<PAGE>
As filed with the Securities and Exchange Commission on November 20, 1997
Registration No. 333-31407
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
PHOENIX PRESCHOOL HOLDINGS, INC.
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(Exact name of Registrant as specified in its charter)
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Pennsylvania 8351 52-2044492
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
PHOENIX PRESCHOOL HOLDINGS, INC.
31st Floor
150 East 58th Street
New York, NY 10155
(212) 826-6130
(Address, including zip code, and telephone number,
including area code, of Registrant's
principal executive offices)
MICHAEL C. KOFFLER
Chairman, Chief Executive Officer and President
Phoenix Preschool Holdings, Inc.
31st Floor
150 East 58th Street
New York, NY 10155
(212) 826-6130
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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FREDERICK D. LIPMAN, ESQUIRE JAY M. KAPLOWITZ, ESQUIRE
MICHAEL MEDVECKUS, ESQUIRE ARTHUR S. MARCUS, ESQUIRE
Blank Rome Comisky & McCauley Gersten, Savage, Kaplowitz & Fredericks, LLP
One Logan Square 101 East 52nd Street
Philadelphia, Pennsylvania 19103 New York, NY 10022-6018
(215) 569-5500 (212) 752-9700
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |_|
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. |_|
<PAGE>
If this Form is a post-effective registration statement 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. |_|
CALCULATION OF REGISTRATION FEE(1)
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Proposed
maximum
offering price
Title of each class of Amount per share Proposed maximum Amount of
securities to be registered to be registered offering price(2) registration fee
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Common Stock......................... 1,466,250(3) $4.25 $ 6,231,562.50 $ 1,888.35
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Warrants............................. 1,466,250(3) $0.125 $ 183,281.25 $55.54
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Common Stock issuable upon exercise
of Warrants.......................... 1,466,250 $5.10(6) $ 7,477,875.00 $ 2,266.02
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Underwriters' Warrants............... 127,500 ---- $ 10.00 (5)
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Common Stock issuable pursuant to
Underwriters' Warrants............... 127,500 $5.10 $ 650,250.00 $ 197.05
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Warrants issuable pursuant to
Underwriters' Warrants............... 127,500 $0.15 $ 19,125.00 $ 5.80
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Common Stock issuable upon exercise
of Warrants granted pursuant to
Underwriters' Warrants............... 127,500(4) $5.10(6) $ 650,250.00 $ 197.05
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Total Fee for Registration........... $ 4,609.81 (7)
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</TABLE>
(1) Included due to change in offering price of shares and reconfiguration
of offering.
(2) Estimated solely for purposes of calculating registration fee.
(3) Includes 191,250 shares of Common Stock and 191,250 Warrants which the
Underwriters have the option to purchase to cover over-allotments, if
any. See "Underwriting."
(4) Pursuant to Rule 416, there are also being registered such
indeterminate number of additional shares as may become issuable
pursuant to the anti-dilution provisions of the Warrants and the
Underwriters' Warrants (and the Warrants included therein).
(5) Pursuant to Rule 457(g) promulgated under the Securities Act of 1993,
no filing fee is required.
(6) Calculated pursuant to Rule 457(g).
(7) Registration fee in the amount of $6,669.01 was paid upon filing of
initial registration statement.
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
This Offering Memorandum and the information contained herein are subject
to change, completion or amendment without notice. These securities may not be
sold nor may an offer to buy be accepted prior to the time the Offering
Memorandum is delivered in final form. Under no circumstances shall this
Offering Memorandum constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such jurisdiction.
Subject to Completion, Dated November 20, 1997
PROSPECTUS [LOGO]
PHOENIX PRESCHOOL HOLDINGS, INC.
1,275,000 Shares of Common Stock
and
1,275,000 Warrants
(each to acquire one share of Common Stock)
Phoenix Preschool Holdings, Inc. (the "Company"), a Pennsylvania
corporation, is hereby offering (a) 1,275,000 shares of its common stock (the
"Common Stock"), par value $0.10 per share, and, (b) on behalf of the selling
securityholders named herein (the "Selling Securityholders"), 1,275,000
redeemable stock purchase warrants (each a "Warrant") each to acquire one share
of Common Stock (the "Offering"). The Company will not receive any of the
proceeds of the sale of the Warrants. The Warrants are exercisable at an
exercise price of $5.10 per share for a period of three years commencing two
years from the effective date of the Company's registration statement filed with
the Securities and Exchange Commission in connection with the Offering (the
"Effective Date"). The exercise price of the Warrants is subject to adjustment
in certain events pursuant to the anti-dilution provisions thereof. The Warrants
are subject to redemption by the Company, in whole or in part, at $0.05 per
Warrant, at any time commencing two years after the Effective Date, on not less
than thirty (30) days prior written notice to the holders of the Warrants,
provided that the closing sale price of the Common Stock has been at least $7.00
for the twenty (20) consecutive trading days ending on the third day prior to
the date on which the Company gives notice of redemption. The Warrants will
remain exercisable until the close of business on the day immediately preceding
the date fixed for redemption.
Prior to the Offering, there has been no public market for the Common
Stock or the Warrants, and there can be no assurance that a public market for
such securities will develop or be sustained after completion of the Offering.
See "Risk Factors--Absence of Public Trading Market." It is anticipated that the
Common Stock and Warrants will be separately traded. The Company has applied to
have the Common Stock and Warrants quoted on The Nasdaq SmallCap Market, under
the proposed symbols "FENX" and "FENXW," respectively, and listed on the Boston
Stock Exchange, under the proposed symbols "FNX and FNXW," respectively. No
assurance can be given that the Company will receive approval to have its Common
Stock and Warrants listed on the Boston Stock Exchange or quoted on the NASDAQ
SmallCap Market. See "Market for Securities and Related Stockholder Matters."
The offering price per share of Common Stock and per Warrant have been
established through negotiations between Duke & Co., Inc. and Briarwood
Investment Counsel (together, the "Underwriters") and the Company, and does not
necessarily bear any relationship to any generally accepted criteria of value.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION" AT
PAGES 6 AND 19 OF THIS PROSPECTUS. ONLY INVESTORS WHO CAN BEAR THE RISK
OF LOSS OF THEIR ENTIRE INVESTMENT IN THE COMPANY SHOULD
INVEST IN THE COMMON STOCK AND/OR WARRANTS.
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.
---------------------------------
<PAGE>
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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Common Stock...................................... $ 4.25 $ 0.425 $ 3.825
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Total(3).......................................... $ 5,418,750 $ 541,875 $4,876,875
=====================================================================================================================
</TABLE>
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=====================================================================================================================
Underwriting Proceeds
Price to Discounts and to Selling
Public Commissions(1) Securityholders(2)
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Warrants.......................................... $0.125 $0.0125 $0.1125
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Total(3)......................................... $ 159,375 $15,937.50 $ 143,437.50
=====================================================================================================================
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(1) The Company has agreed to pay the Underwriters a sales commission of 10%
of the gross proceeds of the Offering. Underwriting discounts shown
excludes (i) a non-accountable expense allowance equal to 3% ($0.1275 per
share of Common Stock and $.00375 per Warrant, or $167,343.75 in total
(less $27,300 which the Company paid to a previous underwriter)) of the
gross proceeds of the Offering payable to the Underwriters; (ii) warrants
(the "Underwriters' Warrants") entitling the Underwriters to acquire up to
10% of the number of shares of Common Stock and Warrants sold to the
public in the Offering (excluding the Over-allotment Option described in
note 3 below) at an exercise price of $5.10 per share and $0.15 per
Warrant (120% of the Price to Public); (iii) a financial advisory fee of
$4,166 per month payable to the Underwriters for the twenty-four (24)
months following the Offering (which is payable in full ($99,984) at the
closing of the Offering); and (iv) a Warrant solicitation fee of 8% of the
exercise price of each Warrant exercised more than twelve (12) months
after the Offering under certain circumstances. The Company has agreed to
indemnify the Underwriters against certain liabilities, including certain
liabilities under the federal securities laws. See "Underwriting."
(2) After deducting the 10% sales commission payable to the Underwriters, but
before payment of the non-accountable expense allowance and legal,
accounting and other expenses of the Offering (estimated to be $710,000)
payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within
forty-five (45) calendar days of the date hereof, to purchase from the
Company up to 191,250 additional shares of Common Stock and/or Warrants
solely to cover over-allotments, if any (the "Over-allotment Option"). To
the extent that such option is exercised, the Underwriters will offer the
additional Common Stock and/or Warrants at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
approximately $6,414,844, $641,484 and $5,773,359, respectively.
See "Underwriting."
The Common Stock and Warrants are offered by the Underwriters on a
"firm-commitment" basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, subject to the approval of certain legal matters
by counsel for the Underwriters. 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 shares of Common Stock and Warrants will be made
against payment therefor at the offices of Duke & Co., Inc., 909 Third Avenue,
New York, New York, on or about _____________, 1997.
[Logo]
DUKE & CO., INC.
BRIARWOOD INVESTMENT COUNSEL
The date of this Prospectus is _______________ __, 1997
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all exhibits
and schedules thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the registration of the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in such Registration Statement and the exhibits
thereto, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information pertaining to the
Company, the securities offered by this Prospectus and related matters,
reference is made to such Registration Statement, including the exhibits filed
as a part thereof. Each statement in this Prospectus referring to a document
filed as an exhibit to such Registration Statement is qualified by reference to
the exhibit for a complete statement of its terms and conditions.
Following the Offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy
statements, information statements, and other information with the Commission.
So long as the Company is subject to the reporting requirements of the Exchange
Act, it will continue to furnish the reports and other information required
thereby to the Commission. The Company will furnish to its stockholders annual
reports containing audited financial statements and an opinion thereon expressed
by the Company's independent auditors and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
The Registration Statement and any reports and other information to be
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at its Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices located as follows: Chicago Regional Office, Citicorp Center, 500 W.
Madison Street, Suite 1400, Chicago, IL 60661-2511; and New York Regional
Office, 7 World Trade Center, New York, NY 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such Web Site is http://www.sec.gov. In
addition, such reports, proxy statements and other information concerning the
Company will also be available for inspection at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC
20006 and the Boston Stock Exchange, Member Services Department, One Boston
Place, Boston, MA 02108.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND WARRANTS, INCLUDING COMMON STOCK AND WARRANTS, OFFERED HEREBY,
INCLUDING PURCHASES OF SUCH SECURITIES TO STABILIZE MARKET PRICES. PURCHASES OF
SUCH SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN SUCH SECURITIES
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
DUE TO CERTAIN RESTRICTIONS IMPOSED BY THE STATE OF CALIFORNIA, EACH
PURCHASER OF SECURITIES AND EACH TRANSFEREE THEREOF RESIDING IN CALIFORNIA MUST,
EITHER INDIVIDUALLY OR JOINTLY WITH THE PERSON'S SPOUSE, MEET THE FOLLOWING
SUITABILITY STANDARDS: (1) NOT LESS THAN $250,000 LIQUID NET WORTH (EXCLUSIVE OF
HOME, HOME FURNISHINGS AND AUTOMOBILES) PLUS $65,000 OF GROSS ANNUAL INCOME OR
(2) $500,000 LIQUID NET WORTH (EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES) OR (3) $1,000,000 NET WORTH (INCLUSIVE OF HOME, HOME FURNISHINGS
AND AUTOMOBILES), OR (4) $200,000 GROSS ANNUAL INCOME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the consolidated
financial statements, including the notes thereto appearing elsewhere in this
Prospectus. Prospective investors should carefully consider the factors set
forth under "Risk Factors." Except as otherwise specified, all information in
this Prospectus assumes no exercise of the Over-allotment Option. See
"Underwriting." Phoenix Preschool Holdings, Inc. is a newly formed Pennsylvania
corporation which, following the reorganization described herein, became the
holding company for Phoenix Preschool Education Centers, Inc. References to the
"Company" in this Prospectus include, as the context requires, Phoenix Preschool
Education Centers, Inc., the subsidiary and predecessor of the Company through
the reorganization described herein. See "Reorganization."
The Company
Phoenix Preschool Holdings, Inc. (the "Company" or "Phoenix Preschool")
provides for-profit child care through 22 child care centers located in Florida,
Georgia and North Carolina. Center-based child care and preschool educational
services are provided five days a week throughout the year to children between
the ages of six weeks and 12 years. As of November 17, 1997, the Company had
approximately 2,529 children enrolled in its centers, which had licensed
capacity of 3,028 (full and part-time). All of the Company's child care centers
are operated under the "Phoenix Preschool Education Centers, Inc." name. The
Company's centers are primarily located on free-standing sites in suburban
residential areas and/or near military installations, each with substantial
preschool populations. See "Business -- Overview."
The Company's strategy is to offer an independently developed
educational curriculum within a stimulating environment in order to provide high
quality child care and to maximize development and preparation of children for
school. The Company emphasizes the recruitment, selection and ongoing training
of its child care center directors. Within a framework of centralized financial
and quality controls, the Company grants significant authority over center
operations to its center directors and rewards directors and assistant directors
on an incentive basis, tied to individual center performance.
According to Childcare Information Exchange (1996), the child care
industry is currently a $26 billion annual industry. The Company believes that
the market for center-based child care will continue to grow rapidly. The
Company believes the following factors will contribute to increased demand for
high quality child care centers: a growing number of women in the work force
with small children, single-parent homes, a shift in parental preference toward
the more structured and education-based environment provided by center-based
child care, as well as the effects of nationwide welfare reform, which
encourages entry by mothers into the workforce.
See "Business -- Industry Overview."
The percentage of mothers in the work force with children under age six
has increased from 39% in 1975 to 58% in 1990 and reached 67% by the end of
1996. In addition, the child care industry is highly fragmented, with
approximately 100,000 centers serving pre-school and/or school-age children in
the United States. According to Childcare Information Exchange, ownership of the
approximately 100,000 childcare centers breaks down as follows: (i) independent
for-profit - 29%; (ii) independent non-profit - 25%; (iii) church-housed - 15%;
(iv) head start - 9%; (v) public school - 8%; (vi) sponsored non-profit - 8%;
and (vii) for-profit chain - 6%. In total, 2,800 centers are owned by the six
largest national child care providers. The Company believes that many child care
centers are managed by individuals who lack the systems, financial
sophistication and professional management skills to operate their centers
profitably in an increasingly regulated industry. The Company believes that the
industry will experience consolidation, as these factors, coupled with
increasing competition from large, well capitalized and better known providers,
combine to create a more difficult operating environment for smaller child care
providers. See "Business -- Industry Overview."
<PAGE>
The Company has pursued a growth strategy that has focused on the
acquisition of existing centers. Upon formation in 1995, the Company acquired
eight units of a Florida entity in bankruptcy under Bankruptcy Court authority
and installed a new management team with experience in the fields of child care
and education. The Company then added eight centers through various acquisitions
during 1996 and an additional six centers to date in 1997. See "Business --
Growth Strategy."
The Company has developed a comprehensive education-based child care
program for its centers that is designed to respond to the increasing demand for
center-based care. Each of the Company's centers utilizes an age-appropriate,
education-based curriculum designed to promote each child's intellectual,
social, physical and emotional growth. In addition to the traditional areas of
language arts, mathematics, science and creative arts, the Company's curriculum
includes an incipient preschool computer science program and a foreign language
program. The Company's centers incorporate a number of features designed to
promote child safety and to support the Phoenix Preschool curriculum. In
addition to interactive learning aids and toys, several centers include swimming
pools. The Company's program also emphasizes continuous communication between
teachers and parents concerning each child's development. The Company believes
that this communication is critical to maintaining parental confidence and
satisfaction. See "Business -- Curriculum."
The Company has developed systems and methodologies with respect to its
operating, accounting and quality control procedures that help it to maintain
uniform quality standards. These systems and methodologies, which have been
compiled in a series of manuals that are periodically revised and updated, were
developed by the Company's management based upon its experience in the child
care industry.
Key to the operations of the Company is the implementation of a
recently licensed data processing system. This system keeps account of the
tuition and timesheets for staff and will utilize an internet routing system for
information and e-mail between preschool sites and the home office.
Additionally, a pilot program is in process to test the viability of using
computers in teaching children. The Company is testing Apple Macintosh computers
to gauge market responsiveness and is testing IBM-compatible personal computers
in one of its North Carolina centers. The Company is also pursuing the delivery
of preschool services to large employers, either contracted to Company sites, or
utilizing a sponsor's site. See "Business -- Management Information System" and
"-- Financial Planning; Budgeting and Cost Control."
The Company is a newly organized corporation formed under the laws of
the Commonwealth of Pennsylvania. Following the reorganization described herein,
the Company holds all of the outstanding capital stock of Phoenix Preschool
Education Centers, Inc., which was incorporated in May 1995 under the laws of
the State of Delaware. See "Reorganization." The Company's principal executive
offices are located at 150 East 58th Street, 31st Floor, New York, New York
10155, and its telephone number is (212) 826-6130.
-2-
<PAGE>
The Offering
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Securities Offered.......................... The Company is offering (a) 1,275,000 of its common stock, $0.10 par value
per share ("Common Stock") and (b) on behalf of the Selling Securityholders
named herein, 1,275,000 redeemable stock purchase warrants ("Warrants"), as
described below (the "Offering"). See "Description of Securities."
Common Stock Offering Price................. $4.25 per share of Common Stock.
Warrant Offering Price...................... $0.125 per Warrant.
Warrants ................................... Each Warrant entitles the investor to purchase one share of Common Stock.
See "Description of Securities--Warrants."
Exercise Price..................... $5.10 per share of Common Stock, subject to adjustment in
certain events. See "Description of Securities -- Warrants."
Exercise Period.................... At any time during the three year period commencing two years from the date
the Company's registration statement with respect to the Offering is
declared effective by the Securities and Exchange Commission (the "Effective
Date"). See "Description of Securities -- Warrants."
Redemption......................... Warrants are redeemable by the Company at a redemption price of $0.05 per
Warrant upon not less than thirty (30) days prior written notice to the
holders of the Warrants at any time commencing two years after the Effective
Date, provided that the closing sale price per share of Common Stock has
been at least $7.00 for twenty (20) consecutive trading days ending on the
third day prior to the date upon which the Company gives notice of
redemption. The Warrants will remain exercisable until the close of business
on the day immediately preceding the date fixed for redemption. See
"Description of Securities-- Warrants."
Market for Securities....................... Prior to the Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that a public market for such
securities will develop or be sustained after completion of the Offering.
See "Risk Factors --Absence of Public Trading Market," and "Market for
Securities and Related Stockholder Matters."
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Proposed Nasdaq Smallcap
Market Symbols.............................. The Company has applied to have the Common Stock and Warrants quoted on The
Nasdaq SmallCap Market, under the proposed symbols "FENX" and "FENXW,"
respectively, and listed on the Boston Stock Exchange, under the proposed
symbols "FNX" and "FNXW," respectively. See "Market for Securities and
Related Stockholder Matters."
Use of Proceeds............................. The net proceeds of the Offering will be used (i) to acquire additional
centers, (ii) to expand sales and marketing efforts, (iii) to repay an
outstanding officer note, (iv) to repay certain promissory notes issued by
the Company in a bridge financing completed in June, 1997, and (v) for
working capital and other general corporate purposes. See "Use of Proceeds."
Common Stock Outstanding:
Before the Offering.................... 810,890 shares (1)
After the Offering..................... 2,085,890 shares (1)
Warrants Outstanding:
Before the Offering.................... 1,275,000(2)
After the Offering..................... 1,275,000(3)
Risk Factors................................ An investment in the Company's securities is highly speculative and involves
substantial risks. Prospective investors should carefully review and
consider the factors described under "Risk Factors."
</TABLE>
- -------------------
(1) Does not include (i) a minimum of 500,000 shares issuable upon conversion
of the Company's Series A Preferred Stock, (ii) 1,527,277 shares reserved
for issuance under the Company's Amended and Restated Stock Option Plan, of
which options to purchase 1,307,883 shares of Common Stock were outstanding
as of the date hereof; (iii) 14,583 shares reserved for issuance under the
Company's Non-employee Stock Option Plan; (iv) up to 1,275,000 shares
issuable upon exercise of the Company's privately placed Bridge Warrants
(see note (2) below), which will be converted and constitute the Warrants
sold hereunder; (v) an aggregate of 87,678 shares issuable upon exercise of
two warrants issued to Gerard Cappello and Linda S. Cappello, with an
adjusted exercise price of $0.63 per share; (vi) 127,500 shares issuable
upon exercise of the Underwriters' Warrants, or (vii) 127,500 shares
issuable upon exercise of Warrants included in the Underwriters' Warrants.
See "Certain Transactions" and "Description of Securities -- Series A
Preferred Stock."
(2) Figure shown reflects the number of shares of Common Stock which may be
acquired pursuant to 25.5 warrants (the "Bridge Warrants"), issued by the
Company in a bridge financing completed in June 1997. Each such Bridge
Warrant provided an option to acquire up to 50,000 shares of Common Stock
at an exercise price of $4.50 per share, and, in the aggregate, up to
1,275,000 shares of Common Stock were subject to Bridge Warrants. As of the
Effective Date, the Bridge Warrants will automatically be converted into
the Warrants issued in the Offering. Does not include an aggregate of
87,678 shares issuable upon the exercise of two unregistered warrants
issued to Gerard Cappello and Linda S. Cappello, with an adjusted exercise
price of $0.63 per share.
(3) Excludes 127,500 Warrants which may be acquired by the Underwriters
pursuant to the Underwriters' Warrant. Does not include an aggregate of
87,678 shares issuable upon the exercise of two unregistered warrants
issued to Gerard Cappello and Linda S. Cappello, with an adjusted exercise
price of $0.63 per share.
-4-
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following information has been derived from the Company's audited
consolidated financial statements for the years ended June 30, 1997 and 1996 and
its unaudited financial statements for the three months ended September 30, 1997
and 1996, included elsewhere in this Prospectus. This information should be read
in conjunction with such consolidated financial statements, the related notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Operating Statement Data:
Three Months Ended
Year Ended June 30, September 30,
------------------------ ---------------------------
1997 1996 1997 1996
---------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue.......................................... $ 5,608 $ 2,824 $ 2,157 $ 1,123
Gross profit..................................... 2,104 1,196 849 487
Net loss......................................... (288) (200) (30) (89)
Net loss per common share........................ (.33) (.23) (.03) (.10)
Weighted average number of common
shares outstanding ........................... 863 863 863 863
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
June 30, 1997 September 30, 1997
------------------------ ---------------------------
As
Actual Adjusted(1)
---------------------------
(In thousands)
<S> <C> <C> <C>
Working capital (deficiency)..................... $ (426) $ (599) $ 2,917
Total assets..................................... 4,553 4,523 7,707
Total debt....................................... 3,289 3,222 2,336
Stockholder's equity ............................ 621 591 4,661
</TABLE>
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(1) Gives effect to (a) the 1,275,000 shares of Common Stock and 1,275,000
Warrants offered hereby and application of certain proceeds thereof toward
the repayment of an officer's note in the amount of $248,000 and repayment
of notes in the amount of $637,500 issued in the Company's bridge
financing.
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<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Prospectus such as statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations concerning the Company's ability to meet its liquidity needs and
control costs; certain statements contained under the heading "Business" such as
statements concerning strategy and government regulation; statements with
respect to the Company's ability to acquire, integrate and achieve efficiencies
with respect to new centers; statements concerning the growth of the child care
and preschool education industry and other statements contained herein regarding
matters that are not historical facts are forward looking statements (as such
term is defined in the Securities Act) and because such statements involve risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. In many cases, forward looking
statements may be identified by the use of words such as "believe," "anticipate"
and "expect." Many aspects of the Company's operations are subject to influences
outside its control. Any one or any combination of these factors could have a
material adverse effect on the Company's business financial condition and
results of operations. These factors include competitive pressures, economic
conditions, governmental regulation and policies, and other conditions effecting
capital markets. Factors which could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors."
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered by investors in evaluating the
Company and its business before purchasing the securities offered hereby. The
securities offered involve a high degree of risk and as such should be purchased
only by persons who can afford to sustain a total loss of their investment. The
risk factors reflected below and elsewhere in this Prospectus are not intended
to be an exhaustive list of all risks involved, but merely a representative
listing of those risks currently contemplated by the Company.
1. Ability to Implement Growth Strategy
The mission of the Company is to grow through acquisition of additional
preschool centers and internal growth of its preschool center business. While
there are a large number of other existing day care/preschool centers currently
in existence, it is not possible to guaranty that the anticipated growth will be
achieved due to the suitability and availability of appropriate targets to the
Company. Additionally, competition from rival companies for acquisition of
centers targeted by the Company may hamper the Company's efforts depending upon
the relative capital, financial resources and strength of such competitors.
Future acquisitions may result in dilution of the Company's earnings and the
ownership interests of then existing stockholders of the Company if the Company
issues securities as part of the consideration for such acquisitions. The
Company has historically obtained between 50% to 75% seller financing for its
center acquisitions. There is no assurance that sellers will continue to provide
this level of financing on terms that are acceptable to the Company. See
"Business -- Growth Strategy."
The Company does not presently have any pending acquisitions or plans,
proposals or understandings with respect to future acquisitions. The Company
does not presently expect to consider acquisitions involving entities related to
the Company, although there are no written policies, procedures or controls in
place which currently limit future transactions with parties related to the
Company. If undertaken, the Company intends to obtain an independent appraisal
in connection with any such transaction and would also require that such a
transaction was on terms and conditions no less favorable to the Company than
those which could be obtained from third parties. See "Certain Relationships and
Related Transactions."
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<PAGE>
2. Demographic and Seasonal Fluctuations
Traditionally, education-oriented institutions experience dramatic
downturns during the summer months. The Company expects to continue experiencing
decreased revenues during the first quarter of its fiscal year, which quarter
ends on September 30, adversely impacting cash flow. In addition to the
decreased revenue during the summer season, demographic cycles could also
adversely impact revenue at times when children outgrow their need for the
Company's facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality."
3. History of Losses/Future Uncertainty
The Company experienced net losses of approximately $288,000 and
approximately $200,000 for the fiscal years ending June 30, 1997 and 1996,
respectively and a net loss of approximately $30,000 for the three months ended
September 30, 1997. The Company had a working capital deficit of approximately
$599,000 at September 30, 1997. The Company's ability to attain, maintain or
improve profitability is dependent upon increased enrollment, acquisition of
existing centers and significant modernization of its operations. Despite the
Company's efforts to control expenses, because of unanticipated general economic
conditions and negative demographic trends, the Company cannot ensure that it
will be profitable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
4. Ability to Manage Expanding Operations
The Company's anticipated future expansion may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand and train its management personnel.
There can be no assurance that the Company will be able to manage these tasks
cost-effectively, and the failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Growth Strategy."
5. Availability of Suitable Locations
The Company's growth and expansion plans depend on successful
acquisitions of existing preschool centers and the ability to open additional
centers in areas that have the desired demographics. Demographic, strategic and
esthetic criteria are used in evaluating each targeted facility. The expenses of
appropriate site analysis, acquisition due diligence and transactional costs may
also adversely impact and operating results. See "Business -- Growth Strategy."
6. Competition
Competition for attracting and maintaining student enrollment among
child care facilities is significant. It is estimated that there are
approximately 100,000 licensed facilities for day care/preschool services across
the United States; approximately 2,800 of which are owned by the five largest
day care/preschool firms, including Kindercare Learning Centers, Inc. and La
Petite, Inc. Additional competition comes from small individually owned
facilities, small at-home sites and many religious/church sponsored child care,
day care or preschool centers. While several of the large national chains have
capital and financial resources significantly greater than those of the Company,
many of the small religious and other non-profit operated centers benefit from
significantly lower or no facility rental costs, and receive private and/or
community contributions to subsidize their operating expenses. Curricula are
also easily duplicated and are difficult to protect in any meaningful
proprietary sense. See "Business -- Competition."
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<PAGE>
7. Government Regulation; Reliance on Government Funding
The Company's operations are subject to a variety of laws and
regulations of federal, state and local authorities, including numerous state
and local governmental regulatory and licensing requirements applicable to child
care/preschool centers governing, among other things, the Company's buildings
and facilities, discrimination on the basis of disability in public
accommodations, fire safety, sanitary conditions, day care activities, social
services requirements, food service requirements, staffing ratios, health,
record keeping and curricula standards. Sanctions may be imposed by regulatory
agencies consisting of probation, fines or, when warranted, suspension or
revocation of applicable licenses. The Company has been fined by licensing
agencies on different occasions for violations of certain requirements. Such
fines were not material in amount. The Company believes that it is currently
substantially in compliance with all material ordinances, regulations and laws
currently in effect within the jurisdictions in which it operates. However,
there can be no assurance that no additional restrictions will not be imposed
upon the Company's operations in the future which might have a material adverse
effect upon its business operating results.
In order for the Company to operate its centers, the Company must first
obtain licenses from the regulatory agency supervising child care center
operations in each state in which the centers are located. Licenses are
typically valid for a period of one year and must be renewed upon expiration.
The renewal of the Company's licenses is contingent upon an annual inspection by
a consultant for the states' regulatory agencies. Five of the Company's centers
are operating under expired licenses. Annual inspections have been completed on
each of these centers. Based upon the results of the completed inspections, the
Company has no reason to believe that the licenses for these centers will not be
renewed. There is no assurance, however, that renewal licenses will be approved
for any of the Company's centers. Failure to obtain such licenses could have a
material adverse impact on the Company's business.
For the fiscal year ended June 30, 1997, the Company generated
approximately 34% of its net revenues from federal food and/or childcare
assistance programs. Funding for such programs, is subject to changes in federal
and state political environments and governmental appropriation procedures, both
of which are unpredictable and are outside the Company's control. There is no
assurance that such funding will continue. Curtailment or diminution of the
programs may have an adverse financial impact on the Company. Additionally, it
is possible that provisions of the Internal Revenue Code of 1986, as amended,
authorizing certain tax deductions for parents utilizing child care programs
could change, adversely impacting the Company's business, financial condition
and results of operations. See "Business -- Government Regulation."
8. Dependence Upon Key Personnel/Conflicts of Interest
The Company's success and future performance will depend significantly
upon the efforts and abilities of Michael C. Koffler, Chairman, President and
Chief Executive Officer of the Company. The loss of Mr. Koffler could adversely
effect the Company's business and, coupled with the limited depth of management
as presently configured, such loss would likely result in a significant adverse
impact. The Company intends to obtain a key man life insurance policy in the
amount of $1,000,000 on the life of Michael Koffler within thirty (30) days
after the Effective Date. Mr. Koffler has a three (3) year employment agreement
with the Company, subject to earlier termination under certain circumstances.
See "Management -- Employment Agreement." The Company's ability to attract and
hire skilled personnel to supervise and manage the Company's present and future
activities is uncertain. The Company's ability to expand is dependent upon its
ability to hire and retain qualified supervisory and management personnel, all
of whom are in high demand and often subject to competing offers. There can be
no assurance that the Company will be able to attract and retain the qualified
personnel necessary for its business and planned growth. See "Management."
-8-
<PAGE>
Michael C. Koffler manages other ventures including other ventures
related to preschool education. While Mr. Koffler anticipates spending an
average of at least thirty (30) hours per week on Company matters, Mr. Koffler
will not devote all of his time to the Company and will devote substantial
amounts of his time to ventures other than the Company, principally Williamsburg
Developmental School.
9. Principal Stockholder Control
Upon completion of the Offering, Michael C. Koffler, Chairman,
President and Chief Executive Officer of the Company, will beneficially own
approximately 40% of the outstanding and voting Common Stock. In addition, as a
result of ownership of 500,000 shares of Series A Preferred Stock, Mr. Koffler
is entitled to cast (together with holders of Common Stock) an additional
500,000 votes on any matter submitted to shareholder vote. Assuming no exercise
of the over-allotment option, Mr. Koffler will therefore be entitled to cast
1,310,890 votes or approximately 51% of the votes entitled to be cast on any
matter submitted for shareholder vote. As a result, he will be able to exercise
significant influence and control over the election of directors, stockholder
voting and all other matters affecting the Company. See "Management-Directors
and Executive Officers," "Principal Stockholders" and "Description of
Securities." In addition, he will hold all of the issued and outstanding Series
A Preferred Stock. See "Description of Securities -- Series A Preferred Stock -
Voting Rights."
10. Adverse Publicity/Insurance
As a result of reported incidents of alleged child physical and sexual
abuse against child care and educations providers throughout the nation, and the
adverse publicity attendant thereto, a heightened sensitivity to and significant
real exposure to legal liability currently exists in the child care/preschool
industry. Compounding this problem is the extended statute of limitations in
many jurisdictions for the bringing of child abuse and personal injury claims.
Bodily injury and sexual molestation issues have heightened the risks attendant
to serving young children and adversely affect the Company's activities. The
Company maintains $2,000,000 in general liability insurance. General liability
insurance premiums have risen appreciably and there is no assurance that such
premiums will not continue to increase in the future. The Company's current
coverage for child abuse claims is subject to an annual aggregate limitation of
$500,000 per child and $1,000,000 per occurrence. There is no assurance that the
Company will be able to maintain and/or obtain such insurance coverage in the
future. See "Business -- Insurance."
11. Broad Discretion as to Use of Proceeds/Repayment of Insider Debt
Approximately $3.0 million or 72.0% of the net proceeds of the Offering
have been allocated to acquisition of new sites and will be used for such
purposes as the Company's management in its discretion may determine.
Approximately $663,000, or 15.9%, of the net proceeds will be used to repay debt
incurred by the Company in a bridge financing. In addition, approximately
$248,000, or 6.0%, of the net proceeds will be applied to repay debt owed to
Michael Koffler, a director, officer and stockholder of the Company. Such
amounts will therefore be unavailable for use by the Company in future business
activities. Net proceeds will also be applied to expand sales and marketing
efforts and for working capital. Management will have broad discretion with
respect to the utilization of a significant portion of the net proceeds of the
Offering. Additionally, the estimated allocations for the use of the anticipated
proceeds of this Offering is subject to reapportionment among existing or new
categories. Depending upon the progress of the Company's growth plans and its
overall operating performance, market and general economic conditions, the
timing and amount of any anticipated expenditures may vary. See "Use of
Proceeds."
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<PAGE>
12. No Dividends
The Company has never declared a dividend on the Common Stock. The
Company anticipates retaining all of its future earnings, if any, for use in the
growth, expansion and operation of its business. The Company does not anticipate
paying any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Board of Directors and will depend
on, among other things, earnings and financial condition of the Company. Future
lenders to the Company may limit the Company's ability to declare or pay
dividends. See "Dividend Policy."
13. Immediate and Substantial Dilution
Investors who purchase Common Stock as part of the Offering will
experience immediate dilution of $2.52 per share or 59% in the net tangible book
value of their investment from the initial offering price of $4.25 per share of
Common Stock. The Warrant exercise price herein is substantially higher than the
pro forma net tangible book value per share. Accordingly, purchasers will likely
incur an immediate and substantial dilution in the pro forma net tangible book
value per share upon exercise of the Warrants. The Company has also increased
the number of shares subject to its Amended and Restated Stock Option Plan to
1,527,277 shares, which plan provides for options at an exercise price equal to
the fair market value on the date of the grant, which may be lower than the
exercise price of the Warrants. In addition, stockholders purchasing Common
Stock in the Offering will pay substantially more per share of Common Stock than
existing stockholders invested per share of Common Stock and will therefore bear
substantially more of the financial risk of investment in the Company. See
"Dilution."
14. Future Capital Needs/Uncertainty of Additional Funding/No Line of
Credit
The Company has no established line of credit. The Company had a net
working capital deficit of approximately $426,000 at June 30, 1997 and $599,000
at September 30, 1997, respectively. While the Company anticipates that its
existing capital resources, including the net proceeds of the Offering and
future earnings will be adequate to satisfy its capital requirements on a
short-term basis (i.e, for up to approximately twelve (12) months) to the extent
that the Company makes acquisitions, the Company's working capital requirements
may increase significantly. To the extent that the funds raised in the Offering,
together with existing capital resources and future earnings, are insufficient
to fund the Company's activities, the Company may need to raise additional funds
through debt or equity financing. No assurance can be given that additional
financing will be available or that, if available, it can be obtained on terms
favorable to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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<PAGE>
15. Price to Public Not Necessarily Reflective of Market Value
The price of the Common Stock and Warrants, and the exercise price of
the Warrants, were determined in negotiations between the Company and the
Underwriters and may not necessarily represent the fair market value of such
securities. To the extent that market valuations of such securities are less
than the initial price to the public, the price, if any, that investors are able
to realize upon sale of such securities may be significantly less than the
initial price to the public (i.e., investors risk the loss of a substantial
portion of, or all of, their investment). See "Underwriting."
16. Anti-Takeover Effects of Certain Provisions of Articles of
Incorporation, By-laws and Applicable Law
The Company's articles of incorporation authorize the board of
directors to issue up to 15,000,000 shares of common stock, par value $.10 per
share, to designate an additional 1,000,000 shares as either common or
preferred, and to issue 1,000,000 shares of preferred stock in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by the stockholders, and which may
include voting rights (including the right to vote as a class or series on
particular matter), preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions. The issuance of any such
preferred stock could materially adversely affect the rights of holders of
Common Stock and, therefore, could reduce the value of the Common Stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict the Company's ability to merge with, or sell its assets to, a
third party, thereby preserving control of the Company by present stockholders.
The issuance of preferred stock may in some circumstances, deter or discourage
takeover attempts and other changes in control of the Company, including
takeovers and changes in control which some holders of the Common Stock may deem
to be in their best interest and in the best interest of the Company, by making
it more difficult for a person who has gained a substantial equity interest in
the Company to obtain voting control or exercise control, thereby effectively
preserving control of the Company for the current stockholders. See "Description
of Securities -- Preferred Stock." The Pennsylvania Business Corporation Law,
which governs the Company, includes certain provisions applicable to the Company
which may have the effect of discouraging takeover attempts, such as provisions
limiting business combinations with 20% or more shareholders and expanding the
considerations the Board of Directors may weigh in evaluating a takeover offer.
See "Description of Securities -- Certain Provisions of Pennsylvania Law."
17. Absence of Public Trading Market
There has been no public or private market for the Common Stock or the
Warrants, and there can be no assurance that any such market will develop or be
sustained in the foreseeable future. No assurance can be given that the Common
Stock or Warrants can be resold in the future at or near the Offering price to
the public. See "Market for Securities and Related Stockholder Matters."
18. Dilutive Effect of Underwriters' Warrant and Other Options
Upon completion of the Offering, the Company will sell to the
Underwriters a warrant to purchase up to 127,500 shares of Common Stock and
127,500 Warrants at an exercise price of $5.10 per share of Common Stock and
$0.15 per Warrant. The Underwriters' Warrant will be exercisable at any time
during the five year period commencing one year from the Effective Date. As of
the date of this Prospectus, there are outstanding warrants to purchase an
aggregate of 1,275,000 shares of Common Stock (which excludes the Cappello
Warrants described under "Description of Securities -- Warrants") and options to
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<PAGE>
purchase an aggregate of 1,322,466 shares of Common Stock. In addition, in the
aggregate, the Company's Series A Preferred Stock is convertible into between
500,000 and 1,320,674 shares of Common Stock. See "Description of Securities --
Series A Preferred Stock." If the Underwriters' Warrant and the outstanding
Warrants and options are exercised, the percentage of Common Stock then held by
the existing stockholders will be reduced and such exercise would result in
dilution of the ownership interests of such stockholders. The Underwriters'
Warrant and the outstanding Warrants and options can be expected to be exercised
at a time when the Company would be able to obtain funds from the sale of Common
Stock or other securities at a price higher than the exercise price thereof. See
"Underwriting."
19. The Nasdaq SmallCap Market/Boston Stock Exchange Maintenance
Requirements; Possible Delisting of Securities; Risks of Low-Priced Stocks
The Company has applied to have the Common Stock and Warrants quoted on
The Nasdaq SmallCap Market and listed on the Boston Stock Exchange upon the
Effective Date. No assurance can be given that the Company will receive approval
to have its Common Stock and Warrants listed on the Boston Stock Exchange or
quoted on the NASDAQ SmallCap Market. The Commission has approved rules imposing
criteria for quotation of securities on The Nasdaq SmallCap Market, including
standards for maintenance of such listing. Currently, for continued quotation on
the NASDAQ SmallCap Market, a company must, among other things, have total
assets of at least $2.0 million, a public float of at least 500,000 shares with
a market value of $1.0 million, two market makers, at least 300 shareholders,
and a minimum bid price of $1.00 per share. Criteria required to be met for
continued listing on the Boston Stock Exchange include total assets of at least
$1.0 million, a public float of at least 150,000 shares with a market value of
$500,000 and at least 250 shareholders. If the Company is unable to satisfy The
Nasdaq SmallCap Market's or the Boston Stock Exchange's maintenance criteria in
the future, its securities will be delisted from these markets. In the event the
Company's securities are delisted from The Nasdaq SmallCap Market and the Boston
Stock Exchange and are not traded on any other exchange, trading, if any, in
securities would, thereafter, be conducted in the over-the-counter on the OTC
Bulletin Board. Consequently, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities. Neither quotation on The Nasdaq SmallCap Market nor listing on the
Boston Stock Exchange implies that a meaningful, sustained market for the
Company's securities will develop or, if developed, that it will be sustained
for any period of time. See "Absence of Public Trading Market."
20. Potential Adverse Effect of Redemption of Warrants
The Warrants offered hereby are redeemable, in whole or in part, at a
price of $.05 per Warrant, commencing two years after the Effective Date and
prior to their expiration; provided that (i) prior notice of not less than
thirty (30) days is given to the holders of the Warrants; (ii) the closing sale
price per share of Common Stock on each of the 20 consecutive trading days
ending on the third business day prior to the date on which the Company gives
notice of redemption has been at least $7.00; and (iii) holders may exercise
Warrants until the close of the business day preceding the date fixed for
redemption. Notice of redemption of the Warrants could force the holders to
exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, or to sell the Warrants at the current market
price when they might otherwise wish to hold them, or to accept the redemption
price, which may be substantially less than the market value of the Warrants at
the time of redemption. The Warrants may not be exercised unless the
registration statement pursuant to the Securities Act covering the underlying
shares of Common Stock is current and such shares have been qualified for sale,
or there is an exemption from applicable qualification requirements, under the
securities laws of the state of residence of the holder of the Warrants.
Although the Company does not presently intend to do so, the Company reserves
the right to call the Warrants for redemption whether or not a current
prospectus is in effect or such underlying shares are not, or cannot be,
registered in the applicable states. Such restrictions could have the effect of
preventing certain holders of Warrants from liquidating their Warrants. See
"Description of Securities -- Warrants."
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<PAGE>
21. Current Prospectus and State Blue Sky Registration Required to
Exercise Warrants
Holders of the Warrants will have the right to exercise the Warrants
for the purchase of shares of Common Stock only if a current prospectus relating
to such shares is then in effect and only if the shares qualified for sale under
the securities laws of the applicable state or states. The Company has
undertaken and intends to file and keep effective and current a prospectus which
will permit the purchase and sale of the Common Stock underlying the Warrants,
but there can be no assurance that the Company will be able to do so. Although
the Company intends to seek to qualify for sale the shares of Common Stock
underlying the Warrants in those states in which the securities are to be
offered, no assurance can be given that such qualifications will occur. The
Warrants may lose or be of no value if a prospectus covering the shares issuable
upon the exercise thereof is not kept current or if such underlying shares are
not, or cannot be, registered in the applicable states. See "Description of
Securities -- Warrants."
22. Penny Stock Regulation
In the event that the Company is unable to satisfy the respective
maintenance requirements for The Nasdaq SmallCap Market and Boston Stock
Exchange, trading would be conducted on the NASD's OTC Bulletin Board (i.e., the
"pink sheets"). In the absence of the Common Stock being quoted on The Nasdaq
SmallCap Market or the Boston Stock Exchange, the Common Stock may become a
"penny stock." Commission regulations generally define a penny stock to be any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such exceptions include an equity security listed on Nasdaq
or an exchange, or an equity security issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for three years, (ii) net tangible assets of at least $5,000,000, if
such issuer has been in continuous operation for less than three years, or (iii)
average revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the Commission regulations require the delivery, prior
to any transaction involving a penny stock, of a disclosure schedule explaining
the penny stock market and the risks associated therewith. Broker-dealers who
recommend such securities to persons other than established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale.
If the Company's securities were to become subject to the regulations
applicable to penny stocks, the market liquidity for the securities would be
severely affected, limiting the ability of broker-dealers to sell the securities
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There is no assurance that trading in the Company's securities
will not be subject to these or other regulations that would adversely affect
the market for such securities.
23. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants
Although the shares of Common Stock and Warrants will not knowingly be
sold to purchasers in jurisdictions in which they are not registered or
otherwise qualified for sale, purchasers may buy Warrants in the aftermarket or
may move to jurisdictions in which the shares of Common Stock issuable upon
exercise of the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In such event, the Company would be unable to
issue shares to those persons desiring to exercise their Warrants unless and
until the shares could be registered or qualified for sale in the jurisdiction
in which such purchasers reside, or an exemption to such qualification exists or
is granted in such jurisdiction. If the Company was unable to register or
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<PAGE>
qualify the shares in a particular state and no exemption to such registration
or qualification was available in such jurisdiction, in order to realize any
economic benefit from the purchase of the Warrants, a holder might have to sell
the Warrants rather than exercise them. No assurance can be given, however, as
to the ability of the Company to effect any required registration or
qualification of the Common Stock or Warrants in any jurisdiction in which
registration or qualification has not already been completed. See "Description
of Securities."
24. Underwriters' Limited Underwriting Experience; Pending Investigation
While certain of the officers of Duke & Co., Inc. ("Duke") have
significant experience in corporate financing and the underwriting of
securities, Duke has previously underwritten only five public offerings.
