<PAGE>
As filed with the Securities and Exchange Commission on September 18, 1997
Registration No. 333-30665
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 2
to
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AUDIO BOOK CLUB, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C>
Florida 5961 65-0429858
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
</TABLE>
2295 Corporate Blvd., N.W.
Suite 222
Boca Raton, Florida 33431
(561) 241-1426
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------
Norton Herrick
Chairman and Chief Executive Officer
Audio Book Club, Inc.
2295 Corporate Blvd., N.W.
Suite 222
Boca Raton, Florida 33431
(561) 241-1426
(Name, address and telephone number of agent for service)
---------------------
Copies of all communications to:
ALAN I. ANNEX, ESQ.
ROBERT J. MITTMAN, ESQ. ERIC M. ROTH, ESQ.
Tenzer Greenblatt LLP Camhy Karlinsky & Stein LLP
The Chrysler Building 1740 Broadway
405 Lexington Avenue 16th Floor
New York, New York 10174-0208 New York, New York 10019-4315
Telephone: (212) 885-5000 Telephone: (212) 977-6600
Facsimile: (212) 885-5001 Facsimile: (212) 977-8389
<PAGE>
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
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. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
Proposed
Maximum Offering Proposed Maximum Amount of
Title of Each Class of Amount to Price Per Aggregate Offering Registration
Securities to be Registered be Registered Unit (1) Price (1) Fee
<S> <C> <C> <C> <C>
Common Stock, no par value ... 2,300,000(2) $ 10.00 $23,000,000 $6,969.70
Representatives' Warrants, each
to purchase one share of
Common Stock, no par value 200,000 $ .0001 $ 20 (3)
Common Stock, no par value ... 200,000(4) $ 16.50 $ 3,300,000 $1,000.00
Amount Previously Paid ..................................................................... $6,308.18
Amount Due ................................................................................ (5)
============================================================================================================
</TABLE>
- --------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Representatives' over-allotment option to purchase up to
300,000 additional shares of Common Stock is exercised in full.
(3) None pursuant to Rule 457(g).
(4) Issuable upon exercise of the Representatives' Warrants, together with such
indeterminant number of shares of Common Stock as may be issuable by
reason of the anti-dilution provisions contained therein.
(5) None pursuant to Rule 457(a).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
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 qualififcation under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1997
2,000,000 Shares
AUDIO BOOK CLUB, INC.
Common Stock
Prior to this offering (the "Offering") there has been no public market
for the common stock ("Common Stock") of Audio Book Club, Inc. (the "Company")
and there can be no assurance that such a market will develop or, if developed,
that it will be sustained. See "Underwriting" with respect to the method used
in determining the initial public offering price. It is anticipated that the
initial public offering price of the Common Stock will be between $8.00 and
$10.00 per share. The Common Stock has been approved for listing on the
American Stock Exchange under the symbol "KLB."
---------------------
The Securities offered hereby involve a high degree of risk and immediate
substantial dilution. See "Risk Factors" commencing on page 7 and "Dilution" on
page 16.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ...... $ $ $
- --------------------------------------------------------------------------------
Total (3) ...... $ $ $
================================================================================
(1) The Company has agreed to pay to L.H. Friend, Weinress, Frankson & Presson,
Inc. as representative (the "Representative") of the several underwriters
(the "Underwriters") a nonaccountable expense allowance and to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase up to 200,000 shares of Common Stock at an exercise
price of $ per share. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting the expenses of this Offering payable by the Company
estimated at $ , which includes the Representative's nonaccountable
expense allowance.
(3) A minority shareholder of the Company (the "Selling Shareholder") and the
Company have granted to the Underwriters a 45-day option to purchase up to
110,000 and 190,000 additional shares of Common Stock, respectively, to
cover over-allotments. If this option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholder are estimated to be
$ , $ , $ and $ , respectively. The
Company will not receive any of the proceeds from the sale of the shares
of Common Stock by the Selling Shareholder and the Selling Shareholder
will pay to the Representative the underwriting discounts and commissions
and nonaccountable expense allowance relating to the sale of such shares
of Common Stock. See "Underwriting."
---------------------
The securities are being offered by the Underwriters, subject to prior
sales when, as, and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Offering and to reject any order in whole or part. It is
expected that delivery of the securities offered hereby will be made against
payment at the offices of the Representative at 3333 Michelson Drive, Suite
650, in Irvine, California 92715, on or about , 1997.
---------------------
L.H. Friend, Weinress, Frankson & Presson, Inc.
The date of this Prospectus is , 1997
<PAGE>
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR
OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Unless otherwise indicated,
Audio Book Club, Inc. is referred to as the "Company." Except as otherwise
noted, all share and per share data and information in this Prospectus (i)
gives retroactive effect to a 16,282-for-1 split of the Common Stock effected
immediately prior to the date of this Prospectus and (ii) assumes no exercise
of the Underwriters' over-allotment option. Investors should carefully consider
the information set forth under the heading "Risk Factors." This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors."
The Company
The Company is a direct marketer of audio books through Audio Book Club, a
membership club which markets and sells audio books by mail order and via the
Internet. As of June 30, 1997, Audio Book Club's total member file consisted of
219,222 names, compared to 154,653 and 64,398 names as of December 31, 1996 and
1995, respectively. The Company's total member file has increased by
approximately 240% since January 1, 1996.
Audio books are literary works or other printed materials read by the
author, a reader or a celebrity actor or an ensemble of readers or actors and
recorded primarily on audio cassette. Most hardcover books printed today are
released simultaneously as audio books and audio book versions of other popular
books are released from time to time, in either an author-approved abridged
version or an unabridged version. Audio books are available in all genre
categories, including fiction, non-fiction, mystery, suspense, biography,
fantasy and science fiction, romance, spiritual, religion, humor, children's,
business, self-improvement and motivational.
The Company believes that consumers of audio books include those who
purchase printed books, as well as those who do not have time to read, as they
can be listened to while engaging in other activities, such as driving, walking
or exercising, and can be used by consumers who have difficulty reading. The
Company also believes that audio books offer exceptional entertainment value
because they can be enjoyed while relaxing at home in the same manner that a
person would watch television or listen to the radio.
Audio books were first introduced in 1985 and, according to the Audio
Publishers Association (the "APA"), sales of audio books increased to
approximately $1.5 billion in 1995 from industry estimated sales of $250
million in 1988. According to a study conducted by the APA in 1995,
approximately 11.3 million American households listen to audio books.
Bookstores, however, typically devote limited shelf space to audio books and
carry only a limited number of the 68,000 or more published audio book titles.
The Company believes that it is positioned to capitalize on opportunities in
the emerging and expanding markets for audio books because of its early
entrance into, and knowledge of, the audio book club industry, established
membership base and Internet web site, knowledge of and expertise in utilizing
mailing lists to target direct mail campaigns, selection of available audio
book titles, established relationships with major audio book publishers and
emphasis on providing friendly, efficient customer service.
Since its inception, the Company has engaged in an aggressive membership
recruitment program to establish a core Audio Book Club member base and
continually expand such member base. The Company has acquired Audio Book Club
members primarily through direct mailings of member solicitation packages,
online computer service and Internet advertising, advertisements in magazines,
newspapers and other publications and package insert programs. In March 1995,
the Company established an Internet web site which offers visitors to the web
site the opportunity to join Audio Book Club, execute club transactions online
(if a member), utilize the site's search engine to locate any of the site's
audio book selections and
3
<PAGE>
sample audio clips of many of the site's selections. The Company believes that
it offers one of the most comprehensive libraries of audio book titles, as
members may order virtually any of the 68,000 published titles in existence
through the Company's Internet web site or "special order" service.
Audio Book Club entices prospective members to join the club by typically
offering four audio books at a low introductory price ($.99 or less) and
obtaining the members' commitment to purchase a minimum number of additional
audio books (typically four) at Audio Book Club's regular prices. Audio Book
Club members receive approximately 17 member mailings each year, which include
high-quality, full color catalogs and other inserts which highlight special
titles or offers. Audio Book Club member mailings offer approximately 500
titles, including a "featured selection" which is usually one of the most
popular titles at the time of mailing; "alternate selections" which are best
selling and other current popular titles; and "backlist selections" which are
long-standing titles that have continuously sold well. Audio Book Club operates
as a negative option mail order club, as members automatically receive the
featured selection, unless the member indicates a different selection or
selects not to order that audio book at such time.
The Company's strategy is to establish Audio Book Club as the largest and
most convenient supplier of audio books by mail and via the Internet. Key
elements of the Company's strategy include:
o Expand Member Base. The Company believes that it has established a core
Audio Book Club member base which it intends to continue to expand,
primarily through direct mail campaigns and increased Internet web site
and online computer service marketing and advertising.
o Optimize Member Acquisition Marketing Activities. The Company intends to
continue to analyze its database of results obtained from direct mail
campaigns and from print and other advertising, as well as Internet
marketing, to increase response rates and reduce per member acquisition
costs.
o Maximize Per Member Revenues. The Company intends to continue to analyze
the purchasing habits of its members to maximize sales and extend
membership lifecycles, including by targeting members with
subject-specific interests.
o Cost Containment. The Company continuously seeks to reduce its costs of
doing business, including the costs associated with member acquisition,
catalog mailings and products.
o International Expansion. The Company's long-term objectives include
expanding Audio Book Club internationally into English-speaking countries
such as Canada and the United Kingdom, as well as into other countries
with large English-speaking populations.
Since inception, the Company has incurred significant losses in connection
with establishing and expanding Audio Book Club's core member base. As a result
of the expanded member base, the Company's net sales increased approximately
112.5% for the year ended December 31, 1996 as compared to the prior year and
approximately 56.2% for the six months ended June 30, 1997 as compared to the
prior comparable period. During the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, the Company incurred losses of $3,396,383,
$6,461,269 and $1,167,878, respectively, and had an accumulated deficit of
$12,720,955 at June 30, 1997. The Company expects to incur significant
expenditures in connection with its expansion strategy (including costs
associated with new member recruitment advertising, member retention programs
and expansion and maintenance of its Interet web site) which will result in
losses until such time as the Company is able to further increase its
membership base revenue and generate sufficient secondary sources of revenue to
support its operations. There can be no assurance that the Company's current
business strategy will enable it to achieve profitable operations.
The Company was founded by Norton Herrick who, through his wholly-owned
affiliates, has owned and managed income producing properties, including office
buildings, shopping centers and multi-family apartment complexes, and has
completed transactions with respect to approximately 250 income producing
properties valued at an aggregate of approximately $2 billion. The Company was
incorporated under the laws of the State of Florida in August 1993. The
Company's principal executive offices are located at 2295 Corporate Boulevard,
N.W., Suite 222, Boca Raton, Florida 33431 and its telephone number is (561)
4
<PAGE>
241-1426. The Company also has executive offices located at 20 Community Place,
Morristown, New Jersey 07960. The Company's Internet web site is located at
http://www.audiobookclub.com. Information contained in the Company's web site
shall not be deemed to be part of this Prospectus.
The Offering
Common Stock offered by the
Company ................ 2,000,000 shares(1)
Common Stock to be outstanding
after this Offering ... 5,920,311 shares(1)(2)
Use of proceeds ......... For the repayment of indebtedness; membership
recruitment advertising; Internet web site marketing
and development; and the balance for working capital
and general corporate purposes. See "Use of
Proceeds."
AMEX symbol................................................ "KLB"
- ------------
(1) Assumes no exercise of the Representative's over-allotment option. See
"Underwriting."
(2) Includes 663,911 shares of Common Stock to be issued immediately prior to
the consummation of this Offering upon the conversion of certain
outstanding indebtedness. Does not include: (i) 750,000 shares of Common
Stock reserved for issuance upon exercise of options available for grant
under the Company's 1997 Stock Option Plan (the "Option Plan"), including
50,000 shares of Common Stock reserved for issuance upon exercise of
options granted under the Option Plan and (ii) 200,000 shares of Common
Stock reserved for issuance upon exercise of the Representative's
Warrants. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Management -- 1997 Stock Option Plan,"
"Description of Securities" and "Certain Transactions."
5
<PAGE>
Summary Financial Information
The summary financial information presented below under the captions
"Summary Statement of Operations Data" and "Summary Balance Sheet Data" as of
December 31, 1996 and for the years ended December 31, 1994, 1995 and 1996, are
derived from the financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The financial statements as of December 31, 1996 and for
each of the years in the two year period ended December 31, 1996, and the
report thereon, are included elsewhere in this Prospectus.
The unaudited summary financial information presented below under the
captions "Summary Statement of Operations Data" and "Summary Balance Sheet
Data" as of June 30, 1997 and for the six months ended June 30, 1996 and 1997,
are derived from the unaudited financial statements of the Company, to which
KPMG Peat Marwick LLP has reported that it has applied limited procedures in
accordance with professional standards for a review of such information. The
unaudited financial statements as of June 30, 1997, and for the six month
periods ended June 30, 1996 and 1997, and the review report thereon, are
included elsewhere in this Prospectus.
Summary Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
------------------------------------------------ --------------------------------
1994 1995 1996 1996 1997
-------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Gross sales ........................ $ 337,347 $ 3,406,395 $ 8,343,304 $ 4,224,659 $ 6,499,331
Returns, discounts and allowances .... 87,762 770,980 2,743,221 965,201 1,409,289
Net sales ........................... 249,585 2,635,415 5,600,083 3,259,458 5,090,042
Gross profit (loss) ............... (138,426) 489,517 1,272,739 931,234 2,279,494
Net loss ........................... (1,597,800) (3,396,383) (6,461,269) (2,495,519) (1,167,878)
Pro forma net loss per share(1) ...... (1.65) (.30)
Pro forma weighted average num-
ber of shares outstanding(2) 3,920,311 3,920,311
Other Data:
Total member file(3) ............... 12,072 64,398 154,653 120,713 219,222
</TABLE>
Summary Balance Sheet Data:
<TABLE>
<CAPTION>
As of
December 31, 1996 As of June 30, 1997 (Unaudited)
------------------- ------------------------------------------------------
Actual Pro Forma(2) As Adjusted(2)(4)
---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Working capital (deficit) ............... $ 139,145 $ (5,583,356) $(3,383,356) $12,161,644
Total assets ........................... 1,800,089 3,380,271 3,380,271 12,831,938
Total liabilities ..................... 13,121,641 15,622,875 9,647,675 3,647,675
Shareholders' equity (deficiency) ...... (11,321,552) (12,242,604) (6,267,404) 9,184,263
</TABLE>
- ------------
(1) Based on pro forma weighted average number of shares outstanding.
(2) Gives effect to (i) the issuance of 663,911 shares of Common Stock
immediately prior to the consummation of this Offering to N. Herrick
Irrevocable ABC Trust of which Norton Herrick, Chairman of the Board and
Chief Executive Officer of the Company, is the sole beneficiary and Howard
Herrick, Executive Vice President and a director of the Company, is the
sole trustee, upon conversion of $5,975,200 of indebtedness and (ii) the
incurrence of an additional $2,200,000 net amount of long-term indebtedness
in August and September 1997, the proceeds of which are being used to pay
accounts payable (the "Pro Forma Adjustments"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Certain Transactions."
(3) Consists of all members acquired by the Company, including active and
inactive members. See "Business -- Audio Book Club -- Members."
(4) Gives effect to the sale of the 2,000,000 shares of Common Stock offered
hereby (based upon an assumed public offering price of $9.00 per share)
and the application of the estimated net proceeds therefrom, including the
repayment of approximately $6,040,000 of indebtedness (including accrued
interest thereon). See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative in nature
and involves a high degree of risk. In addition to the other information
contained in this Prospectus, the following factors should be considered
carefully in evaluating the Company and its business before purchasing the
securities offered hereby. This Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results may differ materially from the results discussed
in the forward-looking statements. Factors that might cause or contribute to
such difference include, but are not limited to, those discussed below, as well
as those discussed in this Prospectus.
Limited Operating History; Significant and Increasing Losses. The Company
commenced operations of Audio Book Club in January 1994 and undertook its first
direct mail campaign in August 1994. Accordingly, the Company has a limited
operating history upon which an evaluation of its prospects and future
performance can be made. Such prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in the operation and
expansion of a new business in an evolving industry characterized by intense
competition. Since inception, primarily in connection with establishing a
member base, the Company has incurred significant losses, including losses of
$3,396,383, $6,461,269 and $1,167,878 during the years ended December 31, 1995
and 1996 and the six months ended June 30, 1997, respectively, and had an
accumulated deficit of $12,720,955 at June 30, 1997. The Company anticipates
that it will incur a loss during the current fiscal year. The Company expects
to incur significant expenditures in connection with its expansion strategy
(including costs associated with new member recruitment advertising and
expansion and maintenance of its Internet web site) which will result in losses
until such time as the Company is able to further increase its membership base
revenue and generate sufficient secondary sources of revenue to support its
operations. There can be no assurance that the Company's current business
strategy will enable it to achieve profitable operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Financial Statements.
Significant Capital Requirements; Dependence on Offering Proceeds to
Implement Business Plan; Possible Need for Additional Financing. The Company's
capital requirements have been and will continue to be significant due to,
among other things, costs associated with direct mail campaigns, other new
member recruitment advertising, member retention programs and building,
expanding and maintaining an Internet web site. The Company's cash requirements
have exceeded cash flow from operations and, at June 30, 1997, the Company had
a working capital deficit of $5,583,356. As a result, the Company has been
substantially dependent upon loans from its shareholders (in the aggregate
amount of $12,775,200 since inception) to establish Audio Book Club's member
base and to finance its operations, including its working capital requirements.
The Company is dependent upon the proceeds of this Offering to implement its
business plan and finance its working capital requirements. Based on the
Company's currently proposed plans and assumptions relating to the
implementation of its business plan (including the timing and success of its
direct marketing and other membership recruitment advertising, as well as the
availability and terms of attractive acquisition opportunities), the Company
anticipates that the net proceeds of this Offering will be sufficient to
satisfy its contemplated cash requirements for at least twelve months following
the consummation of this Offering. In the event that the Company's plans change
or its assumptions prove to be inaccurate (due to unanticipated expenses,
difficulties, delays or otherwise) or the proceeds of this Offering otherwise
prove to be insufficient to fund the implementation of the Company's business
plan and working capital requirements, the Company could be required to seek
additional financing. The Company has no current arrangements with respect to,
or potential sources of, additional financing and, following the consummation
of this Offering, it is not anticipated that existing shareholders will provide
any portion of the Company's future financing requirements. There can be no
assurance that any additional financing will be available to the Company when
needed, on commercially reasonable terms, or at all. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, including the curtailment of its member recruitment activities. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Liquidity and Capital Resources."
Proposed Expansion; Risks Relating to Possible Expansion or
Acquisitions. The Company intends to actively pursue a strategy of continued
growth. The Company's proposed expansion will be dependent on, among other
factors, the success of the Company's member recruitment advertising; consumer
acceptance of new products; and the Company's ability to identify suitable
acquisition candidates and integrate any acquired business into its operations,
hire and retain skilled management, marketing, industry, customer service and
other
7
<PAGE>
personnel and successfully manage growth (including monitoring operations,
cutting costs and maintaining effective quality and service controls). The
Company may seek to expand its operations by acquiring companies in businesses
which the Company believes will compliment or enhance its business. While the
Company has from time to time evaluated possible acquisition opportunities, as
of the date of this Prospectus, the Company is not a party to any agreement,
commitment, arrangement or understanding with respect to any acquisition. The
Company has not established any minimum criteria for any acquisition and
Management will have complete discretion in determining the terms of any such
acquisition. Consequently, there is no basis for the investors in this Offering
to evaluate the specific merits or risks of any potential acquisitions that the
Company may undertake. There can be no assurance that the Company will be able
to ultimately effect any acquisition or successfully integrate any acquired
business into its operations. Under Florida law, various forms of business
combinations can be effected without shareholder approval and, accordingly,
investors in this Offering will, in all likelihood, neither receive nor
otherwise have the opportunity to evaluate any financial or other information
which may be made available to the Company in connection with any acquisition
and must rely entirely on the ability of Management in selecting, structuring
and consummating acquisitions that are consistent with the Company's business
plan. Moreover, the Company may issue equity securities in connection with an
acquisition which would result in dilution to the Company's then-existing
shareholders. There can be no assurance that the Company will be able to
successfully expand its operations. See "Use of Proceeds" and "Business --
Strategy."
Risks Relating to Member Recruitment Strategy. The Company's member
recruitment advertising efforts have been and will continue to consist
primarily of direct mail campaigns. The success of direct mail campaigns is
subject to a high degree of risk and uncertainties, including the ability to
target the type of persons which the Company believes are likely to join Audio
Book Club. Although the Company has experience utilizing mailing lists to
efficiently target the Company's direct mail campaigns and the Company intends
to increase the number of prospective members to which member solicitation
packages will be mailed, there can be no assurance that the Company will
achieve improved response rates or be able to reduce its per member acquisition
costs. There also can be no assurance that the Company's member recruitment
efforts will result in a substantially increased membership base. See "Business
- -- Strategy" and "-- Membership Acquisition."
Niche Market; Changing Consumer Preferences. Although audio books have
been marketed to the public for approximately 12 years and the market for audio
books has expanded rapidly, the market for audio books is still evolving and is
currently a niche market. The sale of audio books through mail order clubs is
an emerging retail concept. As is typically the case for products in an
evolving industry, the ultimate level of demand and market acceptance for audio
books is subject to a high degree of uncertainty. There can be no assurance
that the market for audio books will continue to grow at the current rate or
that growth trends will not be reversed. A decline in the popularity of audio
books generally could adversely affect the Company's business and prospects.
The audio book market is characterized by continuous introductions of new
titles and is subject to changing consumer preferences, which may adversely
affect the Company's ability to plan for catalog offerings, anticipate order
lead time and accurately assess inventory requirements. While the Company
evaluates many factors to anticipate the popularity and life cycle of selected
titles, the ultimate level of demand for specific audio book titles is subject
to a high level of uncertainty. Moreover, sales of a specific audio book title
typically decline rapidly after the first few months of release. Any
unanticipated decline in popularity of selected titles could result in excess
inventory or require the Company to sell such inventory at a reduced price. The
Company's success will be largely dependent upon its ability to anticipate and
respond to these and other factors affecting the industry, such as economic
factors affecting discretionary consumer spending, changes in consumer
demographics and the availability of other forms of entertainment. Failure to
respond to such factors in a timely manner could have an adverse affect on the
Company's operating results. See "Business -- Audio Book Industry Overview."
Benefits to Related Parties. The Company intends to use approximately
$6,040,000 of the proceeds of this Offering to repay indebtedness owed to Bank
of America National Trust and Savings Association (the "Bank"). Effective only
upon failure by the Company to repay indebtedness owed to the Bank at maturity,
Norton Herrick provided to the Bank a guarantee of the Company's payment
obligations under the $6,000,000 loan from the Bank and an additional
$3,000,000 of working capital loans from the Bank, and the shares of Common
Stock held by N. Herrick Irrevocable ABC Trust (of which Norton Herrick is the
sole beneficiary and Howard Herrick is the sole trustee) (the "N. Herrick
Trust") were pledged to the Bank to secure the Company's obligations under the
$6,000,000 loan. Accordingly, Mr. Herrick will receive a benefit as a result of
the reduction in his liability
8
<PAGE>
exposure and the release of the shares pledged as security to the Bank. Upon
the consummation of this Offering, the Company will issue to the N. Herrick
Trust 663,911 shares of Common Stock upon the conversion of $5,975,200 of
outstanding indebtedness. In addition, to the extent cash flow is insufficient
for such purpose, the Company will use a portion of the proceeds allocated to
working capital to pay the salaries of its executive officers (including Norton
Herrick, Michael Herrick and Howard Herrick), estimated to aggregate
approximately $490,000 over the twelve months following consummation of this
Offering. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Management -- Employment Agreements" and "Certain Transactions."
Dependence on Third-Party Service Providers. The Company has entered into
a two-year agreement with National Fulfillment Services, Inc. ("NFS") to
provide order processing, billing and data processing services to the Company
and perform customer service functions, as well as a two-year agreement with
R.R. Donnelly & Sons Company ("Donnelly") to provide warehousing and
distribution services for the Company. The Company is dependent upon NFS and
Donnelly to process and deliver orders on a timely basis and upon NFS to
provide friendly, efficient customer service and to timely process and collect
and accurately report customer payments to avoid delays in collection. Failure
by either of such service providers to perform its services in accordance with
the Company's requirements could result in adverse member perception of Audio
Book Club or delay collections of receivables, either of which could have a
material adverse effect on the Company. Although the Company believes that its
relationship with NFS and Donnelly are satisfactory and that alternate sources
for such services are readily available, the unavailability or interruption of
services from either of such providers would result in a material interruption
of the Company's operations. See "Business -- Fulfillment, Warehousing and
Distribution."
Risks Relating to Operation of a Web Site and Advertising on the Internet
and Online Computer Services. Key elements of the Company's business plan are
to expand its Internet web site and increase Internet and online computer
service advertising. Accordingly, the satisfactory performance, reliability and
availability of the Company's web site, transaction-processing systems and
network infrastructure are critical to the Company's reputation and its ability
to attract visitors to its web site and maintain adequate customer service
levels. Because the Company anticipates that revenues will become partially
dependent on the number of visitors who shop on its web site and the volume of
orders it fulfills, any system interruptions that result in the unavailability
of the Company's web site or reduced order fulfillment performance would reduce
the volume of audio books sold and could adversely affect consumer perception
of Audio Book Club and the Company's web site, either of which could have a
material adverse effect on the Company. Rapid growth in the use of and interest
in the Internet and online computer services is a recent phenomenon, and there
can be no assurance that acceptance and use will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and online computer services as a medium of commerce. See "Business --
Strategy" and "-- Member Acquisition."
Member Attrition. The Company's operating results are and will continue to
be significantly affected by member attrition. Once a member has satisfied his
or her commitment to purchase four audio books at regular prices, the member
has no further commitment to the club. Moreover, the Company incurs significant
upfront expenditures in connection with acquiring new members, including the
costs associated with member recruitment advertising and mailings of member
welcome packages, as well as the costs of supplying the audio books ordered at
Audio Book Club's low introductory price (which is significantly below the
Company's cost). A member may not honor his or her commitment or membership may
be terminated by the Company for several reasons, including failure to pay for
purchases or excessive returns or cancelled orders. The member attrition rate
for mail order clubs is typically high and, the Company believes that Audio
Book Club's member attrition rate has been typical of the negative option mail
order industry. Any significant increase in member attrition could have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to recoup its costs associated with new members. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence Upon Supply of Audio Books. The Company is dependent upon the
continued supply of audio books to offer to Audio Book Club members through its
catalogs and over the Internet. Many of the Company's license agreements with
audio book publishers are short-term, non-exclusive agreements, typically one
or two
9
<PAGE>
years in length, and certain of such agreements expire over the next several
months, unless renewed. To the extent that audio book publishers seek to offer
selected titles on an exclusive basis (for mail order businesses, clubs or
otherwise), the Company anticipates that it will be required to bid for the
rights to such titles which could significantly increase the cost to obtain the
rights to any such titles. Moreover, if the Company is unsuccessful in bidding
for any such title, Audio Book Club could be unable to offer such title to its
members. The Company's success will be dependent upon its ability to renew
existing license and supply arrangements with respect to audio book publishers'
libraries and to enter into additional arrangements for the supply of new audio
book titles. Failure to obtain the rights to audio book libraries or selected
audio book titles, on commercially reasonable terms, or at all, could have a
material adverse effect on the Company's business and prospects. See "Business
- -- Audio Book Supply."
