agent, at its Corporate Office. Copies
of any notice delivered pursuant to this Agreement shall be delivered to the
Representative at 99 Wall Street, New York, NY 10005, Attention: Lorrette
Farris, President, or at such other addresses as may have been furnished to the
Company and the Preferred Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Preferred Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them. Except
as hereinafter stated, nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim or to
impose upon any other person any duty, liability or obligation. The
Representative is, and shall at all times irrevocably be deemed to be,
third-party beneficiaries of this Agreement, with full power, authority and
standing to enforce the rights granted to it hereunder.
SECTION 15. Counterparts.
This Agreement may be executed in several counterparts, which
taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the first date first above written.
[SEAL]
KIDS STUFF, INC. AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: _______________________________ By: _________________________________
Jeanne Miller, President (authorized officer)
14
<PAGE>
Exhibit 4.10
Void after _________ , 2001
No. SPW ____ ____ Preferred Warrants
WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF SERIES 1 PREFERRED STOCK
KIDS STUFF, INC.
CUSIP ________
THIS CERTIFIES THAT, FOR VALUE RECEIVED _______________________________________
_______________________________________________________________________________
or registered assigns (the "Registered Holder") is the owner of the number of
Preferred Warrants to purchase Series 1 Preferred Stock (the "Preferred
Warrants") specified above. Each Preferred Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Preferred Warrant Agency Agreement (as hereinafter
defined), one fully paid and non-assessable share of Series 1 Preferred Stock,
$.001 par value, of KIDS STUFF, INC., a Delaware corporation (the "Company"), at
any time from ____________, 2000, and prior to the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Preferred
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer & Trust Company, 40
Wall Street, New York, NY 10005 as Preferred Warrant Agent, or its successor
(the "Preferred Warrant Agent"), accompanied by payment of $6.00, subject to
adjustment (the "Purchase Price"), in lawful money of the United States of
America in cash or by check made payable to the Preferred Warrant Agent for the
account of the Company.
1
<PAGE>
This Preferred Warrant Certificate and each Preferred Warrant
represented hereby are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Preferred Warrant Agency Agreement (the
"Preferred Warrant Agency Agreement"), dated __________ , 1998, by and between
the Company and the Preferred Warrant Agent.
The Purchase Price and the number of shares of Series 1
Preferred Stock subject to purchase upon the exercise of each Preferred Warrant
represented hereby are subject to modification or adjustment upon the occurrence
of certain events as provided for in the Preferred Warrant Agency Agreement.
Each Preferred Warrant represented hereby is exercisable at
the option of the Registered Holder, but no fractional interests will be issued.
In the case of the exercise of less than all the Preferred Warrants represented
hereby, the Company shall cancel this Preferred Warrant Certificate upon the
surrender hereof and shall execute and deliver a new Preferred Warrant
Certificate or Preferred Warrant Certificates of like tenor, which the Preferred
Warrant Agent shall countersign, for the balance of such Preferred Warrants.
The term "Expiration Date" shall mean 5:00 P.M. New York City
Time) on __________ , 2001. If such date shall in the State of New York be a
Saturday, Sunday, holiday or a day on which the banks are authorized to close,
then the Expiration Date shall mean 5:00 P.M. (New York City Time) the next
following day which in the State of New York is not a Saturday, Sunday, 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 Preferred Warrant unless a registration
statement under the Securities Act of 1933, as amended (the "Act"), with respect
to such securities is effective or an
2
<PAGE>
exemption thereunder is available. The Company has covenanted and agreed that,
if required by the Act, it will file a registration statement under the Act, use
its best efforts to cause the same to become effective, to keep such
registration statement current, if required under the Act, while any of the
Preferred Warrants are outstanding, and deliver a prospectus which complies with
Section 10(a)(3) of the Act to the Registered Holder exercising this Preferred
Warrant. This Preferred Warrant shall not be exercisable by a Registered Holder
in any state where such exercise would be unlawful.
This Preferred Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the
Preferred Warrant Agent, for a new Preferred Warrant Certificate or Preferred
Warrant Certificates of like tenor representing an equal aggregate number of
Preferred Warrants, each of such new Preferred Warrant Certificates to represent
such number of Preferred Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration of transfer of this Preferred Warrant Certificate at such office, a
new Preferred Warrant Certificate or Preferred Warrant Certificates representing
an equal aggregate number of Preferred Warrants will be issued to the transferee
in exchange therefor, subject to the limitations provided in the Preferred
Warrant Agency Agreement.
Prior to the exercise of any Preferred 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,
3
<PAGE>
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided in the Preferred Warrant Agency Agreement.
Subject to the provisions of the Preferred Warrant Agency
Agreement, this Preferred Warrant shall be redeemed by the Company at a
redemption price of $1.20 per Preferred Warrant, at any time commencing after
_____________, 2000, in the event that the Company redeems its Series 1
Preferred Stock.
Prior to due presentment for registration of transfer hereof,
the Company and the Preferred Warrant Agent may deem and treat the Registered
Holder as the absolute owner hereof and of each Preferred 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 Preferred
Warrant Agent) for all purposes and shall not be affected by any notice to the
contrary, except as provided in the Preferred Warrant Agreement.
This Preferred Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to conflicts of law principles.
This Preferred Warrant Certificate is not valid unless
countersigned by the Preferred Warrant Agent.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Preferred
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.
Dated: ____________, 1998
KIDS STUFF, INC.
[SEAL] By:_____________________________
Name: Jeanne Miller
Title: President
By:_____________________________
Name: William Miller
Title: Secretary
COUNTERSIGNED:
AMERICAN STOCK TRANSFER
& TRUST COMPANY,
as Preferred Warrant Agent
By: __________________________
Name:
Title: Principal
5
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Preferred Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Preferred Warrants represented by this Preferred Warrant Certificate, and to
purchase the Series 1 Preferred Stock issuable upon the exercise of such
Preferred Warrants, and requests that certificates for such Series 1 Preferred
Stock shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER: ____________________
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and be delivered to
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
and if such number of Preferred Warrants shall not be all the Preferred Warrants
evidenced by this Preferred Warrant Certificate, that a new Preferred Warrant
Certificate for the balance of such Preferred Warrants be registered in the name
of, and delivered to, the Registered Holder at the address stated below.