Accordingly, there can be no assurance that Duke's limited public offering
experience will not affect the Company's offering of the Common Stock and
Warrants and subsequent development of a trading market, if any, in such
securities. In addition, Duke is aware that the Commission is investigating
certain of Duke's trading practices and mark-ups in connection with the
securities of an issuer whose 1995 public offering was underwritten by Duke.
There can be no assurance that this investigation will not adversely and
materially affect this Offering or subsequent trading in the Common Stock and/or
Warrants of the Company. See "Underwriting."
Although certain officers of Briarwood Investment Counsel ("Briarwood")
have had experience working on public offerings, and other corporate finance
matters, Briarwood has not previously served as the sole or managing underwriter
of a firm commitment public offering nor has it participated as member of an
underwriting syndicate. Since Briarwood's experience in underwriting firm
commitment public offerings is limited, there can be no assurance that the lack
of experience will not adversely affect the public offering of the Company's
Common Stock and Warrants and the subsequent development, if any, of a trading
market for the Common Stock and Warrants. See "Underwriting."
25. Limitation on Director Liability
The Company's articles of incorporation provide that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions under Pennsylvania law. This may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of the
Company against a director. In addition, the Company's articles of incorporation
provides for mandatory indemnification of directors and officers. See
"Management -- Indemnification of Directors and Officers."
26. Underwriters' Influence on the Market; Possible Limitations on Market
Making Activities
A significant number of shares of Common Stock and Warrants may be sold
to customers of the Underwriters. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Underwriters. The Underwriters have indicated that they intend to act as
market-makers and otherwise effect transactions in the Common Stock and
Warrants. To the extent the Underwriters act as market-makers in the Common
Stock and Warrants, they may exert a dominating influence in the markets for
those securities. The prices and liquidity of the shares of Common Stock and
Warrants may be significantly affected to the extent, if any, that the
Underwriters participate in such markets. Furthermore, the Underwriters may
discontinue such activities at any time or from time to time. The Underwriters
also have the right to act as the Company's exclusive agent in connection with
any future solicitation of holders of Warrants to exercise their Warrants.
Applicable rules
-14-
<PAGE>
of the Commission prohibit the Underwriters and any other soliciting
broker-dealers from engaging in any market making activities or solicited
brokerage activities with regard to the Common Stock and Warrants for a period
of up to five business days prior to the solicitation of the exercise of any
Warrants until the later of the termination of such solicitation activity or the
termination of any right the Underwriters may have to receive a fee for the
solicitation of the Warrants. As a result, the Underwriters and such soliciting
broker-dealers may be unable to continue to make a market for the Common Stock
and the Warrants during certain periods while the Warrants are exercisable. Such
a limitation, while in effect, could impair the liquidity and market price of
the Common Stock and the Warrants. See "Underwriting" and "Risk Factors --
Continued Involvement of Underwriters; Advisory Fees."
27. Absence of Independent Director Approval
The Offering and the Reorganization (described under "Reorganization"
below) were approved by Michael C. Koffler as the sole stockholder and director
of the Company. Hence, no independent director considered and approved any
aspect of the Offering and Reorganization.
28. Offering Proceeds to Benefit Affiliated Person
As further described under "Use of Proceeds," $248,000 of the net
proceeds of the Offering will be applied to the repayment of debt owed to
Michael C. Koffler, the Chief Executive Officer and President and a stockholder
and director of the Company. See "Use of Proceeds."
29. Continued Involvement of Underwriters; Advisory Fees
The Underwriters will have continued involvement and influence over the
Company following the Offering. Pursuant to an Advisory and Investment Banking
Agreement with the Underwriters, for a period of two years after the Effective
Date, the Underwriters will provide certain financial advisory and investment
banking services to the Company. The Company will pay fees of $4,166 per month,
for a total of $99,984, under such agreement, payable in advance at the closing
of the Offering. This will reduce the amount of Offering proceeds available for
business operations. In addition, pursuant to its underwriting agreement with
the Underwriters, the Company has agreed to either use its best efforts to have
a designee of the Underwriters elected as a member of the Board of Directors or
to engage a designee of the Underwriters as a nonvoting advisor to the Board of
Directors for a period of three (3) years following the completion of the
Offering. See "Underwriting" and "Management."
-15-
<PAGE>
REORGANIZATION
On or before the Effective Date of the Offering, the Company, Michael
C. Koffler, and Phoenix Preschool Education Centers, Inc., a Delaware
corporation (the "PPEC") will have completed a reorganization transaction (the
"Reorganization") in accordance with Section 351 of the Internal Revenue Code of
1986, as amended (the "Code"). Pursuant to the Plan of Reorganization, dated as
of July 7, 1997 (as amended), among Mr. Koffler, PPEC and the Company (the
"Plan"), Mr. Koffler will have contributed all of the 1,600,000 issued and
outstanding shares of common stock of PPEC to the Company, together with
$500,000 in debt owed to him by PPEC. In exchange therefor, the Company will
have delivered to Mr. Koffler 810,890 shares of Common Stock and 500,000 shares
of the Company's Series A Preferred Stock. PPEC will pay Mr. Koffler, from
proceeds of the Offering, the balance of its debt owed to him, equal to
approximately $248,000. See "Risk Factors -- Offering Proceeds to Benefit
Affiliated Person." As a result of the Reorganization, PPEC became a
wholly-owned subsidiary of the Company. In connection with the Reorganization,
the Company assumed the obligations of PPEC under all outstanding warrants and
options, which consequently relate solely to the Common Stock (and not the
common stock of PPEC).
Because the Company is a newly formed corporation, the financial data
contained herein, including data included in the Consolidated Financial
Statements which are included as part of this Prospectus, are those of PPEC.
-16-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,275,000 shares
of Common Stock offered hereby at $4.25 per share, and after deducting
underwriting discounts and commissions and other expenses of this Offering
(estimated at $710,000) will be approximately $4,166,875 (or approximately
$4,919,922 if the Over-allotment Option is exercised in full). The Company will
not receive any of the proceeds of the sale of the Warrants for the account of
Selling Securityholders. The Company expects that the net proceeds of the
Offering, together with any cash flow from operations, will be adequate to meet
the Company's short-term cash requirements (i.e., for a period of up to
approximately twelve (12) months).
The Company anticipates that the net proceeds of the Offering will be
used (i) to acquire additional centers, (ii) to repay promissory notes issued in
connection with the Company's bridge financing closed on June 9, 1997, (iii) to
repay certain indebtedness to an officer, (iv) to expand the Company's sales and
marketing efforts, and (v) for working capital requirements and for other
general corporate purposes. The following table provides an approximate
allocation of the net proceeds of the Offering among such uses.
<TABLE>
<CAPTION>
Use Amount Percent
- --------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Acquire additional centers.................................. $ 3,000,000 72.0%
Repay Bridge Notes (1)..................................... 663,000 15.9
Repay officer note.......................................... 248,000 6.0
Expand sales and marketing efforts ......................... 80,000 1.9
Working capital requirements and general
corporate purposes .................................... 175,875 4.2
----------- -----------
Total.............................................. $4,166,875 100.0%
=========== ===========
</TABLE>
- -------------------------
(1) A portion of the net proceeds of the Offering will be used to repay
bridge notes in the aggregate principal amount of $637,500, plus interest
of approximately $25,500. The bridge notes, issued in connection with the
Company's bridge financing (the "Bridge Financing") completed in June,
1997, bear interest at 8% per annum and are payable upon the earlier of
October 9, 1998 or the consummation of an initial public offering or
private placement of the Company's debt and/or equity securities
resulting in gross proceeds to the Company of at least $5,000,000. The
net proceeds of the Bridge Financing (approximately $555,000) were used
primarily to reimburse Michael C. Koffler, the Company's Chief Executive
Officer and principal stockholder, for advances Mr. Koffler made to fund
the acquisition of new centers and to upgrade the Company's management
information system. The Company used the remaining net proceeds as
working capital.
-17-
<PAGE>
Acquisitions. The Company has allocated approximately $3.0 million of
the net proceeds for the acquisition of an estimated 40 to 50 new centers. The
$3.0 million of the proceeds allocated to the acquisition of additional centers
includes the cash portion of the purchase price of such centers, which
represents approximately one third of such purchase price, and certain start-up
costs for the new centers. The cash portion of a new center purchase price and
start up costs for a new center can vary significantly depending upon a number
of factors, including the amount of available Seller financing, the existing
enrollment and facility size, and the condition of, and supplies and amenities
available at, the acquired center. Consequently the actual number of centers
which the Company will be able to acquire may be more or less than the Company's
estimate. See also, "Risk Factors -- Ability to Implement Growth Strategy" and
"-- Availability of Suitable Locations". The Company has historically financed
between 50% to 75% of the purchase price for center acquisitions in the form of
seller financing. There is no assurance that sellers will continue to provide
this level of financing, and, as the Company's debt increases, sellers may not
be willing to extend financing at these levels.
Sales and Marketing. The Company intends to use an aggregate of
approximately $80,000 of the net proceeds to expand the Company's sales and
marketing activities. These activities will consist of marketing and advertising
to support the new and existing Company-owned centers, hiring of a marketing
staff person, expansion of print advertising, and general sales and marketing
activities.
Working Capital. The Company intends to use approximately $175,875 of
the net proceeds for working capital and general corporate purposes. Further
allocations of the portion of the Offering proceeds that are to be utilized for
working capital and general corporate purposes have not yet been specifically
determined by the Company.
The foregoing allocations represent the Company's best estimate of its
allocation of the net proceeds of this Offering and are subject to a
reapportionment of proceeds among the categories listed above or to new
categories. The amount and timing of expenditures will vary depending upon a
number of factors, including the progress of the Company's expansion plans, the
number of additional centers which are opened, the operating performance of such
centers, changing competitive conditions, and general economic conditions.
Pending the use of the proceeds as set forth above, the Company intends to
invest the net proceeds from this Offering in short-term interest-bearing,
investment grade securities, certificates of deposit or direct or guaranteed
obligations of the United States of America. See "Risk Factors -- Broad
Discretion as to Use of Proceeds/Repayment of Insider Debt."
-18-
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization
of the Company at September 30, 1997, and as adjusted to give effect to (i)
completion of the Reorganization, and (ii) the Company's sale of the Common
Stock and Warrants offered hereby. This table should be read in conjunction with
the consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------
Actual As Adjusted
-------------- ---------------
<S> <C> <C>
Current maturities of long-term debt................................. $ 466,843 $ 466,843
------------ --------------
Long-term debt:
Officer/stockholder loans......................................... 247,831 --
Notes payable - other............................................. 2,506,912 1,869,418
------------ --------------
Total long-term debt........................................... 2,754,743 1,869,418
------------ --------------
Total debt.................................................. 3,221,586 2,336,261
------------ --------------
Stockholders' equity
Convertible Preferred Stock, $.10 par value; Authorized
1,000,000 shares; Issued and outstanding 500,000 shares (1). 50,000 50,000
Common stock, $.10 par value; Authorized 15,000,000 shares;
Issued and outstanding 810,890 shares actual,
2,085,890 shares as adjusted ............................... 81,089 208,589
Additional paid-in capital...................................... 777,514 4,816,889
Deficit (2)..................................................... (317,530) (414,496)
------------ --------------
Total stockholders' equity.................................. 591,073 4,660,982
------------ --------------
Total capitalization................................... $ 3,812,659 $6,997,243
============ ==============
</TABLE>
- ------------
(1) See "Description of Securities" for conversion features.
(2) Deferred financing costs of $96,933 related to the Bridge Financing will be
expensed upon repayment of the Bridge Notes.
DIVIDEND POLICY
The Company intends to retain earnings, if any, to finance its
operations. Since its inception, the Company has not paid any cash dividends on
its Common Stock and does not anticipate paying such dividends in the
foreseeable future. The payment of dividends by the Company is within the
discretion of its Board of Directors and depends in part upon the Company's
earnings, capital requirements and financial condition. See "Risk Factors -- No
Dividends."
-19-
<PAGE>
DILUTION
At September 30, 1997, the net tangible book value of the Company was
approximately $(786,000), or approximately $(.97) per share of Common Stock.
The net tangible book value attributable to holders of Common Stock of the
Company is tangible assets (total assets less intangible assets, deferred
financing and offering costs) less total liabilities and preferred stock.
Dilution per share represents the difference between net tangible book value and
the amount paid per share of Common Stock by investors in the Offering.
After giving effect to the issuance and sale of 1,275,000 shares of
Common Stock and 1,275,000 Warrants in the Offering, the pro forma net tangible
book value of the Company as of September 30, 1997 attributable to holders of
Common Stock would have been approximately $3,616,000 or $1.73 per common share.
This represents an increase in net tangible book value per common share of $2.70
to the Company's existing stockholders and an immediate dilution of $2.52 per
common share (or 59% of the public offering price) to new stockholders
purchasing shares of Common Stock in the Offering. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial Public offering price per share........................... $ 4.25
Net tangible book value per share at September 30, 1997........... $ (.97)
Increase attributable to new investors in the Offering............ 2.70
----------
Pro forma net tangible book value per share
after the Offering.......................................... 1.73
----------
Dilution per share to new investors............................... $ 2.52
==========
</TABLE>
The information in the following table summarizes, through September 30,
1997, (i) the number and percentages of shares of Common Stock purchased from
the Company, (ii) the amount and percentage of consideration paid and (iii) the
average price per share paid to the Company, by existing stockholders and by new
investors pursuant to the Offering:
<TABLE>
<CAPTION>
Average
Price Per
Shares Purchased Total Consideration Paid Share
-------------------- ------------------------ ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 810,890 39% $ 626,558 $ .77
10.4%
New investors...................... 1,275,000 61% 5,418,750 89.6% $ 4.25
--------- ----- ---------- ------ -----------
2,085,890 100.0% $6,045,308 100.0%
</TABLE>
The information in the foregoing table does not give effect to (i) 38,887
shares reserved for issuance upon exercise of outstanding options at an exercise
price of $2.53 per share, (ii) 24,303 shares reserved for issuance upon exercise
of outstanding options at an exercise price of $3.55 per share, (iii) 1,275,000
shares to be reserved for issuance upon exercise of the Warrants (including the
Warrants to be issued upon automatic conversion of the Bridge Warrants at the
date of the Prospectus), (iv) 585,000 shares, reserved for issuance upon
exercise of the Over-Allotment Option and the Warrants included therein, (v)
255,000 shares reserved for issuance pursuant to the Underwriters' Warrants and
the Warrants included therein, (vi) 56,607 shares reserved for issuance upon
exercise of outstanding options at an exercise price of $0.76 per share, (vii)
47,346 shares reserved for issuance upon exercise of outstanding options at an
exercise price of $0.84 per share, (viii) 4,861 shares reserved for issuance
upon the exercise of outstanding options at an exercise price of $2.53 per
share, (ix) 1,150,000 shares reserved for issuance upon exercise of outstanding
options at an exercise price of $4.25 per share, (x) an aggregate of 462 shares
reserved for issuance upon exercise of outstanding options at an exercise price
of $1.27 per share, (xi) an aggregate of 87,678 shares issuable upon exercise of
two warrants issued to Gerard Cappello and Linda S. Cappello, with an adjusted
exercise price of $0.63 per share; and (xii) up to 1,320,674 shares issuable
upon conversion of the Series A Preferred Stock. See "Description of Securities
- -- Series A Preferred Stock."
-20-
<PAGE>
SELLING SECURITYHOLDERS
The following table identifies the Selling Securityholders on behalf of
whom the Company is offering the Warrants, the number of Warrants owned by such
persons and their percentage Warrant ownership. None of the Selling
Securityholders holds or has held during the past three years, any position,
office or any material relationship with the Company, its affiliates or
predecessors, other than as investors in the Company's Bridge Financing
described herein. See "Use of Proceeds."
<TABLE>
<CAPTION>
Percentage of
Warrants Before the Percentage
Selling Securityholders No. of Warrants Offering After Offering
----------------------- ---------------- -------------------- ---------------
<S> <C> <C> <C>
a. Leonard Tarr................................. 100,000 7.84% 0%
b. Gilda Shapiro................................ 200,000 15.69% 0%
c. Robert L. Dubofsky........................... 50,000 3.92% 0%
d. Richard S. Gershman.......................... 25,000 1.96% 0%
e. Anthony Recchia.............................. 50,000 3.92% 0%
f. Milton and Lila Leblang Trust(1)............. 200,000 15.69% 0%
g. Phyllis H. Kramer............................ 100,000 7.84% 0%
h. Lawrence E. Putterman........................ 50,000 3.92% 0%
i.. Mark Henkin.................................. 400,000 31.37% 0%
j. Martin Rosenman.............................. 100,000 7.84% 0%
1,275,000 100.00% 0%
</TABLE>
- -----------------
(1) Mr. Koffler's wife and certain in-laws are beneficiaries of this trust and
the trustee of the trust is Mr. Koffler's sister-in-law.
-21-
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following are, under currently applicable law, the material United
States federal income tax considerations applicable to the purchase of the
Common Stock and Warrants. The tax treatment described herein may vary depending
upon each stockholder's particular circumstances and tax position. Certain
stockholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations, persons who are not
citizens or residents of the United States, and stockholders who do not acquire
their shares as capital assets may be subject to special rules not discussed
below. No ruling from the Internal Revenue Service ("IRS") will be applied for
with respect to the federal income tax consequences discussed herein and,
accordingly, there can be no assurance that the IRS will agree with the
conclusions stated herein. The discussion below is based upon the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and such
authorities may be repealed, revoked or modified, possibly on a retroactive
basis, so as to result in United States federal income tax consequences
different from those discussed below. In addition, this discussion does not
consider the effect of any applicable foreign, state, local or other tax laws.
Each purchaser of a share of Common Stock and/or Warrant should consult his or
her own tax advisor as to the particular tax consequences to him or her of the
investment, including the applicability and effect of any foreign, state, local
or other tax laws, any recent changes in applicable tax laws and any proposed
legislation.
Under present law, the Company will not recognize any gain or loss for
federal income tax purposes upon the issuance of the Common Stock or the
issuance, exercise or expiration of the Warrants. For federal income tax
purposes, the purchase of the Common Stock and the purchase, exercise or
expiration of the Warrants will involve the following tax consequences to a
holder thereof:
1. The exercise of a Warrant will not give rise to taxable gain or loss
to the holder of such Warrant. However, the holder of a Warrant or of Common
Stock (including Common Stock acquired upon the exercise of a Warrant) generally
will recognize gain or loss on the sale or disposition of such Warrant or Common
Stock equal to the difference between the amount realized from such sale or
other disposition and the adjusted tax basis for such Warrant or Common Stock.
This gain or loss generally will be capital gain or loss, and will be long-term,
mid-term, or short-term capital gain or loss depending upon the applicable
holding period that is satisfied.
2. If a Warrant if not exercised and is allowed to expire, the Warrant
will be deemed to have been sold or exchanged on the expiration date. Any loss
to the holder of a Warrant will be capital loss if the Warrant was held as a
capital asset and if the Common Stock underlying the Warrant would have been a
capital asset had such Warrant been exercised. The classification of the loss as
long-term, mid-term or short-term will depend upon the date the Warrant was
acquired and the length of time the Warrant was held.
3. A Purchaser's adjusted tax basis of the Common Stock acquired upon
exercise of a Warrant will include both the tax basis of the Warrant and the
exercise price thereof. With respect to the Warrants and Common Stock acquired
in the Offering, the holding period will begin on the day after the Warrants and
Common Stock are acquired. With respect to any Common Stock acquired upon
exercise of a Warrant, the holding period will begin on the date such Warrant is
exercised.
-22-
<PAGE>
4. Common Stock issued in the Offering may be "qualified small business
stock" eligible for certain special tax benefits under the Code. Under the
Revenue Reconciliation Act of 1993, an exclusion from gross income is allowed to
certain taxpayers of 50% of any gain from the sale of qualified small business
stock held for at least five years and acquired in an original issue. A number
of conditions apply in determining whether stock is eligible for the 50%
exclusion. The Taxpayer Relief Act of 1997 added to the Code a special rollover
provision whereby gain from the sale of qualified small business stock held for
more than six months may be deferred at election of the taxpayer if other
qualified small business stock is purchased during a sixty day period beginning
on the date of sale, if the cost of the replacement stock exceeds the amount
realized on the prior sale. Accordingly, a taxpayer who holds stock acquired in
the offering for more than six months and recognizes a gain on the disposition
of such stock may be able to defer such recognition indefinitely, and a taxpayer
may be able to defer the recognition of gain from the sale of other qualified
small business stock held for more than six months by purchasing stock in the
Offering.
ALTHOUGH THE FOREGOING ARE THE MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS GENERALLY APPLICABLE TO AN INVESTMENT IN THE COMMON STOCK AND
WARRANTS, THE FOREGOING DISCUSSION DOES NOT ADDRESS EVERY FEDERAL INCOME TAX
CONCERN WHICH MAY BE APPLICABLE TO A PARTICULAR STOCKHOLDER. EACH STOCKHOLDER IS
URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE TAX
CONSEQUENCES TO SUCH STOCKHOLDER, IN THE LIGHT OF HIS OR HER PARTICULAR
CIRCUMSTANCES.
-23-
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of June 30, 1997 and for the years ended
June 30, 1997 and 1996 have been derived from the Company's consolidated
financial statements which have been audited by BDO Seidman LLP, independent
certified public accountants. The selected financial data as of September 30,
1997 and for the three month periods ended September 30, 1997 and 1996 have been
derived from the Company's unaudited consolidated financial statements and, in
the opinion of the Company, reflect and include all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of the Company for such periods.
Such interim results, however, are not necessarily indicative of the Company's
results for a full year. The selected financial data should be read in
conjunction with, and are qualified in their entirety by, the consolidated
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
Operating Statement Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
June 30, September 30,
-------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue................................................ $5,608 $ 2,824 $2,157 $1,123
Gross profit........................................... 2,104 1,196 849 487
Operating expenses..................................... 2,243 1,308 812 528
(Loss) income from operations.......................... (139) (113) 37 (41)
Net loss............................................... (288) (200) (30) (89)
Net loss per common share.............................. (.33) (.23) (.03) (.10)
Weighted average number of common
shares outstanding................................. 863 863 863 863
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At June 30, 1997 At September 30, 1997
---------------- ---------------------
(In thousands)
<S> <C> <C>
Working capital (deficiency)........................... $ (426) $ (599)
Total assets........................................... 4,553 4,523
Total debt............................................. 3,289 3,222
Stockholder's equity................................... 621 591
</TABLE>
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. The following discussion and analysis should be
read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto appearing elsewhere in this Prospectus.
General
The Company provides for-profit child care through 22 child care
centers located in Florida, Georgia and North Carolina. The Company's revenues
consist principally of tuition funded directly by parents and revenues generated
from federal food and/or child care assistance programs. Substantially all
tuition funded directly by parents is paid on a weekly basis in advance of the
Company providing the corresponding child care services.
The Company was formed in November 1997 in anticipation of the
Reorganization. See "Reorganization." Prior to the Reorganization the Company
merged with Phoenix Preschool Holdings, Inc., a Delaware corporation, with the
Company surviving the merger. Phoenix Preschool Education Centers, Inc. was
formed in 1995 under the laws of the State of Delaware with a goal to grow
through acquisition and internal growth to become a premier for-profit provider
of preschool services in the United States. In 1995, eight (8) facilities
located in three cities in Florida were acquired, followed by an acquisition of
eight (8) additional facilities in North Carolina in 1996, and an additional six
(6) facilities to date in 1997.
The Company seeks to achieve continued growth primarily by increasing
revenue at existing child care centers (primarily through increased enrollment
and to a lesser extent through increased rates) and by increasing the number of
centers through acquisitions of existing centers. Over the past fiscal year,
revenue from existing centers has increased as a result of slightly higher
tuition rates and improved operations which have increased center utilization
rates. Center acquisitions are typically asset purchases ranging in cost from
$100,000 to $200,000 per center. These acquisitions are financed through various
combinations of cash and debt financing.
In connection with its expansion plans, the Company has begun to
develop the required corporate infrastructure. This development has involved the
incurrence of substantial one-time and continuing expenses, without the
immediate realization of offsetting income. The Company's rapid expansion
significantly affects the comparability of results of operations from period to
period, in part because costs are typically higher as a result of pre-opening
marketing activities, promotions and general inefficiencies related to the
start-up and assimilation of new centers.
-25-
<PAGE>
Results of Operations and Financial Condition for the Three-Month Period Year
Ended September 30, 1997 Compared to the Three-Month Period Ended September 30,
1996
The following table sets forth, for the periods indicated, certain data
from the Company's Statement of Operations.
<TABLE>
<CAPTION>
Three Month Period Ended September 30,
---------------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenue.............................................. $2,157,081 $1,122,932
Direct Costs......................................... 1,308,181 636,130
Operating Expenses................................... 812,233 527,649
Interest Expense..................................... 66,752 48,805
Net Loss............................................. (29,763) (88,960)
</TABLE>
Revenues increased by $1.03 million during the three months ended
September 30, 1997 when compared to the corresponding period in the prior year.
Of such increase, approximately $600,000 was attributable to six new centers
opened in the 1997 fiscal year and approximately $434,000 was attributable to
increased revenues in existing centers. Of the increase in direct costs of
approximately $672,000 in the comparative periods, approximately $349,000 was
attributable to new operations and approximately $323,000 was attributable to
existing operations. Of the increase experienced in operating expenses of
approximately $284,000 for the three months ended September 30, 1997,
approximately $207,000 was attributable to the six new centers and approximately
$77,000 was attributable to existing sites. Operating expenses, as a percentage
of revenue for the three months ended September 30, 1996 was 47% compared to
37.7% in 1997.
The percentage decrease related to the fixed nature of certain
operating expenses was due to a substantial growth in revenue. Higher interest
expense was incurred in conjunction with additional financing of centers
acquired subsequent to September 30, 1996. The reduction in the incurred loss is
directly attributable to the above factors.
Results of Operations and Financial Condition for the Year Ended June 30, 1997
Compared to Year Ended June 30, 1996
The following table sets forth, for the years indicated, certain data
derived from the Company's Consolidated Statement of Operations.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue.............................................. $ 5,608,092 $ 2,824,168
Direct Costs......................................... 3,504,466 1,628,635
Operating Expenses................................... 2,242,535 1,308,483
Interest Expense..................................... 150,113 89,464
Net Loss............................................. (287,767) (199,703)
</TABLE>
Revenue increased $2.8 million, or 100%, to $5.6 million for the year
ended June 30, 1997 from $2.8 million for the year ended June 30, 1997. Of such
increase, approximately $1.6 million was attributable to revenue generated by
the eleven new centers acquired in the 1997 fiscal year and $1.2 million was
attributable to increased revenue from existing centers, including centers that
were acquired during the year ended June 30, 1996.
-26-
<PAGE>
Direct costs consist primarily of preschool center compensation costs.
Direct costs increased $1.9 million, or 119%, to $3.5 million for the year ended
June 30, 1997 from $1.6 million for the year ended June 30, 1996. Of the $1.9
million increase in direct costs, approximately $978,000 was attributable to the
eleven new centers acquired during fiscal 1997 and approximately $902,000 was
attributable to existing centers, including centers that were acquired during
the year ended June 30, 1996. Direct costs, as a percentage of revenue, were
62.5% for the year ended June 30, 1997 as compared to 57.7% for the year ended
June 30, 1996.
Operating expenses increased $934,000, or 71%, to $2.2 million for the
year ended June 30, 1997 from $1.3 million for the year ended June 30, 1996. The
increase in operating expenses was primarily due to an increase in general and
administrative expenses as a result of the acquisition of eleven new centers.
Operating expenses, as a percentage of revenue was 40.5% for the year ended June
30, 1997 as compared to 46.3% for the year ended June 30, 1996. The percentage
decrease experienced resulted from the fixed nature of certain operating
expenses, while there was a substantial growth in revenue. Based upon the
Company's current growth strategy, it is anticipated that operating expenses
will continue to increase in the future as the Company acquires additional
centers but will decrease as a percentage of revenue.
Interest expense increased $61,000, or 68%, to $150,000 for the year
ended June 30, 1997 from $89,000 for the year ended June 30, 1996. The increase
in interest expense was the result of additional financing of centers acquired
during fiscal 1997.
The Company had a net loss of $288,000 for the year ended June 30,
1997, as compared to a loss of $200,000 for the year ended June 30, 1996. This
represents a loss per share of $0.33 for the year ended June 30, 1997 based upon
weighted average common shares outstanding of 862,811.
Liquidity and Capital Resources
The Company's primary cash requirements are operating expenses, new
center expansion (through new leases and acquisitions), maintenance of existing
centers and the scheduled repayment of debt and interest thereon. These
requirements are generally satisfied out of operating cash flows and borrowings.
While the Company believes that cash flow from operations and proceeds of the
Offering will be sufficient to satisfy the Company's anticipated cash
requirements on a short-term basis (i.e., up to approximately one year), to the
extent that the Company makes acquisitions, the Company's working capital
requirements may increase significantly. No assurance can be given that
additional financing will be available or that, if available, it can be obtained
on terms favorable to the Company.
During the three month period ended September 30, 1997, approximately
$81,000 was used to make capital improvements to existing and recently acquired
centers. Net cash provided by operations was approximately $256,000 during the
three month period ended September 30, 1997 compared to approximately $20,000
during the comparative period ended September 30, 1996. Net cash used in
investment activities totaled approximately $188,000 for the period ended
September 30, 1997 as compared to $280,000 used in the period ended September
30, 1996. Interest paid for the period ended September 30, 1997 was
approximately $61,000 as compared to approximately $49,000 in the three-month
period ended September 30, 1996.
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During the fiscal year 1996, available cash was principally used to add
three new centers and to make capital improvements to existing centers. Net cash
(used in) provided by operations was approximately $(58,000) during fiscal 1996
and approximately $585,000 during fiscal 1997. The Company also, from time to
time, borrowed from its officers to fund acquisitions. See "Certain
Relationships and Related Transactions." The Company has no established line of
credit with a bank. The financial impact of acquired centers will vary with the
economic impact and size of each transaction. The Company's estimated total cash
requirements for center expansion and ongoing maintenance of existing centers
should approximate $390,000 in fiscal 1997. An acquisition of a larger
multi-unit operator could increase these cash requirements. See "Use of
Proceeds."
During fiscal 1997, the Company acquired eleven (11) new centers. The
costs for the Company's acquisitions vary considerably depending, in part, upon
the profitability and maturity of the centers to be acquired, as well as their
size and number. The Company has historically targeted an acquisition price
ranging from $100,000 to $200,000 per center and provides for cash down payments
ranging from 25% to 30% of the acquisition price. On occasion, the Company has
been required to invest additional amounts of $10,000 to $35,000 improve certain
acquired centers up to the Company's standards.
Cash provided by operating activities amounted to approximately
$585,000 for the fiscal year 1997. The major components of this increase were
non-cash charges for depreciation and amortization of $447,980. Cash used in
investing activities amounted to approximately $1,106,000 for the year ended
June 30, 1997, which includes acquisitions of property and equipment of $315,000
and cash paid for assets of acquired businesses of $659,000. Cash provided by
financing activities was approximately $523,000 for the year ended June 30,
1997. Funds of $303,000 were provided by officer/stockholder loans offset by
repayments of other borrowings totaling approximately $312,000.
In June 1997, the Company sold an aggregate of 25.5 units in a private
placement, each unit consisting of the Company's 8% promissory note (the "Bridge
Notes") in the principal amount of $25,000 per unit and a warrant to acquire up
to 50,000 shares of Common Stock. The net proceeds of the Bridge Financing were
approximately $555,000 and were used primarily to repay stockholder loans used
to finance preschool center acquisitions subsequent to March 31, 1997. The
Bridge Notes are payable upon the earlier of October 9, 1998 or the consummation
of an initial public offering ("IPO") or private placement of the Company's debt
and/or equity securities resulting in gross proceeds to the Company of at least
$5,000,000.
Plan of Operation
Over the next six fiscal quarters, the Company intends to attempt to
locate, and attempt to acquire additional preschool operations. The acquisitions
could involve up to 40 to 50 sites. This would likely result in up to 400
additional employees, and the establishment of three to four additional
geographical regional operating divisions (some of which may be located in new
markets while others may be in the Company's existing markets). The Company
plans to continue efforts to upgrade its marketing capabilities and information
management system as needed. There is no assurance that the Company's efforts in
these endeavors will be successful. See "Risk Factors" -- Ability to Implement
Growth Strategy" and "Business--Growth Strategy."
Seasonality
Due to a seasonal reduction in enrollment during the summer months
which occurs throughout the child care industry, the Company historically has
experienced a decrease in tuition revenues during the first quarter (July 1
through September 30). The Company expects to continue to experience such a
decrease in tuition revenues during the first quarter of each fiscal year. As a
result, the Company's annual earnings have been and will continue to be heavily
dependent on the results of operations during the second, third and fourth
quarters of each year. See "Risk Factors -- Seasonality and Quarterly
Fluctuations."
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Effect of Inflation
The impact of general inflation on the Company's business has been
insignificant to date.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than is
currently used in Accounting Principle Board Opinion 15. SFAS 128 provides for
the calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to existing fully diluted earnings
per share. The Company believes adopting SFAS 128 will not have a material
effect on its calculation of earnings per share. The Company will adopt the
provisions for computing earnings per share set forth in SFAS 128 for its
quarter ending December 31, 1997.
Statement of Financial Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosing information about an entity's
capital structure. SFAS 129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stocks, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
In October 1995, the Financial Accounting Standards Board issued
statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995. During fiscal year 1997, the
Company adopted only the disclosure provisions of SFAS 123 and accounted for
stock-based compensation using the intrinsic value method set forth in
Accounting Principle Board Opinion 25.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
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SFAS No 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS No. 130 and No. 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
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BUSINESS
Overview
The Company provides for-profit child care through 22 child care
centers located in Florida, Georgia and North Carolina. Center-based child care
and preschool educational services are provided five days a week throughout the
year to children between the ages of six weeks and 12 years. As of November 17,
1997 the Company had approximately 2,529 children enrolled in its centers, which
had a licensed capacity of 3,028 (full and part-time) nationwide. All of the
Company's child care centers are operated under the "Phoenix Preschool Education
Centers, Inc." name. The Company's centers are primarily located on
free-standing sites in suburban residential areas and/or near military
installations, each with substantial preschool populations.
The Company's strategy is to offer an independently developed
educational curriculum within a stimulating environment in order to provide high
quality child care and to maximize development and preparation of children for
school. The Company places emphasis on the recruitment, selection and ongoing
training of its child care center directors. Within a framework of centralized
financial and quality controls, the Company grants significant authority over
center operations to its center directors and rewards directors on an incentive
basis tied to individual center performance.
The Company has pursued a growth strategy that has focused on the
acquisition of existing facilities. In 1995, the Company acquired eight units of
a Florida entity in bankruptcy under Bankruptcy Court authority and installed a
new management team with experience in the fields of child care and education.
This new senior management team initiated a series of changes intended to attain
profitability, including the recruitment and training of new managers,
acquisition of additional facilities, the implementation of centralized
financial and quality controls and the introduction of revitalized marketing
programs designed to increase each center's enrollment.
The Company has developed a comprehensive education-based child care
program for its centers that is designed to respond to the increasing demand for
center-based care. Each Phoenix Preschool center utilizes an age-appropriate,
education-based curriculum designed to promote each child's intellectual,
social, physical and emotional growth. In addition to the traditional areas of
language arts, mathematics, science and creative arts, the Phoenix Preschool
curriculum includes an incipient preschool computer science program and a
foreign language program.
Phoenix Preschool centers incorporate a number of features designed to
promote child safety and to support the Phoenix Preschool curriculum. In
addition to interactive learning aids and toys, several centers include swimming
pools. The Phoenix Preschool program also emphasizes continuous communication
between teachers and parents concerning each child's development. The Company
believes this communication is critical to maintaining the highest level of
parental confidence and satisfaction.
The Company has developed a set of systems and methodologies with
respect to its operating, accounting and quality control procedures that it
believes enables it to maintain uniform quality standards. These systems and
methodologies, which have been compiled in a series of manuals that are
periodically revised and updated, were developed by the Company's management
based upon its experience in the child care industry.
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Key to the operations of the Company is the implementation of a
recently licensed data processing system. The Company has contracted for
software and technical support from Solomon, Inc. This system keeps account of
the tuition, accounts receivable, accounts payable and will utilize a
telecommunication routing system for information and e-mail between preschool
sites and the home office. Additionally, a pilot program is in process to test
the viability of utilizing computers in teaching children. The Company is
testing Apple Macintosh machines to gauge market responsiveness, and is testing
IBM-compatible personal computers in one of its North Carolina centers.
The Company maintains a growth strategy to expand its business by
acquiring additional existing child care centers. The Company believes that its
ability to grow through the acquisition of existing child care centers affords
it the flexibility to sustain its controlled growth strategy in various
geographic markets. Upon formation in 1995, the Company acquired eight centers
from an entity in bankruptcy and installed a new management team with experience
in the fields of child care and education. The Company then added eight centers
through various acquisitions during 1996 and an additional six centers to date
in 1997. See "Business--Growth Strategy."
Industry Overview
According to Childcare Information Exchange (1996), the child care
industry is currently a $26 billion annual industry. The Company believes that
the market for center-based child care will continue to grow rapidly. The
Company believes that the following factors will contribute to increased demand
for high quality child care include: a growing number of women in the work force
with small children, single-parent homes, a shift in parental preference toward
the more structured and education-based environment provided by center-based
child care, as well as the effects of nationwide welfare reform, which
encourages mothers to enter the workforce.
The child care industry in the United States is experiencing steady
growth in demand driven by demographic and market changes. The percentage of
mothers in the work force with children under age six has increased from
approximately 39% in 1975 to approximately 58% in 1990 and reached approximately
67% at the end of 1996. In addition, the child care industry is highly
fragmented, with over 57,000 licensed sites in the United States, approximately
2,800 of which are owned by the five largest national child care providers. The
Company believes that many child care centers are managed by individuals who
lack the systems, financial sophistication and professional management skills to
operate their centers profitably in an increasingly regulated industry. The
Company believes that the industry will experience consolidation as these
factors, coupled with increasing competition from large, well capitalized and
better known providers, combine to create a more difficult operating environment
for smaller child care providers.
According to Childcare Information Exchange (Insider's Report #3,
1996), as of 1996, there were approximately 100,000 commercial, nonprofit and
"in-home" day-care facilities in the United States. See "Risk Factors --
Competition."
The child care industry is highly fragmented, with national child care
providers holding less than five percent of the industry's licensed capacity and
the 50 largest providers accounting for less than 10% of licensed capacity.
Substantially all of the industry's licensed centers are owned by single center
and other small providers. Among the multi-unit operators, most own fewer than
five centers. Although there are a number of regional multi-unit operators,
there are only a few national providers operating more than 50 centers. Among
the many child care providers, there is a wide range of educational quality. The
Company believes that parents are becoming increasingly aware of this disparity
in quality, resulting in a greater demand for the services of higher quality
providers. At the same time, in home, single center and other small providers
are facing increased state regulation and difficulty in obtaining insurance. The
Company believes that many child care centers are managed by individuals who
lack the systems, financial sophistication and professional management to
operate their centers profitably in this increasingly regulated industry.
Consequently, the Company believes that the industry will experience
consolidation as these factors, coupled with increasing competition from large,
well capitalized and better known providers, combine to create a more difficult
operating environment for smaller child care providers.
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Growth Strategy
The Company's strategy is to (i) acquire new high quality centers in
convenient areas which meet its specific demographic requirements; (ii) maintain
and enhance profitability through a program of financial planning, budgeting and
cost control; (iii) continue to invest in its centers to maintain and improve
quality; (iv) emphasize its sales and marketing programs aimed at increasing new
enrollments and promoting customer loyalty; (v) offer programs to better utilize
its centers on a year-round basis; and (vi) continue to improve the quality of
its staff through recruitment, training and incentive programs.
The success of new centers will depend on various factors, including
the availability of suitable centers, the negotiation of acceptable terms,
permitting and regulatory compliance, the ability to meet schedules, the ability
of the Company to manage this expansion, the hiring of additional personnel, and
general economic and business conditions. There can be no assurance that the
Company will be able to achieve these goals or that the Company's strategy will
result in improved earnings. See "Risk Factors -- Availability of Suitable
Locations" and "--Ability to Implement Growth Strategy."
The Company added three (3) additional centers in fiscal 1996, and in
fiscal 1997, the Company added eleven (11) centers. The Company seeks to add
units in its existing markets in order to increase market concentration and to
leverage administrative and advertising expenses. Entry into new markets is also
considered, but only if these regional markets can eventually support a minimum
of eight centers.
The following is a summary of the material terms of the Company's
acquisitions. For further information, see Note 6 to the Consolidated Financial
Statements included in this Prospectus.
In June 1995, the Company acquired the assets of Phoenix Preschool
Education Centers, Inc. (primarily the fixed assets and supplies of eight
existing Florida preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $1,000,000, which was financed
by a $250,000 cash deposit and a $750,000 five year note payable with interest
at 9% per annum.
In January 1996, the Company acquired the assets of Pollack
Enterprises, Inc. (primarily the fixed assets and supplies of three existing
North Carolina preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $875,000, which was financed by
a $215,000 cash deposit and a $660,000 ten year note payable with interest at 9%
per annum.
In July 1996, the Company acquired the assets of Coastal Kiddie
College, Inc. (primarily the fixed assets and supplies of three existing North
Carolina preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $365,000, which was allocated
among the fair market value of the current assets, property and equipment, and
intangible assets acquired. The purchase was financed by a $115,000 cash deposit
and a $250,000 eight year note payable with interest at 8% per annum.
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In September 1996, the Company acquired the assets of Libbus, Inc.
(primarily the fixed assets and supplies of two existing North Carolina
preschool centers) in a business combination accounted for as a purchase. The
total cost of the acquisition was $300,000, which was allocated among the fair
market value of the current assets, property and equipment, and intangible
assets acquired. The purchase was financed by a $110,000 cash deposit and a
$190,000 ten year note payable with interest at 8% per annum.
In April 1997, the Company acquired the assets of Brighter Day Care
Center, Inc. (primarily the fixed assets and supplies of an existing preschool
center) in a business combination accounted for as a purchase. The total cost of
the acquisition was $130,000, which was allocated among the fair market value of
the current assets, property and equipment, and intangible assets acquired. The
purchase was financed by a $44,000 cash payment and an $86,000 ten-year note
payable with interest at 8% per annum.
In May 1997, the Company acquired the assets of Gingham Goose School,
Inc. (primarily the fixed assets and supplies of an existing preschool center)
in a business combination accounted for as a purchase. The total cost of the
acquisition was $100,000, which was allocated among the fair market value of the
current assets, property and equipment and intangible assets acquired. The
purchase price was financed by a $25,000 cash payment and a $75,000 ten-year
note payable with interest at 8% per annum.
In May 1997, the Company acquired the assets of Reelsboro Christian Day
Care, Inc. (primarily the fixed assets and supplies of an existing preschool
center) in a business combination accounted for as a purchase. The total cost of
the acquisition was $60,000, which was allocated among the fair market value of
the current assets, property and equipment and intangible assets acquired. The
purchase price was financed by a $15,000 cash payment and a $45,000 ten-year
note payable with interest at 7.5% per annum.
In May 1997, the Company acquired the assets of TLC Recreation Center,
Inc. (primarily the fixed assets and supplies of an existing preschool center)
in a business combination accounted for as a purchase. The total cost of the
acquisition was $815,000, which was allocated among the fair market value of the
current assets, property and equipment and intangible assets acquired. The
purchase was financed by a $300,000 cash payment and a $515,000 eight-year note
payable with interest at 8% per annum.
In June 1997, the Company acquired the assets of Humpty Dumpty Play
School, Inc. (primarily the fixed assets and supplies of two existing pre-school
centers) in a business combination accounted for as a purchase. The total cost
of the acquisition was $180,000, which was allocated among the fair market value
of the current assets, property and equipment and intangible assets acquired.
The purchase was financed by a $50,000 cash payment and a $130,000 eight-year
note payable with interest at 8.5% per annum.
In choosing locations for new centers, the Company considers a number
of factors, emphasizing suburban neighborhoods with growing populations of young
families. Management looks for sites in proximity to newly developed or
developing residential areas on heavily traveled local streets. The Company
performs a detailed analysis of the demographics of the area surrounding the
proposed site and focuses on several site selection criteria: an above-average
concentration in the percentage of children under age six; a minimum population
density of 20,000 people within a ten-mile radius surrounding a proposed site;
and an average household income in excess of $35,000. The Company also analyzes
the percentage of the population consisting of college-educated, dual income
families, as well as the average home value in the target area. The Company
believes that parents in more affluent areas are more willing to pay a premium
for higher quality child care services.
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In addition to acquiring centers in residential areas, the Company is
also actively pursuing contracts with employers and office complex managers to
operate centers in at-work locations. One currently owned site, in Morrisville,
North Carolina, is located in the Research Triangle Park area. Historically,
public agencies and hospitals have been the principal employers providing or
otherwise arranging for child care services for their employees. A number of
private sector employers have begun to offer this benefit, as they recognize
that reduction of employee absenteeism due to a lack of reliable and available
child care can significantly offset the cost to employers in offering such
benefits. The Company expects to capitalize on this trend by actively pursuing
contracts with employers, as well as selectively acquiring existing at-work
centers.
The Company's acquisition activity is generally limited to child care
centers in market areas showing growth potential and to sites which the Company
believes it can conform to its standard facility and educational format.