Competition. The audio book and mail order club industries are intensely
competitive and highly fragmented. The Company competes with existing audio
book clubs for prospective members. The Company is currently aware of two other
negative option audio book clubs. The Company also competes with all other
outlets through which audio books are offered, including bookstores, audio
bookstores (which primarily rent and, to a lesser extent, sell only audio
books), retail establishments such as supermarkets, convenience stores, video
rental stores and wholesale clubs (e.g. Costco), and mail order companies which
offer audio books for rental and sale through their catalogs. Some of these
competitors are well-established companies which have greater financial,
marketing, distribution, personnel and other resources than the Company, with
the financial resources necessary to enable them to withstand substantial price
competition or downturns in the market for audio books. In addition, the
Company competes with mail order clubs and catalogs and other direct marketers
that offer products with similar entertainment value as audio books, such as
music cassettes and compact discs, printed books and videos, for discretionary
consumer spending. Moreover, since the audio book club industry does not have
any substantial barriers to competition, other marketers of audio books may
seek to establish audio book clubs and operators of other clubs may seek to
expand their product line by adding audio books. Any increase in competition
could result in increased price competition. There can be no assurance that the
Company will be able to compete successfully. See "Business -- Competition."
Product Returns. The book and mail order club industries generally, and
the audio book industry specifically, have historically experienced high
product return rates. The Company's policy is to accept promptly made returns
of damaged products and, in order to maintain favorable customer relations, the
Company generally accepts returns of unopened products. At the time a member
orders an audio book, the Company establishes a reserve for future returns
based upon historical return rates and an evaluation of current return trends.
The Company has recently experienced a product return rate of approximately
22.0%. Product returns which significantly exceed the Company's reserves would
adversely affect the Company's operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business --
Audio Book Club -- Customer Service."
Collection and Credit Risks. The Company is subject to all of the risks
associated with selling products on credit, including, delays in collection or
uncollectibility of accounts receivable. The Company's accounts receivable
(less allowances for sales returns and doubtful accounts) have historically
increased from period to period and are expected to increase as a result of the
anticipated expansion of Audio Book Club's membership base. As of June 30,
1997, the Company's allowances for sales returns and doubtful accounts were
$643,718, which the Company believes is currently adequate for the size and
nature of its receivables. Nevertheless, delays in collection or
uncollectibility of accounts receivable could have a material adverse effect on
the Company's liquidity and working capital position and could require the
Company to increase its allowance for doubtful accounts. Furthermore, as the
Company seeks to expand Audio Book Club's membership base, the Company will be
required to continually evaluate and assess the credit worthiness of new
members. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Costs of Postage and Shipping. Postage and shipping are significant
expenses in the operation of the Company's business. As is customary in the
mail order industry, the Company passes on the costs of order fulfillment
directly to the member but does not directly pass on the costs of its member
mailings and member solicitation packages. During the year ended December 31,
1996, the Company incurred approximately $2,055,000 on postage expenses, of
which approximately 73.9% was attributable to such member mailings and
10
<PAGE>
member solicitation packages. Any unanticipated increase in postal rates will
have an adverse effect on the Company's operating results to the extent that
the Company is unable to offset such increases by raising its prices or by
implementing more efficient mailing, delivery and order fulfillment methods.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertainty of Protection of Proprietary Information. The Company believes
that its service marks have significant value and are important to the
marketing of Audio Book Club. There can be no assurance, however, that the
Company's marks do not or will not violate the proprietary rights of others or
that the Company's marks would be upheld, or that the Company would not be
prevented from using its marks, if challenged, any of which could have an
adverse effect on the Company. In addition, the Company relies on trade secrets
and proprietary know-how, and employs various methods, to protect its ideas,
concepts and membership database. However, such methods may not afford complete
protection and there can be no assurance that others will not independently
develop similar know-how or obtain access to the Company's know-how, ideas,
concepts and membership database. Although the Company typically obtains
confidentiality agreements with its executive officers, employees, list
managers and appropriate consultants and service suppliers, there can be no
assurance that such agreements will be obtained or, if obtained will adequately
protect the Company's trade secrets. In the event competitors independently
develop or otherwise obtain access to the Company's know-how, concepts, trade
secrets or membership database, the Company may be adversely affected. See
"Business -- Trademarks and Other Intellectual Property."
Fluctuations in Operating Results. The Company's operating results vary
from period to period as a result of purchasing patterns of members, the
timing, cost, magnitude and success of direct mail campaigns and other member
recruitment advertising, member attrition, timing and popularity of new audio
book releases and product returns. Unanticipated events, including delays in
securing adequate supply of popular audio book titles at the time of peak
sales, delays in direct mailing or significant decreases in sales, particularly
during peak sales periods, could result in losses which would not be easily
reversed before the following year. There can be no assurance that the
foregoing will not result in significant fluctuations in operating results in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Fluctuations."
Dependence Upon Key Personnel. The success of the Company will be largely
dependent upon the efforts of Norton Herrick, Chairman of the Board and Chief
Executive Officer of the Company, and Michael Herrick, Chief Operating Officer
and Vice Chairman of the Board of the Company. Although the Company has entered
into employment agreements with each of such officers, the loss of the services
of either such officer or other key personnel would have a material adverse
effect on the Company's business and prospects. The Company does not maintain
keyman insurance on the lives of Norton Herrick, Michael Herrick or any other
officer of the Company. The success of the Company will also be dependent on
its ability to attract and retain experienced management and industry
personnel. The Company faces considerable competition from other mail order
clubs and direct marketing companies for such personnel, many of which have
significantly greater resources than the Company. There can be no assurance
that the Company will be able to attract and retain such personnel and the
inability to do so could have a material adverse effect on the Company. See
"Management."
Certain Relationships with Affiliates; Conflicts of Interest. The Company
has from time to time relied on and benefitted from its relationships with
certain affiliates. The Company has received loans from Norton Herrick, Michael
Herrick and Howard Herrick directly and indirectly, in aggregate amounts of
$11,975,200, $400,000 and $400,000, respectively. In addition, the Company
shares office space with entities affiliated with officers of the Company and
has relied on entities affiliated with Norton Herrick for the provision of
certain accounting, administrative and general office services and to obtain
general business insurance. Norton Herrick is actively involved in the
management and operation of several business and is only required to devote as
much time to the Company's business and affairs as he deems necessary to
perform his duties. Accordingly, Mr. Herrick may have a conflict of interest in
the allocation of his business time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Management" and "Certain
Transactions."
11
<PAGE>
Control by The Herrick Family. Upon the consummation of this Offering,
Norton Herrick, Michael Herrick and Howard Herrick will, in the aggregate,
beneficially own approximately 63.5% of the outstanding Common Stock of the
Company. Accordingly, such persons will be able to control the Company and
generally direct the Company's affairs, including electing a majority of the
Company's directors and causing an increase in the Company's authorized capital
or the dissolution, merger, or sale of the Company or substantially all of its
assets. See "Principal Shareholders."
Broad Discretion in Application of Proceeds. Approximately $3,360,000
(21.6%) of the estimated aggregate net proceeds from this Offering has been
allocated to the Company's working capital and general corporate purposes.
Accordingly, the Company will have broad discretion as to the application of
such proceeds. See "Use of Proceeds."
Classified Board of Directors; Possible Adverse Effects of Authorization
of Preferred Stock. The Company's By-laws divide the Board of Directors into
three classes, serving staggered three-year terms. The staggered Board of
Directors may make it more difficult for a third party to acquire, or may
discourage acquisition bids for, the Company. In addition, the Company's
Articles of Incorporation authorize the Company's Board of Directors to issue
up to 5,000,000 shares of "blank check" preferred stock (the "Preferred Stock")
without shareholder approval, in one or more series and to fix the dividend
rights, terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges, and
restrictions applicable to each new series of Preferred Stock. The issuance of
shares of Preferred Stock in the future could, among other results, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, could make it difficult for a third party to gain control of the
Company, prevent or substantially delay a change in control, discourage bids
for the Common Stock at a premium, or otherwise adversely affect the market
price of the Common Stock. Although the Company has no current plans to issue
any shares of Preferred Stock or designate new series of Preferred Stock, there
can be no assurance that the Board will not decide to do so in the future. See
"Management" and "Description of Securities -- Capital Stock -- Preferred
Stock."
No Dividends. The Company has never paid any dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain all earnings for use in connection with the
expansion of its business and for general corporate purposes. The declaration
and payment of future dividends, if any, will be at the sole discretion of the
Company's Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects, and other factors
deemed relevant by the Board of Directors. See "Dividend Policy" and
"Description of Securities -- Capital Stock."
Limitation of Liability of Directors and Officers. The Company's Articles
of Incorporation include provisions to eliminate, to the full extent permitted
by Florida Business Corporation Act (the "Florida Act") as in effect from time
to time, the personal liability of directors of the Company for monetary
damages arising from a breach of their fiduciary duties as directors. The
Articles of Incorporation also include provisions to the effect that the
Company shall, to the maximum extent permitted from time to time under the law
of the State of Florida, indemnify, and upon request shall advance expenses to
any director or officer to the extent that such indemnification and advancement
of expense is permitted under such law, as it may from time to time be in
effect. See "Management -- Exculpatory Provisions and Indemnification Matters."
Dilution. This Offering involves an immediate and substantial dilution of
$7.45 per share (or 82.8%) between the adjusted net tangible book value per
share of Common Stock after this Offering and the initial public offering price
per share of Common Stock in this Offering (based on an assumed offering price
of $9.00 per share). See "Dilution."
Shares Eligible for Future Sale. Upon consummation of this Offering, the
Company will have 5,920,311 shares of Common Stock outstanding, of which the
2,000,000 shares of Common Stock offered hereby will be freely tradable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 3,920,311 shares of Common
Stock outstanding are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act and 3,093,580 of such restricted
shares will become eligible for sale, under Rule 144, commencing 90 days
following the date of this Prospectus, subject to the contractual restrictions
described forth below. All of the Company's current officers, directors and
security holders have agreed with the Representative not to sell any securities
of the Company for a period of 13 months from the date of this Prospectus
without the Representative's prior written consent. The Company has granted
certain demand and "piggy-back" registration rights to the Representative with
respect to
12
<PAGE>
the shares of Common Stock issuable upon exercise of the Representative's
Warrants. No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or even the availability of such shares for sale will
have on the market prices prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Shares Eligible for Future Sale" and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering Prices;
Possible Volatility of Market Price of Common Stock. Prior to this Offering,
there has been no public trading market for the Common Stock. There can be no
assurance that a regular trading market for the Common Stock will develop after
this Offering or that, if developed, will be sustained. Moreover, the initial
public offering price of the Common Stock has been determined by negotiations
between the Company and the Underwriters and, as such, is arbitrary in that it
does not necessarily bear any relationship to the assets, book value or
potential earnings of the Company or any other recognized criteria of value and
may not be indicative of the prices that may prevail in the public market. The
market price of the Common Stock following this Offering may be highly
volatile, as has been the case with the securities of other emerging companies.
Factors such as the Company's operating results, announcements by the Company
or its competitors and various factors affecting the audio book industry
generally may have a significant impact on the market price of the Common
Stock. In addition, in recent years, the stock market has experienced a high
level of price and volume volatility and market prices for the stock of many
companies have experienced wide price fluctuations which have not necessarily
been related to the operating performance of such companies. See
"Underwriting."
Continuing Influence of the Underwriters on the Company. The Company has
agreed that, if it is requested to do so by the Representative, it will use its
best efforts, for a period of three years from the date of this Prospectus, to
elect a designee of the Representative as a director of the Company, or, at the
Representative's option, as a non-voting advisor to the Company's Board of
Directors. Additionally, the Company will have certain other ongoing
contractual obligations to the Representative and the other Underwriters
following the consummation of this Offering and the Company has granted to the
Representative the Representative's Warrants to purchase up to 200,000 shares
of Common Stock. As a result, the Underwriters may have a continuing influence
on the Company. See "Underwriting."
Limited Experience of the Representative. Although the Representative has
co-managed over fifty public offerings, it has not served as the sole managing
underwriter of a public offering. However, the senior officer of the
Representative overseeing this Offering has served as the lead investment
banker for more than one hundred registered public offerings over the last
twenty five years. There can be no assurance that the Representative's lack of
public offering experience will not affect the proposed public offering of
Common Stock and subsequent development of a trading market, if any. See
"Underwriting."
Possible Delisting of Securities from the American Stock Exchange; Risks
Relating to Penny Stocks. The Company's Common Stock will be listed on The
American Stock Exchange ("AMEX") upon the completion of this Offering. In order
to continue to be listed on AMEX, however, the Company must maintain
shareholders' equity of $2,000,000 if the Company has had losses in two of its
three most recent years (or $4,000,000 if the Company has had losses in its
three most recent years). In addition, continued inclusion requires the market
value of the public float to be at least $1,000,000. The failure to meet these
maintenance criteria in the future may result in the delisting of the Company's
securities from AMEX, and, inasmuch as the Company would under such
circumstances not qualify for initial inclusion in the Nasdaq SmallCap Market,
trading, if any, in the Company's securities would thereafter be conducted in
the non-Nasdaq over-the-counter market. As a result of such delisting, an
investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's securities.
Although the Company anticipates that its securities will be listed for
trading on AMEX, if the Common Stock were to become delisted from trading on
AMEX and the trading price of the Common Stock were to fall below $5.00 per
share on the date the Company's securities were delisted, trading in such
securities would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any equity security that is not listed on AMEX, another
national security exchange or The Nasdaq Stock Market, Inc. and has a market
price of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market
13
<PAGE>
and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Company's securities, which could severely limit
the market price and liquidity of such securities and the ability of purchasers
in this offering to sell their securities of the Company in the secondary
market.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,000,000 shares of Common Stock offered hereby (based on an assumed public
offering price of $9.00 per share) are estimated to be $15,500,000
($17,021,900, if the Underwriters' over-allotment option is exercised in full).
The Company intends to apply the net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Dollar Amount
- --------------------------------------------------------- --------------- --------------
<S> <C> <C>
Repayment of indebtedness(1) ........................... $ 6,040,000 39.0%
Membership recruitment advertising(2) .................. 4,600,000 29.7
Internet web site marketing and development(3) ......... 1,500,000 9.7
Working capital and general corporate purposes(4) ...... 3,360,000 21.6
------------ ------
Total ................................................ $15,500,000 100.0%
============ ======
</TABLE>
- ------------
(1) Represents the repayment of a $6,000,000 loan from Bank of America National
Trust and Savings Association (the "Bank"), plus accrued interest thereon.
The loan bears interest at the Bank's reference rate from time to time
(8 1/2% as of September 1, 1997) minus 1/2% and is due May 7, 1998. The
Company used the proceeds of the Bank loan to repay a portion of its
outstanding indebtedness to N. Herrick Irrevocable ABC Trust of which
Norton Herrick, Chairman of the Board and Chief Executive Officer of the
Company, is the sole beneficiary and Howard Herrick, Executive Vice
President and a director of the Company, is the sole trustee. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and "Certain
Transactions."
(2) Represents estimated costs associated with (i) conducting direct mail
campaigns, including the costs of designing, printing and mailing member
solicitation packages, (ii) designing and placing advertisements in
newspapers, magazines and other publications, (iii) limited testing of
other forms of advertising, including radio and package insert programs,
and (iv) public relations efforts. See "Business -- Strategy" and "--
Member Acquisition."
(3) Represents estimated costs associated with increasing online computer
service and Internet marketing and advertisting, expanding and maintaining
the Company's Internet web site and increasing the number of audio book
titles to select and audio clips to preview online. See "Business -- Member
Acquisition."
(4) Includes costs of general corporate overhead and maintaining inventory and
may, to the extent cash flow from operations is insufficient, be used for
the payment of the salaries of executive officers, estimated to aggregate
approximately $490,000 over the twelve months following the consummation
of this Offering. See "Management."
If the Underwriters exercise the over-allotment option in full, the
Company will receive additional net proceeds of $1,521,900 from the sale of the
190,000 shares by the Company, which will also be added to working capital. The
Company will not receive any of the net proceeds from the sale of shares by the
Selling Shareholder. See "Underwriting."
The allocation of the net proceeds from this Offering represents the
Company's best estimate based upon its currently proposed plans and assumptions
relating to its operations and certain assumptions regarding general economic
conditions. If any of these factors change, the Company may find it necessary
or advisable to reallocate a portion of the proceeds within the above-described
categories.
The Company may, if and when opportunities arise, use a portion of the
proceeds of this Offering allocated to working capital, together with the
issuance of debt or equity securities, to expand its operations by acquiring
companies in businesses which the Company believes will complement or enhance
its business. While the Company has from time to time evaluated possible
acquisition opportunities, as of the date of this Prospectus, the Company is
not a party to any agreement, commitment, arrangement or understanding with
respect to any acquisition. The Company has not established any minimum
criteria for any acquisition and Management will have complete discretion in
determining the terms of any such acquisition.
15
<PAGE>
Based on the Company's currently proposed plans and assumptions relating
to the implementation of its business plan (including the timing and success of
its direct marketing and other new membership recruitment advertising, member
retention programs, as well as the availability and terms of attractive
acquisition opportunities), the Company anticipates that the net proceeds of
this Offering will be sufficient to satisfy its contemplated cash requirements
for at least twelve months following the consummation of this Offering. In the
event that the Company's plans change or its assumptions prove to be inaccurate
(due to unanticipated expenses, difficulties, delays or otherwise) or the
proceeds of this Offering otherwise prove to be insufficient to fund the
implementation of the Company's business plan and working capital requirements,
the Company could be required to seek additional financing. The Company has no
current arrangements with respect to, or potential sources of, additional
financing and, following the consummation of this Offering, it is not
anticipated that existing shareholders will provide any portion of the
Company's future financing requirements. There can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest
bearing investments.
DILUTION
As of June 30, 1997, the net tangible book value of the Company was
$(12,335,937) or $(3.79) per share of Common Stock. "Net tangible book value
per share" represents the book value of the Company's tangible assets less the
amount of its liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the Pro Forma Adjustments (see footnote 2
of "Prospectus Summary -- Summary Financial Information"), the pro forma net
tangible book value of the Company as of June 30, 1997 would have been
$(6,360,737) or $(1.62) per share. Upon the consummation of this Offering and
anticipated application of the net proceeds of this Offering (based on an
assumed public offering price of $9.00 per share), 5,920,311 shares of Common
Stock will be outstanding with an adjusted net tangible book value of
$9,184,263 or $1.55 per share. As a result of this Offering, there will be an
immediate dilution to new investors of approximately $7.45 per share.
"Dilution" represents the difference between the price per share paid by new
investors in this Offering and the adjusted net tangible book value per share
of June 30, 1997, after giving effect to this Offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share ........................ $9.00
Net tangible book value before Pro Forma Adjustments ......... $ (3.79)
Increase attributable to Pro Forma Adjustments ............... 2.17
--------
Pro forma net tangible book value before this Offering ...... (1.62)
Increase attributable to this Offering .................. 3.17
--------
Adjusted net tangible book value after this Offering ............ 1.55
-------
Dilution to investors in this Offering ........................ $7.45
=======
</TABLE>
<PAGE>
The following table summarizes, as of the consummation of this Offering,
the differences between the effective cash contributions paid by the existing
shareholders of the Company and the new investors with respect to the number of
shares purchased from the Company, the total consideration paid, and the
average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ...... 3,920,311 66.2% $ 5,975,400 24.9% $ 1.52
New investors ............... 2,000,000 33.8 18,000,000 75.1 9.00
---------- ------ ------------ ------
Total ..................... 5,920,311 100.0% $23,975,400 100.0%
========== ====== ============ ======
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment option.
If such option is exercised in full, the new investors will have paid
$20,700,000 for 2,300,000 shares of Common Stock, representing 77.6% of the
total consideration for 37.6% of the total number of shares of Common Stock
outstanding.
16
<PAGE>
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock, and the
Board of Directors of the Company does not intend to declare or pay any
dividends on its Common Stock in the foreseeable future. The Board of Directors
currently intends to retain all available earnings (if any) generated by the
Company's operations for the development and growth of its business. The
declaration in the future of any cash or stock dividends on the Common Stock
will be at the discretion of the Board of Directors and will depend upon a
variety of factors, including the earnings, capital requirements and financial
position of the Company and general economic conditions at the time in
question. Moreover, the payment of cash dividends on the Common Stock in the
future could be further limited or prohibited by the terms of financing
agreements that may be entered into by the Company (e.g., a bank line of credit
or an agreement relating to the issuance of other debt securities of the
Company) or by the terms of any Preferred Stock that may be issued and then
outstanding.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997, (i) on an actual basis, (ii) on a pro forma basis, giving effect
to the Pro Forma Adjustments (see footnote 2 of "Prospectus Summary -- Summary
Financial Information"), and (iii) as adjusted to give effect to the sale of
the 2,000,000 shares of Common Stock offered hereby (based on an assumed public
offering price of $9.00 per share) and the anticipated application of the
estimated net proceeds therefrom:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Short-term bank debt ....................................... $ 6,000,000 $ 6,000,000 $ 0
============= ============= =============
Notes payable ................................................ $ 6,775,200 $ 3,000,000 $ 3,000,000
------------- ------------- -------------
Shareholders' equity (deficiency):
Preferred Stock, no par value, 5,000,000 shares authorized;
no shares issued and outstanding ........................... -- -- --
Common Stock, no par value, 25,000,000 authorized,
3,256,400 shares issued and outstanding (actual),
3,920,311 shares issued and outstanding (pro forma),
5,920,311 shares issued and outstanding (as adjusted) ...... 200 5,975,400 21,475,400
Contributed capital .......................................... 478,151 478,151 478,151
Accumulated deficit ....................................... (12,720,955) (12,720,955) (12,769,288)
------------- ------------- -------------
Total shareholders' equity (deficiency) .................. (12,242,604) (6,267,404) 9,184,263
------------- ------------- -------------
Total capitalization ................................. $ (5,467,404) $ (3,267,404) $ 12,184,263
============= ============= =============
</TABLE>
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Selected
Statement of Operations Data" and "Selected Balance Sheet Data" as of December
31, 1996 and for the years ended December 31, 1994, 1995 and 1996, are derived
from the financial statements of the Company, which financial statements have
been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The financial statements as of December 31, 1996 and for each of
the years in the two year period ended December 31, 1996, and the report
thereon, are included elsewhere in this Prospectus.
The selected unaudited financial information presented below under the
captions "Selected Statement of Operations Data" and "Selected Balance Sheet
Data" as of June 30, 1997 and for the six months ended June 30, 1996 and 1997,
are derived from the unaudited financial statements of the Company, to which
KPMG Peat Marwick LLP has reported that it has applied limited procedures in
accordance with professional standards for a review of such information. The
unaudited financial statements as of June 30, 1997, and for the six month
periods ended June 30, 1996 and 1997, and the review report thereon, are
included elsewhere in this Prospectus.
The selected financial data set forth below is qualified by reference to
and should be read in conjunction with the Company's financial statements,
related notes and other financial information contained in this Prospectus, as
well as "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Selected Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended Six Months
December 31, Ended June 30,
------------------------------------------------ --------------------------------
1994 1995 1996 1996 1997
-------------- --------------- --------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Gross sales ........................... $ 337,347 $ 3,406,395 $ 8,343,304 $ 4,224,659 $ 6,499,331
Returns, discounts and allowances ...... 87,762 770,980 2,743,221 965,201 1,409,289
Net sales .............................. 249,585 2,635,415 5,600,083 3,259,458 5,090,042
Cost of sales ........................... 388,011 2,145,898 4,327,344 2,328,224 2,810,548
Gross profit (loss) ..................... (138,426) 489,517 1,272,739 931,234 2,279,494
Advertising and promotion expense
(for acquisition and retention of
members) .............................. 972,517 2,670,650 5,469,761 2,486,834 2,249,737
General and administrative expense ....... 367,652 1,094,973 1,948,821 801,400 725,777
Interest expense, net .................. 3,794 3,947 211,140 56,994 314,645
Net loss .............................. (1,597,800) (3,396,383) (6,461,269) (2,495,519) (1,167,878)
Pro forma net loss per share(1) ......... (1.65) (.30)
Pro forma weighted average number
of shares outstanding(1) ............... 3,920,311 3,920,311
Other Data:
Total member file(2) ..................... 12,072 64,398 154,653 120,713 219,222
</TABLE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
As of June 30, 1997 (Unaudited)
As of ----------------------------------------------------
December 31, 1996 Actual Pro Forma(1) As Adjusted(1)(3)
------------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Working capital (deficit) ............ $ 139,145 $ (5,583,356) $(3,383,356) $12,161,644
Total assets ........................ 1,800,089 3,380,271 3,380,271 12,831,938
Total liabilities .................. 13,121,641 15,622,875 9,647,675 3,647,675
Shareholders' equity (deficiency) ... (11,321,552) (12,242,604) (6,267,404) 9,184,263
</TABLE>
- ------------
(1) Adjusted to give effect to the Pro Forma Adjustments (see footnote 2 of
"Prospectus Summary -- Summary Financial Information"). See "Management's
Discussion and Analysis and Results of Operations -- Liquidation Capital
Resources" and "Certain Transactions."
(2) Consists of all members acquired by the Company, including active and
inactive members. See "Business -- Audio Book Club -- Members."
(3) Gives effect to the sale of the 2,000,000 shares of Common Stock offered
hereby (based on an assumed public offering price of $9.00 per share), and
the application of the estimated net proceeds therefrom, including the
repayment of approximately $6,040,000 of indebtedness including accrued
interest thereon.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company commenced operations of Audio Book Club in January 1994 and
undertook its first direct mail campaign in August 1994. As of June 30, 1997,
the Company's total number file consisted of 219,222 names, compared to 154,653
and 64,398 names as of December 31, 1996 and 1995, respectively. The Company's
total member file has increased by approximately 240% since January 1, 1996.
The total member file consists of all members acquired by the Company,
including active and inactive members.
Through June 30, 1997, the Company had spent an aggregate of $11,401,915
on advertising and promotion for acquisition and retention of members,
including $2,670,650, $5,469,761 and $2,249,737 during the years ended December
31, 1995 and 1996 and six months ended June 30, 1997, respectively.
Since inception, the Company has generated limited revenues and incurred
significant losses, including losses of $3,396,383, $6,461,269 and $1,167,878
for the years ended December 31, 1995 and 1996 and six months ended June 30,
1997, respectively, and had an accumulated deficit of $12,720,955 at June 30,
1997. The Company anticipates that it will incur a loss during the current
fiscal year. There can be no assurance that the Company's current business
strategy will enable it to achieve profitable operations.
The Company recognizes sales revenues (gross sales) upon shipment of
products, at which time customers are billed for the products ordered. Revenues
consist primarily of catalog sales of audio books to members at regular club
price plus shipping and handling less applicable discounts, and to a lesser
extent, revenues from new member enrollments. New member enrollment revenues
represent the low introductory price (typically four audio books for $.99 or
less) plus shipping and handling at which the Company offers the introductory
audio books as an enticement for new members to join Audio Book Club.
The Company records returns, discounts and allowances each period in an
amount equal to actual returns plus an estimated allowance for additional
returns for sales made during such period. The estimated allowance is based on
historical return rates. Cost of sales includes the cost of audio books and
product, shipping, mailing and fulfillment costs. The cost of sales of the
introductory audio books exceeds new member enrollment revenues from such
introductory offer. The Company's gross profit margin increases as catalog
sales of audio books to members account for a greater percentage of sales.
Accounts receivable are recorded net of allowances for sales returns and
doubtful accounts. The allowance for future sales returns is based upon
historical experience and an evaluation of current return trends. The allowance
for doubtful accounts is based upon historical experience. The Company's
allowances for sales returns and doubtful accounts were $666,262 and $165,407,
respectively, as of December 31, 1996 and $486,005 and $157,713 as of June 30,
1997.
