<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1997
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
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
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. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
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 ... 3,105,000(2) $ 6.00 $18,630,000 $5,645.45
- -------------------------------------------------------------------------------------------------------------------
Representatives' Warrants, each
to purchase one share of
Common Stock, no par value 270,000 $.0001 $27 (3)
- -------------------------------------------------------------------------------------------------------------------
Common Stock, no par value ... 270,000(4) $ 8.10 $ 2,187,000 $ 662.73
- -------------------------------------------------------------------------------------------------------------------
Total .......................................................................................... $6,308.18
===================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Representatives' over-allotment option to purchase up to
405,000 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.
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>
SUBJECT TO COMPLETION, DATED JULY 2, 1997
AUDIO BOOK CLUB, INC.
2,700,000 Shares
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 offering price. Application has been made for
listing the Common Stock 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 17.
---------------------
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 ...... $6.00 $.48 $5.52
- -------------------------------------------------------------------------------
Total (3) ...... $16,200,000 $1,296,000 $14,904,000
===============================================================================
(1) In addition, the Company has agreed to pay to National Securities
Corporation and Nolan Securities Corp. as representatives (together, the
"Representatives") of the several underwriters (the "Underwriters") a 3%
nonaccountable expense and to sell to the Representatives, for nominal
consideration, warrants (the "Representatives' Warrants") to purchase up
to 270,000 shares of Common Stock at an exercise price of $8.10 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 which are payable by the
Company estimated at $904,000, which includes the Representatives'
nonaccountable expense allowance in the amount of $486,000.
(3) A principal shareholder of the Company (the "Selling Shareholder") has
granted to the Underwriters a 45-day option to purchase up to 405,000
additional shares of Common Stock to cover over-allotments. If this option
is exercised in full, the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Selling Shareholder will be $18,630,000,
$1,490,400 and $2,235,600, 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 Representatives
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 in New York, New York, on or about , 1997.
---------------------
NATIONAL SECURITIES CORPORATION NOLAN SECURITIES CORPORATION
The date of this Prospectus is , 1997
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.
<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 24,422.5-for-1 split of the Common Stock effected immediately prior
to the date of this Prospectus and (ii) assumes no exercise of the
Representatives' 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 markets and sells audio books through Audio Book Club, its
mail order membership club. 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, erotica, spiritual, religion,
humor, children's, business, self-improvement and motivational. Audio books are
ideal for consumers 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.
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
thousands of audio book selections and sample audio clips of many of the site's
selections.
Audio Book Club operates in a manner similar to other negative option mail
order clubs. 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 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 also offers a "special order" service which enables members to call the
Company and order virtually any of the more than 68,000 audio book titles in
existence, whether or not listed in the Company's mailings.
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
3
<PAGE>
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.
The Company's objective is to establish Audio Book Club as the largest and
most convenient supplier of audio books by mail and via the Internet. The
Company is seeking to expand Audio Book Club's membership base by rapidly
increasing its advertising and Internet web site marketing and development
activities. The Company also engages in list rental programs to maximize the
revenue generation potential of its membership list, and package insert programs
whereby the Company offers products or services of non-competing companies in
its product shipments and member mailings. There can be no assurance that the
Company will be able to successfully implement its business strategy or
otherwise expand its operations.
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. Since inception, primarily in
connection with establishing a core Audio Book Club member base, the Company
has incurred significant losses, including losses of $3,388,056 and $6,242,491
during the years ended December 31, 1995 and 1996, respectively, and had an
accumulated deficit of $10,975,556 at March 31, 1997. The Company intends 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 significant losses until such time as the Company is able to
further increase its membership base 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 incorporated under the laws of the State of Florida in
August 1993. The Company's principal executive offices are located at 2295
Corporate Boulevard, Suite 222, Boca Raton, Florida 33431 and its telephone
number is (561) 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 ............................ 2,700,000 shares(1)
Common Stock to be outstanding
after this Offering(1)(2)............ 8,580,367 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 proposed symbol.................. "KLB"
- ------------
(1) Assumes no exercise of the Representatives' over-allotment option. See
"Underwriting."
(2) Does not include: (i) 750,000 shares of Common Stock reserved for issuance
upon exercise of options available for future grant under the Company's
1997 Stock Option Plan (the "Option Plan") and (ii) the 270,000 shares of
Common Stock reserved for issuance upon exercise of the Representatives'
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."
4
<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 each of the two years ended December 31, 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 March 31, 1997 and for the three months ended March 31, 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 March 31, 1997, and for the three month
periods ended March 31, 1996 and 1997, and the review report thereon, are
included elsewhere in this Prospectus.
Summary Statement of Operations Data:
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended March 31,
--------------------------------- -----------------------------
1995 1996 1996 1997
--------------- --------------- --------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Gross sales .................................... $ 3,406,395 $ 8,343,304 $ 1,743,723 $2,996,403
Returns, discounts and allowances ............... 770,980 2,743,221 412,775 685,869
Net sales .................................... 2,635,415 5,600,083 1,330,948 2,310,534
Gross profit (loss) ........................... 489,517 1,272,739 (19,707) 979,751
Net income (loss) .............................. (3,388,056) (6,242,491) (1,867,211) 346,196
Pro forma net income (loss) per share(1) ...... (1.06) .06
Pro forma weighted average number of shares
outstanding(2) .............................. 5,880,367 5,880,367
</TABLE>
Summary Balance Sheet Data:
<TABLE>
<CAPTION>
As of
December 31, 1996 As of March 31, 1997 (Unaudited)
------------------- ------------------------------------------------------
Actual Pro Forma(2) As Adjusted(2)(3)
---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Working capital ........................ $ 139,145 $ 1,430,524 $ 1,780,524 $9,740,524
Total assets ........................... 1,800,089 2,363,628 2,713,628 10,673,628
Total liabilities ..................... 13,121,641 13,338,984 7,713,784 1,713,784
Shareholders' equity (deficiency) ...... (11,321,552) (10,975,356) (5,000,156) 8,959,844
</TABLE>
- ------------
(1) Based on pro forma weighted average number of shares outstanding.
(2) Gives effect to (i) the issuance of 995,867 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 the conversion of $5,975,200 of indebtedness and (ii)
the incurrence of $350,000 of indebtedness in May 1997 to M.E. Herrick
Irrevocable Trust of which Michael Herrick, Chief Operating Officer and
Vice Chairman of the Board of the Company, is the sole beneficiary, and
Howard Herrick is the sole trustee (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) Gives effect to the sale of the 2,700,000 shares of Common Stock offered
hereby 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."
5
<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
$3,388,056 and $6,242,491 during the years ended December 31, 1995 and 1996,
respectively, and had an accumulated deficit of $10,975,556 at March 31, 1997.
The Company anticipates that it will incur a loss during the current fiscal
year. The Company intends to incur significant expenditures in connection with
its expansion strategy (including costs associated with new member recruitment
advertising and expansion and maintenance of its Interet web site) which will
result in significant losses until such time as the Company is able to further
increase its membership base 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 Interet web site. 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
6
<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. Moreover, direct mail campaigns typically achieve a low response
rate and, therefore, result in high member acquisition costs. 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 Illinois (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, 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
loan. Accordingly, Mr. Herrick will receive a benefit as a result of the
reduction in his liability exposure and the release of the shares
7
<PAGE>
pledged as security to the Bank. Upon the consummation of this Offering, the
Company will issue to the N. Herrick Trust 995,867 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, estimated to aggregate approximately $476,000 over the
twelve months following consummation of this Offering. The N. Herrick Trust has
granted to the Representatives an over-allotment to purchase 405,000 shares of
Common Stock. In the event the Representatives exercise the over-allotment
option in full, the N. Herrick Trust will realize net proceeds of $2,162,700
from the sale of such shares. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Management -- Employment Agreements," "Certain
Transactions," and "Underwriting."
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
8
<PAGE>
license agreements with audio book publishers are short-term, non-exclusive
agreements, typically one or two 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
22.9%. 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 March 31,
1997, the Company's allowances for sales returns and doubtful accounts were
$662,286, 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
9
<PAGE>
$2,055,000 on postage expenses, of which approximately 73.9% was attributable
to such promotional mailings. 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.
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 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, Executive Vice President and a director of the
Company, 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."
10
<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 65.7% of the outstanding Common Stock of the
Company (61.0% of the outstanding shares of Common Stock if the Representatives'
over-allotment option is exercised in full). 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 $3,860,000
(27.6%) 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
$4.96 per share (or 82.7%) 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. See "Dilution."
Shares Eligible for Future Sale. Upon consummation of this Offering, the
Company will have 8,580,367 shares of Common Stock outstanding, of which the
2,700,000 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 5,880,367 shares of Common
Stock outstanding are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act and 4,640,275 of such restricted
shares will become eligible for sale, under Rule 144, commencing 90 days
following the date of this
11
<PAGE>
Prospectus, subject to the contractual restrictions described forth below. All
of the Company's current officers, directors and security holders have agreed
with the Representatives not to sell any securities of the Company for a period
of 13 months from the date of this Prospectus without the Representatives'
prior written consent. The Company has granted certain demand and "piggy-back"
registration rights to the Representatives with respect to the shares of Common
Stock issuable upon exercise of the Representatives' 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."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,700,000 shares of Common Stock offered hereby at a public offering price of
$6.00 per share are estimated to be $14,000,000. 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 43.1%
Membership recruitment advertising(2) .................. 2,600,000 18.6
Internet web site marketing and development(3) ......... 1,500,000 10.7
Working capital and general corporate purposes(4) ...... 3,860,000 27.6
------------ ------
Total ................................................ $14,000,000 100.0%
============ ======
</TABLE>
- ------------
(1) Represents the repayment of a $6,000,000 loan from Bank of America Illinois
(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 May 31, 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 expanding and maintaining the
Company's Internet web site, significantly increasing the number of audio
book titles to select and audio clips to preview on-line and increasing
online computer service and Internet advertising. 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 $476,000 over the twelve months following the consummation
of this Offering. See "Management."
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.
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
13
<PAGE>
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 March 31, 1997, the net tangible book value of the Company was
$(10,975,356) or $(2.25) 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 March 31, 1997 would have been
$(5,000,156) or $(.85) per share. Upon the consummation of this Offering and
anticipated application of the net proceeds of this Offering, 8,580,367 shares
of Common Stock will be outstanding with an adjusted net tangible book value of
$8,959,844 or $1.04 per share. As a result of this Offering, there will be an
immediate dilution to new investors of approximately $4.96 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 March 31, 1997, after giving effect to this Offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share ........................ $6.00
Net tangible book value before Pro Forma Adjustments ......... $ (2.25)
Increase attributable to Pro Forma Adjustments ............... 1.40
-------
Pro forma net tangible book value before this Offering ...... (.85)
Increase attributable to this Offering .................. 1.89
-------
Adjusted net tangible book value after this Offering ......... 1.04
------
Dilution to investors in this Offering ........................ $4.96
======
</TABLE>
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 ...... 5,880,367 68.5% $ 5,975,400 26.9% $1.02
New investors ............... 2,700,000 31.5 16,200,000 73.1 6.00
---------- ------ ------------ ------ ------
Total ..................... 8,580,367 100.0% $22,175,400 100.0%
========== ====== ============ ======
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment option.
14
<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
March 31, 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 2,700,000 shares of Common Stock offered hereby and the anticipated
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
March 31, 1997
------------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Long term liabilities ....................................... $ 12,425,200 $ 6,800,000 $ 800,000
Shareholders' equity:
Preferred Stock, no par value, 5,000,000 shares authorized;
no shares issued and outstanding ........................... -- -- --
Common Stock, no par value, 25,000,000 authorized,
4,884,500 shares issued and outstanding (actual),
5,880,367 shares issued and outstanding (pro forma),
8,580,367 shares issued and outstanding (as adjusted) ...... 200 5,975,400 19,975,400
Accumulated deficit ....................................... (10,975,556) (10,975,556) (11,015,556)
------------ ------------ ------------
Total shareholders' equity (deficiency) .................. (10,975,356) (5,000,156) 8,959,844
------------ ------------ ------------
Total capitalization ................................. $ 1,449,844 $ 1,799,844 $ 9,759,844
============ ============ ============
</TABLE>
15
<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 each of the two years ended December 31, 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 March 31, 1997 and for the three months ended March 31, 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 March 31, 1997, and for the three month
periods ended March 31, 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 Satement of Operations Data:
<TABLE>
<CAPTION>
Years Ended Three Months
December 31, Ended March 31,
--------------------------------- -----------------------------
1995 1996 1996 1997
--------------- --------------- --------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Gross sales .................................... $ 3,406,395 $ 8,343,304 $ 1,743,723 $2,996,403
Returns, discounts and allowances ............ 770,980 2,743,221 412,775 685,869
Net sales .................................... 2,635,415 5,600,083 1,330,948 2,310,534
Cost of sales ................................. 2,145,898 4,327,344 1,350,655 1,330,783
Gross profit (loss) ........................... 489,517 1,272,739 (19,707) 979,751
Advertising and promotion expense (for
acquisition and retention of members) .......... 2,670,650 5,469,761 1,434,236 199,359
General and administrative expenses ............ 1,094,973 1,948,821 359,630 353,456
Net income (loss) .............................. (3,388,056) (6,242,491) (1,867,211) 346,196
Pro forma net income (loss) per share(1) ...... (1.06) .06
Pro forma weighted average number of shares
outstanding(1) .............................. 5,880,367 5,880,367
</TABLE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
As of March 31, 1997 (Unaudited)
As of ----------------------------------------------------
December 31, 1996 Actual Pro Forma(1) As Adjusted(1)(2)
------------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Working capital ..................... $ 139,145 $ 1,430,524 $ 1,780,524 $ 9,740,524
Total assets ........................ 1,800,089 2,363,628 2,713,628 10,673,628
Total liabilities .................. 13,121,641 13,338,984 7,713,784 1,713,784
Shareholders' equity (deficiency) ... (11,321,552) (10,975,356) (5,000,156) 8,959,844
</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) Gives effect to the sale of the 2,700,000 shares of Common Stock offered
hereby, and the application of the estimated net proceeds therefrom,
including the repayment of approximately $6,040,000 of indebtedness
including accrued interest thereon.
16
<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. The Company's primary
focus since its inception has been to continually expand Audio Book Club's
membership base to establish a core member base. Through March 31, 1997, the
Company had spent an aggregate of $9,351,537 on advertising and promotion for
acquisition and retention of members, including $2,670,650 and $5,469,761
during the years ended December 31, 1995 and 1996, respectively.
Since inception, the Company has generated limited revenues and incurred
significant losses, including losses of $3,388,056 and $6,242,491 for the years
ended December 31, 1995 and 1996, respectively, and had an accumulated deficit
of $10,975,556 at March 31, 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 product enrollment. 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 $498,119 and $164,167 as of March 31,
1997.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Gross sales for the three months ended March 31, 1997 were $2,996,403, an
increase of $1,252,680 or 71.8%, as compared to $1,743,723 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 three months ended March 31,
1997 were $685,869, or 22.9% of gross sales, as compared to $412,775, or 23.7%
of gross sales for the prior comparable period.
Net sales for the three months ended March 31, 1997 were $2,310,534, an
increase of $979,586 or 73.6%, as compared to $1,330,948 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 three months ended March 31, 1997 were $1,330,783, a
decrease of $19,872, as compared to $1,350,655 for the prior comparable period.
The decrease in cost of sales was attributable to lower product unit costs,
more favorable licensing arrangements and decreased shipping and fulfillment
costs, despite the substantial increase in net sales. Additionally, cost of
sales for the three months ended March 31, 1996, as compared to the three
months ended March 31, 1997, were higher due to the timing of the Company's
direct mail campaigns which resulted in fewer introductory audio book units
being shipped during the three months ended March 31, 1997. See " -- Quarterly
Fluctuations."
17
<PAGE>
Gross profit for the three months ended March 31, 1997 was $979,751, or
42.4% of net sales, as compared to a gross loss of $19,707 for the prior
comparable period. This improvement in gross profit margin was primarily
attributable to the reduction in cost of sales, and to a lesser extent, a
larger percentage of the Company's net sales from catalog sales of audio books
to members as opposed to new member enrollment revenues. 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 three months ended March 31, 1997 were $199,359, a decrease of
$1,234,877, as compared to $1,434,236 for the prior comparable period. Such
decrease was due to the timing of the Company's first significant direct mail
campaign of that year. The Company commenced its first 1996 direct marketing
campaign in January 1996 whereas it commenced a similar mail campaign in
December 1996 (as opposed to January 1997) and did not undertake its first
significant direct mail campaign for 1997 until April 1997. See " -- Quarterly
Fluctuations."
General and administrative expenses for the three months ended March 31,
1997 were $353,456 or 15.3% of net sales, as compared to $359,630 or 27.0% of
net sales for the prior comparable period. Such expenses decreased as a
percentage of net sales, because the Company established a corporate
infrastructure capable of supporting operations in excess of its then-current
level of operations.
Professional fees for the three months ended March 31, 1997 were $79,933,
an increase of $27,190, as compared to $52,743 for the prior comparable period.
Depreciation expense for the three months ended March 31, 1997 was $1,383, as
compared to $1,016 for the prior comparable period. Interest income for the
three months ended March 31, 1997 was $576, as compared to $121 for the prior
comparable period.
Primarily as a result of the timing of the Company's direct marketing
activities (which resulted in no significant direct mail campaign being
launched during the three months ended March 31, 1997) and an improved gross
profit margin resulting from a higher percentage of continuing member revenue
as compared to revenue from new member enrollments, the Company achieved net
income of $346,196 for the three months ended March 31, 1997, as compared to a
net loss of $1,867,211 for the prior comparable period.
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 increase in returns, discounts and allowance 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.
18
<PAGE>
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 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 expense
for the year ended December 31, 1996 was $5,193, as compared to $2,333 for the
year ended December 31, 1995. Interest income for the year ended December 31,
1996 was $7,638, as compared to $4,380 for the year ended December 31, 1995.
Primarily as a result of the Company's increased efforts to expand Audio
Book Club's membership base, net loss for the year ended December 31, 1996
increased to $6,242,491, as compared to $3,388,056 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. 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 $945,000 during the
years ended December 31, 1995, and 1996 and the three months ended March 31,
1997, respectively, and $350,000 since March 31, 1997. See "Certain
Transactions."
In May 1997, the Company borrowed $6,000,000 from Bank of America Illinois
(the "Bank") pursuant to a credit agreement. The loan bears interest (payable
monthly) at the Bank's reference rate from time to time (8 1/2% as of May 31,
1997) minus 1/2% and is due May 7, 1998 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 loan and, in the event the Company fails to repay the loan 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 intends to use a portion of this Offering to repay the 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 995,867 shares of Common Stock at a
price per share equal to the initial offering price of the Common Stock. See
"Certain Transactions."
During the three months ended March 31, 1997, the Company's cash decreased
by $49,898, as the Company used net cash of $993,698 and $1,200 for operating
and investing activities, respectively, and had cash provided by financing
activities of $945,000. Net cash used in operating activities primarily
consisted of a decrease in accounts payable and accrued expenses of $727,657
and increases in accounts receivable and inventory of $598,497 and $36,699,
respectively, which were partially offset by net income of $346,196. 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 and Howard Herrick.
19
<PAGE>
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 $6,242,491, an increase in inventory of $383,689
and an increase in royalty advances and other assets 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 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.
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. Based on the results of past direct mail
campaigns, the Company undertook a significant direct mail campaign during the
fourth fiscal quarter of 1996 and did not undertake a significant campaign
during the three months ended March 31, 1997. As a result, the Company's total
expenses were significantly reduced during the three months ended March 31,
1997. 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.
20
<PAGE>
BUSINESS
The Company markets and sells audio books through Audio Book Club, its
mail order membership club. 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 thousands of audio book selections and
sample audio clips of many of the sites selections.
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,
erotica, 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.
Audio books are ideal for consumers 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, approximately 47% of audio book sales 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.
21
<PAGE>
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 Expansion of Audio Book Club's Member Base. The Company believes that it
has established a core Audio Book Club member base which the Company
intends to continue to seek to expand. The Company intends to rapidly
increase its advertising and Internet web site marketing and development
activities. The Company anticipates that its advertising activities will
consist primarily of direct mailings of member solicitation packages to
prospective members whose names were obtained from third-party mailing
lists and online computer service and Internet advertising. 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 Maximize Per Member Revenues. The Company intends to continue to analyze
and evaluate the results of its advertising activities and the purchasing
habits of its members to maximize sales to members. 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.
o Exploitation of Secondary Revenue Sources. 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. 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.
o Offer Complimentary Products. 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.
o Cost Containment. The Company continuously seeks to reduce its costs of
doing business, including the costs associated with member acquisition,
costs of mailing its catalogs and product costs. 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.
o Long-Term Objectives. 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 countries with
large English speaking populations, and to establish "niche" clubs to
capitalize on consumer demand for audio books in specific genres and audio
books by specific authors.
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
22
<PAGE>
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, Dove Audio, Inc., 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.
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.
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 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.
23
<PAGE>
Direct mail campaigns typically have a low response rate, which results in
high member acquisition costs. The Company performs continuous target marketing
and analysis of its membership database to enable the Company to identify
mailing lists with names which it believes have characteristics of persons
likely to join Audio Book Club, purchase sufficient quantities of books to be a
profitable source to the Company and become long-term members. The Company also
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.
Online Computer Service and Internet 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.
The Company intends to use a portion of the proceeds of this Offering to
expand and maintain its web site, significantly increase the number of audio
book titles to select and audio clips to preview through its search engines and
increase online computer service and Internet advertising.
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.
The Company continuously analyzes and evaluates the results of all of its
marketing activities in an effort to maximize sales to members and efficiently
target its marketing efforts to increase response rates to its advertisements
and to reduce its per member acquisition costs.
24
<PAGE>
Audio Book Club
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.
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.
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.
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. 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 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.
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.
25
<PAGE>
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 to 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 members 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.
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.
26
<PAGE>
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 a principal shareholder of the Company. The Company
pays $1,167 per month to occupy 1,155 square feet of such space, on a month-
to-month basis. 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
above-referenced arrangements for the Florida and New Jersey properties expire
in November 1997 and December 1998, respectively, and may be extended if the
master lease is extended. The Herrick Company, Inc. and H.H. Realty Investors,
Inc. lease the respective properties from independent third parties.
Employees
As of May 1, 1997, the Company had nine 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.
27
<PAGE>
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. 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, a nationwide retailer of
comfort and walking footwear and related apparel and accessories. 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.
28
<PAGE>
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 Underwriter, nominate and use its best efforts to elect a designee
(reasonably acceptable to the Company) of National Securities Corporation
("National") one of the Representatives (which designee may change from time to
time) as a director of the Company or, at National's option, appoint such
designee as a non-voting advisor to the Company's Board of Directors. National
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 and evaluating the results of the
Company's 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
29
<PAGE>
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. 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. 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. 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
30
<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. 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 with Jesse
Faber which provides for an annual base compensation of $126,000 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 employment agreement expires on October 31, 1997.
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. 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. 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 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
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<PAGE>
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.
The Company has not granted any options under the Option Plan as of the
date of this Prospectus. All of such options will be exercisable at the market
value of the Common Stock on the date of grant.
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.
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<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 2,700,000 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 ........................... 5,636,142(3)(4) 95.8% 65.7%
Howard Herrick ........................... 5,636,142(4)(5) 95.8 65.7
Michael Herrick ........................ 732,675(6) 12.5 8.5
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) ..................... 5,636,142(3)(4)(5)(6) 100.0% 65.7%
</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 of 5,880,367 shares
of Common Stock outstanding prior to this Offering (including the
approximately 995,867 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 8,580,367 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) 4,170,792 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) 732,675 shares of Common Stock
held by Howard Herrick and (iii) 732,675 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) In the event the Representatives exercise the over-allotment option to
purchase 405,000 shares of Common Stock from the N. Herrick Trust in full,
each of Norton Herrick and Michael Herrick, individually, and all
directors and executive officers as a group, will beneficially own
5,231,142 shares of Common Stock, or 61.0% of the outstanding Common Stock
after this Offering.