Historically, the Company has targeted its acquisition activities on less
profitable centers which meet its demographic criteria. After consummation of
the Offering, the Company will be able to focus its acquisition program toward
more profitable centers and larger multi-unit operations in addition to its
historical targets. The Company believes that it can continue to acquire centers
on terms which compare favorably with the costs and risks of establishing new
facilities. Management is continually reviewing possible acquisition candidates,
although there can be no assurance that the Company will be able to continue
acquiring acceptable centers. The Company, from time to time, reviews the
possible acquisition of multi-unit child care operations consisting of more than
five centers. There can be no assurance that an acquisition of this size will be
consummated.
Phoenix Preschool Centers
Safety
The Company's primary concern is the care and safety of children
enrolled at its centers. Precautions are taken at each Phoenix Preschool center
to insure the safety and well-being of all Phoenix Preschool students. In most
centers, the Center Director's office is located adjacent to the entrance-way of
the center which enables the Center Director to monitor any individuals who
enter or leave the building. Additional safety precautions vary from center to
center depending on factors such as the center's floor plan, surrounding area
and size, and may include photo identification badges, parent sign-in logs,
video camera monitors, door alarms and system-wide criminal background checks on
center personnel. It is the Company's policy, upon the occurrence of any
allegations of child abuse, to report such allegations to the appropriate
authorities, to investigate all such allegations and, if appropriate, suspend
any accused employee pending resolution of the incident. The Company's
procedures are designed to prevent child abuse and, historically, the Company
believes it has been successful in its efforts to prevent any such abuse. No
assurances can be made that allegations of abuse will not occur in the future.
Locations
The following table shows the locations by state of the Company centers
which were open and operating as of September 30, 1997.
Open and
State Operating
- ------------------------------------------- -----------
Florida.................................... 10
Georgia.................................... 3
North Carolina............................. 9
--------
Total............................. 22
--------
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Addresses for the Company's centers are as follows:
2623 W. Michigan Avenue, Pensacola, FL 32526
2406 Langley Avenue, Pensacola, FL 32504
7525 West Fairfield Drive, Pensacola, FL 32506
1338 Florida Avenue, Panama City, FL 32401
3905 West Highway 390, Panama City, FL 32405
5705 Hickory Street, Panama City, FL 32404
967 Raymond Diehl Road, Tallahassee, FL 32308
2881 E. Park Avenue, Tallahassee, FL 32301
1883 Granada Street, Navarre, FL 32566
502 Schneider Drive, Ft. Walton Beach, FL 32547
P.O. Box 828/469 Lakes Boulevard, Lake Park, GA 31636
104 Kelly Drive, Valdosta, GA 31636
3737 Perimeter Road, Valdosta, GA 31602
270 Highway 70 West, Havelock, NC 28532
204 N. Shepard Street, Havelock, NC 28532
204 N. 18th Street, Morehead City, NC 28557
6458 Highway 55 E, New Bern, NC 28560
928 Henderson Drive, Jacksonville, NC 28540
312 Brynn Marr Road, Jacksonville, NC 28540
783 West Corbett Avenue, Swansboro, NC 28584
580 E. Chatham Street, Cary, NC 27511
4823 Hopson Road, Morrisville, NC 27560
As of September 30, 1997, the Company owned 22 centers, all of which
are operated at leased sites. The leases have initial terms ranging from five to
10 years, often with renewal options. The leases typically require the Company
to pay utilities, maintenance, insurance and property taxes.
The leases have terms (including renewal options) expiring as follows:
Number of
Fiscal Year Leases Expiring
- ---------------------------------------------------- -----------------
2000-2003........................................... 1
2004 and later...................................... 21
A typical Phoenix Preschool center is a one-story building of
approximately 6,000 square feet located on approximately one acre of land. Each
center accommodates between 60 to 314 children. Each center is equipped with a
variety of audio and visual aids, educational toys, games, puzzles and supplies
and has an adjacent playground, many of such playgrounds are divided into
separate areas for different age groups with age-appropriate equipment and toys.
In addition, several centers have swimming pools.
The various classrooms within a center are decorated with a variety of
colorful pictures, nursery rhyme depictions, seasonal pictures, maps, bilingual
calendars and color charts, and other age-appropriate materials designed to
stimulate the children's curiosity and to support the Phoenix Preschool
curriculum. Colorful educational carpets display themes appropriate for various
age groups such as the alphabet, numbers, time and educational board games.
Decorative wall hangings in each classroom correlate to the Phoenix Preschool
curriculum's monthly and weekly themes and provide other learning supplements.
See "Business -- Curriculum."
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Each center is open throughout the year, five days per week, from 6:30
a.m. to at least 6:00 p.m. Certain centers have extended hours depending on
local conditions such as the length of the typical commute of the parents. Each
center provides those children attending on a full-time basis with breakfast, a
hot lunch and two snacks, all of which are prepared on the center's premises and
meet state nutrition requirements.
Children may be enrolled on a full-time or part-time basis, with the
majority of children enrolled on a full-time basis. Tuition for the programs
varies depending on the location of the center, the age of the child and whether
the child attends on a full-time or part-time basis. Tuition is generally higher
for infants than it is for older children, due, in part, to the lower
child/staff member ratio required by most licensing authorities for the care of
infants. Tuition is proportionally higher for students attending on a part-time
basis. Tuition is typically paid on a weekly basis and must be paid in advance.
Tuition for full-time enrollment ranges from $70 to $95 per week.
Personnel
All Phoenix Preschool centers are managed by a Center Director and an
Assistant Director. Center Directors are required to have either a college
degree with concentrations in early childhood education or a college degree in
any discipline along with prior experience in the child care industry.
Requirements as to the specific qualifications of Center Directors are generally
mandated by state licensing authorities and vary from state to state. Each
center's initial Center Director also must successfully complete the Company's
own training program. The Company assists Center Directors with the training of
other center personnel. It is the Company's policy that all centers must comply
with, and in some cases exceed, states' recommendations and guidelines
pertaining to teacher-to-child ratios. These ratios vary from state to state and
depend upon the age group of children under supervision. In general, a Phoenix
Preschool center employs one teacher or assistant for every four to five infants
under 12 months, one teacher or assistant for every four to eight toddlers
between 12 and 23 months, one teacher or assistant for every six to seven
two-year-olds, one teacher or assistant for every 10 three-years-olds, one
teacher or assistant for every 10 to 15 children between four and five years of
age and one teacher or assistant for every 15 to 20 children over age five. A
typical Phoenix Preschool Center employs one Center Director, one Assistant
Director, eight teachers, nine assistants and one additional staff member.
Curriculum
The Phoenix Preschool curriculum incorporates two basic principles of
learning: (i) preschool age children learn through direct experience by the use
of their own creative abilities to manipulate objects in an environment which
encourages curiosity and exploration, and (ii) teachers must emphasize verbal
skills in order to develop the child's ability to understand, recall and analyze
information conveyed to them. The Phoenix Preschool curriculum encourages
children to construct, move and interact and supplies teachers with the tools to
communicate information in a manner appropriate for various age groups. The
curriculum is supported by both the design and layout of each center and the
supplies and equipment available in each center. The Phoenix Preschool
curriculum emphasizes more structured academics during the traditional
school-year months (September through June) and recreation and socialization
through athletic activities and field trips during the summer months (July and
August). During the school year, monthly themes are established and divided into
specific weekly programs and daily projects, all of which directly relate to the
monthly theme. As children advance through Phoenix Preschool's curriculum, the
specific skills learned at each succeeding age build upon the foundation
established in the previous year or years.
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<PAGE>
Infant/Toddler Program
Phoenix Preschool's infant/toddler program is designed to enable the
teacher to work individually with each child to accommodate the child's
physical, cognitive and psychosocial stages of development. During the early
stages of development (six weeks - 12 months), the infant is provided with
objects that will enable him/her to begin development of fine motor skills. Once
such skills are mastered, the infant is given challenges to broaden his/her
cognitive development. The teacher communicates with parents to develop a daily
schedule, which are typically updated every two months, individualized for each
child in order to develop consistency for the child and to build a relationship
between the parent and the teacher.
The toddler program (12 months - 24 months) is designed to promote
intellectual, social, emotional and physical development by providing the
toddler with a stimulating environment which nurtures the child's curiosity and
motivates him/her to explore, experiment and problem solve.
Two-Year-Old Program
The two-year-old program is designed to meet the rapid overall growth
of the child. Early two-year-olds are encouraged to speak in sentences of three
or more words to develop language skills. Play is primarily sensory-motor (free
movement of large and small muscles). All activities in the two-year-old program
are designed for limited time allotments, which are appropriate for the child's
relatively short attention span, and the developmental needs of each child.
Three-Year-Old Program
The three-year-old program is designed to promote the child's
development of imagination and language. Three-year-olds are encouraged to speak
in sentences of six or more words, listen to short stories, identify colors and
shapes and to begin to recognize the letters of the alphabet.
Four-Year-Old Program
The four-year-old program focuses on the development of pre-reading
skills, such as recognition of the child's name in written form, improvement of
fine motor abilities and increase in verbal interaction through socio-dramatic
role play. Emphasis is placed on the individual child's readiness for school in
different areas of development.
Five-Year-Old Program
In the five-year-old program, activities enable the children to apply
concepts, thought processes, content and skills during planned learning
experiences. Emphasis is placed on recognition of upper and lower case letters,
printing of the child's own name, auditory sound discrimination of letters,
recognition of the child's home address and telephone number, recognition of
body parts and identification of the child's family members.
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<PAGE>
School-Age Program
Phoenix Preschool provides before and after school care for children
ages six through 12 with an emphasis on the provision of a safe and secure
learning environment. Centers are equipped to provide activities in the areas of
arts and crafts, science and discovery, dramatic play and constructive building.
During the school year, before and after school programming allows for groups of
children to socialize in an age-appropriate setting with staff members available
to assist children with daily school assignments. Children are given the
opportunity to choose from a wide variety of individual and/or group activities.
During the summer months, Phoenix Preschool implements its summer camp program.
While classes continue in areas such as language, science and math, less
emphasis is placed on academic learning in favor of a greater focus on
socialization, recreational and outdoor experiences.
Through regular parent surveys, the Company continually assesses the
quality of its educational curriculum. These surveys provide the Company with
feedback on parental satisfaction with their child's developmental growth and
with the Company's curriculum, Center Director, as well as the overall quality
of the center. Center Directors also conduct both formal and informal parent
interviews in order to ascertain parent satisfaction levels and address any
concerns. Information gained from these interviews is forwarded to the Company's
management for review so that all centers can benefit from such feedback. The
Company also endeavors to provide an exit-survey to parents who stop utilizing
the Company's services.
Financial Planning; Budgeting and Cost Control
The Company has implemented a program of financial planning and cost
control that seeks to maximize operational profit without sacrificing quality
child care. To work toward this goal the Company engages the Regional Director
and Center Director in the formulation and implementation of the budget for each
center. Under this budgeting process, budgets are initially developed at the
center level, with center directors taking an active role in developing and
submitting the budget for their respective centers through their regional
director and are then submitted to the Company's corporate management for
approval. Directors are then responsible for implementing the approved budget
and become primarily responsible for the financial performance of the center. In
order to encourage profitable performance, the Company has implemented a
financial incentive program for meeting or exceeding pre-approved budget goals.
Center Selection
The Company undertakes an extensive selection process for each
potential center. A market analysis is first conducted to ascertain the
desirability of a market for a center and to determine the location of suitable
areas within the market. The market is evaluated by researching demographic
data, such as population, age, household income, employment levels, growth and
the local economy. Several geographic areas may be identified within the market
under study.
Within each geographical area, supply and demand for child care is
evaluated through an analysis of the quantity and quality of existing child care
centers, the local schedule of fees, the demographic characteristics of each
area and the enrollment levels in existing competing centers. In addition, state
and local laws, including zoning requirements, development regulations and child
care licensing regulations are reviewed in order to determine the timing
requirements and the probability of receiving the necessary approvals to acquire
and operate a child care center.
Within each geographical area, several sites are typically analyzed.
Each potential site is evaluated against the Company's standards for location,
convenience, visibility, traffic, size, layout, affordable economic terms and
functionality. The Company attempts to locate centers in suitable free-standing
buildings.
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<PAGE>
Marketing
The Company believes that the quality of the Center Director and staff,
center location and consistent advertising and marketing are the key components
to a successful center. The Company relies heavily on recommendations from
current customers as a source of new enrollments. The Company's marketing
efforts, which are designed to build awareness of Phoenix Preschool centers,
consist of advertising and promotion of Phoenix Preschool centers. The Company's
marketing campaigns include a targeted direct-mail program, advertising
placement in regional newspapers, grand opening activities, yellow-page listings
and signage. In addition to traditional marketing methods, the Company also
employs a number of more personal marketing techniques. For example, Center
Directors are trained to solicit parents via telephone and personal contacts.
Facility tours and "meet the teacher" interviews are included in the marketing
efforts of each Phoenix Preschool center.
Management Information System
The Company utilizes a centralized Management Information System to
track revenue and expenses, enrollment, attendance and staffing of all centers.
This system is an important component of the Company's business management
system. As a result of this system, the Company receives accurate data on
enrollment, contracted attendance, extra attendance day(s), and staff-to-child
ratios necessary to optimize labor utilization and to meet ratios legislated by
each state. The majority of the financial data and reporting for each individual
center is generated, controlled and processed on computers by the Company's
corporate accounting department, which enables the Company to monitor each
center's overall financial performance, including revenues and expenses, and
profitability. The Company believes that its Management Information System
reduces incorrect billing and enables management to control payroll and other
variable expenses.
All tuition funds received are deposited in an account established by
the Company in a bank located near each center and verified by the corporate
vendor by the Company's corporate accounting department.
Insurance
The Company currently has in place (i) a commercial liability policy
with an aggregate policy and per occurrence limit of $2,000,000, which includes
property, business interruption, computer, criminal, comprehensive general
liability and automobile liability coverage, (ii) a worker's compensation
policy, and (iii) an umbrella liability policy with an aggregate policy and per
occurrence limit of $1,000,000. The Company believes that the types of insurance
and amounts of coverage it maintains are customary of businesses of comparable
size in its industry. The Company has not experienced difficulty in obtaining
insurance coverage, but there can be no assurances that adequate insurance
coverage will be available in the future, or that the Company's current coverage
will protect it against all possible claims.
Within thirty (30) days after the Effective Date, the Company will
obtain a $1,000,000 key man life insurance policy on the life of Michael C.
Koffler.
Government Regulation
Child care centers are subject to numerous state and local regulations
and licensing requirements. Although these regulations vary by jurisdiction,
governmental agencies typically review the fitness and adequacy of buildings and
equipment, the ratio of staff to enrolled children, the dietary program, the
daily curriculum, staff training and compliance with health and safety
standards. In most jurisdictions, these agencies conduct both scheduled and
unscheduled inspections of the centers and licenses must be renewed
-40-
<PAGE>
periodically. Licenses for certain of the Company's centers are in the process
of renewal or have been issued on a temporary basis pending final licensing.
There is no assurance that final licenses will be obtained for such centers.
In a few jurisdictions, new legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers. Repeated failures by a center to comply with applicable regulations can
subject it to state imposed sanctions, which might include fines, corrective
orders, being placed on probation or, in more serious cases, suspension or
revocation of the center's license to operate. The Company has been fined by
licensing agencies on different occasions for violations of certain
requirements. Such fines were immaterial in amount. Management has never
experienced a license revocation and believes the Company is in substantial
compliance with all material regulations applicable to its business.
For the year ended June 30, 1997, approximately 34% of the Company's
net revenues were generated from federal food and/or child care assistance
programs. These programs are typically designed to assist low-income families
with child care expenses and are administered through various state agencies.
Although no federal license is required at this time, there are minimum
standards which must be met to qualify for participation in certain federal
programs. There is no assurance that funding for such federal and state programs
will continue at current levels and a significant reduction in such funding may
have an adverse impact on the Company. All of the Company's schools meet all the
objective standards to participate in the program; however, certain schools do
not currently have enough eligible students in order to participate.
There are certain tax incentives for parents utilizing child care
programs. Section 21 of the Code provides a federal income tax credit ranging
from 20% to 30% of certain child care expenses for "qualifying individuals" (as
defined therein). The fees paid to the Company for child care services by
eligible taxpayers qualify for the tax credit, subject to the limitations of
Section 21. The amount of the qualifying child care expenses is limited to
$2,400 for one child and $4,800 for two or more children and, therefore, the
maximum credit ranges from $480 to $720 for one child and from $960 to $1,440
for two or more children.
The Code also allows for exclusion from income up to $5,000 per year in
employer-paid qualifying child care expenses (including amounts deducted by the
employer pre-tax from employee compensation and used to reimburse employee
expenses). The ceiling on expenses against which the tax credit may be claimed
is reduced dollar for dollar by employer-paid expenses excluded from income.
The Company must also comply with the Americans with Disabilities Act
("ADA"), which prohibits discrimination on the basis of disability in public
accommodations and employment. Costs incurred to date by the Company to comply
with the ADA have not been significant. A determination that the Company is not
in compliance with the ADA, however, could result in the imposition of fines or
an award of damages to private litigants, and could require significant
expenditures by the Company to bring the Company's centers into compliance with
the ADA.
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<PAGE>
Competition
Competition for attracting and maintaining student enrollment among
child care facilities is significant. It is estimated that there are
approximately 100,000 licensed facilities for day care/preschool services across
the United States; nearly 2,800 of which are owned by the five largest day
care/preschool firms, including Kindercare Learning Centers, Inc. and La Petite,
Inc. Additional competition comes from small individually owned facilities,
small at-home sites and many religious/church sponsored child care, day care or
preschool centers. While several of the large national chains have capital and
financial resources significantly greater than those of the Company, many of the
small religious and other non-profit operated centers benefit from significantly
lower, if any, rental costs, and receive private and/or community contributions
to subsidize their operating expenses. Curricula are also easily duplicated and
are difficult to protect in any meaningful proprietary sense.
The Company believes that it competes in its markets by maintaining its
facilities in a clean, healthy, safe and well-equipped manner, devoting
significant resources to training and qualifying all of its personnel and by
establishing a highly developed curricula and state of the art age-appropriate
learning tools while keeping its prices competitive. The Company's preschool
license capacity as of September 30, 1997, was 3,028 enrolled students. The
Company provides an enriching education curriculum, teaching a foreign language
and basic motor skills to younger pupils. However, despite its successful,
competitive, quality programs, there is no assurance that the Company can
continue to do so in such a highly competitive environment.
Employees
As of November 1, 1997, the Company employed approximately 391 persons
(including part-time and substitute caregivers), of whom six are employed at
corporate headquarters. One is a national field operations director, three are
regional directors and the remainder are employed at the Company's child care
centers. The Company also employs three field support persons (maintenance,
marketing and administrative personnel) at various locations. Center employees
include Center Directors and Assistant Directors, regular full-time and
part-time caregivers, substitute caregivers and aides and other staff, including
cooks and van drivers. All Center Directors and corporate supervisor personnel
are salaried; all other employees are paid on an hourly basis or part-time
salary basis. The Company does not have an agreement with any labor union and
believes that its relations with its employees are good.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime compensation and working
conditions. A portion of the Company's personnel are paid at the Federal minimum
wage.
Properties
The Company's corporate headquarters are located in approximately 1,875
square feet of leased office space in New York City, New York. See "Certain
Relationships and Related Transactions." The Company considers this space for
its corporate headquarters to be in good condition and adequate for its current
needs.
The Company leases the land and buildings for all of its centers, which
are located in Florida, Georgia and North Carolina. Centers leased by the
Company are typically leased under "triple net" leases that require the Company
to pay real estate taxes, maintenance costs and insurance premiums. See "Certain
Relationships and Related Transactions," and "Business -- Phoenix Preschool
Centers -- Locations."
Legal Proceedings
The Company is involved from time to time in routine litigation arising
out of the ordinary course of its business, most of which is covered by
insurance. In managements's opinion, none of such litigation that the Company is
currently involved is material to its financial condition or results of
operations.
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<PAGE>
MANAGEMENT
Executive Officers
The executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Office
------ ---- ------
<S> <C> <C>
Michael C. Koffler............................ 42 Chairman of the Board of Directors,
Chief Executive Officer and President
Michael E. Brown.............................. 51 Field Operations Officer
Robert Sloop.................................. 42 Chief Financial Officer
</TABLE>
Michael C. Koffler has been President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its formation. Mr.
Koffler entered the preschool business in New York in 1986 by founding a
facility for preschool age children with special needs, which is now licensed as
a "School" by the State of New York. Mr. Koffler received a Bachelor of Science
degree in Business Administration from State University of New York at Buffalo.
Mr. Koffler manages or is involved in ventures other than the Company, including
ventures related to preschool education, principally Williamsburg Developmental
School. While Mr. Koffler anticipates spending an average of at least thirty
hours a week on Company matters, Mr. Koffler will not devote all of his time to
the Company and will devote substantial amounts of time to ventures other than
the Company. See "Risk Factors -- Dependence Upon Key Personnel/Conflicts of
Interest."
The Company intends to obtain a $1,000,000 key man life insurance
policy on the life of Mr. Koffler within thirty (30) days after the Effective
Date.
Michael E. Brown has been the Field Operation Officer of the Company
since June, 1996. From January 1991 to May 1996, Mr. Brown served as a Region
Manager for Kindercare Learning Centers, Inc. Mr. Brown has experience in
managing child care facilities for 16 years. In addition, Mr. Brown served as a
teacher and Assistant Principal in the Charlotte-Mecklenburg School District
(Charlotte, NC) for 12 years. Mr. Brown received a Bachelor of Science degree in
Education from Appalachian State University and a Masters of Education degree
from the University of North Carolina at Charlotte.
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<PAGE>
Robert Sloop has been Chief Financial Officer of the Company since
December 1996. From March 1996 to December 1996, Mr. Sloop served as a Senior
Project Manager for Benchmark Solutions, Inc. From July 1995 to July 1996, Mr.
Sloop served as Controller for Whitman Medical Corp./Ultrasound Diagnostic
Schools. From January 1991 to July 1995, Mr. Sloop served as Senior Management
Consultant for United Services, Inc. Mr. Sloop received a Bachelor of Science
and a Masters in Business Administration from Pace University.
Employment Agreement
The Company and Michael C. Koffler are parties to an employment
agreement (the "Employment Agreement"), dated as of September 3, 1997, pursuant
to which the Company has agreed to employ Mr. Koffler as the Chief Executive
Officer and President of the Company during the three (3) year period commencing
on the date of the agreement, unless terminated earlier pursuant to its
provisions. Pursuant to such Employment Agreement, Mr. Koffler will receive as
compensation 5% of the Company's earnings, if any, before giving effect to
interest, taxes, amortization and depreciation. In addition, immediately prior
to the Effective Date of the Offering, Mr. Koffler will receive a non-qualified
employee stock option for up to 1,000,000 shares of Common Stock at an exercise
price of $4.25 per share. Such options vest at a rate of 33 1/3% of the initial
award per year commencing on the one year anniversary of the date of grant. The
Employment Agreement may terminate early if Mr. Koffler dies, becomes disabled
or is dismissed for "cause," which generally includes conviction for any felony,
fraud or embezzlement or willful or malicious misconduct. Mr. Koffler may
voluntarily terminate the Employment Agreement at any time after the first year
of the term upon sixty (60) days notice to the Company. Mr. Koffler has agreed
to maintain the confidentiality of the Company's proprietary information and
covenanted not to directly compete with the Company during the term of the
Agreement. The Company may elect to extend the covenants contained in the
Employment Agreement related to confidentiality or competition for a period of
one year from the expiration of the term of the Employment Agreement upon
payment to Mr. Koffer of an amount equal to the highest annual compensation paid
under such agreement. For a more complete discussion, investors should refer to
the complete Employment Agreement which has been filed as an exhibit to the
Company's Registration Statement.
Board Size and Classification
The Company's Articles of Incorporation fixes the number of Directors
to between one and fifteen as determined by resolution of the Board of
Directors. Prior to the Offering, the Board of Directors of the Company was
comprised only of Michael C. Koffler. In connection with the Offering, three
additional directors have been appointed, with the appointment of one of such
directors to be effective upon completion of the Offering. Within 90 days of the
closing of the Offering, the Company will have at least two independent
directors that are neither employees of, or consultants to, the Company.
The following table sets forth the composition of the Board of
Directors upon the completion of the Offering.
<TABLE>
<CAPTION>
Name Age (1) Position
- ------------------- ------- ---------
<S> <C> <C>
Michael C. Koffler 42 Chairman, President, Chief Executive
Officer, and Class D Director
Garo H. Armen, Ph.D. 44 Class A Director
David Lenefsky, Esq. 59 Class B Director
Ralph Manela, CPA, 45 Class C Director
</TABLE>
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<PAGE>
- -----------
(1) Ages are as of September 30, 1997.
(2) Appointment of Mr. Lenefsky as a director will not be effective until
immediately after the closing of the Offering.
Ralph Manela, is a certified public accountant and has been the senior
partner of Manela & Company, L.L.P., a New York based accounting and tax
counseling firm, for the past fifteen years. Mr. Manela is a member of the AICPA
and New York State Society of CPAs, in good standing. Mr. Manela received a B.S.
degree from Bernard M. Baruch College of New York.
David Lenefsky, Esquire, is an attorney representing a wide variety of
business interests before New York City, New York State and Federal Governments.
He also specializes in litigation in both the state and federal courts. His
public policy work currently includes membership on the New York City Board of
Correction, and Vice-Chair of the New York City Council on the Environment. From
1981-1989, he served as Chairman of the Brooklyn Navy Yard Development
Corporation. From 1983-1994, he served on the Board of the United Nations
Association - U.S.A. Mr. Lenefsky has authored many articles for various law
reviews, and The New York Law Journal. His Bachelors and Masters of Law Degrees
are from New York University School of Law, 1963 and 1964.
Garo H. Armen, Ph.D., has been the Managing General Partner of Armen
Partners, L.P. since 1989. Armen Partners specializes in public and private
healthcare investments. He has been the Chairman and Chief Executive Officer of
Antigenetics, Inc., a pharmaceutical firm, since 1994. In addition, Dr. Armen
has engaged in investment banking and venture capital activities. He sits on the
board of a publicly held company, Elan Corporation, plc. Dr. Armen was the
architect of the merger between Immunex Corporation and Lederle Oncology (a
division of American Cyanamid). He originated and developed the structure for
this merger and served as an advisor to both Immunex and American Cynamid. From
1986 to 1989, Dr. Armen was a Senior Vice President of Research at Dean Witter
Reynolds, Inc. His responsibilities there included research analysis, investment
banking, and merchant banking. From 1981 to 1986, he served as a Vice President
at E.F. Hutton & Company. Dr. Armen received his Ph.D. degree in physical
chemistry from the City University of New York in 1979. Thereafter he was
appointed as a Research Associate at the Brookhaven National Laboratory, in
charge of conducting research in the field of Physical Biochemistry. In 1994,
Dr. Armen founded Antigenics along with Dr. Pramud Srivastava, Antigenic's
founding scientist. Antigenics is a biopharmaceutical company creating an
innovative therapeutics for the treatment of cancers and infectious diseases.
The Company's Articles of Incorporation provide that the Board of
Directors shall be divided into four classes designated as Class A, Class B,
Class C and Class D. Accordingly, following the close of the Offering, Garo
Armen, the initial Class A director will serve until the first annual meeting of
stockholders following the Offering; at such first annual meeting of
stockholders, the Class A director shall be elected for a term of four years,
and after expiration of such term, shall thereafter be elected every four years
for four-year terms. David Lenefsky, the initial Class B director shall serve
until the second annual meeting of stockholders following the Offering. At the
second annual meeting of stockholders following the Offering, the Class B
director shall be elected for a term of four years and, after the expiration of
such term, shall thereafter be elected every four years for four-year terms.
Ralph Manela, the initial Class C director shall serve until the third annual
meeting of stockholders after the Offering. At the third annual meeting of
stockholders following the Offering, the Class C director shall be elected for a
term of four years and after the expiration of such term, shall thereafter be
elected every four years for four-year terms. Likewise, Michael Koffler, as the
initial Class D director, shall serve until the fourth annual meeting of
stockholders after the Offering. At the fourth annual meeting of stockholders
following the Offering, the Class D director shall be elected for a term of four
years and after the expiration of such term, shall thereafter be elected every
four years for four-year terms.
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<PAGE>
In addition, pursuant to its underwriting agreement with the
Underwriters, the Company has agreed to either use its best efforts to have a
designee of the Underwriters elected as a member of the Board of Directors or to
engage a designee of the Underwriters as a nonvoting advisor to the Board of
Directors for a period of three (3) years following the completion of the
Offering. See "Underwriting" and "Management."
Board Committees
Upon completion of the Offering, the Board of Directors will establish
an Audit Committee and a Compensation Committee. The Audit Committee's functions
will be to review the services provided by the Company's independent auditors,
consult with such auditors and review the need for internal auditing procedures
and the adequacy of internal controls. The Compensation Committee's function
will be to determine executive compensation and long-term incentive compensation
awards and to administer the Company's various compensation and benefit plans.
Compensation of the Board of Directors
Prior to consummation of the Offering, directors received no
compensation for serving on the Board of Directors. Immediately prior to the
Effective Date, non-employee Directors, other than Mr. Lenefsky, each will
receive options to acquire 10,000 shares of Common Stock under the Company's
Amended and Restated Stock Option Plan and may be paid fees in the future.
Compensation of Executive Officers
The following table sets forth information regarding compensation paid
by the Company to the Chief Executive Officer. No executive officer received in
excess of $100,000 in compensation for the three fiscal years ended June 30,
1995, 1996 or 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- --------------------
Securities
Restricted Underlying
Name and Fiscal Other Annual Stock Options/ All Other
Principal Position Year Salary Bonus Compensation Award(s) SARS (#) Compensation
------------------ ------ -------- ------- -------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael C. Koffler 1997 -0- -0- -0- -0- -0- --
Chairman, Chief Executive 1996 -0- -0- -0- -0- 94,692(2) --
Officer and President (1) 1995 -0- -0- -0- -0- -0- --
</TABLE>
- ----------
(1) Prior to September 3, 1997, the Company had not separately compensated
Michael C. Koffler as an officer or director. Pursuant to the terms of
his Employment Agreement with the Company, Mr. Koffler will receive 5%
of the Company's earnings before interest, taxes, depreciation and
amortization and will receive a stock option to purchase 1,000,000
shares of Common Stock. See "Management --Employment Agreement."
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<PAGE>
(2) Reflects 47,346 incentive stock options with an exercise price of $0.84
per share and 47,346 non-qualified stock options with an exercise price
of $0.76 per share granted pursuant to the Amended and Restated Stock
Option Plan.
Aggregated Options/SAR Exercised in Last Fiscal Year
and Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options/ In-the-Money
SARs at Options/SARs at Fiscal
Shares Fiscal Year End Year End
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable (#) Unexercisable ($)(1)
- ---------------------------- ------------ ------------ -------------------- ------------------------
<S> <C> <C> <C> <C>
Michael C. Koffler
Chairman, Chief Executive
Officer and President -0- -0- 94,692/-0- $101,162/$202,325
</TABLE>
(1) Assumes a fair market value per share on June 30, 1997 of $4.00 per
share, although there was no market for the Common Stock on such date
and the actual fair market value may have been higher or lower on such
date. Reflects an incentive stock option to acquire 47,346 shares at
$0.84 per share and non-qualified stock option to acquire 47,346 shares
at $0.76 per share. Such options were granted as of January 1, 1996.
Those options became exercisable at a rate of 33 1/3% per year
commencing on the first anniversary of the grant date.
No options were granted to Mr. Koffler in fiscal year 1997. See
"Employment Agreement" for information regarding options granted to Mr. Koffler
in connection with the Offering. No stock appreciation rights ("SARs") have been
granted by the Company.
Amended and Restated Stock Option Plan
In December, 1995, the Company adopted a Stock Option Plan, which was
amended and restated in September, 1997 (the "Option Plan"). Pursuant to the
Option Plan, stock options may be granted which qualify under the Internal
Revenue Code of 1986, as amended, as incentive stock options as well as stock
options that do not qualify as incentive options. All officers and key employees
of the Company or any current or future subsidiary corporation are eligible to
receive options under the Option Plan.
Incentive stock options for a total of 110,537 shares of Common Stock
have been issued by the Company prior to the date of this Prospectus to 33
employees. Set forth below is a summary of the provisions of the Plan.
Non-qualified stock options for a total of 1,177,346 shares have been issued by
the Company prior to the date of this Prospectus to two employees.
Immediately preceding the Effective Date, the Company issued a
non-qualified employee stock option to acquire up to 130,000 shares of Common
Stock to an employee of the Company in consideration for financial advice,
acquisition assistance and other services to be rendered by such employee during
the two years following the Effective Date. The exercise price under such option
is $4.25 per share subject to adjustment. During the two year period commencing
on the Effective Date and prior to registration of the Common Stock subject to
such option, the holder of the option may reprice the option (up to two times)
if the closing sale price of the Common Stock is below $3.40 per share for any
ten consecutive trading days. The reset exercise price would be the average sale
price per share of Common Stock for the three trading days immediately preceding
the day the holder elects to reprice his option.
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Administration. The Option Plan may be administered by the Board of
Directors or an Option Committee ("Committee") which is appointed by the Board
of Directors and consists only of directors who qualify as non-employee
directors within the meaning of Rule 16b-3 of the Commission. The Committee
determines, among other things, which officers and key employees receive an
option or options under the Plan, the type of option (incentive stock options or
non-qualified stock options, or both) to be granted, the number of shares
subject to each option, the rate of option exercisability, and, subject to
certain other provisions to be discussed below, the option price and duration of
the option.
The Committee may, in its discretion, amend or supplement any of the
option terms hereafter described, provided that if an incentive option is
granted under the Option Plan, the option as amended or supplemented continues
to be an incentive stock option.
Aggregate Number of Shares. The aggregate number of shares which may be
issued upon the exercise of options under the Option Plan is 1,527,277 shares of
Common Stock. In the event of any change in the capitalization of the Company,
such as by stock dividend, or what the Committee deems in its sole discretion to
be similar circumstances, the aggregate number and kind of shares which may be
issued under the Option Plan will be appropriately adjusted in a manner
determined in the sole discretion of the Committee. Reacquired shares of the
Company's Common Stock, as well as unissued shares, may be used for the purpose
of the Option Plan. Common Stock of the Company subject to options which have
terminated unexercised, either in whole or in part, will be available for future
options granted under the Option Plan.
Option Price. The option price for options issued under the Option Plan
must be at least equal to 100% of the fair market value of the Common Stock as
of the date the option is granted. Prior to the Offering, the fair market value
of the Common Stock was determined by Michael C. Koffler, then the sole member
of the Board of Directors. The incentive stock options granted to Michael C.
Koffler have an option exercise price equal to 110% of the fair market value of
the Common Stock on the date of grant.
Payment. Payment of the option exercise price on exercise of options
granted under the Option Plan may be made in (a) cash, (b) (unless prohibited by
the Committee) Common Stock which will be valued by the Secretary of the Company
at its fair market value or (c) (unless prohibited by the Committee) any
combination of cash and Common Stock of the Company valued as provided in clause
(b).
Exercisability. Generally, unless otherwise determined by the
Committee, options granted under the Option Plan may not be exercised for a
period of one year from the date of grant and may thereafter be exercised for up
to 33-1/3% of the option shares during the second year, 66-2/3% of the option
shares during the third year and 100% of the option shares thereafter.
In the event of a "change in control" of the Company, as defined in the
Option Plan, each optionee may exercise the total number of shares then subject
to the option. Consequently, the Option Plan may be deemed to have certain
"anti-takeover" and "anti-greenmail" effects. See also "Description of
Securities - Certain Articles of Incorporation and Bylaws Provisions".
The Committee has the authority to provide for a different rate of
option exercisability for any optionee.
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Option Expiration and Termination. Stock options granted under the
Option Plan expire ten years after the date they are granted (the "scheduled
termination date"). Options terminate three months after the date on which
employment is terminated (whether such termination be voluntary or involuntary),
other than by reason of death or disability, but not later than the scheduled
termination date. The option terminates one year from the date of termination
due to death or disability, but not later than the scheduled termination date.
The incentive stock options granted to Michael C. Koffler expire five years
after the date of grant.
Non-Transferability. Options granted pursuant to the Option Plan are
not transferable, except by the will or the laws of descent and distribution in
the event of death. During an optionee's lifetime, the option is exercisable
only by the optionee, including, for this purpose, the optionee's legal guardian
or custodian in the event of disability.
Amendment or Termination; Option Plan Expiration. The Company's Board
of Directors has the right at any time, and from time to time, to amend,
supplement, suspend or terminate the Option Plan, without stockholder approval,
except to the extent that stockholder approval of the Option Plan amendment or
supplement is required by the Internal Revenue Code of 1986, as amended, to
permit the granting of incentive stock options under the Option Plan. Any such
action will not affect options previously granted. If the Committee voluntarily
submits a proposed amendment, supplement, suspension or termination for
stockholder approval, such submission will not require any future amendments,
supplements, suspensions or terminations (whether or not relating to the same
provision or subject matter) to be similarly submitted for stockholder approval.
1996 Non-Employee Stock Option Plan
The Company adopted in June 1996 a Non-Employee Stock Option Plan and
in 1996 granted options for 14,583 shares to one consultant having an option
exercise price of $2.53 per share. These options contain terms substantially
similar to those contained in non-qualified stock options issued pursuant to the
Amended and Restated Stock Option Plan.
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Indemnification of Directors and Officers
As permitted by the Pennsylvania Business Corporation Law, the
Company's Bylaws provide that a director shall not be personally liable in such
capacity for monetary damages for any action taken, or any failure to take any
action, unless the director breaches or fails to perform the duties of his or
her office under the BCL and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness. These provisions of the
Bylaws, however, do not apply to the responsibility or liability of a director
pursuant to any criminal statute, or to the liability of a director for the
payment of taxes pursuant to local, Pennsylvania or federal law. These
provisions offer persons who serve on the Board of Directors of the company
protection against awards of monetary damages for negligence in the performance
of their duties.
The Bylaws also provide that every person who is or was a director or
executive officer of the Company, or of any corporation which he served as such
at the request of the Company, shall be indemnified by the Company to the
fullest extent permitted by law against all expenses and liabilities reasonably
incurred by or imposed upon him, in connection with any proceeding to which he
may be made, or threatened to be made, a party, or in which he may become
involved by reason of his being or having been a director or executive officer
of the Company, or of such other corporation, whether or not he is a director or
executive officer of the Company or such other corporation at the time the
expenses or liabilities are incurred. No indemnification shall be provided,
however, with respect to: liabilities arising under Section 16(b) of the
Securities Exchange Act of 1934, as amended, if a final unappealable judgment or
award establishes that such officer or director engaged in self-dealing, willful
misconduct or recklessness, for expenses or liabilities which have been paid
directly to, or for the benefit of, such person by an insurance carrier or for
amounts paid in settlement of actions without the written consent of the Board
of Directors. Obligations that the Company may have pursuant to the Bylaws to
provide indemnification to its directors and executive officers for liabilities
arising under the Securities Act of 1933 may not be enforceable.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, and officers of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. 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 small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or employee connection with the securities being offered
hereby, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of competent
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, the Company has engaged in various transactions with
its directors, executive officers and other affiliated parties. The following
paragraphs summarize certain information concerning certain transactions
involving $60,000 or more and relationships which occurred during the last two
years or which are presently proposed.
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From inception through September 30, 1997, the Company has borrowed
from Michael C. Koffler, President, Chairman, Chief Executive Officer and a
stockholder of the Company, $1,798,389 to fund certain of the Company's working
capital needs and acquisitions and their related expenses. During the year ended
June 30, 1996, outstanding officer loans payable of $616,558 were exchanged for
810,890 shares of Common Stock of PPEC. During the year ended June 30, 1997,
$434,000 was repaid with proceeds of the Bridge Financing. In connection with
the Reorganization described herein (see "Reorganization"), the Company issued
an aggregate of 500,000 shares of Series A Preferred Stock ("Series A Preferred
Stock") to Michael C. Koffler in exchange for $500,000 of indebtedness and will
also repay Mr. Koffler the balance of the Convertible Note (defined below) which
matures on July 1, 1998. The outstanding loan balance of $247,831 at September
30, 1997, represents a non-interest bearing promissory note ("Convertible Note")
payable to Michael C. Koffler, which is, at his option, convertible, in whole or
in part with respect to any portion of the unpaid balance of the note plus an
amount equal to an interest factor (utilized solely for calculating conversion
into common stock) of 10% per annum, into shares of common stock of the Company,
at a conversion rate of $.76 per share.
Until December 31, 1996, an affiliate of Michael C. Koffler (i) sublet
office space to the Company for its headquarters at cost, (ii) advanced a
portion of the Company's salary expenses and (iii) advanced a portion of the
Company's medical benefits. For the period from May 3, 1995 (inception) to
December 31, 1996, approximately $134,300 was paid by the Company for such rent
and expenses. Effective January 1, 1997, the Company leased office space
directly from the landlord and directly paid all salary and benefits.
The Company believes that each of the above transactions were on terms
no less favorable to the Company than those which were available through third
parties. Future transactions with affiliated parties will be on terms which are
no less favorable to the Company than those which could be obtained from
unaffiliated third parties and will be approved by a majority of disinterested
directors, and any forgiveness of loans from the Company to affiliates will be
approved by a majority of the Company's independent directors who will have the
benefit of independent counsel at the Company's expense. Since Michael C.
Koffler was the sole director of the Company during the relevant periods, none
of the foregoing transactions were approved by independent directors.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock immediately prior to and after the
Offering by (i) each stockholder known by the Company to be a beneficial owner
of more than five percent of the outstanding Common Stock, (ii) each director of
the Company, and (iii) all directors and officers as a group.
<TABLE>
<CAPTION>
Percentage of Common Stock
Beneficially Owned(1)
Amount and Nature of -------------------------------------
Name Beneficial Ownership Before Offering After Offering
- ------------------------------------ -------------------- ---------------- ---------------
<S> <C> <C> <C>
Michael C. Koffler 842,454(2) 100% 40%
Chairman, Chief Executive Officer
and President
Robert Sloop
Chief Financial Officer 6,481(3) (5) (5)
Michael E. Brown
Field Operations Officer 4,861(4) (5) (5)
Garo Armen, Ph.D.
Director -0-(6) --- ---
David Lenefsky, Esq.
Director -0- --- ---
Ralph Manela, CPA
Director -0-(6) --- ---
Directors and Executive
Officers as a Group 853,796 100% 40%
(six persons)
</TABLE>
- ------------
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community
property laws, where applicable. The address for each individual
indicated is 31st Floor, 150 East 58th Street, New York, New York
10155. For purposes of computing the percentage of outstanding shares
held by each person or group of persons named above as of the date of
the Prospectus, any security which such person or group of persons has
the right to acquire within 60 days after such date is deemed to be
outstanding for the purpose of computing the percentage ownership for
such person or persons, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
Accordingly, the information presented in the foregoing table does not
include shares of Common Stock issuable upon (i) conversion of the
Series A Preferred Stock (which may not be converted prior to two years
after the Effective Date) or (ii) Warrants (which may not be exercised
prior to two years after the Effective Date. See "Description of
Securities -- Series A Preferred Stock" and "Management -- Stock Option
Plan." Shares which may be acquired by Michael C. Koffler pursuant to
convertible debt which will be repaid by the Company at Closing are
also excluded.
(2) Includes 810,890 shares held directly as well as options to purchase
31,564 shares which are currently exercisable. Excludes options to
purchase 1,063,128 shares which are not currently exercisable. Stock
options issued under the Option Plan become exercisable at a rate of
one-third per year commencing one year from the grant date and an
additional one-third each year thereafter. See "Management -- Amended
and Restated Stock Option Plan -- Exercisability." Figure excludes
500,000 votes which Mr. Koffler has the right to cast in connection
with his ownership of the Series A Preferred Stock.
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(3) Consists of options to purchase 6,481 shares which are currently
exercisable. Excludes options to purchase 12,963 shares which are not
currently exercisable. Stock options issued under the Option Plan
become exercisable at a rate of one-third per year commencing one year
from the grant date and an additional one-third each year thereafter.
See "Management -- Amended and Restated Stock Option Plan --
Exercisability."
(4) Consists of options to purchase 4,861 shares which are currently
exercisable. Excludes options to purchase 9,722 shares which are not
currently exercisable. Stock options issued under the Company's 1996
Non-employee Stock Option Plan become exercisable at a rate of
one-third per year commencing one year from the grant date and an
additional one-third each year thereafter. See "Management -- 1996
Non-employee Stock Option Plan -- Exercisability."
(5) Less than 1%.
(6) Excludes options to purchase 10,000 shares which are not currently
exercisable. Stock options issued under the Option Plan become
exercisable at a rate of one-third per year commencing one year from
the grant date and an additional one-third each year thereafter. See
"Management -- Amended and Restated Stock Option Plan --
Exercisability."
DESCRIPTION OF SECURITIES
The Company is offering (a) 1,275,000 shares of Common Stock at a
public offering price of $4.25 per share, and (b) on behalf of and for the
account of the Selling Securityholders named herein, 1,275,000 Warrants each to
acquire one share of Common Stock, at a public offering price of $0.125 per
Warrant. Following the Offering it is anticipated that such Common Stock and
Warrants will be separately traded. The following is a brief description of the
Company's capital stock and the Warrants. The following statements do not
purport to be complete or give full effect to statutory or common law, and are
subject in all respects to the applicable provisions of the Company's Articles
of Incorporation and Bylaws and Pennsylvania law.
Common Stock
The Company will issue 1,275,000 shares of Common Stock in the Offering
and up to up to 1,275,000 shares of Common Stock upon exercise of the Warrants
(including Warrants issued pursuant to the Underwriters' Warrant).
Dividends. Subject to the rights of holders of Preferred Stock, holders
of Common Stock are entitled to receive dividends when, as and if declared by
the Board of Directors. The Company does not expect to pay dividends on its
Common Stock in the foreseeable future, and intends to retain earnings, if any,
to finance its operations. See "Dividend Policy".