X _________________________________
(signature)
_________________________________
(address)
_________________________________
(signature guarantee)
6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Preferred Warrants
FOR VALUE RECEIVED, __________________, hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER: ____________________
_______________________________________
_______________________________________
_______________________________________
(please print or type name and address)
__________________________ of the Preferred Warrants represented by this
Preferred Warrant Certificate, and hereby irrevocably constitutes and appoints
attorney to transfer this Preferred Warrant Certificate on the books of the
Company, with full power of substitution in the premises.
Dated: _________________ X _____________________________________
_____________________________________
signature guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS Preferred Warrant CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST
BE GUARANTEED BY A MEMBER OF THE MEDALLION SIGNATURE PROGRAM.
7
<PAGE>
Exhibit 5.0
Lester Morse P.C.
111 Great Neck Road
Suite 420
Great Neck, New York 11021
Telephone: (516) 487-1446
Facsimile: (516) 487-1452
October 21, 1998
Kids Stuff, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
Gentlemen:
You have requested our opinion, as counsel for Kids Stuff, Inc., a
Delaware corporation (the "Company"), in connection with the registration
statement on Form SB-2 (No. 333-61463) (the "Registration Statement"), under the
Securities Act of 1933 (the "Act"), filed by the Company with the Securities and
Exchange Commission.
The Registration Statement relates to (i) an offering of up to 460,000
Units (including 60,000 Units to be offered by the Company pursuant to the
Over-Allotment Option). Each Unit consists of one share of Series 1 Preferred
Stock and two Series 1 Preferred Stock Purchase Warrants (the "Preferred
Warrants") ; (ii) 920,000 shares of Series 1 Preferred Stock issuable upon
exercise of the Preferred Warrants included in the Units (the "Preferred
Shares"); (iii) Underwriters' Warrant to purchase 40,000 Units (the
"Underwriters' Option"); (iv) 40,000 shares of Series 1 Preferred Stock and
80,000 Preferred Warrants issuable upon exercise of the Underwriters' Option and
(v) 80,000 shares of Series 1 Preferred Stock issuable upon exercise of the
Preferred Warrants included in the Underwriters' Option.
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion.
It is our opinion that:
(1) The shares of Series 1 Preferred Stock, the Preferred Warrants
and Underwriters' Option and underlying securities have been
duly authorized and, when issued, delivered and paid for in
the manner described in the form of Underwriting Agreement and
Preferred Stock Agency Agreement filed as Exhibits 1.04 and
4.08, respectively, to the Registration Statement and
Underwriters' Option filed as Exhibit 4.07, such securities
will be legally issued and the shares of Series
<PAGE>
Kids Stuff, Inc.
Page 2
1 Preferred Stock, when so issued, delivered and paid for will
also be fully paid and nonassessable.
(2) The Preferred Shares have been duly authorized, and when
issued, delivered and, paid for upon exercise of the Preferred
Warrants in the manner described in the form of Preferred
Warrant Agency Agreement filed as Exhibit 4.09 to the
Registration Statement, will be legally issued, fully paid,
and nonassessable.
(3) The shares of Series 1 Preferred Stock and Preferred Warrants
issuable upon exercise of the Underwriters' Option and the
shares of Series 1 Preferred Stock issuable upon exercise of
the Preferred Warrants have been duly authorized and, when
issued, delivered and paid for in the manner described in the
Underwriters' Option and Preferred Warrants filed as Exhibits
4.07 and 4.10, respectively, to the Registration Statement,
will be legally issued, and when paid for will be fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
LESTER MORSE P.C.
/s/ Steven Morse
SM:ag
<PAGE>
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of the 16th day of October, 1998, between
KIDS STUFF, INC., an Ohio Corporation with its principal offices at 4450 Belden
Village Street, N.W., Suite 406, Canton, Ohio 44718 (the "Company") and Jeanne
E. Miller residing at P.O. Box 500, 72 East Drive, Hartville, Ohio 44632 (the
"Executive").
RECITALS
WHEREAS, Executive is a director and officer of the Company and has
been instrumental in the success of the Company; and
WHEREAS, the Company and Executive entered into a certain Executive
Employment Agreement dated January 1, 1997 (the "Original Employment Agreement")
and the parties desire to amend and restate the terms of the Original Employment
Agreement as set forth herein; and
WHEREAS, it is the express intent of the parties hereto that the terms
of this Agreement shall replace and supersede, in their entirety, the terms of
the Original Employment Agreement.
NOW THEREFORE, in consideration of the mutual agreements set forth
herein, the parties, intending to be legally bound, agree as follows:
1. Employment.
a) Amendment and Restatement. Although Executive's Base Salary
is calculated from the date hereof, and the Signing Bonus is effective as of the
date hereof, for all other purposes, the date of the Original Employment
Agreement shall be considered the date hereof. For example, the Option Grant has
not been changed or duplicated and vests pursuant to its terms from the date of
the Original Employment Agreement.
b) Position. The Company hereby agrees to continue the
employment of Executive, and Executive hereby accepts continued employment by
the Company as President of the Company.
c) Performance. Executive agrees to devote her full time,
energies and attention to the performance of her duties and functions hereunder,
to exercise her best efforts, judgment, skills, and talents exclusively in the
business and affairs of the Company and, in the performance thereof, to comply
with the policies of and be subject to the direction of the Board of Directors
of the Company.
d) Responsibilities. Executive shall be responsible for the
duties assigned to her by the Board of Directors or by the Chief Executive
Officer of the Company. She shall be subject and report to the Board of
Directors and the Chief Executive Officer. Executive is engaged to act as the
President of the Company and shall perform all of the usual duties inherent in
<PAGE>
such position as well as such other duties as may from time to time be delegated
to her by the Board of Directors.