Results of Operations
The following table sets forth certain historical financial data for the
Company as a percentage of net sales:
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------- ---------------------
1995 1996 1996 1997
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Net sales .................................... 100.0% 100.0% 100.0% 100.0%
======= ======= ====== ======
Cost of sales .............................. 81.4% 77.3% 71.4% 55.2%
Gross profit ................................. 18.6 22.7 28.6 44.8
Advertising and promotion expense (for
acquisition and retention of members) ...... 101.3 97.7 76.3 44.2
General and administrative expense ......... 41.5 34.8 24.6 14.3
Interest expense ........................... 0.1 3.8 1.7 6.2
Net loss .................................... (128.9) (115.4) (76.6) (22.9)
</TABLE>
19
<PAGE>
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Gross sales for the six months ended June 30, 1997 were $6,499,331, an
increase of $2,274,672 or 53.8%, as compared to $4,224,659 for the prior
comparable period. Such increase in gross sales was primarily attributable to
increased sales of audio books resulting from expansion of Audio Book Club's
membership base.
Returns, discounts and allowances for the six months ended June 30, 1997
were $1,409,289, or 21.7% of gross sales, as compared to $965,201, or 22.8% of
gross sales for the prior comparable period.
Net sales for the six months ended June 30, 1997 were $5,090,042, an
increase of $1,830,584 or 56.2%, as compared to $3,259,458 for the prior
comparable period. The increase in net sales was primarily attributable to
expansion of Audio Book Club's membership base.
Cost of sales for the six months ended June 30, 1997 were $2,810,548, an
increase of $482,324, as compared to $2,328,224 for the prior comparable
period. The increase in cost of sales was primarily attributable to the
substantial increase in net sales of audio books which was partially offset by
lower product unit costs, more favorable licensing arrangements and decreased
shipping and fulfillment costs.
Gross profit for the six months ended June 30, 1997 was $2,279,494, or
44.8% of net sales, as compared to $931,234, or 28.6% of net sales, for the
prior comparable period. The improvement in gross profit margin was
attributable to a larger percentage of the Company's net sales from catalog
sales of audio books to members as opposed to revenues from introductory sales
of audio books in connection with new member enrollments. The product unit cost
exceeds the enrollment revenues from the sale of introductory units.
Advertising and promotion expenses (for acquisition and retention of
members) for the six months ended June 30, 1997 were $2,249,737, a decrease of
$237,097, as compared to $2,486,834 for the prior comparable period. Such
decrease was primarily due to the timing of the Company's first significant
direct mail campaign of each year. The Company commenced its first 1996 direct
mail campaign in January 1996 whereas it commenced a similar mail campaign in
December 1996 (as opposed to January 1997). As a result, during the six months
ended June 30, 1997, the Company conducted two significant direct mail
campaigns as opposed to three significant direct mail campaigns during the
prior comparable period. The decrease was also attributable to the lower per
piece mailing costs of member solicitation packages and member mailings which
was partially offset by the increased expense associated with advertising and
promotion activities to a larger membership basis. See "--Quarterly
Fluctuations."
General and administrative expenses for the six months ended June 30, 1997
were $725,777 or 14.3% of net sales, as compared to $801,400 or 24.6% of net
sales for the prior comparable period. Such expenses decreased as a percentage
of net sales, because the Company had previously established a corporate
infrastructure capable of supporting operations in excess of its then-current
level of operations. Additionally, the Company was able to replace certain of
its support staff with lower salaried personnel.
Professional fees for the six months ended June 30, 1997 were $152,535, an
increase of $73,051, as compared to $79,484 for the prior comparable period.
Depreciation and amortization expenses for the six months ended June 30, 1997
was $4,678, as compared to $2,041 for the prior comparable period. Net interest
expense for the six months ended June 30, 1997 was $314,645, as compared to net
interest expense of $56,994 for the prior comparable period. The increase in
net interest expense was attributable to increased borrowings.
The net loss for the six months ended June 30, 1997 decreased to
$1,167,878, as compared to a net loss of $2,495,519 for the prior comparable
period, primarily as a result of an improved gross profit margin resulting from
a higher percentage of continuing member revenue as compared to revenue from
new member enrollments, and the decrease of advertising and promotion and
general and administrative expenses as a percentage of net sales.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Gross Sales for the year ended December 31, 1996 were $8,343,304, an
increase of $4,936,909 or 144.9%, as compared to $3,406,395 for the year ended
December 31, 1995. Such increase in gross sales was primarily attributable to
increased sales of audio books resulting from expansion of Audio Book Club's
membership base.
Returns, discounts and allowances for the year ended December 31, 1996
were $2,743,221, or 32.9% of gross sales, as compared to $770,980 or 22.6% of
gross sales for the year ended December 31, 1995. The increase in returns,
discounts and allowances was primarily the result of an increase in sales of
audio books. The
20
<PAGE>
increase as a percentage of sales is due primarily to product shipments
resulting from an unsuccessful test telemarketing campaign during the year
ended December 31, 1996 and, to a lesser extent, from an increase in returns of
the featured selection resulting from the increased number of member mailings
during the fourth fiscal quarter of 1996.
Net sales for the year ended December 31, 1996 were $5,600,083, an
increase of $2,964,668 or 112.5%, as compared to $2,635,415 for the year ended
December 31, 1995. The increase in net sales was primarily attributable to
expansion of Audio Book Club's membership base and increased new member
enrollment revenue. The number of Audio Book Club's active members
approximately doubled during 1996, as compared to the number of active members
as of December 31, 1995.
Cost of sales for the year ended December 31, 1996 were $4,327,344, an
increase of $2,181,446 or 101.7%, as compared to $2,145,898 for the year ended
December 31, 1995, primarily as a result of increased net sales. Cost of sales
includes product and fulfillment costs.
Gross profit for the year ended December 31, 1996 was $1,272,739, or 22.7%
of net sales, as compared to $489,517, or 18.6% of net sales for the year ended
December 31, 1995. The increase in gross profit as a percentage of net sales
was attributable to improved economies of scale resulting in decreased product,
shipping and fulfillment costs and, to a lesser extent, a larger percentage of
the Company's net sales being derived from catalog sales of audio books to
members as opposed to revenues from introductory sales of audio books in
connection with new member enrollments.
Advertising and promotion expenses (for acquisition and retention of
members) for the year ended December 31, 1996 was $5,469,761, an increase of
$2,799,111 or 104.8%, as compared to $2,670,650 for the year ended December 31,
1995. Such increase was primarily attributable to increased membership
recruitment efforts relating to larger direct marketing campaigns and increased
expenses incurred in connection with member mailings to Audio Book Club's
increased membership base.
General and administrative expenses for the year ended December 31, 1996
were $1,948,821, or 34.8% of net sales, as compared to $1,094,973, or 41.5% of
net sales for the year ended December 31, 1995. During 1995, the Company
established a corporate infrastructure capable of supporting operations in
excess of its then-current level of operations. As a result, the Company was
not required to hire additional personnel and incur additional administrative
expenses commensurate with its increased level of operations. Accordingly,
general and administrative expenses declined as a percentage of net sales.
Professional fees for the year ended December 31, 1996 were $99,093, as
compared to $113,997 for the year ended December 31, 1995. Depreciation and
amortization expense for the year ended December 31, 1996 was $5,193, as
compared to $2,333 for the year ended December 31, 1995. Net interest expense
for the year ended December 31, 1996 was $211,140, as compared to $3,947 for
the year ended December 31, 1995. The increase in net interest expense was
attributable to increased borrowings.
Primarily as a result of the Company's increased efforts to expand Audio
Book Club's membership base, the net loss for the year ended December 31, 1996
increased to $6,461,269, as compared to $3,396,383 for the year ended December
31, 1995.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant due to, among other things, costs associated with direct mail
campaigns, other new member recruitment advertising and building, expanding and
maintaining an Internet web site. The Company's cash requirements have exceeded
cash flows from operations and, at June 30, 1997, the Company had a working
capital deficit of $5,583,356. As a result, the Company has been substantially
dependent upon loans from its shareholders to establish Audio Book Club's
member base and to finance its operations, including its working capital
requirements.
Since inception, the Company has borrowed an aggregate of $12,775,200 from
its shareholders, including $4,105,000, $5,575,200 and $1,295,000 during the
years ended December 31, 1995, and 1996 and the six months ended June 30, 1997,
respectively. The Company repaid an aggregate of $6,000,000 and $800,000 of
such loans in May and September 1997, respectively. See "Certain Transactions."
21
<PAGE>
In May 1997, the Company borrowed $6,000,000 from Bank of America National
Trust and Savings Association (the "Bank") pursuant to a credit agreement. In
August and September 1997, the Company borrowed an additional $3,000,000 from
the Bank. The loans bear interest (payable monthly) at the Bank's reference
rate from time to time (8 1/2% as of September 1, 1997) minus 1/2%. The
$6,000,000 loan is due May 7, 1998 and the $3,000,000 working capital loans are
due October 31, 1998, in each case, unless extended by the Bank. The shares of
Common Stock held by the N. Herrick Trust were pledged to the Bank as security
for the $6,000,000 loan and, in the event the Company fails to repay the loans
at maturity, the personal guarantee of Norton Herrick to the Bank will become
effective. The Company used the proceeds of the $6,000,000 loan from the Bank
to repay a portion of the outstanding indebtedness owed to the N. Herrick
Trust. The Company is using the proceeds of the $3,000,000 of working capital
loans from the Bank to pay accounts payable. The Company intends to use a
portion of this Offering to repay the $6,000,000 loan from the Bank, plus
accrued interest thereon. See "Use of Proceeds" and "Certain Transactions."
Immediately prior to the consummation of this Offering, the N. Herrick
Trust is converting the outstanding $5,975,200 of indebtedness owed to the N.
Herrick Trust under the loan agreement into 663,911 shares of Common Stock at a
price per share equal to the initial offering price of the Common Stock. See
"Certain Transactions."
During the six months ended June 30, 1997, the Company's cash increased by
$21,999, as the Company used net cash of $1,171,874 and $6,127 for operating
and investing activities, respectively, and had cash provided by financing
activities of $1,200,000. Net cash used in operating activities primarily
consisted of a net loss of $1,167,878 and increases in accounts receivable and
inventory of $1,198,356 and $259,603, respectively, which were partially offset
by an increase in accounts payable and accrued expenses of $1,206,234. Net cash
used in investing activities consisted of the acquisition of fixed assets. Net
cash provided by financing activities primarily consisted of loans from the N.
Herrick Trust, Howard Herrick and the M.E.H. Trust which were partially offset
by the incurrence of deferred offering costs.
During the year ended December 31, 1996, the Company's cash decreased by
$48,121, as the Company used net cash of $5,616,258 and $7,063 in operating and
investing activities, respectively, and had cash provided by financing
activities of $5,575,200. Net cash used in operating activities primarily
consisted of the net loss of $6,461,269, an increase in inventory of $383,689
and an increase in royalty advances of $235,440, which were partially offset by
an increase in accounts payable and accrued expenses of $1,170,140. Net cash
used in investing activities consisted of the acquisition of fixed assets. Net
cash provided by financing activities consisted of loans from the N. Herrick
Trust.
The Company entered into three-year employment agreements with Michael
Herrick and Howard Herrick, a two-year employment agreement with Norton Herrick
and a one-year employment agreement with Jesse Faber, President of the Company.
The Company's aggregate committments under such employment agreements are
$490,000, $350,000 and $250,000 during the first, second and third years
following this Offering, respectively.
The Company is dependent upon the proceeds of this Offering to implement
its business plan and finance its working capital requirements. Based on the
Company's currently proposed plans and assumptions relating to the
implementation of its business plans (including the timing and success of its
direct marketing and other new membership recruitment advertising, as well as
the availability and terms of attractive acquisition opportunities), the
Company anticipates that the net proceeds of this Offering will be sufficient
to satisfy its contemplated cash requirements for at least twelve months
following the consummation of this Offering. In the event that the Company's
plans change or its assumptions prove to be inaccurate (due to unanticipated
expenses, difficulties, delays or otherwise) or the proceeds of this Offering
otherwise prove to be insufficient to fund the implementation of the Company's
business plans and working capital requirements, the Company could be required
to seek additional financing. The Company has no current arrangements with
respect to, or potential sources of, additional financing and it is not
anticipated that existing shareholders will provide any portion of the
Company's future financing requirements. There can be no assurance that any
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all.
22
<PAGE>
Quarterly Fluctuations
The Company's operating results vary from period to period as a result of
purchasing patterns of members, the timing, costs, magnitude and success of
direct mail campaigns and other new member recruitment advertising, member
attrition, the timing and popularity of new audio book releases and product
returns.
In prior years, the Company has conducted a significant direct mail
campaign at either the end of the fourth fiscal quarter or the beginning of the
following first fiscal quarter. The timing of new member enrollment varies
depending upon the timing, magnitude and success of new member recruitment
advertising, particularly direct mail campaigns. The Company typically
experiences increased new member enrollment shortly following direct mail
campaigns. As a result, new member enrollment revenues increase as a percentage
of net sales shortly following significant direct mail campaigns. In fiscal
years in which the Company conducts a significant direct mail campaign at the
end of the fourth quarter, the Company's operating results will be adversely
affected because it will incur increased member acquisition expenses but will
not generate any corresponding revenues from such campaign until the following
fiscal year.
23
<PAGE>
BUSINESS
The Company is a direct marketer of audio books through Audio Book Club, a
membership club which markets and sells audio books by mail and via the
Internet. As of June 30, 1997, Audio Book Club's total member file consisted of
219,222 names, compared to 154,653 and 64,398 names as of December 31, 1996 and
1995, respectively. The Company's total member file has increased by
approximately 240% since January 1, 1996. The total member file consists of all
members acquired by the Company, including active and inactive members.
Since its inception, the Company has engaged in an aggressive membership
recruitment program to establish a core Audio Book Club member base and to
continually expand such member base. The Company has acquired Audio Book Club
members primarily through direct mailings of member solicitation packages,
online computer service and Internet advertising, advertisements in magazines,
newspapers and other publications and package insert programs. In March 1995,
the Company established an Internet web site which offers visitors to the web
site the opportunity to join Audio Book Club, execute club transactions online
(if a member), utilize the site's search engine to locate any of the site's
audio book selections and sample audio clips of many of the site's selections.
The Company believes that it offers one of the most comprehensive libraries of
audio book titles, as members may order virtually any of the 68,000 published
titles in existence through the Company's Internet web site or "special order"
service.
Audio Book Industry Overview
Audio books are literary works or other printed materials read by the
author, a reader or a celebrity actor or an ensemble of readers or actors and
recorded primarily on audio cassette and, to a lesser extent, on compact disc.
Most hardcover books printed today are released simultaneously as audio books
and audio book versions of other popular books are released from time to time,
in either an author-approved abridged version or an unabridged version. An
abridged audio book is a condensed version of the printed book, typically
recorded on two to six audio cassettes and three to six hours in length. An
unabridged audio book is a word-for-word version of the printed book, typically
recorded on six to twelve audio cassettes and six to twelve hours in length.
Audio book publishers have traditionally focused their efforts on publishing
abridged audio books because they can be offered at lower prices than
unabridged versions and, therefore, can be more competitive with printed books
and other forms of audio cassette entertainment, such as music cassettes.
Audio books were first introduced in 1985 and, according to the Audio
Publishers Association (the "APA"), sales of audio books increased to
approximately $1.5 billion in 1995 from industry estimates of $250 million in
1988. Sales of audio books increased approximately 11.6% during 1996, compared
to an increase in printed book sales of 1% during 1996. Additionally, the APA
estimates that sales of audio books during the last fiscal quarter of 1996 and
first fiscal quarter of 1997 increased approximately 38% and 23%, respectively,
compared to the prior comparable fiscal quarters, with continued annual growth
in sales of audio books expected to be between 10% and 20%. Simba Information,
Inc., a reporter of book information statistics, forecasts sales by book clubs
(audio and print) to grow more aggressively than any other consumer book
segment.
Audio books are available in all genre categories including, fiction,
non-fiction, mystery, suspense, biography, fantasy and science fiction,
romance, spiritual, religion, humor, children's, business, self-improvement and
motivational. An industry source estimates that there were approximately 68,000
audio book titles in existence as of January 1997, as compared to 11,500 titles
in 1985, with approximately 7,500 titles published in 1996.
The Company believes that consumers of audio books include those who
purchase printed books, as well as those who do not have time to read, as they
can be listened to while engaging in other activities, such as driving, walking
or exercising, and can be used by consumers who have difficulty reading. The
Company also believes that audio books offer exceptional entertainment value
because they can be enjoyed while relaxing at home in the same manner that a
person would watch television or listen to the radio. According to a study
conducted by the APA in 1995, approximately 11.3 million American households
listen to audio books.
When audio books were first introduced, they were available almost
exclusively in libraries. Currently, bookstores account for the largest
percentage of retail audio book sales, selling approximately 47% of audio
24
<PAGE>
books in 1995 according to the APA. Bookstores, however, typically devote
limited shelf space to audio books. A survey conducted by Publishers Weekly in
1994 indicates that bookstores devote only an average of 71 square feet to
audio books. Because of shelf space limitations, bookstores carry only a
limited number of the approximately 68,000 published audio book titles.
Over the last several years, audio book stores, which rent and, to a
lesser extent, primarily sell only audio books, have opened. Audio books are
also offered on a limited basis in other retail establishments such as
convenience stores, video rental stores and wholesale clubs (e.g. Costco), as
well as by several mail order companies which offer audio books for rental and
sale through their catalogs. Audio books are also currently offered through the
limited number of recently established audio book member clubs, such as Audio
Book Club.
The Company believes that it is positioned to capitalize on opportunities
in the emerging and expanding markets for audio books because of its early
entrance into, and knowledge of, the audio book club industry, established
membership base and Internet web site, knowledge of and experience in utilizing
mailing lists to target direct mail campaigns, selection of available audio
book titles, established relationships with major audio book publishers and
emphasis on providing friendly, efficient customer service.
Strategy
The Company's strategy is to establish Audio Book Club as the largest and
most convenient supplier of audio books by mail and via the Internet. Key
elements of the Company's strategy include:
o Expand Member Base. The Company believes that it has established a core
Audio Book Club member base which it intends to continue to expand. The
Company anticipates that its advertising activities will continue to
consist primarily of direct mailings of member solicitation packages to
prospective members whose names were obtained from third-party mailing
lists. In addition, the Company intends to increase its direct mail and
Internet web site and online computer service marketing and advertising
activities. The Company also intends to continue to test other forms of
advertising, including various magazine, newspaper and other print media,
radio and package insert programs. See "--Membership Acquisition."
o Optimize Member Acquisition Marketing Activities. The Company intends to
continue to analyze its database of results obtained from direct mail
campaigns (including the results obtained from each mailing list utilized)
and from print and other advertising, as well as Internet marketing. The
Company maintains a database of information regarding each advertising
campaign, including each third-party mailing list that was utilized in the
campaign, the quantity of names to which the promotional mailings were
sent, the response rate and the per member acquisition cost. The Company
believes that its emphasis on database management improves its ability to
efficiently target advertising campaigns, thereby obtaining increased
response rates and lower per member acquisition costs.
o Maximize Per Member Revenues. The Company intends to continue to analyze
the results of its advertising activities and the purchasing habits of its
members to maximize sales to members and extend membership lifecycles. The
Company maintains a database of information on each name in its member
file, including number and genre of titles ordered, payment history, the
advertising campaign from which the member joined and a lifetime value
analysis. The Company believes that such analyses and evaluations enable
the Company to efficiently target advertising to potential members who
have characteristics of persons likely to join Audio Book Club, purchase
sufficient quantities of audio books to be a profitable source for the
Company and become long-term club members. The Company also intends to
utilize such information to target and establish "niche" clubs to
capitalize on consumer demand for audio books in specific genres and audio
books by specific authors.
o Cost Containment. The Company continuously seeks to reduce its costs of
doing business, including the costs associated with member acquisition,
catalog mailings and products. The Company believes that as it expands its
membership base it will achieve increased economies of scale in connection
with member recruitment advertising, member mailings and order processing
and product fulfillment, and be able to order products and services in
larger quantities and, therefore, be able to negotiate more favorable
licensing, purchasing and manufacturing arrangements.
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o International Expansion. The Company's long-term objectives include
expanding Audio Book Club internationally into English-speaking countries
such as Canada and the United Kingdom, as well as into other countries
with large English-speaking populations.
Consistent with its business plan, the Company may also seek to expand its
operations by acquiring companies in businesses which the Company believes will
complement or enhance its business. Any decision to make an acquisition will be
based upon a variety of factors, including the purchase price and financial
terms of the transaction, the business prospects and competitive position of
and services provided and products offered by the acquisition candidate and the
extent to which any such acquisition would enhance the Company's prospects.
While the Company has from time to time evaluated possible acquisition
opportunities, as of the date of this Prospectus, the Company is not a party to
any agreement, commitment, arrangement or understanding with respect to any
acquisition.
The Company's strategy is subject to change as a result of a number of
factors, including progress or delays in the Company's expansion efforts,
success of the Company's member recruitment advertising, results of continual
test marketing, consumer acceptance of new products, the Company's ability to
identify suitable acquisition candidates and integrate any acquired businesses
into its operations and changes in market conditions, consumer buying habits
and consumer preferences. There can be no assurance that the Company will be
able to successfully implement its business strategy or otherwise expand its
operations.
Audio Book Supply
The Company has established relationships with substantially all of the
major audio book publishers, including Random House Audio Publishing, Inc.,
Bantam Doubleday Dell Audio Publishing, Simon & Schuster Audio, Harper Audio,
Time Warner Audio Books and Audio Renaissance Tapes. The Company has primarily
entered into non-exclusive agreements with selected audio book publishers
pursuant to which the publisher grants to the Company a license to duplicate
the recordings and the packaging materials relating to each audio book in such
publisher's audio book library, including audio books as to which the publisher
acquires rights during the term of the agreement. The Company also enters into
agreements pursuant to which it receives licenses to duplicate the recordings
and packaging materials relating to selected audio books. The Company believes
that its ability to enter into license agreements with publishers enables it to
reduce the costs associated with obtaining its supply of audio books.
Typically, the Company pays to the publisher a royalty for each copy it
sells and an advance on its royalty obligations in exchange for the
non-exclusive license. Such licensing agreements generally have one or two-year
terms, permit the Company to sell audio books in the Company's inventory at the
expiration of the term during a "sell-off" period and prohibit the Company from
selling an audio book prior to its release date. Most of the license agreements
permit the Company to arrange for the packaging, printing and cassette
duplication of audio books, as opposed to the publisher arranging for the
duplication. The Company, to the extent it is able to do so on favorable terms,
enters into arrangements with the publisher's recording duplicator and
packaging supplier.
In addition to entering into license agreements, the Company purchases
certain audio books from publishers' inventories at a substantial discount to
the suggested retail price. The Company from time to time also purchases
certain previously released audio books as remainder sales from publishers at a
substantial discount to wholesale prices, often below manufacturing cost.
Member Acquisition
Since its inception, the Company has engaged in an aggressive membership
recruitment program to establish a core Audio Book Club member base and
continually expand such member base. The Company has acquired Audio Book Club
members primarily through direct mailings of member solicitation packages,
online computer service and Internet advertising, advertisements in magazines,
newspapers and other publications and package insert programs. The Company
continually analyzes the results of its marketing activities in an effort to
maximize sales, extend membership lifecycles, and efficiently target its
marketing efforts to increase response rates to its advertisements and reduce
its per member acquisition costs.
Direct Mail
The Company regularly engages in direct mail campaigns designed to attract
potential Audio Book Club members. The Company obtains lists of names from
various list brokers based on criteria which the Company believes have
characteristics of persons likely to join Audio Book Club, purchase sufficient
quantities of audio
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books to be a profitable source for the Company and become long-term members.
The Company mails member solicitation packages to those persons it has
identified for a specific direct mail campaign. Each member solicitation
package contains a letter from Audio Book Club's editor explaining the Audio
Book Club concept and identifying the advantages of becoming a member, an
easy-to-use enrollment form for the prospective member to complete, a brochure
of audio book titles and a self-addressed, postage paid reply envelope. The
Company believes that it has identified numerous lists that have performed
well in the past and, as a result, expects that future response rates and
member acquisition costs should improve. The Company also believes that members
obtained through direct mail campaigns typically purchase more books over the
term of their membership and are better credit risks than members obtained
through other sources.
The Company intends to use a significant portion of the proceeds of this
Offering allocated to membership recruitment advertising in connection with
direct mail activities during the twelve months following the consummation of
this Offering.
Internet Web Site and Online Computer Service Advertising
In March 1995, the Company established an Internet web site which offers
visitors to the web site the opportunity to join Audio Book Club, execute club
transactions online (if a member), utilize the web site's search engine to
locate many of the web site's thousands of audio book selections and sample
audio clips of any of the web site's selections. The Company's web site also
provides additional options, such as alerting visitors when a new title of an
author or reader previously specified by the visitor is released and offering
reviews of selected titles.
The Company's web site is updated simultaneously with the Audio Book Club
catalog to add new selections and the new current featured selection, as well
as to add new audio clips to preview. The Company's web site currently has
links from numerous search engines and audio book related sites. The web site
is also linked to catalog listing sites offered by online computer and Internet
services.
Prior to June 1997, the Company did not actively market its web site and
has only recently conducted limited test marketing of its web site. The Company
intends to use a portion of the proceeds of this Offering to increase Internet
and online computer service marketing and advertising, and to expand and
maintain its Internet web site, including increasing the number of audio book
titles to select and audio clips to preview through its search engine.
Print Advertising
The Company has from time to time placed print advertisements in various
magazines and other forms of print media, including Forbes, The New Yorker,
People, Redbook and The Saturday Evening Post. Such advertisements either
contain a mail-in enrollment form with a listing of 25 to 50 audio book titles
from which to order or invite the reader to call the Company to join the club.
The Company also advertises in catalogs which feature advertisements for mail
order catalogs. The Company does not pay for the placement of an advertisement
in these catalogs, but pays a fee based on the number of inquiries each such
catalog receives for the Audio Book Club catalog.
The Company intends to continue to test various print media and analyze
and evaluate the results of such advertising to determine the print media which
helps expand its membership base while reducing per member acquisition costs.
Other Advertising Activities
The Company has in the past and will continue in the future to test other
forms of advertising, including radio and package insert programs. Package
insert advertising enables the Company to include advertisements or inserts in
mailings or product shipments made by a third party to the third party's
customers to entice them to join Audio Book Club.
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Audio Book Club
Members
As of June 30, 1997, Audio Book Club's total member file consisted of
219,222 names. The total member file consists of all members to which the
Company has sent a member mailing, including currently active and inactive
members. The Company seeks to attract a financially sound and responsible
membership base. Accordingly, the Company targets its direct mail and other
advertising efforts to these types of persons. Results of the Company's
membership survey indicate that Audio Book Club members are typically
time-constrained individuals who are unable to read as much as they would like
and are concentrated in the 30 to 65-year old age group.
Audio Book Club members can enroll in the club through the mail by
responding to direct mail or print media advertisements, online through the
Company's web site or by calling or faxing the Company. Audio Book Club
typically offers new members four audio books at a low introductory price ($.99
or less). By enrolling, the member commits to purchase a minimum number of
additional audio books (typically four) at Audio Book Club's regular prices
which generally range from $10.00 to $35.00 per audio book, which the Company
believes is comparable to and competitive with audio book retailers.
Audio Book Club encourages its members to purchase audio books in addition
to satisfying their minimum purchase commitment by offering all members special
discount pricing, such as discount prices for the second or third audio book
purchased when the first is purchased at regular price and programs which
enable members to receive free audio books based on bonus points received for
prior purchases. Upon enrollment, the Company sends to the new member a
"welcome package" consisting of a membership guide with information concerning
ordering, payment, returns, cancellation, discounts and the club's bonus point
and advantage member programs; a questionnaire; a welcome letter from the club
director; and a "Member-Get-a-Member" form which enables the member to receive
free audio books for soliciting another person to join Audio Book Club.
The Company engages in list rental programs to maximize the revenue
generation potential of its membership list. As Audio Book Club's membership
base grows, the Company anticipates that its list will become more attractive
to direct marketers as a source of potential customers.