Liquidation. Subject to the rights of holders of Preferred Stock,
holders of Common Stock are entitled to share ratably in the assets of the
Company legally available for distribution to holders of Common Stock in the
event of the liquidation, dissolution or winding up of the Company.
Voting. Subject to the rights of holders of Preferred Stock, holders of
Common Stock are entitled to one vote per share on all matters upon which
stockholders are entitled to vote.
No Other Rights. Holders of the Common Stock do not have subscription,
redemption, conversion or preemptive rights.
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Warrants
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at $5.10 per share, subject to adjustment in certain
events, described below, for a period of three years commencing two years after
the date of the Closing. The exercise price of, and the number of shares of
Common Stock issuable upon exercise of, the Warrants are subject to adjustment.
The conversion rate will be subject to adjustment upon certain events, including
(i) the issuance of Common Stock as a dividend or distribution on Common Stock,
(ii) the subdivision or reclassification of the outstanding Common Stock into a
greater number of shares, (iii) the combination or reclassification of the
outstanding Common Stock into a smaller number of shares, or (iv) the
outstanding shares of Common Stock are at any time changed into or exchanged for
a different number or kind of shares or other security of the Company or of
another corporation through reorganization, merger, consolidation, liquidation
or recapitalization. The Company is not required to make adjustments of less
than $0.05 per share in the exercise price of the Warrants, but any such
adjustment not required to he made will be taken into account in the computation
of any subsequent adjustment.
In addition, the Warrants are subject to redemption by the Company, in
whole or in part, at a price of $0.05 per warrant, upon not less than 30 days
prior written notice at any time commencing two years after the Effective Date,
provided the closing sale price of the Common Stock has been at least $7.00 per
share for the 20 consecutive trading days ending on the third day prior to the
date upon which the notice of redemption is given, as reported on The Nasdaq
SmallCap Market (or if the Common Stock is not traded thereon, the closing sale
price of the Common Stock on the Nasdaq National Market or other principal
securities exchange upon which the Common Stock is then quoted or listed, or
such other reporting system that provides closing sale prices for the Common
Stock). The Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for the redemption of the warrants in the
notice of redemption.
The Company has authorized and reserved for issuance a number of shares
of Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable. Holders
of Warrants will not have any voting or other rights as stockholders of the
Company unless and until Warrants are exercised and shares of Common Stock are
issued upon such exercise.
In addition to warrants described above, on June 1, 1995, the Company
issued a warrant to each of Gerard Cappello and Linda S. Cappello (investors)
for 43,835 shares of common stock of the Company and 43,843 shares of common
stock of the Company, respectively ("Cappello Warrants"). The exercise price for
the Cappello Warrants is $0.63 per share or, if higher, the cost per share of
Common Stock to Michael C. Koffler. The Cappello Warrants may be exercised at
any time prior to May 1, 1999.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors ("Preferred Stock"). Accordingly, the
Board of Directors is empowered, without further stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could decrease the amount of earnings and assets available for distribution
to holders of Common Stock or adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. In
connection with the Reorganization, the Company issued 500,000 shares of Series
A Preferred Stock, par value $.10 per share, to Michael C. Koffler in exchange
for certain indebtedness of Phoenix Preschool Education Centers, Inc. See
"Certain Relationships and Related Transactions." Except for the Series A
Preferred Stock, the Company has no present intention to issue any shares of
Preferred Stock. The Company has agreed with the Underwriters that it will not
issue any shares of Preferred Stock, or any options, warrants or rights to
purchase Preferred Stock, for a period of twenty-four (24) months after the
Effective Date, without the prior written consent of the Underwriters.
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<PAGE>
Series A Preferred Stock
The Board of Directors issued 500,000 shares of Series A Preferred
Stock to Michael C. Koffler in exchange for debt of Phoenix Preschool Education
Centers, Inc. to Mr. Koffler in the principal amount of $500,000. The terms of
the Series A Preferred Stock, established in a Statement With Respect to Shares
filed with the Secretary of the State of the Commonwealth of Pennsylvania are as
follows:
Dividend Rights. Holders of Series A Preferred Stock are entitled to
receive dividends when, as and if declared by the Company's Board of Directors,
out of funds legally available therefor pro rata with the Common Stock on an as
converted basis. The Company does not anticipate payment of dividends on the
Common Stock or the Series A Preferred Stock in the foreseeable future. See
"Dividend Policy."
Liquidation Rights. Subject to the prior rights of the Company's
creditors and the holders of senior securities, the holders of the Series A
Preferred Stock are entitled to receive, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the greater of $1.00 per
share, plus accrued and unpaid dividends, or, determined on an as-converted
basis, the amount per share which holders of Common Stock are entitled. If, in
any such case, the assets of the Company are insufficient to make such payment
in full, then the available assets will be distributed among the holders of the
Series A Preferred Stock and any other series of Preferred Stock which is in
parity with the Series A Preferred Stock, ratably in proportion to the full
amount to which each holder would be entitled.
Conversion Rights. Each share of Series A Preferred Stock is
convertible into shares of Common Stock at a conversion rate of (i) one share of
Common Stock for each share of Preferred Stock, plus (ii) one Contingent
Conversion Right. Contingent Conversion Right means the number of shares of
Common Stock (or fraction thereof), if any, which results from the following
formula: (a) compute the excess, if any, of the current market price per share
(as determined in accordance with the Statement With Respect to Shares) as of
the date of conversion over $3.50, (b) multiply the result of clause (a) by
820,674, (c) divide the result of clause (b) by 3.50, and (d) divide the result
of clause (c) by 500,000. In no event can Contingent Conversion Rights yield
more than 820,674 shares in the aggregate (subject to adjustment). Upon
conversion, no payment or allowance will be made in respect of any accrued but
unpaid dividends on the Series A Preferred Stock.
Shares of Series A Preferred Stock may be converted at the election of
the holder at any time after the earlier of change in Control (as defined in the
Statement with respect to Shares or two years after the original issue date.
The conversion rate will be subject to adjustment upon certain events,
including (i) the issuance of Common Stock as a dividend or distribution on
Common Stock, (ii) the subdivision or reclassification of the outstanding Common
Stock into a greater number of shares, (iii) the combination or reclassification
of outstanding Common Stock into a smaller number of shares, or (iv) the
outstanding shares of Common Stock are at any time changed into or exchanged for
a different number or kind of shares or other security of the Company or of
another corporation through reorganization, merger, consolidation, liquidation
or recapitalization. The Company is not required to make adjustments of less
than $0.05 per share in the conversion price of the Series A Preferred Stock,
but any such adjustment not required to be made will be taken into account in
the computation of any subsequent adjustment.
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<PAGE>
Voting Rights. The holders of the Series A Preferred Stock will vote,
together with the holders of Common Stock (without distinction as to class), on
all matters submitted for approval to the holders of Common Stock and shall be
entitled to one vote for each share of Common Stock into which such Series A
Preferred Stock is then convertible.
Bridge Financing
In June 1997, the Company sold an aggregate of 25.5 units, each unit
consisting of the Company's 8% promissory note (the "Bridge Notes") in the
principal amount of $25,000 per unit (or an aggregate of $637,500) and a warrant
to acquire up to 50,000 shares of Common Stock. The Bridge Notes are payable
upon the earlier of October 9, 1998 or the consummation of an initial public
offering or private placement of the Company's debt and/or equity securities
resulting in gross proceeds to the Company of at least $5,000,000. Each Bridge
Warrant entitled the registered holder thereof to purchase 50,000 shares of
Common Stock at an exercise price of $4.50 per share, subject to adjustment in
certain events, at any time during the period commencing June 9, 1998 and ending
on June 9, 2002. The Bridge Warrants will convert automatically into Warrants on
the Effective Date and will be offered pursuant to this Prospectus on behalf of
the Selling Securityholders named herein.
Certain Provisions of Pennsylvania Law
Under the Pennsylvania Business Corporation Law of 1988, as amended
(the "BCL"), subject to certain exceptions, a business combination between a
Pennsylvania corporation and a person owning 20% or more of such corporation's
voting stock (an "interested person") may be accomplished only if: (i) the
business combination is approved by the corporation's directors prior to the
date on which such person acquired 20% or more of such stock, or if the board
approved such person's acquisition of 20% or more of such stock, prior to such
acquisition; (ii) the interested person owns shares entitled to cast at least
80% of the votes all shareholders would be entitled to cast in the election of
directors, the business combination is approved by the vote of shareholders
entitled to cast a majority of votes that all shareholders would be entitled to
cast in an election of directors (excluding shares held by the interested
person), which vote may occur no earlier than three months after the interested
person acquired its 80% ownership, and the consideration received by
shareholders in the business combination satisfies certain minimum conditions;
(iii) the business combination is approved by the affirmative vote of all
outstanding shares of common stock; (iv) the business combination is approved by
the vote of shareholders entitled to cast a majority of the votes that all
shareholders would be entitled to cast in the election of directors (excluding
shares held by the interested person), which vote may occur no earlier than five
years after the interested person became an interested person. A corporation may
exempt itself from this provision by an amendment to its articles of
incorporation that requires shareholder approval. The Articles do not provide an
exemption from this provision. Pennsylvania has also adopted other anti-takeover
legislation from which the Company has elected to exempt itself in the Articles.
The BCL also provides that the directors of a corporation, in making
decisions concerning takeovers or any other matters, may consider, to the extent
that they deem appropriate, among other things, (i) the effects of any proposed
transaction upon any or all groups affected by such action, including, among
others, shareholders, employees, suppliers, customers and creditors, (ii) the
short-term and long-term interests of the corporation and (iii) the resources,
intent and conduct of the person seeking control.
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Certain Articles of Incorporation and Bylaw Provisions
Certain provisions of the Company's Articles of Incorporation and
Bylaws may be deemed to have an anti-takeover effect and may delay, deter or
prevent a merger, tender offer, proxy contest or other takeover attempt. The
following discussion is a general summary of certain of these provisions which
might be determined to have a potential "anti-takeover" effect. Reference should
be made in each case to such Articles and Bylaws. See "Additional Information"
for information regarding how to obtain a copy of these documents.
The Company's Articles of Incorporation provides that the stockholders
may act only in a meeting that has been duly called and noticed, except that
stockholders may approve by written consent any proposal that has already been
approved by the Board of Directors.
The Company's Articles of Incorporation fixes the number of Directors
between one and fifteen as determined by resolution of the Board of Directors.
The Board of Directors of the Company is currently comprised of four members.
The directors were elected to one-year terms.
The Company's Articles of Incorporation provides that the Board shall
be divided into four classes. Accordingly, following the close of the Offering,
the initial director of Class A will serve until the first annual meeting of
stockholders following the Offering; at such first annual meeting of
stockholders, the directors of Class A shall be elected for a term of four
years, and after expiration of such term, shall thereafter be elected every four
years for four-year terms. The initial director of Class B shall serve until the
second annual meeting of stockholders following the Offering. At the second
annual meeting of stockholders following the Offering, the directors of Class B
shall be elected for a term of four years and, after the expiration of such
term, shall thereafter be elected every four years for four-year terms. The
initial director of Class C shall serve until the third annual meeting of
stockholders after the Offering. At the third annual meeting of stockholders
following the Offering, the directors of Class C shall be elected for a term of
four years and after the expiration of such term, shall thereafter be elected
every four years for four-year terms. The initial Class D director shall serve
until the fourth annual meeting of shareholders after the Offering. At such
meeting, the Class D director shall be elected for a term of four years and
shall thereafter be elected every four years for four-year terms.
Stockholders are not entitled to cumulate their votes in connection
with the election of directors. As a result, a person or a group controlling the
majority of shares of Common Stock can elect all of the directors. Following the
Offering, members of Board of Directors of the Company will own approximately
810,890 shares of Common Stock constituting approximately 39% (excluding
options) of the issued and outstanding Common Stock which may allow it to
control actions taken by stockholders, including the election of directors. See
"Security Ownership of Certain Beneficial Owners and Management" and "Risk
Factors -- Voting Control of the Board of Directors of the Company."
The Company's Articles of Incorporation provide the Board of Directors
latitude in opposing tender offers and enable the Board to negotiate with and
sell the Company to a single offeror rather than conducting an auction.
The Company's Bylaws provide that special meetings of stockholders may
only be called by the Board of Directors, the Chairman or by stockholders
entitled to cast at least 10% of the votes entitled to be cast at a particular
meeting.
-57-
<PAGE>
The Articles of Incorporation and Bylaws of the Company contain certain
provisions permitted under the Pennsylvania Business Corporation Law relating to
the liability of directors. These provisions eliminate the directors' liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, including the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of a law. The Company's Articles of Incorporation and Bylaws
also contain provisions which provide for the indemnification of its directors
and officers to the fullest extent permitted by the Pennsylvania Business
Corporation Law.
-58-
<PAGE>
MARKET FOR SECURITIES AND RELATED STOCKHOLDER MATTERS
The Offering is the initial public offering of Common Stock for the
Company. Prior to the Offering, all of the outstanding Common Stock has been
held by Michael C. Koffler and there has been no trading market in the Common
Stock or Warrants. Sales of substantial amounts of such securities in the public
market could adversely affect market prices and make it more difficult for the
Company to sell equity securities in the future at a time and price which it
deems appropriate.
The Company has applied to have the Common Stock and Warrants quoted on
The Nasdaq SmallCap Market, under the symbols "FENX" and "FENXW," respectively,
and listed on the Boston Stock Exchange, under the proposed symbols "FNX" and
"FNXW," respectively, upon completion of the Offering. No assurance can be given
that the Company will receive approval to have its Common Stock and Warrants
listed on the Boston Stock Exchange or quoted on the NASDAQ SmallCap Market.
Currently, for continued quotation on the NASDAQ SmallCap Market, a company must
have, among other things, total assets of at least 500,000 shares with a market
value of $1.0 million, two market makers, at least 300 shareholders, and a
minimum bid price of $1.00 per share. Criteria required to be met for continued
listing on the Boston Stock Exchange include total assets of at least $1.0
million, a public float of at least 150,000 shares with a market value of
$500,000 and at least 250 shareholders. See "Risk Factors - The NASDAQ SmallCap
Market/Boston Stock Exchange Maintenance Requirements; Possible Relisting of
Securities; Risk of Low Priced Stocks."
The Company has not paid any dividends since its inception and does not
anticipate the payment of dividends in the foreseeable future, as earnings will
used to finance operations. See "Dividend Policy." As a Pennsylvania
corporation, the Company may not declare and pay dividends on its capital stock
if the amount paid exceeds an amount equal to the excess of the Company's net
assets over paid-in-capital or, if there is no excess, its net profits for the
current and/or immediately preceding fiscal year.
As of the date hereof, there were 1,322,466 shares of Common Stock
subject to options (including 14,583 shares issuable under the Non-Employee
Stock Option Plan) and 1,527,277 shares are reserved for issuance under the
Amended and Restated Stock Option Plan. The Company increased the number of
options reserved for issuance under the Company's Amended and Restated Stock
Option Plan by 1,130,000 shares in connection with the Offering.
See "Management."
The 1,275,000 shares of Common Stock to be sold in the Offering
(1,466,250 shares if the Underwriters' over-allotment option is exercised in
full), will be available for resale in the public market without restriction or
further registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control relationship
with the Company), which shares will be subject to the resale limitations of
Rule 144 promulgated under the Securities Act ("Rule 144").
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year is entitled to sell, within any three month period, a number of
shares which does not exceed the greater of 1% of the then-outstanding shares of
the Company's Common Stock (20,859 shares immediately after the Offering
assuming no exercise of the Underwriters' over-allotment option) or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 may also be subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned shares within the definition of
"restricted securities" under Rule 144 for at least two years, is entitled to
sell such shares under Rule 144(k) without regard to the volume limitation,
manner of sale provisions, public information requirements or notice
requirements.
-59-
<PAGE>
The Company's current stockholder, its directors and executive
officers, each holder of an option to acquire Common Stock, and Gerard Cappello
and Linda S. Cappello have entered into an agreement with the Underwriters not
to offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of the shares held by such persons without the prior written consent of
the Underwriters for a period of two years from the Effective Date.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the Underwriters,
and the Underwriters have agreed to purchase, (a) 1,275,000 shares of Common
Stock and (b) on behalf of the Selling Securityholders named herein, 1,275,000
Warrants. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the Common Stock and Warrants offered hereby, if
any are purchased.
The Underwriters have advised the Company that the Underwriters propose
initially to offer the 1,275,000 shares of Common Stock and Warrants to the
public at the initial public offering price set forth on the cover page of this
Prospectus and that it may allow to select dealers who are members of the NASD
concessions not in excess of $__________ per share of Common Stock and
$___________ per Warrant, of which not more than $__________ per share of Common
Stock and $___________ per Warrant may be re-allowed to certain other dealers.
The Underwriting Agreement also provides that the Underwriters will
receive a non-accountable expense allowance of 3% of the gross proceeds of the
Offering, of which $27,300 has been paid by the Company to a previous
underwriter to date. The Company also has agreed to pay all expenses in
connection with qualifying the shares of Common Stock and the Warrants offered
hereby for sale under the laws of such states as the Underwriters may designate,
including expenses of counsel retained for such purpose by the Underwriters.
Pursuant to the Over-allotment Option, which is exercisable for a
period of 45 days after the closing of the Offering, the Underwriters may
purchase up to fifteen (15%) of the total number of shares of Common Stock
and/or Warrants offered hereby, solely to cover over-allotments.
The Company has agreed to sell to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase an amount equal to 10% of
the number of shares of Common Stock and Warrants sold to the public (excluding
the Over-allotment Option). The Underwriters' Warrants shall be exercisable for
a period of five years, commencing one year after the Effective Date, at an
exercise price equal to 120% of the offering price of the shares of the Common
Stock and Warrants sold to the public in the Offering. The Underwriters'
Warrants are not transferable prior to such date, except to officers of the
Underwriters, members of the selling group and their officers and partners.
The Company has agreed that, upon written request of the then holder(s)
of a majority of the Underwriters' Warrants and the shares of Common Stock
issued and/or issuable upon exercise of the Underwriters' Warrants (the
"Underwriters' Warrant Shares") which were originally issued to the Underwriters
or to their respective designees, made at any time with in the period commencing
one year and ending five years after the date of the Prospectus, the Company
will file, at its sole expense, no more than once, a registration statement
under the Securities Act registering the Underwriters' Warrant Shares. The
Company has agreed to use its best efforts to cause the registration statement
to become effective. The holders of the Underwriters' Warrants may demand
registration without exercising the Underwriters' Warrants and, in fact, are
never required to exercise such warrants.
-60-
<PAGE>
The Company has also agreed that if, at any time within the period
commencing one year and ending five years after the date of the Prospectus, it
should file a registration statement with the Commission pursuant to the
Securities Act, regardless of whether some of the holders of the Underwriters'
Warrants and the Underwriters' Warrant Shares shall have therefore availed
themselves of any of the registration rights above, the Company, at its own
expense, will offer to said holders (with certain exceptions) the opportunity to
register or qualify the Underwriters' Warrant Shares. The objection of a
subsequent underwriter to the above "piggyback" registration rights, however,
would preclude such inclusion.
In addition to the demand and "piggyback" registration rights, the
Company will cooperate with the then holders of the Underwriters' Warrants and
Underwriters' Warrant Shares in the preparation and execution of any
registration statement required in order to sell or transfer the Underwriters'
Warrant Shares and will supply all information required therefor, but such
additional expenses of such registration statement will be pro-rated between the
Company and the holders of the Underwriters' Warrants and Underwriters' Warrant
Shares according to the aggregate sales price of the securities being issued.
For the life of the Underwriters' Warrants, the holders thereof are
given, at nominal cost, the opportunity to profit from a rise in the market
price of the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in the
Underwriters' Warrants.
In connection with this Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. 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 or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters may also create a short position for
their respective accounts by selling more shares of Common Stock or Warrants in
connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase shares of Common Stock or Warrants 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
Underwriters may impose "penalty bids" under contractual arrangements whereby it
may reclaim from a dealer participating in the Offering the selling concession
with respect to shares of Common Stock and Warrants that are distributed in the
Offering but subsequently purchased for the account of the dealer in the open
market. Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock and Warrants 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 Company has agreed not to issue any shares of Common Stock,
preferred stock or any warrants, options or other rights to purchase Common
Stock or preferred stock, for a period of two years from the Effective Date
without the prior written consent of the Underwriters, except as contemplated by
or as disclosed in the Prospectus. Officers, directors and certain security
holders of the Company have agreed not to sell, contract to sell or grant any
option to purchase Common Stock for a period of two years from the Effective
Date without the prior written consent of the Underwriters. See "Market for
Securities and Related Stockholder Matters."
-61-
<PAGE>
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against liabilities in connection with
the Offering, including liabilities under the Securities Act. The Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by the Underwriters in connection with the
shares of Common Stock offered hereby, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of competent 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 Underwriters have informed the Company that they do not expect
sales to discretionary accounts to exceed 2% of the shares of Common Stock and
Warrants offered hereby.
While certain of the officers of the Duke & Co., Inc. ("Duke") have
significant experience in corporate financing and the underwriting of
securities, Duke has previously underwritten only five public offerings.
Accordingly, there can be no assurance that Duke's limited public offering
experience will not affect the Company's offering of the Common Stock and
Warrants and subsequent development of a trading market, if any, in such
securities. In addition, Duke is aware that the Commission is investigating
certain of Duke's trading practices and mark-ups in connection with the
securities of an issuer whose 1995 public offering was underwritten by Duke.
There can be no assurance that this investigation will not adversely and
materially affect this Offering or subsequent trading in the Common Stock and/or
Warrants of the Company.
Although certain officers of Briarwood Investment Counsel ("Briarwood")
have had experience working on public offerings, and other corporate finance
matters, Briarwood has not previously served as the sole or managing underwriter
of a firm commitment public offering nor has it participated as member of an
underwriting syndicate. Since Briarwood's experience in underwriting firm
commitment public offerings is limited, there can be no assurance that the lack
of experience will not adversely affect the public offering of the Company's
Common Stock and Warrants and the subsequent development, if any, of a trading
market for the Common Stock and Warrants.
The Company has agreed that upon closing of the Offering it will, for a
period of not less than three (3) years, engage a designee of the Underwriters
as a non-voting advisor to the Board. In addition and in lieu of the
Underwriters' right to designate an advisor, the Company has agreed, if
requested by the Underwriters during such three year period, to nominate and use
its best efforts to cause the election of a designee of the Underwriters as a
director of the Company. The Underwriters have not yet designated any such
person.
The Underwriters intend to act as market makers for the Common Stock
and Warrants after the closing of the Offering.
The Company will pay the Underwriters a fee of 8% of the exercise price
of each Warrant exercised, provided (i) the market price of the Common Stock on
the date the Warrant was exercised was equal to or greater than the Warrant
exercise price on that date, (ii) the exercise price of the Warrant was
solicited by a member of the NASD, (iii) the Warrant was not held in a
discretionary account, (iv) the disclosure of compensation arrangements was made
in documents provided to the holders of the Warrants, (v) the solicitation of
the exercise of the Warrant was not a violation of Rule 101 of Regulation M
under the Exchange Act and (vi) the Underwriters are designated in writing as
the soliciting NASD member. The Underwriters and any other soliciting
broker/dealers will be prohibited from engaging in any market making activities
or solicited brokerage activities with regard to the Company's securities during
the periods prescribed by Rule 101 of Regulation M before the solicitation of
the exercise of any Warrant until the later of the termination of such
solicitation activity or the termination of any right the Underwriters and any
other soliciting broker/dealer may have to receive a fee for the solicitation of
the exercise of the Warrants.
-62-
<PAGE>
The Company has agreed to retain the Underwriters, upon closing of the
Offering, as management and financial advisors for a period of twenty-four (24)
months commencing on the date of the Prospectus at a fee equal to $4,166 per
month, which is payable in full at the closing of the Offering. In its capacity
as an advisor to the Company, the Underwriters will be obligated to provide
general financial advisory services to the Company on an as-needed basis with
respect to possible future financing or acquisitions by the Company and related
matters. The Underwriters are not obligated to provide any minimum number of
hours of advisory services to the Company.
In addition, the company has agreed to engage a financial public
relations firm reasonably satisfactory to the Underwriters. The public relations
firm will not be associated with the Underwriters or any of their respective
affiliates. Such firm, or an acceptable substitute firm, shall be continuously
engaged until a date twenty-four (24) months from the closing of the Offering.
The initial public offering price of the Common Stock and Warrants
offered hereby and the initial exercise price and other terms of the Warrants
have been determined by negotiation between the Company and the Underwriters and
do not necessarily bear any direct relationship to the Company's assets,
earnings, book value per share or other generally accepted criteria of value.
Factors considered in determining the offering prices of the Common Stock and
Warrants and the exercise price of the Warrants included the business in which
the Company is engaged, the Company's financial conditions, an assessment of the
Company's management, the general condition of the securities markets and the
demand for similar securities of comparable companies.
LEGAL MATTERS
The law firm Blank Rome Comisky & McCauley, One Logan Square,
Philadelphia, Pennsylvania 19103 will render its opinion to the effect that the
shares of Common Stock and Warrants offered by the Company, when issued and paid
for as contemplated in this Prospectus, will be legally issued, fully paid and
nonassessable. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Gersten, Savage, Kaplowitz & Fredericks,
LLP, 101 East 52nd Street, New York, New York 10022-6018.
EXPERTS
The Consolidated Financial Statements and Financial Statements included
in this Prospectus and in the Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports appearing elsewhere herein and in the
Registration Statement and have been included herein in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and
Warrants is Continental Stock Transfer & Trust Company, New York, New York.
-63-
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Phoenix Preschool Holdings, Inc.
Report of Independent Certified Public Accountants F-3
Consolidated balance sheets as of June 30, 1997
and September 30, 1997 (unaudited) F-4
Consolidated statements of operations for the years
ended June 30, 1997 and 1996 and for the three
months ended September 30, 1997 and 1996 (unaudited) F-5
Consolidated statements of stockholder's equity for the
years ended June 30, 1997 and 1996 and for the three
months ended September 30, 1997 (unaudited) F-6
Consolidated statements of cash flows for the years
ended June 30, 1997 and 1996 and for the three
months ended September 30, 1997 and 1996 (unaudited) F-7
Notes to consolidated financial statements F-9
Pollack Enterprises, Inc.
Report of Independent Certified Public Accountants F-28
Statement of income for the year ended December 31, 1995 F-29
Statement of stockholder's equity for the year ended
December 31, 1995 F-30
Statement of cash flows for the year ended December 31, 1995 F-31
Notes to financial statements F-32
</TABLE>
F-1
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Libbus, Inc.
Report of Independent Certified Public Accountants F-33
Statements of income for the year ended December 31,
1995 and for the nine months ended September 30,
1996 (unaudited) F-34
Statements of stockholder's equity for the year ended
December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) F-35
Statements of cash flows for the year ended December 31,
1995 and for the nine months ended September 30,
1996 (unaudited) F-36
Notes to financial statements F-37
TLC Recreation Center, Inc
Report of Independent Certified Public Accountants F-38
Statement of income for the year ended January 31, 1997 F-39
Statement of stockholder's equity for the
year ended January 31, 1997 F-40
Statement of cash flows for the year
ended January 31, 1997 F-41
Notes to financial statements F-42
</TABLE>
F-2
<PAGE>
Report of Independent Certified Public Accountants
[The following is the form of the opinion that BDO Seidman, LLP will be in a
position to issue upon completion of the Reorganization described in Note 1(l)].
To the Board of Directors
and Stockholder of
Phoenix Preschool Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Phoenix Preschool
Holdings, Inc. and subsidiary as of June 30, 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for the years
ended June 30, 1997 and 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Preschool
Holdings, Inc. and subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the years ended June 30, 1997 and 1996, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 13, 1997,
except for Note 1(l) which is
as of ___________________, 1997
F-3
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
June 30, September 30,
1997 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current
Cash $ 159,568 $ 117,388
Accounts receivable (Note 2) 424,697 388,533
Prepaid expenses and supplies 72,980 72,538
- -------------------------------------------------------------------------------------------------------------------
Total current assets 657,245 578,459
Property and equipment, net (Notes 3 and 5) 3,058,587 3,059,036
Intangible assets,
net of accumulated amortization of $120,886 and $153,453 576,904 544,337
Deferred financing costs, net 120,510 96,933
Deferred offering costs 134,554 235,396
Other assets 5,566 9,066
- -------------------------------------------------------------------------------------------------------------------
$ 4,553,366 $ 4,523,227
===================================================================================================================
Liabilities and Stockholder's Equity
Current liabilities
Current maturities of long-term debt (Note 5) $ 440,012 $ 466,843
Accounts payable 316,548 447,081
Accrued expenses 309,921 249,116
Deferred revenue 17,095 14,371
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,083,576 1,177,411
Loans payable, officer/stockholder (Note 4) 247,831 247,831
Long-term debt (Notes 5 and 8) 2,601,123 2,506,912
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,932,530 3,932,154
- -------------------------------------------------------------------------------------------------------------------
Commitments (Note 7)
Stockholder's equity (Notes 4, 8, 9 and 11)
Preferred stock, $.10 par value
Authorized 1,000,000 shares
Issued and outstanding 500,000 shares 50,000 50,000
Common stock, $.10 par value
Authorized 15,000,000 shares
Issued and outstanding 810,890 shares 81,089 81,089
Additional paid-in capital 777,514 777,514
Deficit (287,767) (317,530)
- -------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 620,836 591,073
- -------------------------------------------------------------------------------------------------------------------
$ 4,553,366 $ 4,523,227
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Three months
Year ended June 30, ended September 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 5,608,092 $ 2,824,168 $ 2,157,081 $ 1,122,932
Direct costs 3,504,466 1,628,635 1,308,181 636,130
- -------------------------------------------------------------------------------------------------------------------
Gross profit 2,103,626 1,195,533 848,900 486,802
- -------------------------------------------------------------------------------------------------------------------
Operating expenses
Marketing 91,972 41,215 30,180 27,876
General and administrative 2,150,563 1,267,268 782,053 499,773
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,242,535 1,308,483 812,233 527,649
- -------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (138,909) (112,950) 36,667 (40,847)
- -------------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest expense (150,113) (89,464) (66,752) (48,805)
Interest income 1,255 2,711 322 692
- -------------------------------------------------------------------------------------------------------------------
Total other (expense) (148,858) (86,753) (66,430) (48,113)
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (287,767) $ (199,703) $ (29,763) $ (88,960)
- -------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (.33) $ (.23) $ (.03) $ (.10)
- -------------------------------------------------------------------------------------------------------------------
Weighted average common
shares outstanding 862,811 862,811 862,811 862,811
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ----------------------- Paid-In
Shares Amount Shares Amount Capital* Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 500,000 $ 50,000 810,890 $ 81,089 $ 977,217 $ - $1,108,306
Net loss - - - - (199,703) - (199,703)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 500,000 500,000 810,890 81,089 777,514 - 908,603
Net loss - - - - - (287,767) (287,767)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 500,000 50,000 810,890 81,089 777,514 (287,767) 620,836
Net loss (unaudited) - - - - - (29,763) (29,763)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997
(unaudited) 500,000 $ 50,000 810,890 $ 81,089 $ 777,514 $ (317,530) $ 591,073
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes net losses through termination of the Company's S Corporation status.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Three months
Year ended June 30, ended September 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (287,767) $ (199,703) $ (29,763) $ (88,960)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 343,640 178,860 129,824 70,789
Loss on sale of equipment 3,193 20,735 - -
Amortization of intangible assets and
deferred costs 104,340 20,642 56,169 20,724
(Increase) decrease in
Receivables (232,257) (192,440) 36,164 (61,957)
Other assets (94) (4,437) (3,500) (94)
Prepaid expenses and supplies 128,375 13,378 442 67,517
Increase (decrease) in
Accounts payable and
accrued expenses 517,137 96,308 69,728 19,806
Deferred revenue 8,889 8,206 (2,724) (8,206)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 585,456 (58,451) 256,340 19,619
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisitions of property and equipment (315,063) (59,475) (81,427) (55,000)
Proceeds from sale of property
and equipment 2,807 7,400 - -
Cash payments for assets of
acquired businesses (659,000) (215,000) - (225,000)
Organization costs - (16,855) - -
Deferred offering costs (134,554) - (100,867) -
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in)
investing activities (1,105,810) (283,930) (188,294) (280,000)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Three months
Year ended June 30, ended September 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities
Repayments of long-term debt $ (311,570) $ (200,684) $ (110,226) $ (69,658)
Proceeds of officer/stockholder loan 303,288 592,326 - 227,316
Proceeds of long-term debt 656,683 - - -
Deferred financing costs (125,750) - - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) financing activities 522,651 391,642 (110,226) 157,658
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,297 49,261 (42,180) (102,723)
Cash, beginning of period 157,271 108,010 159,568 157,271
- -------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 159,568 $ 157,271 $ 117,388 $ 54,548
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 145,001 $ 89,464 $ 60,833 $ 48,805
- -------------------------------------------------------------------------------------------------------------------
Noncash transactions
Acquisition of financed assets $ 1,291,000 $ 750,389 $ 42,846 $ 440,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
1. Summary of a) Business
Significant
Accounting Phoenix Preschool Holdings, Inc. ("Phoenix" or the
Policies "Company") provides for-profit preschool educational
services and childcare centers located in Florida,
North Carolina and Georgia through its wholly-owned
subsidiary, Phoenix Preschool Education Centers, Inc.
("PPEC"). These centers are set up in classroom style
and staffed by licensed teachers and administrative
directors. The corporate offices are located in New
York City. At September 30, 1997 and 1996, the Company
was operating 22 and 13 centers, respectively.
b) Basis of Financial Statement Presentation
The consolidated financial statements have been
prepared as if Phoenix and PPEC had operated as a
single consolidated group since inception of PPEC. Any
intercompany balances and transactions have been
eliminated.
c) Revenue Recognition
Revenue from preschool and daycare services is
recognized when the service has been provided.
Non-subsidized students are billed on a weekly basis in
advance. Governmental agencies acting on behalf of
subsidized students are billed on a monthly basis in
arrears.
d) Depreciation and Amortization
Property and equipment are stated at cost or at fair
values assigned to the assets at the time of business
acquisition.
Depreciation of leasehold improvements is computed on
the straight-line method over the lives of the related
leases. Furniture, equipment and vehicles are
depreciated using the straight-line method over 5-7
years.
Intangible assets, which consist of customer lists,
restrictive covenants, organization costs and goodwill,
all principally arising from acquisitions, are being
amortized over a five year period using the
straight-line method.
F-9
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
The Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS 121")
"Accounting for the impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" during the
year ended June 30, 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles
to be disposed of.
The Company reviews the carrying values of its
long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the
assets may not be recoverable. As of September 30,
1997, there has been no impairment of asset carrying
values.
e) Deferred Offering Costs
Direct costs incurred in connection with a proposed
initial public offering have been deferred and will be
charged to additional paid-in capital upon completion
of the offering or expensed if the offering is
unsuccessful.
f) Deferred Financing Costs
Direct costs incurred in connection with Bridge
Financing (see Note 8) are being amortized over the
sixteen month term of the related debt.
g) Cash Equivalents
For purposes of the statements of cash flows, cash and
cash equivalents are highly liquid investments with an
original maturity of three months or less.
h) Income Taxes
Prior to July 1, 1996, the Company had elected S
corporation status under the Internal Revenue Code and
the tax regulations in the states which it operates
and, accordingly, the Company's tax losses were
reported on the personal income tax returns of the
stockholder rather than at the corporate level. As of
July 1, 1996, the Company terminated its S corporation
status and began accounting for income taxes under
Statement of Financial Accounting Standards No. 109,
"Accounting for
F-10
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
Income Taxes" ("SFAS 109"). SFAS 109 is an asset and
liability approach that requires the recognition of
deferred tax assets and liabilities for the expected
future tax consequences of events that have been
recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS
109 generally considers all expected future events
other than enactments of changes in the tax law or
rates. A valuation allowance is established to reduce
deferred tax assets when it is "more likely than not"
that some portion or all of the deferred tax assets
will not be realized. The termination of the Company's
S corporation status did not result in any deferred tax
assets or liabilities being recorded at July 1, 1996,
since any differences in the financial statement and
income tax basis of assets and liabilities were
immaterial at that date.
i) Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
j) Credit Risk
The Company maintains its cash balances at high quality
financial institutions. At times, such amounts may be
in excess of the FDIC insurance limits.
The majority of the Company's accounts receivable
balances are with government agencies which pose
relatively low credit risks.
k) Fair Value of Financial Instruments
Financial instruments of the Company include long-term
debt. Based upon current borrowing rates available to
the Company, estimated fair values of these financial
instruments approximate their recorded amounts.
F-11
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
l) Reorganization
In connection with the Company's proposed initial
public offering of common stock (see Note 11), certain
events have occurred or will occur (the
"Reorganization"). Prior to, or simultaneously with the
effective date of the proposed Offering, the Company,
Michael C. Koffler (sole shareholder) and PPEC will
undertake a reorganization transaction in accordance
with Section 351 of the Internal Revenue Code of 1986,
as amended, pursuant to the Plan of Reorganization,
dated as of July 7, 1997 (amended on August 30, 1997
and November 18, 1997), among Mr. Koffler, PPEC and the
Company. Mr. Koffler will contribute all of the
1,600,000 issued and outstanding shares of common stock
of PPEC to the Company, together with $500,000 in debt
owed to him by PPEC. In exchange, the Company will
deliver to Mr. Koffler 810,890 shares of Common Stock
and 500,000 shares of the Company's Series A
Convertible Preferred Stock. In addition, PPEC will pay
to Mr. Koffler the balance of its debt to him equal to
approximately $248,000. As a result of the
Reorganization, the Company will own all of PPEC's
issued and outstanding shares and PPEC will become a
wholly-owned subsidiary of the Company. The Company
will assume the obligations of PPEC under all
outstanding warrants and options.
The reorganization transaction as described in the
previous paragraph has been reflected historically in
the accompanying financial statements.
m) Earnings Per Share
Net income per share is based on the weighted averaged
number of shares of common stock outstanding during
each period, as adjusted for the effects of the
application of Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 83 ("SAB No. 83").
Pursuant to SAB No. 83, common stock issued by the
Company at a price less than the proposed initial
public offering price during the twelve months
immediately preceding the initial filing of an
offering, together with common stock purchase warrants
and options issued during such period with an exercise
price less than the initial public offering price, are
treated as outstanding for all periods presented. Net
income per share is computed using a treasury stock
method, under which the number of shares outstanding
reflects an assumed use of the proceeds from the
issuance of such shares and from the assumed exercise
of such
F-12
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
warrants and options, to repurchase shares of the
Company's common stock at the initial public offering
price.
n) Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). SFAS 128 provides
a different method of calculating earnings per share
than is currently used in Accounting Principle Board
Opinion 15. SFAS 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings
per share includes no dilution and is computed by
dividing income available to common stockholders by the
weighted average number of common shares. Diluted
earnings per share reflects the potential dilution of
securities that could share in the earnings of an
entity, similar to existing fully diluted earnings per
share. The Company believes adopting SFAS 128 will not
have a material effect on its calculation of earnings
per share. The Company will adopt the provisions for
computing earnings per share set forth in SFAS 128 for
its quarter ending December 31, 1997.
Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure
("SFAS 129") effective for periods ending after
December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS
129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stock,
options, warrants, preferred stock, debt and
participation rights) including dividend and
liquidation preferences, participant rights, call
prices and dates, conversion or exercise prices and
redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the
information specified.
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 is effective for
transactions entered into in fiscal years beginning
after December 15, 1995. During fiscal year 1997, the
Company adopted only the disclosure provisions of SFAS
123 and accounted for stock-based compensation using
the intrinsic value method set forth in Accounting
Principle Board Opinion 25.
F-13
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
In June 1997, the Financial Accounting Standards Board
issued two new disclosure standards. Results of
operations and financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive
income, its components and accumulated balances.
Comprehensive income is defined to include all changes
in equity except those resulting from investments by
owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting
standards as components of comprehensive income be
reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes
SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," establishes standards for the way
that public enterprises report information about
operating segments in annual financial statements and
requires reporting of selected information about
operating segments in interim financial statements
issued to the public. It also establishes standards for
disclosures regarding products and services, geographic
areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about
which separate financial information is available that
is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in
assessing performance.
SFAS 130 and 131 are effective for financial statements
for periods beginning after December 15, 1997 and
require comparative information for earlier years to be
restated. Due to the recent issuance of these
standards, management has been unable to fully evaluate
the impact, if any, they may have on future financial
statement disclosures.
o) Interim Financial Information
The consolidated financial information as of September
30, 1997 and for the three months ended September 30,
1997 and 1996 is unaudited. In the opinion of
management, such information contains all adjustments,
consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for
such periods. Results for interim periods are not
necessarily indicative of results to be expected for an
entire year.
F-14
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
2. Accounts
Receivable Accounts receivable are detailed as follows:
June 30, September 30,
1997 1997
------------------------------------------------------
Governmental agencies $ 398,077 $ 337,570
Non-subsidized students 26,620 50,963
------------------------------------------------------
Total $ 424,697 $ 388,533
------------------------------------------------------
3. Property Property and equipment consist of:
and
Equipment
June 30, September 30,
1997 1997
------------------------------------------------------
Furniture and equipment $ 1,579,386 $1,636,809
Vehicles 508,642 561,668
Leasehold improvements 1,499,707 1,519,531
Other 1,500 1,500
-----------------------------------------------------
3,589,235 3,719,508
Less accumulated
depreciation
and amortization 530,648 660,472
------------------------------------------------------
$3,058,587 $3,059,036
======================================================
4. Related From inception through September 30, 1997, PPEC
Party borrowed from Michael C. Koffler, President, Chairman,
Transactions Chief Executive Officer and sole stockholder,
$1,798,389 to fund working capital needs and
acquisitions. During the year ended June 30, 1996,
outstanding officer loans payable of $616,558 were
exchanged for 810,890 shares of PPEC common stock.
During the year ended June 30, 1997, $434,000 was
repaid with proceeds of the Bridge Financing described
in Note 8. Of the remaining outstanding loans of
$747,831 at September 30, 1997, $247,831 represents a
noninterest bearing promissory note payable to Michael
C. Koffler, which is, at his
F-15
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
option, convertible, in whole or in part with respect
to any portion of the unpaid balance of the note plus
an amount equal to an interest factor (utilized solely
for calculating conversion into common stock) of 10%
per annum, into shares of common stock of the Company,
at a price of $.76 per share. The note may not be
converted prior to the first closing date of an initial
public offering. Pursuant to the Reorganization
described in Note 1(l) to the financial statements, the
accompanying financial statements reflect the exchange
of the remaining $500,000 of indebtedness to Mr.
Koffler for 500,000 shares of Series A Convertible
Preferred Stock. In addition, PPEC will pay to Mr.
Koffler the balance of its debt to him equal to
approximately $248,000. Officer loans mature on July 1,
1998.
Until December 31, 1996, an affiliate of Michael C.
Koffler (i) sublet office space to the Company for its
headquarters at cost, (ii) advanced a portion of the
Company's salary expenses and (iii) advanced a portion
of the Company's medical benefits. For the period from
May 3, 1995 (inception) to December 31, 1996,
approximately $134,300 was paid on behalf of the
Company for such rent and expenses. Effective January
1, 1997, the Company leased office space directly from
the landlord and directly paid all salary and benefits.
The Company and Michael C. Koffler entered into an
Employment Agreement, pursuant to which the Company
has agreed to employ Mr. Koffler as the Chief Executive
Officer and President of the Company during the three
(3) year period commencing on September 3, 1997, unless
terminated earlier pursuant to its provisions. Pursuant
to such Employment Agreement, Mr. Koffler will receive
as compensation 5% of the Company's earnings, if any,
before giving effect to interest, taxes, amortization
and depreciation. In addition, upon an initial public
offering by the Company, the Company will issue Mr.
Koffler a nonqualified stock option to acquire up to
1,000,000 shares of common stock at an exercise price
of $4.25 per share.