2. Compensation.
a) Base Salary. The Company agrees to pay Executive and
Executive agrees to accept as compensation for all of her services, a Base
Salary payable in accordance with the Company's standard payroll policy at the
annual rate of $105,000. The Board of Directors or the Compensation Committee of
the Board of Directors shall review the Executive's performance on an annual
basis and shall determine, in its discretion, whether to increase the Base
Salary.
b) Bonuses. Executive shall be eligible to receive, in
addition to her Base Salary, an annual cash Bonus under the Company's Bonus
program for key management personnel administered by the Board of Directors or
the Compensation Committee of the Board of Directors under which a cash Bonus
will be payable based upon the Company's performance and Executive's personal
performance, with a range of Bonus from 0 to 50% of Executive's prior year's
Base Salary. For the year 1998, the Executive's Base Salary shall be considered
to be the average of the Base Salary received by the Executive for 1998.
c) Option Grants. The Company hereby grants options to
purchase 100,000 shares of the Company's Common Stock (the Option). The Options
were not exercisable on the date of the Original Employment Agreement, but shall
vest and become exercisable at a rate of 25,000 shares of Common Stock on
January 1, 1998; an additional 25,000 shares of Common Stock on January 1, 1999;
an additional 25,000 shares of Common Stock on January 1, 2000; and the final
25,000 shares of Common Stock on January 1, 2001. The Options will vest and
become exercisable on such dates regardless of whether Executive is employed on
such dates with the Company. The Options will expire and be non-exercisable ten
years from the date hereof.
The exercise price of the Option shall be $5.00 per share of Common
Stock, subject to adjustment as set forth below. The exercise price for vested
options may be decreased if (i) the Company meets certain performance goals, and
(ii) Executive timely elects to "lock-in" a lower exercise price with respect to
her vested options.
The exercise price for vested options may be reduced by $1.00 per share
for each $500,000 of pretax net income of the Company for the prior fiscal year.
The Company shall report to Executive, promptly upon audited financial
statements for the prior fiscal year becoming available, the pretax net income
of the Company for that year. Executive shall have thirty (30) days in which to
decide, with respect to her vested options for which an alternative exercise
price has not previously been locked-in, whether to adjust the exercise price of
such vested options based upon the pretax income of the Company for the prior
year. For example, if the Company has $1,100,000 of pretax net income for the
year ended December 31, 1997, the Company shall report such net income to
Executive in 1998. Executive will have to decide, within thirty (30) days of
receipt of the financial information, whether to modify or "lock-in" an amended
exercise price for the vested options (with the original grant date of January
1, 1997, options to purchase 25,000 shares of Common Stock would be vested at
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<PAGE>
that time). The exercise price for such vested options could be lowered to $3.00
per share and locked-in with respect to the underlying shares (two $500,000
increments of pretax net profit (no additional adjustment for the $100,000
partial increment)).
If Executive locks-in the new exercise price, that price will be the
exercise price for those shares for the entire term of the option. However,
Executive may determine not to so lock-in the exercise price. In that event,
Executive may, in the subsequent year(s), elect to lock-in a new exercise price
for all vested options with respect to which alternate exercise price has not
previously been locked-in. In no event shall Executive be allowed to lock-in a
new exercise price subsequent to any election that Executive can make to lock-in
a new exercise price based on the Company's pretax net income for the year
ending December 31, 2001.
d) Signing Bonus. The Company hereby grants to Executive, as a Signing
Bonus, an option to purchase 100,000 shares of the Company's unregistered Common
Stock at the purchase price of $2.50 per share. The option shall expire ten (10)
years from the date of the execution of this agreement, and may be exercised by
Executive at any time.
3. Expenses. The Company shall pay or reimburse Executive during her
employment hereunder for all reasonable travel and other expenses incurred by
Executive in the performance of her duties and obligations hereunder upon
submission of appropriate supporting documentation. In addition, the Company
shall pay or reimburse Executive during her employment for expenses incurred by
Executive in personal financial and legal counseling (including income tax
preparation and counseling, financial planning, financial counseling and
financial management and legal services on personal matters) in amounts not to
exceed in the aggregate $5,000 annually, and supplemental medical/dental
expenses up to the maximum of $1,500 annually. To the extent reimbursement by
the Company of any of Executive's expenses set forth in the preceding sentence
results in taxable income to Executive, the Company shall pay Executive, in
addition, an amount sufficient to gross-up such expenses so that Executive shall
not bear any personal out-of-pocket expenses with respect thereto. The Company
shall also, during the term hereof, provide Executive with a Company automobile
for her exclusive use, of a make and model mutually agreed upon by Executive and
the Company from time to time, at the Company's expense.
4. Benefit Plans. Executive shall be entitled to participate in all of
the Company sponsored employee benefit plans.
5. Vacation. Executive shall be entitled to at least one month of
vacation during each twelve-month period of her employment hereunder.
6. Indemnification. The Company shall to the full extent permitted by
law and not inconsistent with the provisions of the Certificate of Incorporation
and By-laws of the Company indemnify Executive if Executive shall become, or
shall be threatened with becoming, a party to any action, suit, or proceeding by
reason of her acting as an officer, agent, or employee of the Company, and such
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<PAGE>
indemnification shall not be deemed exclusive of any other rights to which
Executive may be entitled as a matter of law or in accordance with any
agreement, document, instrument, or under any policy of insurance carried by the
Company and such indemnification shall survive termination of this Agreement.
7. Confidential Information.
a) Executive acknowledges that the information, observations
and data regarding the Company and its subsidiaries obtained by her during the
course of her employment, either before or after the effective date of the
Agreement, are the property of the Company. Therefore, Executive agrees that she
will not disclose to any unauthorized person or use for her own account or for
the benefit of any third party (other than the Company and its subsidiaries) any
of such information, observations or data without the prior express written
approval of the Board of Directors of the Company. Notwithstanding the
foregoing, Executive may disclose information, observations or data to the
extent that (a) the same become generally known to and available for use by the
public other than as a result of acts or omissions to act by Executive in
violation of this paragraph 7 or (b) such disclosure is required by law or legal
process. Executive agrees to deliver to the Company, at the termination of her
employment, all memoranda, notes, plans, records, reports and other documents
(and copies thereof) relating to the Company and its subsidiaries, which she may
then possess or have under her control, provided, however, that Executive may
retain copies of her director files, initial public offering files and Company
presentation files.
b) Except as may be otherwise provided in Paragraph 1,
Executive shall not during the term of this Agreement engage in, or otherwise,
whether or not such business or organization now is or shall then be competing
with the Company, or invest in the securities (other than a portfolio
investment, including without limitation investment in mutual funds, not
exceeding 2% of outstanding securities of a firm listed on a national stock
exchange or traded in the Nasdaq Stock Market) of any other business or
organization if such business or organization now is or shall then be competing
with the Company; provided, however, that Executive may serve on the board of
directors or the board of trustees of other businesses or organizations with the
approval of the Board of Directors of the Company.
c) For a period of one year subsequent to the later to occur
of (i) the termination of Executive's employment with the Company, or (ii) the
termination of any consulting arrangement between the Company and Executive,
Executive shall not compete directly or indirectly be associated with, or act as
an independent contractor or consultant to, or be a director, officer, employee,
owner, or partner of, any other business or organization that competes with the
business of the Company as then conducted. Nothing contained herein will be
deemed to require the Company to enter into a consulting agreement with the
Executive upon termination of Executive's employment with the Company.