(5) Includes the shares of Common Stock referred to in footnote 3(i) above and
footnote (6) below.
(6) 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.
33
<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. The Company also
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 a principal shareholder of the Company, for which it pays $1,167 per
month for 1,155 square feet of space, on a month-to-month basis. H.H. Realty
Investors, Inc. and The Herrick Company, Inc. lease the respective properties
from independent third parties.
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
three months ended March 31, 1997, respectively. In May 1997, the Company used
the proceeds from the $6,000,000 loan from Bank of America Illinois (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 loan and, in the event the Company fails
to repay the loan 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 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 995,867 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). Borrowings, together with accrued interest thereon, under the
H.H. Loan Agreement become due on the earlier of December 31, 1998 or fifteen
months following the consummation of this Offering. Such borrowings, do not
bear interest through July 31, 1997 and, thereafter, bear interest at an annual
rate equal to the greater of 10% or the prime rate charged by Citibank, N.A. of
New York ("Citibank"), adjusted monthly.
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). Borrowings under the M.E.H. Loan Agreement, together with accrued
interest thereon, become due on the earlier of December 31, 1998 or fifteen
months following the consummation of this Offering. Such borrowings do not bear
interest through July 31, 1997 and, thereafter, bear interest at an annual rate
equal to the greater of 10% or the prime rate charged by Citibank.
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
34
<PAGE>
$14,340, during the years ended December 31, 1995 and 1996 and the three months
ended March 31, 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.
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.
35
<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 4,884,500 shares of Common Stock
outstanding. Immediately prior to the consummation of this Offering, there will
be approximately 5,880,367 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 American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
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.
36
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 8,580,367
shares of Common Stock outstanding. All 2,700,000 of the Shares being offered
hereby will be immediately tradable without restriction or further registration
under the Securities Act. The remaining 5,880,367 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
5,880,367 restricted shares of Common Stock, 4,640,275 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 a 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 Representatives 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 Representatives' prior written consent. The Company has
granted certain demand and "piggy-back" registration rights to the
Representatives 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 National
Securities Corporation ("National") and Nolan Securities Corporation are acting
as representatives (together, the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, between the
Company and the Representatives (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
- --------------------------------------- -----------------
National Securities Corporation ......
Nolan Securities Corporation ......... ----------
Total .............................. 2,700,000
==========
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.
37
<PAGE>
The Company has been advised by the Representatives that they propose
initially to offer the shares of Comon 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 commencement of
the Offering, the public offering prices, concession and reallowance may be
changed by the Representatives.
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 Representatives 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.
One of the principal shareholders of the Company has granted to the
Underwriters an over-allotment option, exercisable within 45 days of the date of
this Prospectus, to purchase up to 405,000 additional shares of Common Stock at
the initial public offering price per share, less underwriting discounts and
commissions (the "Over-Allotment Option"). 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
Representatives and their designees, for nominal consideration, warrants to
purchase from the Company up to 270,000 shares of Common Stock (the
"Representatives' Warrants"). The Representatives' Warrants are exercisable at
a price of $8.10 per share (135% of the initial public offering price per
share) for a period of four years commencing at the beginning of the second
year after their issuance and sale. The Representatives' 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 Representatives. The
Representatives' Warrants provide for adjustments in the number of shares of
Common Stock issuable upon the exercise thereof and in the exercise price of
the Representatives' Warrants as a result of certain events, including
subdivisions and combinations of the shares of Common Stock. The
Representatives' Warrants grant to the holders thereof certain rights of
registration for the Common Stock issuable upon exercise of the
Representatives' 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 Representatives, 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 Representatives,
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 National, to nominate and use its best
efforts to elect a designee (reasonably acceptable to the Company) of National
as a director of the Company, or, at National'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. National has not yet exercised its
right to designate such a person. The Company has agreed to reimburse the
designee of National 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
38
<PAGE>
the Representatives 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.
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
Representatives, 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."
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 March 31, 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 quarters ended March 31, 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 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.
39
<PAGE>
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.
40
<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 March 31, 1997
(unaudited) ...................................................... F-4
Statements of Operations for the years ended December 31, 1995 and
1996 (audited) and for the three months ended March 31, 1996 and
1997 (unaudited) ................................................ F-5
Statements of Stockholders' Deficiency for the years ended December
31, 1995 and 1996 (audited) and for the three months ended March
31, 1997 (unaudited) ............................................. F-6
Statements of Cash Flows for the years ended December 31, 1995 and
1996 (audited) and for the three months ended March 31, 1996 and
1997 (unaudited) ................................................ F-7
Notes to Financial Statements .................................... F-8-F-11
</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 8,
which is as of June 20, 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
March 31, 1997, and the related statements of operations, stockholders'
deficiency and cash flows for each of the three month periods ended March 31,
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
June 20, 1997
F-3
<PAGE>
AUDIO BOOK CLUB, INC.
Balance Sheets
December 31, 1996 (audited) and
March 31, 1997 (unaudited - see accompanying
review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1996 1997
-------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash ............................................................ $ 92,856 42,958
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $831,669 and $662,286, respectively ...... 595,630 1,194,127
Due from related party (note 4) ................................. 20,000 --
Inventory ...................................................... 836,660 873,359
Royalty advances ................................................ 235,440 233,864
------------ ------------
Total current assets .......................................... 1,780,586 2,344,308
Fixed assets, at cost, net of accumulated depreciation of $8,214 and
$9,597, respectively ............................................. 19,503 19,320
------------ ------------
$ 1,800,089 2,363,628
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable ................................................ 1,517,796 505,739
Accrued expenses ................................................ 123,645 408,045
------------ ------------
Total current liabilities .................................... 1,641,441 913,784
Notes payable - related parties (note 5) ........................... 11,480,200 12,425,200
------------ ------------
Total liabilities ............................................. 13,121,641 13,338,984
------------ ------------
Commitments and contingencies (notes 6 and 8)
Stockholders' deficiency (notes 2 and 8):
Common stock; no par value. Authorized 10,000 shares; 200
shares issued and outstanding ................................. 200 200
Accumulated deficit ............................................. (11,321,752) (10,975,556)
------------ ------------
Total stockholders' deficiency .............................. (11,321,552) (10,975,356)
------------ ------------
$ 1,800,089 2,363,628
============ ============
</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 three months ended March 31, 1996 and 1997 (unaudited --
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Years ended Three months
December 31, ended March 31,
----------------------------------- ----------------------------
1995 1996 1996 1997
----------------- --------------- --------------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Sales ....................................... $ 3,406,395 8,343,304 1,743,723 2,996,403
Returns, discounts and allowances ......... 770,980 2,743,221 412,775 685,869
------------- ----------- ----------- ----------
Sales, net ........................... 2,635,415 5,600,083 1,330,948 2,310,534
Cost of sales .............................. 2,145,898 4,327,344 1,350,655 1,330,783
------------- ----------- ----------- ----------
Gross profit (loss) .................. 489,517 1,272,739 (19,707) 979,751
Expenses:
Advertising and promotion (for
acquisition and retention of members) ..... 2,670,650 5,469,761 1,434,236 199,359
General and administrative ............... 1,094,973 1,948,821 359,630 353,456
Professional fees ........................ 113,997 99,093 52,743 79,933
Depreciation .............................. 2,333 5,193 1,016 1,383
------------- ----------- ----------- ----------
Operating (loss) income ............... (3,392,436) (6,250,129) (1,867,332) 345,620
Interest income ........................... 4,380 7,638 121 576
------------- ----------- ----------- ----------
Net (loss) income ..................... $ (3,388,056) (6,242,491) (1,867,211) 346,196
============= =========== =========== ==========
Net (loss) income per share of common stock . $ (16,940) (31,212) (9,336) 1,731
============= =========== =========== ==========
</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 three months ended March 31, 1997 (unaudited --
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Common Accumu-
stock; no lated
par value deficit Total
----------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1995 ..................... $ 200 (1,691,205) (1,691,005)
Net loss .................................... -- (3,388,056) (3,388,056)
------ ------------ ------------
Balance at December 31, 1995 .................. 200 (5,079,261) (5,079,061)
Net loss .................................... -- (6,242,491) (6,242,491)
------ ------------ ------------
Balance at December 31, 1996 .................. 200 (11,321,752) (11,321,552)
Net income for the three months ended March 31,
1997 (unaudited) ........................... -- 346,196 346,196
------ ------------ ------------
Balance at March 31, 1997 (unaudited) ......... $ 200 (10,975,556) (10,975,356)
====== ============ ============
</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 three months ended March 31, 1996 and 1997 (unaudited -
see accompanying review report of KPMG Peat Marwick LLP)
<TABLE>
<CAPTION>
Years ended Three months
December 31, ended March 31,
------------------------------- -------------------------------
1995 1996 1996 1997
--------------- ------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ....................................... $ (3,388,056) (6,242,491) (1,867,211) 346,196
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation .......................................... 2,333 5,193 1,016 1,383
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable, net ...... (567,150) 6,418 (177,143) (598,497)
Decrease in due from related party ..................... -- -- -- 20,000
(Increase) decrease in inventory ..................... (200,654) (383,689) 279,997 (36,699)
(Increase) decrease in prepaid advertising ............ (63,341) 63,341 63,341 --
Decrease (increase) in royalty advances and other
assets ............................................. 6,885 (235,440) -- 1,576
Increase (decrease) in accounts payable and
accrued expenses .................................... 225,429 1,170,410 33,130 (727,657)
Decrease in due to related parties, net ............... (83,300) -- -- --
------------- ----------- ----------- ---------
Net cash used in operating activities ............... (4,067,854) (5,616,258) (1,666,870) (993,698)
------------- ----------- ----------- ---------
Cash flows from investing activities:
Acquisition of fixed assets ........................... (13,774) (7,063) (5,425) (1,200)
------------- ----------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related
parties ................................................ 4,105,000 5,575,200 1,605,000 945,000
------------- ----------- ----------- ---------
Net increase (decrease) in cash ........................ 23,372 (48,121) (67,295) (49,898)
Cash at beginning of period .............................. 117,605 140,977 140,977 92,856
------------- ----------- ----------- ---------
Cash at end of period .................................... $ 140,977 92,856 73,682 42,958
============= =========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements
December 31, 1996 (audited) and
March 31, 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 each of the three years 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 to the Company of $12,425,200 as of March 31,
1997. The amount of additional loans available under the loan agreement from
the Chairman, Chief Executive Officer and founder dated November 17, 1995, as
amended, may be increased by $1,024,800 to a total of $13,000,000 (see notes 5
and 8(b)).
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 note 8). 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 8(c)).
(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.
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.
F-8
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
March 31, 1997 (unaudited -- see accompanying
review report of KPMG Peat Marwick LLP)
(3) Significant Accounting Policies -- (Continued)
Advertising and promotion expense was $2,670,650 and $5,469,761 for the
years ended December 31, 1995 and 1996, respectively, and $1,434,236 and
$199,359 for the three months ended March 31, 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 three months ended March 31, 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.
Interim Reporting
The accompanying financial information as of March 31, 1997 and for the
three months ended March 31, 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.
(4) Due from Related Party
Due from related party represents the amounts 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
further amended to increase the maximum borrowing amount to $13,000,000 from
$12,000,000. As of December 31, 1996 and March 31, 1997, an aggregate of
$11,380,200 and $11,975,200, respectively of this loan had
F-9
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
March 31, 1997 (unaudited -- see accompanying
review report of KPMG Peat Marwick LLP)
(5) Notes Payable - Related Parties -- (Continued)
been drawn down (see note 8). The note is noninterest bearing from the date of
issuance to July 31, 1997. Thereafter, interest accrues at the greater of 10%
per annum or the prime rate of interest, adjusted monthly, and is payable
semiannually beginning January 1, 1998 until January 1, 2006, the maturity date
of the loan (see note 8).
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. The unsecured notes are
noninterest bearing from the date of issuance to July 1, 1997. Thereafter,
interest accrues at the greater of 10% per annum or the prime rate of interest,
adjusted monthly, and is payable semiannually beginning January 1, 1998 until
January 1, 2006, the maturity date of the notes (see note 8).
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"). Borrowings under the 1997 HH Loan become due on the earlier of December
31, 1998 or fifteen months following the consummation of the proposed initial
public offering, do not bear interest through July 31, 1997 and, thereafter,
bear interest at an annual rate equal to the greater of 10% or the prime rate
charged by Citibank, adjusted monthly. Interest is payable at maturity (see
note 8).
(6) Commitments and Contingencies
Leases - Related Parties
Rent expense for each of the years ended December 31, 1995 and 1996
amounted to $38,000, and $9,500 for each of the three months ended March 31,
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
=========
(7) Supplemental Cash Flow Information
No cash has been expended for interest or income taxes for the years ended
December 31, 1995 and 1996 and the three months ended March 31, 1996 and 1997.
(8) Subsequent Events
(a) 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.
F-10
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements -- (Continued)
December 31, 1996 (audited) and
March 31, 1997 (unaudited -- see accompanying
review report of KPMG Peat Marwick LLP)
(8) Subsequent Events -- (Continued)
(b) Notes Payable - Related Parties
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.
On May 12, 1997, loans payable to the Company's Executive Vice President
in existence at March 31, 1997 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.
On May 12, 1997, the loan payable to the Chairman, Chief Executive
Officer, and founder was amended. The amendment stipulates that the loan does
not and will not bear interest, and removes all references to interest in prior
documents. Additionally, the amendment stipulates that the obligation of the
Chairman, Chief Executive Officer, and founder to make further advances to the
Company under this loan agreement as amended on May 12, 1997, 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 995,867 shares of common stock at a price per share equal
to the initial offering price of the common stock.
(c) Proposed Offering
The Company is contemplating the raising of additional financing through a
proposed initial public offering of 2.7 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.
(d) 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 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.
F-11
<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 ................................................. 6
Use of Proceeds ................................................. 13
Dilution ....................................................... 14
Dividend Policy ................................................. 15
Capitalization ................................................. 15
Selected Financial Data ........................................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................. 17
Business ....................................................... 21
Management .................................................... 28
Principal Shareholders ........................................ 33
Certain Transactions ........................................... 34
Description of Securities ..................................... 36
Shares Eligible for Future Sale ............................... 37
Underwriting .................................................... 37
Legal Matters ................................................. 39
Experts ....................................................... 39
Additional Information ........................................ 40
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>
===============================================================================
AUDIO BOOK CLUB, INC.
2,700,000 Shares of
Common Stock
---------------
PROSPECTUS
---------------
National Securities Corporation
Nolan Securities Corporation
, 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 ................................................... 30,000.00
Legal fees and expenses ............................................. *
Accounting fees and expenses ....................................... *
Blue sky fees and expenses (including legal fees) .................. *
Transfer agent, warrant agent and registrar fees and expenses ...... *
Miscellaneous (including printing expenses) ........................ *
------------
Total ............................................................ $418,000.00
============
</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 Representatives' 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
Services, 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, dated _________, 1997.
10.6 Employment Agreement between Registrant and Michael Herrick, dated ________, 1997.
10.7 Employment Agreement between Registrant and Howard Herrick, dated _________, 1997.
10.8 Employment Agreement between Registrant and Jesse Faber, dated May 1, 1997.
10.9 1997 Stock Option Plan.
10.10 Marketing Consulting Agreement between the Company and Abrams Direct Marketing dated June 6,
1997.
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>
- ------------
* To be filed by amendment.
** 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.
lnsofar 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
Registration Statement to be signed on its behalf by the undersigned, in the
city of Boca Raton, State of Florida on July 2, 1997.
AUDIO BOOK CLUB, INC.
By: /s/ Norton Herrick
--------------------------------
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Norton Herrick and Michael Herrick, and each of
them, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all
amendments (including pre-effective amendments and post-effective amendments
and amendments thereto) to this Registration Statement on Form SB-2 of Audio
Book Club, Inc. and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone or his substitute, may lawfully do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, 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 July 2, 1997
- --------------------- Executive Officer and Director
Norton Herrick
/s/ Michael Herrick Chief Operating Officer, Vice Chairman July 2, 1997
- --------------------- of the Board and Director
Michael Herrick
/s/ Howard Herrick Executive Vice President and Director July 2, 1997
- ---------------------
Howard Herrick
/s/ Robert Klein Chief Financial Officer and Treasurer July 2, 1997
- --------------------- (Principal Accounting Officer)
Robert Klein
</TABLE>
<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 Representatives' 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
Services, 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, dated _________, 1997.
10.6 Employment Agreement between Registrant and Michael Herrick, dated ________, 1997.
10.7 Employment Agreement between Registrant and Howard Herrick, dated _________, 1997.
10.8 Employment Agreement between Registrant and Jesse Faber, dated May 1, 1997.
10.9 1997 Stock Option Plan.
10.10 Marketing Consulting Agreement between the Company and Abrams Direct Marketing dated June 6,
1997.
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>
- ------------
* To be filed by amendment.
** 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.
Exhibit Number Description
<PAGE>
2,700,000 Shares of Common Stock
AUDIO BOOK CLUB, INC.
UNDERWRITING AGREEMENT
Boca Raton, Florida
__________, 1997
National Securities Corporation
Nolan Securities, Inc.
Representatives of the Several Underwriters
1001 Fourth Avenue, Suite 2200
Seattle, Washington 98154-1100
Ladies and Gentlemen:
Audio Book Club, Inc., a Florida corporation (the "Company"),
hereby agrees with National Securities Corporation ("National") and Nolan
Securities Corporation ("Nolan") 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
National and Nolan are acting as representatives (in such capacity, National and
Nolan shall hereinafter be referred to as "you" or the "Representatives") 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 2,700,000 shares (the "Shares"). Upon your request,
as provided in Section 2(b) of this Agreement, a certain principal stockholder
of the Company shall also issue and sell to the Underwriters, acting severally
and not jointly, up to an additional aggregate of 405,000 shares of Common Stock
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 "Representatives' Warrants") pursuant to the
Representatives' Warrant Agreement (the "Representatives' Warrant Agreement")
for the purchase of an additional 270,000 shares of Common Stock. The shares of
Common Stock issuable upon exercise of the Representatives' Warrants are
hereinafter referred to as the "Representatives' Shares." The Shares, Option
Shares, the Representatives' Warrants, and the Representatives' Shares are more
fully described in the Registration Statement and the Prospectus referred to
below.
<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, and as of the Closing Date and the Option Closing Date, 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 (No. ), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Shares, the Option Shares, the Representatives' Warrants, and the
Representatives' 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. The Company will
not file any other amendment thereto to which the Underwriters shall have
objected in writing after having been furnished with a copy thereof. Except as
the context may otherwise require, such registration statement, as amended, on
file with the Commission at the time the registration statement becomes
effective (including the prospectus, financial statements, schedules, exhibits
and all other documents filed as a part thereof 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 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 none of the Preliminary
Prospectus, the Registration Statement or 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 and each of its subsidiaries have been
duly organized and are validly existing as corporations in good standing under
the laws of the respective states of their 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. Each of the Company and its
subsidiaries 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. Each of the Company and its subsidiaries 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; the Company and each of its subsidiaries have 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 neither the Company nor any of its
subsidiaries have 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 Company and its
subsidiaries, taken as a whole. 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 as described in the Prospectus. The
Registered Securities and all other securities issued or
3
<PAGE>
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. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. 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, neither the Company nor
any subsidiary has 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 stockholder, have been
duly authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable and 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 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 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 Representatives, 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 stockholder 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 stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or authority of the
stockholders or the Board of Directors of the Company will be required for the
issuance and sale of the Shares, the Option Shares and the Representatives'
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 stockholders' 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 involved. 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 and its subsidiaries taken as
a
4
<PAGE>
whole 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 and its subsidiaries taken as a whole 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 1986, 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, (ii) the purchase by the
Underwriters of the Registered Securities from the Company and the purchase by
the Representatives of the Representatives' 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 distribution
contemplated hereby.
(j) 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 Representatives' Warrant Agreement, or of
any action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Representatives' 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, stockholders' equity, operation, properties, or results of operations
of the Company and its subsidiaries taken as a whole.
(k) The Company has the corporate power and authority
to authorize, issue, deliver, and sell the Registered Securities and to enter
into this Agreement and the Representatives' Warrant Agreement, and to
consummate the transactions provided for in such agreements; and this Agreement
and the Representatives' Warrant Agreement have each been duly and properly
authorized, executed, and delivered by the Company. Each of this Agreement and
the Representatives' Warrant Agreement constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
respective terms (except as
5
<PAGE>
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
issue and sale of the Registered Securities, execution, delivery or performance
of this Agreement and the Representatives' 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, stockholders 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, 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 Representatives' 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 or may be required under state securities
or Blue Sky laws 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 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 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
6
<PAGE>
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 and the
Representatives' Shares hereunder 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, 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) there is no
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) No default exists in the due performance and
observance of any term, covenant or condition of any license, contract,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, note, loan or credit agreement, or any
other 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.
(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
7
<PAGE>
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. 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. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company to any tax penalty on prohibited transactions and which has
not adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and ERISA as
they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company has never completely
or partially withdrawn from a "multiemployer plan."
(s) None of the Company, nor any of its employees,
directors, stockholders, 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 has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus to be owned or leased by it, free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(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,
8
<PAGE>
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
National (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) There are no claims, payments, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Registered
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company or any of its officers,
directors, stockholders, employees or affiliates that may affect the
Underwriters' compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
(x) The Registered Securities have 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.
(z) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the 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.
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(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 stockholders 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) Each of the Company and its subsidiaries maintains
insurance 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 and its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which 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 claims, has no material
disputes with its insurance company regarding any 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
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Representatives 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 Company hereby grants an option to the
Underwriters, severally and not jointly, 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 Representatives to
the Company 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 Representatives, but shall not
be later than three full 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 Representatives 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 [National, at 1001
Fourth Avenue, Suite 2200, Seattle, Washington], or at such other place as shall
be agreed upon by the Representatives 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 Representatives 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 National
or at such other place as shall be agreed upon by the Representatives and the
Company on each Option Closing Date as specified in the notice from the
Representatives 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 and the Option Shares, if
any, to the order of the Company. 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 Representatives 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
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certificates for the Shares and the Option Shares, if any, shall be made
available to the Representatives at such office or such other place as the
Representatives 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 Representatives Representatives' Warrants at a purchase price of
$0.001 per warrant, which warrants shall entitle the holders thereof to purchase
an aggregate of 270,000 shares of Common Stock. The Representatives' 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 135% of the initial public offering price of the Shares. The
Representatives' 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 Representatives' Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the
Registration Statement becomes effective as the Representatives 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 Representatives may from time to time increase or
decrease the public offering price after distribution of the Shares has been
completed to such extent as the Representatives, in their sole discretion deem
advisable. 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 termination of the offering of the Shares
by the Underwriters of which the Representatives shall not previously have been
advised and furnished with a copy, or to which the Representatives 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 Representatives and confirm the
notice in writing, (i) when the Registration Statement, as amended, becomes
effective, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A and when any post-effective amendment to the Registration Statement becomes
effective, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending the effectiveness
of the Registration Statement or any order preventing or suspending the use of
the Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose, (iii)
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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 Representatives) in accordance with the
requirements of the Act.
(d) The Company will give the Representatives 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 revised
prospectus is required to be filed pursuant to Rule 424(b) of the Regulations),
and will furnish the Representatives 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
Representatives or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall
reasonably object.