F-16
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
5. Long-Term Long-term debt is detailed as follows:
Debt
June 30, September 30,
1997 1997
-------------------------------------------------------
Notes are payable to finance
companies in various monthly
installments with annual
interest rates ranging from
10.05% to 11.9%. The final
payment is due in August 2000
The notes are collateralized
by vehicles $118,078 $141,736
A ten-year note is payable to
a corporation in quarterly
principal installments of
$16,500 plus interest at 9%
per annum. The final payment
is due February 1, 2006
The note is collateralized
by the assets of three
acquired preschool
centers in North
Carolina 577,500 561,000
A five-year note is payable
to a corporation in quarterly
principal installments
of $37,500 plus interest at
9% per annum. The final
payment is due June 1, 2000
The note is collateralized
by the assets of eight
acquired preschool
centers in Florida 450,000 412,500
F-17
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
June 30, September 30,
1997 1997
-------------------------------------------------------
An eight-year note is
payable to a corporation
in quarterly principal
installments of $7,813
plus interest at 8% per
annum. The final payment
is due August 1, 2004
The note is collateralized
by the assets of two acquired
preschool centers
in North Carolina $226,563 $218,750
A ten-year note is payable
to a corporation in quarterly
principal installments
of $4,750 plus interest at 8%
per annum. The final payment
is due October 1, 2006. The
note is collateralized by the
assets of three acquired
preschool centers in
North Carolina 180,500 175,750
A ten-year note is payable
to a corporation in quarterly
principal installments of
$2,150 plus interest at 8%
per annum. The final payment
is due May 1, 2007. The note
is collateralized by the assets
of an acquired preschool center
in Georgia 86,000 83,850
A ten-year note is payable to
a corporation in quarterly
principal installments of
$1,875 plus interest of 8%
per annum. The final payment
is due May 1, 2007. The note
is collateralized by the
assets of an acquired
preschool center in Florida 75,000 73,125
F-18
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
June 30, September 30,
1997 1997
-------------------------------------------------------
A ten-year note is payable
to a corporation in
quarterly principal
installments of $1,125
plus interest at 7.5%
per annum. The final payment
is due May 1, 2007. The note
is collateralized by the
assets of an acquired
preschool center in
North Carolina $ 45,000 $ 43,895
An eight-year note is
payable to a corporation
in monthly principal
installments of $5,365
plus interest at 8% per
annum. The final payment
is due June 1, 2005. The
note is collateralized
by the assets of an
acquired preschool center
in Florida 515,000 498,905
A ten-year note is payable
to a corporation in
quarterly principal
installments of $3,250
plus interest at 8.5% per
annum. The final payment
is due June 1, 2007. The
note is collateralized by
the assets of two acquired
preschool centers in Georgia 130,000 126,750
Notes are payable to
individuals in connection
with the bridge financing
described in Note 8. The
entire principal amount plus
accrued interest at 8% per
annum is payable on the
earlier of October 9, 1998
or the consummation of an
initial public offering
or private placement 637,494 637,494
-------------------------------------------------------
3,041,135 2,973,755
Less current maturities 440,012 466,843
-------------------------------------------------------
$2,601,123 2,506,912
=======================================================
F-19
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
At September 30, 1997, long-term debt matures as
follows:
Year ending June 30,
-------------------------------------------------------
1998 $ 340,483
1999 1,051,459
2000 387,132
2001 217,019
2002 214,230
Thereafter 763,432
-------------------------------------------------------
$2,973,755
-------------------------------------------------------
6. Acquisitions Operations of acquired entities, which are described
below, are included in the accompanying financial
statements from the dates of acquisition. The costs of
the acquisitions were allocated among the fair market
value of the current assets, property and equipment and
intangible assets acquired. Cash down payments were
provided through stockholder loans with the balances of
the purchase acquisition costs financed through seller
notes (see Notes 4 and 5).
o In June 1995, the Company acquired the assets of
Phoenix Preschool Education Centers, Inc. in a
business combination accounted for as a purchase.
The total cost of the acquisition was $1,000,000,
which was financed by a $250,000 cash deposit and a
$750,000 five year note payable with interest at 9%
per annum.
o In January 1996, the Company acquired the assets of
Pollack Enterprises, Inc. in a business combination
accounted for as a purchase. The total cost of the
acquisition was $875,000, which was financed by a
$215,000 cash deposit and a $660,000 ten year note
payable with interest at 9% per annum.
o In July 1996, the Company acquired the assets of
Coastal Kiddie College, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $365,000, which was
financed by a $115,000 cash
F-20
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
deposit and a $250,000 eight year note payable with
interest at 8% per annum.
o In September 1996, the Company acquired the assets
of Libbus, Inc. in a business combination accounted
for as a purchase. The total cost of the
acquisition was $300,000, which was financed by a
$110,000 cash deposit and a $190,000 ten year note
payable with interest at 8% per annum.
o In April 1997, the Company acquired the assets of
Brighter Day Care Center, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $130,000, which was
financed by a $44,000 cash payment and an $86,000
ten-year note payable with interest at 8% per
annum.
o In May 1997, the Company acquired the assets of
Gingham Goose School, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $100,000, which was
financed by a $25,000 cash payment and a $75,000
ten-year note payable with interest at 8% per
annum.
o In May 1997, the Company acquired the assets of
Reelsboro Christian Day Care, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $60,000, which was
financed by a $15,000 cash payment and a $45,000
ten-year note payable with interest at 7.5% per
annum.
o In May 1997, the Company acquired the assets of TLC
Recreation Center, Inc. in a business combination
accounted for as a purchase. The total cost of the
acquisition was $815,000, which was financed by a
$300,000 cash payment and a $515,000 eight-year
note payable with interest at 8% per annum.
o In June 1997, the Company acquired the assets of
Humpty Dumpty Play School, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $180,000, which was
financed by a
F-21
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
$50,000 cash payment and a $130,000 eight-year note
payable with interest at 8.5% per annum.
The following unaudited pro forma results gives effect
to significant acquisitions prior to June 30, 1997 as
if they had occurred on July 1, 1995:
(in thousands, except common per share amounts)
Year ended June 30, 1997 1996
-------------------------------------------------------
Revenue $ 6,610 $ 4,669
Net loss (331) (346)
Net loss per common share (.38) (.40)
The pro forma results include certain adjustments such
as additional amortization expense as a result of
goodwill and other intangible assets and increased
interest expense on acquisition debt. The pro forma
results are not necessarily indicative of what the
actual results of operations might have been if the
acquisitions had been effective at the beginning of
fiscal 1996 or of future operations of the combined
companies under the ownership and management of the
Company.
7. Commitments The Company leases space for its corporate headquarters
and its preschool center facilities under operating
leases with initial lease terms of 5-10 years, which
expire through September 30, 2006. All leases contain a
minimum 5-year renewal option. Rent expense for the
years ended June 30, 1997 and 1996 was approximately
$614,000 and $336,000, respectively. Rent expense for
the three months ended September 30, 1997 and 1996 was
approximately $217,000 and $115,000, respectively.
F-22
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
Future minimum rental payments as of June 30, 1997 are
approximately as follows:
Year ending June 30,
-------------------------------------------------------
1998 $ 811,000
1999 835,000
2000 829,000
2001 766,000
2002 753,000
Thereafter 2,082,000
-------------------------------------------------------
$6,076,000
-------------------------------------------------------
8. Bridge In June 1997, the Company sold an aggregate of 25.5
Financing units, each unit consisting of the Company's 8%
promissory note (the "Bridge Notes") in the principal
amount of $25,000 per unit and a warrant to acquire up
to 50,000 shares of common stock. The net proceeds of
Bridge financing were approximately $555,000 and were
used primarily to repay stockholder loans used to
finance preschool center acquisitions (see Note 4). The
Bridge Notes are payable upon the earlier of October 9,
1998 or the consummation of an initial public offering
("IPO") or private placement of the Company's debt
and/or equity securities resulting in gross proceeds to
the Company of at least $5,000,000. Each Bridge Warrant
entitles the registered holder thereof to purchase one
share of common stock at an exercise price of $4.50 per
share, subject to adjustment in certain events, at any
time during the period commencing June 9, 1998 and
ending June 9, 2002. As of the effective date of an
IPO, the Bridge warrants will automatically be
converted into the warrants issued in the offering.
9. Stockholder's a) Organization
Equity
The Company was organized on July 2, 1997. The
Company's Board of Directors has authorized the
issuance of up to 15,000,000 shares of $.10 par value
common stock.
F-23
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
In addition, the Board of Directors have authorized the
issuance of up to 1,000,000 shares of preferred stock
in one or more series. In connection with the
Reorganization (see Note 1(l)), the Company authorized
the issuance of 500,000 shares of Series A Preferred
Stock, which is convertible into between 500,000 and
1,320,674 shares of Common Stock.
b) Stock Options and Warrants
An employee stock option plan dated December 1995
(amended and restated during September 1997) permits
the granting of options to purchase shares of common
stock. The plan provides for the granting of both
incentive stock options, as defined in Section 422 of
the Internal Revenue Code (the "Code"), and options
that do not qualify as options defined by Section 422
of the Code ("Non-qualified options"). The aggregate
number of shares which may be issued under the plan is
1,527,277.
The plan is administered by the Company's Board of
Directors ("Board"), which grants all options and
determines their terms. Options are non-transferable
and are only granted to officers and key employees to
be determined by the Board. The maximum term of any
option under the plan is ten years and future grants
will be at a price not less than 100% of the fair
market value of the Company's common stock on the date
the option is granted.
In December 1996, the Company adopted a non-employee
stock option plan. These options contain terms
substantially similar to those contained in options
issued pursuant to the 1995 Employee Stock Option Plan.
F-24
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
<TABLE>
<CAPTION>
Employee Stock Options
Weighted
Average
Option Option Remaining
Price Price Average
Incentive Number of Per Per Contractual
Options Shares Share Share Life
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -
Granted 71,651 $.76 to 1.27 $ .83
- -------------------------------------------
Balance, June 30, 1996 71,651 $.76 to 1.27 $ .83
Granted 55,901 $2.53 to 3.55 $ 2.93
Canceled (13,368) $.76 to 1.27 $ .85
- -------------------------------------------
Balance, June 30, 1997 114,184 $.76 to 3.55 $ 1.86
Granted 7,290 $ 3.55 $ 3.55
Canceled (10,937) $.76 to 3.55 $ 2.79
- -------------------------------------------
Balance, September 30, 1997 110,537 $.76 to 3.55 $ 1.89 9 yrs.
- ------------------------------------------------------------------------------------------------------------
Number of
Non-Qualified Options Shares
- -------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 -
Granted 47,346 $ .76 $ .76
- -------------------------------------------
Balance, June 30, 1996 47,346 $ .76 $ .76
Granted -
- -------------------------------------------
Balance, June 30, and
September 30, 1997 47,346 $ .76 $ .76 8.3 yrs.
- --------------------------------------------------------------------------------------------------------------
Non-Employee Stock Options
- --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 -
Granted 4,861 $ 2.53 $ 2.53
- -------------------------------------------
Balance, June 30, 1996 4,861 $ 2.53 $ 2.53
Granted 9,722 $ 2.53 $ 2.53
- -------------------------------------------
Balance, June 30, and
September 30, 1997 14,583 $ 2.53 $ 2.53 9.3 yrs.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
The options become fully exercisable over a three year
period with 33 1/3% exercisable on the later of (a) one
year from date of grant or (b) the first closing date
of an initial public offering of the stock. An
additional 33 1/3% become exercisable each year
thereafter. At September 30, 1997, none of the options
were exercisable.
On June 1, 1995, the Company issued warrants to
purchase 87,678 shares of its common stock at $.63 per
share, subject to adjustment. The warrants are
exercisable at anytime through May 1, 1999.
Immediately preceding the effective date of an initial
public offering, the Company will issue a nonqualified
employee stock option to acquire up to 130,000 shares
of Common Stock to an employee of the Company in
consideration for financial advice, acquisition
assistance and other services to be rendered by such
employee during the two years following this effective
date. The exercise price under such option is $4.25 per
share subject to adjustment. During the two-year period
commencing on the effective date and prior to
registration of the Common Stock subject to such
option, the holder of the option may reprice the option
subject to certain conditions.
Additionally, the Company intends to issue an option to
acquire up to 10,000 shares of common stock at the
initial public offering price to each of two
nonemployee directors upon their appointment to the
board.
The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". Accordingly,
no compensation has been recognized in the accompanying
financial statements for the stock option plans. Had
compensation cost for the stock option plans been
determined based on the fair value at the grant date
consistent with the provisions of SFAS No. 123, the
F-26
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of September 30, 1997 and for the three
months ended September 30, 1997 and 1996 is unaudited)
================================================================================
Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
Year ended June 30, 1997 1996
-------------------------------------------------------
Net loss - as reported $(287,767) $ (199,703)
Net loss - pro forma $(815,457) $ (614,003)
Net loss per
common share - as reported $ (.17) $ (.16)
Net loss per common share -
pro forma $ (.49) $ (.49)
The minimum value of an option is the excess of the
fair value of the stock at the date of grant (utilized
proposed public offering price of $4.25) over the
present value of both the exercise price and the
expected dividend payments (assumed none), each
discounted at the risk-free rate (6%), over the
expected exercise life of the option.
10. Income Taxes At June 30, 1997, the Company had a tax net operating
loss carryforward of approximately $200,000 for federal
income tax purposes which expires in 2011. A valuation
allowance was established for the full amount of the
estimated tax benefit upon realization of the
carryforward since the Company has not determined the
deferred tax asset to be more likely than not
realizable at this time.
11. Proposed Initial The Company's proposed IPO calls for the Company to
Public Offering offer for public sale (a) 1,275,000 shares of its
common stock at $4.25 per share and (b) on behalf of
the holders of the bridge notes described in Note 8,
1,275,000 redeemable stock purchase warrants at $.125
per warrant to acquire one share of common stock. The
warrants are exercisable at an exchange price of $5.10
per share for a period of three years commencing two
years from the effective date of the Company's
Registration Statement. The exercise price of the
warrants is subject to change in certain events. The
warrants are subject to redemption by the Company, in
whole or in part, at $.05 per warrant, at any time
commencing two years after the effective date, provided
that the closing sale price of the common stock has
been at least $7.00 for the twenty consecutive trading
days ending on the third day prior to the date on which
the Company gives notice of redemption. The warrants
will remain exercisable until the close of business on
the day immediately preceding the date fixed for
redemption.
F-27
<PAGE>
Report of Independent Certified Public Accountants
Pollack Enterprises, Inc.
Morehead City, North Carolina
We have audited the accompanying statements of income, stockholder's equity and
cash flows of Pollack Enterprises, Inc. for the year ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Pollack
Enterprises, Inc. for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
June 9, 1997
F-28
<PAGE>
Pollack Enterprises, Inc.
Statement of Income
================================================================================
Year ended December 31, 1995
- --------------------------------------------------------------------------------
Net revenue $ 1,014,130
Operating expenses 966,605
- --------------------------------------------------------------------------------
Operating income 47,525
Interest expense 2,362
- --------------------------------------------------------------------------------
Net income $ 45,163
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-29
<PAGE>
Pollack Enterprises, Inc.
Statement of Stockholder's Equity
================================================================================
- --------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- --------------------------------------------------------------------------------
Balance, January 1, 1995 $ 5,000 $ - $ 5,000
Net income - 45,163 45,163
Stockholder distributions - (31,000) (31,000)
- --------------------------------------------------------------------------------
Balance, December 31, 1995 $ 5,000 $ 14,163 $ 19,163
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-30
<PAGE>
Pollack Enterprises, Inc.
Statement of Cash Flows
================================================================================
Year ended December 31, 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 45,163
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 14,416
Changes in assets and liabilities
Decrease in receivables 380
Increase in accounts payable and accruals 39,245
- --------------------------------------------------------------------------------
Net cash provided by operating activities 99,204
- --------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (19,896)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds of shareholder loans 12,500
Repayments of shareholder loans (36,500)
Proceeds from issuance of long-term debt 27,647
Principal payments on long-term debt (12,843)
S-corp distributions to stockholder (31,000)
- --------------------------------------------------------------------------------
Net cash (used in) financing activities (40,196)
- --------------------------------------------------------------------------------
Net increase in cash 39,112
Cash, beginning of year 11,100
- --------------------------------------------------------------------------------
Cash, end of year $ 50,212
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-31
<PAGE>
Pollack Enterprises, Inc.
Notes to Financial Statements
================================================================================
1. Summary of Business
Significant
Accounting Pollack Enterprises, Inc. (the "Company") provided
Policies for-profit preschool educational and daycare services
in three childcare centers located in North Carolina.
These centers are set up in classroom style and staffed
by licensed teachers and administrative directors.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation
is computed using accelerated methods for financial
statement and income tax purposes.
Income Taxes
The Company elected S corporation status under the
Internal Revenue Code and state tax regulations. As a
result, the Company's income or loss is reported on the
personal income tax returns of the stockholder and,
accordingly, no income tax is imposed on the Company.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the amounts reports in the financial statements
and accompanying notes.
2. Related Party The Company leased facilities for $10,947 per month
Transaction from the shareholder. Total rent expense in 1995 was
$131,364.
3. Subsequent In January 1996, the assets of the Company were sold to
Event Phoenix Preschool Education Centers, Inc. for $875,000.
F-32
<PAGE>
Report of Independent Certified Public Accountants
Libbus, Inc.
Cary, North Carolina
We have audited the accompanying statements of income, stockholder's equity and
cash flows of Libbus, Inc. for the year ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Libbus, Inc.
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
June 20, 1997
F-33
<PAGE>
Libbus, Inc.
Statements of Income
================================================================================
Year Nine months
ended ended
December 31, September 30,
1995 1996
- -------------------------------------------------------------------------------
(Unaudited)
Net revenue $ 536,842 $ 353,556
Operating expenses 482,431 308,367
- -------------------------------------------------------------------------------
Operating income 54,411 45,189
Interest expense 9,047 7,549
- -------------------------------------------------------------------------------
Net income $ 45,364 $ 37,640
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-34
<PAGE>
Libbus, Inc.
Statements of Stockholder's Equity
================================================================================
- --------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- --------------------------------------------------------------------------------
Balance, January 1, 1994 $ 5,000 $ 149,387 $ 154,387
Net income - 45,364 45,364
Stockholder distributions - (97,000) (97,000)
- --------------------------------------------------------------------------------
Balance, December 31, 1995 5,000 97,751 102,751
Net income (unaudited) - 37,640 37,640
- --------------------------------------------------------------------------------
Balance, September 30, 1996 (unaudited) $ 5,000 $ 135,391 $ 140,391
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-35
<PAGE>
Libbus, Inc.
Statements of Cash Flows
================================================================================
Year Nine months
ended ended
December 31, September 30,
1995 1996
- --------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities
Net income $ 45,364 $ 37,640
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 32,059 11,882
Changes in assets and liabilities
Decrease in receivables 3,747 -
Increase (decrease) in accounts payable
and accruals 1,978 (3,443)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 83,148 46,079
- -------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures (23,455) (27,525)
- -------------------------------------------------------------------------------
Cash flows from financing activities
Repayment of shareholder loans (23,461) -
Principal payments on long-term debt (4,942) (4,451)
S-corp distributions to stockholder (97,000) -
- -------------------------------------------------------------------------------
Net cash (used in) financing activities (125,403) (4,451)
- -------------------------------------------------------------------------------
Net (decrease) increase in cash (65,710) 14,103
Cash, beginning of year/period 69,295 3,585
- -------------------------------------------------------------------------------
Cash, end of year/period $ 3,585 $ 17,688
- -------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-36
<PAGE>
Libbus, Inc.
Notes to Financial Statements
================================================================================
1. Summary of Business
Significant
Accounting Libbus, Inc. (the "Company") provided for-profit
Policies preschool educational services in three childcare
centers located in North Carolina. These centers are
set up in classroom style and staffed by licensed
teachers and administrative directors.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation
is computed using accelerated methods for financial
statement and income tax purposes.
Income Taxes
The Company elected S corporation status under the
Internal Revenue Code and state tax regulations. As a
result, the Company's income or loss is reported on the
personal income tax returns of the stockholder and,
accordingly, no income tax is imposed on the Company.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the amounts reports in the financial statements
and accompanying notes. Actual results could differ
from those estimates.
Interim Financial Information
The financial information as of September 30, 1996 and
for the nine months then ended is unaudited. In the
opinion of management, such information contains all
adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the
results for the period. Results for interim periods are
not necessarily indicative of results to be expected
for an entire year.
2. Related Party The Company leased facilities for $6,200 per month from
Transaction the sole shareholder. Total rent expense in 1995 was
$74,400.
3. Subsequent In October 1996, the assets of the Company were sold to
Event Phoenix Preschool Education Centers, Inc. for $300,000.
F-37
<PAGE>
Report of Independent Certified Public Accountants
TLC Recreation Center, Inc.
Fort Walton Beach, Florida
We have audited the accompanying statements of income, stockholder's equity and
cash flows of TLC Recreation Center, Inc. for the year ended January 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of TLC
Recreation Center, Inc. for the year ended January 31, 1997, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 27, 1997
F-38
<PAGE>
TLC Recreation Center, Inc.
Statement of Income
================================================================================
Year ended January 31, 1997
- --------------------------------------------------------------------------------
Net revenue $ 891,226
Operating expenses 831,875
- --------------------------------------------------------------------------------
Operating income 59,351
Interest expense 25,261
- --------------------------------------------------------------------------------
Income before taxes 34,090
Income tax expense 5,846
- --------------------------------------------------------------------------------
Net income $ 28,244
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-39
<PAGE>
TLC Recreation Center, Inc.
Statement of Stockholder's Equity
================================================================================
- --------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- --------------------------------------------------------------------------------
Balance, February 1, 1996 $ 500 $ 178,602 $ 179,102
Net income - 28,244 28,244
- --------------------------------------------------------------------------------
Balance, January 31, 1997 $ 500 $ 206,846 $ 207,346
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-40
<PAGE>
TLC Recreation Center, Inc.
Statement of Cash Flows
================================================================================
Year ended January 31, 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 28,244
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 17,498
Changes in assets and liabilities
Decrease in receivables 3,555
Decrease in prepaid expense 11,853
(Decrease) in accounts payable (577)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 60,573
- --------------------------------------------------------------------------------
Cash flows from investing activities
Repayment of shareholder loans 17,323
- --------------------------------------------------------------------------------
Cash flows from financing activities
Principal payments on long-term debt (46,255)
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 31,641
Cash and cash equivalents, beginning of year 74,634
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $106,277
- --------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 25,261
Income taxes $ 3,000
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-41
<PAGE>
TLC Recreation Center, Inc.
Statement of Cash Flows
================================================================================
1. Summary of Business
Significant
Accounting TLC Recreation Center, Inc. (the "Company") provided
Policies for-profit preschool educational and daycare services
in a childcare center located in Florida. The center is
set up in classroom style and staffed by licensed
teachers and administrative directors.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation
is computed using accelerated methods for financial
statement and income tax purposes.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the amounts reports in the financial statements
and accompanying notes.
Cash Equivalents
For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments
with an original maturity of three months or less to be
cash equivalents.
Income Taxes
The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS 109). SFAS 109 is an asset and
liability approach that requires the recognition of
deferred tax assets and liabilities for the expected
future tax consequences of events that have been
recognized in the Company's financial statements or tax
returns.
2. Related Party The Company leased facilities for $93,484 from the
Transaction shareholder during the year.
3. Subsequent In June 1997, the assets of the Company were sold to
Event Phoenix Preschool Education Centers, Inc. for $800,000.
F-42
<PAGE>
================================================================================
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made in connection herewith shall, under any circumstances, create any
implication that there has been no change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof. This
Prospectus, does not constitute an offer to sell or solicitation of any offer to
buy the Common Stock by anyone in any jurisdictions in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation of any offer to buy the Common Stock is not qualified to do so, or
to any person to whom it is unlawful to make such an offer or solicitation.
-------------------
TABLE OF CONTENTS
Page
------
Available Information.....................................(i)
Prospectus Summary..........................................1
Cautionary Statement Regarding Forward Looking Statements...6
Risk Factors................................................6
Reorganization.............................................15
Use of Proceeds............................................16
Capitalization.............................................18
Dividend Policy............................................18
Dilution...................................................19
Selling Securityholders....................................22
Certain Federal Income Tax Consequences....................20
Selected Financial Data....................................22
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............23
Business.................................................. 28
Management.................................................40
Certain Relationships and Related Transactions.............46
Security Ownership of Certain Beneficial
Owners and Management.....................................48
Description of Securities..................................49
Market for Securities and Related Stockholder Matters......54
Underwriting...............................................55
Legal Matters..............................................58
Experts....................................................58
Transfer Agent and Registrar...............................58
Until _____________, 1997, all dealers effecting transactions in the
registered securities, 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>
================================================================================
1,275,000 Shares of Common Stock
and
1,275,000 Warrants
(each to acquire one share of Common Stock)
PHOENIX PRESCHOOL
HOLDINGS, INC.
[LOGO]
-------------
PROSPECTUS
-------------
DUKE & CO., INC.
BRIARWOOD INVESTMENT COUNSEL
_______________, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law of 1988 (the "BCL") contain provisions for
mandatory and discretionary indemnification of a corporation's directors,
officers and other personnel, and related matters.
Under Section 1741, subject to certain limitations, a corporation has
the power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a party by reason of his being a
representative, director or officer of the corporation or serving at the request
of the corporation as a representative of another corporation, partnership,
joint venture, trust or other enterprise, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. Under Section 1743, indemnification
is mandatory to the extent that the officer or director has been successful on
the merits or otherwise in defense of any action or proceeding if the
appropriate standards of conduct are met.
Section 1742 provides for indemnification in derivative actions except
in respect of any claim, issue or matter as to which the person has been
adjudged to be liable to the corporation unless and only to the extent that the
proper court determines upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses that the court deems
proper.
Section 1744 provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 shall be made by the corporation only
as authorized in the specific case upon a determination that the representative
met the applicable standard of conduct, and such determination will be made by
the board of directors (i) by a majority vote of a quorum of directors not
parties to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority of disinterested directors so directs, by independent
legal counsel; or (iii) by the shareholders. Section 1745 provides that expenses
incurred by an officer, director, employee or agent in defending a civil or
criminal action or proceeding may be paid by the corporation in advance of the
final disposition of such action or proceeding upon receipt of an undertaking by
or on behalf of such person to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the corporation.
Section 1746 provides generally that, except in any case where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17D of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders of disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding that office.
II-1
<PAGE>
Section 1747 also grants to a corporation the power to purchase and
maintain insurance on behalf of any director or officer against any liability
incurred by him or her in his or her capacity as officer or director, whether or
not the corporation would have the power to indemnify him or her against the
liability under Subchapter 17D of the BCL.
Section 1748 and 1749 extend the indemnification and advancement of
expenses provisions contained in Subchapter 17D of the BCL to successor
corporations in fundamental changes and to representatives serving as
fiduciaries of employee benefit plans.
Section 1750 provides that the indemnification and advancement of
expense provided by, or granted pursuant to, Subchapter 17D of the BCL, shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs and personal representative of such person.
The Company's Bylaws provide in general that the Company shall
indemnify its officers and directors to the fullest extent authorized by law.
The Company has obtained insurance to cover the Company's directors and
executive officers for liabilities which may be incurred in connection with the
offer, sale and registration of the Common Stock.
II-2
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering of the Company's Units (consisting of Common Stock
and Warrants), other than underwriting discounts and commissions, all of which
will be paid by Phoenix:
SEC Registration Fee ................................... $ 6,669
NASD Filing Fee ........................................ 2,700
NASDAQ SmallCap Market ................................. 10,000
Non-accountable Expense Allowance of Underwriter........ 165,750
Printing and Engraving ................................. 80,000
Legal Fees and Expenses (other than blue sky)........... 175,000
Accounting Fees and Expenses............................ 125,000
Transfer Agent and Warrant Agent Fees and Expenses...... 5,000
Blue Sky Fees and Expenses.............................. 35,000
Investment Advisor Fees................................. 99,984
Miscellaneous........................................... 4,897
--------
TOTAL................................. $710,000
========
Item 26. Recent Sales of Unregistered Securities.
On June 9, 1997, Phoenix Preschool Education Centers, Inc. closed a
private offering of 25.5 units, each of which consisted of an 8% Promissory Note
(each in the principal amount of $25,000) and a warrant to purchase 50,000
shares of Common Stock of the Company. Exemption from registration for the
issuance described above was claimed pursuant to Section 4(2) and 4(6) of the
Securities Act and Regulation D promulgated under Section 4(2) of the Securities
Act, in reliance upon the fact that such sales did not involve a public offering
because offers and sales were not made to investors other than accredited
investors. Therefore, such securities are subject to certain transfer
restrictions.
Item 27. Financial Statements and Exhibits
The following documents were filed as part of this Registration
Statement.
(a) Financial Statements:
Phoenix Preschool Holdings, Inc.
Report of Independent Certified Public Accountants
Consolidated balance sheets as of June 30, 1997
and September 30, 1997 (unaudited)
II-3
<PAGE>
Consolidated statements of operations for the years ended June 30, 1997
and 1996 and for the three months ended September 30, 1997 and
1996 (unaudited)
Consolidated statements of stockholder's equity for the years ended
June 30, 1997 and 1996 and for the three months ended
September 30, 1997 (unaudited)
Consolidated statements of cash flows for the years ended June 30, 1997
and 1996 and for the three months ended September 30, 1997 and
1996 (unaudited)
Notes to consolidated financial statements
Pollack Enterprises, Inc.
Report of Independent Certified Public Accountants
Statement of income for the year ended December 31, 1995
Statement of stockholder's equity for the year ended
December 31, 1995
Statement of cash flows for the year ended December 31, 1995
Notes to financial statements
Libbus, Inc.
Report of Independent Certified Public Accountants
Statements of income for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 (unaudited)
Statements of stockholder's equity for the year ended December 31, 1995
and for the nine months ended September 30, 1996 (unaudited)
Statements of cash flows for the years ended December 31, 1995 and for
the nine months ended September 30, 1996 (unaudited)
Notes to financial statements
II-4
<PAGE>
TLC Recreation Center, Inc.
Report of Independent Certified Public Accountants
Statement of income for the year ended January 31, 1997
Statement of stockholder's equity for the year ended January 31, 1997
Statement of cash flows for the year ended January 31, 1997
Notes to financial statements
(b) Exhibits:
<TABLE>
<CAPTION>
Regulation S-B
Exhibit Number Description
---------------- -------------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Advisory Agreement
2.1 Form of Amended Plan of Reorganization
2.2 Articles of Merger
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
4.2 Form of Warrant Agreement and Certificate
4.3 Form of 8% Promissory Note*
4.4 Form of Bridge Warrant*
4.5 Form of Underwriter's Warrant
5 Opinion of Blank Rome Comisky & McCauley
10.1 Form of Non-employee Stock Option** (previously filed)
10.2 Amended and Restated Stock Option Plan**
10.3 Form of Lock-up Agreement***
10.4 Asset Purchase Agreement, by and between Coastal Kiddie College, Inc. and Phoenix
Preschool Education Centers, Inc.*
10.5 Asset Purchase Agreement, by and between Libbus, Inc. and Phoenix Preschool Education
Centers, Inc.*
10.6 Asset Purchase Agreement, by and between TLC Recreation Center, Inc. and Phoenix Preschool
Education Centers, Inc.*
10.7 Asset Purchase Agreement, by and between Pollack Enterprises, Inc. and Phoenix Preschool
Education Centers, Inc.*
10.8 Form of Employment Agreement**(previously filed)
10.9 Non-qualified Stock Option granted to Michael C. Koffler
21 Subsidiaries*
23.1 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)
23.2 Consent of BDO Seidman, LLP
24 Power of attorney (included on signature page)
27 Financial Data Schedule*
99 Consents of Directors to be Appointed*
</TABLE>
- ----------
* Previously filed.
** Compensatory Plan
*** To be filed by amendment
II-5
<PAGE>
Exhibit numbers correspond to the exhibits required by Item 601 of
Regulation S-B for a Registration Statement on Form SB-2.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "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 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.
(b) The undersigned hereby undertakes:
(1) that for purposes of determining any liability under the
Securities Act, 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 under
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective; and
(2) that for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and that offering of such
securities at that time shall be deemed as the initial bona fide
offering of those securities.
(c) The Company will provide to the underwriters at the Closing
specified in the Underwriting Agreement, certificates registered in such names
and in such denominations as required by the underwriters to permit prompt
delivery to each purchaser.
II-6
<PAGE>
(d) The undersigned small business issuer hereby undertakes that it
will:
(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 registrant
statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the estimated
maximum offering range may be reflected in
the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and
price represent no more than a 20% change in
the maximum aggregate offering price set
forth in the "Calculation of Registration
Fee" table in the effective registration
statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining any liability under the Securities
Act, treat each post-effective amendment as a new
registration statement relating to the securities
offered, and the offering of such securities at that
time to be the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold
at the end of the offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, 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, thereunto duly
authorized in the City of Philadelphia, Commonwealth of Pennsylvania on November
20, 1997.
PHOENIX PRESCHOOL HOLDINGS, INC.
Date: November 20, 1997 By: /s/ Michael C. Koffler
-----------------------------------
Michael C. Koffler, Chairman, Chief
Executive Officer and President
(Duly Authorized Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Michael C. Koffler and Robert
Sloop, his true and lawful attorney-in-fact and agent with full power of
substitution or resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documentation in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents 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, or their substitute or substitutes, 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 duly signed below by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Capacity Date
----------- ---------- ------
<S> <C> <C>
/s/ Michael C. Koffler Chairman, Chief Executive Officer and November 20, 1997
---------------------------- President, Chief Operating Officer (Principal
Michael C. Koffler Executive and Operating Officer) and Director
/s/ Robert Sloop Chief Financial Officer (Principal Financial November 20,1997
--------------------------- and Accounting Officer)
Robert Sloop
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
S-B Exhibit Numbers Description
- --------------------- -------------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Advisory Agreement
2.1 Form of Amended Plan of Reorganization
2.2 Articles of Merger
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Specimen Common Stock Certificate
4.2 Form of Warrant Agreement and Certificate
4.3 Form of 8% Promissory Note*
4.4 Form of Bridge Warrant*
4.5 Form of Underwriter's Warrant
5 Opinion of Blank Rome Comisky & McCauley
10.1 Form of Non-Employee Stock Option** (previously filed)
10.2 Amended and Restated Stock Option Plan**
10.3 Form of Lock-up Agreement***
10.4 Asset Purchase Agreement, by and between Coastal Kiddie College, Inc. and
Phoenix Preschool Education Centers, Inc.*
10.5 Asset Purchase Agreement, by and between Libbus, Inc. and Phoenix Preschool
Education Centers, Inc.*
10.6 Asset Purchase Agreement, by and between TLC Recreation Center, Inc. and
Phoenix Preschool Education Centers, Inc.*
10.7 Asset Purchase Agreement, by and between Pollack Enterprises, Inc. and Phoenix
Preschool Education Centers, Inc.*
10.8 Form of Employment Agreement** (previously filed)
10.9 Non-qualified Stock Option granted to Michael C. Koffler
21 Subsidiaries*
23.1 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)
23.2 Consent of BDO Seidman, LLP
24.1 Power of attorney (included on signature page)
27 Financial Data Schedule*
99 Consents of Directors to be Appointed*
</TABLE>
- -----------
* Previously filed
** Compensatory Plan
*** To be filed by amendment
<PAGE>
PHOENIX PRESCHOOL HOLDINGS, INC.
UNDERWRITING AGREEMENT
New York, New York
Dated: , 1997
Briarwood Investment Counsel
45 Crossways Park Drive
Woodbury, New York 11797
Duke & Co., Inc.
909 Third Avenue
New York, New York 10022
Gentlemen:
The undersigned, PHOENIX PRESCHOOL HOLDINGS, INC., a Delaware
corporation (the "Company"), proposes to issue and sell to Duke & Co., Inc.
("Duke") and Briarwood Investment Counsel ("Briarwood") (Duke and Briarwood are
collectively referred to as "Underwriters") pursuant to this Underwriting
Agreement ("Agreement"), an aggregate of 1,275,000 shares of Common Stock, par
value $0.10 per share, of the Company (the "Common Stock"). Additionally, each
of the warrantholders of the Company named in Schedule A hereto (the "Selling
Warrantholders"), acting severally and not jointly, proposes to sell to you the
respective number of warrants set forth opposite the Selling Warrantholders'
names on Schedule A for an aggregate of 1,275,000 Redeemable Common Stock
Purchase Warrants (the "Warrants"). The Warrants are each exercisable to
purchase one share of Common Stock, at any time commencing two years from the
date on which the Registration Statement (as defined in Section 1(a) hereof),
shall have become or been declared effective (the "Effective Date"), and ending
on the fifth anniversary of the Effective Date. The Warrant exercise price,
subject to adjustment as described in the agreement providing for the Warrants
(the "Warrant Agreement"), shall be $5.10 per share, subject to adjustment as
described in the Warrant Agreement.
<PAGE>
The shares of Common Stock and the Warrants will be separately
transferable immediately upon issuance. Commencing two years after the Effective
Date, with the prior consent of the Underwriters, the Warrants are subject to
redemption by the Company at $0.05 per Warrant, provided that (a) prior notice
of not less than 30 days is given to the holders of the Warrants (the
"Warrantholders"), and (b) the closing sale price per share of Common Stock, if
traded on The NASDAQ Stock Market, or the last sale price per share of Common
Stock, if traded on a national exchange, for the 20 consecutive trading days
ending on the third day prior to the date on which notice of redemption is
given, has been at least $7.00.
In addition, the Company proposes to grant to the Underwriters
the Over-Allotment Option (as defined in Section 2(c) hereof) to purchase all or
any part of 191,250 additional shares of Common Stock and/or 191,250 Warrants,
and to issue to you the Underwriters' Warrant (as defined in Section 11 hereof)
to purchase certain further additional shares of Common Stock and Warrants.
The 1,275,000 shares of Common Stock to be sold by the
Company, together with the aggregate of 191,250 additional shares of Common
Stock that are the subject of the Over-allotment Option, are herein collectively
called the "Shares." The the Shares and the Warrants, the additional Warrants
subject to the Over-Allotment Option and the Warrants issuable upon exercise of
the Underwriters' Warrant), the shares of Common Stock issuable upon exercise of
the Warrants and the shares of Common Stock issuable upon exercise of the
Underwriters' Warrant, are herein collectively called the "Securities." The term
"Underwriter's Counsel" shall mean the firm of Gersten, Savage, Kaplowitz &
Fredericks, LLP, counsel to the Underwriter, and the term "Company Counsel"
shall mean the firm of Blank Rome Comisky & McCauley, counsel to the Company.
Unless the context otherwise requires, all references herein to a "Section"
shall mean the appropriate Section of this Agreement.
You have advised the Company and the Selling Warrantholders
that you desire to purchase the Shares and the Warrants as herein provided. The
Company and the Selling Warrantholders confirm the agreements made by them with
respect to the purchase of the Shares and Warrants by you, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SELLING WARRANTHOLDERS. The Company represents and warrants to, and agrees with,
the Underwriters that:
(a) Registration Statement; Prospectus; A
registration statement (File No. 333-31407) on Form SB-2 relating to the public
offering of the Securities (the "Offering"), including a preliminary form of
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933 (the "Act"), and the rules and regulations of the Securities and
Exchange Commission (the "Commission") promulgated thereunder (the "Rules and
Regulations"), and has been filed with the Commission under the Act. As used
herein, the term "Preliminary Prospectus" shall mean
2
<PAGE>
each prospectus filed pursuant to Rule 430 or Rule 424(a) of the Rules and
Regulations. The Preliminary Prospectus bore the legend required by Item 501 of
Regulation S-B under the Act and the Rules and Regulations. Such registration
statement (including all financial statements, schedules and exhibits) as
amended at the time it becomes effective and the final prospectus included
therein are herein respectively called the "Registration Statement" and the
"Prospectus," except that (i) if the prospectus filed by the Company pursuant to
Rule 424(b) or Rule 430A of the Rules and Regulations shall differ from such
final prospectus as then amended, then the term "Prospectus" shall instead mean
the prospectus first filed pursuant to said Rule 424(b) or Rule 430A, and (ii)
if such registration statement is amended or such prospectus is amended or
supplemented after the effective date of such registration statement and prior
to the Option Closing Date (as defined in Section 2(c) hereof), then (unless the
context necessarily requires otherwise) the term "Registration Statement" shall
include such registration statement as so amended, and the term "Prospectus"
shall include such prospectus as so amended or supplemented, as the case may be.
As used herein, the term "Subsidiary" shall mean Phoenix Preschool Education
Centers, Inc.
(b) Contents of Registration Statement. On the
Effective Date, and at all times subsequent thereto for so long as the delivery
of a prospectus is required in connection with the offering or sale of any of
the Securities, (i) the Registration Statement and the Prospectus shall in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and (ii) neither the Registration Statement nor the Prospectus
shall include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary or make statements
therein in light of the circumstances in which they were made, not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, the
material set forth under the caption "UNDERWRITING," the information on the
cover page of the Prospectus regarding the underwriting arrangements and the
identity of the Underwriters' Counsel under the caption "LEGAL MATTERS," which
information the Underwriters hereby represent and warrant to the Company are
true and correct in all material respects and does not omit to state any
material fact required to be stated therein or necessary to make statements
therein, in light of the circumstances in which they were made, not misleading,
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Registration Statement and Prospectus, as the
case may be.
Except for the registration rights granted under the
Underwriters' Warrant, or as disclosed in the Prospectus, no holders of any
securities of the Company or of any options, warrants or convertible or
exchangeable securities of the Company exercisable for or convertible or
exchangeable for securities of the Company, have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company.
3
<PAGE>
(c) Organization, Standing, Etc. The Company is duly
incorporated and validly exists as a corporation in good standing under the laws
of its jurisdiction of incorporation, with full power and corporate authority to
own its properties and conduct its business as described in the Prospectus, and
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in each other jurisdiction in which the nature of its business or
the character or location of its properties requires such qualification, except
where failure so to qualify will not have a material adverse effect on the
business, properties or financial condition of the Company, as the case may be.
(d) Capitalization. The authorized, issued and
outstanding capital stock of the Company as of the date of the Prospectus is as
set forth in the Prospectus under the caption "CAPITALIZATION". The shares of
Common Stock issued and outstanding on the Effective Date have been duly
authorized, validly issued and are fully paid and non-assessable. No options,
warrants or other rights to purchase, agreements or other obligations to issue,
or agreements or other rights to convert any obligation into, any shares of
capital stock of the Company or the Subsidiary have been granted or entered into
by the Company or the Subsidiary, except as expressly described in the
Prospectus. The Securities conform to all statements relating thereto contained
in the Registration Statement or the Prospectus.
(e) Securities. The Securities conform, or will
conform when issued, in all material respects to all statements with respect
thereto contained in the Registration Statement and the Prospectus. The
Securities have been duly authorized and, when issued and delivered against
payment therefor pursuant to this Agreement, the Warrant Agreement or the
Underwriters' Warrant, as the case may be, will be duly authorized, validly
issued, fully paid and non-assessable and free of preemptive rights of any
security holder of the Company. Neither the filing of the Registration Statement
nor the offering or sale of any of the Securities as contemplated by this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any securities of the Company,
except as described in the Registration Statement.
(f) Authority, Etc. This Agreement, the Warrant
Agreement, the Underwriters' Warrant, and the Financial Consulting Agreement (as
hereinafter defined), have been duly and validly authorized, executed and
delivered by the Company and, assuming due execution of this Agreement and such
other agreements by the other party or parties hereto and thereto, constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms. The Company has full right, power and
lawful authority to authorize, issue and sell the Securities and the
Underwriters' Warrant on the terms and conditions set forth herein. All
consents, approvals, authorizations and orders of any court or governmental
authority which are required in connection with the authorization, execution and
delivery of such agreements, the authorization, issue and sale of the Securities
and the Underwriters' Warrant, and the consummation of the transactions
contemplated hereby have been obtained.
4
<PAGE>
(g) No Conflict. Except as described in the
Prospectus, neither the Company nor the Subsidiary is in violation, breach or
default of or under, and consummation of the transactions hereby contemplated
and fulfillment of the terms of this Agreement will not conflict with or result
in a breach of, any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance pursuant to the terms of, any contract, indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to which the
Company or the Subsidiary is a party or by which the Company or the Subsidiary
may be bound or to which any of the property or assets of the Company or the
Subsidiary are subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or the By-laws of the Company, or
the certificate of incorporation or by-laws of the Subsidiary, or any statute or
any order, rule or regulation applicable to the Company or the Subsidiary, or of
any court or of any regulatory authority or other governmental body having
jurisdiction over the Company or the Subsidiary.
(h) Assets. Subject to the qualifications stated in
the Prospectus: (i) the Company and the Subsidiary, as the case may be, has good
and marketable title to all properties and assets described in the Prospectus as
owned by it, including without limitation intellectual property, free and clear
of all liens, charges, encumbrances or restrictions, except such as do not
materially affect the value of such properties or assets and do not interfere
with the use made or proposed to be made of such assets or properties by the
Company or the Subsidiary or are not materially significant or important in
relation to the business of the Company or the Subsidiary, as the case may be;
(ii) all of the material leases and subleases under which the Company or the
Subsidiary is the lessor or sublessor of properties or assets or under which the
Company or the Subsidiary hold properties or assets as lessee or sublessee, as
described in the Prospectus, are in full force and effect and, except as
described in the Prospectus, neither the Company nor the Subsidiary is in
default in any material respect with respect to any of the terms or provisions
of any of such leases or subleases, and no claim has been asserted by any party
adverse to the rights of the Company or the Subsidiary as lessor, sublessor,
lessee or sublessee under any such lease or sublease, or affecting or
questioning the right of the Company or the Subsidiary to continued possession
of the leased or subleased premises or assets under any such lease or sublease,
except as described or referred to in the Prospectus; and (iii) the Company and
the Subsidiary, as the case may be, owns or leases all such assets and
properties, described in the Prospectus, as are necessary to its operations as
now conducted and, except as otherwise stated in the Prospectus, as proposed to
be conducted as set forth in the Prospectus.
The outstanding debt, the property and the business of the
Company conforms in all material respects to the descriptions thereof contained
in the Registration Statement and Prospectus.
(i) Independent Accountants. BDO Seidman LP, who have
given their report on certain financial statements filed or to be filed with the
Commission as a part of the Registration Statement, and which are included in
the Prospectus, are with respect to the Company, independent public accountants
as required by the Act and the Rules and Regulations.
5
<PAGE>
(j) Financial Statements. The consolidated financial
statements, together with related notes, set forth in the Registration Statement
and the Prospectus present fairly the consolidated financial position, results
of operations, changes in stockholders' equity and cash flows of the Company and
the Subsidiary on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Such
financial statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except to the extent disclosed therein.
The Summary Financial Data and Selected Financial Data included in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been prepared on a basis consistent with that of the financial
statements included in the Registration Statement and the Prospectus.
(k) No Material Change. Except as otherwise set forth
in the Prospectus, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company nor
the Subsidiary has: (i) incurred any liability or obligation, direct or
contingent, or entered into any transaction, which is material to its business;
(ii) effected or experienced any change in its capital stock or incurred any
long-term debt; (iii) issued any options, warrants or other rights to acquire
its capital stock; (iv) declared, paid or made any dividend or distribution of
any kind on its capital stock; or (v) effected or experienced any adverse
change, or development involving a prospective adverse change, in its financial
position, net worth, results of operations, business or business prospects,
assets or properties or key personnel.