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<PAGE>
8. Term and Termination.
a) Term. The term of this Agreement shall commence as
described in Paragraph 1(a) hereof, and shall terminate on December 31, 2002
unless earlier terminated as provided in Section 8(b) below.
b) Termination.
(i) This Agreement and Executive's employment
hereunder may be terminated by the Company at any time with Cause (as
hereinafter defined) on 30 days prior written notice.
(ii) This Agreement and Executive's employment
hereunder may be terminated by Executive on 30 days prior written notice upon
the occurrence of any one of the following events: (1) The failure of the
Company to elect or reelect or to appoint or reappoint Executive to the office
of President; (2) A material change by the Company in Executive's functions,
duties, or responsibilities which change would cause Executive's position with
the Company to become of less dignity, responsibility or scope from the position
and responsibilities described in Section 1 hereof; (3) The liquidation or
dissolution, or consolidation, merger or other business combination (including
assumption of control by a shareholder or consortium of shareholders) of the
Company, or transfer of all or substantially all of its assets, unless any such
consolidation, merger or other business combination does not adversely affect
Executive's position or the dignity or responsibilities of Executive, in
Executive's judgment; and (4) Any material breach of this Agreement by the
Company. Provided, however, that this Section 8(b)(ii) shall not be effective
unless Executive's beneficial ownership of the Company's outstanding voting
capital stock (within the meaning of Section 13(d) of the Securities Exchange
Act of 1934) is less than 50% of the Company's total outstanding voting capital
stock.
c) Effect of Termination. Upon termination of this Agreement
neither party shall have any further obligation to the other party, except as
provided in Section 8(d) below and under the provisions of any outstanding stock
options held by Executive at the time of termination, and except that the
provisions of Sections 6 and 7(a), if applicable, shall survive termination of
the Agreement.
d) Payments to Executive on Termination.
(i) In the event that this Agreement is terminated by
the Company without Cause or Executive terminates this Agreement pursuant to
Section 8(b)(ii), the Company shall pay in a lump sum on the date of termination
severance compensation to Executive in the amount derived by multiplying the
factor 2.99 by the sum of Executive's Base Salary and Bonus paid in the year
prior to the year of termination.
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(ii) In the event this Agreement expires and
Executive is not rehired in the same position under the terms and conditions of
a new executive employment agreement acceptable to Executive and the Company
superseding this Agreement, the Company shall pay in a lump sum on the date of
termination severance compensation to Executive in an amount equal to the sum of
Executive's Base Salary and Bonus paid in the year ending December 31, 2002.
(iii) In the event Executive becomes disabled (as
hereinafter defined) during the term hereof, the Company shall pay severance
compensation to Executive in the amount derived by multiplying the factor 2.99
by the sum of Executive's Base Salary and Bonus paid in the year prior to the
year in which the disability occurs, reduced to a lesser amount determined by
multiplying said amount by a fraction, the numerator of which is the number of
whole or partial months remaining from the date of death or disability, as the
case may be, to December 31, 2002 and the denominator is 60; provided, however,
that such severance compensation shall in no event be less than Executive's Base
Salary and Bonus paid in the year prior to the year in which Executive becomes
disabled. Such severance compensation shall be paid in a lump sum as soon as
practicable following the date of disability. The Company also agrees to
maintain in force during the term of this Agreement a life insurance policy on
the life of Executive in face amount equal to five times Base Salary, the
proceeds of which will be paid to Executive's estate.
(iv) In addition to the severance payment provided in
subparagraphs (i), (ii) or (iii) above, Executive's participation in the
Company-sponsored employee health benefit plan shall be continued at Company
expense for a maximum period of eighteen months so long as Executive is alive
and is not elsewhere earlier employed on a full time basis.
e) Definitions. For the purposes of this Agreement:
(i) Cause shall mean acts of moral turpitude, and the
willful repeated or habitual neglect of Executive's obligations under this
Agreement, the misuse of corporate funds, the failure to manage the business of
the Company in accordance with normal business practices, or the material breach
of this Agreement.
(ii) Disabled shall mean the physical or mental
inability of Executive to perform her duties hereunder for a period of three
consecutive months as determined by an independent physician chosen by the
Company and approved by Executive.
(iii) Fair Market Value of the Company's stock on the
applicable date shall mean the mean of the highest and lowest quoted selling
prices of such stock on the composite tape of the Nasdaq SmallCap Market (or
such other national market or exchange on which the Company's common stock is
then traded) on the applicable date, or if the Company's common stock was not
traded on such exchange on such date, on the next preceding date on which the
common stock was traded.
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<PAGE>
9. Change of Control; Executive's Stock Options. In the event any
person, by any means of purchase or acquisition, becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, or any successor provision thereto)
of more than 50% of the outstanding shares of the Company's common stock, or
commences a tender offer pursuant to Regulation 14-C promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, or
any successor provision thereto, which, if successful, would result in such
person becoming the beneficial owner of more than 50% of such shares, then all
of Executive's options to purchase common stock of the Company outstanding at
the time of the event and which were granted six months or more prior to the
event shall immediately become exercisable in full and upon the written election
of Executive, given to the Company within 180 days of the event, the Company
shall repurchase for cash all or any part of the options as specified in the
written election, at a price per share equal to the difference between the Fair
Market Value of the Company's stock on the date of the event and the option
exercise price per share.
In the event of the execution of an agreement of reorganization, merger
or consolidation of the Company with one or more corporations as a result of
which the Company is not to be the surviving corporation or the execution of an
agreement of sale or transfer of all or substantially all of the assets of the
Company, then all of Executive's options to purchase common stock of the Company
outstanding at the time of the event and which were granted six months or more
prior to the event shall immediately become exercisable in full and upon the
written election of Executive given to the Company within 180 days of the event,
the Company shall repurchase for cash all or any part of the options as
specified in the written election, at a price per share equal to the difference
between the Fair Market Value of the Company's stock on the execution date and
the option exercise price per share.