Member Mailings
Audio Book Club members receive approximately 17 member mailings each
year, including 12 monthly mailings, 4 seasonal mailings and one expanded
offering mailing. Audio Book Club monthly mailings typically include a 32-page
catalog which, together with the "more titles" insert, offers approximately 500
titles, including a "featured selection" which is usually one of the most
popular titles at the time of mailing; "alternate selections" which are best
selling and other current popular titles; and "backlist selections" which are
long-standing titles that have continuously sold well. The seasonal mailings
typically include a 24-page catalog, a portion of which is devoted to a
seasonally-related theme. The annual expanded offering mailing typically
includes a 48 to 64-page catalog which offers substantially all of the titles
in the Company's inventory. Each member mailing also includes a negative option
reply form and a "Member-Get-a-Member" form. The Company currently engages
third-party creative consultants and print shops to design the creative aspects
of and print the catalogs and related materials included in the member
mailings.
Under the negative option reply system, the member receives the featured
selection unless he or she replies by the date specified on the reply card by
returning the reply card, calling the Company with a reply, faxing a reply to
the Company or e-mailing a reply to the Company via the Company's Internet web
site with a decision not to receive such selection. Members can also use any of
such methods to order additional selections from each catalog.
The Company's Editorial Director selects which titles to feature, add to
and remove from each catalog after consideration of, among other factors, an
evaluation of the author, audio book content and production quality; the
reader; sales of the author's previous audio books and printed books; the
author's reputation; the audio book's relation to a movie, television show or
other book or audio book; as well as independent publication reviews. The
Company offers a balance between unabridged and abridged audio books to satisfy
differing member preferences. In addition, the Company emphasizes the timely
introduction of new audio book titles to its catalogs.
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The Company also offers a "special order" service which enables members to
call the Company and order virtually any of the approximately 68,000 published
titles in existence, whether or not listed in the Company's member mailings.
The Company intends to continue to test market complimentary products,
such as CD-Roms, digital compact disc format books, videos, audio related
products, audio and electronic equipment, storage racks and cases and audio
music cassettes and compact discs to determine which products, if any, to add
to its product offerings. The Company from time to time offers certain of such
products to Audio Book Club members by including a promotional insert with its
member mailings.
The Company also includes inserts for products or services of
non-competing companies in product shipments to customers and member mailings
for which it receives a fee based on the number of shipments and mailings in
which the insert is included. In addition, the Company is evaluating
opportunities to enter into joint venture arrangements with non-competing
companies to offer their products or services to Audio Book Club members.
Customer Service
In order to encourage members to maintain their relationship with Audio
Book Club and to maximize the long-term value of a member, the Company seeks to
provide friendly, efficient, personalized service. The Company's goal is to
remove potential barriers to making a purchase and to make members comfortable
shopping via mail order. Audio Book Club's negative option system makes it easy
for members to receive the featured selection without having to take any
action.
The Company offers faster ordering options, including (i) placing orders
online through the Company's web site, (ii) by calling the Company with an
order on its toll-free order hotline and (iii) faxing an order to the Company.
Orders are sent fourth class mail and are typically delivered 10 to 14 days
following the receipt by the Company. For an additional fee, members can
receive faster delivery of an order either by priority delivery, which takes 3
to 5 days, or by overnight delivery.
Members are billed for their purchases at the time their orders are
delivered and are required to make payment promptly. The Company generally
allows members in good standing to order up to $50 of products on credit, which
amount may be increased if the member maintains a good credit history with the
Company.
The Company's policy is to accept returns of damaged products and, to
maintain favorable customer relations, the Company generally accepts promptly
made returns of unopened products. The Company monitors each member's account
to determine if the member has made excessive returns. The Company's policy is
to terminate a membership if the member makes three consecutive returns of
either audio books ordered or of featured selections received because the
member did not return the reply card on time.
Fulfillment, Warehousing and Distribution
In October 1996, the Company entered into an agreement with National
Fulfillment Services ("NFS") pursuant to which NFS provides to the Company
order processing and data processing services. Such services include accepting
member orders, implementation of the Company's credit policies, inventory
tracking, billing, invoicing and generating periodic reports, such as reports
of sales activity, accounts receivable, aging customer profile and marketing
effectiveness. The Company's agreement with NFS expires on October 31, 1998,
unless earlier terminated by either party upon not less than 60 days notice.
In November 1996, the Company entered into an agreement with R.R. Donnelly
& Sons Company ("Donnelly") pursuant to which Donnelly provides to the Company
warehousing and distribution services. The initial term of the Company's
agreement with Donnelly expires on October 31, 1998 and the agreement provides
for automatic three-year renewals, provided that the Company may terminate the
agreement upon notice ranging from 60 days to six months (depending upon the
amount of termination payment) and Donnelly may terminate the agreement upon
notice of not less than six months.
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Customer orders are sent directly to NFS where they are processed, and
invoices are generated by NFS and sent directly to Donnelly. Donnelly locates
the ordered audio books from inventory, packs and ships the order, using the
invoice as a packing list, to the Audio Book Club member.
Competition
The audio book and mail order club industries are intensely competitive
and highly fragmented. The Company competes with existing audio book clubs for
prospective members. The Company is currently aware of two other negative
option audio book clubs, Audiobook's Direct and a club operated by Columbia
House.
The Company also competes with all other outlets through which audio books
are offered, including bookstores, audio bookstores (which rent and, to a
lesser extent, primarily sell only audio books), retail establishments such as
convenience stores, video rental stores and wholesale clubs (e.g. Costco), and
mail order companies which offer audio books for rental and sale through
catalogs. In addition, the Company also competes with mail order clubs and
catalogs and other direct marketers that offer products with similar
entertainment value as audio books, such as music cassettes and compact discs,
printed books and videos, for discretionary consumer spending.
Intellectual Property
The Company holds two United States service mark registrations and has
applied for several additional service marks relating to slogans and designs
used in its advertisements, member mailings and member solicitation packages
and service marks relating to an animated character used on the Internet. The
Company believes that its service marks have significant value and are
important to the marketing of Audio Book Club.
The Company relies on trade secrets and proprietary know-how, and employs
various methods, to protect its ideas, concepts and membership database. In
addition, the Company typically obtains confidentiality agreements with its
executives officers, employees, list managers and appropriate consultants and
service suppliers.
Properties
The Company shares office space in Boca Raton, Florida with The Herrick
Company, Inc., a company wholly-owned by Norton Herrick, Chairman of the Board,
Chief Executive Officer and beneficially a principal shareholder of the
Company, pursuant to separate leases. The Company leases 1,155 square feet of
such space pursuant to a lease agreement which expires in November 2000. The
Company's rent is $1,167 per month, and will increase to $1,307 per month in
December 1997. The Company has the option to renew the lease for three-year
periods on two occasions. The Herrick Company, Inc. has guaranteed the
Company's obligations under the Company's lease for the Florida property. The
Company also subleases 1,550 square feet of space in Morristown, New Jersey at
an annual rent of $24,000 pursuant to a sublease agreement dated as of January
1, 1995 between the Company and H. H. Realty Investors, Inc., a company
wholly-owned by Michael Herrick, Chief Operating Officer, Vice Chairman of the
Board and a director of the Company, Howard Herrick, Executive Vice President
and a director of the Company, and Evan Herrick, a son of Norton Herrick and
brother of Michael and Howard Herrick. The sublease relating to the New Jersey
property expires in December 1998, and may be extended if the master lease is
extended. H.H. Realty Investors, Inc. leases such property from an independent
third party. The Company believes that its leases are on commercially
reasonable terms.
Employees
As of September 1, 1997, the Company had 10 full-time employees and one
part-time employee, of whom five were in management and five were in
operational positions. The Company believes its employee relations to be good.
None of the Company's employees is covered by a collective bargaining
agreement.
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MANAGEMENT
Directors and Executive Officers
The following are the directors, director designees and executive officers
of the Company:
Name Age Position
- ----------------- ----- -----------------------------------------------
Norton Herrick 58 Chief Executive Officer, Chairman of the Board
and Director
Michael Herrick 30 Chief Operating Officer, Vice Chairman of the
Board and Director
Jesse Faber 42 President and Director Designee
Howard Herrick 32 Executive Vice President and Director
Robert Klein 49 Chief Financial Officer and Treasurer
Roy Abrams 54 Director Designee
George Farley 59 Director Designee
Norton Herrick co-founded the Company, has been Chief Executive Officer
and Chairman of the Company since January 1996 and a director of the Company
since its inception, and was President of the Company from its inception until
January 1996. Mr. Herrick has been a private investor for over 30 years and is
currently Chairman and Chief Executive Officer of The Herrick Company, Inc., a
private investment firm he founded. Through his wholly-owned affiliates, Mr.
Herrick has owned and managed income producing properties, including office
buildings, shopping centers and multi-family apartment complexes, and has
completed transactions with respect to approximately 250 income producing
properties valued at an aggregate of approximately $2 billion. Mr. Herrick is
involved in the management of numerous entities he formed to acquire, finance,
manage and lease office, industrial and retail properties; and to acquire,
operate, manage, redevelop and sell residential rental properties. Mr. Herrick
serves on the advisory board of the Make A Wish Foundation, the advisory
committee of the National Multi Housing Council and the National Board of
Directors for People for the American Way.
Michael Herrick co-founded the Company, has been Vice Chairman of the
Board of the Company since January 1996, Chief Operating Officer of the Company
since January 1997 and director of the Company since its inception, and has
held various other offices with the Company since its inception. Since August
1993, Michael Herrick has been an officer (since January 1994, Vice President)
of the corporate general partner of a limited partnership, which limited
partnership is a principal shareholder of The Walking Company, a nationwide
retailer of comfort and walking footwear and related apparel and accessories.
Since May 1989, Mr. Herrick has been employed by The Herrick Company, Inc., and
is currently one of its Vice Presidents. Mr. Herrick is also an officer of the
corporate general partners of numerous limited partnerships which acquire,
finance, manage and lease office, industrial and retail properties; and which
acquire, operate, manage, redevelop and sell residential rental properties.
Jesse Faber has been President of the Company since October 1996 and has
agreed to serve as a director of the Company as of the consummation of this
Offering. From 1989 to October 1996, Mr. Faber was Senior Vice President and
Partner of AyerDirect, a direct response advertising agency wholly-owned by
McManus, Inc., one of the ten largest advertising and marketing agencies in the
world. From 1984 to 1989, Mr. Faber was Management Supervisor of Grey Direct, a
direct response advertising agency.
Howard Herrick co-founded the Company and has been Executive Vice
President, Editorial Director and a director of the Company since its
inception. Since August 1993, Howard Herrick has been Vice President of the
corporate general partner of a limited partnership, which limited partnership
is a principal shareholder of The Walking Company. Since 1988, Mr. Herrick has
been an officer of The Herrick Company, Inc. and is currently its President.
Mr. Herrick is also an officer of the corporate general partners of numerous
limited partnerships which acquire, finance, manage and lease office,
industrial and retail properties; and which acquire, operate, manage, redevelop
and sell residential rental properties.
Robert Klein has been Chief Financial Officer and Treasurer of the Company
on a part-time basis since January 1997. Since October 1992, Mr. Klein has been
Director of Finance and Taxation of The Herrick Company, Inc. From January 1983
to October 1992, Mr. Klein was an independent accountant and consultant and,
from 1987 through 1989, Mr. Klein was also Tax Director for Prime Motor Inns,
an operator, developer and franchisor of hotels and motels. From April 1978
through 1982, Mr. Klein was employed by Daon Corporation, a diversified real
estate company, last holding the titles of Vice President, Secretary and
Director. From 1970 through April 1978, Mr. Klein was with Arthur Andersen &
Company, an independent public accounting firm last holding the title of Tax
Manager.
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The Board of Directors will appoint Jesse Faber and the following two
additional non-management directors upon the consummation of this Offering.
Roy Abrams has agreed to serve as a director the Company as of the
consummation of this Offering. Since April 1993 and from 1986 through March
1990, Mr. Abrams has owned and operated Abrams Direct Marketing, a marketing
consulting firm. From April 1990 to April 1993, Mr. Abrams was Vice President
of New Business Development of Getting to Know You, Inc., a new homeowner
welcoming service. From 1981 through 1985, Mr. Abrams was President of Margrace
Corporation, a publicly-held direct marketing company. From 1980 through 1981,
Mr. Abrams was a director of mail order marketing of Hearst Corporation, a
publishing company. From 1976 to 1979, Mr. Abrams was employed by Columbia
House, a negative option and continuity direct marketing company, most recently
as Vice President, Merchandise and Continuity Marketing. From 1975 to 1976, Mr.
Abrams was director of Mail Order Merchandise Marketing for American Express
Company.
George Farley has agreed to serve as a director of the Company as of the
consummation of this Offering. Since September 1995, Mr. Farley has been Group
Vice President of Finance/Chief Financial Officer of Twin County Grocers, Inc.,
a food distribution company. From 1974 to September 1995, Mr. Farley was a
partner of BDO Seidman, LLP, an independent public accounting firm, and, from
1962 to 1974, Mr. Farley was employed by BDO Seidman, LLP. Mr. Farley is also
currently a director of Tel-Save Holdings, Inc., Essential Resources, Inc. and
Recticon Enterprises, Inc.
Michael Herrick and Howard Herrick are sons of Norton Herrick.
The Board of Directors is classified into three classes, each with a term
of three years, with only one class of directors standing for election by the
shareholders in any year. Norton Herrick and Jesse Faber are Class I directors
and stand for re-election at the 1998 annual meeting of shareholders, Michael
Herrick and Roy Abrams are Class II directors and stand for re-election at the
1999 annual meeting of shareholders and Howard Herrick and George Farley are
Class III directors and stand for re-election at the 2000 annual meeting of
shareholders. Executive officers of the Company serve at the direction of the
Board and until their successors are duly elected and qualified. The Company is
currently seeking to retain a full-time Chief Financial Officer.
The Company reimburses directors for reasonable travel expenses incurred
in connection with their activities on behalf of the Company but does not pay
its directors any fees for Board participation.
In connection with this Offering, the Company has agreed that it will, for
a period of three years following the date of this Prospectus, upon the request
of the Representative, nominate and use its best efforts to elect a designee
(reasonably acceptable to the Company) of the Representative (which designee
may change from time to time) as a director of the Company or, at
Representative's option, appoint such designee as a non-voting advisor to the
Company's Board of Directors. The Representative has not yet exercised its
rights to designate such a person. See "Underwriting."
Key Employees
Christine A. Kelly, 34, has been Marketing Manager of the Company since
February 1997 and is responsible for coordinating, with senior management, the
Company's member acquisition and retention advertising activities. From June
1995 through January 1997, Ms. Kelly was media manager of Collier Newfield, a
publishing company. From January 1994 through June 1995, Ms. Kelly was a media
analyst for Doubleday Book and Music Clubs, Inc. From August 1988 to January
1994, Ms. Kelly was employed by Columbia House Company, most recently as
manager -- music club administration.
Tracy Lamb, 33, has been employed by the Company since May 1997 as its
list manager. From July 1996 through April 1997, Ms. Lamb was director of list
brokerage of Worlddata, a list management company. From 1990 through June 1996,
Ms. Lamb was employed by Tiger Direct, Inc., a computer equipment mail order
company, most recently as circulation manager. From 1987 to 1990, Ms. Lamb was
a media planner and buyer for McFarland & Price, Inc.
Jeffrey P. Wittstock, 31, has been employed by the Company since May 1997
and has been responsible for analyzing the results of the Company's direct
marketing efforts. From August 1994 through April 1997, Mr. Wittstock was
continuity supervisor of QVC, Inc., an operator of a shop-at-home television
network. From
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February 1992 through June 1994, Mr. Wittstock was a sales planner and analyst
for The Franklin Mint, a marketing company. From 1991 to 1992, Mr. Wittstock
was a marketing analyst for Foster Manufacturing, a subsidiary of North
American Publishing Company. From 1988 to 1991, Mr. Wittstock was an area
supervisor for RGIS, an inventory control company.
Audit Committee
The Board of Directors has established an audit committee which, upon the
consummation of this Offering, will be comprised of Messrs. Michael Herrick,
Roy Abrams and George Farley. The audit committee is responsible for making
recommendations concerning the engagement of the independent public
accountants, reviewing the plans and results of the audit engagement with the
independent public accountants, approving professional services provided by the
independent public accountants and reviewing the adequacy of the Company's
internal accounting controls.
Executive Compensation
The following table sets forth certain compensation paid by the Company
during the fiscal year ended December 31, 1996 to Norton Herrick, its Chief
Executive Officer and Chairman of the Board and each executive officer who
received compensation in excess of $100,000 during the fiscal year ended
December 31, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------------- ------ ---------- ------- -------------
<S> <C> <C> <C> <C>
Norton Herrick
Chairman of the Board and Chief
Executive Officer ............ 1996 $ -0- $ -0- --
Howard Herrick
Executive Vice President ...... 1996 $102,000 $ -0- --
</TABLE>
The Company did not grant any options to its executive officers during the
year ended December 31, 1996.
Employment Agreements
The Company has entered into a two-year employment agreement, effective as
of the date of this Prospectus, with Norton Herrick which provides for an
annual base compensation of $100,000 and such increases and bonuses as the
Board of Directors may from time to time determine, based on criteria that it
deems appropriate at such time but which it has not yet been established. The
employment agreement provides that Mr. Herrick shall devote such time to the
business and activities of the Company as he deems necessary to perform his
duties. The employment agreement contains a provision prohibiting Mr. Herrick
from, on his own behalf or on behalf of any other person, persons, firms,
partnership, corporation or company, engaging or participating in any
activities which are in direct conflict with the interests of the Company; and
from soliciting or attempting to solicit the business or patronage of any
person, firm, corporation, company or partnership which had previously been a
customer of the Company, for the purpose of selling products and services
similar to those provided by the Company during the term of the employment
agreement and for a period of two years thereafter. There can be no assurance,
however, that a court will not enforce such provision or only partially enforce
such provision. The employment agreement also provides that if Mr. Herrick's
employment is terminated under certain circumstances, including as a result of
a change in control, Mr. Herrick will be entitled to receive severance pay
equal to the greater of $200,000 or two times the total compensation received
by Mr. Herrick from the Company during the twelve months prior to the date of
termination.
The Company has entered into a three-year employment agreement, effective
as of the date of this Prospectus, with Michael Herrick which provides for an
annual base compensation of $125,000 and such increases and bonuses as the
Board of Directors may from time to time determine, based on criteria that it
deems appropriate at such time but which it has not yet been established. The
employment agreement requires Mr. Herrick to devote substantially all of his
business time to the Company's business and affairs. The employment agreement
contains a provision prohibiting Mr. Herrick from, on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or
company, engaging or participating in any activities which are in
33
<PAGE>
direct conflict with the interests of the Company; and from soliciting or
attempting to solicit the business or patronage of any person, firm,
corporation, company or partnership which had previously been a customer of the
Company, for the purpose of selling products and services similar to those
provided by the Company during the term of the employment agreement and for a
period of two years thereafter. There can be no assurance, however, that a
court will not enforce such provision or only partially enforce such provision.
The employment agreement also provides that if Mr. Herrick's employment is
terminated under certain circumstances, including as a result of a change in
control, Mr. Herrick will be entitled to receive severance pay equal to the
greater of $375,000 or three times the total compensation received by Mr.
Herrick from the Company during the twelve months prior to the date of
termination.
In May 1997, the Company entered into an employment agreement (the "May
Employment Agreement") with Jesse Faber which provides for an annual base
compensation of approximately $121,000 and a bonus of $40,000, payable $10,000
on the first day of July, August, September and October 1997, provided Mr.
Faber is employed by the Company on each such date. The May Employment
Agreement expires on October 31, 1997. In September 1997, the Company entered
into a one-year employment agreement with Mr. Faber, to be effective upon the
expiration of the May Employment Agreement which provides for an annual base
compensation of $140,000 and a bonus of $35,000, provided that he is employed
by the Company on October 31, 1998. The Company has granted to Mr. Faber
options to purchase 50,000 shares of Common Stock at an exercise price equal to
110% of the initial public offering price of the Common Stock. See "-- 1997
Stock Option Plan."
The Company has entered into a three-year employment agreement effective
as of the date of this Prospectus, with Howard Herrick which provides for an
annual base compensation of $125,000 and such increases and bonuses as the
Board of Directors may from time to time determine, based on criteria that it
deems appropriate at such time but which it has not yet been established. The
employment agreement requires Mr. Herrick to devote substantially all of his
business time to the Company's business and affairs. The employment agreement
contains a provision prohibiting Mr. Herrick from, on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or
company, engaging or participating in any activities which are in direct
conflict with the interests of the Company; and from soliciting or attempting
to solicit the business or patronage of any person, firm, corporation, company
or partnership which had previously been a customer of the Company, for the
purpose of selling products and services similar to those provided by the
Company during the term of the employment agreement and for a period of two
years thereafter. There can be no assurance, however, that a court will not
enforce such provision or only partially enforce such provision. The employment
agreement also provides that if Mr. Herrick's employment is terminated under
certain circumstances, including as a result of a change in control, Mr.
Herrick will be entitled to receive severance pay equal to the greater of
$375,000 or three times the total compensation received by the executive from
the Company during the twelve months prior to the date of termination.
1997 Stock Option Plan
In June 1997, the Company's shareholders approved a stock option plan (the
"Option Plan") pursuant to which 750,000 shares of Common Stock have been
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code") or (ii) nonqualified
options. ISOs may be granted under the Option Plan to officers and employees of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company.
The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plan is intended to qualify under
Rule 16b-3 under the Securities Exchange Act of 1934. The Board of Directors,
within the limitations of the Option Plan, determines the persons to whom
options will be granted, the number of shares to be covered by each option,
whether the options granted are intended to be ISOs, the duration and rate of
exercise of each option, the option purchase price per share and the manner of
exercise, and the time, manner and form of payment upon exercise of an option.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more
34
<PAGE>
of the voting stock of the Company). The aggregate fair market value of shares
for which ISOs granted to any employee are exercisable for the first time by
such employee during any calendar year (under all stock option plans of the
Company and any related corporation) may not exceed $100,000. Non-qualified
options granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant. Options granted
under the Option Plan will expire not more than ten years from the date of
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company). All options granted under the Option Plan are
not transferable during an optionee's lifetime (unless otherwise provided in
the option agreement) but are transferable at death by will or by the laws of
descent and distribution. In general, upon termination of employment of an
optionee, all options granted to such person which are not exercisable on the
date of such termination immediately terminate, and any options that are
exercisable terminate 90 days following termination of employment.
In September 1997, the Company granted to Mr. Faber options to purchase
50,000 shares of Common Stock at an exercise price equal to 110% of the initial
public offering price of the Common Stock. Such options shall vest as to
one-fifth of the shares covered thereby annually over a five-year period
commencing on October 31, 1998, provided, however, that such options shall
terminate and be cancelled if Mr. Faber is no longer employed by the Company
prior to the date on which such options vest. Such options shall be exercisable
for a period of five years commencing immediately upon vesting, provided,
however, if Mr. Faber is no longer employed by the Company, such options shall
expire on the earlier of 30 days following the date Mr. Faber is no longer
employed by the Company or five years following the date on which such options
vest.
Exculpatory Provisions and Indemnification Matters
The Company's Articles of Incorporation and By-Laws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Florida Act. The Florida Act provides that no director or
officer of the Company shall be personally liable to the Company or its
shareholders for damages for breach of any duty owed to the Company or its
shareholders, except for liability for (i) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (ii) any
unlawful payment of a dividend or unlawful stock repurchase or redemption in
violation of the Florida Act, (iii) any transaction from which the director
received an improper personal benefit or (iv) a violation of a criminal law.
lnsofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the 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 Securities Act and will be governed by the final
adjudication of such issue.
35
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, immediately prior to
the consummation of this Offering and as adjusted to reflect the sale by the
Company of the 2,000,000 Shares offered hereby (based on information obtained
from the persons named below), relating to the beneficial ownership of shares
of Common Stock by: (i) each person or entity who is known by the Company to
own beneficially 5% or more of the outstanding Common Stock, (ii) each of the
Company's directors and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned(2)
----------------------
Name and Address of Beneficial Number of Shares Before After
Owners(1) Beneficially Owned(2) Offering Offering
- ----------------------------------------- ----------------------- ---------- ---------
<S> <C> <C> <C>
Norton Herrick ........................ 3,757,491(3) 95.8% 63.5%
Howard Herrick ........................ 3,757,491(4) 95.8 63.5
Michael Herrick ........................ 488,460(5) 12.5 8.3
Jesse Faber ........................... 0 0 0
Roy Abrams ........................... 0 0 0
George Farley ........................... 0 0 0
All directors and executive officers as a
group (7 persons) ..................... 3,757,491(3) 95.8% 63.5%
(4)(5)
</TABLE>
- ------------
(1) The address for each named individual or group is in care of Audio Book
Club, Inc., 2295 Corporate Blvd., Suite 222, Boca Raton, Florida 33431.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised and converted. Assumes 3,920,311 shares of
Common Stock outstanding prior to this Offering (including the 663,911
shares to be issued immediately prior to the consummation of this Offering
upon conversion of $5,975,200 of indebtedness) and a base of approximately
5,920,311 shares of Common Stock outstanding immediately after this
Offering, before any consideration is given to other outstanding options.
See "Description of Securities."
(3) Represents (i) 2,780,571 shares held by N. Herrick Irrevocable ABC Trust of
which Norton Herrick is the sole beneficiary and Howard Herrick is the
sole trustee (the "N. Herrick Trust"), (ii) 488,460 shares of Common Stock
held by Howard Herrick and (iii) 488,460 shares of Common Stock held by
M.E. Herrick Irrevocable Trust, of which Michael Herrick is the sole
beneficiary and Howard Herrick is the sole trustee (the "M.E.H. Trust").
The N. Herrick Trust agreement provides that Howard Herrick shall have
sole voting and dispositive power over the shares held by the trust.
Howard Herrick has irrevocably granted to Norton Herrick sole dispositive
power with respect to the shares of Common Stock held by Howard Herrick on
his own behalf and on behalf of the M.E.H. Trust.
(4) Includes the shares of Common Stock referred to in footnote 3(i) above and
footnote (5) below.
(5) Represents shares held by the M.E.H. Trust. The M.E.H. Trust agreement
provides that Howard Herrick shall have sole voting and dispositive power
over the shares held by the M.E.H. Trust and Howard Herrick has granted to
Norton Herrick sole dispositive power over the shares held by the M.E.H.
Trust.
36
<PAGE>
CERTAIN TRANSACTIONS
As of January 1, 1995, the Company entered into a sublease agreement with
H.H. Realty Investors, Inc., a company wholly-owned by Michael Herrick, Chief
Operating Officer, Vice Chairman of the Board and a director of the Company,
Howard Herrick, Executive Vice President and a director of the Company, and
Evan Herrick, a son of Norton Herrick and brother of Michael Herrick and Howard
Herrick. Pursuant to the agreement, the Company subleases 1,550 square feet of
space in Morristown, New Jersey at an annual rent of $24,000. H.H. Realty
Investors, Inc. leases such property from an independent third party.
Additionally, The Herrick Company, Inc., a company wholly-owned by Norton
Herrick, Chairman of the Board, Chief Executive Officer and a principal
shareholder of the Company, guaranteed the Company's obligations under the
Company's lease for its Florida office.