(e) The Company shall endeavor in good faith, in
cooperation with the Representatives, 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 Representatives
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 Representatives 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
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<PAGE>
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 Representatives
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be 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 Representatives, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent public
accountants) and will make available to its stockholders unaudited quarterly
reports of earnings, and will deliver to the Representatives:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the
Company for each quarter in the form furnished to the
Company's stockholders;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company as
at the end of the preceding fiscal year, together with
statements of operations, stockholders' equity, and cash flows
of the Company for such fiscal year, accompanied by a copy of
the certificate thereon of independent certified public
accountants;
(iii) as soon as they are available, copies of
all reports (financial or other) mailed to stockholders;
(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;
(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
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(vi) any additional information of a public
nature concerning the Company (and any future subsidiaries) or
its businesses which the Representatives may reasonably
request.
During such five-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, and will be accompanied by similar financial statements for any
significant subsidiary which is not so 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 and the Representatives' Warrants.
(j) The Company will furnish to the Representatives or
on the Representatives' order, without charge, at such place as the
Representatives may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits), each Preliminary Prospectus, the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such quantities as the Representatives may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representatives with true copies of
duly executed, legally binding and enforceable 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, stockholders 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.
(m) The Company shall apply the net proceeds from the
sale of the Registered Securities 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 463 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.
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<PAGE>
(o) The Company shall cause the Registered Securities
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
Registered Securities to the extent outstanding.
(p) For a period of two (2) years from the Closing
Date, the Company shall furnish to the Representatives, 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 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 National, 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, except for the issuance of
the Option Shares, the Representatives' 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, or shares of Common Stock issued pursuant to any employee stock
purchase plan in effect on the Closing Date.
(t) Until the completion of the distribution of the
Registered Securities, the Company shall not without the prior written consent
of National 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
Representatives' 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 Representatives' Shares.
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(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 National to the Company's Board of
Directors for a period of three (3) years following the Closing, provided that
such designees are 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 forty-five (45) days
after the Closing it shall retain a public relations firm which is acceptable to
the Representatives. The Company shall keep such public relations firm, or any
replacement, for a period of three (3) years from the Closing. Any replacement
public relations firm shall be retained only with the consent of the
Representatives.
(x) The Company agrees that any and all future
transactions between the Company and its officers, directors, principal
stockholders 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 transactions also
be approved by a majority of the Company's outside independent directors
disinterested in the transaction.
(y) The Company shall prepare and deliver, at the
Company's sole expense, to the Representatives within the one hundred and twenty
(120) day period after the later of the effective date of the Registration
Statement or the latest Option Closing Date, as the case may be, four bound
volumes containing all correspondence with regulatory officials, agreements,
documents and all other materials in connection with the offering as requested
by the Underwriters' Counsel.
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 Representatives' 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,
including the costs of printing and mailing the
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"Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum," the
"Final Blue Sky Memorandum" and "Legal Investments Survey," if any, and
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 in connection with due diligence
investigations, including but not limited to the fees of any independent counsel
or consultant retained, (viii) fees and expenses of the transfer agent and
registrar, (ix) the fees payable to the Commission and the NASD, (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, and
(xi) applications for assignments of a rating of the Securities by qualified
rating agencies.
(b) If this Agreement is terminated by the Underwriters
in accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Representatives 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 amounts already paid
pursuant to Section 5(c) hereof.
(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 Representatives on the Closing Date by certified or bank cashier's check or,
at the election of the Representatives, 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, $50,000 of which has been paid to date. In the event the Representatives
elect to exercise the over-allotment option described in Section 2(b) hereof,
the Company further agrees to pay to the Representatives on the Option Closing
Date (by certified or bank cashier's check or, at the Representatives' election,
by deduction from the proceeds of the offering) a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Option 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, 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 Representatives, 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
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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 Representatives 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 Representatives shall not have advised the
Company that the Registration Statement, or any amendment thereto, contains an
untrue statement of fact which, in the Representatives' opinion, is material, or
omits to state a fact which, in the Representatives' opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representatives' reasonable opinion, is
material, or omits to state a fact which, in the Representatives' reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(c) On or prior to the Closing Date, the 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 Representatives may request and Underwriters' Counsel shall have received
from the Company such papers and information as they request to enable them to
pass upon such matters.
(d) At Closing Date, the Underwriters shall have
received the favorable opinion of Tenzer Greenblatt LLP ("Tenzer Greenblatt"),
counsel to the Company, 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.
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(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 Representatives' Warrant
Agreement, and as described in the Prospectus. The
Registered Securities and all other 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 Representatives' Warrant
Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder,
have been duly authorized and, when issued, paid for
and delivered in accordance with 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 Representatives' 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 Representatives, 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
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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
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 representatives of the Company and the
Representatives and representatives 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
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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
Representatives' 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 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, stockholders'
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
Representatives' Warrant Agreement or which in any
manner draws into question the validity or
enforceability of this Agreement or the Representatives'
Warrant Agreement;
(vii) the Company has the corporate power and
authority to enter into each of this Agreement and the
Representatives' Warrant Agreement and to consummate
the transactions provided for therein; and each of this
Agreement and the Representatives' Warrant Agreement
has been duly authorized, executed and delivered by the
Company. Each of this Agreement and the
Representatives' 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 Representatives' 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, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument
known to such counsel to
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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;
(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 Representatives' 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, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a
party or by which the Company 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;
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(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;
(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 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
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<PAGE>
(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, stockholders' 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 transaction, not in the 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; (iv) the Company shall not have issued any securities (other than
the Registered Securities) 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 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 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
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, as of their respective dates, thereto
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 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 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 loss or damage to its property or assets,
whether or not insured, (f) there is no litigation
which is pending or 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.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(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;
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<PAGE>
(ii) stating that it is their opinion that the
financial statements and supporting schedules of the
Company included in the Registration Statement comply
as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations
thereunder and that the Representatives may rely upon
the opinion of Peat Marwick with respect to the
financial statements and supporting schedules 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 stockholders 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
stockholders' 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
Representatives 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 6, 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 6 with respect to certain amounts, percentages and financial information
as specified by the Representatives 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 Representatives 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 Representatives 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 Representatives, (i) the Representatives'
Warrant Agreement, substantially in the form filed as Exhibit 4.2, to the
Registration Statement, in final form and substance satisfactory to the
Representatives, and (ii) the Representatives' Warrants in such denominations
and to such designees as shall have been provided to the Company.
(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 Representatives 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 Representatives may
terminate this Agreement or, if the Representatives so elect, they 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 representation, warranty, covenant or agreement of
the Company contained in this Agreement. 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 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 Representatives 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
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<PAGE>
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
Representatives 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 (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. 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
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<PAGE>
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 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,
31
<PAGE>
the Company, any controlling person of either the Underwriter or the Company,
and shall survive termination of this Agreement or the issuance and delivery of
the Registered Securities to the Underwriters and the Representatives, 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 Registered Securities to be purchased hereunder shall be deemed to have been
so released upon the earlier of dispatch by the Representatives of telegrams to
securities dealers releasing such shares for offering or the release by the
Representatives for publication of the first newspaper advertisement which is
subsequently published relating to the Registered Securities.
10. Termination.
(a) Subject to subsection (b) of this Section 10, the
Representatives shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Representatives' 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, whether or not such loss shall have been insured, will, in the
Representatives' opinion, make it inadvisable to proceed with the delivery of
the Registered Securities; or (viii) 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 Representatives' 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
Representatives in accordance with any of the provisions of Section 6, Section
10(a) 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 6, 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.
32
<PAGE>
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 6, 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 Representatives 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 Representatives 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 Representatives 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.
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 Representatives' option, by notice from the
Representatives 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
Representatives, c/o National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention: Steven A. Rothstein, 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,
33
<PAGE>
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 representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this 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
Representatives' 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 Representatives
and the Company.
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:
34
<PAGE>
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:
By:__________________________________________________
Name:
Title:
NOLAN SECURITIES CORPORATION
By:
By:__________________________________________________
Name:
Title:
For themselves and as Representatives of the Underwriters named in Schedule A
hereto.
35
<PAGE>
SCHEDULE A
Number of
Shares to be
Name of Underwriters Purchased
- -------------------- ------------
National Securities Corporation...............................
Nolan Securities Corporation .................................
TOTAL..................... 2,700,000
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
AUDIO BOOK CLUB, INC.
ARTICLE I NAME
The corporate name of the Corporation shall be:
AUDIO BOOK CLUB, INC.
ARTICLE II PRINCIPAL OFFICE
The principal place of business and mailing address of this Corporation
shall be:
2295 Corporate Boulevard, N.W.
Suite 222, P.O. Box 5010
Boca Raton, Florida 33431
ARTICLE III CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is Thirty Million (30,000,000) shares, of which Twenty
Five Million (25,000,000) shares shall be Common Stock, without par value, and
Five Million (5,000,000) shares shall be Preferred Stock, without par value.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby expressly authorized
to provide, by resolution or resolutions duly adopted by it prior to issuance,
for the creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the Board of Directors with
respect to each series of Preferred Stock shall include, but not be limited to,
determining the following:
<PAGE>
(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par
value thereof;
(b) whether the shares of such series shall have voting
rights, in addition to any voting rights provided by law, and, if so,
the terms of such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether
any such dividends shall be cumulative, and, if so, from what dates,
the conditions and dates upon which such dividends shall be payable,
and the preference or relation which such dividends shall bear to the
dividends payable on any shares of stock of any other class or any
other series of Preferred Stock;
(d) whether the shares of such series shall be subject to
redemption by the Corporation, and, if so, the times, prices and other
conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement
or other corporate
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<PAGE>
purposes and the terms and provisions relating to the
operation thereof;
(g) whether the shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or any
other series of Preferred Stock or any other securities and, if so, the
price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same, and any other terms and
conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the
purchase, redemption or other acquisition by the Corporation of, the
Common Stock or shares of stock of any other class or any other series
of Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation
of indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class; and
(j) any other powers, preferences and relative,
participating, optional and other special rights, and any
qualifications, limitations and restrictions, thereof.
The powers, preferences and relative, participating, optional and
other special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time out-
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<PAGE>
standing. All shares of any one series of Preferred Stock shall be identical in
all respects with all other shares of such series, except that shares of any one
series issued at different times may differ as to the dates from which dividends
thereof shall be cumulative.
ARTICLE IV INITIAL REGISTERED AGENT ADDRESS
The name and address of the initial registered agent is:
Norton Herrick
2295 Corporate Boulevard, N.W.
Suite 222, P.O. Box 5010
Boca Raton, Florida 33431
ARTICLE V INCORPORATOR
The name and street address of the incorporator is:
Norton Herrick
2295 Corporate Boulevard, N.W.
Suite 222, P.O. Box 5010
Boca Raton, Florida 33431
ARTICLE VI PURPOSES
The purposes for which the Corporation is organized, which shall
include the authority of the Corporation to engage in any lawful business, are
to have all of the general powers granted to corporations organized under the
Florida Business Corporation Act, whether granted by specific statutory
authority or by construction of law.
ARTICLE VII VOTE OF SHAREHOLDERS-SPECIAL MEETINGS
Special meetings of the shareholders of the Corporation may be
not be called by shareholders unless the shareholders represent at least 25% of
the total voting power of the stock of the Corporation.
-4-
<PAGE>
ARTICLE VIII VOTE OF STOCKHOLDERS-STAGGERED BOARD
The provisions of Sections 3 and 5 of Article IV of the Corporation's
By-Laws which provide for the classification of the Board of Directors of the
Corporation into three classes may not be altered, amended or repealed by the
shareholders of the Corporation unless by the affirmative vote of the holders
of at least 66-2/3% of the total voting power of the Corporation's stock
outstanding and entitled to vote thereon and the foregoing supermajority voting
requirement may be altered, amended or repealed only by the affirmative vote of
the holders of 66-2/3% of the total voting power of the Corporation's stock
entitled to vote thereon.
ARTICLE IX INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by the
provisions of the Florida Business Corporation Act, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said provisions from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said provisions, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-law, vote
of shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person. If the Florida
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<PAGE>
Business Corporation Act is amended hereafter to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Florida Business Corporation Act, as so amended.
ARTICLE X LIMITATION OF LIABILITY
No director shall be personally liable for monetary damages to the
Corporation or any other person for any statement, vote, decision, or failure to
act, regarding corporate management or policy, by a director, unless:
A. The director breached or failed to perform his duties as a
director; and
B. The director's breach of, or failure to perform, those duties
constitutes:
1. A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful. A judgement or other final adjudication
against a director in any criminal proceeding for a violation of the criminal
law estops that director from contesting the fact that his breach, or failure to
perform, constitutes a violation of the criminal law; but does not estop the
director from establishing that he had reasonable cause to believe that his
conduct was lawful or had no reasonable cause to believe that his conduct was
unlawful;
2. A transaction from which the director derived an improper
personal benefit, either directly or indirectly;
-6-
<PAGE>
3. A circumstance under which the liability provisions of
Section 607.0834 of the Florida Business Corporation Act, or any successor
provision, are applicable;
4. In a proceeding by or in the right of the Corporation to
procure a judgement in its favor or by or in the right of a shareholder,
conscious disregard for the best interest of the Corporation, or willful
misconduct; or
5. In a proceeding by or in the right of someone other than
the Corporation or a shareholder, recklessness or an act or omission which was
committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property.
Signed on , 1997
AUDIO BOOK CLUB, INC.
By:________________________________
Name:
Title:
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<PAGE>
AUDIO BOOK CLUB, INC.
BY-LAWS
ARTICLE I
OFFICES
1. The location of the registered office of the Corporation in
the State of Florida is 2295 Corporate Boulevard, N.W., Suite 222, P.O. Box
5010, Boca Raton, Florida 33431, and the name of its registered agent at such
address is Norton Herrick.
2. The Corporation shall in addition to its registered office
in the State of Florida establish and maintain an office or offices at such
place or places as the Board of Directors may from time to time find necessary
or desirable.
ARTICLE II
CORPORATE SEAL
The corporate seal of the Corporation shall have inscribed
thereon the name of the Corporation and may be in such form as the Board of
Directors may determine. Such seal may be used by causing it or a facsimile
thereof to be impressed, affixed or otherwise reproduced.
ARTICLE III
MEETINGS OF SHAREHOLDERS
1. All meetings of the shareholders shall be held at the
registered office of the Corporation in the State of Florida or
<PAGE>
at such other place as shall be determined from time to time by the Board of
Directors.
2. The annual meeting of shareholders shall be held on such
day and at such time as may be determined from time to time by resolution of the
Board of Directors. The election of Directors and any other proper business, as
provided by Section 7 of Article III of these By-laws, may be transacted at the
annual meeting.
3. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business, except as otherwise expressly provided by statute, by
the Articles of Incorporation of the Corporation or by these By-laws, except
that when specified business is to be voted on by a class or series voting as a
class, the holders of a majority of the stock of such class or series shall
constitute a quorum for the transaction of such business. If, however, such
majority shall not be present or represented at any meeting of the shareholders,
the shareholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting (except as otherwise provided by statute), and in
addition, the Chairman of the meeting shall have the power to adjourn the
meeting from time to time whether or not such majority is present. At such
adjourned meeting at which the requisite amount of voting stock shall be
represented any business may be transacted which might have been transacted at
the previously adjourned meeting.
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<PAGE>
4. At all meetings of the shareholders, each shareholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing subscribed by such shareholder and bearing
a date not more than eleven months prior to said meeting, unless such instrument
provides for a longer period. All proxies must be filed, at or before the time
of the meeting of stockholders, with the Secretary of the Corporation or such
other person designated by the Board of Directors to tabulate votes at the
meeting.
5. At each meeting of the shareholders each shareholder shall
have one vote for each share of capital stock having voting power, registered in
his name on the books of the Corporation at the record date fixed in accordance
with these By-laws, or otherwise determined, with respect to such meeting.
Except as otherwise expressly provided by statute, by the Articles of
Incorporation of the Corporation or by these By-laws, all matters coming before
any meeting of the shareholders shall be decided by the vote of a majority of
the number of shares of stock present in person or represented by proxy at such
meeting and entitled to vote thereat, a quorum being present.
6. Except as otherwise provided by law, written or printed
notice of each meeting of the shareholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each shareholder entitled to vote at such meeting. Such notice shall be
delivered either personally or by mail or at the direction of the Chief
Executive Officer, the
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<PAGE>
Chief Operating Officer or the Secretary. Each notice of meeting
shall state the place, date and hour of the meeting.
7. At any meeting of the shareholders, only such business
shall be conducted as shall have been brought before the meeting (i) pursuant to
the Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors, or (iii) by any shareholder who complies with the procedures set
forth in this Section 7.
The only business which shall be conducted at any meeting of
the shareholders shall (i) have been specified in the written notice of the
meeting (or any supplement thereto) given as provided in the preceding Section,
(ii) be brought before the meeting at the direction of the Board of Directors or
the Chairman of the meeting or (iii) have specified in a written notice (a
"Shareholder Meeting Notice") given to the Corporation, in accordance with all
of the following requirements, by or on behalf of any shareholder who shall have
been a shareholder of record on the record date for such meeting and who shall
continue to be entitled to vote thereat. Each Shareholder Meeting Notice must be
delivered personally to, or be mailed to and received by, the Secretary of the
Corporation, at the principal executive offices of the Corporation, not less
than 50 days nor more than 75 days prior to the meeting; provided, however, that
in the event that less than 65 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting
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<PAGE>
was mailed or such public disclosure was made. Each Shareholder Meeting Notice
to the Secretary shall set forth as to each matter the shareholder proposes to
bring before the meeting: (i) a description of each item of business proposed to
be brought before the meeting and the reasons for conducting such business at
the meeting; (ii) the name and address, as they appear on the Corporation's
books, of the shareholder proposing to bring such item of business before the
meeting; (iii) the class and number of shares of stock held of record, owned
beneficially and represented by proxy by such shareholder as of the record date
for the meeting (if such date then shall have been made publicly available) and
as of the date of such Shareholder Meeting Notice; and (iv) all other
information which would be required to be included in a proxy statement filed
with the Securities and Exchange Commission (the "Commission") if, with respect
to any such item of business, such shareholder were a participant in a
solicitation subject to Section 14 of the Securities Exchange Act of 1934.
Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at any meeting of the shareholders except in
accordance with the procedures set forth in these By-laws. The Chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
procedures prescribed by these By-laws, and if he should so determine, he shall
so declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
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<PAGE>
When a meeting is adjourned to another time or place, notice
of the adjourned meeting need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken, unless the
adjournment is for more than 120 days, or unless after the adjournment a new
record date is fixed for the adjourned meeting, in which case notice of the
adjourned meeting shall be given to each shareholder of record entitled to vote
at the meeting. At the adjourned meeting, any business may be transacted that
might have been transacted at the original meeting.
8. Special meetings of the shareholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the Chief
Executive Officer (or, if such office is vacant, by the Chief Operating Officer)
or by the Board of Directors and must be called on the written request of the
holders representing not less than 25% of the total voting power of the stock of
the Corporation unless the Corporation's Articles of Incorporation provide for a
greater or lesser percentage.
9. The order of business at each meeting of shareh- olders
shall be determined by the presiding officer.
ARTICLE IV
DIRECTORS
1. The business and affairs of the Corporation shall be
managed under the direction of a Board of Directors, which may exercise all such
powers and authority for and on behalf of the Corporation as shall be permitted
by law, the Articles of Incorporation of the Corporation or these By-laws.
-6-
<PAGE>
2. The Board of Directors may hold their meetings within or
outside of the State of Florida, at such place or places as it may from time to
time determine.
3. The number of directors comprising the Board of Directors
shall be such number as may be from time to time fixed by resolution of the
Board of Directors. The directors shall be classified in respect to the time for
which they shall severally hold office, by dividing them into three classes. The
number of directors in each class shall be as nearly equal as possible. At each
annual election, any vacancy in any class may be filled and the successors to
the directors of the class whose terms shall expire in that year shall be
elected to hold office for the term of three years, and the term of office of
one class of directors shall expire in each year. In the event the number of
directors is increased, election may be made to a class of directors with terms
expiring in three years or less in order to maintain proportionate equality
between the classes.
4. Subject to the rights of the holders of any class or series
of stock having a preference over the Common Stock of the Corporation as to
dividends or upon liquidation (if any), nominations for the election of
directors may be made by the Board of Directors or a committee appointed by the
Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any shareholder entitled to vote in the election
of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations
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<PAGE>
has been delivered personally to, or been mailed to and received by the
Secretary of the Corporation at, the principal executive offices of the
Corporation, not less than 50 days nor more than 75 days prior to the meeting;
provided, however, that, in the event that less than 65 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Each such
notice shall set forth: (i) the name and address of the shareholder, as they
appear on the Corporation's books, who intends to make the nomination and of the
person or persons to be nominated; (ii) the class and number of shares of stock
held of record, owned beneficially and represented by proxy by such shareholder
as of the record date for the meeting (if such date shall then have been made
publicly available) and of the date of such notice; (iii) a representation that
the shareholder intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iv) a description of
all arrangements or understandings between such shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by such shareholder; (v) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Commission, had each nominee been nominated, or intended to be nominated
by the Board of
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<PAGE>
Directors; and (vi) the consent of each nominee to serve as a director of the
Corporation if so elected.
No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in
these By-laws. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by these By-laws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
5. The directors shall be elected by the holders of shares of
stock of the Corporation entitled to vote on the election of directors, and
directors shall be elected by a plurality vote. The initial directors shall be
divided into three classes, designated as Class I, Class II and Class III as set
forth in Section 3 of this Article IV. The Class I initial director or directors
shall serve until the annual meeting of shareholders held in 1998, the Class II
initial director or directors shall serve until the annual meeting of
shareholders held in 1999, and the Class III initial director or directors shall
serve until the annual meeting of shareholders held in 2000 and, in each case,
until their successor(s) are duly elected and qualified. At each annual meeting
of shareholders, commencing with the annual meeting to be held during the
calendar year 1998, each of the successors to the Directors of the class whose
term shall have expired that year shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the
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<PAGE>
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his
term expires and until the successor shall be elected and shall qualify,
subject, however to prior death, resignation, retirement, disqualification or
removal from office.
6. Any vacancy occurring in the Board of Directors, including
any vacancy created by reason of an increase in the number of directors, shall
be filled for the unexpired term by the concurring vote of a majority of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
7. Any director may resign at any time by giving written
notice of his resignation to the Board of Directors. Any such resignation shall
take effect upon receipt thereof by the Board, or at such later date as may be
specified therein. Any such notice to the Board shall be addressed to it in care
of the Secretary of the Corporation.
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ARTICLE V
COMMITTEES OF DIRECTORS
1. By resolutions adopted by a majority of the whole Board of
Directors, the Board may designate an Executive Committee and one or more other
committees, each such committee to consist of two or more directors of the
Corporation. The Executive Committee shall have and may exercise all the powers
and authority of the Board in the management of the business and affairs of the
Corporation (except as otherwise expressly limited by statute), including the
power and authority to declare dividends and to authorize the issuance of stock,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall have such of the powers and authority
of the Board as may be provided from time to time in resolutions adopted by a
majority of the whole Board.
2. The requirements with respect to the manner in which the
Executive Committee and each such other committee shall hold meetings and take
actions shall be set forth in the resolutions of the Board of Directors
designating the Executive Committee or such other committee.
ARTICLE VI
COMPENSATION OF DIRECTORS
The directors shall receive such compensation for their
services as may be authorized by resolution of the Board of Directors, which
compensation may include, among other things, an annual fee and a fixed sum for
expense of attendance at regular or
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special meetings of the Board or any committee thereof and the grant of stock
options. Nothing herein contained shall be construed to preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE VII
MEETINGS OF DIRECTORS; ACTION WITHOUT A MEETING
1. Regular meetings of the Board of Directors may be held
without notice at such time and place, either within or without the State of
Florida, as may be determined from time to time by resolution of the Board.