(l) Litigation. Except as set forth in the
Prospectus, there is not now pending nor, to the knowledge of the Company,
threatened, any action, suit or proceeding (including any related to
environmental matters or discrimination on the basis of age, sex, religion or
race), whether or not in the ordinary course of business, to which the Company
or the Subsidiary is a party or its business or property is subject, before or
by any court or governmental authority, which, if determined adversely to the
Company, would have a material adverse effect on the financial position, net
worth, or results of operations, business or business prospects, assets or
property of the Company or the Subsidiary; and no labor disputes involving the
employees of the Company or the Subsidiary exist which would affect materially
adversely the business, property, financial position or results of operations of
the Company or the Subsidiary.
(m) Employee and Independent Contractor Matters. The
Company and the Subsidiary have generally enjoyed satisfactory employer/employee
relationships with their respective employees and are in compliance in all
material respects with all Federal, state and local laws and regulations,
including but not limited to, applicable tax laws and regulations, respecting
the employment of their respective employees and employment practices, terms and
conditions of employment and wages and hours relating thereto. To the knowledge
of the Company or the Subsidiary, there are no pending or threatened
investigations involving the Company or the Subsidiary by the U.S. Department of
Labor or corresponding foreign agency, or any other governmental agency
responsible for the enforcement of such Federal, state or local laws and
regulations. To the knowledge of the Company or the Subsidiary, there are no
unfair labor
6
<PAGE>
practice charges or complaints against the Company or the Subsidiary pending
before the National Labor Relations Board or corresponding foreign agency or any
strikes, picketing, boycotts, disputes, slowdowns or stoppages pending or
threatened against or involving the Company or the Subsidiary, or any
predecessor entity, and none has occurred. No representation question exists
respecting the employees of the Company or the Subsidiary. No collective
bargaining agreements or modifications thereof are currently in effect or being
negotiated by the Company or the Subsidiary and their respective employees. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or the Subsidiary.
Neither the Company nor the Subsidiary: (i) maintain
nor have maintained, sponsored or contributed to any program or arrangement that
is an "employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), except for the Stock Option Plan described in the Prospectus;
(ii) presently maintain or contribute nor at any time in the past, have they
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA; or (iii) has ever completely or partially withdrawn from a
"multi-employer plan."
The Company and the Subsidiary have generally enjoyed
satisfactory relationships with their respective independent contractors and are
in compliance in all material respects with all federal, state and local laws
and regulations, including but not limited to applicable tax laws and
regulations, respecting the engagement of their respective independent
contractors.
(n) No Unlawful Prospectuses. The Company has not
distributed any prospectus or other offering material in connection with the
Offering contemplated herein, other than any Preliminary Prospectus, the
Prospectus or other material permitted by the Act and the Rules and Regulations.
(o) Taxes. Except as disclosed in the Prospectus, the
Company and the Subsidiary have filed all necessary federal, state, local and
foreign income and franchise tax returns and has paid all taxes shown as due
thereon on or before the date such taxes are due to be paid; and there is no tax
deficiency which has been or, to the knowledge of the Company, might be asserted
against the Company or the Subsidiary.
(p) Licenses, Etc. The Company and the Subsidiary
have in effect all necessary licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property, as described in the Prospectus, and is in all
material respects in compliance therewith. To the knowledge of the Company, none
of the activities or business of the Company or the Subsidiary is in violation
of, or would cause the Company or the Subsidiary to violate, any law, rule,
regulation or order of the United States, any country, state, county or
locality, the violation of which would have a material adverse effect upon the
financial position, net worth, results of operations, business or business
prospects, assets or property of the Company or the Subsidiary.
7
<PAGE>
(q) No Prohibited Payments. Neither the Company, the
Subsidiary, nor, to the knowledge of the Company or the Subsidiary, any of their
respective employees or officers or directors, agents or any other person acting
on behalf of the Company or the Subsidiary has, directly or indirectly,
contributed or agreed to contribute any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer, supplier, or official
or governmental agency 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 the Subsidiary (or assist it in connection with any actual or
proposed transaction) which (i) could reasonably be expected to subject the
Company or the Subsidiary to any material damage or penalty in any civil,
criminal or governmental litigation or proceeding, (ii) if not given in the
past, could reasonably be expected to have had a materially adverse effect on
the assets, business or operations of the Company or the Subsidiary as reflected
in any of the financial statements contained in the Prospectus, or (iii) if not
continued in the future, could reasonably be expected to materially adversely
affect the assets, business, operations or prospects of the Company or the
Subsidiary. The Company's internal accounting controls and procedures are
sufficient to cause the Company to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(r) Transfer Taxes. On the Closing Dates (as defined
in Section 2(d) hereof), all transfer and other taxes (including franchise,
capital stock and other taxes, other than income taxes, imposed by any
jurisdiction), if any, which are required to be paid in connection with the sale
and transfer of the Units to the Underwriter hereunder shall have been fully
paid or provided for by the Company, and all laws imposing such taxes shall have
been fully complied with.
(s) Exhibits. All contracts and other documents of
the Company or the Subsidiary described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement, have been
described in the Registration Statement or the Prospectus or filed with the
Commission, as required under the Rules and Regulations.
(t) Shareholder Agreements, Registration Rights.
Except as described in the Prospectus, no security holder of the Company has any
rights with respect to the purchase, sale or registration of any Securities, and
all registration rights with respect to the Offering have been waived.
(u) No Stabilization or Manipulation. Neither the
Company nor, to the Company's knowledge, any of its officers or directors or any
of its employees or stockholders, have taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, under the Exchange Act or
otherwise, the stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Securities.
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(v) No Finders. Except as described in the
Prospectus, to the knowledge of the Company or the Subsidiary, there are no
claims, payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
commitments, payments or issuances of securities with respect to the Company
that may affect the Underwriter's compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
(w) Lock-up Agreements. The Company has obtained from
each director, officer and existing stockholder of the Company (the "Existing
Shareholders"), a Lock-Up Agreement (as defined in Section 3(r) hereof) in the
form previously delivered.
(x) No Adverse Effect of Transaction Contemplated
Hereby. Neither the completion of the Offering nor any of the transactions
contemplated herein or in the Prospectus, including but not limited to the
issuance of any of the Securities, will result in a "change of control" or the
loss of, or have any adverse effect on, the maintenance in good standing of the
Company's licenses.
(aa) Each of the Selling Warrantholders, severally
and not jointly, represents and warrants to, and agrees with, the Underwriters
as of the date hereof, each of subparagraphs (a) through (x), inclusive, of
Section 1 and as follows:
(i) The execution and delivery of this
Agreement and the consummation of the transactions herein and therein
contemplated will not result in a breach by such Selling Warrantholder of, or
constitute a default by such Selling Warrantholder under, any material
indenture, deed or trust, contract or other agreement or instrument or any
decree, judgment or order to wich such Selling Warrantholder is a party or by
which such Selling Warrantholder may be bound.
(ii) Such Selling Warrantholder has and will
have, at the First Closing Date, good and marketable title to the Warrants to be
sold by such Selling Warrantholder hereunder, free and clear of any pledge,
lien, security interest, encumbrance, claim or equity, created by or arising
through the Selling Warrantholder other than pursuant to this Agreement; such
Selling Warrantholder has full right, power and authority to sell, transfer and
deliver the Warrants to be sold by such Selling Warrantholder hereunder; and
upon delivery of the Warrants to be sold by such Selling Warrantholder hereunder
and payment of the purchase price therefor as herein contemplated, the
Underwriters will receive good and marketable title to the Warrants purchased by
it from such Selling Warrantholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equity.
(iii) Such Selling Warrantholder has duly
executed and delivered in the form heretofore furnished to the Underwriters, a
power of attorney and custody agreement (the "Power of Attorney and Custody
Agreement") with Michael Koffler and Phoenix Preschool Holdings, Inc., as the
attorney-in-fact and the custodian (the "Attorney-in-Fact" and the
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"Custodian", respectively); the Attorney-in-Fact is authorized to execute and
deliver this Agreement and the certificates referred to in Section 4(j) or that
may be required pursuant to Section 4(f) on behalf of such Selling
Warrantholder, to authorize the delivery of the Warrants to be sold by such
Selling Warrantholder hereunder, to duly endorse (in blank or otherwise) the
warrant certificate or warrant certificates representing such Warrants, to
accept payment therefor, and otherwise to act on behalf of such payment
therefor, and otherwise to act on behalf of such Seller in connection with this
Agreement.
(iv) All authorizations, approvals and
consents necessary for the execution and delivery by such Selling Warrantholder
of the Power of Attorney and Custody Agreement, the execution and delivery by or
on behalf of such Selling Warrantholder of this Agreement, and the sale and
delivery of the Warrants to be sold by such Selling Warrantholder hereunder and
thereunder (other than, at the time of the execution hereof, the issuance of the
order of the Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws), have been obtained and are in full force and effect; and such Selling
Warrantholder has the full right, power and authority to enter into this
Agreement and the Power of Attorney and Custody Agreement and to sell, transfer
and deliver the Warrants to be sold by such Selling Warrantholder hereunder.
(v) Such Selling Warrantholder has not taken
and will not take, directly or indirectly, any action which is designed to or
which constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security or the Company to
facilitate the sale or exercise of the Warrants.
(vi) Certificates in negotiable form for all
Warrants to be sold by such Selling Warrantholder thereunder have been placed in
custody with the Custodian by or for the benefit of such Selling Warrantholder
for the purposes or effecting delivery by such Selling Warrantholder hereunder.
2. PURCHASE, DELIVERY AND SALE OF SHARES AND WARRANTS
(a) Purchase Prices for the Shares and the Warrants.
The Shares and the Warrants shall be sold to and purchased by the Underwriters
at the purchase prices of $3.825 per Share and $.1125 per Warrant (that being
the public offering prices of $4.25 per Share and $.125 per Warrant less an
underwriting discount of 10 percent) (the "Purchase Price").
(b) Firm Securities.
(i) Subject to the terms and conditions of
this Agreement, and on the basis of the representations, warranties and
agreements herein contained the Company and the Selling Warrantholders agree to
issue and sell to the Underwriters and the Underwriters, agree to buy from the
Company and the Selling Warrantholders at the Purchase Price (the "Firm
Securities").
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(ii) Delivery of the Firm Securities against
payment therefor shall take place at the offices of Briarwood Investment Counsel
(or at such other place as may be designated by agreement between you and the
Company) at 10:00 a.m., New York Time, on _____, 1997, or at such later time and
date, not later than five business days after the Effective Date, as you may
designate (such time and date of payment and delivery for the Firm Securities
being herein called the "First Closing Date"). Time shall be of the essence and
delivery of the Firm Securities at the time and place specified in this Section
2(b)(ii) is a further condition to the obligations of the Underwriters
hereunder.
(c) Option Securities.
(i) In addition, subject to the terms and
conditions of this Agreement, and on the basis of the representations,
warranties and agreements herein contained, the Company hereby grants to the
Underwriters an option (the "Over-Allotment Option"), to purchase from the
Company all or any part of an aggregate of an additional 191,250 Shares and
191,250 Warrants at the Purchase Price (the "Option Securities").
(ii) The Over-Allotment Option may be
exercised by the Underwriters, in whole or in part, within forty-five days after
the Effective Date, upon written notice by the Underwriters to the Company
advising it of the number of Option Securities as to which the Over-Allotment
Option is being exercised, the names and denominations in which the certificates
for the Shares and the Warrants are to be registered, and the time and date when
such certificates are to be delivered. Such time and date shall be determined by
you but shall not be less than two nor more than ten business days after
exercise of the Over-Allotment Option, nor in any event prior to the First
Closing Date (such time and date being herein called the "Option Closing Date").
Delivery of the Option Securities against payment therefor shall take place at
Briarwood Investment Counsel offices. Time shall be of the essence and delivery
at the time and place specified in this Section 2(c)(ii) is a further condition
to the obligations of the Underwriters hereunder.
(iii) The Over-Allotment may be exercised
only to cover over-allotments in the sale by the Underwriters of Firm
Securities.
(d) Delivery of Certificates; Payment.
(i) The Company and the Selling
Warrantholders shall make the certificates for the Shares and the Warrants to be
purchased hereunder available to you for checking at least two full business
days prior to the First Closing Date or the Option Closing Date (each, a
"Closing Date"), as the case may be. The certificates shall be in such names and
denominations as you may request at least two business days prior to the
relevant Closing Date. Time shall be of the essence and the availability of the
certificates at the time and place specified in this Section 2(d)(i) is a
further condition to the obligations of the Underwriters hereunder.
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(ii) On the First Closing Date the Company
and the Selling Warrantholders shall deliver to you for the account of the
Underwriters definitive engraved certificates in negotiable form representing
all of the Shares and the Warrants to be sold by the Company and the Selling
Warrantholders, against payment of the Purchase Price therefor by you for the
several accounts of the Underwriters, by certified or bank cashier's checks
payable in New York Clearing House funds to the order of the Company and each of
the Selling Warrantholders.
(iii) In addition, if and to the extent that
the Underwriters exercise the Over-Allotment Option, then on the Option Closing
Date the Company shall deliver to you for the accounts of the Underwriters or
its designees definitive engraved certificates in negotiable form representing
the Shares and the Warrants comprising the Option Securities to be sold by the
Company, against payment of the Purchase Price therefor by the Underwriters for
the account of the Underwriters or its designees, by certified or bank cashier's
checks payable in next day funds to the order of the Company.
(iv) It is understood that the Underwriters
propose to offer the Shares and Warrants to be purchased hereunder to the
public, upon the terms and conditions set forth in the Registration Statement,
after the Registration Statement becomes effective.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Underwriters that:
(a) Registration.
(i) The Company shall use its best efforts
to cause the Registration Statement to become effective and, upon notification
from the Commission that the Registration Statement has become effective, shall
so advise you and shall not at any time, whether before or after the Effective
Date, file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy, or to which you or Underwriter's Counsel shall have
objected in writing, or which is not in compliance with the Act and the Rules
and Regulations.
(ii) Promptly after you or the Company shall
have been advised thereof, you shall advise the Company or the Company shall
advise you, as the case may be, and confirm such advice in writing, of (A) the
receipt of any comments of the Commission, (B) the effectiveness of any
post-effective amendment to the Registration Statement, (C) the filing of any
supplement to the Prospectus or any amended Prospectus, (D) any request made by
the Commission for amendment of the Registration Statement or amendment or
supplementing of the Prospectus, or for additional information with respect
thereto, or (E) the issuance by the Commission or any state or regulatory body
of any stop order or other order denying or suspending the effectiveness of the
Registration Statement, or preventing or suspending the use of any Preliminary
Prospectus, or suspending the qualification of the Securities for offering in
any jurisdiction, or otherwise preventing or impairing the Offering, or the
institution or threat of any
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proceeding for any of such purposes. The Company and you shall not acquiesce in
such order or proceeding, and shall instead actively defend such order or
proceeding, unless the Company and you agree in writing to such acquiescence.
(iii) The Company has caused to be delivered
to you copies of each Preliminary Prospectus, and the Company has consented and
hereby consents to the use of such copies for the purposes permitted by the Act.
The Company authorizes the Underwriters and selected dealers to use the
Prospectus in connection with the sale of the Shares and Warrants for such
period as in the opinion of Underwriters' Counsel the use thereof is required to
comply with the applicable provisions of the Act and the Rules and Regulations.
In case of the happening, at any time within such period as a prospectus is
required under the Act to be delivered in connection with sales by an
underwriter or dealer, of any event of which the Company has knowledge and which
materially affects the Company or the Securities, or which in the opinion of
Company Counsel or of Underwriters' Counsel should be set forth in an amendment
to the Registration Statement or an amendment or supplement to the Prospectus in
order to make the statement made therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be delivered to
a purchaser of the Shares and/or Warrants, or in case it shall be necessary to
amend or supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company shall notify you promptly and forthwith prepare and
furnish to the Underwriters copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
shall not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of each such amendment to the Registration Statement,
amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriter, except that in the case that the
Underwriters are required, in connection with the sale of the Shares and
Warrants, to deliver a prospectus nine months or more after the Effective Date,
the Company shall upon your request and at the expense of the Underwriters,
amend the Registration Statement and amend or supplement the Prospectus, or file
a new registration statement, if necessary, and furnish the Underwriters with
reasonable quantities of prospectuses complying with section 10(a)(3) of the
Act.
(iv) The Company will deliver to you at or
before the First Closing Date two signed copies of the Registration Statement
including all financial statements and exhibits filed therewith, and of all
amendments thereto. The Company will deliver to or upon your order, from time to
time until the Effective Date as many copies of any Preliminary Prospectus filed
with the Commission prior to the Effective Date as the Underwriters may
reasonably request. The Company will deliver to you on the Effective Date and
thereafter for so long as a Prospectus is required to be delivered under the
Act, from time to time, as many copies of the Prospectus, in final form, or as
thereafter amended or supplemented, as the Underwriters may from time to time
reasonably request.
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(v) The Company shall comply with the Act,
the Rules and Regulations, and the Securities Exchange Act of 1934 (the
"Exchange Act"), and the rules and regulations promulgated thereunder in
connection with the offering and issuance of the Securities in all material
respects.
(b) Blue Sky. The Company shall, at its own expense,
use its best efforts to qualify or register the Securities for sale (or obtain
an exemption from registration) under the securities or "blue sky" laws of such
jurisdictions as you may designate, and shall make such applications and furnish
such information to Underwriters' Counsel as may be required for that purpose,
and shall comply with such laws; provided, however, that the Company shall not
be required to qualify as a foreign corporation or a dealer in securities or to
execute a general consent to service of process in any jurisdiction in any
action other than one arising out of the offering or sale of the Shares and
Warrants. The Company shall bear all of the expense of such qualifications and
registrations, including without limitation the legal fees and disbursements of
Underwriters' Counsel, which fees, exclusive of disbursements, shall equal
$35,000 (unless otherwise agreed). After each Closing Date the Company shall, at
its own expense, from time to time prepare and file such statements and reports
as may be required to continue each such qualification (or maintain such
exemption from registration) in effect for so long a period as required by law,
regulation or administrative policy in connection with the offering of the
Securities.
(c) Exchange Act Registration. The Company shall at
its own expense, prepare and file with the Commission a registration statement
(on Form 8-A or Form 10) under section 12 of the Exchange Act, and shall use its
best efforts to cause such registration statement to be declared effective by
the Commission on an accelerated basis on the Effective Date and maintained in
effect for at least five years from the Effective Date.
(d) Prospectus Copies. The Company shall deliver to
you on or before the First Closing Date a copy of the Registration Statement
including all financial statements, schedules and exhibits filed therewith, and
of all amendments thereto. The Company shall deliver to or on the order of the
Underwriters, from time to time until the Effective Date, as many copies of any
Preliminary Prospectus filed with the Commission prior to the Effective Date as
the Underwriters may reasonably request. The Company shall deliver to the
Underwriters on the Effective Date, and thereafter for so long as a prospectus
is required to be delivered under the Act, from time to time, as many copies of
the Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriters may from time to time reasonably request.
(e) Amendments and Supplements. The Company shall,
promptly upon your request, prepare and file with the Commission any amendments
to the Registration Statement, and any amendments or supplements to the
Preliminary Prospectus or the Prospectus, and take any other action which in the
reasonable opinion of Underwriters' Counsel and Company Counsel may be
reasonably necessary or advisable in connection with the distribution of the
Shares and Warrants, and shall use its best efforts to cause the same to become
effective as promptly as possible.
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(f) Certain Market Practices. The Company has not
taken, and shall not take, directly or indirectly, any action designed, or which
might reasonably be expected, to cause or result in, or which has constituted,
the stabilization or manipulation of the price of the Securities to facilitate
the sale or resale thereof.
(g) Certain Representations. Neither the Company nor
any representative of the Company has made or shall make any written or oral
representation in connection with the Offering and sale of the Securities or the
Underwriters' Warrant which is not contained in the Prospectus, which is
otherwise inconsistent with or in contravention of anything contained in the
Prospectus, or which shall constitute a violation of the Act, the Rules and
Regulations, the Exchange Act or the rules and regulations promulgated under the
Exchange Act.
(h) Continuing Registration of Warrants and
Underlying Common Stock. For so long as any Warrant is outstanding, the Company
shall, at its own expense: (i) use its reasonable best efforts to cause
post-effective amendments to the Registration Statement, or new registration
statements relating to the Warrants and the Common Stock underlying the Warrants
to become effective in compliance with the Act and without any lapse of time
between the effectiveness of the Registration Statement and of any such
post-effective amendment or new registration statement; provided, however, that
the Company shall have no obligation to maintain the effectiveness of such
Registration Statement or file a new Registration Statement, or to keep
available a prospectus at any time at which such registration or prospectus is
not then required; (ii) cause a copy of each Prospectus, as then amended, to be
delivered to each holder of record of a Warrant; (iii) furnish to the
Underwriters and dealers as many copies of each such Prospectus as the
Underwriters or dealers may reasonably request; and (iv) maintain the "blue sky"
qualification or registration of the Warrants and the Common Stock underlying
the Warrants, or have a currently available exemption therefrom, in each
jurisdiction in which the Securities were so qualified or registered for
purposes of the Offering.
(i) Use of Proceeds. The Company shall apply the net
proceeds from the sale of the Shares substantially for the purposes set forth in
the Prospectus under the caption "USE OF PROCEEDS," and shall file such reports
with the Commission with respect to the sale of the Shares and the application
of the proceeds therefrom as may be required pursuant to Rule 463 of the Rules
and Regulations.
(j) Twelve Months' Earnings Statement. The Company
shall make generally available to its security holders and deliver to you as
soon as it is practicable so to do, but in no event later than ninety days after
the end of twelve months after the close of its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least
twelve consecutive months beginning after the Effective Date, which shall
satisfy the requirements of section 11(a) of the Act.
(k) NASDAQ Exchange Listings, Etc. The Company shall
immediately make all filings required to seek approval for the quotation of the
Securities on the NASDAQ
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SmallCap Market ("NASDAQ") and shall use its best efforts to effect and maintain
such approval for at least five years from the Effective Date. Within 10 days
after the Effective Date, the Company shall also use its best efforts to list
itself, on an expedited basis, in Moody's OTC Industrial Manual, Standard and
Poor's Corporation Descriptions or other recognized securities manuals
acceptable to the Underwriters and shall use its best efforts to cause such
listing to be maintained for five years from the Effective Date.
(l) Board of Directors. For a period of three (3)
years after the Fist Closing Date, the Company shall nominate and use its best
efforts to engage a designee of the Underwriters as a nonvoting advisor to the
Company's Board of Directors (the "Advisor") or, in lieu thereof, to designate
an individual for election as a director, in which case the Company shall use
its best efforts to have such individual elected as a director. The designee may
be a director, officer, partner, employee or affiliate of an Underwriter, and
the Underwriters shall designate such person in writing to the Board. In the
event the Underwriters shall not have designated such individual at the time of
any meeting of the Board or such person is unavailable to serve, the Company
shall notify the Underwriters of each meeting of the Board. An individual, if
any, designated by the Underwriters shall receive all notices and other
correspondence and communications sent by the Company to members of the Board.
Such Advisor shall be entitled to receive reimbursement for all reasonable costs
incurred in attending such meetings including, but not limited to, food,
lodging, and transportation. In addition, such Advisor shall be entitled to the
same compensation as the Company gives to other non-employee directors for
acting in such capacity. The Company further agrees that, during said three (3)
year period, it shall schedule no less than four (4) formal and "in person"
meetings of its Board of Directors in each such year at which meetings such
Advisor shall be permitted to attend as set forth herein; said meetings shall be
held quarterly each year and thirty (30) days advance notice of such meetings
shall be given to the Advisor. Further, during such three (3) year period, the
Company shall give notice to the Underwriters with respect to any proposed
acquisitions, mergers, reorganizations or other similar transactions involving a
purchase price in excess of $200,000, at the time a letter of intent is entered
into for such transaction.
The Company agrees to indemnify and hold harmless the
Underwriters and the Advisor against any and all claims, actions, damages, costs
and expenses, and judgments arising solely out of the attendance and
participation of the Advisor at any such meeting described herein. In the event
the Company maintains a liability insurance policy affording coverage for the
acts of its officers and directors, it agrees, if possible, to include the
Advisor as an insured under such policy.
(m) Periodic Reports. For so long as the Company is a
reporting company under section 12(g) or section 15(d) of the Exchange Act, the
Company shall, at its own expense, hold an annual meeting of stockholders for
the election of directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years, and furnish to its stockholders an annual report (including financial
statements audited by certified public accountants) in reasonable detail. In
addition, during the
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period ending three years from the date hereof, the Company shall, at its own
expense, furnish to you: (i) following the release of such information to the
public, a balance sheet of the Company and the Subsidiary as at the end of such
fiscal year, together with statements of income, stockholders' equity and cash
flows of the Company and the Subsidiary as at the end of such fiscal year, all
in reasonable detail and accompanied by a copy of the certificate or report
thereon of certified public accountants; (ii) as soon as they are available, a
copy of all reports (financial or otherwise) distributed to security holders;
(iii) as soon as they are available, a copy of all non-confidential reports and
financial statements furnished to or filed with the Commission; and (iv) such
other non-confidential information as you may from time to time reasonably
request. The financial statements referred to herein shall be on a consolidated
basis to the extent the accounts of the Company and the Subsidiary are
consolidated in reports furnished to its stockholders generally.
(n) Form S-8 Registrations. For a period of two years
following the First Closing Date, the Company shall not, without the
Underwriters' prior written consent, register or otherwise facilitate the
registration of any of its securities issuable upon the exercise of options,
warrants or other rights, whether by means of a Registration Statement on Form
S-8 or otherwise.
(o) Future Sales. For a period of two years following
the First Closing Date, the Company shall not, without the Underwriters' prior
written consent, sell or otherwise dispose of any securities of the Company,
including but not limited to the issuance of any Common Stock, and the granting
of any options or warrants excluding options to employees, directors and
officers under the Company's Stock Option Plans. Notwithstanding the foregoing,
the Company may at any time issue shares of Common Stock pursuant to the
exercise of the Warrants or options under the Company's Stock Option Plans, the
Underwriters' Warrant, the Warrants underlying the Underwriters' Warrant, and
options, warrants or conversion rights issued and outstanding on the Effective
Date and described in the Prospectus.
(p) Regulation S Sales. For a period of two years
following the First Closing Date, the Company shall not issue or sell any
securities pursuant to Regulation S of the Rules and Regulations under the Act,
without Underwriters' prior written consent.
(q) Agreements with Stockholders, Directors and
Officers. The Company shall cause each of the Company's existing stockholders,
directors and officers to enter into written agreements with the Underwriters
(the "Lock-up Agreements") prior to the Effective Date, that, for a period of
twenty-four months from the Effective Date, they will not, without the consent
of the Underwriters, (i) publicly sell any securities of the Company owned
directly or indirectly by them or owned beneficially by them (as defined in the
Exchange Act), or (ii) otherwise sell, or transfer such securities unless the
transferee agrees in writing to be bound by an identical lock-up.
(r) Warrant Solicitation. Upon the exercise of any
Warrants on or after
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the first anniversary of the Effective Date, the Company shall pay to the
Underwriters a commission of eight (8%) percent of the aggregate exercise price
of such Warrants, a portion of which may be reallowed by the Underwriters to the
dealer who solicited the exercise (which may also be you), if: (i) the market
price of the Common Stock is greater than the exercise price of the Warrant on
the date of exercise; (ii) the exercise of the Warrant was solicited by a member
of the NASD; (iii) the Warrant is not held in a discretionary account; (iv) the
disclosure of the compensation arrangements has been made in documents provided
to customers, both as part of the Offering and at the time of exercise; and (v)
the solicitation of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act. No commission shall be paid to you on any Warrant
exercise prior to the first anniversary of the Effective Date, or on any Warrant
exercised at any time without solicitation by Underwriters or a soliciting
dealer.
(s) Available Shares. The Company shall reserve and
at all times keep available that maximum number of it authorized but unissued
shares of Common Stock which are issuable upon exercise of options pursuant to
the Company's Stock Option Plan, the Warrants, the Underwriters' Warrant, and
the Warrants issuable upon exercise of the Underwriters' Warrant, in each case
taking into account the anti-dilution provisions thereof.
(t) Financial Consulting Agreement. On the First
Closing Date and simultaneously with the delivery of the Firm Securities, the
Company shall execute and deliver to the Underwriters an agreement with the
Underwriters, or its representative, in the form previously delivered to the
Company by the Underwriters, regarding the services of the Underwriters or its
representative a financial consultant to the Company (the "Financial Consulting
Agreement"), for a twenty-four month period commencing as of the date hereof at
a fee equal to $4,166 per month which shall be paid in its entirety on the First
Closing Date.
(u) Management. On each Closing Date, the Chief
Executive Officer of the Company shall be Michael C. Koffler. Prior to the
Effective Date, the Company shall have obtained "key-employee" life insurance
coverage in the amount of $1,000,000 on Mr. Koffler. Prior to the Effective
Date, the Company shall have entered into an employment agreement with Mr.
Koffler as set forth in the Registration Statement.
(v) Stock Transfer Sheets. The Company shall instruct
its Transfer Agent (as defined in Section 4(h) hereto) to deliver to you copies
of all advice sheets showing the daily transfer of the outstanding shares of
Common Stock and Warrants sold by the Company in the public offering and shall,
at its own expense, furnish you weekly for the first six weeks following the
First Closing Date and monthly thereafter during the period ending three years
following the First Closing Date with Depository Trust Company stock transfer
sheets.
(w) Public Relations. Prior to the Effective Date the
Company shall have retained a public relations firm reasonably acceptable to
you, and shall continue to retain such firm, or an alternate firm reasonably
acceptable to the Underwriters, for a period of twelve (12) months.
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(x) Additional Representations. The Company shall
engage the Underwriters' Counsel to provide the Underwriter, at the First
Closing Date and quarterly thereafter, until such time as the Common Stock is
listed on the New York Stock Exchange or the American Stock Exchange or quoted
on NASDAQ National Market System, with an opinion, setting forth those states in
which the Common Stock may be traded in non-issuer transactions under the blue
sky laws of the fifty states. The Company shall pay the Underwriters' Counsel a
one-time fee of $12,500 at the First Closing Date for such opinions.
(aa) Bound Volumes. Within a reasonable time after
the First Closing Date, the Company shall deliver to you, at the Company's
expense, five bound volumes in form and content acceptable to the Underwriters,
containing the Registration Statement and all exhibits filed therewith and all
amendments thereto, and all other agreements, correspondence, filings,
certificates and other documents filed and/or delivered in connection with the
Offering.
4. CONDITIONS TO UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters to purchase and pay for the Shares and Warrants which you have
agreed to purchase hereunder are subject to the accuracy (as of the date hereof
and as of each Closing Date) of and compliance with the representations and
warranties of the Company and the Selling Warrantholders contained herein, the
performance by the Company and the Selling Warrantholders of all of their
respective obligations hereunder and the following further conditions:
(a) Effective Registration Statement; No Stop Order.
The Registration Statement shall have become effective and you shall have
received notice thereof not later than 6:00 p.m., New York time, on the date of
this Agreement, or at such later time or on such later date as to which you may
agree in writing. In addition, on each Closing Date (i) no stop order denying or
suspending the effectiveness of the Registration Statement shall be in effect,
and no proceedings for that or any similar purpose shall have been instituted or
shall be pending or, to your knowledge or to the knowledge of the Company, shall
be contemplated by the Commission, and (ii) all requests on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel.
(b) Opinion of Company Counsel. On the First Closing
Date, you shall have received the opinion, dated as of the First Closing Date,
of Company Counsel, in form and substance satisfactory to the Underwriters'
Counsel, substantially to the effect that:
(i) the Company and the Subsidiary have been
duly incorporated and validly exist as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full corporate power and authority to own their properties and conduct
their business as described in the Prospectus, and are duly qualified
or licensed to do business as foreign corporations and are in good
standing in each other jurisdiction in which the nature
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of their business or the character or location of their properties
requires such qualification, except where failure to so qualify will
not have a material adverse effect on the business, properties or
financial condition of the Company and the Subsidiary taken as a
whole.
(ii) (A) the authorized capitalization of
the Company as of the date of the Prospectus was as is set forth in the
Prospectus under the caption "CAPITALIZATION", except as disclosed in
the Registration Statement under the heading "As Adjusted"; (B) all of
the shares of Common Stock now outstanding have been duly authorized
and validly issued, are fully paid and non-assessable, conform in all
material respects to the description thereof contained in the
Prospectus and to, the best knowledge of such counsel have not been
issued in violation of any statutory preemptive rights and, except as
described in the Prospectus and restrictions applicable to registered
securities under federal and state laws, are not subject to any
restrictions upon the voting or transfer thereof; (C) all of the Shares
and all of the Warrants have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided
herein, shall be validly issued, fully paid and non-assessable, shall
not have been issued in violation of any statutory preemptive rights;
(D) to the best knowledge of such counsel the stockholders of the
Company do not have any preemptive rights or other rights to subscribe
for or purchase, and except for the transfer restrictions imposed by
Rule 144 of the Rules and Regulations promulgated under the Act or
contained in the Lock-up Agreements executed with the Underwriters,
there are no restrictions upon the voting or transfer of, any of the
Securities; (E) the Shares and the Warrants, the Warrant Agreement and
the Underwriters' Warrant conform in all material respects to the
respective descriptions thereof contained in the Prospectus; (F) the
issuance by the Company of all of its outstanding securities has been
made in compliance with, or under an exemption from, the Act and
applicable state securities laws; (G) a sufficient number of shares of
Common Stock has been reserved, for all times when any of the Warrants
(including the Warrants issuable upon exercise of the Underwriters'
Warrant) are outstanding, for issuance upon exercise of all of the
Warrants; and (H) to the best knowledge of such counsel, neither the
filing of the Registration Statement nor the offering or sale of the
Shares and Warrants as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which have been
effectively waived or satisfied or described in the Prospectus, for or
relating to the registration of any securities of the Company;
(iii) the certificates evidencing the Shares
and the Warrants have been duly authorized by the Board of Directors
and complies with all applicable legal requirements under Delaware
General Corporation Law; and the Warrants are exercisable for shares of
Common Stock in accordance with the terms
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of the Warrants and at the prices therein provided for;
(iv) this Agreement, the Warrant Agreement,
the Underwriters' Warrant, and the Financial Consulting Agreement have
been duly and validly authorized, executed and delivered by the Company
and (assuming due execution and delivery thereof by the Underwriters
and/or Continental Stock Transfer & Trust Company, as the case may be)
all of such agreements are, or when duly executed shall be, the valid
and legally binding obligations of the Company, enforceable in
accordance with their respective terms (except as enforceability may be
limited bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, receivership, conservatorship, or other similar laws,
regulations or procedures of general applicability now or hereafter in
effect relating to or affecting creditors, or other obligees' rights,
generally, (b) Federal or state securities laws to the extent that
rights to indemnification and contribution under such agreements may be
unenforceable thereunder, and (c) general equity principles and to the
discretion of the court, regardless of whether such enforceability is
considered in a proceeding in equity or at law); provided, however,
that no opinion need to be expressed as to the enforceability of the
indemnity provisions contained in Section 6 or the contribution
provisions contained in Section 7;
(v) to the knowledge of such counsel, other
than as described in the Prospectus (A) there is no pending, threatened
or contemplated legal or governmental proceeding affecting the Company
or the Subsidiary which is reasonably likely to materially and
adversely affect the business, property, financial condition or results
of operations of the Company or the Subsidiary taken as a whole, or
which questions the validity of the Offering, the Securities, this
Agreement, the Warrant Agreement, the Underwriters' Warrant, or the
Financial Consulting Agreement or of any action taken or to be taken by
the Company pursuant thereto; and (B) there is no legal or governmental
regulatory proceeding required to be described or referred to in the
Registration Statement which is not so described or referred to;
(vi) to the knowledge of such counsel, (A)
the Company is not in violation of or default under this Agreement, the
Warrant Agreement, the Underwriters' Warrant, or the Financial
Consulting Agreement; and (B) to the knowledge of such counsel, the
execution and delivery hereof and thereof and consummation of the
transactions herein or therein contemplated shall not result in a
material violation of, or constitute a default under, the Certificate
of Incorporation or By-laws of the Company or the certificate of
incorporation or by-laws of the Subsidiary, or any material obligation,
agreement, covenant of condition contained in any bond, debenture, note
or other evidence of indebtedness, or in any material contract,
indenture, mortgage, loan agreement, lease, joint
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venture or other agreement or instrument to which the Company or the
Subsidiary is a party or by which the assets of the Company or the
Subsidiary are bound and which is attached as an exhibit to the
Registration Statement, or any material order, rule, regulation, writ,
injunction or decree of any government, governmental instrumentality
or court applicable to the Company or the Subsidiary (other than state
securities or blue sky laws as to which we express no opinion);
(vii) to the knowledge of such counsel, (a)
the Company and the Subsidiary have obtained, or are in the process of
obtaining, all licenses, necessary to the conduct of its business as
described in the Prospectus, except where the failure to obtain such
licenses would not have a material adverse effect on the financial
condition, business or properties of the Company, and (b) such obtained
licenses, are in full force and effect, except where the failure to
obtain such licenses would not have a material adverse effect on the
financial condition, business or properties of the Company;
(viii) the Registration Statement has become
effective under the Act, and to the knowledge of such counsel, no stop
order denying or suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for that or any similar
purpose have been instituted or are pending before or threatened by the
Commission;
(ix) the Registration Statement and the
Prospectus (except for the financial statements, notes thereto and
other financial tables, financial information and statistical data
contained therein, as to which counsel need not express an opinion)
comply as to form in all material respects with the Act and the Rules
and Regulations;
(x) all descriptions contained in the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, of material contracts and other documents are
accurate and fairly present the information required to be described,
and such counsel is familiar with all contracts and other documents
referred to in the Registration Statement and the Prospectus, and any
such amendment or supplement, or filed as exhibits to the Registration
Statement and, to the knowledge of such counsel, no contract or other
documents of a character required to be summarized or described therein
or to be filed as an exhibit thereto is not so summarized, described or
filed.
(xi) except for registration under the Act
and registration or qualification of the Securities under applicable
state or foreign securities or blue sky laws the clearance of such
offering by the NASD, the listing of the stock on NASDAQ, the Boston
Stock Exchange, no authorization, approval, consent or license of any
governmental or regulatory authority or agency is necessary in
connection with: (A) the
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<PAGE>
authorization, issuance, sale, transfer or delivery of the Securities
by the Company in accordance with this Agreement; (B) the execution,
delivery and performance of this Agreement by the Company; (C) the
issuance of the Underwriters' Warrant in accordance with this
Agreement or the Securities issuable upon exercise thereof;
Such opinion shall also state that Company Counsel's examination of the
Registration Statement and its discussions with the Company and its independent
auditors did not disclose any information which gives Company Counsel reason to
believe that the Registration Statement (other than the financial statements,
notes thereto, financial tables and schedules and other financial and
statistical information and information regarding the underwriter as to which
counsel need not express an opinion) at the time it became effective contained
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 not
misleading, or that the Prospectus (other than the schedules, financial
statements and other financial and statistical information as to which no view
is expressed) at the time it became effective contained 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 not misleading. In addition,
such opinion shall also cover such matters incident to the transactions
contemplated hereby as you or Underwriters' Counsel shall reasonably request. In
rendering such opinion, Company Counsel may rely as to matters of fact upon
certificates of officers of the Company, and of public officials, and may rely
as to all matters of law other than the law of the United States and the General
Corporation Law of the State of Delaware upon opinions of counsel satisfactory
to you, in which case the opinion shall state that they have no reason to
believe that you and they are not entitled so to rely.
(c) Corporate Proceedings. All corporate proceedings
and other legal matters relating to this Agreement, the Registration Statement,
the Prospectus and other related matters shall be reasonably satisfactory to
Underwriters' Counsel.
(d) Comfort Letter. Prior to the Effective Date, and
again on and as of the First Closing Date, you shall have received a letter from
BDO Seidman LP, certified public accountants for the Company, satisfactory in
form and substance to the Underwriters' Counsel.
(e) Bring Down. At each of the Closing Dates, (i) the
representations and warranties of the Company contained in this Agreement shall
be true and correct with the same effect as if made on and as of such Closing
Date, and the Company shall have performed all of its obligations hereunder and
satisfied all the conditions to be satisfied at or prior to such Closing Date;
(ii) the Registration Statement and the Prospectus shall contain all statements
which are required to be stated therein in accordance with the Act and the Rules
and Regulations, and shall in all material respects conform to the requirements
of the Act and the Rules and Regulations, and neither the Registration Statement
nor the Prospectus shall contain any untrue statement of a material fact or omit
to state any material fact required to be stated or which they were made, not
misleading; (iii) there shall have been, since the respective dates as of which
information is given, no material adverse change in the business, property,
condition (financial or otherwise), results
23
<PAGE>
of operations, earnings, capital stock, or long-term or short-term debt of the
Company from that set forth in the Registration Statement and the Prospectus,
except changes which the Registration Statement and Prospectus indicate might
occur after the Effective Date, and the Company shall not have incurred any
material liabilities nor entered into any material agreement other than as
referred to in the Registration Statement and Prospectus; and (iv) except as set
forth in the Prospectus, no action, suit or proceeding shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially adversely affect the business,
property, financial condition, results of operations of the Company and the
subsidiary taken as a whole.
(f) Transfer and Warrant Agent. On or before the
Effective Date, the Company shall have appointed Continental Stock Transfer &
Trust Company (or other agent mutually acceptable to the Company and the
Underwriters), as its transfer agent and warrant agent ("Transfer Agent") to
transfer all of the Shares and Warrants issued and sold by the Company and sold
by the Selling Warrantholders in the Offering, as well as to transfer other
shares of the Common Stock outstanding from time to time.
(g) NASD Approval of Underwriters' Compensation. By
the Effective Date, the Underwriters shall have received clearance from the NASD
as to the amount of compensation allowable or payable to the Underwriters, as
described in the Registration Statement.
(h) Certain Further Matters. On each Closing Date,
Underwriters' Counsel shall have been furnished with all such other documents
and certificates as they may reasonably request for the purpose of enabling them
to render their legal opinion to the Underwriters and in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants, or the fulfillment of any
of the conditions, herein contained.
(i) All proceedings taken in connection with
the authorization, issuance or sale of the Securities, as herein contemplated
shall be reasonably satisfactory in form and substance to the Underwriters and
to Underwriters' Counsel;
(ii) On each Closing Date there shall have
been duly tendered to you for your account the appropriate number of Securities;
(iii) No order suspending the sale of the
Securities in any jurisdiction designated by you pursuant to Section 3(b) hereof
shall have been issued on either Closing Date, and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Underwriters or
the Company, shall be contemplated;
(iv) On or prior to the First Closing Date,
the Underwriters' Warrant, the Warrant Agreement and the Financial Consulting
Agreement shall have been
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executed and delivered by the Company, and the Lock-Up Agreements shall have
been executed and delivered by all of the Company's officers, directors and
existing stockholders, to the Underwriters.
(i) Additional Conditions. Upon exercise of
the Over-Allotment Option, the Underwriters' obligations to purchase and pay for
the Option Securities shall be subject (as of the date hereof and as of the
Option Closing Date) to the following conditions:
(i) The Registration Statement shall remain
effective at the Option Closing Date, no stop order denying or suspending the
effectiveness thereof shall have been issued, and no proceedings for that or any
similar purpose shall have been instituted or shall be pending or, to your
knowledge or the knowledge of the Company, shall be contemplated by the
Commission, and all reasonable requests on the part of the Commission for
additional information shall have been complied with to the satisfaction of
Underwriters' Counsel.
(ii) On the Option Closing Date there shall
have been delivered to you the signed opinion of Company Counsel, dated as of
the Option Closing Date, in form and substance satisfactory to Underwriters'
Counsel, which opinion shall be substantially the same in scope and substance as
the opinion furnished to you on the First Closing Date pursuant to Section 4(b),
except that such opinion, where appropriate, shall cover the Option Securities
rather than the Firm Securities. If the First Closing Date is the same as the
Option Closing Date, such opinions may be combined.
(iii) All proceedings taken at or prior to
the Option Closing Date in connection with the sale and issuance of the Option
Securities shall be satisfactory in form and substance to you, and you and
Underwriters' Counsel shall have been furnished with all such documents,
certificates and opinions as you may reasonably request in connection with this
transaction in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its compliance with
any of the covenants or conditions contained herein.
(iv) On the Option Closing Date there shall
have been delivered you a letter in form and substance satisfactory to the
Underwriters from BDO Seidman LP, dated the Option Closing Date addressed to
you, confirming the information in their letter referred to in Section 4(f) as
of the date thereof and stating that, without any additional investigation
required, nothing has come to their attention during the period from the ending
date of their review referred to in such letter to a date not more than five
banking days prior to the Option Closing Date which would require any change in
such letter if it were required to be dated the Option Closing Date.
Any certificate signed by any officer of the Company and
delivered to the Underwriters or to Underwriters' Counsel shall be deemed a
representation and warranty by the Company to the Underwriters as to the
statements made therein. If any of the conditions herein
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<PAGE>
provided for in this Section shall not have been completely fulfilled as of the
date indicated, this Agreement and all obligations of the Underwriters under
this Agreement may be canceled at, or at any time prior to, each Closing Date by
your notifying the Company of such cancellation in writing or by telecopy at or
prior to the applicable Closing Date. Any such cancellation shall be without
liability of any Underwriters to the Company, except as otherwise provided
herein.