10. Miscellaneous.
a) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision.
b) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, the heirs and legal
representatives of Executive, and the successors and assigns of the Company,
except that Executive may not assign this Agreement or delegate any of
Executive's duties or services hereunder.
c) No Waivers. The failure of either party to insist upon the
strict performance of any of the terms, conditions, and provisions of this
Agreement shall not be construed as a waiver or relinquishment of future
compliance therewith, and said terms, conditions, and provisions shall remain in
full force and effect. No waiver of any term or condition of this Agreement on
the part of either party shall be effective for any purpose whatsoever unless
such waiver is in writing and signed by such party.
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<PAGE>
d) Modification. This Agreement may not be changed, amended,
or modified except by a writing signed by both parties.
e) Notices. Any notice, request, demand, waiver, consent,
approval, or other communication which is required to be or may be given under
this Agreement shall be in writing and shall be deemed given only if delivered
to the party personally or sent to the party by registered or certified mail,
return receipt requested, postage prepaid, to the parties at the addresses set
forth herein or to such other address as either party may designate from time to
time by notice to the other party sent in like manner.
f) Governing Law. This Agreement constitutes the entire
agreement between the parties and shall be governed by and construed in
accordance with the laws of the State of Ohio applicable to agreements made and
to be performed solely within such state.
g) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not be deemed to be a part of this
Agreement or to affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the day and year first above written.
KIDS STUFF, INC.
By: /s/ William L. Miller
----------------------------------------
Title: CEO
----------------------------------------
EXECUTIVE:
By: /s/ Jeanne E. Miller
----------------------------------------
Print Name: Jeanne E. Miller
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<PAGE>
Exhibit 10.22
FAIRCHILD FINANCIAL GROUP, INC.
October , 1998
Kids Stuff, Inc.
4450 Belden Village Street, N.W.
Suite 406
Canton, Ohio 44718
Attention: Mr. William Miller, President
Dear Mr. Miller:
This letter, when executed by the parties hereto, will
constitute an agreement between Kids Stuff, Inc. (the "Company") and Fairchild
Financial Group, Inc. ("Fairchild") pursuant to which the Company agrees to
retain Fairchild and Fairchild agrees to be retained by the Company under the
terms and conditions set forth below.
1. The Company hereby retains Fairchild to perform consulting
services related to corporate finance and other financial services matters, and
Fairchild hereby accepts such retention. In this regard, subject to the terms
set forth below, Fairchild shall furnish to the Company advice and
recommendations with respect to such aspects of the business and affairs of the
Company as the Company shall, from time to time, reasonably request upon
reasonable notice.
2. As compensation for the services described in paragraph 1
above, the Company shall pay to Fairchild a fee of $46,000 for a period of one
year, commencing on July 3, 2000, fees to be paid in advance, in full on the
date hereof. In addition, the Company will reimburse Fairchild for any and all
reasonable expenses incurred by Fairchild in the performance of its duties
hereunder, and Fairchild shall account for such expenses to the Company. Such
reimbursement shall accumulate and be paid monthly. Nothing contained herein
shall prohibit Fairchild from receiving any additional compensation under
paragraphs 3 and 4 herein or otherwise.
3. In addition, Fairchild shall hold itself ready to assist
the Company in evaluating and negotiating particular contracts or transactions,
if requested to do so by the Company, upon reasonable notice, and will undertake
such evaluations and negotiations upon prior written agreement as to additional
compensation to be paid by the Company to Fairchild with respect to such
evaluations and negotiations. Nothing herein shall require the Company to
utilize Fairchild's services in any particular transactions nor shall limit the
Company's obligations arising under any other agreement or understanding.
<PAGE>
4. The Company and Fairchild further acknowledge and agree
that Fairchild may act as a finder or financial consultant in various business
transactions in which the Company may be involved, such as mergers, acquisitions
or joint ventures. The Company hereby agrees that in the event Fairchild shall
introduce to the Company another party or entity, and that as a result of such
introduction, a transaction is consummated, the Company shall pay to Fairchild a
fee equal to (i) five percent (5%) of the first $1,000,000; (ii) four percent
(4%) of the second $1,000,000; (iii) three percent (3%) of the third $1,000,000;
and (iv) two percent (2%) of any consideration over $4,000,000 involved in any
transaction. Such fee shall be paid in cash at and subject to the closing of the
transaction to which it relates, and shall be payable whether or not the
transaction involves stock, or a combination of stock and cash, or is made on
the installment sale basis. In addition, if the Company shall, within 36 months
immediately following the termination of this Agreement, consummate a
transaction with any party or entity introduced by Fairchild to the Company, the
Company shall pay to Fairchild a fee with respect to such transaction calculated
in accordance with this paragraph. Nothing herein shall prevent the Company from
utilizing other individuals or entities in such capacities nor shall limit the
Company's obligations arising under any other agreement or understanding. As
used herein, "Company" shall include any and all subsidiaries and/or affiliates
of the Company.
5. All obligations of Fairchild contained herein shall be
subject to Fairchild's reasonable availability for such performance, in view of
the nature of the requested service and the amount of notice received. Fairchild
shall devote such time and effort to the performance of its duties hereunder as
Fairchild shall determine is reasonably necessary for such performance.
Fairchild may look to such others for such factual information, investment
recommendations, economic advice and/or research, upon which to base its advice
to the Company hereunder, as it shall deem appropriate. The Company shall
furnish to Fairchild all information relevant to the performance by Fairchild of
its obligations under this Agreement, or particular projects as to which
Fairchild is acting as advisor, which will permit Fairchild to know all facts
material to the advice to be rendered, and all material or information
reasonably requested by Fairchild. In the event that the Company fails or
refuses to furnish any such material or information reasonably requested by
Fairchild, and thus prevents or impedes Fairchild's performance hereunder, any
inability of Fairchild to perform shall not be a breach of its obligations
hereunder.
6. Nothing contained in this Agreement shall limit or restrict
the right of Fairchild or of any partner, employee, agent or representative of
Fairchild, to be a partner, director, officer, employee, agent or representative
of, or to engage in, any other business, whether of a similar nature or not, nor
to limit or restrict the right of Fairchild to render services of any kind to
any other corporation, firm, individual or association.