On November 17, 1995, Norton Herrick entered into a loan agreement
pursuant to which Norton Herrick agreed to loan the Company up to $8,000,000,
including the $5,380,000 aggregate amount of loans made to the Company by
Norton Herrick as of such date. The loan agreement was subsequently amended to
increase permitted borrowings by the Company of up to $13,000,000 and Norton
Herrick subsequently assigned his rights under the loan agreement to N. Herrick
Irrevocable ABC Trust, of which Norton Herrick is the sole beneficiary and
Howard Herrick is the sole trustee (the "N. Herrick Trust"). Borrowings under
the loan agreement are non-interest bearing and are permitted by the Company
until the earlier of June 30, 1998 or the date of this Prospectus, and, as
described below, will be converted into equity upon the consummation of this
Offering. To date, Norton Herrick, directly and through the N. Herrick Trust,
has loaned the Company an aggregate of $11,975,200, including $4,105,000,
$5,575,200 and $595,000 during the years ended December 31, 1995 and 1996 and
six months ended June 30, 1997, respectively. In May 1997, the Company used the
proceeds from the $6,000,000 loan from Bank of America National Trust and
Savings Association (the "Bank") to repay a portion of the outstanding
indebtedness under the loan agreement with the N. Herrick Trust. The shares of
Common Stock held by N. Herrick Trust were pledged to the Bank as security for
the $6,000,000 loan. In the event the Company fails to repay the loans at
maturity, the personal guarantee of Norton Herrick to the Bank will become
effective. The Company intends to use a portion of the proceeds of the Offering
to repay the $6,000,000 loan from the Bank, plus accrued interest thereon.
Immediately prior to the consummation of this Offering, the N. Herrick
Trust is converting the outstanding $5,975,200 of indebtedness owed to it under
the loan agreement into 663,911 shares of Common Stock at a price per share
equal to the initial offering price of the Common Stock.
In August 1996, Norton Herrick personally guaranteed an irrevocable
standby letter of credit in the amount of $50,000 issued by the Bank on behalf
of the Company to a vendor of the Company.
On May 12, 1997, Howard Herrick entered into a consolidation and
restatement of loan agreements (the "H.H. Loan Agreement") with the Company
relating to the aggregate $400,000 loaned to the Company by Howard Herrick
(consisting of a $50,000 loan made in June 1994 and a $350,000 loan made in
February 1997). Such borrowings, did not bear interest through July 31, 1997
and, thereafter, bore interest at an annual rate equal to the greater of 10% or
the prime rate charged by Citibank, N.A. of New York ("Citibank"). This loan,
together with accrued interest, was repaid in September 1997.
On May 12, 1997, the M.E. Herrick Irrevocable Trust (the "M.E.H. Trust"),
of which Michael Herrick is the sole beneficiary and Howard Herrick is the sole
trustee, entered into a loan agreement (the "M.E.H. Loan Agreement") with the
Company relating to the aggregate $400,000 loaned to the Company by the M.E.H.
Trust (consisting of a $50,000 loan made in June 1994 and a $350,000 loan made
in May 1997). Such borrowings did not bear interest through July 31, 1997 and,
thereafter, bore interest at an annual rate equal to the greater of 10% or the
prime rate charged by Citibank. This loan, together with accrued interest, was
repaid in September 1997.
Companies wholly-owned by Norton Herrick have in the past provided certain
accounting, administrative and general office services to, and obtained
insurance coverage for, the Company at cost since the Company's inception, and
the Company paid to such entities for such services, in the aggregate,
$115,839, $38,928 and $43,505, during the years ended December 31, 1995 and
1996 and the six months ended June 30, 1997, respectively. The Company
anticipates obtaining similar services from time to time from companies
affiliated with Norton Herrick for which it will reimburse such companies' cost
to provide such services to the Company.
37
<PAGE>
During 1997, Abrams Direct Marketing ("ADM"), a company wholly-owned by
Roy Abrams, a director designee of the Company, provided independent marketing
consulting services to the Company and has been paid approximately $25,500 by
the Company for such services. In June 1997, the Company entered into a
consulting agreement with ADM pursuant to which ADM assists the Company in
connection with marketing activities, including designing, implementing and
reviewing the results of direct marketing campaigns and selecting direct
marketing lists, on an as-needed basis at the rate of $250 per hour.
The Company's policy with respect to transactions between the Company and
its officers, directors 5% or greater shareholders is that each such future
transaction (other than in accordance with existing agreements described in
this Prospectus) will be on terms no less favorable than could be obtained from
independent third parties and that any such transaction requiring a payment of
more than $10,000 will be approved by a majority of the disinterested
directors. Notwithstanding the foregoing, companies affiliated with Norton
Herrick may continue to provide certain accounting, administrative and general
office services to, and obtain insurance coverage for, the Company at cost.
38
<PAGE>
DESCRIPTION OF SECURITIES
Capital Stock
General
The Company is authorized to issue 25,000,000 shares of Common Stock, no
par value, and 5,000,000 shares of Preferred Stock, no par value. As of the
date of this Prospectus, there are 3,256,400 shares of Common Stock
outstanding, which are held of record by four shareholders. Immediately prior
to the consummation of this Offering, there will be approximately 3,920,311
shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. In the event of liquidation or dissolution of
the Company, the holders of Common Stock are entitled to receive all assets
available for distribution to the shareholders, subject to any preferential
rights of any Preferred Stock then outstanding. The holders of Common Stock
have no preemptive or other subscription rights, and there are no conversion
rights or redemption or sinking fund provisions with respect to the Common
Stock. All outstanding shares of Common Stock are, and the shares of Common
Stock offered hereby upon issuance and sale will be, fully paid and non-
assessable. The rights, preferences and privileges of the holders of Common
Stock are subject to, and may be adversely affected by, the right of the
holders of any shares of Preferred Stock which the Company may designate in the
future.
Preferred Stock
Authorized but undesignated shares of Preferred Stock may be issued from
time to time in one or more series upon authorization by the Company's Board of
Directors. The Board of Directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
and other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, prevent or
substantially delay a change of control, discourage bids for the Company's
Common Stock at a premium or otherwise adversely affect the market price of the
Common Stock.
Transfer Agent
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company, 2 Broadway, New York, New York 10004.
Reports to Shareholders
The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Common Stock and Warrants under the
provisions of Section 12(b) of the Exchange Act prior to the date of this
Prospectus and has agreed with the Underwriters that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 5,920,311
shares of Common Stock outstanding. All 2,000,000 of the Shares being offered
hereby will be immediately tradeable without restriction or further registration
under the Securities Act. The remaining 3,920,311 shares of Common Stock
outstanding are deemed to be "restricted securities," as that term is defined
under Rule 144 promulgated under the Securities Act, in that such shares were
acquired by the shareholders of the Company in transactions not involving a
public offering, and, as such, may only be sold pursuant to a registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144, or pursuant to another exemption under the Securities Act. Of the
3,920,311 restricted shares of Common Stock, 3,093,580 shares will become
eligible for sale under Rule 144, subject to the volume limitations prescribed
by the Rule and the contractual restrictions described below commencing 90 days
following the date of this Prospectus.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the common stock is quoted on the Nasdaq, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months immediately
preceding the sale and who has beneficially owned shares of Common Stock for at
least two years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.
All of the Company's current officers, directors and security holders have
agreed with the Representative not to sell or otherwise dispose of any
securities of the Company for a period of 13 months from the date of this
Prospectus without the Representative's prior written consent. The Company has
granted certain demand and "piggy-back" registration rights to the
Representative with respect to the shares of Common stock issuable upon
exercise of the Representatives' Warrants.
Prior to this Offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock prevailing from time to time. Nevertheless,
the possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability in the future to raise additional
capital through the sale of its equity securities.
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom L.H. Friend,
Weinress, Frankson & Presson, Inc. acting as representative (the
"Representative"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, between the Company and the Representative (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of shares of Common stock set forth opposite their name below.
Number of Shares
Underwriter of Common Stock
- ----------- ----------------
L.H. Friend, Weinress, Frankson & Presson, Inc. ......
---------
Total ............................................. 2,000,000
=========
The Underwriters are committed to purchase all of the Common Stock offered
hereby, if any of the Common Stock is purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
conditions precedent specified therein.
40
<PAGE>
The Company has been advised by the Representative that it proposes
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such prices less concessions not in excess of $ per share
of Common Stock. Such dealers may re-allow a concession not in excess of $
per share of Common Stock to certain other dealers. After the initial public
offering, the public offering prices, concession and reallowance may be changed
by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make. The Company has
agreed to pay the Representative a nonaccountable expense allowance of 3% of
the gross proceeds from the sale of the Common Stock offered hereby, of which
$50,000 has been paid as of the date of this Prospectus.
The Selling Shareholder and the Company have granted to the Underwriters
an over-allotment option, exercisable within 45 days of the date of this
Prospectus, to purchase up to 110,000 and 190,000 additional shares of Common
Stock, respectively, at the initial public offering price per share, less
underwriting discounts and commissions (the "Over-Allotment Option"). The first
shares to be issued in connection with the exercise of all or a portion of the
Over-Allotment Option will be purchased by the Underwriters from the Selling
Shareholder. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of shares of Common Stock as the percentage it was obligated to
purchase pursuant to the Underwriting Agreement. Such option may be exercised
only for the purpose of covering over-allotments, if any, incurred in the sale
of the Common Stock offered hereby.
In connection with this Offering, the Company has agreed to sell to the
Representative and its designees, for nominal consideration, warrants to
purchase from the Company up to 200,000 shares of Common Stock (the
"Representative's Warrants"). The Representative's Warrants are exercisable at
a price of $ per share (165% of the initial public offering price per
share) for a period of five years commencing on the effectiveness of this
Offering. However, the Representative's Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the date of this
Prospectus, except to officers of the Representative. The Representative's
Warrants provide for adjustments in the number of shares of Common Stock
issuable upon the exercise thereof and in the exercise price of the
Representative's Warrants as a result of certain events, including subdivisions
and combinations of the shares of Common Stock. The Representative's Warrants
grant to the holders thereof certain rights of registration for the Common
Stock issuable upon exercise of the Representative's Warrants.
All of the officers, directors and security holders of the Company as of
the date of this Prospectus, have agreed not to, directly or indirectly, offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any equity securities of the Company for a period of thirteen months
following the effective date of the Registration Statement without the prior
written consent of the Representative, except for the Common Stock issued
pursuant to the Over-Allotment Option. An appropriate legend shall be marked on
the reverse of the certificates representing all such securities. The Company
has agreed not to, without the prior written consent of the Representative,
offer, issue, sell, contract to sell, grant any option for the sale of or
otherwise dispose of any equity securities for a period of thirteen months
following the effective date of the Registration Statement, except for options
under the Option Plan which have an exercise price no less than the market
price of the Common Stock on the date of grant.
The Company has agreed that, for a period of three years from the date of
this Prospectus, if so requested by the Representative, to nominate and use its
best efforts to elect a designee (reasonably acceptable to the Company) of the
Representative as a director of the Company, or, at the Representative's
option, as a non-voting advisor to the Company's Board of Directors. Such
person shall be entitled to attend all such meetings and to receive all notices
and other correspondence and communications sent by the Company to members of
its Board of Directors. The Company's officers, directors and shareholders have
agreed to vote their shares of Common Stock in favor of such designee. The
Representative has not yet exercised its right to designate such a person. The
Company has agreed to reimburse the designee of the Representative for such
designee's out-of-pocket expenses incurred in connection with such designee's
attendance of meetings of the Board of Directors.
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiation between the Company and
41
<PAGE>
the Representative and does not necessarily bear any relationship to the
Company's asset value, net worth or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industries in which
the Company competes, an assessment of the Company's management and the
prospects of the Company, the Company's capital structure, the market for
initial public offerings and certain other factors as were deemed relevant.
The Underwriters will not make sales of the securities offered hereby to
discretionary accounts.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Company's
Common Stock. Such transactions may include stabilization transactions effected
in accordance with Rule 104 of Regulation M, pursuant to which, such persons
may bid for or purchase Common Stock of the Company for the purpose of
stabilizing its market price. The Underwriters also may create a short position
of the account of the Underwriters by selling more of the Common Stock in
connection with the Offering then they are committed to purchase from the
Company, and in such case may purchase Common Stock of the Company in the open
market following completion of the Offering to cover all or a portion of such
short position. The Underwriters may also cover all or a portion of such short
position by exercising the Over-Allotment Option. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to the shares of Common Stock
that are distributed in the Offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may stabilize or maintain the price of the Common Stock of the
Company at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if they
are undertaken, they may be discontinued at any time.
The foregoing is a summary of the agreements described above and does not
purport to be complete. Reference is made to copies of each such agreement
which are filed as exhibits to the Registration Statement. See "Additional
Information."
Since its inception in 1984, the Representative has been engaged generally
in the securities underwriting and brokerage business. The Representative has
acted as co-managing underwriter in over fifty public offerings, but has not
served as the sole managing underwriter of a public offering. The senior
officers and managing directors of the Representative, however, each have a
minimum of fifteen years of experience in the investment banking industry. The
senior officer of the Representative overseeing this Offering has served as the
lead investment banker for more than one hundred registered public offerings
over the last twenty five years.
LEGAL MATTERS
The legality of the securities offered by this Prospectus has been passed
upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., Ft. Lauderdale,
Florida. Certain legal matters with respect to this Offering have been passed
upon by Tenzer Greenblatt LLP, New York, New York. Camhy Karlinsky & Stein LLP,
New York, New York, has acted as counsel to the Underwriters in connection with
this Offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for
each of the years in the two year period ended December 31, 1996 have been
included herein and in the Registration Statement of which this Prospectus is a
part, in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the
periods ended June 30, 1996 and 1997, included herein, KPMG Peat Marwick LLP
have reported that they applied limited procedures in accordance with
professional standards for a review of such information. However, their
separate report for the six months ended June 30, 1996 and 1997 included
herein, states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on
their report on such information
42
<PAGE>
should be restricted in light of the limited nature of the review procedures
applied. KPMG Peat Marwick LLP are not subject to the liability provisions of
Section 11 of the Securities Act for their report on the unaudited interim
financial information because that report is not a "report" or a "part" of the
registration statement prepared or certified by KPMG Peat Marwick LLP within
the meaning of Sections 7 and 11 of the Securities Act.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus, filed as a part of such Registration
Statement, does not contain all of the information set forth in, or annexed as
exhibits to, the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulation of the Commission. For further
information with respect to the Company and this Offering, reference is made to
the Registration Statement, including the exhibits filed therewith, which may
be inspected without charge at the Office of the Commission, 450 Fifth Street,
N.W., Washington D.C. 20549; and at the following regional offices: Midwest
Regional Office, Northwestern Atrium Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661-2511, and the Northeast Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Commission at its principal office upon
payment of prescribed fees. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
where the contract or other document has been filed as an exhibit to the
Registration Statement, each statement is qualified in all respects by
reference to the applicable document filed with the Commission. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically
with the Commission. The address of that site is http://www.sec.gov.
43
<PAGE>
AUDIO BOOK CLUB, INC.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Independent Auditors' Report .................................... F-2
Independent Accountants' Review Report ........................... F-3
Balance Sheets as of December 31, 1996 (audited) and June 30, 1997
(unaudited) ................................................... F-4
Statements of Operations for the years ended December 31, 1995 and
1996 (audited) and for the six months ended June 30, 1996 and 1997
(unaudited) ................................................... F-5
Statements of Stockholders' Deficiency for the years ended December
31, 1995 and 1996 (audited) and for the six months ended June 30,
1997 (unaudited) ................................................ F-6
Statements of Cash Flows for the years ended December 31, 1995 and
1996 (audited) and for the six months ended June 30, 1996 and 1997
(unaudited) ................................................... F-7
Notes to Financial Statements .................................... F-8-F-12
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Audio Book Club, Inc.:
We have audited the accompanying balance sheet of Audio Book Club, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
deficiency and cash flows for each of the years in the two-year period ended
December 31, 1996. 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 Audio Book Club, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1996 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
March 7, 1997, except as to note 11(a), which
is as of July 16, 1997, and notes 11(b), (c) and (d)
which are as of September 16, 1997
F-2
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Audio Book Club, Inc.:
We have reviewed the accompanying balance sheet of Audio Book Club, Inc. as of
June 30, 1997, and the related statements of operations for the six month
period ended June 30, 1996 and 1997, statement of stockholders' deficiency for
the six month period ended June 30, 1997, and statements of cash flows for the
six month period ended June 30, 1996 and 1997, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants. All information included in these financial
statements is the representation of the management of Audio Book Club, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
July 16, 1997, except for notes 11(b), (c) and (d)
which are as of September 16, 1997
F-3
<PAGE>
AUDIO BOOK CLUB, INC.
Balance Sheets
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
Assets --------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash ............................................................ $ 92,856 114,855
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $831,669 and $643,718, respectively ...... 595,630 1,793,986
Due from related party (note 4) ................................. 20,000 --
Inventory ...................................................... 836,660 1,096,263
Royalty advances ................................................ 235,440 259,215
------------- ------------
Total current assets ....................................... 1,780,586 3,264,319
Fixed assets, at cost, net of accumulated depreciation of $8,214 and
r$11,225, espectively ............................................. 19,503 22,619
Deferred offering costs (note 3) ................................. -- 85,000
Prepaid loan costs, net .......................................... -- 8,333
------------- ------------
$ 1,800,089 3,380,271
============= ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable ................................................ 1,517,796 2,740,175
Accrued expenses ................................................ 123,645 107,500
Bank debt (note 6) ............................................. -- 6,000,000
------------- ------------
Total current liabilities .................................... 1,641,441 8,847,675
Notes payable - related parties (note 5) ........................... 11,480,200 6,775,200
------------- ------------
Total liabilities .......................................... 13,121,641 15,622,875
------------- ------------
Commitments and contingencies (notes 7, 9, 10 and 11)
Stockholders' deficiency (notes 2 and 5):
Common stock; no par value. Authorized 10,000 shares; 200
shares issued and outstanding ................................. 200 200
Contributed capital ............................................. 231,325 478,151
Accumulated deficit ............................................. (11,553,077) (12,720,955)
------------- ------------
Total stockholders' deficiency .............................. (11,321,552) (12,242,604)
------------- ------------
$ 1,800,089 3,380,271
============= ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Operations
Years ended December 31, 1995 and 1996 (audited) and for
the six months ended June 30, 1996 and 1997 (unaudited --
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Years ended Six months
December 31, ended June 30,
----------------------------------- -------------------------------
1995 1996 1996 1997
----------------- --------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Sales .......................................... $ 3,406,395 8,343,304 4,224,659 6,499,331
Returns, discounts and allowances ............ 770,980 2,743,221 965,201 1,409,289
------------- ----------- ----------- -----------
Sales, net .............................. 2,635,415 5,600,083 3,259,458 5,090,042
Cost of sales ................................. 2,145,898 4,327,344 2,328,224 2,810,548
------------- ----------- ----------- -----------
Gross profit ........................... 489,517 1,272,739 931,234 2,279,494
Expenses:
Advertising and promotion (for acquisi-
tion and retention of members) 2,670,650 5,469,761 2,486,834 2,249,737
General and administrative .................. 1,094,973 1,948,821 801,400 725,777
Professional fees ........................... 113,997 99,093 79,484 152,535
Depreciation and amortization ............... 2,333 5,193 2,041 4,678
------------- ----------- ----------- -----------
Operating loss ........................... (3,392,436) (6,250,129) (2,438,525) (853,233)
Interest expense, net of interest income of
$4,380 and $7,638 at December 31, 1995
and 1996, respectively, and $195 and $1,514
at June 30, 1996 and 1997, respectively ...... 3,947 211,140 56,994 314,645
------------- ----------- ----------- -----------
Net loss ................................. $ (3,396,383) (6,461,269) (2,495,519) (1,167,878)
============= =========== =========== ===========
Net loss per share of common stock ............ $ (16,982) (32,306) (12,478) (5,839)
============= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Stockholders' Deficiency
Years ended December 31, 1995 and 1996 (audited) and for
the six months ended June 30, 1997 (unaudited --
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Common Accumu-
stock; no Contributed lated
par value capital deficit Total
----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 .................. $ 200 4,220 (1,695,425) (1,691,005)
Imputed interest on notes payable --
related parties (note 5) ............... -- 8,327 -- 8,327
Net loss ................................. -- -- (3,396,383) (3,396,383)
------ -------- ------------ ------------
Balance at December 31, 1995 ............... 200 12,547 (5,091,808) (5,079,061)
Imputed interest on notes payable --
related parties (note 5) ............... -- 218,778 -- 218,778
Net loss ................................. -- -- (6,461,269) (6,461,269)
------ -------- ------------ ------------
Balance at December 31, 1996 ............... 200 231,325 (11,553,077) (11,321,552)
Imputed interest on notes payable - related
parties (note 5) (unaudited) ............ -- 246,826 -- 246,826
Net loss for the six months ended June 30,
1997 (unaudited) ........................ -- -- (1,167,878) (1,167,878)
------ -------- ------------ ------------
Balance at June 30, 1997 (unaudited) ...... $ 200 478,151 (12,720,955) (12,242,604)
====== ======== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Cash Flows
Years ended December 31, 1995 and 1996 (audited) and for
the six months ended June 30, 1996 and 1997 (unaudited --
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Years ended Six months
December 31, ended June 30,
-------------------------------- ------------------------------
1995 1996 1996 1997
----------------- ------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (3,396,383) (6,461,269) (2,495,519) (1,167,878)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 2,333 5,193 2,041 4,678
Imputed interest on notes payable - related parties ...... 8,327 218,778 57,189 246,826
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable, net ......... (567,150) 6,418 (613,044) (1,198,356)
Decrease in due from related party ..................... -- -- -- 20,000
(Increase) decrease in inventory ........................ (200,654) (383,689) 48,844 (259,603)
(Increase) decrease in prepaid advertising ............... (63,341) 63,341 63,341 --
Decrease (increase) in royalty advances .................. 6,885 (235,440) (98,295) (23,775)
Increase in accounts payable and accrued expenses 225,429 1,170,410 162,077 1,206,234
Decrease in due to related parties, net .................. (83,300) -- -- --
------------- ----------- ----------- -----------
Net cash used in operating activities .................. (4,067,854) (5,616,258) (2,873,366) (1,171,874)
------------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets .............................. (13,774) (7,063) (9,563) (6,127)
------------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related
parties ................................................ 4,105,000 5,575,200 2,830,000 1,295,000
Repayment of notes payable - related parties ............ -- -- -- (6,000,000)
Proceeds from issuance of bank debt ..................... -- -- -- 6,000,000
Prepaid loan costs ....................................... -- -- -- (10,000)
Deferred offering costs ................................. -- -- -- (85,000)
------------- ----------- ----------- -----------
Net cash provided by financing activities ............... 4,105,000 5,575,200 2,830,000 1,200,000
------------- ----------- ----------- -----------
Net increase (decrease) in cash ........................... 23,372 (48,121) (52,929) 21,999
Cash at beginning of period ................................. 117,605 140,977 140,977 92,856
------------- ----------- ----------- -----------
Cash at end of period ....................................... $ 140,977 92,856 88,048 114,855
============= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
(1) Organization
Audio Book Club, Inc. (the "Company"), a Florida corporation, was formed
on August 16, 1993. The Company is a negative option membership club engaged
principally in mail order sales of audiocassettes.
(2) Liquidity and Capital Resources
The Company has incurred a loss for the six months ended June 30, 1997,
for each of the years in the three year period ended December 31, 1996, and for
the period from August 16, 1993 (date of inception) to December 31, 1993.
Management has continued its development efforts to increase its subscriber
membership base.
In order to fund the Company's development efforts, the stockholders of
the Company have provided loans, net of repayments, to the Company of
$6,775,200 as of June 30, 1997 (see note 6). Additional loans pursuant to a
1995 loan agreement, as amended, with the Chairman, Chief Executive Officer and
founder in the amount of $7,024,800 are available to the Company until the
earlier of the effective date of an initial public offering by the Company or
June 30, 1998 (see note 5).
Any additional growth in the Company's current subscriber base, or
liabilities as they come due, to the extent that they cannot be funded by its
current level of operations, is expected to come from its existing stockholders
or alternative financing sources (see notes 5, 10, and 11). Accordingly, the
Company's Chairman, Chief Executive Officer and founder has committed to
provide additional funding necessary to fund the Company's cash requirements
until the earlier of June 30, 1998 or the receipt of net proceeds by the
Company of a minimum of $10,000,000 from the Company's proposed initial public
offering (see note 10).
(3) Significant Accounting Policies
Inventory
Inventory, consisting primarily of audiocassettes held for resale, is
valued at the lower of cost (weighted average cost method) or market.
Fixed Assets
Fixed assets, consisting primarily of furniture and computer equipment,
are recorded at cost. Depreciation is provided by the straight-line method over
the estimated useful life of five years.
Revenue Recognition
Revenue is recorded upon shipment of merchandise and simultaneous billing.
Allowances for future returns are based upon historical experience and
evaluation of current return trends.
Income Taxes
The Company has elected to be taxed as a small business corporation (S
corporation) under Section 1362 of the Internal Revenue Code. No provision for
Federal income taxes has been made since such taxes are the obligation of the
stockholders.
Upon successful completion of the Company's contemplated offering, the
Company will be unable to retain its S corporation status. Accordingly the
Company will be taxed as an incorporated entity.
F-8
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
(3) Significant Accounting Policies -- (Continued)
Advertising and Promotional Costs
The Company expenses the production costs of advertising the first time
the advertising takes place. Direct-response advertising consists primarily of
print advertisements and mailings to individuals that include order forms for
the Company's products. The capitalized costs of the direct mail advertising
are amortized in the month of publication of the magazine in which it appears
or the month in which the individual letters are mailed.
Promotional costs for new and current members are expensed on the date the
promotional materials are mailed.
Advertising and promotion expense was $2,670,650 and $5,469,761 for the
years ended December 31, 1995 and 1996, respectively, and $2,486,834 and
$2,249,737 for the six months ended June 30, 1996 and 1997, respectively.
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. Royalties, in excess of advances, are
payable based on contractual terms. Royalty advances not expected to be
recovered through royalties on sales are charged to royalty expense. For the
year ended December 31, 1996 and the six months ended June 30, 1997, no
writedown of royalty advances was recorded.
Use of Estimates
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
In estimating the fair value for financial instruments, the Company has
assumed that the carrying amount of cash, accounts receivable, accounts payable
and accrued expenses approximates fair value because of the short maturity of
those instruments. It is not practical to estimate the fair market value of
notes payable - related party due to the related party nature of the
transaction.
Reclassifications
Certain balances in the 1995 financial statements have been reclassified
to conform to the 1996 presentation.
Deferred Offering Costs
The Company has incurred expenses of $85,000 related to its contemplated
initial public offering (see note 10), including legal and accounting fees and
expenses. As of June 30, 1997, a portion of such amounts have been provided for
in accounts payable and accrued expenses. Upon successful completion of the
contemplated offering, the associated costs will be deducted from the net
proceeds of such offering. If the contemplated offering is abandoned, these
costs will be expensed.
Interim Reporting
The accompanying financial information as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 is unaudited and, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation have been included. Operating
results for any interim period are not necessarily indicative of the results
for any other interim period or for an entire year.
F-9
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
(4) Due from Related Party
Due from related party represents the amount due from a company affiliated
with the Company's Chairman, Chief Executive Officer and founder for the
reimbursement of employee services in the amount of $20,000 as of December 31,
1996.
(5) Notes Payable - Related Parties
On November 17, 1995, the Company executed a loan agreement with its
Chairman, Chief Executive Officer and founder in the amount of $8,000,000, of
which $5,805,000 had been granted in the form of unsecured, noninterest bearing
advances as of December 31, 1995.
On February 6, 1997, the loan agreement was amended to increase the
maximum borrowing amount to $13,000,000 from $12,000,000. On May 12, 1997, the
loan agreement was further amended to stipulate that the loan does not and will
not bear interest, and removed all references to interest in prior documents.
Additionally, the amendment stipulated that the obligation of the Chairman,
Chief Executive Officer, and founder to make further advances to the Company
under this loan agreement shall terminate on the earlier of the effective date
of an initial public offering by the Company or June 30, 1998. However, the
Company's Chairman, Chief Executive Officer and founder has committed to
provide additional funding necessary to fund the Company's cash requirements
until the earlier of June 30, 1998 or the receipt of net proceeds by the
Company of a minimum of $10,000,000 from the Company's proposed initial public
offering.