(j) At the First Closing Date the Underwriters shall
have received a certificate of the Attorney-in-Fact for each of the Selling
Warrantholders, dated as of te First Closing Date, to the effect that (i) the
representations and warranties of each Selling Warrantholder contained in
Section 1(aa) are true and correct with the same force and effect as though
expressly made at and as of the First Closing Date and (ii) each Selling
Warrantholder has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied hereunder at or prior to the First Closing
Date. The Attorney-in-Fact shall be entitled to rely upon certificates of the
Selling Warrantholders in giving its certificate. Such certificate shall be
required at the Option Closing Date, as of the date thereof, in the event the
First Closing Date and the Option Closing Date are on separate dates.
5. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company and the Selling Warrantholders to sell and deliver
the Shares and Warrants are subject to the following conditions:
(a) Effective Registration Statement. The
Registration Statement shall have become effective not later than 6:00 p.m. New
York Time, on the date of this Agreement, or at such later time or on such later
date as the Company and you may agree in writing.
(b) No Stop Order. On the applicable Closing Date, no
stop order denying or suspending the effectiveness of the Registration Statement
shall have been issued under the Act or any proceedings therefor initiated or
threatened by the Commission.
(c) Payment for Shares and Warrants. On the
applicable Closing Date, you shall have made payment, for the several accounts
of the Underwriters, of the aggregate Purchase Price for the Shares and Warrants
then being purchased by certified or bank cashier's checks payable in next day
funds to the order of the Company and the Selling Warrantholders.
If the conditions to the obligations of the Company and the Selling
Warrantholders provided by this Section 5 have been fulfilled on the First
Closing Date but are not fulfilled after the First Closing Date and prior to the
Option Closing Date, then only the obligation of the Company to sell and deliver
the Option Securities upon exercise of the Over-Allotment Option shall be
affected.
6. INDEMNIFICATION.
(a) Indemnification by the Company. As used in this
Agreement, the
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term "Liabilities" shall mean any and all losses, claims, damages and
liabilities, and actions and proceedings in respect thereof (including without
limitation all reasonable costs of defense and investigation and all attorneys'
fees) including without limitation those asserted by any party to this Agreement
against any other party to this Agreement. The Company and the Selling
Warrantholders hereby indemnify and holds harmless the Underwriters and each
person, if any, who controls the Underwriters within the meaning of the Act,
from and against all Liabilities, joint or several, to which the Underwriters or
such controlling person may become subject, under the Act or otherwise, insofar
as such Liabilities arise out of or are based upon: (i) any untrue statement or
alleged untrue statement of any material fact, in light of the circumstances in
which it was made, contained in (A) the Registration Statement or any amendment
thereto, or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto, or (B) any "blue sky" application or other document executed
by the Company specifically for that purpose, or based upon written information
furnished by the Company, filed in any state or other jurisdiction in order to
qualify any or all of the Securities under the securities laws thereof (any such
application, document or information being herein called a "Blue Sky
Application"); or (ii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, or in any Blue
Sky Application, a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which it was made,
not misleading; provided, however, that the Company shall not be liable in any
such case to the extent, but only to the extent, that any such Liabilities arise
out of or are based upon an untrue statement or alleged untrue statement or
omission or alleged omission (x) made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment thereto, or the Prospectus or any such Preliminary Prospectus, or
any such amendment or supplement thereto, or any such Blue Sky Application or
(y) corrected by the final Prospectus and the failure of the Underwriters to
deliver the final Prospectus or comply with the state and federal securities
laws applicable to it. The foregoing indemnity shall be in addition to any other
liability which the Company may otherwise have.
(b) Indemnification by Underwriters. The Underwriters
hereby indemnify and hold harmless the Company, each of its directors, each
nominee (if any) for director named in the Prospectus, each of its officers who
have signed the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act, and the Selling Warrantholders from
and against all Liabilities to which the Company or any such director, nominee,
officer or controlling person and/or the Selling Warrantholders may become
subject under the Act or otherwise, insofar as such Liabilities arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
or the Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
any such Liabilities arise out of or are based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
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Registration Statement or any amendment thereto, or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, in reliance upon
and in conformity with written information furnished to the Company through you,
by or on behalf of such Underwriters, specifically for use in the preparation
thereof. In no event shall the Underwriters be liable under this Section 6(b)
for any amount in excess of the compensation received by the Underwriters, in
the form of underwriting discounts or otherwise, pursuant to this Agreement or
any other agreement contemplated hereby. The foregoing indemnity shall be in
addition to any other liability which the Underwriters may otherwise have.
(c) Procedure. Promptly after receipt by an
indemnified party under this Section 6 of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Section 6, notify in writing the
indemnifying party of the commencement thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to any indemnified party otherwise than under this Section 6 unless the rights
of the indemnifying party have been prejudiced by such omission or delay. In
case any such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions hereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided,
however, that the fees and expenses of such counsel shall be at the expense of
the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both such
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it which
are different from or in addition to those available to the indemnifying party
or that the indemnified and indemnifying party have conflicting interests which
would make it inappropriate for the same counsel to represent both of them (in
which case the indemnifying party shall into have the right to assume the
defense of such action on behalf of the indemnified party, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys). No settlement of any action against an indemnified party shall be
made without the consent of the indemnified party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnified
party.
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7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (a) any indemnified party makes
claims for indemnification pursuant to Section 6 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 Section 6 provide for indemnification in
such case, or (b) contribution under the Act may be required on the part of any
indemnified party, then such indemnified party and each indemnifying party (if
more than one) shall contribute to the aggregate Liabilities to which it may be
subject, in either such case (after contribution from others) in such proportion
that the Underwriters are responsible in the aggregate for the portion of such
Liabilities represented by the percentage that the underwriting discount per
Share and Warrant appearing on the cover page of the Prospectus bears to the
public Offering price per Share and Warrant appearing thereon, and the Company
shall be responsible for the remaining portion; provided, however, that if such
allocation is not permitted by applicable law, then the relative fault of the
Company and the Selling Warrantholders, and the Underwriters in connection with
the statements or omissions which resulted in such Liabilities and other
relevant equitable considerations shall also be considered. The relative fault
shall be determined by reference to, among other things, whether in the case of
an untrue statement of material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company and
the Selling Warrantholders, or the Underwriters, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company and the Selling Warrantholders
and the Underwriters agree that it would not be just and equitable if the
respective obligations of the Company and the Selling Warrantholders, and the
Underwriters to contribute pursuant to this Section 7 were to be determined by
pro rata or per capita allocation of the aggregate Liabilities or by any other
method of allocation that does not take account of the equitable considerations
referred to in the first sentence of this Section 7. Moreover, the contribution
of the Underwriters shall not be in excess of the cash compensation received by
the Underwriters, in the form of underwriting discounts or otherwise, pursuant
to this agreement or any other agreement contemplated hereby. No person guilty
of a fraudulent misrepresentation (within the meaning of section 11(f) of the
Act) shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this Section 7, the term "Company"
shall include any officer, director or person who controls the Company within
the meaning of section 15 of the Act. If the full amount of the contribution
specified in this Section 7 is not permitted by law, then each indemnified party
and each person who controls an indemnified party shall be entitled to
contribution from each indemnifying party to the full extent permitted by law.
The foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under section 11 of the Act other
than the Company and the Underwriters. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
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<PAGE>
8. COSTS AND EXPENSES.
(a) Certain Costs and Expenses. Whether or not this
Agreement becomes effective or the sale of the Units to the Underwriter is
consummated, the Company shall pay all reasonable out-of-pocket costs and
expense incident to the issuance, offering, sale and delivery of the Units and
the performance of its obligations under this Agreement, including without
limitation: (i) all fees and expenses of the Company's legal counsel and
accountants; (ii) all costs and expenses incident to the preparation, printing,
filing and distribution of the Registration Statement (including the financial
statements contained therein and all exhibits and amendments thereto), each
Preliminary Prospectus and the Prospectus, each as amended or supplemented, this
Agreement and the other underwriting documents, as well as the other agreements
and documents referred to herein and the Blue Sky Memorandum; each in such
quantities as you shall deem necessary; (iii) all fees of NASD required in
connection with the filing required by NASD to be made by the Underwriter with
respect to the Offering; (iv) all reasonable expenses, including fees (but not
in excess of the amount set forth in Section 3(b)) and disbursements of
Underwriter's Counsel in connection with the qualification of the Securities
under the "blue sky" laws which you shall designate; (v) all costs and expenses
of printing the respective certificates representing the Shares and the
Warrants; (vi) the expense of placing one or more "tombstone" advertisements or
promotional materials as directed by you (provided, however, that the aggregate
amount thereof shall not exceed $10,000) and of offering memorabilia; (vii) all
costs and expenses of the Company and its employees (but not of the Underwriter
or its employees) associated with due diligence meetings and presentations
(including the payment for road show conference centers); (viii) all costs and
expenses associated with the preparation of a seven to ten minute professional
video presentation concerning the Company, its products and its management for
broker due diligence purposes not to exceed $5,000; (ix) any and all taxes
(including without limitation any transfer, franchise, capital stock or other
tax imposed by any jurisdiction) on sales of the Units to the Underwriter
hereunder; and (x) all costs and expenses incident to the furnishing of any
amended Prospectus or any supplement to be attached to the Prospectus as
required by Sections 3(a) and 3(d), except as otherwise provided by said
Sections. In addition, the Company shall engage Underwriter's Counsel to provide
the Underwriter, at the Closing and quarterly thereafter, until such time as the
Common Stock is listed on the New York Stock Exchange or the American Stock
Exchange or quoted on NASDAQ/NMS, with a memorandum, setting forth those states
in which the Common Stock and the Warrants may be traded in non-issuer
transactions under the blue sky laws of the 50 states. The Company shall pay
such counsel a one-time fee of $12,500 at the Closing for such opinions.
(b) Underwriters' Expense Allowance. In addition to
the expenses described in Section 8(a), the Company shall on the First Closing
Date pay to the Underwriters a non-accountable expense allowance, which shall
include fees of Underwriters' Counsel, exclusive of the fees referred to in
Section 3(b), of $140,043.75 (that being an amount equal to three percent (3%)
of the gross proceeds received upon sale of the Firm Securities less $27,300
paid to the previous Underwriter). In the event that the Offering is not
consummated the Underwriters and will only be reimbursed for their actual
accountable out-of-pocket expenses.
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In the event that the Over-Allotment Option is exercised, then the Company
shall, on the Option Closing Date, pay to the Underwriters, based on the number
of Option Securities to be sold by the Company, an additional amount equal to
three percent (3%) of the gross proceeds received upon sale of any of the Option
Securities, in the amount of $25,101.56 if the Over-Allotment Option is
exercised in full.
(c) No Finders. No person is entitled either directly
or indirectly to compensation from the Company, the Underwriters or any other
person for services as a finder in connection with the Offering, and the Company
hereby indemnifies and holds harmless the Underwriters, and the Underwriters
hereby indemnify and hold harmless the Company from and against all Liabilities,
joint or several, to which the indemnified party may become subject insofar as
such Liabilities arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the Offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
9. EFFECTIVE DATE. The Agreement shall become effective upon
its execution, except that you may, at your option, delay its effectiveness
until 10:00 a.m., New York time, on the first full business day following the
Effective Date, or at such earlier time after the Effective Date as you in your
discretion shall first commence the initial public offering by the Underwriters
of any of the Shares and Warrants. The time of the initial public offering shall
mean the time of release by you of the first newspaper advertisement which is
subsequently published with respect to the Shares and Warrants, or the time when
the Shares and Warrants are first generally offered by you to dealers by letter
or telegram, whichever shall first occur. This Agreement may be terminated by
you at any time before it becomes effective as provided above, except that the
provisions of Sections 3(x), 6, 7, 8, 12, 13, 14 and 15 shall remain in effect
notwithstanding such termination.
10. TERMINATION.
(a) Grounds for Termination.
(i) This Agreement, except for Sections
3(x), 6, 7, 8, 12, 13, 14 and 15, may be terminated at any time prior to the
First Closing Date, and the Over-Allotment Option, if exercised, may be canceled
at any time prior to the Option Closing Date, by you if in your sole judgment it
is impracticable to offer for sale or to enforce contracts made by you for the
resale of the Shares and Warrants agreed to be purchased hereunder, by reason
of: (A) the Company having sustained a material loss, whether or not insured, by
reason of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (B) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited; (C) material governmental restrictions having been
imposed on trading in securities generally which are not in force and effect on
the date hereof; (D) a banking moratorium having been declared by federal or New
York State authorities; (E) an outbreak or
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significant escalation of major international hostilities or other national or
international calamity having occurred; (F) the passage by the Congress of the
United States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by you to have a material adverse
impact on the business, financial condition or financial statements of the
Company; (G) any material adverse change in the financial or securities markets
beyond normal fluctuations in the United States having occurred since the date
of this Agreement; or (H) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or condition (financial or
otherwise) of the Company, whether or not arising in the ordinary course of
business.
(ii) The Underwriters shall have the right,
in their sole discretion, to terminate this Agreement, including without
limitation, the obligation to purchase the Firm Securities and the obligation to
purchase the Option Securities after the exercise of the Over-Allotment Option,
by notice given to the Company prior to delivery and payment for all the Firm
Securities or the Option Securities, as the case may be, if any of the
conditions enumerated in Section 4 are not either fulfilled or waived by the
Underwriters on or before any Closing Date.
(iii) Anything herein to the contrary
notwithstanding, if this Agreement shall not be carried out within the time
specified herein, or any extensions thereof granted by the Underwriters, by
reason of any failure on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement by it to be performed or satisfied then,
in addition to the obligations assumed by the Company pursuant to Section 8(a)
hereof, the Underwriters shall provide the Company with, and the Company shall
pay, a statement of the Underwriters' accountable expenses.
(b) Notification. If you elect to prevent this
Agreement from becoming effective or to terminate this Agreement as provided by
this Section 10 or by Section 9, you shall promptly notify the Company by
telephone or telegram, confirmed by letter.
11. Underwriters' Warrant. On the First Closing Date, the
Company shall issue and sell to you, for $10.00, and upon the terms and
conditions set forth in the form of Underwriters' Warrant filed as an exhibit to
the Registration Statement, an option entitling you to purchase 127,500 Shares
and/or 127,500 Warrants at an exercise price equal to 120% of the initial public
offering price per Share and per Warrant exercisable for a period of four years
commencing one year from the Effective Date (the "Underwriters' Warrant"). The
Underwriters' Warrant grant to the holders thereof certain "piggyback"
registration rights for a period of seven years, and demand registration rights
for a period of four years, commencing one year from the Effective Date with
respect to the registration under the Securities Act of the Securities issuable
upon exercise thereof. In the event of conflict in the terms of this Agreement
and the Underwriters' Warrant, the terms and conditions of the Underwriters'
Warrant shall control.
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12. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations, warranties,
covenants and other statements of the Company, the Selling Warrantholders and
the Underwriters set forth in Sections 3, 6, 7 and 8 of this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of any other party, and shall survive delivery of and payment for the
Units and the termination of this Agreement. The Company and the Selling
Warrantholders hereby indemnify and hold harmless the Underwriters from and
against all Liabilities, joint or several, to which the Underwriters may become
subject insofar as such Liabilities arise out of or are based upon the breach or
failure of any of the provisions of Sections 3, 6, 7 and 8.
13. NOTICES. All communications hereunder shall be in writing
and, except as otherwise expressly provided herein, if sent to you, shall be
mailed, delivered or telegraphed and confirmed to you at Briarwood Investment
Counsel, 45 Crossways Park Drive, Woodbury, New York 11797, with a copy sent to
Jay M. Kaplowitz, Esq., Gersten, Savage, Kaplowitz & Fredericks, LLP, 101 East
52nd Street, New York, New York 10022; or if sent to the Company, shall be
mailed, delivered, or telegraphed and confirmed to it at Phoenix Preschool
Education Centers, Inc., 150 East 50th Street, 31st Floor, New York, New York
10155, with a copy sent to Frederick D. Lipman, Esq., Blank Rome Comisky &
McCauley, One Logan Square, Philadelphia, Pennsylvania 19103.
14. PARTIES IN INTEREST. This Agreement is made solely for the
benefit of the Underwriters, the Company, the Selling Warrantholders and, to the
extent expressed, any person controlling the Company or the Underwriter, as the
case may be, and the directors of the Company, nominees for directors of the
Company (if any) named in the Prospectus, officers of the Company who have
signed the Registration Statement, and their respective executors,
administrators, successors and assigns; and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser, as such, from the Underwriter of the
Shares and Warrants.
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 conflict of laws. The parties agree to submit
themselves to the jurisdiction of the courts of the State of New York or of the
United States of America for the Southern District of New York, which shall be
the sole tribunals in which any parties may institute and maintain a legal
proceeding against the other party arising from any dispute in this Agreement.
In the event either party initiates a legal proceeding in a jurisdiction other
than in the courts of the State of New York or of the United States of America
for the Southern District of New York, the other party may assert as a complete
defense and as a basis for dismissal of such legal proceeding that the legal
proceeding was not initiated and maintained in the courts of the State of New
York or of the United States of America for the Southern District of New York,
in accordance with the provisions of this Section 15.
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16. ENTIRE AGREEMENT. This Agreement, the Underwriters'
Warrant, and the Financial Consulting Agreement contain the entire agreement
between the parties hereto in connection with the subject matter hereof and
thereof.
17. COUNTERPARTS. This Agreement may be executed in two or
more counterpart copies, each of which shall be deemed and an original but all
of which together shall constitute one and the same instrument.
[Signature on following page]
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<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this Agreement, whereupon it will become a
binding agreement between the Company, the Selling Warrantholders and the
Underwriter in accordance with its terms.
Very truly yours,
PHOENIX PRESCHOOL HOLDINGS, INC.
By: ______________________________
Name:
Title:
THE SELLING WARRANTHOLDERS
By:_________________________________________
As Attorney-in-Fact, acting on behalf of
each of the Selling Warrantholders named
in Schedule A hereto
Accepted as of the date
first above written:
New York, New York
DUKE & CO., INC.
By: ___________________________________
Name:
Title:
BRIARWOOD INVESTMENT COUNSEL
By:___________________________________
Name:
Title:
<PAGE>
ADVISORY AND INVESTMENT BANKING AGREEMENT
This Agreement is made and entered into as of the __ day
of_____ , 1997 by and between Duke & Co., Inc., a Florida corporation ("Duke")
and Briarwood Investment counsel, a ___________ corporation ("Briarwood"), and
Phoenix Preschool Holdings, Inc., a Delaware corporation (the "Company").
In consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages Duke and Briarwood for
the term specified in Paragraph 2 hereof to render consulting advice to the
Company as investment bankers relating to financial and similar matters upon the
terms and conditions set forth herein.
2. Term: Except as otherwise specified in paragraph 4 hereof,
this Agreement shall be effective from _________, 1997 to___________ , 1999.
3. Duties of Duke and Briarwood: During the term of this
Agreement, Duke and Briarwood shall seek out Transactions (as hereinafter
defined) on behalf of the Company and shall furnish advice to the Company in
connection with any such Transactions.
<PAGE>
4. Compensation: In consideration for the services rendered by
Duke and Briarwood to the Company pursuant to this Agreement (and in addition to
the expenses provided for in Paragraph 5 hereof), the Company shall compensate
Duke and Briarwood as follows:
(a) The Company shall pay Duke and Briarwood a fee of
$4,166 per month during the term of this Agreement. The sum of $99,984 shall be
payable in full on the date of this Agreement. In the event that Duke and
Briarwood ceases its business operations as a financial advisor and investment
banker, materially breaches or is unable to satisfy its performance obligations
hereunder, then Duke and Briarwood shall repay to the Company the pro rata
unearned portion of foregoing fee, based on the number of months for which
performance was delivered and the remaining number of months in the term.
(b) In the event that any Transaction (as hereinafter
defined) occurs during the term of this Agreement or one year thereafter, the
Company shall pay fees to Duke and Briarwood as follows:
Consideration Fee
------------- ---
$ - 0 - to $ 500,000 Minimum fee of $25,000
$ 500,000 to $5,000,000 5% of Consideration
$5,000,000 or more $250,000 plus 1% of the
Consideration in excess of
$5,000,000
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For the purposes of this Agreement, "Consideration" shall mean
the total market value on the day of the closing of stock, cash, assets and all
other property (real or personal) exchanged or received, directly or indirectly
by the Company or any of its security holders in connection with any
Transaction. Any co-broker or brokers retained by Duke and Briarwood shall be
paid by Duke and Briarwood.
For the purposes of the Agreement, a "Transaction" shall mean
(a) any transaction originated by Duke and Briarwood, other than in the ordinary
course of trade or business of the Company, whereby, directly or indirectly,
control of or a material interest in the Company or any of its businesses or any
of their respective assets, is transferred for Consideration, (b) any
transaction originated by Duke and Briarwood whereby the Company acquires any
other company or the assets of any other company or an interest in any other
company (an "Acquisition") or (c) any sale or Acquisition in connection with
which the Company engages an investment banker other than Duke and Briarwood and
pays such investment banker a fee in respect of such Transaction unless Duke and
Briarwood was unwilling or unable to so act.
In the event Duke and Briarwood originates a line of credit
with a lender, the Company and Duke and Briarwood will mutually agree on a
satisfactory fee for such services provided based upon reasonable and customary
practice in the industry and the terms of payment of such fee; provided,
however, that in the event the Company is introduced to a corporate partner by
Duke and Briarwood in
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connection with a merger, acquisition or financing and a credit line develops
directly as a result of the introduction, the appropriate fee shall be the
amount set forth in the schedule above with consideration to be based upon the
amount of the line of credit. In the event Duke and Briarwood introduces the
Company to a joint venture partner or customer and sales develop as a result of
the introduction, the Company agrees to pay a fee of five percent (5%) of total
sales generated directly from this introduction during the first two years
following the date of the first sale, in lieu of the fees set forth in the
schedule above. Total sales shall mean cash receipts less any applicable
refunds, returns, allowances, credits and shipping charges and monies paid by
the Company by way of settlement or judgment arising out of claims made by or
threatened against the Company. Commission payments shall be paid on the 15th
day of each month following the receipt of customers' payment. In the event any
adjustments are made to the total sales after the commission has been paid, the
Company shall be entitled to an appropriate refund or credit against future
payments under this Agreement. All fees to be paid pursuant to this Agreement,
except as otherwise specified, are due and payable to Duke and Briarwood in cash
at the closing or closings of any transaction specified in Paragraph 4 hereof.
In the event that this Agreement shall not be renewed or if terminated for any
reason, notwithstanding any such non-renewal or termination, Duke and Briarwood
shall be entitled to a full fee as provided under Paragraphs 4 and 5 hereof, for
any transaction for which the discussions were
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initiated during the term of this Agreement and which is consummated within a
period of twelve months after non-renewal or termination of this Agreement.
5. Expenses of Duke and Briarwood: In addition to the fees
payable hereunder, and regardless of whether any transaction set forth in
Paragraph 4 hereof is proposed or consummated the Company shall reimburse Duke
and Briarwood for all fees and disbursements of Duke and Briarwood's counsel and
Duke and Briarwood's travel and reasonable out-of-pocket expenses incurred in
connection with and in direct furtherance of the services performed by Duke and
Briarwood pursuant to this Agreement, including without limitation, hotels, food
and associated expenses and long-distance telephone calls. Duke and Briarwood
shall obtain the consent of the Company before incurring any expense over $200.
6. Liability of Duke and Briarwood:
(1) The Company acknowledges that all opinions and advice
(written or oral) given by Duke and Briarwood to the Company in connection with
Duke and Briarwood's engagement are intended solely for the benefit and use of
the Company in considering the transaction to which they relate, and the Company
agrees that no person or entity other than the Company shall be entitled to make
use of or rely upon the advice of Duke and Briarwood to be given hereunder, and
no such opinion or advice shall be used for any other purpose or reproduced,
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disseminated, quoted or referred to at any time, in any manner or for any
purpose, nor may the Company make any public references to Duke and Briarwood,
or use Duke and Briarwood's name in any annual reports or any other reports or
releases of the Company without Duke and Briarwood's prior written consent.
(2) The Company acknowledges that Duke and Briarwood makes
no commitment whatsoever as to making a market in the Company's securities or to
recommending or advising its clients to purchase the Company's securities,
except that Duke and Briarwood has committed to make a market in the Company's
securities for at least 45 days after the effective date of the Company's
initial public offering. Research reports or corporate finance reports that may
be prepared by Duke and Briarwood will, when and if prepared, be done solely on
the merits or judgment of analysis of Duke and Briarwood or any senior corporate
finance personnel of Duke and Briarwood.
7. Duke and Briarwood's Services to Others: The Company
acknowledges that Duke and Briarwood's or its affiliates are in the business of
providing financial services and consulting advice to others. Nothing herein
contained shall be construed to limit or restrict Duke and Briarwood in
conducting such business with respect to others, or in rendering such advice to
others.
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8. Company Information:
(a) The Company recognizes and confirms that, in advising
the Company and in fulfilling its engagement hereunder, Duke and Briarwood will
use and rely on data, material and other information furnished to Duke and
Briarwood by the Company. The Company acknowledges and agrees that in performing
its services under this engagement, Duke and Briarwood may rely upon the data,
material and other information supplied by the Company without independently
verifying the accuracy, completeness or veracity of same.
(b) Except as contemplated by the terms hereof or as
required by applicable law, Duke and Briarwood shall keep confidential all
material non-public information provided to it by the Company, and shall not
disclose such information to any third party, other than such of its employees
and advisors as Duke and Briarwood determines to have a need to know. Upon
termination of this Agreement, at the request of the Company, Duke and Briarwood
shall deliver to the Company all non-public material in its possession relating
to the business affairs of the Company.
9. Indemnification:
a. The Company shall indemnify and hold Duke and Briarwood
and its directors, officers, employees and agents harmless against any and all
liabilities, claims, lawsuits, including any and all awards and/or judgments to
which it may become subject under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended (the "Act") or any
other federal or
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state statute, at common law or otherwise, insofar as said liabilities, claims
and lawsuits (including awards and/or judgments) arise out of or are in
connection with the services rendered by Duke and Briarwood or any transactions
in connection with this Agreement, except for any liabilities, claims and
lawsuits (including awards judgments and related costs and expenses), arising
out of acts or omissions of Duke and Briarwood. In addition, the Company shall
also indemnify and hold Duke and Briarwood harmless against any and all
reasonable costs and expenses, including reasonable counsel fees, incurred or
relating to the foregoing. If it is finally judicially determined that the
Company will not be responsible for any liabilities, claims and lawsuits or
expenses related thereto, the indemnified party, by his or its acceptance of
such amounts, agrees to repay the Company all amounts previously paid by the
Company to the indemnified person and will pay all costs of collection thereof,
including but not limited to reasonable attorneys' fees related thereto.
Duke and Briarwood shall give the Company prompt notice of any
such liability, claim or lawsuit which Duke and Briarwood contends is the
subject matter of the Company's indemnification and the Company thereupon shall
be granted the right to take any and all necessary and proper action, at its
sole cost and expense, with respect to such liability, claim and lawsuit,
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<PAGE>
including the right to settle, compromise and dispose of such liability, claim
or lawsuit, excepting therefrom any and all proceedings or hearings before any
regulatory bodies and/or authorities.
Duke and Briarwood shall indemnify and hold the Company and
its directors, officers, employees and agents harmless against any and all
liabilities, claims and lawsuits, including any and all awards and/or judgments
to which it may become subject under the 1933 Act, the Act or any other federal
or state statute, at common law or otherwise, insofar as said liabilities,
claims and lawsuits (including awards and/or judgments) arise out of or are
based upon Duke and Briarwood's gross negligence, useful misconduct, bad faith
or any untrue statement or alleged untrue statement of a material fact or
omission at a material fact required to be stated or necessary to make the
statement provided by Duke and Briarwood, not misleading, which statement or
omission was made in reliance upon information furnished in writing to the
Company by or on behalf of Duke and Briarwood for inclusion in any registration
statement or prospectus or any amendment or supplement thereto in connection
with any transaction to which this Agreement applies. In addition, Duke and
Briarwood shall also indemnify and hold the Company harmless against any and all
costs and expenses, including reasonable counsel fees, incurred or relating to
the foregoing.
The Company shall give to Duke and Briarwood prompt notice of
any such liability, claim or lawsuit which the Company contends is the subject
matter of Duke and Briarwood's indemnification and Duke and Briarwood thereupon
shall be granted the right to a take
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any and all necessary and proper action, at its sole cost and expense, with
respect to such liability, claim and lawsuit, including the right to settle,
compromise or dispose of such liability, claim or lawsuit, excepting therefrom
any and all proceedings or hearings before any regulatory bodies and/or
authorities.
b. In order to provide for just and equitable contribution
under the Act in any case in which (i) any person entitled to indemnification
under this Section 9 makes claim for indemnification pursuant hereto but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 10, then, and in each such case, the Company and Duke and Briarwood
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after any contribution from others) in such
proportion taking into consideration the relative benefits received by each
party from the offering covered by the prospectus with respect to any
transactions in connection with this Agreement (taking into account the portion
of the proceeds of the offering realized by each), the parties' relative
knowledge and access to information concerning the matter with respect to which
the claim was assessed, the opportunity
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<PAGE>
to correct and prevent any statement or omission and other equitable
considerations appropriate under the circumstances; provided, however, that
notwithstanding the above in no event shall Duke and Briarwood be required to
contribute any amount in excess of 10% of the public offering price of any
securities to which such Prospectus applies; and provided, that, in any such
case, no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit or proceeding, such party will, if a claim for contribution in respect
thereof is to be made against another party (the "Contributing Party"), notify
the Contributing Party of the commencement thereof, but the omission so to
notify the Contributing Party will not relieve it from any liability which it
may have to any other party other than for contribution hereunder. In case any
such action, suit or proceeding is brought against any party, and such party
notifies a Contributing Party or his or its representative of the commencement
thereof within the aforesaid fifteen (15) days, the Contributing Party will be
entitled to participate therein with the notifying party and any other
Contributing Party similarly notified. Any such Contributing Party shall not be
liable to any party seeking contribution on account of any settlement of any
claim, action or proceeding effected by such party seeking contribution without
the
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written consent of the Contributing Party. The indemnification provisions
contained in this Section 10 are in addition to any other rights or remedies
which either party hereto may have with respect to the other or hereunder.
10. Duke and Briarwood an Independent Contractor : Duke and
Briarwood shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that Duke and Briarwood shall
have no authority to act for, represent or bind the Company or any affiliate
thereof in any manner, except as may be agreed to expressly by the Company in
writing from time to time.
11. Miscellaneous:
(1) This Agreement between the Company and Duke and
Briarwood constitutes the entire agreement and understanding of the parties
hereto, and supersedes any and all previous agreements and understandings,
whether oral or written, between the parties with respect to the matters set
forth herein.
(2) Any notice or communication permitted or required
hereunder shall be in writing and shall be deemed sufficiently given if
hand-delivered or sent (i) postage prepaid by registered mail, return receipt
requested, or (ii) by facsimile, to the respective
12-
<PAGE>
parties as set forth below, or to such other address as either party may notify
the other in writing:
If to the Company, to: Phoenix Preschool Holdings,
Inc.
150 East 50th Street, 31st Fl.
New York, New York 10155
with a copy to: Frederick D. Lipman
Blank Rome Comisky & McCauley
One Logan Square
Philadelphia, PA 19103
If to Duke and Briarwood, to: Duke & Co., Inc.
909 Third Avenue
New York, New York 10022
Briarwood Investment Counsel
101 East 52nd Street
New York, New York 10022
with a copy to: JAY M. KAPLOWITZ
Gersten, Savage, Kaplowitz &
Fredericks, LLP
101 East 52nd Street
New York, New York 10022
(3) This Agreement shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors, legal
representatives and assigns.
(4) This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same original
document.
(5) No provision of this Agreement may be amended, modified
or waived, except in a writing signed by all of the parties hereto.
(6) This Agreement shall be construed in accordance with
and governed by the laws of the State of New York, without giving
13-
<PAGE>
effect to conflict of law principles. The parties hereby agree that any dispute
which may arise between them arising out of or in connection with this Agreement
shall be adjudicated before a court located in New York City, and they hereby
submit to the exclusive jurisdiction of the courts of the State of New York
located in New York, New York and of the federal courts in the Southern District
of New York with respect to any action or legal proceeding commenced by any
party, and irrevocably waive any objection they now or hereafter may have
respecting the venue of any such action or proceeding brought in such a court or
respecting the fact that such court is an inconvenient forum, relating to or
arising out of this Agreement, and consent to the service of process in any such
action or legal proceeding by means of registered or certified mail, return
receipt requested, in care of the address set forth in Paragraph 11(b) hereof.
14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
DUKE & CO., INC.
By:________________________________
BRIARWOOD INVESTMENT COUNSEL
By:_________________________________
PHOENIX PRESCHOOL HOLDINGS, INC.
By:________________________________
15-
<PAGE>
July 7, 1997
(as amended August 30, 1997 and
November 18, 1997)
Phoenix Preschool Holdings, Inc.
150 E. 58th Street
31st Floor
New York, NY 10155
Re: Plan of Reorganization between and among
Phoenix Preschool Holdings, Inc., Phoenix
Preschool Education Centers, Inc. and
Michael C. Koffler ("Plan of Reorganization")
Gentlemen:
This letter agreement is intended to constitute a legally binding Plan
of Reorganization and to express our legally binding agreement with respect to
those matters addressed in the Plan of Reorganization including the contemplated
underwritten public offering of the common stock of Phoenix Preschool Holdings,
Inc., a Pennsylvania corporation ("Holdings"), the successor by merger to the
Delaware corporation of the same name. The parties to this Plan of
Reorganization are Holdings, Phoenix Preschool Education Centers, Inc., a
Delaware corporation ("Education Centers, Inc."), and Michael C. Koffler
("Koffler"), who owns all of the outstanding common stock of Education Centers,
Inc. At or before the effective date (the "Effective Date")for the contemplated
firm-commitment underwritten initial public offering of the common stock of
Holdings, Koffler will contribute to Holdings all of his common stock of
Education Centers, Inc. and $500,000 of principal amount of indebtedness owed to
Koffler by Education Centers, Inc. in a transaction (hereafter called the
"Section 351 Transaction") effectuated pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended, and Holdings will thereupon own all of the
outstanding common stock of Education Centers, Inc.
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -2-
Koffler hereby warrants and represents to Holdings that he is, as of
the date hereof, the sole owner of record and beneficially (as such term is
defined in Rule 13d-3 of the Securities Exchange Act of 1934) of all of the
outstanding shares of the common stock of Education Centers, Inc. To the best of
Koffler's knowledge, there are no other shareholders of Education Centers, Inc.
and that, and no person has the right to acquire shares of Education Centers,
Inc. except for certain employees, consultants, bridge note holders, and the
holders of the Cappello warrants.
Prior to the Effective Date, Education Centers, Inc. shall declare a
dividend to Koffler equal to the undistributed Subchapter S income (if any) of
Education Centers, Inc. for periods prior to the Effective Date. Holdings hereby
guarantees all payments to be made by Education Centers, Inc. pursuant hereto
and agrees to contribute to Education Centers, Inc. a sufficient amount of cash
to fund all payments due to Koffler hereunder.
Koffler hereby agrees that he will contribute to Holdings all of his
shares of common stock of Education Centers, Inc., and $500,000 of the principal
amount of indebtedness owed by Education Centers, Inc. to Koffler, on either the
Effective Date of the registration statement of the contemplated public offering
of Holdings common stock or at such later date, but not later than the First
Closing Date (as defined in the underwriting agreement entered into with Duke &
Co., Inc. and Briarwood Investment Counsel in connection with the offering
contemplated hereby), as is requested by Holdings. Koffler agrees not to convert
the Convertible Promissory Note, dated as of January 1, 1996, of which Education
Centers, Inc. is the maker and Koffler is the payee (the "Note"), prior to the
First Closing Date, assuming that the First Closing Date occurs by March, 1998.
In exchange, Koffler will receive 810,890 shares of the common stock of
Holdings and 500,000 shares of Series A Preferred Stock of Holdings. Koffler's
shares in Holdings issued upon incorporation will be cancelled. Education
Centers, Inc. will pay to Koffler any excess of the indebtedness due to Koffler
from Education Centers, Inc. over and above the $500,000 in principal amount of
indebtedness contributed by Koffler to Holdings. It is agreed that, as of March
31, 1997, Education Centers, Inc. owes Koffler $747,831, and that the due date
of such indebtedness (which is evidenced in part by the Note) is hereby extended
until July 1, 1998.
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -3-
Holdings agrees to assume, effective as of the Effective Date, the
obligations of Education Centers, Inc. under all outstanding warrants and
options of Education Centers, Inc. and, subsequent to the Effective Date, these
warrants and options shall relate solely to the common stock of Holdings.
It is understood that the consent of holders of warrants and options to
purchase common stock of Education Centers, Inc. may be required by Holdings in
order to confirm that their sole rights under the warrants and options are to
receive common stock of Holdings, rather than common stock of Education Centers,
Inc. If for any reason these consents are not obtained prior to the Effective
Date, Holdings may require the transaction to be structured as a merger in which
a subsidiary of Holdings is merged into Education Centers, Inc., rather than a
Section 351 Transaction.
This letter agreement shall automatically become null and void if for
any reason there is no closing of the underwriting agreement for the
contemplated public offering of Holdings common stock within four months from
the date hereof or if there are substantial changes from the proposed initial
public offering described in this letter agreement. Any Section 351 Transaction
consummated hereunder shall become null and void, and automatically rescinded,
if the First Closing Date does not occur.
This letter agreement represents the entire understanding of the
parties with respect to the subject matter, may not be amended, supplemented,
terminated or waived except by written instrument signed by all parties hereto,
may be executed in one or more counterparts, each of which shall be deemed an
original against any party whose signature appears thereon, and shall be
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed solely in Delaware. This agreement shall be
binding upon and inure to the benefit of the signatories hereto and their heirs,
legal and other personal representatives (similar or dissimilar), estates,
executors, administrators, successors and assigns. The signatories hereto,
intend to be legally bound hereby.
Very truly yours,
/s/ Michael C. Koffler
----------------------
MICHAEL C. KOFFLER
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
By: /s/ Michael C. Koffler
-----------------------
Agreed:
PHOENIX PRESCHOOL HOLDINGS, INC., a
Pennsylvania corporation
BY: /s/ Michael C. Koffler
------------------------
<PAGE>
ARTICLES OF MERGER-DOMESTIC BUSINESS CORPORATION
DSCB:15-1926 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. ss. 1926 (relating to
articles of merger or consolidation), the undersigned business corporations,
desiring to effect a merger, hereby state that:
<TABLE>
<CAPTION>
<S> <C>
1. The name of the corporation surviving the merger is: Phoenix Preschool Holdings, Inc.
------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
2. (Check and complete one of the following):
X The surviving corporation is a domestic business corporation and the (a) address of its current registered
--- office in this Commonwealth or (b) name of its commercial registered office provider and the county
of venue is (the Department is hereby authorized to correct the following information to conform to the
records of the Department):
(a)
------------------------------------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o: Esquire Assist, Ltd. Dauphin
------------------------------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the county in (b) shall be
deemed the county in which the corporation is located for venue and official publication purposes.
--- The surviving corporation is a qualified foreign business corporation incorporated under the laws of
and the (a) address of its current registered office in this Commonwealth or (b) name of its commercial
registered office provider and the county of venue is (the Department is hereby authorized to correct
the following information to conform to the records of the Department):
(a)
------------------------------------------------------------------------------------------------
Number and Street City State Zip County
(b)
------------------------------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider, the county in (b) shall be deemed
the county in which the corporation is located for venue and official publication purposes.
--- The surviving corporation is a nonqualified foreign business corporation incorporated under the laws of and
the address of its principal office under the laws of such domiciliary jurisdiction is:
(a)
------------------------------------------------------------------------------------------------
Number and Street City State Zip County
3. The name and the address of the registered office in this Commonwealth or name of its commercial registered
office provider and the county of venue of each other domestic business corporation and qualified foreign
business corporation which is a party to the plan of merger are as follows:
Name of Corporation Address of Registered Office or Name of Commercial Registered Office Provider County
Phoenix Preschool Holdings, Inc., Esquire Assist, Ltd., 225 South Street, Harrisburg PA 17101 Dauphin
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
4. (Check, and if appropriate complete, one of the following):
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
X The plan of merger shall be effective upon filing these Articles of Merger in the Department of State.
---
The plan of merger shall be effective on: at
--- ----------------------------- --------------------------------
Date Hour
5. The manner in which the plan of merger was adopted by each domestic
corporation is as follows:
Name of Corporation Manner of Adoption
Phoenix Preschool Holdings, Inc. Adopted by action of the Board of Directors of the Corporation pursuant to 15
- ----------------------------------------------------------------------------------------------------------------------
Pa.C.S. sec. 1924(b)(2).
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
6. (Strike out this paragraph if no foreign corporation is a party to the merger). The plan was authorized, adopted
or approved, as the case may be, by the foreign business corporation (or each of the foreign business
corporations) party to the plan in accordance with the laws of the jurisdiction in which it is incorporated.
7. (Check, and if appropriate complete, one of the following):
X The plan of merger is set forth in full in Exhibit A attached hereto and made a part hereof.
---
Pursuant to 15 Pa.C.S. ss. 1901 (relating to omission of certain provisions from filed plans) the provisions, if
--- any, of the plan of merger that amend or constitute the operative Articles of Incorporation of the surviving
corporation as in effect subsequent to the effective date of the plan are set forth in full in Exhibit A attached
hereto and made a part hereof. The full text of the plan of merger is on file at the principal place of business
of the surviving corporation, the address of which is:
--------------------------------------------------------------------------------------------------------------------
Number and Street City State Zip County
IN TESTIMONY WHEREOF, the undersigned corporation or each undersigned corporation has caused these Articles of
Merger to be signed by a duly authorized officer thereof this 20th day of November , 1997 .
</TABLE>
Phoenix Preschool Holdings, Inc. a Pennsylvania corporation
BY: /s/ Michael C. Koffler
-----------------------------------------------------------
Michael C. Koffler
TITLE: President
--------------------------------------------------------
Phoenix Preschool Holdings, Inc. a Delaware corporation
BY: /s/ Michael C. Koffler
-----------------------------------------------------------
Michael C. Koffler
TITLE: President
--------------------------------------------------------
<PAGE>
PLAN OF MERGER
This PLAN OF MERGER, dated as of November 20, 1997, is by and between
Phoenix Preschool Holdings, Inc.("PPHI"), a Pennsylvania corporation, and
Phoenix Preschool Holdings, Inc. ("PPHIDEL"), a Delaware corporation, (the
foregoing are hereinafter sometimes referred to as the "Constituent
Corporations").
BACKGROUND
The sole director and sole shareholder of each of the Constituent
Corporations have determined that a merger of PPHIDEL with and into PPHI
(hereinafter sometimes referred to as the "Merger") has a valid business
purpose, is advisable, and is in the best interests of each of the Constituent
Corporations, and by resolutions duly adopted, have approved this Plan of Merger
in the manner and upon the terms and conditions hereinafter set forth and
pursuant to the applicable provisions of the laws of the Commonwealth of
Pennsylvania.
NOW THEREFORE
In consideration of the foregoing premises and the material promises,
agreements and covenants contained herein, and for the purpose of effecting the
Merger upon the terms and conditions set forth herein, each of the Constituent
Corporations, intending to be legally bound, agree as follows:
1. Merger. Upon compliance with the applicable provisions of the laws
of the Commonwealth of Pennsylvania, on the Effective Date (as defined herein),
PPHIDEL shall be merged with and into PPHI, which later corporation shall be the
surviving corporation of the Merger (hereinafter sometimes referred to as the
"Surviving Corporation") and shall continue to exist and to be governed by the
laws of the Commonwealth of Pennsylvania. The separate existence of PPHIDEL
shall thereupon cease.
<PAGE>
2. Certificate of Incorporation of the Surviving Corporation. The
Certificate of Incorporation of PPHI, in effect as of and on the Effective Date,
shall remain the Certificate of Incorporation of the Surviving Corporation,
until amended as provided by applicable law.
3. Bylaws of the Surviving Corporation. The Bylaws of PPHI, in effect
as of and on the Effective Date, shall remain the Bylaws of the Surviving
Corporation until amended as provided by applicable law.
4. Directors and Officers of the Surviving Corporation. The directors
of PPHI in office on and as of the Effective Date, shall remain the directors of
the Surviving Corporation and shall retain their respective positions until the
end of the respective terms for which they were elected, subject to removal,
resignation, or such other change as may otherwise occur. The officers of
PPHIDEL shall be the officers of the Surviving Corporation and shall retain
their respective positions. If on the Effective Date a vacancy shall exist in
any directorship or office of the Surviving Corporation, such vacancy shall
thereafter be filled in the manner provided by the Bylaws of the Surviving
Corporation and applicable law.
5. Effective Date. The Effective Date of the Merger shall be upon
filing.
6. Cancellation of Securities. On the Effective Date, all shares of
Common Stock of PPHIDEL shall be canceled, extinguished or retired and no new
shares of stock or other securities of any of the Constituent Corporations shall
be issued in exchange therefor. The certificates representing such shares shall
be marked "canceled in merger."
7. State Filings. The proper officers of the Constituent Corporations
shall make and execute, under the corporate seals of the respective
corporations, whatever certificates and documents are required by the
Commonwealth of Pennsylvania to effect the Merger and to cause the same to be
filed, in the manner provided by law, and to do all things whatsoever, whether
within or without the Commonwealth of Pennsylvania, which may be necessary and
proper to effect the Merger.