7. Fairchild will hold in confidence any confidential
information which the Company provides to Fairchild pursuant to this Agreement
which is designated by an appropriate stamp or legend as being confidential.
Notwithstanding the foregoing, Fairchild shall not be required to maintain
confidentiality with respect to information (i) which is or becomes part of
the public domain not due to the breach of this agreement by Fairchild; (ii) of
which it had independent knowledge prior to disclosure; (iii) which comes into
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<PAGE>
the possession of Fairchild in the normal and routine course of its own business
from and through independent non-confidential sources; or (iv) which is required
to be disclosed by Fairchild by governmental requirements. If Fairchild is
requested or required (by oral questions, interrogatories, requests for
information or document subpoenas, civil investigative demands, or similar
process) to disclose any confidential information supplied to it by the Company,
or the existence of other negotiations in the course of its dealings with the
Company or its representatives, Fairchild shall, unless prohibited by law,
promptly notify the Company of such request(s) so that the Company may seek an
appropriate protective order.
8. The Company agrees to indemnify and hold harmless
Fairchild, its partners, employees, agents, representatives and controlling
persons (and the officers, directors, employees, agents, representatives and
controlling persons of each of them) from and against any and all losses,
claims, damages, liabilities, costs and expenses (and all actions, suits,
proceedings or claims in respect thereof) and any legal or other expenses in
giving testimony or furnishing documents in response to a subpoena or otherwise
(including, without limitation, the cost of investigating, preparing or
defending any such action, suit, proceeding or claim, whether or not in
connection with any action, suit, proceeding or claim in which Fairchild is a
party), as and when incurred, directly or indirectly, caused by, relating to,
based upon or arising out of Fairchild's service pursuant to this Agreement so
long as Fairchild shall not have committed an intentional or willful misconduct,
or shall have acted grossly negligent, in connection with the services which
form the basis of the claim for indemnification. The Company further agrees that
Fairchild shall incur no liability to the Company or any other party on account
of this Agreement or any acts or omissions arising out of or related to the
actions of Fairchild relating to this Agreement or the performance or failure to
perform any services under this Agreement except for Fairchild's intentional or
wilful misconduct. This paragraph shall survive the termination of this
Agreement.
9. This Agreement may not be transferred, assigned or
delegated by any of the parties hereto without the prior written consent of the
other party hereto.
10. The failure or neglect of the parties hereto to insist, in
any one or more instances, upon the strict performance of any of the terms or
conditions of this Agreement, or their waiver of strict performance of any of
the terms or conditions of this Agreement, shall not be construed as a waiver or
relinquishment in the future of such term or condition, but the same shall
continue in full force and effect.
11. This Agreement is for a term of twelve (12) months and may
not be terminated by the Company. This Agreement may be terminated by Fairchild
at any time upon 30 days' notice; provided Fairchild shall repay any portion of
their fee which was not earned on the effective date of such termination
($3,833.33) multiplied by the number of months paid in advance). Paragraphs 4, 7
and 8 shall survive the expiration or termination of this Agreement under all
circumstances.
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12. Any notices hereunder shall be sent to the Company and to
Fairchild at their respective addresses set forth above. Any notice shall be
given by certified mail, return receipt requested, postage prepaid, and shall be
deemed to have been given when deposited in the United States mail. Either party
may designate any other address to which notice shall be given, by giving
written notice to the other of such change of address in the manner herein
provided.
13. This Agreement has been made in the State of New York and
shall be construed and governed in accordance with the laws thereof without
giving effect to principles governing conflicts of law.
14. This Agreement contains the entire agreement between the
parties, may not be altered or modified, except in writing and signed by the
party to be charged thereby, and supersedes any and all previous agreements
between the parties relating to the subject matter hereof.
15. This Agreement shall be binding upon the parties hereto,
the indemnified parties referred to in the Indemnification Provisions, and their
respective heirs, administrators, successors and permitted assigns.
If you are in agreement with the foregoing, please execute two
copies of this letter in the space provided below and return them to the
undersigned.
Very truly yours,
FAIRCHILD FINANCIAL GROUP, INC.
By: _____________________________
Name:
Title:
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN
KIDS STUFF, INC.
By: ___________________________
William Miller, President
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EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of the 8th day of June, 1998, between KIDS
STUFF, INC., an Ohio Corporation with its principal offices at 4450 Belden
Village Street, N.W., Suite 406, Canton, Ohio 44718 (the "Company") and William
T. Evans, residing at 6563 Palmer Drive, Canton, Ohio 44718 (the "Executive").
AGREEMENT
In consideration of the mutual agreements set forth herein, the
parties, intending to be legally bound, agree as follows:
1. Employment.
a) Position. The Company hereby agrees to continue the
employment of Executive, and Executive hereby accepts employment by the Company
as Vice President-Finance and Operations of the Company.
b) Performance. Executive agrees to devote his full time,
energies and attention to the performance of his duties and functions hereunder,
to exercise his best efforts, judgment, skills, and talents exclusively in the
business and affairs of the Company and, in the performance thereof, to comply
with the policies of and be subject to the direction of the Board of Directors
of the Company.
c) Responsibilities. Executive shall be responsible for the
duties assigned to him by the Board of Directors or by an executive officer of
the Company with authority to assign duties and shall be subject and report to
the Board of Directors and/or any such other executive officer. Executive is
engaged to act as the Vice President-Finance and Operations and shall perform
all of the usual duties inherent in such position as well as such other duties
as may from time to time be delegated to him by the Board of Directors.
2. Compensation.
a) Base Salary. The Company agrees to pay Executive and
Executive agrees to accept as compensation for all of his services, a base
salary payable in accordance with the Company's standard payroll policy at the
annual rate of $75,000. The Board of Directors or the Compensation Committee of
the Board of Directors shall review the Executive's performance on an annual
basis and shall determine, in its discretion, whether to increase the base
salary.
b) Bonuses. Executive shall be eligible to receive, in
addition to his base salary, an annual cash bonus under the Company's bonus
program for key management personnel administered by the Board of Directors or
the Compensation Committee of the Board of Directors under which a cash bonus
will be payable based upon the Company's performance and Executive's personal
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performance, with a range of bonus from 0 to 50% of Executive's prior year's
base salary.
c) Option Grants. The Company hereby grants options to
purchase 80,000 shares of the Company's Common Stock (the Option). The Options
are not exercisable on the date hereof. The Options shall vest and become
exercisable with respect to options to purchase 20,000 shares of Common Stock on
each of the first four anniversary dates of this Agreement. The Options will
vest and become exercisable on such dates regardless of whether Executive is
employed on such dates by the Company. The Options will expire and be
nonexercisable ten years from the date hereof.