Immediately prior to the consummation of the Company's proposed initial
public offering, the Company's Chairman, Chief Executive Officer, and founder
will convert the outstanding $5,975,200 of indebtedness owed to him under the
loan agreement into 663,911 shares of common stock at a price per share equal
to the initial offering price of the common stock.
In June 1994, the Company received $50,000 from both the Chief Operating
Officer and Executive Vice President for a total of $100,000, in exchange for
the Company issuing two notes payable of $50,000 each.
In February 1997, the Company's Executive Vice President loaned the
Company an additional $350,000 pursuant to a loan agreement (the "1997 HH
Loan"). On May 12, 1997, loans payable to the Company's Executive Vice
President in the amounts of $50,000 and $350,000 were consolidated via a
consolidated and restated loan agreement. The consolidated loan balance of
$400,000 does not bear interest until August 1, 1997, after which time interest
is calculated annually at the greater of 10% or the prime rate of interest. The
principal and interest due on the consolidated loan is due on the earlier of 15
months from the consummation of an initial public offering by the Company or
December 31, 1998. (see note 11(c))
On May 12, 1997, the Chief Operating Officer loaned the Company $350,000
pursuant to a loan agreement (the "1997 MEH Loan"). Borrowings under the 1997
MEH Loan were consolidated via a loan agreement with the $50,000 loan balance
originated in June of 1994. The consolidated loan balance of $400,000 does not
bear interest until August 1, 1997, after which time interest is calculated
annually at the greater of 10% or the prime rate of interest. The principal and
interest due on the consolidated loan is due on the earlier of 15 months from
the consummation of an initial public offering by the Company or December 31,
1998. (see note 11(c))
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost on the portion of the non-interest bearing notes
payable to related parties which will not be converted to equity upon the
successful completion of the Company's contemplated offering. The imputed
interest rate used was based on the terms negotiated by the Company for its
bank debt (see note 6) and was 8.32% and 7.77% for the years
F-10
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
ended December 31, 1995 and 1996, respectively, and 7.79% and 7.88% for the six
months ended June 30, 1996 and 1997, respectively. Interest expense imputed was
$8,327 and $218,778 for the years ended December 31, 1995 and 1996,
respectively, and $57,189 and $246,826 for the six months ended June 30, 1996
and 1997, respectively.
(6) Bank Debt
On May 9, 1997, the Company borrowed $6,000,000 from a major bank, which
was used to repay a portion of the outstanding notes payable to the Company's
Chairman, Chief Executive Officer, and founder. The loan has a one-year term,
and bears an interest rate which is 1/2% under the bank's reference rate.
Interest is payable monthly. The principal will be due on May 7, 1998.
The portion of the outstanding stock of the Company owned by the Chairman,
Chief Executive Officer, and founder has been pledged as security for the loan.
Additionally, in the event the Company fails to repay the loan at maturity, the
personal guarantee of the Company's Chairman, Chief Executive Officer and
founder will become effective.
(7) Commitments and Contingencies
Leases - Related Parties
Rent expense for each of the years ended December 31, 1995 and 1996
amounted to $38,000, and $19,000 for each of the six months ended June 30, 1996
and 1997. The Company sublets office space from an entity wholly-owned by
officers and directors of the Company.
Minimum annual lease commitments under noncancelable operating leases are
as follows:
Year ending
December 31, Amount
------------ ---------
1997 ........................ $ 36,837
1998 ........................ 24,000
---------
Total lease commitments ...... $ 60,837
=========
(8) Supplemental Cash Flow Information
No cash has been expended for interest or income taxes for the years ended
December 31, 1995 and 1996.
No cash has been expended for income taxes for the six months ended June
30, 1996 and 1997. Cash expended for interest was none and $69,333 for the six
months ended June 30, 1996 and 1997, respectively.
During the years ended December 31, 1995 and 1996 and for each of the six
month periods ended June 30, 1996 and 1997, the Company had a noncash financing
activity related to the recognition of imputed interest on a portion of the
notes payable - related parties of $8,327, $218,778, $57,189 and $246,826,
respectively.
(9) Stock Option Plan
On June 20, 1997, the Company adopted the 1997 Stock Option Plan, pursuant
to which the Company's Board of Directors may grant stock options to key
employees of the Company. The Plan will terminate and any options granted will
be of no force or effect if the Company does not consummate its proposed
initial public offering prior to December 31, 1997. The Plan authorizes grants
of options to purchase up to 750,000 shares of
F-11
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
June 30, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
(9) Stock Option Plan -- (Continued)
authorized but unissued common stock. Under the Plan, the Company may grant
incentive and non-qualified stock options. The terms and conditions of options
granted under the Plan may vary at the discretion of the Company's Board of
Directors. In addition, shares issued pursuant to the exercise of the options
may be restricted as to their transferability. (see note 11(d))
(10) Proposed Offering
The Company is contemplating the raising of additional financing through a
proposed initial public offering of 2.0 million shares of common stock. If the
offering is successful, management plans to use the related proceeds for the
repayment of indebtedness to the bank, membership recruitment advertising,
internet web site marketing and development, and working capital and general
corporate purposes. Although management believes that it will successfully
obtain such capital, there can be no assurance that it will be able to do so.
(11) Subsequent Events
(a) Leases
On July 1, 1997, the Company entered into a new lease for office space.
Minimum monthly rent under the newly executed lease is $1,167 per month through
November, 1997, at which time the monthly rent increases to $1,307. The lease
expires on November 30, 2000 and is subject to two extension periods of three
years each. A company affiliated with the Chairman, Chief Executive Officer and
founder has guaranteed the lease.
(b) Bank Debt
The Company obtained loans of $2,250,000 and $750,000 from a major bank in
August and September 1997, respectively. The loans mature on October 31, 1998
and bear interest at 1/2% under the bank's reference rate. Interest is payable
monthly beginning September 30, 1997. The proceeds are being used to pay
accounts payable. In the event the Company fails to repay the loans at
maturity, the personal guarantee of the Company's Chairman, Chief Executive
Officer and founder will become effective.
(c) Notes Payable -- Related Parties
On September 15, 1997, the Company repaid the $800,000 of outstanding
notes payable plus accrued interest to the Company's Chief Operating Officer
and Executive Vice President.
(d) Stock Options
In September 1997, the Company granted to an officer options to purchase
50,000 shares of common stock at an exercise price equal to 110% of the initial
public offering price per share of the Company's common stock. Such options
shall vest as to one-fifth of the shares covered thereby annually over a
five-year period commencing on October 31, 1998, provided, however, that such
options shall terminate and be cancelled if the officer is no longer employed
by the Company prior to the date on which such options vest. Such options shall
be exercisable for a period of five years commencing immediately upon vesting,
provided, however, if the officer is no longer employed by the Company, such
options shall expire on the earlier of 30 days following the date the officer
is no longer employed by the Company or five years following the date on which
such options vest.
F-12
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Underwriters. 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. The delivery of this Prospectus shall not, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary .................. 3
Risk Factors ........................ 7
Use of Proceeds ..................... 15
Dilution ........................... 16
Dividend Policy ..................... 17
Capitalization ..................... 17
Selected Financial Data ............... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................ 19
Business .............................. 24
Management ........................... 31
Principal Shareholders ............... 36
Certain Transactions ............... 37
Description of Securities ............ 39
Shares Eligible for Future Sale ...... 40
Underwriting ........................ 40
Legal Matters ........................ 42
Experts .............................. 42
Additional Information ............... 43
Index to Financial Statements ......... F-1
--------------------------------------------
Until , 1997, (25 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Common Stock or Warrants
offered hereby, whether or not participating in this distribution may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
2,000,000 Shares
AUDIO BOOK CLUB, INC.
Common Stock
--------------------------------------------
PROSPECTUS
--------------------------------------------
L.H. Friend, Weinress,
Frankson & Presson, Inc.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Florida Business Corporation Act (the "Florida Act") contain
provisions entitling the Registrant's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Registrant. In its Articles of Incorporation, the Registrant has included a
provision that limits, to the fullest extent now or hereafter permitted by the
Florida Act, the personal liability of its directors to the Registrant or its
shareholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the Florida Act as currently in effect, this
provision limits a director's liability except where such director breaches a
duty. The Company's Articles of Incorporation and By-Laws provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Florida Act. The Florida Act provides that no director or
officer of the Company shall be personally liable to the Company or its
shareholders for damages for breach of any duty owed to the Company or its
shareholders, except for liability for (i) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (ii) any
unlawful payment of a dividend or unlawful stock repurchase or redemption in
violation of the Florida Act, (iii) any transaction from which the director
received an improper personal benefit or (iv) a violation of a criminal law.
This provision does not prevent the Registrant or its shareholders from seeking
equitable remedies, such as injunctive relief or rescission. If equitable
remedies are found not to be available to shareholders in any particular case,
shareholders may not have any effective remedy against actions taken by
directors that constitute negligence or gross negligence.
The Articles of Incorporation also include provisions to the effect that
(subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of Florida, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as may from time to time be in effect. In addition, the Articles of
Incorporation require the Registrant to indemnify, to the full extent permitted
by law, any director or officer of the Registrant.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's nonaccountable
expense allowance) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ............... $ 6,308.18
NASD filing fee ................................................... 2,581.70
AMEX listing fee ................................................... 35,000.00
Legal fees and expenses ............................................. 175,000.00
Accounting fees and expenses ....................................... 120,000.00
Transfer agent, warrant agent and registrar fees and expenses ...... 3,000.00
Miscellaneous (including printing and roadshow expenses) ......... 178,110.12
------------
Total ......................................................... $520,000.00
============
</TABLE>
- ------------
* To be filed by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Since May 1994, the Registrant has not issued any securities without
registration under the Securities Act of 1933, as amended (the "Securities
Act").
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
1.1 Form of Underwriting Agreement.
*3.1 Articles of Incorporation, as amended, of the Registrant.
*3.2 Bylaws, as amended, of the Registrant.
*4.1 Form of Registrant's Common Stock Certificate.
4.2 Form of Representative's Warrant Agreement, including Form of Warrant Certificate.
*5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A.
*+10.1 Agreement between Registrant and R.R.Donnelly & Sons Company, dated as of January 23, 1997.
*+10.2 Master Agreement for National Fulfillment Services between Registrant and National Fulfillment Ser-
vices, Inc., dated as of October 25, 1996.
*10.3 Loan Agreement between Registrant and M.E. Herrick Irrevocable Trust, dated May, 12, 1997.
*10.4 Consolidation and Restatement of Loan Agreements between Registrant and Howard Herrick, dated
May 12, 1997.
*10.5 Employment Agreement between Registrant and Norton Herrick.
*10.6 Employment Agreement between Registrant and Michael Herrick.
*10.7 Employment Agreement between Registrant and Howard Herrick.
*10.8 Employment Agreement between Registrant and Jesse Faber, dated May 1, 1997.
10.8.1 Employment Agreement between Registrant and Jesse Faber, dated September 16, 1997.
*10.9 1997 Stock Option Plan.
*10.10 Marketing Consulting Agreement between the Company and Abrams Direct Marketing dated June 6,
1997.
*10.11 Form of Shareholder Lockup Letter.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
23.2 Letter of KPMG Peat Marwick LLP re: Unaudited Interim Financial Information.
*23.3 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (will be contained in such firm's opinion filed as
Exhibit 5.1).
*23.4 Consent of Tenzer Greenblatt LLP.
*23.5 Consent of Roy Abrams.
*23.6 Consent of George Farley.
*23.7 Consent of Jesse Faber.
*24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages
of this Registration Statement.
*27.1 Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
+ Filed in redacted form pursuant to Rule 406 promulgated under the
Securities Act. Filed separately in unredacted form subject to a request
for confidential treatment pursuant to Rule 406 under the Securities Act.
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) reflect in the prospectus any facts or events which,
individually or together, 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;
II-2
<PAGE>
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered,
and the Offering of such securities at that time to be initial bona fide
Offering; and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the Offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing
agreement certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to each
purchaser; (2) that for the purpose of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Securities and Exchange
Commission declares it effective; and (3) that for the purpose of
determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration
Statement therein, and treat the Offering of the securities at that time as
the initial bona fide Offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Amendment
No. 2 to this Registration Statement to be signed on its behalf by the
undersigned, in the city of Boca Raton, State of Florida on September 17, 1997.
AUDIO BOOK CLUB, INC.
By: /s/ Norton Herrick
-------------------------------------
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
- ----------------------- ---------------------------------------- -------------------
<S> <C> <C>
/s/ Norton Herrick Chairman of the Board, Chief September 17, 1997
- --------------------- Executive Officer and Director
Norton Herrick
* Chief Operating Officer, Vice Chairman September 17, 1997
- --------------------- of the Board and Director
Michael Herrick
* Executive Vice President and Director September 17, 1997
- ---------------------
Howard Herrick
* Chief Financial Officer and Treasurer September 17, 1997
- --------------------- (Principal Accounting Officer)
Robert Klein
/s/ Norton Herrick
- ---------------------
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
*3.1 Articles of Incorporation, as amended, of the Registrant.
*3.2 Bylaws, as amended, of the Registrant.
*4.1 Form of Registrant's Common Stock Certificate.
4.2 Form of Representative's Warrant Agreement, including Form of Warrant Certificate.
*5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A.
*+10.1 Agreement between Registrant and R.R.Donnelly & Sons Company, dated as of January 23, 1997.
*+10.2 Master Agreement for National Fulfillment Services between Registrant and National Fulfillment Ser-
vices, Inc., dated as of October 25, 1996.
*10.3 Loan Agreement between Registrant and M.E. Herrick Irrevocable Trust, dated May, 12, 1997.
*10.4 Consolidation and Restatement of Loan Agreements between Registrant and Howard Herrick, dated
May 12, 1997.
*10.5 Employment Agreement between Registrant and Norton Herrick.
*10.6 Employment Agreement between Registrant and Michael Herrick.
*10.7 Employment Agreement between Registrant and Howard Herrick.
*10.8 Employment Agreement between Registrant and Jesse Faber, dated May 1, 1997.
10.8.1 Employment Agreement between Registrant and Jesse Faber, dated September 16, 1997.
*10.9 1997 Stock Option Plan.
*10.10 Marketing Consulting Agreement between the Company and Abrams Direct Marketing dated June 6,
1997.
*10.11 Form of Shareholder Lockup Letter.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
23.2 Letter of KPMG Peat Marwick LLP re: Unaudited Interim Financial Information.
*23.3 Consent of Atlas, Pearlman, Trop & Borkson, P.A. (will be contained in such firm's opinion filed as
Exhibit 5.1).
*23.4 Consent of Tenzer Greenblatt LLP.
*23.5 Consent of Roy Abrams.
*23.6 Consent of George Farley.
*23.7 Consent of Jesse Faber.
*24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages
of this Registration Statement.
*27.1 Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
+ Filed in redacted form pursuant to Rule 406 promulgated under the
Securities Act. Filed separately in unredacted form subject to a request
for confidential treatment pursuant to Rule 406 under the Securities Act.
<PAGE>
2,000,000 Shares of Common Stock
AUDIO BOOK CLUB, INC.
UNDERWRITING AGREEMENT
Boca Raton, Florida
__________, 1997
L.H. Friend, Weinress, Frankson & Presson, Inc.
Representative of the Several Underwriters
3333 Michelson Drive, Suite 50
Irvine, California 92715
Ladies and Gentlemen:
Audio Book Club, Inc., a Florida corporation (the "Company"),
hereby agrees with L.H. Friend, Weinress, Frankson & Presson, Inc. ("L.H.
Friend") and each of the underwriters named in Schedule A hereto (collectively,
the "Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom L.H Friend is acting as
representative (in such capacity, L.H. Friend shall hereinafter be referred to
as "you" or the "Representative") with respect to the sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of the
respective amount of shares set forth in said Schedule A of the Company's common
stock, no par value per share (the "Common Stock") which aggregate to 2,000,000
shares (the "Shares"). Upon your request, as provided in Section 2(b) of this
Agreement, a minority shareholder (the "Selling Shareholder") of the Company and
the Company shall also issue and sell to the Underwriters, acting severally and
not jointly, up to an additional 190,000 shares from the Selling Shareholder
and then 110,000 shares of Common Stock from the Company for the purpose of
covering over-allotments, if any. Such shares of Common Stock are hereinafter
referred to as the "Option Shares." The Company also proposes to issue and sell
to you warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of an additional 200,000 shares of Common Stock. The shares of
Common Stock issuable upon exercise of the Representative's Warrants are
hereinafter referred to as the "Representative's Shares." The Shares, Option
Shares, the Representative's Warrants, and the Representative's Shares are more
fully described in the Registration Statement and the Prospectus referred to
below.
-1-
<PAGE>
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters as of the
date hereof, if any, as follows:
(a) The Company has prepared and filed with the Securities
and Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (Registration No. 333-305),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Shares, the Option Shares, the Representative's Warrants,
and the Representative's Shares (collectively, hereinafter referred to as the
"Registered Securities") under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
Regulations (as defined below) of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 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, "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, to the best of the Company's knowledge, has issued any order
preventing or suspending the use of any Preliminary Prospectus, the Registration
Statement or the Prospectus and no proceedings for a stop order suspending the
effectiveness of the Registration Statement have been instituted, or, to the
Company's knowledge, are threatened. Each of the Preliminary Prospectus, the
Registration Statement and the Prospectus at the time of filing thereof
conformed in all material respects with the requirements of the Act and
Regulations, and neither the Preliminary Prospectus, the Registration Statement
nor the 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 Underwriters by or on behalf of the Underwriters 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 (as defined in Section
2(c) hereof) and each Option Closing Date (as defined in Section 2(b) hereof),
if any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Underwriters or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and
-2-
<PAGE>
the Regulations, and will conform in all material respects to the requirements
of the Act and the Regulations; neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in 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 furnished
to the Company in writing by or on behalf of any Underwriter expressly for use
in the Registration Statement or the Prospectus or any amendment thereof or
supplement thereto.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the state of its
incorporation. The Company does not own or control, directly or indirectly, any
corporation, partnership, trust, joint venture or other business entity other
than the subsidiaries listed in Exhibit 21 of the Registration Statement, if
any. 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
any properties or the character of its operations require such qualification or
licensing and where the failure to do so qualify or be licensed could have a
material adverse effect on the financial condition, results of operations or
business of the Company. The Company 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 business as described in the
Prospectus, except where the failure to do so would not have a material adverse
effect on the financial condition, results of operations or business of the
Company; to the best of the Company's knowledge, 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; and 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 business affairs, operations, properties, or
results of operations of the. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material 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 the headings
"Capitalization" and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and the Option Closing
Date, if any, 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 it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and
-3-
<PAGE>
as described in the Prospectus. The Registered Securities and all other
securities issued or issuable by the Company conform or, when issued and paid
for, will conform, in all material respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. Except as
disclosed in or contemplated by the Prospectus and the financial statements of
the Company and the related notes thereto included in the Prospectus, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements and the options or other rights granted and
exercised thereunder as set forth in the Prospectus conforms in all material
respects with the requirements of the Act. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully paid
and non-assessable, and the holders thereof have no rights of rescission with
respect thereto and are not subject to personal liability by reason of being
such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company.
(f) The Registered Securities are not and will not be
subject to any preemptive or other similar rights of any shareholder, 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 will
conform in all material respects to the description thereof contained in the
Prospectus; the holders thereof will not be subject to any liability solely by
reason of being holders; all corporate action required to be taken for the
authorization, issue and sale of the Registered Securities has been duly and
validly taken; and the certificates representing the Registered Securities will
be in due and proper form. Upon the issuance and delivery pursuant to the terms
hereof of the Registered Securities to be sold by the Company hereunder, the
Underwriters or the Representative (assuming they are bona fide purchasers
within the meaning of the Uniform Commercial Code), as the case may be, will
acquire good and marketable title to such Registered Securities free and clear
of any lien, charge, claim, encumbrance, pledge, security interest, defect, or
other restriction or equity of any kind whatsoever. No shareholder of the
Company has any right which has not been waived in writing to require the
Company to register the sale of any shares owned by such shareholder under the
Act in the public offering contemplated by this Agreement. No further approval
or authority of the shareholders or the Board of Directors of the Company will
be required for the issuance and sale of the Shares, the Option Shares and the
Representative's Warrants to be sold by the Company as contemplated herein.
(g) The financial statements of the Company, together with
the related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in shareholders' equity 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 Regulations, consistently
applied throughout the periods
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involved. Except as otherwise set forth in or contemplated by the Prospectus,
there has been no material adverse change or development involving a material
prospective change in the condition, financial or otherwise, or in the business,
affairs, operations, properties, or results of operation of the Company whether
or not arising in the ordinary course of business since the date 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 conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information set forth in the Prospectus under the headings "Prospectus Summary -
Selected Financial Data," "Capitalization," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," fairly present, on
the basis stated in the Prospectus, the information set forth therein and have
been derived from or compiled on a basis consistent with that of the audited
financial statements included in the Prospectus.
(h) The Company (i) has paid all federal, state, local,
franchise, and foreign taxes for which it is liable, including, but not limited
to, withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 198, as amended (the "Code"), and has furnished all
information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(i) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriters in connection with (i) the issuance
by the Company of the Registered Securities to be sold by the Company, (ii) the
purchase by the Underwriters of the Registered Securities from the Company and
the purchase by the Representative of the Representative's Warrants from the
Company, (iii) the consummation by the Company of any of its obligations under
this Agreement, or (iv) resales of the Registered Securities in connection with
the initial distribution contemplated hereby.
(j) To the best of the Company's knowledge, there is no
action, suit, proceeding, inquiry, arbitration, mediation, 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, this Agreement or the
Representative's Warrant Agreement, or any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or the Representative's
Warrant 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 material respects),
or (iii) might materially and adversely affect the condition, financial or
otherwise, or the business, affairs, position, shareholders' equity, operation,
properties, or results of operations of the Company and its subsidiaries taken
as a whole.
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<PAGE>
(k) The Company has the corporate power and authority to
enter into this Agreement and the Representative's Warrant Agreement, and to
consummate the transactions provided for in such agreements; and this Agreement
and the Representative's Warrant Agreement have each been duly and properly
authorized, executed, and delivered by the Company. Each of this Agreement and
the Representative's Warrant Agreement constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
respective terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance 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 issue and sale of the
Registered Securities, execution, delivery or performance of this Agreement and
the Represent- ative's Warrant Agreement, its consummation of the transactions
contemplated herein and therein, or the conduct of its businesses 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, as amended and restated,
(ii) any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, shareholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which it is or may
be bound or to which its properties or assets (tangible or intangible) is or may
be subject, or any indebtedness, except for any such breach, violation or
default which would not have a material adverse effect on the Company, 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 of any of their activities or properties.
(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 Registered Securities
pursuant to the Prospectus and the Registration Statement, the performance of
this Agreement, the Representative's Warrant Agreement, and the transactions
contemplated hereby and thereby, including without limitation, any waiver of any
preemptive, first refusal or other rights that any entity or person may have for
the issue and/or sale of any of the Registered Securities, except such as have
been or may be obtained under the Act and the regulations, may be required under
state securities or Blue Sky laws or may be required by the NASD in connection
with the Underwriters' purchase and distribution of the Registered Securities to
be sold by the Company hereunder.
(m) All executed agreements, contracts or other documents
or copies of executed agreements, contracts or other documents filed as exhibits
to the Registration Statement
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<PAGE>
to which the Company is a party or by which it may be bound or to which its
assets, properties or businesses 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 (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance 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). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects 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) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus (i) the Company has not incurred
any material liabilities or obligations, indirect, direct or contingent, or
entered into any material verbal or written agreement or other transaction which
is not in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company; (ii) the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock, and the Company is not in
default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other than
upon the sale of the Shares, the Option Shares, the Representative's Shares
hereunder and the conversion of $5,975,200 of indebtedness into _____ shares of
Common Stock to the N. Herrick Irrevocable ABC Trust as described in the
Prospectus (the "Conversion Shares") and upon the exercise of options and
warrants described in the Registration Statement) of, or indebtedness material
to, the Company (other than in the ordinary course of business); (v) the Company
has not issued any securities or incurred any liability or obligation (which is
not in the ordinary course of business), primary or contingent, for borrowed
money; and (vi) there has not been any material adverse change in the condition
(financial or otherwise), business, properties, results of operations, or
prospects of the Company.
(o) Except as disclosed in or specifically contemplated by
the Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) the
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<PAGE>
Company has no notice of any claim being made against the Company regarding
trademark, trade name, patent, copyright, license, trade secret or other
infringement which could have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company.
(p) The Company is not, nor has the Company received notice
that another party is, in default of 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,
shareholders agreement, note, loan or credit agreement, or any other material
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which the property or assets (tangible or
intangible) of the Company is subject or affected, other than any defaults which
would not have a material adverse effect on the Company.
(q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to its knowledge threatened against or involving the Company. To the
Company's knowledge, no representation question exists respecting the employees
of the Company. No collective bargaining agreement, or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company. No labor dispute with the employees of the Company
exists or to its knowledge is imminent.
(r) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute 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 to a
defined benefit plan, as defined in Section 3(35) of ERISA.
(s) None of the Company, nor any of its employees,
directors, shareholders, or affiliates (within the meaning of the Regulations)
of any of the foregoing has taken or will take directly or indirectly, any
action designed to or which has constituted or which might be expected to cause
or result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Registered Securities.
(t) The Company does not own any real Property. The Company
has good title to all items of 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, or other restrictions or equities of
any kind whatsoever other than those referred to in the Prospectus,
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<PAGE>
those which do not materially affect the value or transferability of such
property and do not interfere with the use of such property by the Company and
liens for taxes not yet due and payable.
(u) KPMG Peat Marwick LLP ("Peat Marwick"), whose report is
filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act and the
Regulations.
(v) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which all persons or entities
that directly or beneficially own Common Stock, as of the effective date of the
Registration Statement, have agreed not to, directly or indirectly, offer, offer
to sell, sell, grant any option for the sale of, transfer, assign, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into Common Stock, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any
interest therein for a period from the date of the Prospectus until thirteen
(13) months following the date that the Registration Statement becomes
effective, without the prior written consent of the Representative (the "Lock-up
Agreements"). The Company will cause the Transfer Agent (as defined herein) to
place "stop transfer" orders on the Company's stock ledgers in order to effect
the Lock-up Agreements.
(w) Neither the Company nor any of the its officers,
directors, shareholders, employees or affiliates are a party to any claims,
arrangements or understandings, whether oral or written, nor has the Company or
any such person made any payments, for services in the nature of a finder's or
origination fee with respect to the sale of the Registered Securities hereunder
that may affect the Underwriters' compensation as determined by the National
Association of Securities Dealers, Inc. (the "NASD").
(x) The Common Stock has been approved for quotation on
the American Stock Exchange.
(y) 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 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 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). The Company's
internal accounting controls are sufficient to cause the Company to comply with
the Foreign Corrupt Practices Act of 1977, as amended.
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<PAGE>
(z) Except as set forth in the Prospectus, an except that
certain "affiliates" of certain officers and directors of the Company have, from
time to tome, facilitated the Company without receiving compensation, no
officer, director or shareholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under the
Regulations) of any of the foregoing persons or entities has or has had, either
directly or indirectly, (i) an interest in any person or entity which (A)
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold by the Company, or (B) purchases from or sells
or furnishes to the Company any goods or services, or (ii) a beneficiary
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected. Except as set forth in the Prospectus there
are no existing agreements, arrangements, understandings or transactions, or
proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, principal shareholder (as such
term is used in the Prospectus) of the Company, or any affiliate or associate of
any of the foregoing persons or entities which is required to be disclosed in
accordance with Regulation S-B promulgated under the Act.