2. Special meetings of the Board of Directors shall be held
whenever called by the Chief Executive Officer (or, if such office is vacant, by
the Chief Operating Officer of the Corporation or a majority of the Board of
Directors on at least 2 days' notice to each director. Except as may be
otherwise specifically provided by statute, by the Articles of Incorporation of
the Corporation or by these By-laws, the purpose or purposes of any such special
meeting need not be stated in such notice, although the time and place of the
meeting shall be stated.
3. At all meetings of the Board of Directors, the presence in
person of a majority of the members of the Board of Directors shall be necessary
and sufficient to constitute a quorum for the transaction of business, and,
except as otherwise provided by statute, by the Articles of Incorporation of the
Corporation or by these By-laws, if a quorum shall be present the act of a
majority of the directors present shall be the act of the Board.
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4. Any action required or permitted to be taken at any meeting
of the Board of Directors or of any committee thereof may be taken without a
meeting if all the members of the Board or such committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of committee. Any director may participate
in a meeting of the Board, or any committee designated by the Board, by means of
a conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this sentence shall constitute presence in person at such
meeting.
ARTICLE VIII
OFFICERS
1. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a Chief Executive Officer, Chief Operating
Officer, President, one or more Executive Vice Presidents, one or more Vice
Presidents, a Secretary and a Treasurer. The Board may also choose one or more
Assistant Secretaries and Assistant Treasurers, and such other officers as it
shall deem necessary. Any number of offices may be held by the same person.
2. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors, or in such manner as the Board may prescribe.
3. The officers of the Corporation shall hold office until
their successors are elected and qualified, or until their
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earlier resignation or removal. Any officer may be at any time removed from
office by the Board of Directors, with or without cause. If the office of any
officer becomes vacant for any reason, the vacancy may be filled by the Board of
Directors.
4. Any officer may resign at any time by giving written notice
of his resignation to the Board of Directors. Any such resignation shall take
effect upon receipt thereof by the Board or at such later date as may be
specified therein. Any such notice to the Board shall be addressed to it in care
of the Secretary of the Corporation.
ARTICLE IX
CHIEF EXECUTIVE OFFICER
The Chief Executive Officer shall have general strategic oversight and control
of the business and affairs of the Corporation subject, however, to the
direction and control of the Board. The Chief Executive Officer may sign and
execute in the name of the Corporation deeds, mortgages, bond, contracts or
other instruments. He shall perform all duties incident to the office of the
Chief Executive Officer and shall, when requested, counsel with and advise the
other officers of the Corporation and shall perform such other duties as the
Board may from time to time determine. The Chief Executive Officer, at his
election, shall serve as the Chairman of the Board of Directors, and shall
preside at meetings of the shareholders and of the Board of Directors.
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ARTICLE X
CHIEF OPERATING OFFICER
The Chief Operating Officer shall be the chief operating
officer of the Corporation. Subject to the supervision and direction of the
Chief Executive Officer and the Board of Directors, he shall be responsible for
overseeing the business and affairs of the Corporation. At his election, the
Chief Operating Officer shall serve as the Vice-Chairman of the Board of
Directors.
PRESIDENT
The President shall have such powers and perform such duties as may be
delegated to him by the Board of Directors, the Chief Executive Officer and
Chief Operating Officer of the Corporation.
ARTICLE XI
EXECUTIVE VICE PRESIDENTS
Each Executive Vice President shall have such powers and
perform such duties as may be delegated to him by the Board of Directors, the
Chief Executive Officer, the Chief Operating Officer or any other senior officer
of the Corporation to whom he reports.
ARTICLE XII
VICE PRESIDENTS
The Vice Presidents shall have such powers and duties as may
be delegated to them by the Chief Executive Officer and the
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Chief Operating Officer or any other senior officer of the Corporation to whom
he reports.
ARTICLE XIII
SECRETARY AND ASSISTANT SECRETARY
1. The Secretary shall attend all meetings of the Board of
Directors and of the shareholders, and shall record the minutes of all
proceedings in a book to be kept for that purpose. He shall perform like duties
for the committees of the Board when required.
2. The Secretary shall give, or cause to be given, notice of
meetings of the shareholders, of the Board of Directors and of the committees of
the Board. He shall keep in safe custody the seal of the Corporation, and when
authorized by the Chief Executive Officer, the Chief Operating Officer, the
President, an Executive Vice President or a Vice President, shall affix the same
to any instrument requiring it, and when so affixed it shall be attested by his
signature or by the signature of an Assistant Secretary. He shall have such
other powers and duties as may be delegated to him by the Chief Executive
Officer.
3. The Assistant Secretary shall, in case of the absence of
the Secretary, perform the duties and exercise the powers of the Secretary, and
shall have such other powers and duties as may be delegated to them by the Chief
Executive Officer.
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ARTICLE XIV
TREASURER AND ASSISTANT TREASURER
1. The Treasurer shall have the custody of the corporate funds
and securities, and shall deposit or cause to be deposited under his direction
all moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors
or pursuant to authority granted by it. He shall render to the Chief Executive
Officer and the Board whenever they may require it an account of all his
transactions as Treasurer. He shall have such other powers and duties as may be
delegated to him by the Chief Executive Officer.
2. The Assistant Treasurer shall, in case of the absence of
the Treasurer, perform the duties and exercise the powers of the Treasurer, and
shall have such other powers and duties as may be delegated to them by the Chief
Executive Officer.
ARTICLE XV
CERTIFICATES OF STOCK
The certificates of stock of the Corporation shall be numbered
and shall be entered in the books of the Corporation as they are issued. They
shall exhibit the holder's name and number of shares and shall be signed by
either the Chief Executive Officer or the Chief Operating Officer or, if both
such offices are vacant, by the President or an Executive Vice President, and by
the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary.
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ARTICLE XVI
CHECKS
All checks, drafts and other orders for the payment of money
and all promissory notes and other evidences of indebtedness of the Corporation
shall be signed by such officer or officers or such other person as may be
designated by the Board of Directors or pursuant to authority granted by it.
ARTICLE XVII
FISCAL YEAR
The fiscal year of the Corporation shall be as determined from
time to time by resolution duly adopted by the Board of Directors.
ARTICLE XVIII
NOTICES AND WAIVERS
1. Whenever by statute, by the Articles of Incorporation of
the Corporation or by these By-laws it is provided that notice shall be given to
any director or shareholder, such provision shall not be construed to require
personal notice, but such notice may be given in writing, by mail, by depositing
the same in the United States mail, postage prepaid, directed to such
shareholder or director at his address as it appears on the records of the
Corporation, and such notice shall be deemed to be given at the time when the
same shall be thus deposited. Notice of regular or special meetings of the Board
of Directors may also be given to any director by telephone or by telex,
telegraph or cable, and in
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the latter event the notice shall be deemed to be given at the time such notice,
addressed to such director at the address hereinabove provided, is transmitted
by telex (with confirmed answerback), or delivered to and accepted by an
authorized telegraph or cable office.
2. Whenever by statute, by the Articles of Incorporation of
the Corporation or by these By-laws a notice is required to be given, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of any
shareholder or director at any meeting thereof shall constitute a waiver of
notice of such meeting by such shareholder or director, as the case may be,
except as otherwise provided by statute.
ARTICLE XIX
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by the
provisions of the Florida Business Corporation Act or any successor act, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said provisions from and against any and all
of the expenses, liabilities, or other matters referred to in or covered by said
provisions, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
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holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such person. If the Florida Business
Corporation Act is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director shall be eliminated or limited to the fullest extent permitted by
the Florida Business Corporation Act, as so amended.
ARTICLE XX
ALTERATION OF BY-LAWS
The By-laws of the Corporation may be altered, amended or
repealed, and new By-laws may be adopted, by the majority vote of the
shareholders or by the Board of Directors; provided, however, that the
provisions of Sections 3 and 5 of Article IV of these ByLaws may be altered,
amended or repealed only by the affirmative vote of the holders of 66 2/3% of
the total voting power of the Corporation's stock outstanding and entitled to
vote thereon; provided, further, that this supermajority requirement may be
altered, amended or repealed only by the affirmative vote of the holders of
66 2/3% of the total voting power of the Corporation's stock outstanding and
entitled to vote thereon.
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DRAFT 07/01/97
-------------------------------------
AUDIO BOOK CLUB, INC.
AND
NATIONAL SECURITIES CORPORATION
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
NATIONAL SECURITIES CORPORATION and its assignees or designees (each hereinafter
referred to variously as a "Holder" or "National").
W I T N E S S E T H :
WHEREAS, the National has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") between the Company, and National 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
2,700,000 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 270,000 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.
<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. National 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 $___
(135% 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.
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4. Exercise of Representatives' Warrant.
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
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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 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
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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 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,
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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 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:
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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 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
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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 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
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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 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
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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).
(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).
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(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.
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),
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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
(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.
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<PAGE>
(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 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
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<PAGE>
prior written consent of National 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 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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
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.
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<PAGE>
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 Representatives' Warrant Certificate
of like tenor and date representing in the aggregate the right
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<PAGE>
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:
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<PAGE>
(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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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.
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<PAGE>
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:
NATIONAL SECURITIES CORPORATION
By:______________________________________________
Name:
Title:
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<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 National 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.
EXH. A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration 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.
EXH. A-2
<PAGE>
This Warrant Certificate does not entitle any holder thereof
to any of the rights 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
<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 National Securities Corporation. 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
<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
<PAGE>
Confidential Portions of this
document have been omitted and filed
separately with the Securities and
Exchange Commission
R.R. Donnelley & Sons Co.
Terms of Agreement
R. R. DONNELLEY & SONS CO.
TERMS OF AGREEMENT
This agreement between R.R. Donnelley & Sons Company (hereinafter referred to as
"Company") and Audio Book Club, Inc., (hereinafter referred to as "Client") sets
forth in terms and conditions for the warehousing and distribution by the
Company of materials from the Client.
DESCRIPTION
Subject to the provisions set forth herein, the Client will be obligated to
utilize and the Company will be required to provide warehousing and distribution
services as described herein. The Client will pay the Company for such services
at the rates set forth in Exhibit B, adjusted over time as described herein.
TERM OF AGREEMENT
The term of this agreement will commence November 1, 1996, and end on October
31, 1998. Thereafter, this Agreement will continue for three-year increments.
After six (6) months, from completion of Customer conversion from Dunmore, PA
warehouse into Louisville, KY warehouse, Client may terminate this Agreement (a)
upon giving the Company sixty (60) days prior written notice of its intent to do
so and paying the Company $20,000; or (b) upon giving the Company ninety (90)
days prior written notice of its intent to do so and paying the Company $10,000;
or (c) upon giving the Company six (6) months prior written notice of its intent
to do so. Company can also terminate this agreement upon giving the Client six
(6) months prior written notice of its intent to do so. Price increase to be
discussed sixty (60) days prior to the end of the agreement and to be agreed
upon by both parties. If parties cannot agree on new price, Client can terminate
this agreement. If parties cannot agree on price prior to the end of this
agreement, Company agrees to perform work at the old price plus the percentage
change in the Consumer Price Index from the fifteenth month preceding the date
of adjustment to the third month preceding the date of adjustment for a period
of at least one hundred-and-twenty (120) days after termination.
MATERIALS
Unless otherwise provided, the Company will supply the materials (cartons and
other shipping containers, etc.) specified herein or their equivalents. It is
understood and agreed that should the Company be unable to obtain such materials
or their equivalents in necessary quantities, the parties will select mutually
agreeable substitute materials. Should the use of such substitute materials or
services increase or decrease the cost of performing work, the prices will be
adjusted to fairly reflect any such increase or decrease in cost. Should there
be extraordinary increases in the costs of cartons or shipping containers
significantly beyond the CPI increase we reserve the right to adjust the pricing
to fairly reflect the increase in cost to the Company after discussion with the
Client. A "significant" increase would be considered an increase of 10% or
greater in a 12 month period with the first period beginning with the date of
the contract. The unavailability of materials will not be considered a breach of
this Agreement unless due to negligence of Company. Should
<PAGE>
any volume or trade discounts be earned on materials or services, they will be
retained by the Company. All scrap and by-products will become the Company's
property.
MAILING
For any product, direct mail piece or similar item not associated with the day
to day dealings that the Company performs for the Client, such as generating
labels or shipping audio product. All address labels, mail sack labels, or
magnetic media for the preparation thereof, will be furnished by the Client in
compliance with the current specifications of the facility performing the
mailing and the current U.S. Postal service rules and regulations. The mailing
prices set forth herein are based on U.S. Postal Service regulations and
procedures in effect as of the date hereof. If postal regulations or procedures
change so as to affect the Company's cost of mailing, the prices herein will be
revised to fairly reflect any increase or decrease in such costs. The costs of
postage and permits will be paid by the Client, and the Client will be
responsible, if necessary, for establishing an account at the U.S. Postal Office
with funds sufficient to cover these costs. Nothing contained herein will
require the Company to perform anything in violation of U.S. Postal laws,
regulations, or procedures.
TRANSPORTATION
Unless the Client requests otherwise, the Company will arrange for shipment of
the Client's products from the Company's facility. In such event, the Client
will pay all transportation and/or postage charges, and the Company will be
entitled to retain any brokerage commissions or other service charges earned by
it or its wholly-owned subsidiaries.
TITLE
The Client warrants and represents that all property deposited or to be
deposited with the Company is owned by the Client.
DISPUTES
Should any portion of an invoice become disputed, the Client agrees to pay the
undisputed portion according to its terms and the Client will notify the Company
promptly of the dispute. Both parties agree to use their best efforts to resolve
the disputed portion of such invoice within thirty (30) days of learning of the
dispute.
INTEREST AND COLLECTION COSTS
If Client fails to pay Company's invoices in accord with these terms, Client
agrees to pay interest at the rate of one and one-half percent (1-1/2%) per
month, or the lawful limit if less, on all amounts past due as well as all costs
of collection including but not limited to reasonable attorneys' fees. Company's
failure to bill for interest due shall not constitute a waiver of Company's
right to charge interest. If you delay completion of manufacture beyond the
period contemplated by the production schedule, or if partial shipment is made
prior to the completion of the entire quantity, interim billing may be made.
page 2
<PAGE>
CREDIT REVIEW
The above provisions may be reviewed by the Company, and should there be a
substantial adverse change in the Client's credit standing or in the event that
the Client does not comply with terms of these provisions, the Company will have
the right to change terms of payment, and the Company's obligation to perform
further work will be subject to reaching mutual agreement on revised terms.
LIEN ON PROPERTY
As security for payments of any sum due or to become due to the Company under
the terms of this Agreement, the Company will have the right, if necessary, to
retain possession of, and will have a lien on all property owned by the Client
and in the Company's possession, and all work in process and undelivered work.
PRICE ADJUSTMENTS
The warehousing and distribution prices stated in this Agreement will be
adjusted on (anniversary date) of each year (" the date of adjustment") during
the term as follows: In (Anniversary month -1) of each year during the term of
this Agreement, the Company will calculate the percentage of change in the
Consumers Price Index ("the CPI") from the fifteenth month preceding the date of
adjustment to the third month preceding the date of adjustment. Should this
calculation show that there has been an increase in the CPI, then effective on
the date of adjustment, each of the warehousing and distribution prices will be
increased by the percentage of increase in the CPI. In such event, at the next
date of adjustment at which the foregoing calculation indicates an increase in
the CPI, the percentage of change in the CPI for the purpose of determining the
price adjustment hereunder, if any, will be calculated from the CPI upon which
the last adjustment of warehousing and distribution prices was based. Any sales,
retailers occupation, service occupation, value added or use tax imposed on
account of these transactions will be added as an extra charge.
GUARANTEE AND LIMITATION OF LIABILITY
The Company will perform the work in a good and workmanlike manner and in
accordance with the requirements stated herein. In the event the work is
defective or delayed due to the Company's fault (including negligence), the
Company will not be liable for special or consequential damages, including, but
not limited to, lost profits or business as such terms are used in the Uniform
Commercial Code enacted in the State of Florida and without regard to whether
this agreement would be a sale of goods or a sale of services under Florida law.
Subject to this limitation, the Client will be entitled to any other rights and
remedies available at law or in equity.
SERVICE LEVELS
Company agrees to fulfill orders in the manner described in Exhibit A. At time
of physical inventory or end of annual certified cycle count, Company guarantees
physical inventory variances to be no greater than one percent (1%) of the total
number of Client's audio books in Company's possession. Company agrees to give
Client written notice whenever
page 3
<PAGE>
the physical inventory variance exceeds this level. Company agrees to replace
inventory which exceeds one percent (1%) at the purchase cost from the publisher
to Client.
RESPONSIBILITY FOR SUBJECT MATTER
In furnishing the Company matter to reproduce or to have incorporated in the
completed product, or completed books the Company stores or ships, the Client
represents and warrants that none of such matter (either as furnished the
Company by the Client or as altered by the Company at the Client's direction)
infringes any copyright, is libelous, or otherwise violates the rights of or
will cause damage or injury to other persons, and the Client agrees to indemnify
and save the Company harmless from all losses, damages and expenses, including
attorney's fees, which the Company may suffer as the result of any claim of such
violation, damage or injury.
WORK STOPPAGES
The Company will not be liable for delays or non-performance of this agreement
occasioned by strikes, fires, accidents, or by causes beyond its control
including, but not limited to, the unavailability of materials, purchased
services, utilities or fuel. In the event of a stoppage or delay resulting from
any such cause, the Client at its option may immediately terminate the agreement
or at the Client's election it will permit the Company to perform such parts of
the work as it is capable of performing, and in the event the Client does not
terminate this agreement but instead places any other part of the work
elsewhere, the Company will be entitled to resume the same as promptly as
practicable.
INSURANCE
The Company will carry at it's expense fire, sprinkler leakage and extended
coverage insurance, subject to the usual exclusions, limitations, and conditions
of such policies on the actual cash value of all our materials, work in process,
and all production completed and not shipped, and on the actual cash value of
all other materials furnished by Client, while in Company's care, custody and
control. If Client's property is damaged as a result of an insured peril under
the applicable insurance policy, then, at Company's option, it will either
replace Client's damaged property or reimburse Client for the actual cash value
of the damaged property. If Company elects to reimburse Client for the damaged
property's actual cash value, the amount payable to Client shall be limited to
the proceeds of such policy plus any related deductible, if any, applied to the
claim for damage to your property. For film positives, audio cassettes, compact
discs and other media Company's insurance coverage and Company liability shall
be limited to the cost of blank film, blank audio cassettes, blank compact discs
or blank other media and the cost of duplication from an original or other copy
approved by the Client. Subject to this limitation, the Company agrees they will
carry adequate insurance both in amount and coverage so that the Client will be
reimbursed for its actual losses.
BANKRUPTCY
If either party shall be adjudicated a bankrupt, institute voluntary proceedings
for bankruptcy or reorganization, make an assignment for the benefit of
creditors, apply for or consent to the appointment of a receiver for it or its
property, or admit in writing its inability to pay debts as they become due, the
other party may terminate this Agreement
page 4
<PAGE>
by written notice. Any such termination shall not relieve either party from any
accrued obligations hereunder.
CONFIDENTIAL DISCLOSURES
The parties agree that to accomplish the purposes of this agreement, it may be
necessary for the parties to exchange certain information considered
confidential and proprietary. In order to protect the confidential and
proprietary nature of such information, the parties agree as follows:
a. Subject to the provisions of the following paragraph, the term "Confidential
Information" means all information disclosed by either party in a tangible
medium and clearly marked "Confidential", "Restricted", "Secret" or other
similar term; and information disclosed orally by either party or observed by
either party during a visit to the other s facility, clearly identified as
confidential at the time of disclosure, and subsequently confirmed in writing as
confidential. Notwithstanding the foregoing the list of Clients customers and
information related to those customers (i.e. sales, returns, payments) will be
considered to be Confidential Information without any marking. Company will
provide monthly computerized information relating to the Client s customers and
products. Additional reports, reports requiring customized format or reports
involving information which is more than twelve (12) months old will be subject
to mutual agreement on format and prices.
b. Confidential Information does not include information that (a) is or becomes
available to the public through no breach of the Confidential Disclosures
provisions of this Agreement, (b) is already known to the recipient at the time
of disclosure, (c) is or becomes available to one party and the other agrees in
writing is not confidential, or (d) is independently developed by personnel of
the recipient that have no knowledge of information disclosed under the
Confidential Disclosures provisions of this Agreement.
c. Each party agrees that it will (a) only use Confidential Information of the
other for the purposes described in this Agreement, (b) not disclose
Confidential Information to any employees who do not have a reasonable need for
such information, (c) instruct all employees who have access to Confidential
Information of the necessity to maintain the confidentiality of such
information, and (d) use the same degree of care it would use with its own
information of equal importance, but in no event less than reasonable care, not
to disclose to any third party and Confidential Information of the disclosing
party without the prior written consent of the disclosing party.
d. All Confidential Information in the form of record bearing media and all
copies will be resumed to the disclosing party promptly upon its written
request.
e. All rights that the disclosing party may have in Confidential Information,
such as rights of patent, copyright, trade secret or similar intellectual
property right, shall be retained exclusively by the disclosing party. Nothing
in this Agreement shall be construed as granting any license, waiver or right to
the recipient with respect to any Confidential Information disclosed under this
Agreement.
f. The confidentiality obligations of this Agreement shall terminate with
respect to each individual disclosure of Confidential Information on the third
anniversary of the date of disclosure of such Confidential Information except
for the list of Client s customers and
page 5
<PAGE>
information related to those customers (i.e. sales, returns, payments) which
shall terminate on the tenth (10th) anniversary of the date of disclosure.
g. The Confidential Disclosures provisions of this Agreement shall govern all
communications between the parties during the term of this Agreement.
h. The parties acknowledge that breaches of the Confidential Disclosures
provisions of this Agreement may result in irreparable injury and that temporary
and permanent injunctive relief shall be available along with any other remedies
provided by law.
ASSIGNMENT
Both parties reserve the right to assign, transfer, set over or sell their
rights in and to this Agreement without the consent of the other party to a
successor to all or substantially all of its business or to an entity with which
the party is merged or consolidated. Subject to the prior written consent of the
other party, either party may assign, transfer, set over or sell their rights in
and to this Agreement to an affiliate or a third party. In the event of such an
assignment, the assignee shall be solely responsible for all obligations of the
assigning party upon the assignee's written assumption of the obligations of the
assignor. In addition, Company may assign its right to payment to any wholly
owned subsidiary.
WAIVER
No waiver by either party hereto of any default by the other in the strict and
literal performance of or compliance with any provision, condition, or
requirement herein will be deemed to be a waiver of, or in any manner release
such party from, strict compliance with any provision, condition or requirement
in the future; nor will any delay or omission of either party to exercise any
right hereunder in any manner impair the exercise of any such right accruing to
it thereafter. Except when otherwise expressly stated, no remedy expressly
granted herein to either party in the event of a default by the other will be
deemed to exclude any other remedy which would otherwise be available.
GOVERNING LAW
This Agreement shall be governed by the internal laws of the State of Florida.
EXHIBITS
This Agreement includes the following exhibits:
Exhibit A - Description of Services
Exhibit B - Prices Schedules
page 6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective duly authorized officers, as of the date written above. The
signature of both parties mean that all the terms and conditions on the
preceding pages, and the attached pages, are incorporated herein and made part
of this agreement.
Audio Book Club. Inc. R.R. Donnelley & Sons Company
By: By:
Title: Title:
Date: Date:
page 7
<PAGE>
EXHIBIT A - DESCRIPTION OF SERVICES
1) Company will pay National Fulfillment Services ("NFS") entire Client
conversion fee as agreed for converting Audio Book Club to NFS.