The exercise price of the Option shall be $3.00 per share of Common
Stock, subject to adjustment as set forth below. The exercise price for vested
options may be decreased if (i) the Company meets certain performance goals, and
(ii) Executive timely elects to Alock-in@ a lower exercise price with respect to
his vested options.
The exercise price for vested options may be reduced by $1.00 per share
for each $500,000 of pretax net income of the Company for the prior fiscal year.
The Company shall report to Executive, promptly upon audited financial
statements for the prior fiscal year becoming available, the pretax net income
of the Company for that year. Executive shall have thirty (30) days in which to
decide, with respect to his vested options for which an alternative exercise
price has not previously been locked-in, whether to adjust the exercise price of
such vested options based upon the pretax income of the Company for the prior
year. For example, if the Company has $1,100,000 of pretax net income for the
year ended December 31, 1998, the Company shall report such net income to
Executive in 1999. Executive will have to decide, within thirty (30) days of
receipt of the financial information, whether to modify or Alock-in@ an amended
exercise price for the vested options (with the original grant date of January
1, 1998, options to purchase 20,000 shares of Common Stock would be vested at
that time). The exercise price for such vested options could be lowered to $3.00
per share and locked-in with respect to the underlying shares (two $500,000
increments of pretax net profit (no additional adjustment for the $100,000
partial increment)).
If Executive locks-in the new exercise price, that price will be the
exercise price for those shares for the entire term of the option. However,
Executive may determine not to so lock-in the exercise price. In that event,
Executive may, in the subsequent year(s), elect to lock-in a new exercise price
for all vested options with respect to which alternate exercise price has not
previously been locked-in. In no event shall Executive be allowed to lock-in a
new exercise price subsequent to any election that Executive can make to lock-in
a new exercise price based on the Company's pretax net income for the year
ending December 31, 2001.
d) Stock Grant. The Company shall grant to Executive 20,000
unregistered and restricted shares of the Company's Common Stock upon the
occurrence of the following event: (i) upon such time as the Company's Common
Stock has been trading at an average price of $10.00 per share for thirty (30)
consecutive days. For the purposes of this paragraph, the average price shall be
based on the last sale price for the Company's Common Stock on each day.
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3. Expenses. The Company shall pay or reimburse Executive during his
employment hereunder for all reasonable travel and other expenses incurred by
Executive in the performance of his duties and obligations hereunder upon
submission of appropriate supporting documentation. In addition, the Company
shall pay or reimburse Executive during his employment for expenses incurred by
Executive in personal financial and legal counseling (including income tax
preparation and counseling, financial planning, financial counseling and
financial management and legal services on personal matters) in amounts not to
exceed in the aggregate $5,000 annually, and supplemental medical/dental
expenses up to the maximum of $1,500 annually. To the extent reimbursement by
the Company of any of Executive's expenses set forth in the preceding sentence
results in taxable income to Executive, the Company shall pay Executive, in
addition, an amount sufficient to gross-up such expenses so that Executive shall
not bear any personal out-of-pocket expenses with respect thereto. The Company
shall also, during the term hereof, provide Executive with a Company automobile
for his exclusive use, of a make and model mutually agreed upon by Executive and
the Company from time to time, at the Company's expense.
4. Benefit Plans. Executive shall be entitled to participate in all of
the Company sponsored employee benefit plans.
5. Vacation. Executive shall be entitled to at least three weeks of
vacation during each twelve-month period of his employment hereunder.
6. Indemnification. The Company shall to the full extent permitted by
law and not inconsistent with the provisions of the Certificate of Incorporation
and By-laws of the Company indemnify Executive if Executive shall become, or
shall be threatened with becoming, a party to any action, suit, or proceeding by
reason of his acting as an officer, agent, or employee of the Company, and such
indemnification shall not be deemed exclusive of any other rights to which
Executive may be entitled as a matter of law or in accordance with any
agreement, document, instrument, or under any policy of insurance carried by the
Company and such indemnification shall survive termination of this Agreement.
7. Confidential Information.
a) Executive acknowledges that the information, observations
and data regarding the Company and its subsidiaries obtained by him during the
course of his employment, either before or after the effective date of the
Agreement, are the property of the Company. Therefore, Executive agrees that he
will not disclose to any unauthorized person or use for his own account or for
the benefit of any third party (other than the Company and its subsidiaries) any
of such information, observations or data without the prior express written
approval of the Board of Directors of the Company. Notwithstanding the
foregoing, Executive may disclose information, observations or data to the
extent that (a) the same become generally known to and available for use by the
public other than as a result of acts or omissions to act by Executive in
violation of this paragraph 7 or (b) such disclosure is required by law or legal
process. Executive agrees to deliver to the Company, at the termination of his
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employment, all memoranda, notes, plans, records, reports and other documents
(and copies thereof) relating to the Company and its subsidiaries, which he may
then possess or have under his control.
b) Except as may be otherwise provide in Paragraph 1,
Executive shall not during the term of this Agreement engage in, or otherwise,
whether or not such business or organization now is or shall then be competing
with the Company, or invest in the securities (other than a portfolio
investment, including without limitation investment in mutual funds, not
exceeding 2% of outstanding securities of a firm listed on a national stock
exchange or traded in the Nasdaq Stock Market) of any other business or
organization if such business or organization now is or shall then be competing
with the Company; provided, however, that Executive may serve on the board of
directors or the board of trustees of other businesses or organizations with the
approval of the Board of Directors of the Company.
c) For a period of one year subsequent to the later to occur
of (i) the termination of Executive's employment with the Company, or (ii) the
termination of any consulting arrangement between the Company and Executive,
Executive shall not compete directly or indirectly be associated with, or act as
an independent contractor or consultant to, or be a director, officer, employee,
owner, or partner of, any other business or organization that competes with the
business of the Company as then conducted. Nothing contained herein will be
deemed to require the Company to enter into a consulting agreement with the
Executive upon termination of Executive's employment with the Company.