(aa) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(ab) Any certificate signed by any officer of the Company
and delivered to the Underwriters or to the Underwriters' Counsel (as defined in
Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
(ac) The minute books of the Company have been made
available to the Underwriters and contain a complete summary of all meetings and
actions of the directors and shareholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(ad) The Company has not distributed and will not
distribute prior to the Closing Date any offering material in connection with
the offering and sale of the Shares in this offering other than the Prospectus,
the Registration Statement and the other materials permitted by the Act. Except
as described in the Prospectus, no holders of any securities of the Company or
of any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company as part
of the Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company.
(ae) The Company maintains insurance, directly or
indirectly, by insurers of recognized financial responsibility of the types and
in the amounts as are prudent, customary and adequate for the business in which
it is engaged, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which
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<PAGE>
insurance is in full force and effect. The Company has no reason to believe that
it will not be able to renew existing insurance coverage with respect to the
Company as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business, in either case,
at a cost that would not have a material adverse effect on the financial
condition, operations, business, assets or properties of the Company. The
Company has not failed to file any material claims, has no material disputes
with its insurance company regarding any material claims submitted under its
insurance policies, and has complied with all material provisions contained in
its insurance policies.
2. Purchase, Sale and Delivery of the Registered Securities.
(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 each Underwriter, and
each Underwriter, severally and not jointly agrees to purchase from the Company,
at a price equal to [$ ] per share, that number of Shares set forth in Schedule
A opposite the name of such Underwriter, subject to such adjustment as the
Representative in their discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional numbers of Shares which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 11 hereof.
(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 Underwriters, severally and not jointly,
are hereby granted an option to purchase all or any part of the Option Shares at
a price equal to [$ ] per share. The option granted hereby will expire 45 days
after (i) the date the Registration Statement becomes effective, if the Company
has elected not to rely on Rule 430A under the Regulations, or (ii) the date of
this Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but not
on more than two (2) occasions) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the Shares
upon notice by the Representative to counsel for the Company (at the address for
copies of notices as set forth in Section 13 below), as agent for the Selling
Shareholder, setting forth the number of Option Shares as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for any such Option Shares. Any such time and date of delivery (an
"Option Closing Date") shall be determined by the Representative, but shall not
be sooner than three (3) business days, nor later than five (5) business days,
after the exercise of said option, nor in any event prior to the Closing Date,
as hereinafter defined, unless otherwise agreed upon by the Representative and
the Company. Nothing herein contained shall obligate the Underwriters to
exercise the over-allotment option described above. No Option Shares shall be
delivered unless the Shares 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 Shares shall be made at the offices of L.H. Friend, at
3333 Michelson Drive, Suite 50, Irvine,
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California, or at such other place as shall be agreed upon by the Representative
and the Company. Such delivery and payment shall be made at [ ] _.m. (New York
time) on _________, 1997, or at such other time and date as shall be agreed upon
by the Representative and the Company, but no more than four (4) business days
after the date hereof (such time and date of payment and delivery being herein
called the "Closing Date"). In addition, in the event that any or all of the
Option Shares are purchased by the Underwriters, payment of the purchase price
for, and delivery of certificates for, such Option Shares shall be made at the
above mentioned office of L.H. Friend or at such other place as shall be agreed
upon by the Representative and the Company on each Option Closing Date as
specified in the notice from the Representative to the Company. Delivery of the
certificates for the Shares and the Option Shares, if any, shall be made to the
Underwriters against payment by the Underwriters, of the purchase price for the
Shares to the order of the Company and of the Option Shares, if any, to the
order of the Selling Shareholder, by wire transfer of same day funds. In the
event such option is exercised, each of the Underwriters, acting severally and
not jointly, shall purchase that proportion of the total number of Option Shares
then being purchased which the number of Shares set forth in Schedule A hereto
opposite the name of such Underwriter bears to the total number of Shares,
subject in each case to such adjustments as the Representative in their
discretion shall make to eliminate any sales or purchases of fractional shares.
Certificates for the Shares and the Option Shares, 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 Underwriters may
request in writing at least three (3) business days prior to Closing Date or the
relevant Option Closing Date, as the case may be. The certificates for the
Shares and the Option Shares, if any, shall be made available to the
Representative at such office or such other place as the Representative 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.
(d) On the Closing Date, the Company shall issue and sell
to the Representative Representative's Warrants at a purchase price of $0.001
per warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 200,000 shares of Common Stock. The Representative's Warrants shall
expire five (5) years after the effective date of the Registration Statement and
shall be exercisable for a period of four (4) years commencing one (1) year from
the effective date of the Registration Statement at a price equaling 15% of the
initial public offering price of the Shares. The Representative's Warrant
Agreement and form of Warrant Certificate shall be substantially in the form
filed as Exhibit 4.2 to the Registration Statement. Payment for the
Representative's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the
Registration Statement becomes effective as the Representative deem advisable,
the Underwriters shall make a public offering of the Shares (other than to
residents of or in any jurisdiction in which qualification of the Shares is
required and has not become effective) at the price and upon the other terms set
forth in the Prospectus. The Representative may from time to time, after the
initial public offering, increase or decrease the public offering price after
distribution of the Shares has been completed to such extent as the
Representative, in their sole discretion deem advisable; provided,
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however, that the foregoing shall not effect the per share purchase price from
the Company set forth in Section 2(a) above. The Underwriters may enter into one
or more agreements as the Underwriters, in each of their sole discretion, deem
advisable with one or more broker-dealers who shall act as dealers in connection
with such public offering.
4. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters 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 or file any document
under the Act or Exchange Act before completion of the initial distribution of
the offering of the Shares by the Underwriters of which the Representative shall
not previously have been advised and furnished with a copy, or to which the
Representative shall have objected or which is not in compliance with the Act,
the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Representative and confirm the
notice in writing, (i) when the Registration Statement 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 Prospectus, or
any amendment or supplement thereto, or the institution of proceedings for that
purpose, (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any of
the Registered Securities 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 authority shall enter a stop order or suspend
such qualification at any time, the Company will use its best efforts to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Representative) in accordance with the
requirements of the Act.
(d) The Company will give the Representative 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 Underwriters in connection with the offering of the Registered Securities
which differs from the corresponding prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such
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<PAGE>
revised prospectus is required to be filed pursuant to Rule 424(b) of the
Regulations), and will furnish the Representative 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 amendment or
supplement to which the Representative or Camhy Karlinsky & Stein LLP
("Underwriters' Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in
cooperation with the Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the Registered Securities for offering
and sale under the securities laws of such jurisdictions as the Representative
may reasonably designate to permit the continuance of sales and dealings therein
for as long as may be necessary to complete the distribution, 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 become subject to service of process in
any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Representative agree 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 Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Registered Securities 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 Registered
Securities is 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
Underwriters' 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 or supplement the Prospectus to comply with
the Act, the Company will notify the Representative promptly and prepare and,
subject to Section 4(a) hereof, file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be satisfactory to Underwriters' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or supplement
as soon as available and in such quantities as the Underwriters may request.
(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 Regulations, and to the Representative, 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
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158(a) of the 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 three (3) years after the date
hereof, the Company will furnish to its shareholders, as soon as practicable,
annual reports (including financial statements audited by independent public
accountants) and will make available to its shareholders unaudited quarterly
reports of earnings, and will deliver to the Representative:
(i) concurrently with furnishing such quarterly
reports to its shareholders, statements of income of the
Company for each quarter in the form furnished to the
Company's shareholders;
(ii) concurrently with furnishing such annual reports
to its shareholders, a copy of such annual report;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with
the Commission, the American Stock Exchange or any securities
exchange on which the Shares are listed;
(v) 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 or on behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its
businesses which the Representative may reasonably request.
During such three-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated basis
to the extent that the accounts of the Company and its subsidiaries are
consolidated.
(i) The Company will maintain a transfer agent (the
"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)
for the Common Stock.
(j) The Company will furnish to the Representative or on
the Represen- tative's order, without charge, at such place as the
Representative may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto, each Preliminary Prospectus, the Prospectus, and all amendments and
supplements thereto, including any prospectus prepared after the effective date
of the
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Registration Statement, in each case as soon as available and in such quantities
as the Representative may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative with true copies of duly
executed Lock-up Agreements. On or before the Closing Date, the Company shall
deliver instructions to the Transfer Agent authorizing it to place appropriate
stop transfer orders on the Company's ledgers.
(l) The Company shall use its best efforts to cause its
officers, directors, shareholders or affiliates (within the meaning of the
Regulations) not to 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
during the initial distribution of the offering of the Shares.
(m) The Company shall apply the net proceeds from the sale
of the Shares substantially in the manner, and subject to the conditions, set
forth under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports, forms
or other documents as may be required (including, but not limited to, a Form SR
as may be required pursuant to Rule 43 under the Act) from time to time, under
the Act, the Exchange Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Regulations.
(o) The Company shall cause the Common Stock to be quoted
on the American Stock Exchange, and for a period of two (2) years from the date
hereof shall use its best efforts to maintain the quotation of the Common Stock
on the American Stock Exchange or the Nasdaq Stock Market, Inc. to the extent
outstanding and to the extent so qualified.
(p) For a period of two (2) years from the Closing Date,
the Company shall cause its transfer agent to furnish to the Representative, if
so requested in writing, at the Company's sole expense, daily consolidated
transfer sheets relating to the Common Stock.
(q) For a period of five (5) years after the effective date
of the Registration Statement the Company shall, at the Company's sole expense,
take all necessary and appropriate actions to further qualify the Company's
securities in all jurisdictions of the United States in order to permit
secondary sales of such securities pursuant to the Blue-Sky laws of those
jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all
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necessary and appropriate actions to be included in Standard and Poor's
Corporation Descriptions and Moody's OTC Manual and to continue such inclusion
for a period of not less than five (5) years.
(s) The Company agrees that for a period of thirteen (13)
months following the effective date of the Registration Statement it will not,
without the prior written consent of the Representative, offer, issue, sell,
contract to sell, grant any option for the sale of or otherwise dispose of any
Common Stock, or securities convertible into Common Stock, the Representative's
Warrants, and shares of Common Stock issued upon the exercise of currently
outstanding warrants or options issued under any stock option plan in effect on
the Closing Date, shares of Common Stock automatically granted pursuant to any
stock option plan in effect on the Closing Date, shares of Common Stock issued
pursuant to any employee stock purchase plan in effect on the Closing Date or
the Conversion Shares.
(t) For a period of twenty-five (25) days from the
effective date of the Registration Statement, the Company shall not without the
prior written consent of the Representative or Underwriters' 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 Company's business
consistent with past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5) years
from the date hereof, and (ii) the sale to the public of the Representative's
Shares, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 (or other appropriate form) for the
registration under the Act of the Representative's Shares.
(v) The Company agrees that it shall use its best efforts,
which shall include, but shall not be limited to, the solicitation of proxies,
to elect one (1) designee of the Representative to the Company's Board of
Directors for a period of three (3) years following the Closing, provided that
such designee is reasonably acceptable to the Company. The Company shall use its
best efforts to insure that such designee serve from the time of election until
the expiration of such three-year period.
(w) The Company agrees that within one hundred twenty (120)
days after the Closing it shall retain a public relations firm which is
reasonably acceptable to the Representative. The Company shall keep such public
relations firm, or any replacement, for a period of two (2) years from the
Closing. Any replacement public relations firm shall be retained only with the
consent of the Representative.
(x) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal shareholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such such transactions requiring a
payment of more than $10,000 will be approved by a majority of the Company's
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outside independent directors disinterested in the transaction. In addition,
companies affiliated with Norton Herrick which are presently providing certain
accounting, administrative and general office services to, and obtaining
insurance coverage for, the Company at cost may continue to provide such
services to the Company at cost.
(y) The Company shall prepare and deliver to the
Representative, at the Company's sole expense, four bound volumes containing all
correspondence with regulatory officials, agreements, documents and all other
materials in connection with the offering.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing
Date and each Option Closing Date (to the extent not previously paid) all
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement and the Representative's Warrant 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 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 duplication,
mailing (including the payment of postage with respect thereto) and delivery of
this Agreement, the Agreement Among Underwriters, the Selected Dealers
Agreements, the Powers of Attorney, 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 Underwriters and
such dealers as the Underwriters may request, in quantities as hereinabove
stated, (iii) the printing, engraving, issuance and delivery of the certificates
representing the Registered Securities, (iv) the qualification of the Registered
Securities under state or foreign securities or "Blue Sky" laws and
determination of the status of such securities under legal investment laws (not
to exceed $25,000 plus any filing fees), including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky
Memorandum," the "Final Blue Sky Memorandum" and "Legal Investments Survey," if
any, and including reasonable disbursements and fees of counsel in connection
therewith, (v) expense of tombstone advertisements and other advertising costs
and expenses (not to exceed $10,000 in the aggregate), (vi) costs and expenses
in connection with the "road show," (vii) costs and expenses of any independent
counsel or consultant retained (provided that the Company approves in writing of
the retention of such independent counsel or consultants in advance), (viii)
fees and expenses of the transfer agent and registrar, (ix) the fees payable to
the Commission and the NASD and (x) the fees and expenses incurred in connection
with the listing of the Registered Securities on the American Stock Exchange and
any other market or exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section , Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Representative for all of their actual
out-of-pocket expenses in an amount not to exceed $50,000, including the fees
and disbursements of Underwriters' Counsel, less any
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amounts already paid pursuant to Section 5(c) hereof. In no event, however, will
the Representative, in the event the offering is terminated, be entitled to
retain or receive more than an amount equal to their actual accountable
out-of-pocket expenditures.
(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 Representative on the Closing Date by certified or bank cashier's check or,
at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Shares, less $50,000 which has been paid to date. In the event the
Representative elect to exercise the over-allotment option described in Section
2(b) hereof, the Selling Shareholder further agrees to pay to the Representative
on the Option Closing Date (by certified or bank cashier's check or, at the
Representative's election, by deduction from the proceeds of the offering of the
Option Shares) a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company (or the Selling Shareholder) from
the sale of the Option Shares.
6. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and 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, as the case may be, 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 its
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 City time, on the date prior to the date of
this Agreement or such later date and time as shall be consented to in writing
by the Representative, and, at 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 Underwriters' Counsel. If the
Company has elected to rely upon Rule 430A of the Regulations, the price of the
Shares 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 Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Representative 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 Regulations.
(b) The Representative shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which,
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in the opinion of Underwriters' Counsel, is material, or omits to state a fact
which, in the opinion of Underwriters' Counsel, 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 reasonable opinion of Underwriter's Counsel, is material,
or omits to state a fact which, in the reasonable opinion of Underwriter's
Counsel, 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 Underwriters
shall have received from Underwriters' Counsel such opinion or opinions with
respect to the organization of the Company, the validity of the Registered
Securities, the Registration Statement, the Prospectus and other related matters
as the Representative may request.
(d) At the Closing Date, the Underwriters shall have
received the opinions of Tenzer Greenblatt LLP ("Tenzer Greenblatt"), counsel to
the Company, and Atlas, Pearlman, Tropt & Borkson, P.A., special Florida
counsel, each dated the Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect that:
(i) the Company (A) has been duly organized and
is validly existing as a corporation in good standing under
the laws of its jurisdiction 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, and
(C) to the best of such counsel's knowledge, has all
requisite corporate power and authority 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 business as described in the
Prospectus.
(ii) except as described in the Prospectus, and to
the best of such counsel's knowledge after reasonable
investigation, the Company does not own an interest in any
corporation, limited liability company, partnership, joint
venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus,
and any amendment or supplement thereto, under
"Capitalization" and "Description of Securities," and to
the knowledge of such counsel, the Company is not a party
to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock,
rights, warrants, options or other securities, except for
this Agreement, the Representative's Warrant Agreement, and
as described in the Prospectus. The Registered Securities
and all other
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securities issued or issuable by the Company conform in all
material respects to the 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 holders of any security of the
Company. The Registered Securities to be sold by the
Company hereunder and under the Representative's Warrant
Agreement are not and will not be subject to any preemptive
or other similar rights of any shareholder, have been duly
authorized and, when issued, paid for and delivered in
accordance with their terms, will be validly issued, fully
paid and non-assessable and conform in all material
respects to the description 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 Registered Securities has been duly and validly
taken; and the certificates representing the Registered
Securities are in due and proper form. The Representative's
Warrants constitute valid and binding obligations of the
Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the
Company called for thereby (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). Upon the issuance and delivery pursuant to
this Agreement of the Registered Securities to be sold by
the Company, the Company will convey, against payment
therefor as provided herein, to the Underwriters and the
Representative, respectively, good and marketable title to
the Registered Securities free and clear of all liens and
other encumbrances;
(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 no stop order suspending the use of the
Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or 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 such counsel's knowledge,
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
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material respects with the requirements of the Act and the
Regulations. Such counsel shall state that such counsel has
participated in conferences with officers and other
representative of the Company and the Representative and
representative of the independent public accountants for
the Company, at which conferences the contents of the
Preliminary Prospectus, the Registration Statement, the
Prospectus, and any amendments or supplements thereto were
discussed, and, although such counsel is not passing upon
and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement and
Prospectus, and any amendments or supplements thereto, on
the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that
either the Registration Statement or any amendment thereto,
at the time such Registration Statement or amendment became
effective or the Preliminary Prospectus or Prospectus or
amendment or supplement thereto as of the date of such
opinion contained any untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading (it being understood that such counsel need
express no opinion with respect to the financial statements
and schedules and other financial and statistical data
included in the Preliminary Prospectus, the Registration
Statement or Prospectus, and any amendments or supplements
thereto);
(vi) to the best of such counsel's knowledge after
reasonable investigation, (A) there are no agreements,
contracts or other documents required by the Act 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; (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 it is bound are accurate in all material
respects and fairly represent the information required to
be shown by Form SB-2; (C) there is not pending or
threatened against the Company any action, arbitration,
suit, proceeding, litigation, governmental or other
proceeding (including, without limitation, those having
jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against the
Company which (x) 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 material respects), (y)
questions the validity of the capital stock of the Company
or this Agreement, or the Representative's Warrant
Agreement, or of any action taken or to be taken by the
Company pursuant to or in connection with any of the
foregoing; and (D) there is no action, suit or proceeding
pending or threatened against the Company before any
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court or arbitrator or governmental body, agency or
official in which there is a reasonable possibility of an
adverse decision which may result in a material adverse
change in the financial condition, business, affairs,
shareholders' equity, operations, properties, business or
results of operations of the Company, which could adversely
affect the present or prospective ability of the Company to
perform its obligations under this Agreement or the
Representative's Warrant Agreement or which in any manner
draws into question the validity or enforceability of this
Agreement or the Representati- ve's Warrant Agreement;
(vii) the Company has the corporate power and
authority to enter into each of this Agreement and the
Representative's Warrant Agreement and to consummate the
transactions provided for therein; and each of this
Agreement and the Representative's Warrant Agreement has
been duly authorized, executed and delivered by the
Company. Each of this Agreement and the Representative's
Warrant Agreement, assuming due authorization, execution
and delivery by each other party thereto, 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, delivery or performance of this
Agreement and the Representative's Warrant Agreement, 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 results in any
breach or violation of any of the terms or provisions of,
or constitutes 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, as amended, (B) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement,
shareholders' agreement, note, loan or credit agreement or
any other agreement or instrument known to such counsel to
which the Company is a party or by which it is bound, or
(C) any federal, state or local statute, rule or regulation
applicable to the Company or any judgment, decree or order
known to such counsel 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;
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(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 federal securities or Blue Sky laws, as to which no
opinion need be rendered) is required in connection with
the issuance of the Registered Securities pursuant to the
Prospectus, and the Registration Statement, the performance
of this Agreement and the Representative's Warrant
Agreement, and the transactions contemplated hereby and
thereby;
(ix) to the best of such counsel's knowledge after
reasonable investigation, the properties and business of
the Company conform in all material respects to the
description thereof contained in the Registration Statement
and the Prospectus;
(x) to the best knowledge of such counsel, and
except as disclosed in Registration Statement and the
Prospectus, the Company is not in breach of, or in default
under, any term or provision of any license, contract,
indenture, mortgage, installment sale agreement, deed of
trust, lease, voting trust agreement, shareholders'
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 is
bound or to which the property or assets (tangible or
intangible) of the Company is subject; and the Company is
not in violation of any term or provision of its articles
of incorporation or by-laws, as amended, and to the best of
such counsel's knowledge after reasonable investigation,
not in violation of any franchise, license, permit,
judgment, decree, order, statute, rule or regulation;
(xi) the statements in the Prospectus under "Dividend
Policy," "Description of Securities," and "Shares Eligible
for Future Sale" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations or legal
conclusions, are correct in all material respects;
(xii) the Common Stock has been accepted for quotation
on the American Stock Exchange;
(xiii) to the best of such counsel's knowledge and
based upon a review of the outstanding securities and the
contracts furnished to such counsel by the Company, 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;
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(xiv) assuming due execution by the parties thereto
other than the Company, each Lock-up Agreement is a legal,
valid and binding obligation of the party 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);
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws, rules and
regulations of the United States and the laws, rules and regulations of the
State of Florida, 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 satisfactory to Underwriters' Counsel) of other counsel acceptable to
Underwriters' 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
Underwriters' Counsel if requested. The opinion of such counsel shall state that
knowledge shall not include the knowledge of a director or officer of the
Company who is affiliated with such firm in his or her capacity as an officer or
director of the Company. 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.
At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinion of Tenzer Greenblatt, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel confirming as of such
Option Closing Date the statements made by Tenzer Greenblatt in their opinion
delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' 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 , or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to each of the 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, shareholders' equity or the business activities of the
Company, whether or not in the 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
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transaction, not in the ordinary course of its 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 adverse to
the Company; (iii) the Company shall not be in default under any provision of
any instrument relating to any outstanding indebtedness which default has not
been waived or which would not have a material adverse effect on the Company;
(iv) the Company shall not have issued any securities (other than the Registered
Securities and the Conversion Shares) or declared or paid any dividend or made
any distribution in respect of its capital stock of any class and there has not
been any change in the capital stock, or any material increase in the debt (long
or short term) or liabilities or obligations (other than any increase in its
short-term borrowings in the ordinary course of business) of the Company
(contingent or otherwise); (v) 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; (vi) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company, or affecting any of its respective properties or
businesses 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 (vii) no stop order shall have been
issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing
Date, if any, the Underwriters shall have received a certificate of the Company
signed on behalf of the Company by the principal executive officer of the
Company, dated the Closing Date or Option Closing Date, as the case may be, to
the effect that such executive 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
(unless waived) 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 or any part thereof 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 after due inquiry, are contemplated or threatened
under the Act;
(iii) The Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto,
contain all statements and information required by the Act
to be included therein, and none of the
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<PAGE>
Registration Statement, the Prospectus nor any
post-effective amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading and neither the
Preliminary Prospectus or any supplement thereto, as of
their respective dates, included any untrue statement of a
material fact or omitted 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, (a) 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; (b) the Company has not paid or declared any
dividends or other distributions on its capital stock; (c)
the Company has not entered into any transactions not in
the ordinary course of its business; (d) there has not been
any change in the capital stock or material increase in
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, (e) the
Company has not sustained any material loss or damage to
its property or assets, whether or not insured, (f) there
is no litigation which is pending or, to each of such
person's knowledge, threatened (or circumstances giving
rise to same) against the Company or any affiliated party
of any of the foregoing which is required to be set forth
in an amended or supplemented Prospectus which has not been
set forth, and (g) there has occurred no event required to
be set forth in an amended or supplemented Prospectus which
has not been set forth.
(h) By the Closing Date, the Underwriters will have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Underwriters.
(i) At the time this Agreement is executed, the
Underwriters shall have received a letter, dated such date, addressed to the
Underwriters 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 Underwriters and Underwriters' Counsel, from Peat Marwick:
(i) confirming that they are independent certified
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, if any) of
the Company included in the Registration
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<PAGE>
Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the
Regulations thereunder and that the Representative may rely
upon the opinion of Peat Marwick with respect to the
financial statements (and supporting schedules, if any)
included in the Registration Statement;
(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 shareholders and board of
directors and the various committees of the board 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, if any, do not comply as to
form in all material respects with the applicable
accounting requirements of the Act and the 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 material increase in long-term debt of the Company, or
any material decrease in the shareholders' equity or net
current assets or net assets of the Company as compared
with amounts shown in the ___________, 199_, 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.
(iv) 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
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<PAGE>
(v) statements as to such other material matters
incident to the transaction contemplated hereby as the
Representative may reasonably request.
(j) At the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received from Peat Marwick a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to Subsection (i) of this Section , except that the specified date referred to
shall be a date not more than five (5) days prior to Closing Date or the Option
Closing Date, as the case may be, 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 Representative 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).
(k) On each of Closing Date and Option Closing Date, if
any, there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Registered Securities.
(l) No order suspending the sale of the Registered
Securities in any jurisdiction designated by the Representative 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 shall be contemplated.
(m) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's Warrant
Agreement, substantially in the form filed as Exhibit 4.2, to the Registration
Statement, in final form and substance satisfactory to the Representative, and
(ii) the Representative's Warrants in such denominations and to such designees
as shall have been provided to the Company in writing.
(n) On or before Closing Date, the Common Stock shall have
been duly approved for quotation on American Stock Exchange.
(o) On or before Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements in final form and
substance satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' 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 Representative may terminate
this Agreement or, if the Representative so elect, it may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
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<PAGE>
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
of the Underwriters (for purposes of this Section 7 "Underwriters" shall include
the officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in Section 11 hereof), 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, from and against any and all
loss, liability, claim, damage, and expense whatsoever (including, but not
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement of any claim or litigation provided that the
indemnified persons may not agree to any such settlement without the prior
written consent of the Company), as and when incurred, arising out of, based
upon or in connection with (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented); or
(B) in any application or other document or communication (in this Section 7
collectively called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company in any
jurisdiction in order to qualify the Registered Securities under the securities
laws thereof or filed with the Commission, any state securities commission or
agency, The American Stock Exchange or any securities exchange; or any omission
or alleged omission to state 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; or (ii) any breach of any material representation, warranty, covenant or
agreement of the Company contained in this Agreement. Notwithstanding anything
to the contrary, the indemnity agreement in this Section 7(a) with respect to
any Preliminary Prospectus will not inure to the benefit of the Underwriters (or
to the benefit of any other person that may be indemnified pursuant to this
Section 7(a)) if (A) the person asserting any such losses, claims, damages,
expenses or liabilities purchased the Shares which are the subject thereof from
an Underwriter or other indemnified person; (B) such Underwriter or other
indemnified person failed to send or give a copy of the Prospectus to such
person at or prior to the written confirmation of the sale of such Shares to
such person; and (c) the Prospectus did not contain any untrue statement or
alleged untrue statement or omission or alleged omission giving rise to such
cause, claim, damage, expense or liability. 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) Each of the Underwriters 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
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<PAGE>
meaning of the Act, to the same extent as the foregoing indemnity from the
Company to the Underwriters 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 or
the Representative 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 Underwriters in connection with this Offering. The Company
acknowledges that the statements with respect to the public offering of the
Registered Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters or the Representative for inclusion
in the Prospectus.
(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 to so notify an indemnifying party shall not relieve it
from any liability which it may have otherwise or which it may have under this
Section 7, except to the extent that it has been prejudiced in any material
respect by such failure). 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 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 indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties and that
it is a conflict of interest for the indemnified party or parties to be
represented by such counsel (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 the reasonable 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.
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<PAGE>
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 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 Registered Securities or (B) if the allocation provided by clause (A) above
is not permitted 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 a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Registered
Securities (before deducting expenses other than underwriting discounts and
commissions) bear to the total underwriting discounts received by the
Underwriters 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 Underwriters, 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 Underwriters shall not be required to contribute any amount
in excess of the underwriting discount applicable to the Registered Securities
purchased by the Underwriters hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(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
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<PAGE>
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 of the Company
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 respective
indemnity and contribution 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 any Underwriter, the Company, any controlling person of any of
the Underwriters or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the Registered Securities to the Underwriters
and the Representative, as the case may be.