2) Company agrees to credit Client the differential of the distribution and
fulfillment costs associated with the picking and packing of product from
warehouse in excess of Louisville, KY rates beginning November 1, 1996 until
such date that Clients inventory is transferred to the Louisville, KY
facility. During this period of time, the differential will be based upon
the projected hand-pack to machine pack work-mix for Louisville, KY,
outlined below. Louisville, KY rates are attached hereto and agreed upon by
both Company and Client. All product shipped from the Louisville, KY
facility will be manifested and co-mingled with other outgoing shipments to
obtain the lowest possible postage rate.
3) Company agrees to machine pack all products to the extent that: 1) It is a
machinable package, i.e. is within the capabilities of the machine. 2) That
the order quantity per machine occurrence is a minimum of 500 units of
like-size (same make-ready). Examples of #2 are: A. Five (5) orders of one
hundred (100) pieces, five (5) different sku's that are all the same size
would qualify for the five hundred (500) like-piece minimum because the five
(5) orders can be run sequentially on the same machine makeready. B. One (1)
order of five hundred (500) pieces all the same sku would qualify as
machinable also.
An item that would not qualify for machine pack rates is a one (1) sku order
with three hundred and fifty (350) pieces. If the order cannot be ganged
with a like-size (machine specifications) item, it will be cartoned by hand.
As of 10/31/96, RRD hand packs seventy-two percent (72%) of A.B.C.'s orders,
with the remaining twenty-eight percent (28%) being done by machine.
Our commitment, when A.B.C.'s inventory is relocated to Louisville, will be
as follows: at least seventy-five percent (75%) of the orders will be done,
and billed at, machine/ semi-auto; and not more than twenty-five percent
(25%) will be done, and billed at hand rates. Continual efforts will be made
to improve upon this percentage breakdown so that a greater percentage of
orders will be done machine/ semi-auto.
4) Company agrees not to use, in the Louisville, KY facility, metered postage
strips on outgoing shipments that are 3rd class, special 4th, or BPM. 1st,
APO, FPO, and 2nd class will still be metered. All mail classes will be
electronically manifested through either the Accu-sort or Tandata manifest
systems. Outbound packages must be in complete compliance with all U.S.
Postal regulations to qualify for a specific mail class, i.e. BPM or special
4th, etc.
Postage will be billed back to Audio Book Club through an R.R. Donnelley
established postal permit account, or can be charged to Audio Book Club's
own permit account providing sufficient funds are maintained to the account
to not disrupt the flow of outbound mail.
page 8
<PAGE>
5) NFS will print invoices for client and courier them to R.R. Donnelley,
Dunmore PA, Distribution Center-Key warehouse for pick, pack, and ship until
such time stock is transferred to the Louisville, KY facility. In
Louisville, company will continue to receive preprinted enveloped invoice
label bills until such time a local invoice printer/lettershop can be
identified and qualified as a certified R.R. Donnelley business partner.
Once these capabilities are available in Louisville, which shall not be
later than 3/31/97, Company will receive electronic transmission of invoices
from NFS and will print them locally. Orders/invoices need to be received no
later than 2 p.m. EST, to be in compliance with the forty eight (48) hour
service level agreement.
Company will transmit a shipping confirmation file immediately to NFS
confirming product was picked, packed, and shipped per service level
agreement, within 48 hours of receipt of orders/invoices.
SERVICE LEVEL: Forty eight (48) hour turnaround from time of order and
invoice receipt to mailing. Overnight and priority requests received prior
to 2 p.m. will be shipped out the same day they are received, whether
received by telephone, fax, electronically, regular mail.
6) TRANSPORTATION. Company shall arrange and incur all costs associated with
transporting Client's complete inventory from Haddon Craftsman- Key
Warehouse to the Louisville, KY facility at such time that transfer occurs,
to be no later than February 1, 1997.
7) SHIPPING PREPARATION AND ORDER ACCURACY. Company will carton, label address,
and affix correct postage for each order. Manifest documentation and exact
mailing/shipping costs will be captured and reported. The company guarantees
that 99.5% will be shipped accurately, over a rolling 12-week period. An
accurate shipment is defined as the correct product(s), cartoned as
specified with the correct address placement and postage affixed.
8) RETURNS. Company will process returns and return salable units, as defined
by Client to inventory. Damaged units will be sorted and separately held for
Client to inspect prior to destruction or other disposition as prescribed by
Client and Client's criteria. Returns include receiving the returned package
from the customer, opening the carton, standard inspection of material as
prescribed by Client, capturing the customer account number, product number
of a "clean" return, restocking good merchandise, updating inventory files,
refurbishing required to restock any product and any materials associated
with repackaging or refurbishing. One hundred percent (100%) of clean
returns will be processed within seventy two (72) hours and reported by
electronic means to the data processing center.
Whitemail returns, returns other than clean returns, will have all available
information "cut-out" and forwarded to client or designated service bureau,
such as NFS.
9) RECEIPT OF UNITS. Company will receive units and related materials from
shippers, including unloading units, verifying receipts, placing units in
easily accessible and retrievable storage, and forwarding receiving reports
to Client daily. All units will be
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<PAGE>
recorded into inventory and available for shipping within twenty-four (24)
hours of receipt by Company.
10) INVENTORY STORAGE. Company will store all products and materials in a dry,
easily accessible area and take all reasonable measures to protect all
products and materials.
11) An annual physical inventory will be performed at Company's expense after
one (1) year of activity. All subsequent physical inventories are at
Client's expense and must be scheduled ninety (90) days in advance of
inventory date.
Cycle counting will be relied upon as the inventory control methodology and
therefore annual physical inventories are not required after year one (1).
12) In the event of termination of this agreement, company agrees to fully
cooperate in preparing the inventory for relocation. All preparation will be
billed at full skid shipping prices as outlined in exhibit B.
page 10
<PAGE>
EXHIBIT B
Table ST -
AU
Effective
11/1/96
RR DONNELLEY 1996 STORAGE OF AUDIO BOOKS
Standard size audio books, per pallet, per month* $
* Minimum storage charge, per month $
The month in which items are delivered into the warehouse, either from
our bindery or from outside sources, will be the beginning month used
to calculate storage charges.
BILLING
An invoice will be issued monthly, listing title and the quantity of
audio books in storage, aged by month and year.
A monthly inventory of audio books in storage will also be issued. This
monthly inventory will provide a detailed record of all audio books in
storage by title, and will show the quantity shipped and received by
title.
page 11
<PAGE>
EXHIBIT B
Table MM - AU
Effective 11/1/96
RR DONNELLEY 1996 DIRECT RESPONSE MAILING
Includes: Sortation for 4th class mail.*
Affixing a sealed envelope to the carton.
Packing in unprinted suitable shipping container
Machine Packing Per Carton Shipped
Single Additional Units
Quantity per Mailing Selection in Ctn
---------------------- ----------- ------------------
Machine 100M or greater
Machine 50M to 99,999
Machine 25M to 49,999
Machine 1OM to 24,999
Machine 5M to 9,999
Machine 4M to 4,999
Machine 500 to 3,999
Semi-automated Packing Per Carton Shipped
Single Additional Units
Quantity per Mailing Selection in Ctn
---------------------- ---------- ------------------
Machine/Semi Auto 20 to 1,999
Hand Packing Per Carton Shipped
Hand Pack Single Selection
Hand Pack Dual Selection
Hand Pack 3-Book Selection
Hand Pack 4-Book Selection
Hand Pack 5-Book Selection
Hand Pack Over 5 books add for each audio book over 5
Additional for each insert placed in the carton on top of the audio book:
* For 3rd Class mailing see additional sorting charges per Table PO-AU
page 12
<PAGE>
EXHIBIT B
Table RM - AU
Effective
11/1/96
RR DONNELLEY 1996 RETURNS AND MISCELLANEOUS PRICES
- ---------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1) Process returns - Includes removing audio book from carton, separating
usable from unusable audio books, and resuming usable audio books to
inventory, per audio book
- Received in individual cartons - (includes uncartoning, inspection,
and data entry of returns information)
2) Affix a label onto the outside of the case, per audio book
- Manual
- Mechanical
3) Packing audio books on pallets for a remainder sale or move,
- per pallet
- Pallet included in above
4) Transfer audio books - from one publisher's account to another, or transfer
one publisher's internal account to another (i.e., sales or market region),
per title, per transfer
5) Receiving audio books, one title per pallet
- Pallets not requiring re-piling, per audio book
- Pallets requiring re-piling, per audio book
- Additional if titles are mixed on a pallet, per audio book
6) Destroying audio books
- Without confirmation, per pallet plus applicable
landfill charge
7) Pull full cartons from inventory, at client's request, per carton (does not
include regular shipping)
</TABLE>
page 13
<PAGE>
EXHIBIT B
Table PO - AU
Effective 11/1/96
RR DONNELLEY 1996 - 3RD CLASS MAIL SORTING PRICES
---------------------------------------------------
Labels Envelopes
1) Received in random sequence
a. Sort to 5 digits, for mailing of at least $ $
5,000 identical pieces per day
b. Sort to 3 digits, for mailing of at least
1,000-4,999 identical pieces per day
2) Received in alphabetized State sequence
a. Sort to 5 digits, for mailing of at least
5,000 identical pieces per day
b. Sort to 3 digits, for mailing of at least
1,000-4,999 identical pieces per day
3) Received in numerical Zip Code sequence
a. Sort to 5 digits, for mailing of at least
5,000 identical pieces per day
b. Sort to 3 digits, for mailing of at least
1,000-4,999 identical pieces per day
4) Receive pre-sorted labels and a suitable bag
list, any quantity
page 14
<PAGE>
Confidential portions of this
document have been omitted and filed
separately with the Securities and
Exchange Commission
MASTER AGREEMENT FOR NATIONAL FULFILLMENT SERVICES
This MASTER AGREEMENT (the "Agreement") is made effective as
of October 25, 1996, by and between Audio Book Club, Inc., a Florida corporation
("Client") located at 2295 Corporate Blvd., N.W., Suite 222, Boca Raton, FL
33431, and National Fulfillment Services, Inc., 8 Pennsylvania corporation
("NFS") located at 100 Pine Avenue, Holmes, PA 19043.
Client hereby requests that NFS provide the marketing services
described herein (the "Services") and, upon acceptance by NFS by execution by
its authorized representative in the space provided below, this Agreement shall
become a binding Agreement between NFS and Client, pursuant to which NFS agrees
to provide the Services to Client upon the Terms and Conditions stated in this
Agreement.
ACCEPTED AND AGREED TO:
Client: Audio Book Club. Inc.
Address: 2295 Corporate Blvd N.W.
Suite 222
Boca Raton, FL 33431
Phone: (561) 241-1426
Fax: (561) 241-9887
Contact Person: Mike Herrick
Direct Phone: ( )
By:/s/ Michael Herrick Michael Herrick
---------------------- --------------------------
(Authorized Signature) (Typed Name)
Title: Vice Chairman
Accepted by NFS this 30th day of October, 1996.
By:/s/ Eugene Krueger Eugene Krueger
----------------------- --------------------------
(Authorized Signature) (Typed Name)
Title: President
<PAGE>
1. Commencement of Services. Services shall commence as follows:
SERVICE EFFECTIVE DATE
Book Club Fulfillment October 25, 1996
2. Duration and Termination of Service. Service hereunder shall
continue until October 31, 1998 or until terminated by Client or NFS on written
notice specifying as a termination date the end of the second (or any
subsequent) calendar month following the calendar month in which such notice
shall have been served.
3. Conversion Fee. NFS agrees and acknowledges that any conversion fee
due NFS will be billed to and paid by RR Donnelley & Sons Company in connection
with RR Donnelley & Sons Company agreement to pay such conversion fee for Client
and NFS will not look to Client for amount of such fee and if such fee is not
paid, this Agreement will nevertheless continue in full force and effect.
4. Non-Divulgence. All information that NFS acquires from Client with
respect to the Services shall be considered confidential and proprietary
information of Client. NFS agrees not to use such information except for the
purpose of performing the Services and agrees not to disclose such information
to others, except to those NFS employees and agents who reasonably require such
information in the performance of the Services. NFS will use reasonable care in
safeguarding such information and shall, upon written request of Client, return
such information to Client upon the termination of this Agreement.
Notwithstanding the other provisions of this paragraph, NFS shall not be
prevented from disclosing such information (i) which, at the time of disclosure,
was in the public domain, (ii) which was lawfully disclosed to NFS on a
non-confidential basis by a third party who is not bound by a confidentiality
agreement with Client, (iii) which is disclosed with Client's prior Written
approval or (iv) in response to valid legal process, whether issued by a court
or administrative or regulatory body. Notwithstanding any other provisions of
this Agreement to the contrary, NFS shall maintain absolutely confidential all
customer names and customer lists of the Client and shall not disclose such
information to others. NFS acknowledges that a breach of this provision will
cause Client substantial and irreparable damages and therefore NFS agrees that
the Client will be entitled to injunctive relief for such breach or threatened
breach in addition to all other remedies that the Client may otherwise be
entitled.
5. Banking Facilities. If necessary for the provision of Services,
Client shall establish a bank account in Pennsylvania, into which NFS shall
deposit funds received for the account of Client. If Client so desires to
establish a bank account outside of Pennsylvania, then NFS shall send, each day,
by Federal Express, all checks, money orders or other funds received by NFS that
day, together with a deposit slip, to such bank using Client's Federal Express
account number, and shall send by facsimile to Client a copy of such deposit
slip on a daily basis.
-2-
<PAGE>
6. Property Rights of Client, Etc.:
(a) Ownership of Client's Property. Magnetic tapes containing
names on Client's proprietary lists, including, but not
limited to, all member names and subscription information
microfilmed and other records, promotional letters and
messages, stationery, Client's credit billing forms and other
special material furnished to NFS by Client or purchased from
NFS by Client are deemed to be the property of Client
(b) Return of Client's Property. Upon termination of the
Services or any portion thereof, NFS, upon receipt of a
written request from Client, will promptly return to Client
any portion of its property (then in NFS's possession or under
its control and not required for the efficient completion of
Services) specified in such request. The remainder of Client's
property shall be returned to Client promptly following
completion of Services
(c) Completion of Services. Following the return of any
property as provided in paragraph 6(b), NFS shall complete the
performance of all Services required hereunder.
(d) Extra Magnetic Tapes. NFS, at least once every three
months or on written notice from Client, will furnish one
complete set of magnetic tapes containing the names on
Client's proprietary lists, such set to be in addition to
those required by NFS in providing Services
7. Tape Format. Promptly following notice served by Client or on
delivery of any tapes furnished pursuant to paragraph 6(d) of this Agreement,
NFS will deliver to Client a tape format which will enable Client to interpret
the magnetic tapes (mentioned in paragraph 6(a) of this Agreement) in converting
to another fulfillment system.
8. Responsibility for Errors. In the event of errors, inaccuracies or
omissions by NFS or its employees, NFS shall immediately attempt, in good faith,
at its sole expense to correct the error, inaccuracy or omission. The above is
not in limitation of any of the Client's other rights and remedies which may
exist for a breach by NFS of this Agreement.
9. Non-Performance. If NFS shall fail in any material respect for any
reason to furnish any Service or deliver any material required under this
Agreement, NFS agrees either to re-perform such Service or to refund to the
Client any amounts paid for such Service or material (or to credit such amounts
against future invoices). The above is not in limitation of any of the Client's
other rights and remedies which may exist for a breach by NFS of this Agreement.
-3-
<PAGE>
10. Assignability.
Client reserves the right to assign, transfer, set over or
sell its rights in and to this Agreement to an affiliate of
Client; a successor to all or substantially all of the
business of Client; or an entity with which Client is merged
or consolidated, and upon the assumption of this Agreement by
the assignee, the assignee shall be solely responsible for all
obligations of Client hereunder.
11. Notice. Deposit of any notice required hereunder in the United
States mails addressed, by certified mail, return receipt requested, or by
overnight delivery service to the Client at:
2295 Corporate Boulevard, N.W.
Suite 222
P.O. Box 5010
Boca Raton FL 33431-0810
Attn: Michael Herrick, Vice Chairman
or to NFS at:
__________________________________________
__________________________________________
__________________________________________
__________________________________________
Attn:_____________________________________
or personal delivery shall constitute serving notice.
12. Due Authorization. The parties hereto have caused this Agreement to
be executed and delivered by their respective duly authorized officers.
13. Invalid Portions. If any portion of this Agreement is found to be
invalid or unenforceable, the parties agree that the remaining portions shall
remain in full force and effect.
14. Receive Mail. NFS will receive and promptly process all incoming
transactions, including' but not limited to, payments, orders, enrollments,
customer service inquiries, and correspondence via mail, facsimile, telephone
and electronic means. All orders, payments, enrollments, and customer service
inquiries will be processed and entered into the system. The following service
level standard will apply:
Mail 80% in one day, 100% in two days.
Electronic Mail 100% in one day.
Fax Orders 80% in one day, 100% in two days.
Balance 100% in three days.
Billing and Statementing:
-------------------------
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<PAGE>
Invoices sent to RRD 24 hours
Lettershop 24 hours
All Records Sent to Lettershop Within 24 hours
------------------------------
Return Processing: 100% within 24 hours of receipt from RRD
-----------------
Payment Processing: 90% within 24 hours of receipt
------------------- 100% within 48 hours of receipt.
NFS will take telephone, mail and electronic inquiries from prospects daily and
will mail Client information packages to these prospects at least two (2) times
per week.
15. Daily Deposits. For each date that is not a legal bank holiday, NFS
will make deposits of cash, checks and money orders received in Client's name to
an account maintained by Client at a bank chosen by Client in Pennsylvania (the
"Bank"). The Client, at its option, may choose a bank outside of Pennsylvania
(also defined as a "Bank"), and if the Client so chooses such Bank, then NFS
will send by Federal Express each day all funds received on such day, together
with a deposit slip to such Bank using Client's Federal Express account number
and will send by facsimile to Client a copy of such deposit slip. Furthermore,
NFS will provide a daily deposit report to Client each day that is not a legal
bank holiday.
16. Maintain Records. NFS will maintain on magnetic media an itemized
record of each customer's account and all its transactions.
17. Accounts Receivable. NFS will maintain a customer accounts
receivable system using Client's credit rules, which may be revised or
supplemented as needed by NFS. Changes to credit rules will be made by NFS
within forty-eight (48) hours of Client's written notice.
18. Customer Service. NFS recognizes that Client is committed to a high
level of customer service and satisfaction. NFS will take reasonable appropriate
actions to satisfy customers' inquiries and/or complaints and to provide service
to Customer in accordance with Client written policies. The following service
standard levels will apply.
Average Speed of Answer 85% within 20 seconds
Abandonment Rate Less than 5%
White Mail 100% in three days
Electronic 100% in 24 hours
19. Management Reports. NFS will supply, through printed and/or
electronic means, a standard report package, including, but not limited to, all
reports included in the package entitled "Audio Book Club Standard Report
Package", to be provided by NFS and attached to this Agreement hereto In
addition, NFS will apprise Client of any new reports as they become available
and will make them part of Client's standard report package if Client desires to
have them. Client will receive each report daily, weekly or monthly as noted in
the Audio Book Club Standard Report Package".
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<PAGE>
20. Duplicates of Magnetic Tapes. NFS will store a complete master file
of Program Customer names and addresses (grandfather tapes) in Client's Florida
location as noted in paragraph 11 of this Agreement, sent to the attention of
Michael Herrick, Vice Chairman.
21. Fulfillment Terms.
Monthly Per Member Charge for Active Members $/Mmbr/Mo
-------------------------------------------- ---------
Under 7,500 **
7,500 and over
10,000 and over
15,000 and over
25,000 and over
35,000 and over
50,000 and over
75,000 and over
100,000 and over
150,000 and over
200,000 and over
250,000 end over
300,000 and over
400,000 and over
** Minimum Monthly Charge. . . . . . . $
Monthly Per Member Charge for Canceled Members $
Monthly per Member Charge for Active Members includes, but is not limited to all
member related activity excluding product distribution and Lettershop services.
A member is considered canceled if his status is 'canceled' and the account is
not in collection. In other words, if no further processing is to be done on the
account. The $ is, in essence, a storage fee.
Stuffing/Inserting $ per M
Special Clerical (Client requested) $ per hour
Programming Services $ per hour
-6-
<PAGE>
Mailing List Output
A. Cheshire Labels $ per M
$ Minimum Charge
B. Magnetic Tape: Same as A above plus $ per Tape (refundable)
C. Pressure Sensitive Labels $ per M
$ Minimum Charge
Disk Creation/BBS Services $ per File Run
All Payment Terms Due Net 30 Days.
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<PAGE>
LOAN AGREEMENT
AGREEMENT made this 12 day of May, 1997, by and between AUDIO BOOK
CLUB, INC., having an office at 2295 Corporate Boulevard, N.W., Suite 222, Boca
Raton, Florida 33432 (hereinafter "Borrower") and HOWARD HERRICK,as Trustee of
the M.E. Herrick Irrevocable Trust maintaining an office at 295 Madison Avenue,
New York, NY 10017 (hereinafter "M.E. Herrick Trust").
W I T N E S E T H :
WHEREAS, M.E. Herrick Trust is the assignee of a loan agreement dated
the first day of June 1994 which was duly assigned to M.E. Herrick Trust by
assignment dated November 29, 1996 (the "Loan Agreement"), which loan agreement
was in the principal amount of $50,000; and
WHEREAS, Borrower is further indebted to M.E. Herrick Trust in
the amount of $350,000 by reason of cash advances made by M.E.
Herrick Trust to Borrower; and
WHEREAS, the above noted Loan Agreement indebtedness and additional
indebtedness aggregating $400,000 are to be consolidated and repaid as herein
provided, and are hereinafter collectively referred to as the "Indebtedness";
and
WHEREAS, the parties hereto wish to restate the Loan Agreement
in its entirety;
NOW, THEREFORE, in consideration of the mutual covenants and provisions
herein contained, it is agreed as follows:
<PAGE>
1. Acknowledgement of Indebtedness. Borrower acknowledges
and agrees to pay the Indebtedness in accordance with the terms
hereinafter set forth.
2. Terms of Payment. The Indebtedness shall be paid by
Borrower to M.E. Herrick Trust as follows:
(a) No interest shall be paid or accrued until August 1,
1997; and
(b) Interest shall be accrued on the principal balance from
time to time outstanding calculated from August 1, 1997 at a rate which is equal
to the greater of 10% per annum or the prime rate of interest charged by
Citibank, N.A. of New York, adjusted monthly, which Indebtedness, together with
accrued interest thereon shall be due and payable on the earlier of:
(i) 15 months from the consumation of an initial public
offering of Borrowers stock; or
(ii) December 31, 1998
(c) Notwithstanding the provisions of subparagraph (b) above,
in no event shall the rate (commencing August 1, 1997) ever be lower than the
minimum interest rate (and compounding frequency) that would be required to
bring the Indebtedness into compliance with the provisions of Internal Revenue
Code Section 7872 or any successor provision.
3. Prepayment. The Indebtedness may be prepaid by Borrower
at any time, and from time to time, in whole or in part, without
penalty.
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<PAGE>
4. Events of Default. The following events shall be deemed
defaults pursuant to the terms of this Loan Agreement:
(a) A binding decree or order of a court shall have been
entered adjudging Borrower bankrupt or insolvent, or approving as properly filed
a petition seeking reorganization, readjustment, arrangements, composition or
similar relief for Borrower under the Bankruptcy Laws of any jurisdiction, or
any other similar applicable law, and such decree or order shall have continued
undischarged or unstayed for a period of thirty (30) days; and
(b) Borrower shall institute proceedings to be adjudicated a
voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking
reorganization, readjustment, arrangement, composition or similar relief under
the Bankruptcy Laws, or any other similar applicable law, or shall consent to
the appointment of a receiver or liquidator or trustee or assignee in bankruptcy
or insolvency of a substantial part of its property, or shall make an assignment
for the benefit of creditors, or shall admit in writing its inability to pay its
debts generally, as they become due; or.