8. Term and Termination.
a) Term. The term of this Agreement shall commence on March
10, 1998 and shall terminate on March 9, 2002 unless earlier terminated as
provided in Section 8(b) below.
b) Termination.
(i) This Agreement and Executive's employment
hereunder may be terminated by the Company at any time with Cause (as
hereinafter defined) with 30 days prior written notice.
(ii) The Executive's sole remedy for the Company's
termination of this Agreement prior to its expiration shall be those specific
remedies set forth in Paragraph 8(d) hereof.
(iii) This Agreement and Executive's employment
hereunder may be terminated by Executive at any time upon 120 days prior written
notice. Provided, however, that this Section 8(b)(iii) shall not be effective
unless Executive's beneficial ownership of the Company's outstanding voting
capital stock (within the meaning of Section 13(d) of the Securities Exchange
Act of 1934) is less than 50% of the Company's total outstanding voting capital
stock.
c) Effect of Termination. Upon termination of this Agreement
neither party shall have any further obligation to the other party, except as
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provided in Section 8(d) below and under the provisions of any outstanding stock
options held by Executive at the time of termination, and except that the
provisions of Sections 6 and 7(a), if applicable, shall survive termination of
the Agreement.
d) Payments to Executive on Termination. In the event that
this Agreement is terminated by the Company without Cause: (i) on or before
March 9, 1999, the Company shall pay to Executive an amount equal to four (4)
months base salary; or (ii) at any time on or after March 10, 1999 through March
9, 2002, the Company shall pay to Executive an amount equal to twelve (12)
months base salary. In the event that the Company terminates this Agreement for
Cause, or the Agreement expires of its own terms, the Company shall not be
obligated to pay Executive any sum.
e) Definitions. For the purposes of this Agreement:
(i) Cause shall mean acts of moral turpitude, and the
willful repeated or habitual neglect of Executive's obligations under this
Agreement, the misuse of corporate funds, the failure to manage the business of
the Company in accordance with normal business practices, or the material breach
of this Agreement.
(ii) Fair Market Value of the Company's stock on the
applicable date shall mean the mean of the highest and lowest quoted selling
prices of such stock on the composite tape of the Nasdaq SmallCap Market (or
such other national market or exchange on which the Company's common stock is
then traded) on the applicable date, or if the Company's common stock was not
traded on such exchange on such date, on the next preceding date on which the
common stock was traded.
9. Change of Control; Executive's Stock Options. In the event any
person, by any means of purchase or acquisition, becomes the "beneficial owner"
(as defined in Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, or any successor provision thereto)
of more than 50% of the outstanding shares of the Company's common stock, or
commences a tender offer pursuant to Regulation 14-C promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, or
any successor provision thereto, which, if successful, would result in such
person becoming the beneficial owner of more than 50% of such shares, then all
of Executive's options to purchase common stock of the Company outstanding at
the time of the event and which were granted six months or more prior to the
event shall immediately become exercisable in full and upon the written election
of Executive, given to the Company within 180 days of the event, the Company
shall repurchase for cash all or any part of the options as specified in the
written election, at a price per share equal to the difference between the Fair
Market Value of the Company's stock on the date of the event and the option
exercise price per share.
In the event of the execution of an agreement of reorganization, merger
or consolidation of the Company with one or more corporations as a result of
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which the Company is not to be the surviving corporation or the execution of an
agreement of sale or transfer of all or substantially all of the assets of the
Company, then all of Executive's options to purchase common stock of the Company
outstanding at the time of the event and which were granted six months or more
prior to the event shall immediately become exercisable in full and upon the
written election of Executive given to the Company within 180 days of the event,
the Company shall repurchase for cash all or any part of the options as
specified in the written election, at a price per share equal to the difference
between the Fair Market Value of the Company's stock on the execution date and
the option exercise price per share.
10. Miscellaneous.
a) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision.
b) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, the heirs and legal
representatives of Executive, and the successors and assigns of the Company,
except that Executive may not assign this Agreement or delegate any of
Executive's duties or services hereunder.
c) No Waivers. The failure of either party to insist upon the
strict performance of any of the terms, conditions, and provisions of this
Agreement shall not be construed as a waiver or relinquishment of future
compliance therewith, and said terms, conditions, and provisions shall remain in
full force and effect. No waiver of any term or condition of this Agreement on
the part of either party shall be effective for any purpose whatsoever unless
such waiver is in writing and signed by such party.
d) Modification. This Agreement may not be changed, amended,
or modified except by a writing signed by both parties.
e) Notices. Any notice, request, demand, waiver, consent,
approval, or other communication which is required to be or may be given under
this Agreement shall be in writing and shall be deemed given only if delivered
to the party personally or sent to the party by registered or certified mail,
return receipt requested, postage prepaid, to the parties at the addresses set
forth herein or to such other address as either party may designate from time to
time by notice to the other party sent in like manner.
f) Governing Law. This Agreement constitutes the entire
agreement between the parties and shall be governed by and construed in
accordance with the laws of the State of Ohio applicable to agreements made and
to be performed solely within such state.
g) Headings. The section headings contained in this Agreement
are for reference purposes only and shall not be deemed to be a part of this
Agreement or to affect the construction or interpretation of this Agreement.
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h) Integration. This Agreement contains the entire agreement
among the parties with respect to the purchase of the Purchased Assets and
related transactions and supersedes all prior agreements, written or oral, with
respect thereto, including, but not limited to, the terms contained in that
certain item of correspondence dated November 24, 1997 to Executive from the
Company.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the day and year first above written.
KIDS STUFF, INC.
By: /s/ William L. Miller
------------------------------------
Title: CEO
---------------------------------
EXECUTIVE:
By: /s/ William T. Evans
------------------------------------
Print Name: William T. Evans
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS
Kids Stuff, Inc.
Canton, OH 44718
As independent certified public accountants for Kids Stuff, Inc., we
hereby consent to the use in this Form SB-2 Registration Statement for Kids
Stuff, Inc. of our report included herein, which has a date of February 10,
1998, relating to the balance sheets of Kids Stuff, Inc. as of December 31, 1997
and 1996, and the related statements of operations, cash flows, and
stockholders' equity for each of the three years in the period ended December
31, 1997 and to the reference to our firm under the caption "Experts" in the
Prospectus.
Hausser + Taylor LLP
Canton, Ohio
October 20, 1998