9. Effective Date.
(a) This Agreement shall become effective at 10:00 a.m.,
New York City time, on the date hereof. For purposes of this Section 9, the
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of dispatch by the Representative of telegrams to securities dealers
releasing such shares for offering or the release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the
Representative shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Representative's reasonable opinion will in the immediate future disrupt the
financial markets; or (ii) any material adverse change in the financial markets
shall have occurred; or (iii) 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 (iv) if the United States shall
have become involved in a war or major hostilities, or if there shall have been
an escalation in an existing war or major hostilities or a national emergency
shall have been declared in the United States; or (v) if a banking moratorium
has been declared by a state or federal authority; or (vi) if the Company shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which,
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<PAGE>
whether or not such loss shall have been insured, will, in the Representative's
reasonable opinion, make it inadvisable to proceed with the delivery of the
Shares; or (vii) if there shall have been such a material adverse change in the
prospects or conditions of the Company, or such material adverse change in the
general market, political or economic conditions, in the United States or
elsewhere as in the Representative's reasonable judgment would make it
inadvisable to proceed with the offering, sale and/or delivery of the Registered
Securities.
(b) If this Agreement is terminated by the Representative
in accordance with any of the provisions of Section , Section 10(a)(i) - (v), or
Section 12, the Company shall promptly reimburse and indemnify the Underwriters
pursuant to Section 5(b) hereof. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections , 10, 11 and 12
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.
11. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section , Section 10 or
Section 12 hereof) to purchase the Registered Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 24 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth. If, however, the Representative shall not have completed
such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed
10% of the total number of Shares to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of
the total number of Shares, this Agreement shall terminate without liability on
the part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in
a termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
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12. 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 Registered Securities 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 Shares to be purchased on an Option Closing Date, the
Underwriters may at the Representative's option, by notice from the
Representative to the Company, terminate the Underwriters' obligation to
purchase Option Shares from the Company on such date) without any liability on
the part of any non-defaulting party other than pursuant to Section 5, Section 7
and Section 10 hereof. No action taken pursuant to this Section shall relieve
the Company from liability, if any, in respect of such default.
13. 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 Underwriters shall be directed to the
Representative, c/o L.H. Friend, Weinress, Frankson & Presson, Inc., 3333
Michelson Drive, Suite 50, Irvine, California 92715, Attention: Gregory E.
Presson, with a copy, which shall not constitute notice, to Camhy Karlinsky &
Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attention: Alan
I. Annex, Esq. Notices to the Company shall be directed to the Company at 2295
Corporate Blvd., N.W., Suite 222, Boca Raton, Florida 33431, Attention: CEO,
with a copy, which shall not constitute notice, to Tenzer Greenblatt LLP, 405
Lexington Avenue, New York, New York 10174, Attention:
Robert J. Mittman, Esq.
14. Parties. This Agreement shall inure solely to the benefit
of and shall be binding upon the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof and their
respective successors, legal representative and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Registered Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
15. 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.
16. 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.
17. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding
between the Underwriters 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,
AUDIO BOOK CLUB, INC.
By:______________________________________
Name:
Title:
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<PAGE>
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
By:__________________________________________________
Name:
Title:
For themselves and as Representative of the Underwriters named in Schedule A
hereto.
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<PAGE>
SCHEDULE A
Number of
Shares to be
Name of Underwriters Purchased
- -------------------- ------------
L.H. Friend, Weinress, Frankson & Presson, Inc.................
TOTAL................................... 2,000,000
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<PAGE>
-------------------------------------
AUDIO BOOK CLUB, INC.
AND
L. H. FRIEND, WEINRESS,
FRANKSON & PRESSON, INC.
REPRESENTATIVES'
WARRANT AGREEMENT
Dated as of _____ __, 1997
-------------------------------------
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of , 1997,
between AUDIO BOOK CLUB,INC., a Florida corporation (the "Company"), and L. H.
FRIEND WEINRESS, FRANKSON & PRESSON, INC. and its assignees or designees (each
hereinafter referred to variously as a "Holder" or "L. H. Friend").
W I T N E S S E T H :
WHEREAS, the L. H. Friend has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") between the Company, and
L. H. Friend and Nolan Securities Corporation (together, the "Representatives"),
to act as one of the representatives of the several underwriters listed therein
(the "Underwriters") in connection with the Company's proposed public offering
of 2,000,000 shares of common stock of the Company, no par value, (the "Common
Stock"), at a public offering price of $_____ per share (the "Public Offering").
WHEREAS, pursuant to the Underwriting Agreement, the Company
proposes to issue warrants to the Representatives to purchase up to an aggregate
of 200,000 shares of Common Stock (the "Representatives' Warrants").
WHEREAS, the Representatives' Warrants 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 Representatives in
consideration for, and as part of the Underwriters' compensation in connection
with, the Representatives acting as the representatives pursuant to the
Underwriting Agreement.
1
<PAGE>
NOW, THEREFORE, in consideration of the premises, the payment
by the Representatives to the Company of an aggregate of Twenty-seven Dollars
($27.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. L. H. Friend is hereby collectively granted the
right to purchase, at any time from _____ __, 1998 until 5:30 p.m., New York
time, on _____ __, 2002 (5 years from the Effective Date of the registration
statement and any supplement thereto, on Form SB-2, No. _________), at which
time the Representatives' Warrants expire, up to an aggregate _______ shares of
Common Stock (subject to adjustment as provided in Section 8 hereof), at an
initial exercise price (subject to adjustment as provided in Section 11 hereof)
of $___ (165% of the public offering price) (the "Exercise Price").
2. Representatives' Warrant Certificates. The Representatives'
Warrant certificates (the "Warrant 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. Registration of Warrant. The Representatives' Warrants
shall be numbered and shall be registered on the books of the Company when
issued.
4. Exercise of Representatives' Warrant.
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4.1 Method of Exercise. The Representatives' Warrants
initially are exercisable at the Exercise Price (subject to adjustment as
provided in Section 11 hereof) per Representatives' Warrant set forth in Section
8 hereof payable by certified or official bank check in New York Clearing House
funds. Upon surrender of a Representatives' Warrant Certificate with the annexed
Form of Election to Purchase duly executed, together with payment of the
Exercise Price for the shares of Common Stock purchased at the Company's
principal offices in Florida (presently located at 2295 Corporate Blvd. N.W.,
Suite 222, Boca Raton, Florida 33431) the registered holder of a
Representatives' Warrant Certificate ("Holder" or "Holders") shall be entitled
to receive a certificate or certificates for the shares of Common Stock so
purchased. The purchase rights represented by each Representatives' Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of Common Stock underlying the
Representatives' Warrants). In the case of the purchase of less than all of the
shares of Common Stock purchasable under any Representatives' Warrant
Certificate, the Company shall cancel said Representatives' Warrant Certificate
upon the surrender thereof and shall execute and deliver a new Representatives'
Warrant Certificate of like tenor for the balance of the shares of Common stock
purchasable thereunder.
4.2 Exercise by Surrender of Representatives' Warrant. In
addition to the method of payment set forth in Section 4.1 and in lieu of any
cash payment required thereunder, the Holder(s) of the Representatives' Warrants
shall have the right at any time and from time to time to exercise the
Representatives' Warrants in full or in part by surrendering the Warrant
Certificate in the manner specified in Section 4.1 in exchange for the number of
shares of Common Stock equal to the product of (x) the number of shares of
Common Stock as to which
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the Representatives' Warrants are being exercised, multiplied by (y) a fraction,
the numerator of which is the Market Price (as defined in Section 9.3 (e)
hereof) of the shares of Common Stock minus the Exercise Price of the shares of
Common Stock and the denominator of which is the Market Price per share of
Common Stock. Solely for the purposes of this Section 4.2, Market Price shall be
calculated either (i) on the date on which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 15 hereof
("Notice Date") or (ii) as the average of the Market Price for each of the five
trading days immediately preceding the Notice Date, whichever of (i) or (ii)
results in a greater Market Price.
5. Issuance of Certificates. Upon the exercise of the
Representatives' Warrant, the issuance of certificates for shares of Common
Stock, properties or rights underlying such Representatives' Warrant shall be
made forthwith (and in any event within five (5) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax,
other than income taxes, which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the provisions of Sections 7
and 9 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
Holder and the Company shall not be 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 Representatives' Warrant Certificates and the certificates
representing the
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shares of Common Stock or other securities, property or rights issued upon
exercise of the Representatives' Warrant shall be executed on behalf of the
Company by the manual or facsimile signature of the then present President or
any 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 any Assistant Secretary of the Company. Representatives' Warrant Certificates
shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
6. Transfer of Representatives' Warrant. The Representatives'
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
representative accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration transfer, the Company shall execute
and deliver the new Representatives' Warrant to the person entitled thereto.
7. Restriction On Transfer of Representatives' Warrant. The
Holder of a Representatives' Warrant Certificate, by its acceptance thereof,
covenants and agrees that the Representatives' Warrant is being acquired as an
investment and not with a view to the distribution thereof, and that the
Representatives' Warrant may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, for the term of the Representatives'
Warrant, except to officers or partners of the Underwriters, or by operation of
law.
8. Exercise Price and Number of Securities. Except as
otherwise provided in
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Section 10 hereof, each Representatives' Warrant is exercisable to purchase one
share of Common Stock at an initial exercise price equal to the Exercise Price.
The Exercise Price and the number of shares of Common Stock for which the
Representatives' Warrant may be exercised shall be the price and the number of
shares of Common Stock which shall result from time to time from any and all
adjustments in accordance with the provisions of Section 11 hereof.
9. Registration Rights.
9.1 Registration Under the Securities Act of 1933. Each
Representatives' Warrant Certificate and each certificate representing shares of
Common Stock and any of the other securities issuable upon exercise of the
Representatives' Warrant (collectively, the "Warrant Shares") shall bear the
following legend unless (i) such Representatives' Warrant or Warrant Shares are
distributed to the public or sold to the underwriters for distribution to the
public pursuant to Section 9 hereof or otherwise pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the "Act"), or
(ii) the Company has received an opinion of counsel, in form and substance
reasonably satisfactory to counsel for the Company, that such legend is
unnecessary for any such certificate:
THE REPRESENTATIVES' WARRANT 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
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SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESEN-
TATIVES' WARRANT REPRESENTED BY THE CERTIFICATE
IS RESTRICTED IN ACCORDANCE WITH THE
REPRESENTATIVES' WARRANT AGREEMENT REFERRED TO
HEREIN.
9.2 Piggyback Registration. If, at any time commencing after
the effective date of the Registration Statement and expiring five (5) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger or pursuant to Form S-4 or Form S-8 or
successor form thereto) it will give written notice by registered mail, at least
thirty (30) days prior to the filing of each such registration statement, to the
Holders of the Warrant Shares of its intention to do so. If any of the Holders
of the Warrant Shares notify the Company within twenty (20) days after mailing
of any such notice of its or their desire to include any such securities in such
proposed registration statement, the Company shall afford such Holders of the
Warrant Shares the opportunity to have any such Warrant Shares registered under
such registration statement. In the event that the managing underwriter for said
offering advises the Company in writing that in its opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in such offering without causing a diminution in the offering
price or otherwise adversely affecting the offering, the Company will include in
such registration (a) first, the securities the Company proposes to sell, (b)
second, the securities held by the entities that made the demand for
registration, (c) third, the Warrant Shares requested to be included in such
registration which in the opinion of such underwriter can be sold, pro rata
among the Holders of Warrant Shares on the basis of the
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<PAGE>
number of Representatives' Warrant Shares requested to be registered by such
Holders, and (d) fourth, other securities requested to be included in such
registration.
Notwithstanding the provisions of this Section 9.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 9.2 (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.
9.3 Demand Registration.
(a) At any time commencing one (1) year after the effective
date of the Registration Statement and expiring five (5) years from the
effective date of the Registration Statement, the Holders of the
Representatives' Warrants and/or Warrant Shares representing a "Majority" (as
hereinafter defined) of the Representatives' Warrants and/or Warrant Shares
shall have the right (which right is in addition to the registration rights
under Section 9.2 hereof), exercisable by written notice to the Company, to have
the Company prepare and file with the Securities and Exchange Commission (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 Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale by such
Holders and any other Holders of the Representatives' Warrant and/or Warrant
Shares who notify the Company within fifteen (15) days after the Company mails
notice of such request pursuant to Section 9.3(b) hereof (collectively, the
"Requesting Holders") of their respective Warrant Shares for the earlier
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<PAGE>
of (i) six (6) consecutive months or (ii) until the sale of all of the Warrant
Shares requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written notice
of any registration request under this Section 9.3 by any Holder or Holders
representing a Majority of the Representatives' Warrants and/or Warrant Shares
to all other registered Holders of the Representatives' Warrants and the Warrant
Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under Section
9.2 and subsection (a) of this Section 9.3, at any time commencing one (1) year
after the effective date of the Registration Statement and expiring five (5)
years from the effective date of the Registration Statement, the Holders of a
Majority of the Representatives' Warrants and/or Warrant Shares shall have the
right on one occasion, exercisable by written request to the Company, to have
the Company prepare and file with the Commission a registration statement so as
to permit a public offering and sale by such Holders of their respective Warrant
Shares for the earlier of (i) six (6) consecutive months or (ii) until the sale
of all of the Warrant Shares requested to be registered by such Holders;
provided, however, that the provisions of Section 9.4(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. If the
Holders have exercised their rights under Section 9.3(a) then the Holders may
not exercise their rights under Section 9.3(c) for a period of six (6) months
following the effective date of any registration statement filed pursuant to
Section 9.3(a).
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<PAGE>
(d) Notwithstanding anything to the contrary contained
herein, if the Company shall not have filed a registration statement for the
Warrant Shares within the time period specified in Section 9.4(a) hereof
pursuant to the written notice specified in Section 9.3(a) of the Holders of a
Majority of the Representatives' Warrants and/or Warrant Shares, the Company, at
its option, may repurchase (i) any and all Warrant Shares at the higher of the
Market Price (as defined in Section 9.3(e)) per share of Common Stock on (x) the
date of the notice sent pursuant to Section 9.3(a) or (y) the expiration of the
period specified in Section 9.4(a) and (ii) any and all Representatives' Warrant
at such Market Price less the Exercise Price of such Representatives' Warrant.
Such repurchase shall be in immediately available funds and shall close within
two (2) days after the later of (i) the expiration of the period specified in
Section 9.4(a) or (ii) the delivery of the written notice of election specified
in this Section 9.3(d).
(e) Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average closing
sale price as furnished by the American Stock Exchange ("Amex") or similar
organization if Amex is no longer reporting such information, or if the Common
Stock is not quoted on Amex, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.
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<PAGE>
9.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within ninety (90) days of receipt of any demand
therefor, and to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Shares 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, and
excluding roadshow expenses if the only shares to be registered in such
Registration Statement are Warrant Shares), fees and expenses in connection with
all registration statements filed pursuant to Sections 9.2 and 9.3(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and
expenses (including those of the Company) in connection with the registration
statement filed pursuant to Section 9.3(c).
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Shares 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.
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<PAGE>
(d) The Company shall indemnify the Holder(s) of the
Warrant Shares 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 each of the Underwriters
contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Warrant Shares to be sold pursuant
to a registration statement, and their successors 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 Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed
as requiring
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<PAGE>
the Holder(s) to exercise their Representatives' Warrant 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 Warrant Shares to be included in any registration
statement filed pursuant to Section 9.3 hereof, or permit any other registration
statement to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 9.3 hereof (other than registration
statements filed prior to an exercise of registration rights by a Holder of
Representatives Warrants and/or Warrant Shares pursuant to Section 9.2 hereof),
without the prior written consent of L. H. Friend Securities Corporation or as
otherwise required by the terms of any existing registration rights granted
prior to the date of this Agreement by the Company to the holders of any of the
Company's 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
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<PAGE>
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, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) 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 enter into an underwriting agreement
with the managing underwriters (in the case of registration rights exercised
pursuant to Section 9.3 hereof, selected for such underwriting by Holders
holding a Majority of the Warrant Shares requested to be included in such
underwriting, which may be the Representative). Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Shares 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
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<PAGE>
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 and their
intended methods of distribution.
(k) For purposes of this Agreement, the term "Majority" in
reference to the Representatives' Warrants or Warrant Shares shall mean in
excess of fifty percent (50%) of the then outstanding Representatives' Warrants
or Warrant Shares 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 family, persons acting as nominees or in conjunction therewith
or (ii) have not been resold to the public pursuant to a registration statement
filed with the Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to Section 9
hereof that each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the Warrant Shares covered by a registration statement is required
to be delivered under the Act, of the happening of any event with respect to
such selling Holder as a result of which the
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<PAGE>
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
11. Adjustments to Exercise Price and Number of Securities.
The Exercise Price in effect at any time and the number and kind of securities
purchased upon the exercise of the Representatives' Warrant shall be subject to
adjustment from time to time only upon the happening of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case
the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
Such adjustment shall be made successively whenever any event listed above shall
occur.
11.2 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section 11,
the number of Warrant Shares issuable upon the exercise at the adjusted Exercise
Price of each Representatives' Warrant shall
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<PAGE>
be adjusted to the nearest number of whole shares of Common Stock by multiplying
a number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares issuable upon exercise of the
Representatives' Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
11.3 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 Articles 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.
11.4 Merger or Consolidation. In case of any consolidation
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 the Holder a supplemental
warrant agreement providing that the Holder of each Representatives' Warrant
then outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representatives' Warrant) to receive, upon exercise of such
Representatives' Warrant, 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 shares of Common Stock for which such Representatives' Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
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which shall be identical to the adjustments provided in Section 11. The above
provision of this subsection shall similarly apply to successive consolidations
or mergers.
11.5 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 Representatives'
Warrant or the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any
other security convertible, exercisable, or exchangeable into shares of Common
Stock) upon the direct or indirect conversion, exercise, or exchange of any
options, rights, warrants, or other securities or indebtedness of the Company
outstanding as of the date of this Agreement or granted pursuant to any stock
option plan of the Company in existence as of the date of this Agreement,
pursuant to the terms thereof; or
(c) If the amount of said 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 Representatives' Warrant.
11.6 Exchange and Replacement of Representatives' Warrant
Certificates. Each Representatives' Warrant Certificate is exchangeable, without
expense, upon the surrender thereof by the registered Holder at the principal
executive office of the Company for a new
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Representatives' Warrant Certificate of like tenor and date representing in the
aggregate the right to purchase the same number of Warrant Shares 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
Representatives' Warrant 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 the Representatives' Warrant, if mutilated,
the Company will make and deliver a new Warrant Certificate of like tenor, in
lieu thereof.
12. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Representatives' Warrant, 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 shares of Common Stock
or other securities, properties or rights.
13. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the
Representatives' Warrant, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
Every transfer agent ("Transfer Agent") for the Common Stock and other
securities of the Company issuable upon the exercise of the Representatives'
Warrant will be irrevocably
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<PAGE>
authorized and directed at all times to reserve such number of authorized shares
of Common Stock and other securities as shall be requisite for such purpose. The
Company will keep a copy of this Agreement on file with every Transfer Agent for
the Common Stock and other securities of the Company issuable upon the exercise
of the Representatives' Warrant. The Company will supply every such Transfer
Agent with duly executed stock and other certificates, as appropriate, for such
purpose. The Company covenants and agrees that, upon exercise of the
Representatives' Warrant and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Representatives' Warrant shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Representatives' Warrant to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock issued to the public in connection herewith may then be
listed and/or quoted on Amex.
14. Notices to Representatives' Warrant 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 Representatives' Warrants
and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution payable
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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 its
Common Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(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 said 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.
21
<PAGE>
15. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made and sent when delivered, or mailed by registered or certified mail,
return receipt requested:
(a) if to the registered Holder of the Representatives'
Warrant, 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
4 hereof or to such other address as the Company may designate by notice to the
Holders.
16. Supplements; Amendments; Entire Agreement. 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. The Company and the Representatives may
from time to time supplement or amend this Agreement without the approval of any
holders of Representatives' Warrant 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 Representatives may deem necessary or desirable and
which the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Representatives' Warrant Certificates.
17. Successors. All of the covenants and provisions of this
Agreement shall be
22
<PAGE>
binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.
18. Survival of Representations and Warranties. All statements
in any schedule, exhibit or certificate or other instrument delivered by or on
behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.
19. Governing Law. This Agreement and each Representatives'
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
20. 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.
21. 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.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Representatives and any
23
<PAGE>
other registered Holder(s) of the Representatives' Warrant Certificates or
Warrant Shares 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 Underwriters and any other Holder(s) of the Representatives'
Warrant Certificates or Warrant Shares.
23. 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 OF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
ATTEST: AUDIO BOOK CLUB, INC.
_______________________________ By:_____________________________________________
Name:
Title:
L. H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
By:_____________________________________________
Name:
Title:
24
<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVES' WARRANT CERTIFICATE]
THE REPRESENTATIVES' WARRANT 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 REPRESENTATIVES' WARRANT
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ____ ___, 2002
Representatives' Warrant No.
__________ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or registered
assigns, is the registered holder of Warrants to purchase initially, at any time
from ____ ___, 1998 until 5:30 p.m., New York time on ____ ___, 2002
("Expiration Date"), up to shares of fully-paid and non-assessable common stock,
no par value ("Common Stock") of Audio Book Club, Inc., a Florida corporation
(the "Company") at the initial exercise price, subject to adjustment in certain
events, of $_____ per share (the "Exercise Price") upon surrender of this
Representatives' Warrant 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 Representatives' Warrant Agreement dated as of _____ ___, 1997 among
the Company and L. H. Friend Securities Corporation (the "Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank check
in New York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration
EXH. A-2
1
<PAGE>
Date, at which time all Representatives' Warrant evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Representatives' Warrant evidenced by this Warrant
Certificate are part of a duly authorized issue of Representatives' Warrant
issued pursuant to the Warrant Agreement, which Warrant 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 Representatives' Warrant.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type 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
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the
Representatives' Warrant; provided, however, that the failure of the Company to
issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Representatives' Warrant shall be issued to the
transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided herein and in the Warrant 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 Representatives'
Warrant evidenced by this Certificate, the Company shall forthwith issue to the
holder hereof a new Warrant Certificate representing such numbered unexercised
Representatives' Warrant.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
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 Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
This Warrant Certificate does not entitle any holder thereof
to any of the rights
EXH. A-2
2
<PAGE>
of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ____ ___, 1997.
ATTEST: AUDIO BOOK CLUB, INC.
_______________________________ By:_____________________________________________
Name:
Title:
EXH. A-3
3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.11]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase Shares of Common
Stock 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
Audio Book Club, Inc. (the "Company") in the amount of $_____, all in accordance
with the terms of Section 3.1 of the Representatives' Warrant Agreement dated as
of ____ __, 1997 among the Company and L. H. Friend Weiness, Frankson & Presson,
Inc. The undersigned requests that a certificate for such securities be
registered in the name of___________________________________________ , whose
address is________________________________ and that such certificate be
delivered to_________________________________ , whose address is
_________________________________, and if said number of shares shall not be all
the shares purchasable hereunder, that a new Warrant Certificate for the balance
of the shares purchasable under the within Warrant Certificate be registered in
the name of the undesigned warrant holder or his assignee as below indicated and
delivered to the address stated below.
Dated:_____________________
Signature:____________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
Address:______________________________________________
______________________________________________
______________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-4
4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED___________________ here sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and
appoint___________________________ Attorney, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated:_____________________
Signature:____________________________________
(Signature must conform in all respects to
name of holder as specified on the face of the
Warrant Certificate.)
Address:______________________________________________
______________________________________________
______________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
EXH. A-5
5
<PAGE>
[LETTERHEAD OF AUDIO BOOK CLUB]
September 15, 1997
Mr. Jesse Faber
1 Nutting Place
West Caldwell, NJ 07006
Re: AUDIO BOOK CLUB, INC. (the "Company")
Dear Jesse:
This letter will cover the period of your employment with the Company from
November 1, 1997 until October 31, 1998 (the "Employment Term").
In this regard, the, Company will pay you a base salary, commencing November 1,
1997 of $140,000 (One Hundred and Fourty Thousand) per annum. Such salary will
be paid monthly in arrears on the last day of the month at the rate of $11,667)
per month, prorated for your first and last month, for the actual number of
days employed during each month.
In addition to this base salary, you will receive a bonus, provided you are
still employed by the Company at the conclusion of the Employment Term, of
$35,000 (Thirty-Five Thousand Dollars) to be paid to you on October 31, 1998.
In the event the Company completes it's initial public offering that is
presently underway, then you will receive options to acquire 50,000 shares of
common stock in the Company pursuant to and in accordance with the Company's
stock option plan. Such options shall vest as to 1/5th of the shares covered
therely on October 31, 1998 and each October 31, 1998 thru October 31, 2002;
provided, however, that such options shall terminate and be cancelled if you are
no longer employed by the Company prior to the date such options vest. Such
options shall be exercisable at a price per share equal to 110% of the public
offering price of the common stock in the initial public offering and will be
exercisable for a period of five years commencing immediately upon vesting,
provided, however, if you are no longer employed by the Company, such options
shall expire on the earlier of 30 days following the date you are no longer
employed by the Company or five years from the date such options initially
became exercisable.
20 Community Place * P.O. Box 2316 * Morristown, New Jersey 07962-2316
(201) 539-9528 FAX (201) 539-1273 http://www.audiobookclub.com
<PAGE>
Mr. Jesse Faber
September 15,1997
Page 2
You will also receive four weeks paid vacation during the Employment Term.
You acknowledge and agree that: all mailing lists; customer, member and prospect
names; licensor arrangements; front end and back end marketing performance;
financial statements; operating system, data base and other computer software
specific to the Company; and all information which is known by you to be subject
to a confidentiality agreement or obligation of confidentiality, even without a
confidentiality agreement between the Company and another person or party, shall
be maintained by you in a confidential manner and you agree that you will not
use such information to the detriment of the Company or disclose such
information to any third party, except as may be necessary in the course of
perfoming your job responsibilities. You further agree that your obligations of
confidentiality with respect to such information shall continue for five years
after you cease to be employed by the Company.
You acknowledge that this letter and the May 1, 1997 employment letter between
the Company and you embodies and constitutes the entire understanding between
the Company and you with respect to your employment by the Company and such
employment arrangement may not be modified except by a writing signed by the
Company and you.
Very truly yours,
AUDIO BOOK CLUB, INC.
Michael Herrick, COO
AGREED AND ACCEPTED this 16th
day of September, 1997
/s/ Jesse Faber
- ------------------------------
Jesse Faber
Enclosure
c: Norton Herrick
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
The Board of Directors
Audio Book Club, Inc.
We consent to the use of our audit report dated March 7, 1997, except as to
note 11(a), which is as of July 16, 1997, and notes 11(b), (c) and (d) which
are as of September 16, 1997, on the financial statements of Audio Book Club,
Inc. as of December 31, 1996 and for each of the years in the two year period
then ended included herein and to the reference to our firm under the headings
"Summary Financial Information", "Selected Financial Data", and "Experts" in
the prospectus.
KPMG Peat Marwick LLP
New York, New York
September 16, 1997
<PAGE>
EXHIBIT 23.2
Letter of KPMG Peat Marwick LLP re: Unaudited Interim Financial Information
Audio Book Club, Inc.
2295 Corporate Blvd., N.W.
Boca Raton, Florida 33431
Ladies and Gentlemen:
Re: Registration Statement No. 333-30665
With respect to the subject registration statement, we acknowledge our
awareness of the use therein of our report dated July 16, 1997, except for
notes 11(b), (c) and (d) which are as of September 16, 1997, related to our
reviews of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
New York, New York
September 16, 1997