5. Remedies. In the event of a default hereunder as hereinabove
defined, M.E. Herrick Trust shall have the right to declare the entire unpaid
balance of the Indebtedness immediately due and payable; the right to seek all
remedies available to him under law for the collection of the Indebtedness and
shall be
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<PAGE>
entitled to recover all of the reasonable costs of collection, including
attorney's fees.
6. Non-Waiver. No course of dealing on the part of M.E. Herrick Trust,
its agents or employees, nor any failure or delay on the part of M.E. Herrick
Trust with respect to the exercise of any right, power or privilege given or
granted hereunder shall operate as a waiver thereof as to any future default,
nor shall any single or partial exercise by M.E. Herrick Trust of any right,
power or privilege granted or contained herein preclude M.E. Herrick Trust from
later or future exercise of any right, power or privilege as to any future
defaults. The rights and remedies of M.E. Herrick Trust are cumulative to and
not exclusive of any remedies under the law.
7. Binding Effect. In the event that any part or parts of
this Agreement are found to be void, the remaining provisions shall
nevertheless be binding with the same effect as though the void part or parts
were deleted.
8. Modifications. This Agreement may not be changed orally, but only by
a writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought; this Agreement contains the entire
understanding of the parties hereto and all prior agreements or understandings,
whether written or oral, are merged herein.
9. Controlling Law. This Agreement has been executed by
Borrower in the State of Florida and shall be construed and interpreted under
the laws of that State.
-4-
<PAGE>
IN WITNESS WHEREOF the parties hereto have signed this Agreement the
day and year first above written.
AUDIO BOOK CLUB, INC.
by: /s/ Norton Herrick
---------------------------------
Norton Herrick - Chairman
/s/ Howard Herrick
------------------------------------
HOWARD HERRICK as Trustee of the
M.E. Herrick Irrevocable Trust
Dated 11/29/96
-5-
<PAGE>
CONSOLIDATION AND RESTATEMENT OF LOAN AGREEMENTS
AGREEMENT made this 12 day of May, 1997, by and between AUDIO BOOK
CLUB, INC., having an office at 2295 Corporate Boulevard, N.W., Suite 222, Boca
Raton, Florida 33432 (hereinafter "Borrower") and HOWARD HERRICK, residing at 26
Alder Lane, Basking Ridge, New Jersey 07920 (hereinafter "Howard").
W I T N E S S E T H :
WHEREAS, Borrower is indebted to Howard in the amount of $50,000
pursuant to the terms of a Loan Agreement dated and entered into on the first
day of June, 1994;
WHEREAS, Borrower is indebted to Howard pursuant to the terms of a Loan
Agreement in the amount of $350,000 dated and entered into on the 6th day of
February, 1997, which amount of $350,000, and the amount of $50,000 due under
the Loan Agreement dated June 1, 1994 are hereinafter collectively referred to
as the "Indebtedness";
WHEREAS, the parties wish to modify the terms of the Loan Agreements
and consolidate the Indebtedness as hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants and provisions
herein contained, it is agreed as follows:
1. Acknowledgement of Indebtedness. Borrower acknowledges and agrees to
pay the Indebtedness in accordance with the terms hereinafter set forth.
<PAGE>
2. Terms of Payment. The Indebtedness shall be paid by Borrower to
Howard as follows:
(a) No interest shall be paid or accrued until August 1, 1997;
and
(b) Interest shall be accrued on the principal balance from
time to time outstanding calculated from August 1, 1997 at a rate which is equal
to the greater of 10% per annum or the prime rate of interest charged by
Citibank, N.A. of New York, adjusted monthly, which Indebtedness, together with
accrued interest thereon, shall be due and payable on the earlier of:
(i) 15 months on the consummation of an initial
public offering of the stock of the Borrower; or
(ii) December 31, 1998
(c) Notwithstanding the provisions of subparagraph (b) above,
in no event shall the rate (commencing August 1, 1997) ever be lower than the
minimum interest rate (and compounding frequency) that would be required to
bring the Indebtedness into compliance with the provisions of Internal Revenue
Code Section 7872 or any successor provision.
3. Prepayment. The Indebtedness may be prepaid by Borrower at any time,
and from time to time, in whole or in part, without penalty.
4. Events of Default. The following events shall be deemed defaults
pursuant to the terms of this Loan Agreement:
(a) A binding decree or order of a court shall have been
entered adjudging Borrower bankrupt or insolvent, or approving as
-2-
<PAGE>
properly filed a petition seeking reorganization, readjustment, arrangements,
composition or similar relief for Borrower under the Bankruptcy Laws of any
jurisdiction, or any other similar applicable law, and such decree or order
shall have continued undischarged or unstayed for a period of thirty (30) days;
and
(b) Borrower shall institute proceedings to be adjudicated a
voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking
reorganization, readjustment, arrangement, composition or similar relief under
the Bankruptcy Laws, or any other similar applicable law, or shall consent to
the appointment of a receiver or liquidator or trustee or assignee in bankruptcy
or insolvency of a substantial part of its property, or shall make an assignment
for the benefit of creditors, or shall admit in writing its inability to pay its
debts generally, as they become due; or.
5. Remedies. In the event of a default hereunder as hereinabove
defined, Howard shall have the right to declare the entire unpaid balance of the
Indebtedness immediately due and payable; the right to seek all remedies
available to him under law for the collection of the Indebtedness and shall be
entitled to recover all of the reasonable costs of collection, including
attorney's fees.
6. Non-Waiver. No course of dealing on the part of Howard, his agents
or employees, nor any failure or delay on the part of Howard with respect to the
exercise of any right, power or
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<PAGE>
privilege given or granted hereunder shall operate as a waiver thereof as to any
future default, nor shall any single or partial exercise by Howard of any right,
power or privilege granted or contained herein preclude Howard from later or
future exercise of any right, power or privilege as to any future defaults. The
rights and remedies of Howard are cumulative to and not exclusive of any
remedies under the law.
7. Binding Effect. In the event that any part or parts of this
Agreement are found to be void, the remaining provisions shall nevertheless be
binding with the same effect as though the void part or parts were deleted.
8. Modifications. This Agreement may not be changed orally, but only by
a writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought; this Agreement contains the entire
understanding of the parties hereto and all prior agreements or understandings,
whether written or oral, are merged herein.
9. Controlling Law. This Agreement has been executed by Borrower in the
State of Florida and shall be construed and interpreted under the laws of that
State.
-4-
<PAGE>
IN WITNESS WHEREOF the parties hereto have signed this Agreement the
day and year first above written.
AUDIO BOOK CLUB, INC.
by: /s/ Norton Herrick
-----------------------------
Norton Herrick - Chairman
/s/ Howard Herrick
---------------------------
HOWARD HERRICK
-5-
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the ____ day of _____________, 19___, by and
between Audio Book Club, Inc., a Florida corporation, with offices at 2295
Corporate Boulevard, N.W., Suite 222, P.O. Box 5010, Boca Raton, Florida
33431-0810 (the "Company"), and Norton Herrick (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the audio book club business; and
WHEREAS, the Company recognizes the Executive's substantial
contribution to the growth and success of the Company and desires to provide for
his continued employment by reinforcing and encouraging his continued attention
and dedication to the Company; and
WHEREAS, the Executive is willing to commit himself to continue to
serve and to establish a minimum period during which he will serve the Company
on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, in consideration of
the Executive's services and value to the Company over and beyond his
obligations as an employee, and intending to be legally bound hereby, the
parties agree as follows:
1. Recitals. The Whereas clauses recited above are hereby incorporated
by reference as though they were fully set forth herein.
2. Employment. The Company shall employ the Executive and the Executive
shall serve the Company, on the terms and conditions set forth herein.
3. Term. The employment of the Executive by the Company as provided in
paragraph 2 shall commence on the effective date of this Agreement and end on
the second (2nd) anniversary of the effective date, subject, however, to the
other termination provisions contained herein.
4. Position and Duties. (a) The Executive shall be employed by the
Company as its Chief Executive Officer and may also serve, at his option, as the
Company's Chairman of the Board of Directors. His power and authority shall be
and remain superior to those of any other officer or employee of the Company.
Subject to the direction and control of the Board of Directors, the Executive
shall have general strategic oversight and control of the business and affairs
of the Company consistent with his current position as Chief Executive Officer
of the Company. The scope of his duties and the extent of his responsibilities
shall be substantially the same as the duties and responsibilities that the
Executive currently performs. In addition, the Executive shall not be required
to spend any fixed amount of time in connection with his performance of his
duties.
<PAGE>
5. Compensation and Related Matters.
(a) Salary. During the term of this Agreement, the Company
shall pay to the Executive, as basic compensation for his services, an initial
annual salary of $100,000 in equal monthly installments during the first year of
the term of this Agreement; thereafter at any time during the term of this
Agreement the Board of Directors may increase, but not decrease such amount. In
addition the Executive shall be entitled to participate in the Company's
incentive stock option plans and may receive a performance-based bonus, to be
determined by the Board of Directors. The Executive's salary and bonus shall be
reconsidered at least once each fiscal year of the Company and shall not
necessarily be limited to such increases granted other officers.
(b) Expenses. The Executive shall be entitled to receive
prompt reimbursement for all reasonable travel and business expenses in
connection with services performed hereunder in accordance with normal Company
policy, as the same may be determined from time to time.
(c) Insurance and Employee Benefits. The Executive shall be
entitled to receive insurance and employee benefits applicable to all officers
of the Company.
6. Termination by the Company. The Executive's employment hereunder may
be terminated by the Company without any breach of this Agreement only under the
circumstances described below.
(a) Death. The Executive's employment hereunder shall
terminate upon his death.
(b) Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, as determined by a physician mutually chosen
by the Executive and the Company, the Executive shall have been absent from his
duties hereunder for a consecutive period of one hundred eighty (180) days and
after notice of termination is given (which may be given before or after the end
of such 180 day period but which will in no event be effective until, at the
earliest, the day following the one hundred eightieth (180th) day of the period)
shall not have returned to the performance of his duties hereunder, as that
concept is contemplated in this Agreement, within thirty (30) days after the
notice of termination is given, the Company may terminate the Executive's
employment hereunder.
(c) Cause. The Company may terminate the Executive's
employment under this Agreement at any time for cause. For purposes of this
Agreement, the term "cause" shall include one or more of the following: (i)
willful misconduct and continued failure by the Executive in the performance of
his duties, as contemplated in this Agreement, as Chief Executive Officer (other
than through disability as defined in paragraph 6(b), above), or (ii) conviction
of a crime involving moral turpitude, theft, embezzlement or continuing alcohol
or drug abuse to the extent that he is unable to perform the duties of his
office. The termination
2
<PAGE>
shall be evidenced by written notice thereof to the Executive, which shall
specify the cause for termination.
(d) Without Cause. In addition to any other rights the Company
has to terminate the Executive's employment under this Agreement, the Company
may, at any time, by a vote of not less than sixty percent (60%) of the
directors then in office (excluding the vote of the Executive if he is also a
director), terminate the Executive without cause upon ninety (90) days' prior
written notice to the Executive setting forth the reasons, if any, for the
termination. For purposes of this Agreement, the term "without cause" shall mean
termination by the Company on any grounds other than those set forth in
paragraphs 6(a), (b) or (c) hereof.
(e) Severance Pay. In the event that the Company has
terminated the Executive's employment under this Agreement "without cause" or in
the event there is a "Change of Control" (as defined below), then the Executive
will be entitled to receive severance pay equal to the greater of Two Hundred
Thousand and 00/100 U.S. Dollars ($200,000.00) or two (2) times the total
compensation received by the Executive from the Company during the twelve (12)
months prior to the date of termination. In the event there is a "Change of
Control" (as defined below), the Executive will have six (6) months following
the event which constituted the "Change of Control" to elect to resign (unless
in connection with such event the Executive was terminated) at which time the
Executive will then receive the aforementioned severance pay.
(f) Change of Control. For purposes of this Agreement, a
"Change of Control" shall be deemed to occur, unless previously consented to in
writing by the Executive, upon (i) the actual acquisition or the execution of an
agreement to acquire twenty percent (20%) or more of the voting securities of
the Company by any person or entity not affiliated with the Executive (other
than pursuant to a bona fide underwriting agreement relating to a public
distribution of securities of the Company), (ii) the commencement of a tender or
exchange offer for more than twenty percent (20%) of the voting securities of
the Company by any person or entity not affiliated with the Executive, (iii) the
commencement of a proxy contest against the management for the election of a
majority of the Board of Directors of the Company if the group conducting the
proxy contest owns, has or gains the power to vote at least twenty percent (20%)
of the voting securities of the Company, (iv) a vote by the Board of Directors
to merge, consolidate, sell all or substantially all of the assets of the
Company to any person or entity not affiliated with the Executive, or (v) the
election of directors constituting a majority of the Board of Directors who have
not been nominated or approved by the Executive.
(g) The Executive shall not be required to mitigate the amount
of any payment provided for in this paragraph 6 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this paragraph 6
be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the Executive
from any other source at any time before and after the date of termination. The
amounts payable to the Executive under this Agreement shall not be treated as
damages, but as severance pay to which the Executive is entitled by reason of
his employment and the circumstances contemplated by this Agreement.
3
<PAGE>
(h) The severance pay which the Executive will be entitled to
receive as a result of the termination of his employment under this Agreement,
shall not be the Executive's exclusive remedy in the event of such termination,
and the Executive will continue to be entitled to all other damages to which the
Executive may be entitled as a result to the termination of his employment under
this Agreement, including all legal fees and expenses incurred by him in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement.
7. Non-Competition Covenant. The Executive hereby covenants and agrees
that he will not serve as an officer of or perform any equivalent functions for
any other audio book company during the term of his employment under this
Agreement. Nothing in the immediately preceding sentence is intended to be
construed as otherwise preventing the Executive from (i) engaging in other
business activities, (ii) holding positions in charitable organizations, (iii)
purchasing, holding or owning interests in other entities and/or serving as a
director and/or officer of other corporations, or serving as a manager of
limited liability companies or a general partner of partnerships, or (iv) having
any other interest in other businesses. In addition, during the term of this
Agreement and for a period of two (2) years immediately following the
termination of his employment, whether said termination is occasioned by the
Company, the Executive or a mutual agreement of the parties, the Executive shall
not, for himself or on behalf of any other person, persons, firm, partnership,
corporation or company, engage or participate in any activities which are in
direct conflict with the interests of the Company or solicit or attempt 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.
8. Indemnification. To the maximum extent permitted under the corporate
laws of the State of Florida or, if more favorable, the Articles of
Incorporation and/or By-Laws of the Company as in effect on the date of this
Agreement, (a) the Executive shall be indemnified and held harmless by the
Company, as provided under such corporate laws or such Articles of Incorporation
and/or By-Laws, as applicable, for any and all actions taken or matters
undertaken, directly or indirectly, in the performance of his duties and
responsibilities under this Agreement or otherwise on behalf of the Company, and
(b) without limiting clause (a), the Company shall indemnify and hold harmless
the Executive from and against (i) any claim, loss, liability, obligation,
damage, cost, expense, action, suit, proceeding or cause of action
(collectively, "Claims") arising from or out of or relating to the Executive's
acting as an officer, director, employee or agent of the Company or any of its
affiliates or in any other capacity, including, without limitation, any
fiduciary capacity, in which the Executive serves at the request of the Company,
and (ii) any cost or expense (including, without limitation, fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Executive
in connection with the defense or investigation thereof. If any Claim is
asserted or other matter arises with respect to which the Executive believes in
good faith the Executive is entitled to indemnification as contemplated hereby,
the Company shall pay the Expenses incurred by the Executive in connection with
the defense or investigation of such Claim or matter (or cause such Expenses to
be paid) on a monthly basis, provided that the Executive shall reimburse the
Company for such amounts, plus
4
<PAGE>
simple interest thereon at the then current Prime Rate as in effect from time to
time, compounded annually, if the Executive shall be found, as finally
judicially determined by a court of competent jurisdiction, not to have been
entitled to indemnification hereunder.
9. Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, divisees and legatees. In addition, this Agreement and the
obligations and rights of the Company hereunder shall be binding on any person,
firm or corporation which is a successor-in-interest to the Company.
10. Notice. For the purpose of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally, or by private
overnight courier or mail service, postage prepaid or (unless otherwise
specified) mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Norton Herrick
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-9880
If to the Company: Audio Book Club, Inc.
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-1426
or to such other address as the parties may furnish to each other in writing.
Copies of all notices, demands and communications shall be sent to the home
addresses of all members of the Board of Directors of the Company.
11. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the parties hereto, provided, however, that this Agreement may be
modified, waived or discharged by mutual agreement in writing.
(b) No delay, waiver, omission or forbearance (whether by
conduct or otherwise) by any party hereto at any time to exercise any right,
option, duty or power arising out of breach or default by the other party of any
of the terms, conditions or provisions of this Agreement to be performed by such
other party shall constitute a waiver by such party or a waiver of such party's
rights to enforce any right, option or power as against the other party or as to
subsequent
5
<PAGE>
breach or default by such other party, and no explicit waiver shall constitute a
waiver of similar or dissimilar terms, provisions or conditions at the same time
or at any prior or subsequent time.
(c) In the event of a dispute between the Executive and the
Company concerning any of the provisions of this Agreement or the enforcement of
the terms hereof, should the Executive prevail in any settlement or final,
unappealable judgment of a court of competent jurisdiction, the Company shall
pay the Executive's costs incurred therein, including reasonable attorneys'
fees.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida and any action brought by either party shall be
commenced in the courts of the State of Florida. The Executive and the Company
hereby irrevocably and unconditionally consent to submit to the exclusive
jurisdiction of the courts of the State of Florida and the United States of
America located in Palm Beach County, Florida for any and all actions, suits or
proceedings arising out of or resulting from or relating to this Agreement and
the transactions contemplated hereby and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any such action, suit or proceeding arising out of, resulting from or
relating to this Agreement or the transactions contemplated hereby in such
courts and hereby further irrevocably and unconditionally waive and agree not to
plead or claim in any such court that such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Entire Agreement. This Agreement contains the entire understanding
of the Company and the Executive with respect to his employment by the Company.
This Agreement supersedes all prior agreements and understandings whether
written or oral between the Executive and the Company, and there are no
restrictions, agreements, promises, warranties or covenants other than those
stated in this Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK -
SIGNATURE BLOCKS APPEAR ON NEXT PAGE]
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date shown below effective as of the date first written above.
"COMPANY"
Date Signed:___________, 19__ AUDIO BOOK CLUB, INC., a Florida
corporation
By:___________________________________
Printed Name:_________________________
Title:________________________________
"EXECUTIVE"
Date Signed:___________, 19__ _____________________________________
Printed Name:_________________________
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the ____ day of _____________, 19___, by and
between Audio Book Club, Inc., a Florida corporation, with offices at 2295
Corporate Boulevard, N.W., Suite 222, P.O. Box 5010, Boca Raton, Florida
33431-0810 (the "Company"), and Michael Herrick (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the audio book club business; and
WHEREAS, the Company recognizes the Executive's substantial
contribution to the growth and success of the Company and desires to provide for
his continued employment by reinforcing and encouraging his continued attention
and dedication to the Company; and
WHEREAS, the Executive is willing to commit himself to continue to
serve and to establish a minimum period during which he will serve the Company
on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, in consideration of
the Executive's services and value to the Company over and beyond his
obligations as an employee, and intending to be legally bound hereby, the
parties agree as follows:
1. Recitals. The Whereas clauses recited above are hereby incorporated
by reference as though they were fully set forth herein.
2. Employment. The Company shall employ the Executive and the Executive
shall serve the Company, on the terms and conditions set forth herein.
3. Term. The employment of the Executive by the Company as provided in
paragraph 2 shall commence on the effective date of this Agreement and end on
the third (3rd) anniversary of the effective date, subject, however, to the
other termination provisions contained herein.
4. Position and Duties. (a) The Executive shall be employed by the
Company as its Chief Operating Officer and may also serve, at his option, as the
Company's Vice Chairman of the Board of Directors. His power and authority shall
be and remain superior to those of any other officer or employee of the Company
other than the Chief Executive Officer. Subject to the direction and control of
the Board of Directors, the Executive shall have oversight of the business and
affairs of the Company consistent with his current position as Chief Operating
Officer of the Company. The scope of his duties and the extent of his
responsibilities shall be substantially the same as the duties and
responsibilities that the Executive currently performs. The Executive shall be
required to devote substantially all of his business time to the Company's
business and affairs.
<PAGE>
5. Compensation and Related Matters.
(a) Salary. During the term of this Agreement, the Company shall pay
to the Executive, as basic compensation for his services, an initial annual
salary of $125,000 in equal monthly installments during the first year of the
term of this Agreement; thereafter at any time during the term of this Agreement
the Board of Directors may increase, but not decrease such amount. In addition
the Executive shall be entitled to participate in the Company's incentive stock
option plans and may receive a performance-based bonus, to be determined by the
Board of Directors. The Executive's salary and bonus shall be reconsidered at
least once each fiscal year of the Company and shall not necessarily be limited
to such increases granted other officers.
(b) Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable travel and business expenses in connection with
services performed hereunder in accordance with normal Company policy, as the
same may be determined from time to time.
(c) Insurance and Employee Benefits. The Executive shall be
entitled to receive insurance and employee benefits applicable to all officers
of the Company.
6. Termination by the Company. The Executive's employment hereunder may
be terminated by the Company without any breach of this Agreement only under the
circumstances described below.
(a) Death. The Executive's employment hereunder shall terminate
upon his death.
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, as determined by a physician mutually chosen by the
Executive and the Company, the Executive shall have been absent from his duties
hereunder for a consecutive period of one hundred eighty (180) days and after
notice of termination is given (which may be given before or after the end of
such 180 day period but which will in no event be effective until, at the
earliest, the day following the one hundred eightieth (180th) day of the period)
shall not have returned to the performance of his duties hereunder, as that
concept is contemplated in this Agreement, within thirty (30) days after the
notice of termination is given, the Company may terminate the Executive's
employment hereunder.
(c) Cause. The Company may terminate the Executive's employment
under this Agreement at any time for cause. For purposes of this Agreement, the
term "cause" shall include one or more of the following: (i) willful misconduct
and continued failure by the Executive in the performance of his duties, as
contemplated in this Agreement, as Chief Operating Officer (other than through
disability as defined in paragraph 6(b), above), or (ii) conviction of a crime
involving moral turpitude, theft, embezzlement or continuing alcohol or drug
abuse to the extent that he is unable to perform the duties of his office. The
termination
2
<PAGE>
shall be evidenced by written notice thereof to the Executive, which shall
specify the cause for termination.
(d) Without Cause. In addition to any other rights the Company has
to terminate the Executive's employment under this Agreement, the Company may,
at any time, by a vote of not less than sixty percent (60%) of the directors
then in office (excluding the vote of the Executive if he is also a director),
terminate the Executive without cause upon ninety (90) days' prior written
notice to the Executive setting forth the reasons, if any, for the termination.
For purposes of this Agreement, the term "without cause" shall mean termination
by the Company on any grounds other than those set forth in paragraphs 6(a), (b)
or (c) hereof.
(e) Severance Pay. In the event that the Company has terminated the
Executive's employment under this Agreement "without cause" or in the event
there is a "Change of Control" (as defined below), then the Executive will be
entitled to receive severance pay equal to the greater of Three Hundred Seventy
Five Thousand and 00/100 U.S. Dollars ($375,000.00) or three (3) times the total
compensation received by the Executive from the Company during the twelve (12)
months prior to the date of termination. In the event there is a "Change of
Control" (as defined below), the Executive will have six (6) months following
the event which constituted the "Change of Control" to elect to resign (unless
in connection with such event the Executive was terminated) at which time the
Executive will then receive the aforementioned severance pay.
(f) Change of Control. For purposes of this Agreement, a "Change of
Control" shall be deemed to occur, unless previously consented to in writing by
the Executive, upon (i) the actual acquisition or the execution of an agreement
to acquire twenty percent (20%) or more of the voting securities of the Company
by any person or entity not affiliated with the Executive (other than pursuant
to a bona fide underwriting agreement relating to a public distribution of
securities of the Company), (ii) the commencement of a tender or exchange offer
for more than twenty percent (20%) of the voting securities of the Company by
any person or entity not affiliated with the Executive, (iii) the commencement
of a proxy contest against the management for the election of a majority of the
Board of Directors of the Company if the group conducting the proxy contest
owns, has or gains the power to vote at least twenty percent (20%) of the voting
securities of the Company, (iv) a vote by the Board of Directors to merge,
consolidate, sell all or substantially all of the assets of the Company to any
person or entity not affiliated with the Executive, or (v) the election of
directors constituting a majority of the Board of Directors who have not been
nominated or approved by the Executive.
(g) The Executive shall not be required to mitigate the amount of
any payment provided for in this paragraph 6 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this paragraph 6
be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the Executive
from any other source at any time before and after the date of termination. The
amounts payable to the Executive under this Agreement shall not be treated as
damages, but as
3
<PAGE>
severance pay to which the Executive is entitled by reason of his employment and
the circumstances contemplated by this Agreement.
(h) The severance pay which the Executive will be entitled to
receive as a result of the termination of his employment under this Agreement,
shall not be the Executive's exclusive remedy in the event of such termination,
and the Executive will continue to be entitled to all other damages to which the
Executive may be entitled as a result to the termination of his employment under
this Agreement, including all legal fees and expenses incurred by him in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement.
7. Non-Competition Covenant. The Executive hereby covenants and agrees
that he will not serve as an officer of or perform any equivalent functions for
any other audio book company during the term of his employment under this
Agreement. Nothing in the immediately preceding sentence is intended to be
construed as otherwise preventing the Executive from (i) engaging in other
business activities, (ii) holding positions in charitable organizations, (iii)
purchasing, holding or owning interests in other entities and/or serving as a
director and/or officer of other corporations, or serving as a manager of
limited liability companies or a general partner of partnerships, or (iv) having
any other interest in other businesses. In addition, during the term of this
Agreement and for a period of two (2) years immediately following the
termination of his employment, whether said termination is occasioned by the
Company, the Executive or a mutual agreement of the parties, the Executive shall
not, for himself or on behalf of any other person, persons, firm, partnership,
corporation or company, engage or participate in any activities which are in
direct conflict with the interests of the Company or solicit or attempt 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.
8. Indemnification. To the maximum extent permitted under the corporate
laws of the State of Florida or, if more favorable, the Articles of
Incorporation and/or By-Laws of the Company as in effect on the date of this
Agreement, (a) the Executive shall be indemnified and held harmless by the
Company, as provided under such corporate laws or such Articles of Incorporation
and/or By-Laws, as applicable, for any and all actions taken or matters
undertaken, directly or indirectly, in the performance of his duties and
responsibilities under this Agreement or otherwise on behalf of the Company, and
(b) without limiting clause (a), the Company shall indemnify and hold harmless
the Executive from and against (i) any claim, loss, liability, obligation,
damage, cost, expense, action, suit, proceeding or cause of action
(collectively, "Claims") arising from or out of or relating to the Executive's
acting as an officer, director, employee or agent of the Company or any of its
affiliates or in any other capacity, including, without limitation, any
fiduciary capacity, in which the Executive serves at the request of the Company,
and (ii) any cost or expense (including, without limitation, fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Executive
in connection with the defense or investigation thereof. If any Claim is
asserted or other matter arises with respect to which the Executive believes in
good faith the Executive is entitled to indemnification as contemplated
4
<PAGE>
hereby, the Company shall pay the Expenses incurred by the Executive in
connection with the defense or investigation of such Claim or matter (or cause
such Expenses to be paid) on a monthly basis, provided that the Executive shall
reimburse the Company for such amounts, plus simple interest thereon at the then
current Prime Rate as in effect from time to time, compounded annually, if the
Executive shall be found, as finally judicially determined by a court of
competent jurisdiction, not to have been entitled to indemnification hereunder.
9. Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, divisees and legatees. In addition, this Agreement and the
obligations and rights of the Company hereunder shall be binding on any person,
firm or corporation which is a successor-in-interest to the Company.
10. Notice. For the purpose of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally, or by private
overnight courier or mail service, postage prepaid or (unless otherwise
specified) mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Michael Herrick
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-9880
If to the Company: Audio Book Club, Inc.
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-1426
or to such other address as the parties may furnish to each other in writing.
Copies of all notices, demands and communications shall be sent to the home
addresses of all members of the Board of Directors of the Company.
11. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the parties hereto, provided, however, that this Agreement may be
modified, waived or discharged by mutual agreement in writing.
(b) No delay, waiver, omission or forbearance (whether by conduct or
otherwise) by any party hereto at any time to exercise any right, option, duty
or power arising out of breach
5
<PAGE>
or default by the other party of any of the terms, conditions or provisions of
this Agreement to be performed by such other party shall constitute a waiver by
such party or a waiver of such party's rights to enforce any right, option or
power as against the other party or as to subsequent breach or default by such
other party, and no explicit waiver shall constitute a waiver of similar or
dissimilar terms, provisions or conditions at the same time or at any prior or
subsequent time.
(c) In the event of a dispute between the Executive and the Company
concerning any of the provisions of this Agreement or the enforcement of the
terms hereof, should the Executive prevail in any settlement or final,
unappealable judgment of a court of competent jurisdiction, the Company shall
pay the Executive's costs incurred therein, including reasonable attorneys'
fees.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida and any action brought by either party shall be
commenced in the courts of the State of Florida. The Executive and the Company
hereby irrevocably and unconditionally consent to submit to the exclusive
jurisdiction of the courts of the State of Florida and the United States of
America located in Palm Beach County, Florida for any and all actions, suits or
proceedings arising out of or resulting from or relating to this Agreement and
the transactions contemplated hereby and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any such action, suit or proceeding arising out of, resulting from or
relating to this Agreement or the transactions contemplated hereby in such
courts and hereby further irrevocably and unconditionally waive and agree not to
plead or claim in any such court that such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Entire Agreement. This Agreement contains the entire understanding
of the Company and the Executive with respect to his employment by the Company.
This Agreement supersedes all prior agreements and understandings whether
written or oral between the Executive and the Company, and there are no
restrictions, agreements, promises, warranties or covenants other than those
stated in this Agreement.
6
<PAGE>
[THIS SPACE INTENTIONALLY LEFT BLANK -
SIGNATURE BLOCKS APPEAR ON NEXT PAGE]
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date shown below effective as of the date first written above.
"COMPANY"
Date Signed:_________________, 19__ AUDIO BOOK CLUB, INC., a Florida
corporation
By:_____________________________
Printed Name:___________________
Title:__________________________
"EXECUTIVE"
Date Signed:_________________, 19__ ________________________________
Printed Name:___________________
7
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the ____ day of _____________, 19___, by and
between Audio Book Club, Inc., a Florida corporation, with offices at 2295
Corporate Boulevard, N.W., Suite 222, P.O. Box 5010, Boca Raton, Florida
33431-0810 (the "Company"), and Howard Herrick (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the audio book club business; and
WHEREAS, the Company recognizes the Executive's substantial
contribution to the growth and success of the Company and desires to provide for
his continued employment by reinforcing and encouraging his continued attention
and dedication to the Company; and
WHEREAS, the Executive is willing to commit himself to continue to
serve and to establish a minimum period during which he will serve the Company
on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, in consideration of
the Executive's services and value to the Company over and beyond his
obligations as an employee, and intending to be legally bound hereby, the
parties agree as follows:
1. Recitals. The Whereas clauses recited above are hereby incorporated
by reference as though they were fully set forth herein.
2. Employment. The Company shall employ the Executive and the Executive
shall serve the Company, on the terms and conditions set forth herein.
3. Term. The employment of the Executive by the Company as provided in
paragraph 2 shall commence on the effective date of this Agreement and end on
the third (3rd) anniversary of the effective date, subject, however, to the
other termination provisions contained herein.
4. Position and Duties. (a) The Executive shall be employed by the
Company as an Executive Vice President. The scope of his duties and the extent
of his responsibilities shall be substantially the same as the duties and
responsibilities that the Executive currently performs. The Executive shall be
required to devote substantially all of his business time to the Company's
business and affairs.
<PAGE>
5. Compensation and Related Matters.
(a) Salary. During the term of this Agreement, the Company
shall pay to the Executive, as basic compensation for his services, an initial
annual salary of $125,000 in equal monthly installments during the first year of
the term of this Agreement; thereafter at any time during the term of this
Agreement the Board of Directors may increase, but not decrease such amount. In
addition the Executive shall be entitled to participate in the Company's
incentive stock option plans and may receive a performance-based bonus, to be
determined by the Board of Directors. The Executive's salary and bonus shall be
reconsidered at least once each fiscal year of the Company and shall not
necessarily be limited to such increases granted other officers.
(b) Expenses. The Executive shall be entitled to receive
prompt reimbursement for all reasonable travel and business expenses in
connection with services performed hereunder in accordance with normal Company
policy, as the same may be determined from time to time.
(c) Insurance and Employee Benefits. The Executive shall be
entitled to receive insurance and employee benefits applicable to all officers
of the Company.
6. Termination by the Company. The Executive's employment hereunder may
be terminated by the Company without any breach of this Agreement only under the
circumstances described below.
(a) Death. The Executive's employment hereunder shall
terminate upon his death.
(b) Disability. If, as a result of the Executive's incapacity
due to physical or mental illness, as determined by a physician mutually chosen
by the Executive and the Company, the Executive shall have been absent from his
duties hereunder for a consecutive period of one hundred eighty (180) days and
after notice of termination is given (which may be given before or after the end
of such 180 day period but which will in no event be effective until, at the
earliest, the day following the one hundred eightieth (180th) day of the period)
shall not have returned to the performance of his duties hereunder, as that
concept is contemplated in this Agreement, within thirty (30) days after the
notice of termination is given, the Company may terminate the Executive's
employment hereunder.
(c) Cause. The Company may terminate the Executive's
employment under this Agreement at any time for cause. For purposes of this
Agreement, the term "cause" shall include one or more of the following: (i)
willful misconduct and continued failure by the Executive in the performance of
his duties, as contemplated in this Agreement, as Executive Vice President
(other than through disability as defined in paragraph 6(b), above), or (ii)
conviction of a crime involving moral turpitude, theft, embezzlement or
continuing alcohol or drug abuse to the extent that he is unable to perform the
duties of his office. The termination
2
<PAGE>
shall be evidenced by written notice thereof to the Executive, which shall
specify the cause for termination.
(d) Without Cause. In addition to any other rights the Company
has to terminate the Executive's employment under this Agreement, the Company
may, at any time, by a vote of not less than sixty percent (60%) of the
directors then in office (excluding the vote of the Executive if he is also a
director), terminate the Executive without cause upon ninety (90) days' prior
written notice to the Executive setting forth the reasons, if any, for the
termination. For purposes of this Agreement, the term "without cause" shall mean
termination by the Company on any grounds other than those set forth in
paragraphs 6(a), (b) or (c) hereof.
(e) Severance Pay. In the event that the Company has
terminated the Executive's employment under this Agreement "without cause" or in
the event there is a "Change of Control" (as defined below), then the Executive
will be entitled to receive severance pay equal to the greater of Three Hundred
Seventy Five Thousand and 00/100 U.S. Dollars ($375,000.00) or three (3) times
the total compensation received by the Executive from the Company during the
twelve (12) months prior to the date of termination. In the event there is a
"Change of Control" (as defined below), the Executive will have six (6) months
following the event which constituted the "Change of Control" to elect to resign
(unless in connection with such event the Executive was terminated) at which
time the Executive will then receive the aforementioned severance pay.
(f) Change of Control. For purposes of this Agreement, a
"Change of Control" shall be deemed to occur, unless previously consented to in
writing by the Executive, upon (i) the actual acquisition or the execution of an
agreement to acquire twenty percent (20%) or more of the voting securities of
the Company by any person or entity not affiliated with the Executive (other
than pursuant to a bona fide underwriting agreement relating to a public
distribution of securities of the Company), (ii) the commencement of a tender or
exchange offer for more than twenty percent (20%) of the voting securities of
the Company by any person or entity not affiliated with the Executive, (iii) the
commencement of a proxy contest against the management for the election of a
majority of the Board of Directors of the Company if the group conducting the
proxy contest owns, has or gains the power to vote at least twenty percent (20%)
of the voting securities of the Company, (iv) a vote by the Board of Directors
to merge, consolidate, sell all or substantially all of the assets of the
Company to any person or entity not affiliated with the Executive, or (v) the
election of directors constituting a majority of the Board of Directors who have
not been nominated or approved by the Executive.
(g) The Executive shall not be required to mitigate the amount
of any payment provided for in this paragraph 6 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this paragraph 6
be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the Executive
from any other source at any time before and after the date of termination. The
amounts payable to the Executive under this Agreement shall not be treated as
damages, but as
3
<PAGE>
severance pay to which the Executive is entitled by reason of his employment and
the circumstances contemplated by this Agreement.
(h) The severance pay which the Executive will be entitled to
receive as a result of the termination of his employment under this Agreement,
shall not be the Executive's exclusive remedy in the event of such termination,
and the Executive will continue to be entitled to all other damages to which the
Executive may be entitled as a result to the termination of his employment under
this Agreement, including all legal fees and expenses incurred by him in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement.
7. Non-Competition Covenant. The Executive hereby covenants and agrees
that he will not serve as an officer of or perform any equivalent functions for
any other audio book company during the term of his employment under this
Agreement. Nothing in the immediately preceding sentence is intended to be
construed as otherwise preventing the Executive from (i) engaging in other
business activities, (ii) holding positions in charitable organizations, (iii)
purchasing, holding or owning interests in other entities and/or serving as a
director and/or officer of other corporations, or serving as a manager of
limited liability companies or a general partner of partnerships, or (iv) having
any other interest in other businesses. In addition, during the term of this
Agreement and for a period of two (2) years immediately following the
termination of his employment, whether said termination is occasioned by the
Company, the Executive or a mutual agreement of the parties, the Executive shall
not, for himself or on behalf of any other person, persons, firm, partnership,
corporation or company, engage or participate in any activities which are in
direct conflict with the interests of the Company or solicit or attempt 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.
8. Indemnification. To the maximum extent permitted under the corporate
laws of the State of Florida or, if more favorable, the Articles of
Incorporation and/or By-Laws of the Company as in effect on the date of this
Agreement, (a) the Executive shall be indemnified and held harmless by the
Company, as provided under such corporate laws or such Articles of Incorporation
and/or By-Laws, as applicable, for any and all actions taken or matters
undertaken, directly or indirectly, in the performance of his duties and
responsibilities under this Agreement or otherwise on behalf of the Company, and
(b) without limiting clause (a), the Company shall indemnify and hold harmless
the Executive from and against (i) any claim, loss, liability, obligation,
damage, cost, expense, action, suit, proceeding or cause of action
(collectively, "Claims") arising from or out of or relating to the Executive's
acting as an officer, director, employee or agent of the Company or any of its
affiliates or in any other capacity, including, without limitation, any
fiduciary capacity, in which the Executive serves at the request of the Company,
and (ii) any cost or expense (including, without limitation, fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Executive
in connection with the defense or investigation thereof. If any Claim is
asserted or other matter arises with respect to which the Executive believes in
good faith the Executive is entitled to indemnification
4
<PAGE>
as contemplated hereby, the Company shall pay the Expenses incurred by the
Executive in connection with the defense or investigation of such Claim or
matter (or cause such Expenses to be paid) on a monthly basis, provided that the
Executive shall reimburse the Company for such amounts, plus simple interest
thereon at the then current Prime Rate as in effect from time to time,
compounded annually, if the Executive shall be found, as finally judicially
determined by a court of competent jurisdiction, not to have been entitled to
indemnification hereunder.
9. Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, divisees and legatees. In addition, this Agreement and the
obligations and rights of the Company hereunder shall be binding on any person,
firm or corporation which is a successor-in-interest to the Company.
10. Notice. For the purpose of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally, or by private
overnight courier or mail service, postage prepaid or (unless otherwise
specified) mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Howard Herrick
20 Community Place
P.O. Box 2316
Morristown, New Jersey 07962-2316
(201) 539-1390
If to the Company: Audio Book Club, Inc.
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-1426
or to such other address as the parties may furnish to each other in writing.
Copies of all notices, demands and communications shall be sent to the home
addresses of all members of the Board of Directors of the Company.
11. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the parties hereto, provided, however, that this Agreement may be
modified, waived or discharged by mutual agreement in writing.
(b) No delay, waiver, omission or forbearance (whether by
conduct or otherwise) by any party hereto at any time to exercise any right,
option, duty or power arising out of
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<PAGE>
breach or default by the other party of any of the terms, conditions or
provisions of this Agreement to be performed by such other party shall
constitute a waiver by such party or a waiver of such party's rights to enforce
any right, option or power as against the other party or as to subsequent breach
or default by such other party, and no explicit waiver shall constitute a waiver
of similar or dissimilar terms, provisions or conditions at the same time or at
any prior or subsequent time.
(c) In the event of a dispute between the Executive and the
Company concerning any of the provisions of this Agreement or the enforcement of
the terms hereof, should the Executive prevail in any settlement or final,
unappealable judgment of a court of competent jurisdiction, the Company shall
pay the Executive's costs incurred therein, including reasonable attorneys'
fees.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of New Jersey and any action brought by either party shall
be commenced in the courts of the State of New Jersey. The Executive and the
Company hereby irrevocably and unconditionally consent to submit to the
exclusive jurisdiction of the courts of the State of New Jersey located in
Morris County and the courts of the United States of America located in Essex
County, New Jersey for any and all actions, suits or proceedings arising out of
or resulting from or relating to this Agreement and the transactions
contemplated hereby and the parties agree not to commence any action, suit or
proceeding relating thereto except in such courts. The parties hereby
irrevocably and unconditionally waive any objection to the laying of venue of
any such action, suit or proceeding arising out of, resulting from or relating
to this Agreement or the transactions contemplated hereby in such courts and
hereby further irrevocably and unconditionally waive and agree not to plead or
claim in any such court that such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Entire Agreement. This Agreement contains the entire understanding
of the Company and the Executive with respect to his employment by the Company.
This Agreement supersedes all prior agreements and understandings whether
written or oral between the Executive and the Company, and there are no
restrictions, agreements, promises, warranties or covenants other than those
stated in this Agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK -
SIGNATURE BLOCKS APPEAR ON NEXT PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date shown below effective as of the date first written above.
"COMPANY"
Date Signed:_____________, 19__ AUDIO BOOK CLUB, INC., a Florida
corporation
By:_______________________________________
Printed Name:_____________________________
Title:____________________________________
"EXECUTIVE"
Date Signed:_____________, 19__ __________________________________________
Printed Name:_____________________________
7
<PAGE>
[AUDIO BOOK CLUB LETTERHEAD]
May 1, 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 18, 1996 (the date your employment commenced) until October 31, 1997
(the "Employment Term").
The Company will pay you a salary, during the Employment Term, at the annual
rate of $121,100 (One Hundred Twenty One Thousand One Hundred Dollars). Such
salary will be paid monthly in arrears on the last day of the month at the rate
of $10,092 per month, prorated for your first and last month, for the actual
number of days employed during each month.
In addition to this salary, you will receive a bonus of $40,000 as follows;
$10,000 on July 1, 1997, August 1, 1997, September 1, 1997 and October 1, 1997,
provided you are still employed by the Company on each of those dates.
If your employment with the Company continues after the conclusion of the
Employment Term, you will then be eligible for the 401K, until then you will
receive an additional $416.66 per month in salary. You will also receive the
Company's normal medical insurance which includes dependant coverage for your
wife and two children but does not include dental coverage. The Company will
provide you with a cellular phone and computer during your employment and a
reserved parking space at the Morristown office. 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
performing 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 embodies and constitutes the entire
understanding between the Company and you with respect to your employment by the
Company and supersedes the October 17, 1996 letter between the Company and you,
which letter is now null and void and of no further force and effect whatsoever.
<PAGE>
Very truly yours,
AUDIO BOOK CLUB, INC.
/s/ Michael Herrick
Michael Herrick, Vice Chairman
AGREED AND ACCEPTED this 12th
day of May, 1997
/s/ Jesse Faber
- ------------------------------------
Jesse Faber
Enclosure
cc: Norton Herrick
-2-
<PAGE>
1997 STOCK OPTION PLAN
OF
AUDIO BOOK CLUB, INC.
1. Purpose.
Audio Book Club, Inc. (the "Company") desires to attract and
retain the best available talent and encourage the highest level of performance
in order to continue to serve the best interests of the Company, and its
shareholders. By affording key personnel the opportunity to acquire proprietary
interests in the Company and by providing them incentives to put forth maximum
efforts for the success of the business, the 1997 Stock Option Plan of Audio
Book Club, Inc. (the "1997 Plan") is expected to contribute to the attainment of
those objectives.
The word "Parent" as used herein, shall mean any corporation
that owns fifty percent or more of the voting stock of the Company.
The word "Subsidiary" or "Subsidiaries" as used herein, shall
mean any corporation, fifty percent or more of the voting stock of which is
owned by the Company.
2. Scope and Duration.
Options under the 1997 Plan may be granted in the form of
incentive stock options ("Incentive Options") as provided in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or in the form of
nonqualified stock options ("Non-Qualified Options"). (Unless otherwise
indicated, references in the 1997 Plan to "options" include Incentive Options
and Non-Qualified Options.) The maximum aggregate number of shares as to which
options may be granted from time to time under the 1997 Plan is 750,000 shares
of the Common Stock of the Company ("Common Stock"), which shares may be, in
whole or in part, authorized but unissued shares or shares reacquired by the
Company. The maximum number of shares with respect to which options may be
granted to any employee during the term of the Plan is 250,000. Except as
otherwise provided in Paragraph 7(b) hereof, if an option shall expire,
terminate or be surrendered for cancellation for any reason without having been
exercised in full, the shares represented by the option or portion thereof not
so exercised shall (unless the 1997 Plan shall have been terminated) become
available for subsequent option grants under the 1997 Plan. As provided in
Paragraph 13, the 1997 Plan shall become effective on June 20, 1997, and unless
terminated sooner pursuant to paragraph 14, the 1997 Plan shall terminate on
June 19, 2007, and no option shall be granted hereunder after that date.
<PAGE>
3. Administration.
The 1997 Plan shall be administered by the Board of Directors
of the Company, or, at their discretion, by a committee which is appointed by
the Board of Directors to perform such function (the "Committee"). The Committee
shall consist of not less than two members of the Board of Directors, each of
whom shall serve at the pleasure of the Board of Directors and shall be a
"Non-Employee Director" as defined in Rule l6b-3 pursuant to the Securities
Exchange Act of 1934 (the "Act"). Vacancies occurring in the membership of the
Committee shall be filled by appointment by the Board of Directors.
The Board of Directors or the Committee, as the case may be,
shall have plenary authority in its discretion, subject to and not inconsistent
with the express provisions of the 1997 Plan, to grant options, to determine the
purchase price of the Common Stock covered by each option, the term of each
option, the persons to whom, and the time or times at which, options shall be
granted and the number of shares to be covered by each option; to designate
options as Incentive Options or Non-Qualified Options; to interpret the 1997
Plan; to prescribe, amend and rescind rules and regulations relating to the 1997
Plan; to determine the terms and provisions of the option agreements (which need
not be identical) entered into in connection with options under the 1997 Plan;
and to make all other determinations deemed necessary or advisable for the
administration of the 1997 Plan. The Board of Directors or the Committee, as the
case may be, may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Board of Directors
or the Committee, as the case may be, or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Board of Directors or the Committee, as the case may
be, or such person may have under the 1997 Plan.
4. Eligibility; Factors to be Considered in Granting Options.
Incentive Options shall be limited to persons who are
employees of the Company or, if applicable, its Parent, or a Subsidiary and at
the date of grant of any option are in the employ of the Company or its Parent
or a Subsidiary. In determining the employees to whom Incentive Options shall be
granted and the number of shares to be covered by each Incentive Option, the
Board of Directors or the Committee, as the case may be, shall take into account
the nature of employees' duties, their present and potential contributions to
the success of the Company and such other factors as it shall deem relevant in
connection with accomplishing the purposes of the 1997 Plan. An employee who has
been granted an option or options under the 1997 Plan may be granted an
additional option or options, subject, in the case of
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<PAGE>
Incentive Options, to such limitations as may be imposed by the Code on such
options. Except as provided below, a Non-Qualified Option may be granted to any
person, including, but not limited to, employees, independent agents,
consultants and attorneys, and non-employee directors, who the Board of
Directors or the Committee, as the case may be, believes has contributed, or
will contribute, to the success of the Company.
5. Option Price.
The purchase price of the Common Stock covered by each option
shall be determined by the Board of Directors or the Committee, as the case may
be. In the case of Incentive Options the purchase price shall not be less than
100% (110% if granted to an employee referred to in paragraph 8(b) hereof) of
the Fair Market Value (as defined in paragraph 15 below) of a share of the
Common Stock on the date on which the option is granted. In the case of
Non-Qualified Options the purchase price per share of Common Stock covered by
each option shall be such price, not less than the par value of a share of
Common Stock, as shall be determined by the Board of Directors or the Committee,
as the case may be. Such purchase prices shall be subject to adjustment as
provided in paragraph 12 below. The Board of Directors or the Committee, as the
case may be, shall determine the date on which an option is granted; in the
absence of such a determination, the date on which the Board of Directors or the
Committee, as the case may be, adopts a resolution granting an option shall be
considered the date on which such option is granted.
6. Term of Options.
The term of each option shall be determined by the Board of
Directors or the Committee, as the case may be, provided, however that the term
of any option cannot be more then ten years from the date of grant (five years
in the case of an Incentive Option granted to an employee referred to in
paragraph 8(b) hereof). All options granted pursuant to the 1997 Plan are
subject to earlier termination as provided in paragraphs 10 and 11 below.
7. Exercise of Options.
(a) Subject to the provisions of the 1997 Plan and unless
otherwise provided in the option agreement, options granted under the 1997 Plan
shall become exercisable as determined by the Board of Directors or Committee.
In its discretion, the Board of Directors or the Committee, as the case may be,
may, in any case or cases, prescribe that options granted under the 1997 Plan
become exercisable in installments or provide that an option may be exercisable
in full immediately upon the date of its grant. The Board of Directors or the
Committee, as the case may be, may, in its sole discretion, also provide that an
option granted pursuant to the 1997 Plan shall immediately become exercisable in
full upon
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<PAGE>
the happening of any of the following events; (i) the first purchase of shares
of Common Stock pursuant to a tender offer or exchange offer (other than an
offer by the Company) for all, or any part of, the Common Stock, (ii) the
approval by the shareholder(s) of the Company of an agreement for a merger in
which the Company will not survive as an independent, publicly owned
corporation, a consolidation, or a sale, exchange or other disposition of all or
substantially all of the Company's assets, (iii) with respect to an employee, on
his 65th birthday, or (iv) with respect to an employee, on the employee's
involuntary termination from employment, except as provided in Section 10
herein. In the event of a question or controversy as to whether or not any of
the events hereinabove described has taken place, a determination by the Board
of Directors or the Committee, as the case may be, that such event has or has
not occurred shall be conclusive and binding upon the Company and participants
in the 1997 Plan.
(b) Any option at any time granted under the 1997 Plan may
contain a provision to the effect that the optionee (or any persons entitled to
act under paragraph 11 hereof) may, at any time at which Fair Market Value is in
excess of the exercise price and prior to exercising the option, in whole or in
part, request that the Company purchase all or any portion of the option as
shall then be exercisable at a price (the "Purchase Price") equal to the
difference between (i) an amount equal to the option price multiplied by the
number of shares subject to that portion of the option in respect of which such
request shall be made and (ii) an amount equal to such number of shares
multiplied by the fair market value of the Company's Common Stock (within the
meaning of Section 422 of the Code and the treasury regulations promulgated
thereunder) on the date of purchase. The Company shall have no obligation to
make any purchase pursuant to such request, but if it elects to do so, such
portion of the option as to which the request is made shall be surrendered to
the Company. The Purchase Price for the portion of the option to be so
surrendered shall be paid by the Company, less any applicable withholding tax
obligations imposed upon the Company by reason of the purchase, at the election
of the Board of Directors or the Committee, as the case may be, either in cash
or in shares of Common Stock (valued as of the date and in the manner provided
in clause (ii) above), or in any combination of cash and Common Stock, which may
consist, in whole or in part, of shares of authorized but unissued Common Stock
or shares of Common Stock held in the Company's treasury. No fractional share of
Common Stock shall be issued or transferred and any fractional share shall be
disregarded. Shares covered by that portion of any option purchased by the
Company pursuant hereto and surrendered to the Company shall not be available
for the granting of further options under the 1997 Plan. All determinations to
be made by the Company hereunder shall be made by the Board of Directors or the
Committee, as the case may be.
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<PAGE>
(c) An option may be exercised, at any time or from time to
time (subject, in the case of Incentive Options, to such restrictions as may be
imposed by the Code), as to any or all full shares as to which the option has
become exercisable until the expiration of the period set forth in paragraph 6
hereof, by the delivery to the Company, at its principal place of business, of
(i) written notice of exercise in the form specified by the Board of Directors
or the Committee, as the case may be, specifying the number of shares of Common
Stock with respect to which the option is being exercised and signed by the
person exercising the option as provided herein, (ii) payment of the purchase
price; and (iii) in the case of Non-Qualified Options, payment in cash of all
withholding tax obligations imposed on the Company by reason of the exercise of
the option. Upon acceptance of such notice, receipt of payment in full, and
receipt of payment of all withholding tax obligations, the Company shall cause
to be issued a certificate representing the shares of Common Stock purchased. In
the event the person exercising the option delivers the items specified in (i)
and (ii) of this Subsection (c), but not the item specified in (iii) hereof, if
applicable, the option shall still be considered exercised upon acceptance by
the Company for the full number of shares of Common Stock specified in the
notice of exercise but the actual number of shares issued shall be reduced by
the smallest number of whole shares of Common Stock which, when multiplied by
the Fair Market Value of the Common Stock as of the date the option is
exercised, is sufficient to satisfy the required amount of withholding tax.
(d) The purchase price of the shares as to which an option is
exercised shall be paid in full at the time of exercise. Except as otherwise
provided in subsection (b) of this paragraph 7, payment shall be made in cash,
which may be paid by check or other instrument acceptable to the Company; in
addition, subject to compliance with applicable laws and regulations and such
conditions as the Board of Directors or the Committee, as the case may be, may
impose, the Board of Directors or the Committee, as the case may be, in its sole
discretion, may on a case-by-case basis elect to accept payment in shares of
Common Stock of the Company which are already owned by the option holder, valued
at the Fair Market Value thereof (as defined in paragraph 15 below) on the date
of exercise; provided, however, that with respect to Incentive Options, no such
discretion may be exercised unless the option agreement permits the payment of
the purchase price in that manner.
(e) Except as provided in paragraphs 10 and 11 below, no
option granted to an employee may be exercised at any time by such employee
unless such employee is then an employee of the Company or a Subsidiary or
Parent.
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<PAGE>
8. Incentive Options.
(a) With respect to Incentive Options granted, the aggregate
Fair Market Value (determined in accordance with the provisions of paragraph 15
at the time the Incentive Option is granted) of the Common Stock or any other
stock of the Company or its current or future Subsidiaries with respect to which
incentive stock options, as defined in Section 422 of the Code, are exercisable
for the first time by any employee during any calendar year (under all incentive
stock option plans of the Company and its parent and subsidiary corporation's,
as those terms are defined in Section 424 of the Code) shall not exceed
$100,000.
(b) No Incentive Option may be awarded to any employee who
immediately prior to the date of the granting of such Incentive Option owns more
than 10% of the combined voting power of all classes of stock of the Company or
any of its Subsidiaries unless the exercise price under the Incentive Option is
at least 110% of the Fair Market Value and the option expires within 5 years
from the date of grant.
(c) In the event of amendments to the Code or applicable
regulations relating to Incentive Options subsequent to the date hereof, the
provisions of the 1997 Plan and the provisions of outstanding option agreements
between the Company and any optionee with respect to options issued pursuant to
the 1997 Plan shall automatically, and without any action on the part of any
person, be modified to conform to such amendments, provided, however, that no
such amendment shall occur to an existing option without the express approval of
the Company and the optionee if the effect of such amendment were to result in
the granting of a new option pursuant to Section 424(h) of the Code or any
successor provision.
9. Transferability of Options.
Incentive Options granted under the 1997 Plan shall not be
transferable otherwise than by will or the laws of descent and distribution, and
Incentive Options may be exercised during the lifetime of the optionee only by
the optionee. Non-Qualified Options are only transferable if such right is
granted by the Board of Directors, or the Committee, as the case may be, and
such provision is contained in the option agreement with respect to the
Non-Qualified Options. No transfer of an option by the optionee by will or by
the laws of descent and distribution or otherwise shall be effective to bind the
Company unless the Company shall have been furnished with written notice thereof
and a copy of the will and/or such other evidence as the Company may deem
necessary to establish the validity of the transfer and the acceptance by the
transferor or transferees of the terms and conditions of such option.
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<PAGE>
10. Termination of Employment.
In the event that the employment of an employee to whom an
option has been granted under the 1997 Plan shall be terminated (except as set
forth in paragraph 11 below), such option may be, subject to the provisions of
the 1997 Plan, exercised (to the extent that the employee was entitled to do so
at the termination of his employment) at any time within three (3) months after
such termination, but not later than the date on which the option terminates;
provided, however, that any option which is held by an employee whose employment
is terminated for cause or voluntarily without the consent of the Company or
Parent or Subsidiary, as the case may be, shall, to the extent not theretofore
exercised, automatically terminate as of the date of termination of employment.
As used herein, "cause" shall mean conduct amounting to fraud, dishonesty, or
engaging in competition or solicitations in competition with the Company and
breaches of any applicable employment agreement between the Company and the
optionee. Options granted to employees under the 1997 Plan shall not be affected
by any change of duties or position so long as the holder continues to be a
regular employee of the Company, Parent or a Subsidiary, as the case may be. Any
option agreement or any rules and regulations relating to the 1997 Plan may
contain such provisions as the Board of Directors or the Committee, as the case
may be, shall approve with reference to the determination of the date employment
terminates and the effect of leaves of absence. Nothing in the 1997 Plan or in
any option granted pursuant to the 1997 Plan shall confer upon any employee any
right to continue in the employ of the Company or any of the Subsidiaries or
Parent or interfere in any way with the right of the Company or any such
Subsidiary or Parent, as the case may be, to terminate such employment at any
time.
11. Death or Disability of Employee.
If an employee to whom an option has been granted under the
1997 Plan shall die while employed by the Company or a Parent or a Subsidiary,
as the case may be, or within three (3) months after the termination of such
employment (other than termination for cause or voluntary termination without
the consent of the Company or the Parent or a Subsidiary, as the case may be),
such option may be exercised, to the extent exercisable by the employee on the
date of death, by a legatee or legatees of the employee under the employee's
last will, or by the employee's personal representative or distributees, at any
time within one year after the date of the employee's death, but not later than
the date on which the option terminates. In the event that the employment of an
employee to whom an option has been granted under the 1997 Plan shall be
terminated as the result of a disability, such option may be exercised, to the
extent exercisable by the employee on the date of such termination, at any time
within one year after the date of such termination, but not later than the date
on which the option terminates.
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<PAGE>
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the 1997 Plan, the
Board of Directors or the Committee, as the case may be, may, at any time, make
or provide for such adjustments to the 1997 Plan, to the number and class of
shares issuable thereunder or to any outstanding options as it shall deem
appropriate to prevent dilution or enlargement of rights, including adjustments
in the event of changes in the outstanding Common Stock by reason of stock
dividends, split-ups, recapitalizations, mergers, consolidations, combinations
or exchanges of shares, separations, reorganizations, liquidations and the like.
In the event of any offer to holders of Common Stock generally relating to the
acquisition of their shares, the Board of Directors or the Committee, as the
case may be, may make such adjustment as it deems equitable in respect of
outstanding options and rights, including in its discretion revision of
outstanding options and rights so that they may be exercisable for the
consideration payable in the acquisition transaction. Any such determination by
the Board of Directors or the Committee, as the case may be, shall be
conclusive. Any fractional shares resulting from such adjustments shall be
eliminated.
13. Effective Date.
The 1997 Plan shall become effective on June 20, 1997, the
date of adoption by the Board of Directors and shareholders of the Company.
14. Termination and Amendment.
The Board of Directors of the Company may, without the
approval of its shareholders, suspend, terminate, modify or amend the 1997 Plan,
provided, however, that any amendment that would increase the aggregate number
of shares which may be issued under the 1997 Plan, materially increase the
benefits accruing to participants under the 1997 Plan, or materially modify the
requirements as to eligibility for participation in the 1997 Plan, shall be
subject to the approval of the Company's shareholder(s), except that any such
increase or modification that may result from adjustments authorized by
paragraph 12 does not require such approval. Except as provided below and in
paragraph 8(c) hereof, no suspension, termination, modification or amendment of
the 1997 Plan shall require the approval of any optionee. Notwithstanding the
foregoing, no suspension, termination, modification or amendment of the 1997
Plan shall be made without the consent of the person to whom an option shall
theretofore have been granted if it adversely effects the rights of such
optionee under such option.
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<PAGE>
15. Miscellaneous.
As said term is used in the 1997 Plan, the "Fair Market Value"
of a share of Common Stock on any day means: (a) if the principal market for the
Common Stock is a national securities exchange or the National Association of
Securities Dealers Automated Quotations System ("NASDAQ), the closing sales
price of the Common Stock on such day as reported by such exchange or market
system, or on a consolidated tape reflecting transactions on such exchange or
market system, or (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not quoted on NASDAQ, the
mean between the highest bid and lowest asked prices for the Common Stock on
such day as reported by the National Quotation Bureau, Inc.; provided that if
clauses (a) and (b) of this paragraph are both inapplicable, or if no trades
have been made or no quotes are available for such day, the Fair Market Value of
the Common Stock shall be determined by the Board of Directors or the Committee,
as the case may be, shall be conclusive as to the Fair Market Value of the
Common Stock.
The Board of Directors or the Committee, as the case may be,
may require, as a condition to the issuance and delivery of the shares issuable
upon exercise of any option granted under the 1997 Plan, that to the extent
required at the time of exercise (i) such shares of Common Stock have been duly
listed, upon official notice of issuance, upon any stock exchange(s) on which
the Common Stock is listed or upon NASDAQ, if the Common Stock is then listed on
NASDAQ, (ii) a Registration Statement under the Securities Act of 1933, as
amended, with respect to such shares shall be effective and any applicable state
registration or qualification has been complied with, or, in the opinion of
either counsel to the Company or counsel to the optionholder reasonably
acceptable to the Company, exemptions from such federal and state registration
requirements are available and/or (iii) the person exercising such option
deliver to the Company such documents, agreements and investment and other
representations as the Board of Directors or the Committee, as the case may be,
shall reasonably determine to be in the best interests of the Company.
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<PAGE>
During the term of the 1997 Plan, the Board of Directors or
the Committee, as the case may be, in its discretion, may offer one or more
option holders the opportunity to surrender any or all unexpired options for
cancellation or replacement. If any options are so surrendered, the Board of
Directors or the Committee, as the case may be, may then grant new Non-Qualified
or Incentive Options to such holders for the same or different numbers of shares
at higher or lower exercise prices than the surrendered options. Such new
options may have a different term and shall be subject to the provisions of the
1997 Plan the same as any other option.
Anything herein to the contrary notwithstanding, the Board of
Directors or the Committee, as the case may be, may, in their sole discretion,
impose more restrictive conditions on the exercise of an option granted pursuant
to the 1997 Plan; however, any and all such conditions shall be specified in the
option agreement limiting and defining such option.
Nothing in the 1997 Plan or in any Non-Qualified Option
granted pursuant to the 1997 Plan to a non-employee, including a director, shall
confer on any individual or entity the right to provide services to the Company,
Parent or a Subsidiary, as the case may be, or the right of any director to
continue as a director of the Company, Parent or a Subsidiary, as the case may
be, or interfere with the right of the Company, Parent or any Subsidiary, as the
case may be, to terminate the optionee's services at any time.
16. Privileges of Stock Ownership.
No person entitled to exercise any option granted under the
1997 Plan shall have any of the rights or privileges of a shareholder of the
Company in respect of any shares of stock issuable upon exercise of such option
until certificates representing such shares shall have been issued (whether
electronically or in paper format).
17. Compliance with SEC Regulations.
It is the Company's intent that the 1997 Plan comply in all
respects with Rule 16b-3 of the Act and any regulations promulgated thereunder.
If any provision of the 1997 Plan is later found not to be in compliance with
said Rule, the provisions shall be deemed null and void.
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<PAGE>
CONSULTATION AGREEMENT
AGREEMENT made as of the 6 day of June , 1997 by and between AUDIO BOOK
CLUB, INC. (hereinafter referred to as "ABC") and ABRAMS DIRECT MARKETING
(hereinafter referred to as the "Consultant").
WHEREAS, Consultant is an independent marketing consultant with
expertise in the direct marketing business; and
WHEREAS, ABC is involved in the direct marketing business, including
without limitation, operating a negative option audio book club and selling
audio books via the Internet.
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration and the mutual covenants contained herein, the
undersigned agree to the following:
1. The Whereas clauses recited above are hereby incorporated by
reference as though they were fully set forth herein.
2. The Consultant agrees to assist ABC, on an as-needed basis, with
respect to the following matters:
A. Designing and implementing direct marketing campaigns.
B. Assisting in the selection of direct marketing lists.
C. Reviewing the results of the direct marketing campaign.
D. Recommending and giving advice as to the future growth
and development of ABC's business.
E. Any other matters which ABC may reasonably request, provided
that Consultant has the necessary expertise to provide
such advice.
Any work that the Consultant does for ABC, must be done either pursuant
to a written request Consultant has received from ABC or pursuant to a written
accepted purchase order which is submitted from Consultant to ABC and accepted
in writing by ABC.
3. For the services rendered by Consultant hereunder, ABC agrees to pay
the Consultant on an hourly basis at the rate of Two Hundred Fifty and 00/100
U.S. Dollars ($250.00) per hour (hereinafter the "Consulting Fee"). The
Consultant agrees to provide ABC bi-weekly detailed bills reflecting the time
worked and the matters worked on. Payment will be required within thirty (30)
days of the invoice date and will be made by check made payable to Roy Abrams.
4. Consultant will also be reimbursed for all expenses incurred by it
on behalf of ABC, provided such expenses are fully documented by Consultant with
appropriate back-up and were pre-approved, in writing, by ABC. Pre-approved
travel time in excess of ninety (90) minutes daily, will be billed at the same
rate as the Consulting Fee.
<PAGE>
5. The Consultant acknowledges that the Consulting Fee shall be the
only remuneration or consideration which Consultant receives in connection with
this Agreement and that Consultant will not be entitled to participate in any
fashion in connection with the profits, if any, resulting from Consultants
advice.
6. ABC assumes the risk of reliance upon any advice given by the
Consultant and agrees not to look to the Consultant in the event ABC suffers any
loss, cost or expense as a result of relying upon Consultant's advice, except in
the event of the Consultant's fraud, gross negligence or willful misconduct.
7. It is understood and agreed by the parties hereto, that the
Consultant shall, at all times, and for all intents and purposes under this
Agreement, be deemed to act as an independent contractor and not as an agent,
employee or subcontractor of ABC. The terms of this Agreement shall commence on
the date set forth above and may be terminated by ABC or Consultant at any time;
provided, that Consultant may not terminate this Agreement if Consultant has
been given an assignment which Consultant has commenced, but not yet completed
until such assignment is completed.
8. This Agreement supersedes, in the entirety, all other agreements
which may exist between the parties with respect to the Consultant's services
(other than any agreements which may exist with respect to Roy Abrams acting as
a director of ABC and confidentiality agreements, including without limitation,
the March 11, 1997 confidentiality agreement from Consultant and Roy Abrams in
favor of ABC, which agreement is hereby acknowledged to remain in full force and
effect), and all such other agreements, if any, are now null and void and of no
force and effect.
9. This Agreement does not cover nor is it intended to cover services
which Roy Abrams may provide to ABC as a result of or in connection with being a
director of ABC.
10. This Agreement shall be construed in accordance with the laws of
the State of New Jersey and any action brought by either party shall be
commenced in the courts of the State of New Jersey. The Consultant and the
Company hereby irrevocably and unconditionally consent to submit to the
exclusive jurisdiction of the courts of the State of New Jersey located in
Morris County and the courts of the United States of America located in Essex
County, New Jersey for any and all actions, suits or proceedings arising out of
or resulting from or relating to this Agreement and the transactions
contemplated hereby and the parties agree not to commence any action, suit or
proceeding relating thereto except in such courts. The parties hereby
irrevocably and unconditionally waive any objection to the laying of venue of
any such action, suit or proceeding arising out of, resulting from or relating
to this Agreement or the transactions contemplated hereby in such courts and
hereby further irrevocably and unconditionally waive and agree not to plead or
claim in any such court that such action, suit or
2
<PAGE>
proceeding brought in any such court has been brought in an inconvenient forum.
11. This Agreement cannot be modified except by written instrument
signed by the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
"CONSULTANT"
ABRAMS DIRECT MARKETING
By: /s/ Roy Abrams
---------------------------------
Roy Abrams
President
/s/ Roy Abrams
------------------------------------
ROY ABRAMS, Individually
AGREED TO:
AUDIO BOOK CLUB, INC.
By: /s/ Michael Herrick
------------------------------------
Michael Herrick
Vice Chairman
3
<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 8, which is as of June 20, 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
June 27, 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-
With respect to the subject registration statement, we acknowledge our
awareness of the use therein of our report dated June 20, 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
June 27, 1997
<PAGE>
CONSENT OF ROY ABRAMS
I consent to the reference to me as a person to be appointed a
Director of Audio Book Club, Inc. under the caption "Management" in the
Prospectus included in the Registration Statement on Form SB-2 of Audio Book
Club, Inc.
/s/ Roy Abrams
-------------------
Roy Abrams
New York, New York
June 25, 1997
<PAGE>
CONSENT OF GEORGE FARLEY
I consent to the reference to me as a person to be appointed a
Director of Audio Book Club, Inc. under the caption "Management" in the
Prospectus included in the Registration Statement on Form SB-2 of Audio Book
Club, Inc.
/s/ George Farley
------------------------
George Farley
New York, New York
June 25, 1997
<PAGE>
CONSENT OF JESSE FABER
I consent to the reference to me as a person to be
appointed a Director of Audio Book Club, Inc. under the caption
"Management" in the Prospectus included in the Registration
Statement on Form SB-2 of Audio Book Club, Inc.
/s/ Jesse Faber
--------------------
Jesse Faber
New York, New York
June 25, 1997
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<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
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<BONDS> 0 0
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0 0
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<OTHER-EXPENSES> 2,053 435
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<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,242) 346
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,242) 346
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