<PAGE>
8. Termination or Modification of Merger. a) This Plan of Merger may be
terminated and abandoned by the Board of Directors of any of the Constituent
Corporations at any time prior to the Effective Date notwithstanding approval of
the Plan of Merger by the sole shareholder of each Constituent Corporation. In
the event of such termination and abandonment, this Plan of Merger shall be void
and have no effect, without any liability on part of either of the Constituent
Corporations, their shareholders, directors or officers.
b) Upon the authorization of the Boards of Directors of any of the
Constituent Corporations, at any time prior to the Effective Date,
notwithstanding approval of the Plan of Merger by the sole shareholder of each
Constituent Corporation, this Plan of Merger may be modified and amended in any
manner which may be necessary or appropriate to conform it to the requirements
of the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, each of the undersigned corporations has caused
this Plan of Merger to be signed by a duly authorized officer on the date first
written above.
PHOENIX PRESCHOOL HOLDINGS, INC., a Pennsylvania Corporation
By: /s/ Michael C. Koffler
---------------------------------
Michael C. Koffler, President
Attest: /s/ Michael C. Koffler
------------------------------
Michael C. Koffler, Secretary
PHOENIX PRESCHOOL HOLDINGS, INC., a Delaware Corporation
By: /s/ Michael C. Koffler
---------------------------------
Michael C. Koffler, President
Attest: /s/ Michael C. Koffler
------------------------------
Michael C. Koffler, Secretary
<PAGE>
ARTICLES OF INCORPORATION
OF
PHOENIX PRESCHOOL HOLDINGS, INC.
1. Name
The name of the Corporation is:
Phoenix Preschool Holdings, Inc.
2. Registered Office
The location and post office address of its current registered
office in the Commonwealth of Pennsylvania is:
Esquire Assist
225 South Street
Harrisburg, PA 17101
3. Incorporation
The Corporation is incorporated under the provisions of the
Pennsylvania Business Corporation Law of 1988 (as amended).
4. Capital Stock.
(a) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 17,000,000 shares, consisting
of (i) 1,000,000 shares of preferred stock, par value $0.10 per share (the
"Preferred Stock"), (ii) 15,000,000 shares of common stock, par value $0.10 per
share ("Common Stock"), and (iii) 1,000,000 shares of undesignated stock, par
value $0.10 per share.
The designations, relative rights, preferences and liabilities
of each class of stock, itemized by class, shall be as follows:
(1) Preferred Stock. The Corporation's board of directors
(hereafter called "Board of Directors" or "Board") is authorized to
adopt at any time, or from time to time, amendments to these Articles
of Incorporation with respect to any unissued and/or treasury shares of
Preferred Stock, and thereby to fix or change the division of shares of
the Preferred Stock into classes and/or into series within any class or
classes, and to fix or change the determination of the voting rights,
designations, preferences, limitations, special rights and relative
rights of the shares of any class or series. The authority of the Board
with respect to each class or series of Preferred Stock shall include,
but not be limited to, determination of the following:
<PAGE>
(i) The number of shares constituting that class or
series and the distinctive designation of that class or series;
(ii) The voting rights and powers (if any) of the
Preferred Stock and each series thereof:
(iii) The rates and times at which, and the terms and
conditions on which, dividends (if any) on the Preferred Stock, and each series
thereof, will be paid and any dividend preferences or rights of cumulation;
(iv) The rights (if any) of holders of the Preferred
Stock, and each series thereof, to convert the same into, or exchange the same
for, shares of other classes (or series of classes) of capital stock of the
Corporation and the terms and conditions for such conversion or exchange,
including provisions for adjustment of conversion or exchange prices or rates in
such events as the Board of Directors shall determine;
(v) The redemption rights (if any) of the Corporation
and of the holders of the Preferred Stock, and each series thereof, and the
times at which, and the terms and conditions on which, the Preferred Stock, and
each series thereof, may be redeemed; and
(vi) The rights and preferences (if any) of the
holders of the Preferred Stock, and each series thereof, upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation.
(vii) Any other relative rights, preferences and
limitations of that class or series as may be permitted or required by law.
(2) Common Stock. Each share of Common Stock shall be entitled
to one vote on all matters submitted to a vote of shareholders except as the
right to exercise such vote may be limited by the provisions of these Articles
of Incorporation or of any class or series of Preferred Stock or undesignated
shares established hereunder. The holders of Common Stock shall be entitled to
such dividends as may be declared by the Board of Directors from time to time,
provided that required dividends, if any, on the Preferred Stock or undesignated
shares have been paid or provided for. In the event of the liquidation,
dissolution, or winding up, whether voluntary or involuntary of the Corporation,
the assets and funds of the Corporation available for distribution to
shareholders, and remaining after the payment to holders of Preferred Stock or
undesignated shares of the amounts (if any) to which they are entitled, shall be
divided and paid to the holders of the Common Stock according to their
respective shares.
2
<PAGE>
(3) Undesignated Stock. The Board of Directors is authorized
to adopt at any time, or from time to time, amendments to these Articles of
Incorporation with respect to any undesignated shares, and thereby to fix or
change the division of the undesignated shares into classes and/or into series
within any class or classes, and to fix or change the determination of the
voting rights, designations, preferences, limitations, special rights and
relative rights of the shares of any class or series. The undesignated shares
may be determined by the Board of Directors to be either additional shares of
Preferred Stock, or Common Stock, or any class or series of Preferred Stock or
Common Stock. The authority of the Board with respect to each class or series of
undesignated shares shall include, but not be limited to, the same authority the
Board has with respect to the Preferred Stock as described in Article 4(1)
above. The undesignated shares may be determined by the Board of Directors to be
either additional shares of Preferred Stock, or Common Stock, or any class or
series of Preferred Stock or Common Stock. The authority of the Board with
respect to each class or series of undesignated shares shall include, but not be
limited to, the same authority the Board has with respect to designation of the
Preferred Stock as described in Article 4 (a)(1) above.
5. No Cumulative Voting
The shareholders of the Corporation shall not have the right
to cumulate their votes for the election of directors.
6. Directors
The Board of Directors shall consist of not less than one (1)
nor more than fifteen (15) persons, the exact number to be fixed and determined
from time to time by resolution of the Board of Directors.
7. Classification of the Board of Directors
The Board of Directors shall be divided into four (4) classes,
as nearly as equal in number as possible, known as Class A, Class B, Class C,
and Class D. The Class A director shall serve until the first annual meeting of
shareholders to be held in 1998. At the first annual meeting of shareholders,
the Class A director shall be elected for a term of four (4) years and, after
expiration of such term, shall thereafter be elected every four (4) years for
four (4) year terms. The Class B director shall serve until the second annual
meeting of shareholders to be held in 1998. At the second annual meeting of
shareholders, the Class B director shall be elected for a term of four (4) years
and, after the expiration of such term shall thereafter be elected every four
(4) years for four (4) year terms. The Class C directors shall serve until the
third annual meeting of shareholders to be held in 2000. At the third annual
meeting of shareholders, the Class C directors shall be elected for a term of
four (4) years and, after the expiration of such term, shall thereafter be
elected every four (4) years for four (4) year terms. The Class D directors
shall serve until the fourth annual meeting of shareholders to be held in 2001.
At the fourth annual meeting of shareholders, the Class D directors shall be
elected for a term of four (4) years and, after the expiration of such term,
shall thereafter be elected every four (4) years for four (4) year terms. Each
director shall serve until his successor shall have been elected and shall
qualify, even though his term of office as herein provided has otherwise
expired, except in the event of his earlier death, resignation, removal or
disqualification. This Article 7, or any portion thereof, may be changed by a
by-law amendment which is adopted by all of the then members of the Board of
Directors.
3
<PAGE>
8. Removal of Directors
The Board of Directors may, without stockholder approval,
declare vacant the office of any director for any proper cause including, but
not limited to, conflict of interest or other breach of fiduciary duty, or
unacceptability of the director to federal or state securities regulators, the
regulators of any securities exchange or automated quotation system on which
securities of the Corporation are traded, or to federal, state or local
regulators of the business of the Corporation.
9. Personal Liability of Directors
A director of this Corporation shall not be personally liable
for monetary damages as such for any action taken, or any failure to take any
action, unless
(1) the director has breached or failed to perform the duties
of his office under Section 1713 of the Pennsylvania Business Corporation Law of
1988 (as amended); and
(2) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
This Article 9 shall not apply to a director's liability for
monetary damages to the extent prohibited by Section 1713(b) of the Pennsylvania
Business Corporation Law of 1988 (as amended).
10. Indemnification.
The Corporation shall indemnify the directors and executive
officers of the Corporation and hold them harmless to the fullest extent
permitted by the provisions of the Pennsylvania Business Corporation Law of 1988
(as amended). In the event that the Pennsylvania Business Corporation Law of
1988 (as amended) is amended, after the date of these Articles of Incorporation,
to authorize corporate action further eliminating or limiting the personal
liability of directors and officers (whether an executive officer or not), then
the liability of a director or officer of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Pennsylvania Business Corporation
Law of 1988 (as amended) as so amended.
The Corporation shall pay the expenses incurred by a director
or executive officer in defending any civil, criminal, administrative, or
investigative action, suit or proceeding in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it should be ultimately
determined that he or she is not entitled to be indemnified by the Corporation
as authorized by the Pennsylvania Business Corporation Law of 1988 (as amended).
Any amendment or repeal of this Article 10 by the stockholders
of the Corporation shall not adversely affect any right or protection of the
director or officer of the Corporation existing at the time of such amendment or
repeal. Nothing contained herein shall prevent the Corporation
4
<PAGE>
from supplementing the indemnification provisions contained herein by Bylaw
provisions, contracts with directors or officers, insurance or otherwise.
11. Nonapplicability of Certain Provisions of the Pennsylvania
Business Corporation Law of 1988 (as amended)
Subchapters E, G, H, I and J of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988 (as amended) shall not be applicable to this
Corporation.
12. Partial Written Consent of Shareholders
The provisions of Section 1766(b) of the Pennsylvania Business
Corporation Law of 1988 (as amended) shall be applicable to any action by the
shareholders which has been previously approved by the Board of Directors, but
shall not otherwise be applicable to the Corporation.
13. Amendment to By-Laws
Any amendment to the Bylaws of the Corporation which is
proposed by shareholders, and which has not previously received the approval of
the Board of Directors, shall require for adoption the affirmative vote of the
holders of at least sixty-six and two-thirds (66 2/3%) percent of the votes
which all shareholders are entitled to cast thereon, in addition to any other
approval which is required by law, these Articles of Incorporation, the Bylaws
of the Corporation or otherwise.
14. Acquisition of Corporation.
(a) The Board of Directors may, if it deems it advisable,
oppose a tender, or other offer for the Corporation's securities, whether the
offer is in cash or in the securities of a corporation or otherwise. When
considering whether to oppose an offer, the Board of Directors may, but is not
legally obligated to, consider any pertinent issues; by way of illustration, but
not of limitation, the Board of Directors may, but shall not be legally
obligated to, consider any and all of the following:
(1) Whether the offer price is acceptable based on the
historical and present operating results or financial condition of the
Corporation.
(2) Whether a more favorable price could be obtained for the
Corporation's securities in the future.
(3) The impact which an acquisition of the Corporation would
have on the employees, creditors and customers of the Corporation and any
Subsidiary (as defined in Article 16) and the community which they serve.
5
<PAGE>
(4) The reputation and business practices' of the offeror and
its management and affiliates as they would affect the employees, creditors and
customers of the Corporation and its Subsidiaries and the future value of the
Corporation's stock.
(5) The value of the securities, if any, which the offeror is
offering in exchange for the Corporation's securities, based on an analysis of
the worth of the Corporation as compared to the Corporation or other entity
whose securities are being offered.
(6) Any antitrust or other legal and regulatory issues that
are raised by the offer.
If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its purpose including, but
not limited to, any or all of the following: advising stockholders not to accept
the offer; litigation against the offeror; filing complaints with all
governmental and regulatory authorities; acquiring the Corporation's securities;
selling or otherwise issuing authorized but unissued securities or treasury
stock or granting options with respect thereto; acquiring a company to create an
antitrust or other regulatory impediment for the offeror; and obtaining a more
favorable offer from another individual or entity.
(b) If the Board of Directors determines to sell the
Corporation or any Subsidiary to a third party, or to merge or consolidate the
Corporation or any Subsidiary with a third party, the Board of Directors shall
not be legally obligated to create an auction and may negotiate with only one
acquirer.
15. Severability
In the event that all, some or any part of any provision
contained in these Articles of Incorporation shall be found by any court of
competent jurisdiction to be illegal, invalid or unenforceable (as against
public policy or otherwise), such provision shall be enforced to the fullest
extent permitted by law and shall be construed as if it had been narrowed only
to the extent necessary so as not to be invalid, illegal or unenforceable; the
validity, legality and enforceability of the remaining provisions of these
Articles of Incorporation shall continue in full force and effect and shall not
be affected or impaired by such illegality, invalidity or unenforceability of
any other provision (or any part or parts thereof) of these Articles of
Incorporation. If and to the extent that any provision contained in these
Articles of Incorporation violates any rule of a securities exchange or
automated quotation system on which securities of the Corporation are traded,
the Board of Directors is authorized, in its sole discretion, to suspend or
terminate such provision for such time or periods of time and subject to such
conditions as the Board of Directors shall determine in its sole discretion.
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16. Definitions.
(a) As used herein, the term "person" shall mean any
individual, partnership, corporation, group or other entity (other than the
Corporation or any Subsidiary for itself or as a fiduciary for customers, or a
trustee holding Voting Securities for the benefit of the employees of the
Corporation or its Subsidiaries, pursuant to one or more employee benefit plans
or arrangements sponsored by the Corporation or any Subsidiary).
(b) As used herein, the term "Subsidiary" shall mean any
corporation of which the Corporation owns fifty percent (50%) or more of any
class of securities entitled to vote in the election of directors, either
directly or indirectly, through one or more other corporations.
(c) As used herein, the term "Voting Securities" refers to all
outstanding securities of the Corporation entitled to vote (whether in the
election of directors or otherwise).
17. Headings
Article headings and the ordering of paragraphs are for
convenience of reference only and shall not be construed to alter, amend or
otherwise affect the meaning, intent or effect of the provisions of these
Articles of Incorporation.
18. Incorporator
The name and address of the incorporator is: Michael C.
Koffler, 150 East 58th Street, 31st Floor, New York, New York 10155.
/s/ Michael C. Koffler, Incorporator
------------------------------------
Michael C. Koffler
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STATEMENT WITH RESPECT TO SHARES OF
PHOENIX PRESCHOOL HOLDINGS, INC.
ADOPTED BY ITS BOARD OF DIRECTORS PURSUANT TO SECTION 1522 OF
THE PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988 (AS AMENDED)
RESOLVED, that pursuant to the authority expressly granted to the Board
of Directors (the "Board of Directors") of Phoenix Preschool Holdings, Inc., a
Pennsylvania corporation (the "Corporation"), by the provisions of the Articles
of Incorporation of the Corporation and the provisions of Section 1522 of the
Pennsylvania Business Corporation Law of 1988 (as amended), the Board of
Directors hereby creates a series of preferred stock, par value $.10 per share,
and determines the designation and number of shares which constitute such series
and the voting rights, preferences, limitations and special rights, if any, of
such series as follows:
1. Designation and Number of Shares. The series of Preferred Stock
shall be designated as "Series A Convertible Preferred Stock" (hereinafter
called "Series A Preferred Stock") and shall consist of a total of 500,000
shares, par value $.10 per share.
2. Dividends. The holders of the Series A Preferred Stock shall be
entitled to receive dividends in cash, when, as and if declared by the Board of
Directors, in an amount per share equal to the product of (a) the dividend or
other distribution payable per share on the Common Stock of the Corporation
("Common Stock") or any other equity securities ranking junior to the Series A
Preferred Stock as to the payment of dividends or other distributions (such
Common Stock and any such other equity securities being hereafter individually
and collectively called "Junior Stock"), multiplied by (b) the number of shares
of Common Stock into which the Series A Preferred Stock is then convertible.
3. Liquidation. In the event of the liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, after all creditors of
the Corporation shall have been paid in full, the holders of the outstanding
Series A Preferred Stock shall be entitled to receive, before any distribution
of assets shall be made to the holders of any Common Stock or other Junior
Stock, an amount equal to the higher of (a) $1.00 per share plus all accrued and
unpaid dividends thereon, without interest to the date fixed for payment of such
<PAGE>
distributive amount or (b) the amount which would have been received per share
by the holders of the Series A Preferred Stock had such Series A Preferred Stock
been converted to Common Stock immediately prior to the distribution of assets
to the holders of the Series A Preferred Stock. If, upon any dissolution,
liquidation or winding up of the Corporation, the net assets of the Corporation
shall be insufficient to pay the holders of all outstanding shares of Series A
Preferred Stock and stock which ranks on a parity with the Series A Preferred
Stock in dissolution, liquidation or winding up of the Corporation ("Parity
Stock") the full amounts to which they respectively shall be entitled, the
holders of each such stock shall share ratably in any distribution of assets
according to the respective amounts which would be payable in respect of such
stock upon such distribution if all amounts payable on or with respect to all
stock were paid in full.
Neither merger or consolidation of the Corporation with any
corporation or other entity, nor the sale of all or part of the Corporation's
assets for cash, securities or other property, nor the purchase or redemption by
the Corporation of any class of stock permitted by the Articles of Incorporation
or any amendment thereof, shall be deemed a liquidation, dissolution or winding
up of the Corporation.
Holders of the Series A Preferred Stock shall not be entitled,
upon the liquidation, dissolution or winding up of the Corporation, to receive
any amounts with respect to such stock other than the amounts referred to in
this paragraph 3. Nothing contained herein shall be deemed to prevent the
purchase of the Series A Preferred Stock or the conversion of the Series A
Preferred Stock pursuant to paragraph 5 herein prior to liquidation, dissolution
or winding up.
4. Redemption. The shares of Series A Preferred Stock shall not be
redeemable by either the Corporation or the holder thereof, except that nothing
contained herein shall be deemed to prevent the Corporation from purchasing the
Series A Preferred Stock from the holder thereof.
5. Conversion.
(a) Each share of the Series A Preferred Stock shall, at any
time after the earlier of (i) two years from the date of original issuance by
the Corporation of the share of Series A Preferred Stock or (ii) the date of a
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Change of Control (as hereafter defined), be convertible at the option of the
respective holders thereof at the office of the Corporation or, if the
Corporation has a transfer agent for the Series A Preferred Stock, at the office
of such transfer agent, into fully paid and nonassessable shares of Common Stock
at the rate of one share of Common Stock plus one Contingent Conversion Right
(as hereafter defined) for each share of Series A Preferred Stock surrendered
for conversion, all such figures to be subject to appropriate adjustment
pursuant to Section 5(c) hereof to the extent that the conversion rights of the
Series A Preferred Stock are adjusted pursuant to Section 5(c) hereof. The term
"Contingent Conversion Right" refers to the number of shares or fraction of a
share of Common Stock (if any) which results from the following formula (all
figures to be subject to appropriate adjustment to the extent that the
conversion rights of the Series A Preferred Stock are adjusted pursuant to
Section 5(c)): (i) compute the excess (if any) of the current market price per
share of Common Stock (as defined in Section 5(c)(iv)) with respect to the date
of conversion over $3.50 (expressing such excess without a dollar sign); (ii)
multiply the result of clause (i) by 820,674; (iii) divide the result of clause
(ii) by 3.50; (iv) divide the result of clause (iii) by 500,000. Fractions of a
share of Common Stock resulting from one or more Contingent Conversion Rights
may be aggregated for purposes of determining the number of whole shares of
Common Stock to be issued pursuant to one or more conversions of Series A
Preferred Stock. Notwithstanding the foregoing, in no event can the Contingent
Conversion Rights permit more than an aggregate of 820,674 shares of Common
Stock to be issued pursuant to the conversion of all 500,000 shares of Series A
Preferred Stock issued hereunder, such figures to be subject to appropriate
adjustment to the extent that the conversion rights of Series A Preferred Stock
are adjusted pursuant to Section 5(c). The term "Change of Control" refers to
any event described in Item 1 of Form 8-K filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (as amended), or any
replacement form, or any other event determined in good faith by resolution of
the Board of Directors to constitute a change of control of the Corporation.
Upon conversion by a holder pursuant to this paragraph 5, the Corporation shall
make no payment or adjustment on account of dividends accrued (including, but
not limited to, dividends declared and set apart for payment but not paid) or in
arrears on the shares of the Series A Preferred Stock surrendered for such
conversion.
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(b) Each conversion of a share or shares of Series A Preferred
Stock shall be effected by surrender of the certificate or certificates
representing the shares to be converted, duly endorsed to the Corporation or in
blank (and if requested by the Corporation or transfer agent, with all
signatures guaranteed), at the principal office of the Corporation or transfer
agent (or such other office or agency of the Corporation as the Corporation may
designate by notice in writing to the holders of the Series A Preferred Stock)
at any time during its usual business hours, together with written notice to the
Corporation or the transfer agent that the holder elects to convert the shares
or a stated number of shares, represented by such certificate or certificates,
which notice shall state the name or names (with addresses) in which the holder
wishes the certificate or certificates for Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver by
registered or certified mail, addressed to the person for whose account
surrender of the share or shares of Series A Preferred Stock was made at such
person's last known address according to the records of the Corporation, or to
his nominee or nominees, certificates for the number of full shares of Common
Stock to which he shall be entitled, together with a cash adjustment in respect
of any fraction of a share as provided in clause (vii) of subparagraph (c)
hereof if not convertible into a number of whole shares. Conversion shall be
deemed to have been made as of the date of surrender of the share or shares of
Series A Preferred Stock to be converted and of notice to the Corporation or the
transfer agent, and the person or persons entitled to receive the Common Stock
issuable upon conversion shall be treated for all purposes as the record holder
or holders of such Common Stock on such date. Unless otherwise required by law,
the stock transfer books of the Corporation for the Series A Preferred Stock
shall not be closed at any time so long as any of the shares of Series A
Preferred Stock are outstanding, but this shall not prevent the fixing of a
record date.
(c) The number of shares of Common Stock into which the shares
of Series A Preferred Stock shall be convertible shall be subject to adjustment
as follows:
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(i) In case the Corporation shall (A) declare a dividend on
its Common Stock payable in shares of its capital stock, (B)
subdivide its outstanding shares of Common Stock, (C) combine
its outstanding shares of Common Stock into a smaller number
of shares, or (D) issue, by reclassification of its shares of
Common Stock (including any such reclassification in
connection with a merger or consolidation in which the
Corporation is the continuing corporation), any shares of
stock of the Corporation, the conversion rate in effect at the
time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification
shall be proportionately adjusted so that the holder of any
Series A Preferred Stock surrendered for conversion after such
date shall be entitled to receive upon the conversion of such
shares, the number and kind of shares which he would have
owned or have been entitled to receive after the happening of
any of the events described herein had such Series A Preferred
Stock been converted immediately prior to such date. Such
adjustment shall be made successively whenever any event
listed above shall occur.
(ii) In case the Corporation shall fix a record date for the
distribution, as a dividend or without consideration, of
subscription rights, warrants or other options to all holders
of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than
the current market price per share of Common Stock (as defined
in clause (iv) below) on such record date, which distribution
is not made ratably to the holders of the Series A Preferred
Stock, the number of shares of Common Stock into which each
share of Series A Preferred Stock shall be convertible after
such record date shall be determined by multiplying the number
of shares of Common Stock into which each such share of Series
A Preferred Stock was convertible immediately prior to such
record date by a fraction, of which the numerator shall be the
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number of shares of Common Stock outstanding on such record
date plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total
number of shares so offered would purchase at such current
market price. For the purpose of this clause (ii), the
issuance of rights or warrants to subscribe for or to purchase
stock or securities convertible into shares of Common Stock
shall be deemed to be the issuance of rights or warrants to
purchase the shares of Common Stock into which such stock or
securities are convertible at an aggregate offering price of
such stock or securities plus the minimum aggregate amount (if
any) payable upon the conversion of such stock or securities
into Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that
such rights or warrants are not so issued, the conversion rate
shall again be adjusted to be the conversion rate which would
then be in effect if such record date had not been fixed.
Notwithstanding the above, the granting of options or rights
pursuant to an employee benefit plan adopted by the Board of
Directors shall not constitute an event requiring an
adjustment under this subparagraph (c).
(iii) In case the Corporation shall fix a record date for the
making of a distribution to holders of its Common Stock
(including any such distribution made in connection with a
merger or consolidation in which the Corporation is the
continuing corporation, but excluding any such distribution
made in connection with the liquidation, dissolution or
winding up of the Corporation, whether voluntary or
involuntary), which distribution is not made ratably to the
holdersof the Series A Preferred Stock, of (1) evidences of
its indebtedness or (2) assets (excluding cash dividends to
the extent payable as such under applicable law) or (3)
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subscription rights, warrants or other options (excluding
those referred to in clause (ii) above), and if the aggregate
fair market value of such evidences of indebtedness or assets
or subscription rights, warrants or other options on such
record date is greater than the consideration received
therefor, the number of shares of Common Stock into which each
share of Series A Preferred Stock shall be convertible after
such record date shall be determined by multiplying the number
of shares of Common Stock into which each such share of Series
A Preferred Stock was convertible immediately prior to such
record date by a fraction, of which the numerator shall be the
current market price per share of Common Stock (as defined in
Section 5(c)(iv)) on such record date, and of which the
denominator shall be such current market price per share of
Common Stock (as defined in Section 5(c)(iv)) plus the
consideration (if any) paid by the holder of the Common Stock
for such portion of the assets or evidences of indebtedness
distributed or subscription rights, warrants or other options
applicable to one share of Common Stock less the fair market
value of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights,
warrants or other options applicable to one share of Common
Stock. Such adjustment shall be made successively whenever
such a record date is fixed; and in the event that such
distribution is not so made, the conversion rate shall again
be adjusted to be the conversion rate which would then be in
effect if such record date had not been fixed.
(iv) For the purpose of any computation under Section 5(a)
hereof or clauses (ii) and (iii) above and clause (vii) below,
the current market price per share of Common Stock at any date
shall be the average of the daily closing prices for such
stock for fifteen consecutive trading days commencing twenty
trading days before the date of such computation. The closing
price for the Common Stock for a day shall be the closing sale
price as reported in the Wall Street Journal or, in case no
reported sale takes place on such day, the average of the
closing bid and asked prices for such day on the principal
national securities exchange on which shares of Common Stock
are listed or admitted to trading or, if not listed or
admitted to trading, the average of the closing bid and asked
prices for the Common Stock in the over-the-counter market as
reported by NASDAQ or any comparable system. In the absence of
one or more such quotations for a day, the Corporation shall
determine the closing price for such day on the basis of such
quotations as it considers appropriate.
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(v) No adjustment in the conversion rate shall be required
unless such adjustment would require an increase or decrease
of at least .01% in such rate; provided, however, that any
adjustments which by reason of this clause (v) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under
this subparagraph (c) shall be made to the nearest
one-hundredth of a share.
(vi) For the purposes of this subparagraph (c), the term
"Common Stock" shall mean (A) the class of stock designated as
the Common Stock of the Corporation at the date of initial
issuance of Series A Preferred Stock or (B) 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. If, at any time, as a result of an adjustment
made pursuant to clause (i) above, the holder of any share of
Series A Preferred Stock thereafter surrendered for conversion
shall become entitled to receive any shares of the Corporation
other than shares of its Common Stock, the number of such
other shares so receivable upon conversion of any share of
Series A Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in clauses (i) through (v), inclusive, above, and
the provisions of clauses (vii) and (viii) inclusive, below,
with respect to the Common Stock shall apply on like terms to
any such other shares.
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(vii) No fractional shares of Common Stock shall be issued
upon conversion. In lieu of the issuance of fractional shares,
a cash adjustment will be paid to each holder of Series A
Preferred Stock in respect of any fraction of a share to which
such holder becomes entitled pursuant to this paragraph 5,
which cash adjustment shall be equal to an amount determined
by multiplying such fraction by the current market price (as
defined in clause (iv) above) for a share of Common Stock).
(viii) In case of any merger of the Corporation into, or
consolidation of the Corporation with, any other corporation
or other entity (other than a merger or consolidation in which
the Corporation is the continuing corporation), or in case of
any sale or transfer of all or substantially all of the assets
of the Corporation, the holder of each share of Series A
Preferred Stock then outstanding shall have the right
thereafter to convert such share into the kind and amount of
shares of stock and other securities and property and other
consideration receivable upon such merger, consolidation, sale
or transfer by a holder of the number of shares of Common
Stock into which such shares of Series A Preferred Stock might
have been converted immediately prior to such merger,
consolidation, sale or transfer.
(ix) If any event occurs of the type contemplated by the
provisions of this subparagraph (c) which is not expressly
provided for or adequately covered by such provisions, then
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the Board of Directors will make an appropriate adjustment in
the conversion rate so as to protect the rights of the holders
of the Series A Preferred Stock. The Corporation may make such
adjustments in the conversion rate, in addition to those
required above, as it considers to be advisable in order that
any event treated for Federal income tax purposes as a
dividend of stock or stock rights shall not be taxable to the
recipients.
(x) The Corporation shall at all times reserve and keep
available out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the
shares of Series A Preferred Stock, the full number of shares
of Common Stock deliverable upon conversion of all shares of
the Series A Preferred Stock from time to time outstanding.
The Corporation shall from time to time, in accordance with
the laws of the Commonwealth of Pennsylvania, increase the
authorized number of shares of its Common Stock if at any time
the number of shares of Common Stock remaining unissued shall
not be sufficient to permit the conversion of all the then
outstanding Series A Preferred Stock.
(xi) Whenever the number of shares of Common Stock deliverable
upon the conversion of each share of Series A Preferred Stock
shall be adjusted pursuant to the provisions of this
subparagraph (c), the Corporation shall promptly (A) make
available at the principal office of the Corporation or
transfer agent a statement, signed by the Chairman of the
Board of Directors or the President or a Vice-President of the
Corporation, setting forth, in reasonable detail, the
adjustment and the method of calculation and the facts
requiring such adjustment, and (B) mail to all holders of
shares of Series A Preferred Stock, at their last addresses as
they shall appear upon the books of the Corporation, a notice
of such adjustment which sets forth the adjusted number of
shares of Common Stock deliverable upon the conversion of each
share of Series A Preferred Stock.
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(d) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issue or delivery of shares of Common
Stock on conversion of shares of the Series A Preferred Stock pursuant hereto.
The Corporation shall not, however, be required to pay any tax that may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that in which the shares of the Series A
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
6. Voting Rights.
The holders of the Series A Preferred Stock will vote, together with
the holders of Common Stock (without distinction as to class), on all matters
submitted for approval to the holders of Common Stock and shall be entitled to
one vote for each share of Common Stock into which such Series A Preferred Stock
is then convertible.
7. Reissuance of Shares. Shares of Series A Preferred Stock which have
been purchased, or which have been converted into shares of Common Stock or
shares of stock of any other class or classes, shall have the status of
authorized and unissued shares of preferred stock and may be reissued as part of
the series of which they were originally a part or may be reissued as part of a
new series of the preferred stock to be created by resolution or resolutions of
the Board of Directors or as part of any other series of preferred stock, all
subject to the conditions or restrictions on issuance set forth in any
resolution or resolutions adopted by the Board of Directors providing for the
issue of any series of preferred stock.
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BYLAWS
OF
Phoenix Preschool Holdings, Inc.
These Bylaws are adopted by this Corporation
and are supplemental to the Pennsylvania
Business Corporation Law of 1988, as amended,
as the same shall from time to time be in effect.
ARTICLE I. NAME AND SEAL.
Section 101. Name. The name of the Corporation is Phoenix Preschool
Holdings, Inc.
Section 102. State of Incorporation. The Corporation has been
incorporated under the laws of the Commonwealth of Pennsylvania.
Section 103. Seal. The corporate seal of the Corporation shall have
inscribed thereon the name of the Corporation, the year of its organization, the
words "Corporate Seal", and the name of the State of Incorporation. The seal may
be used by any person authorized by the Board of Directors of the Corporation or
by these Bylaws by causing the seal or a facsimile thereof to be impressed or
affixed, or in any manner reproduced.
ARTICLE II. REGISTERED AND PRINCIPAL OFFICES
Section 201. Registered Office. The registered office of the
Corporation in the State of Incorporation shall be located at: Esquire Assist,
225 South Street, Harrisburg, Pennsylvania 17101.
Section 202. Offices. The principal office of the Corporation and any
other offices of the Corporation shall be located at such places, within and
without the Commonwealth of Pennsylvania, as the Board of Directors may from
time to time determine or as the business of the Corporation may require.
ARTICLE III. MEETINGS OF SHAREHOLDERS.
Section 301. Place of Meetings. All meetings of the shareholders shall
be held at such place or places, within or without the Commonwealth of
Pennsylvania, as shall be determined by the Board of Directors from time to
time.
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Section 302. Annual Meetings. The annual meeting of the shareholders
for the election of directors and the transaction of such other business as may
properly come before the meeting shall be held at such place and at such time as
the Board of Directors shall fix. Any business which is a proper subject for
shareholder action may be transacted at the annual meeting, irrespective of
whether the notice of said meeting contains any reference thereto, except as
otherwise provided by applicable statute or regulation.
Section 303. Special Meetings. Special meetings of the shareholders
may be called at any time by the Board of Directors, the President, or by the
shareholders entitled to cast at least one-third of the vote which all
shareholders are entitled to cast at the particular meeting.
Section 304. Conduct of Shareholders' Meetings. Subject to Section 803
hereof, the President shall preside at all shareholders' meetings, or, in
his/her absence, any vice-president. The officer presiding over the
shareholders' meeting may establish such rules and regulations for the conduct
of the meeting as he/she may deem to be reasonably necessary or desirable for
the orderly and expeditious conduct of the meeting. The revocation of a proxy
shall not be effective until written notice thereof has been given to the
Secretary of the Corporation.
ARTICLE IV. DIRECTORS AND BOARD MEETINGS.
Section 401. Management by Board of Directors. The business and affairs
of the Corporation shall be managed by its Board of Directors. The Board of
Directors may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Articles of Incorporation or by
these Bylaws directed or required to be exercised or done by the shareholders.
Section 402. Nomination for Directors. Written nominations for
directors to be elected at an annual meeting of shareholders must be submitted
to the Secretary of the Corporation not later than the close of business on the
fifth business day immediately preceding the date of the meeting. All late
nominations shall be rejected.
Section 403. Number of Directors. The Board of Directors shall
consist of one or more directors. The number of directors to be elected, subject
to the foregoing limits, shall be determined by resolution of the Board of
Directors. The directors shall be elected by the shareholders at the annual
meeting of shareholders to serve until the next annual meeting of shareholders.
Each director shall serve until his successor shall have been elected and shall
qualify, even though his term of office as herein provided has otherwise
expired, except in the event of his earlier resignation or removal.
Section 404. Resignations. Any director may resign at any time. Such
resignation shall be in writing, but the acceptance thereof shall not be
necessary to make it effective.
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Section 405. Compensation of Directors. No director shall be entitled
to any salary as such; but the Board of Directors may fix, from time to time, a
reasonable fee to be paid each director for his services in attending meetings
of the Board.
Section 406. Regular Meetings. Regular meetings of the Board of
Directors shall be held on such day and at such hour as the Board shall from
time to time designate. The Board of Directors shall meet for reorganization at
the first regular meeting following the annual meeting of shareholders at which
the directors are elected. Notice of regular meetings of the Board of Directors
need not be given.
Section 407. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and shall
be called whenever one or more members of the Board so request in writing.
Notice of the time and place of every special meeting, which need not specify
the business to be transacted thereat and which may be either verbal or in
writing, shall be given by the Secretary to each member of the Board at least
one calendar day before the date of such meeting.
Section 408. Reports and Records. The reports of officers and
committees shall be filed with the Secretary of the Board. The Board of
Directors shall keep complete records of its proceedings in a minute book kept
for that purpose. When a director shall request it, the vote of each director
upon a particular question shall be recorded in the minutes.
Section 409. Executive Committee. The Board of Directors may, without
limiting its right to establish other committees, establish an Executive
Committee of the Board which shall consist of any one or more directors. The
Executive Committee shall have and exercise the authority of the Board of
Directors in the management and affairs of the Corporation, except as otherwise
provided in the resolution establishing the Executive Committee.
Section 410. Absence or Disqualification of Committee Members. In the
absence or disqualification of any member of any committee or committees
established by the Board of Directors, the member or members thereof present at
any meeting of such committee or committees, and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of any such absent or disqualified
member.
Section 411. Chairman of the Board. The directors may choose a Chairman
of the Board who shall preside at the meetings of the Board and perform such
other duties as may be prescribed by the Board of Directors.
ARTICLE V. OFFICERS.
Section 501. Officers. The officers of the Corporation shall be a President, one
or more Vice Presidents, a Secretary, a Treasurer, and such other officers or
assistant officers as the Board of Directors may from time to time deem
advisable. Except for the President, Secretary
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and Treasurer, the Board may refrain from filling any of the said offices at any
time and from time to time. Officers shall be elected by the Board of Directors
at the time and in the manner as the Board of Directors from time to time shall
determine. Each officer shall hold office for a term extending until the first
regular meeting of the Board of Directors following the annual meeting of
shareholders and until his successor shall have been elected and shall qualify,
except in the event of his earlier resignation or removal.
Section 502. President. The President shall be the Chief Executive
Officer and shall have general supervision of all of the departments and
business of the Corporation; he/she shall prescribe the duties of the other
officers and employees and see to the proper performance thereof. The President
shall be responsible for having all orders and resolutions of the Board of
Directors carried into effect. As authorized by the Board of Directors, he/she
shall execute on behalf of the Corporation and may affix or cause to be affixed
a seal to all instruments requiring such execution, except to the extent that
signing and execution thereof shall have been expressly delegated to some other
officer or agent of the Corporation. The President shall perform such other
duties as may be prescribed by the Board of Directors.
Section 503. Vice Presidents. The Vice Presidents shall perform such
duties and do such acts as may be prescribed by the Board of Directors or the
President. Subject to the provisions of this Section, the Vice Presidents in
order of their seniority shall perform the duties and have the powers of the
President in the event of his absence or disability.
Section 504. Treasurer. The Treasurer shall act under the direction of
the President. Subject to the direction of the President, he/she shall have
custody of the Corporation funds and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the President, taking
appropriate vouchers for such disbursements, and shall on request render to the
President and the Board of Directors, at its meetings, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
Section 505. Secretary. The Secretary shall act under the direction of
the President. Unless a designation to the contrary is made at a meeting, the
Secretary shall attend all meetings of the Board of Directors and all meetings
of the shareholders and record all of the proceedings of such meetings in a book
to be kept for that purpose, and shall perform like duties for the standing
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
President or the Board of Directors. The Secretary shall keep in safe custody
the seal of the Corporation, and, when authorized by the President or the Board
of Directors, cause it to be affixed to any instruments requiring it.
Section 506. Assistant Officers. Any assistant officers elected by the
Board of Directors shall have such duties as may be prescribed by the Board of
Directors, the President, or the officer to whom they are an assistant.
Assistant officers shall perform the duties and have the
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<PAGE>
power of the officer to whom they are an assistant in the event of such
officer's absence or disability.
Section 507. Compensation. Unless otherwise provided by the Board of
Directors, the salaries and compensation of all officers, except the President
and any Executive Vice President elected by the Board, shall be fixed by the
Executive Committee of the Board and, in the absence of an Executive Committee,
by the President.
Section 508. General Powers. The officers are authorized to do and
perform such corporate acts as are necessary in the carrying on of the business
of the Corporation, subject always to the directions of the Board of Directors.
ARTICLE VI. PERSONAL LIABILITY OF DIRECTORS AND INDEMNIFICATION.
Section 601. Personal Liabilities of Directors.
(a) A director of this Corporation shall not be personally liable, as
such, for monetary damages for any action taken, or any failure to take any
action, unless:
(1) the director has breached or failed to perform the duties of his
office under Subchapter B of Chapter 17 of the Pennsylvania Business Corporation
Law of 1988; and
(2) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
(b) This Section 601 shall not limit a director's liability for
monetary damages to the extent prohibited by the Pennsylvania Business
Corporation Law of 1988.
Section 602. Mandatory Indemnification of Directors and Officers. The
Corporation shall, to the fullest extent permitted by applicable law, indemnify
its directors and officers who were or are a party or are threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (whether or not such
action, suit or proceeding arises or arose by or in the right of the Corporation
or other entity) by reason of the fact that such director or officer is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee, general partner, agent or
fiduciary of another corporation, partnership, joint venture, trust or other
enterprise (including service with respect to employee benefit plans), against
expenses (including, but not limited to, attorneys' fees and costs), judgments,
fines (including excise taxes assessed on a person with respect to any employee
benefit plan) and amounts paid in settlement actually and reasonably incurred by
such director or officer in connection with such action, suit or proceeding,
except as otherwise provided in Section 604 hereof. Persons who were directors
or officers of the Corporation prior to the date this Section is approved by
shareholders of the Corporation, but who do not hold such office on or after
such date, shall not be covered by this Section 602. A director or officer of
the
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Corporation entitled to indemnification under this Section 602 is hereafter
called a "person covered by Section 602 hereof."
Section 603. Expenses. Expenses incurred by a person covered by Section
602 hereof in defending a threatened, pending or completed civil or criminal
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the Corporation, except as otherwise provided in Section 604.
Section 604. Exceptions. No indemnification under Section 602 or
advancement or reimbursement of expenses under Section 603 shall be provided to
a person covered by Section 602 hereof (a) with respect to expenses or the
payment of profits arising from the purchase or sale of securities of the
Corporation in violation of Section 16(b) of the Securities Exchange Act of
1934; (b) if a final unappealable judgment or award establishes that such
director or officer engaged in self-dealing, wilful misconduct or recklessness;
(c) for expenses or liabilities of any type whatsoever (including, but not
limited to, judgments, fines, and amounts paid in settlement) which have been
paid directly to, or for the benefit of, such person by an insurance carrier
under a policy of officers' and directors' liability insurance whose premiums
are paid for by the Corporation or by an individual or entity other than such
director or officer; and (d) for amounts paid in settlement of any threatened,
pending or completed action, suit or proceeding without the written consent of
the Corporation, which written consent shall not be unreasonably withheld. The
Board of Directors of the Corporation is hereby authorized, at any time by
resolution, to add to the above list of exceptions from the right of
indemnification under Section 602 or advancement or reimbursement of expenses
under Section 603, but any such additional exception shall not apply with
respect to any event, act or omission which has occurred prior to the date that
the Board of Directors in fact adopts such resolution. Any such additional
exception may, at any time after its adoption, be amended, supplemented, waived
or terminated by further resolution of the Board of Directors of the
Corporation.
Section 605. Continuation of Rights. The indemnification and
advancement or reimbursement of expenses provided by, or granted pursuant to,
this Article shall continue as to a person who has ceased to be a director or
officer of the Corporation, and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 606. General Provisions.
(a) The term "to the fullest extent permitted by applicable law," as
used in this Article, shall mean the maximum extent permitted by public policy,
common law or statute. Any person covered by Section 602 hereof may, to the
fullest extent permitted by applicable law, elect to have the right to
indemnification or to advancement or reimbursement of expenses, interpreted, at
such person's option, (i) on the basis of the applicable law on the date this
Article was approved by shareholders, or (ii) on the basis of the applicable law
in effect at the time of the occurrence of the event or events giving rise to
the action, suit or proceeding, or (iii) on the basis of the applicable law in
effect at the time indemnification is sought.
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<PAGE>
(b) The right of a person covered by Section 602 hereof to be
indemnified or to receive an advancement or reimbursement of expenses pursuant
to Section 603 (i) may also be enforced as a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Corporation and such person,
(ii) to the fullest extent permitted by applicable law, is intended to be
retroactive and shall be available with respect to events occurring prior to the
adoption hereof, and (iii) shall continue to exist after the rescission or
restrictive modification (as determined by such person) of this Article with
respect to events, acts or omissions occurring before such rescission or
restrictive modification is adopted.
(c) If a request for indemnification or for the advancement or
reimbursement of expenses pursuant hereto is not paid in full by the Corporation
within thirty days after a written claim has been received by the Corporation
together with all supporting information reasonably requested by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim (plus interest at the
prime rate announced from time to time by the Corporation's primary banker) and,
if successful in whole or in part, the claimant shall be entitled also to be
paid the expenses (including, but not limited to, attorney's fees and costs) of
prosecuting such claim. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel, or its shareholders) to have made
a determination prior to the commencement of such action that indemnification of
or the advancement or reimbursement of expenses to the claimant is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses, shall be a defense to the action or create a
presumption that the claimant is not so entitled.
(d) The indemnification and advancement or reimbursement of expenses
provided by, or granted pursuant to, this Article shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement or
reimbursement of expenses may be entitled under any by-law, agreement, vote of
shareholders or directors or otherwise, both as to action in such director or
officer's official capacity and as to action in another capacity while holding
that office.
(e) Nothing contained in this Article shall be construed to limit the
rights and powers the Corporation possesses under Section 1741 to Section 1750,
inclusive of the Pennsylvania Business Corporation Law of 1988 (as amended from
time to time), the Directors' Liability Act or otherwise, including, but not
limited to, the powers to purchase and maintain insurance, create funds to
secure or insure its indemnification obligations, and any other rights or powers
the Corporation may otherwise have under applicable law.
(f) The provisions of this Article may, at any time (and whether before
or after there is any basis for a claim for indemnification or for the
advancement or reimbursement of expenses pursuant hereto), be amended,
supplemented, waived, or terminated, in whole or in part, with respect to any
person covered by Section 602 hereof by a written agreement signed by the
Corporation and such person.
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<PAGE>
(g) The Corporation shall have the right to appoint the attorney for a
person covered by Section 602 hereof, provided such appointment is not
unreasonable under the circumstances.
Section 607. Optional Indemnification. The Corporation may, to the
fullest extent permitted by applicable law, indemnify, and advance or reimburse
expenses for, persons in all situations other than that covered by this Article.
Section 608. Prior By-Laws. Any by-law provisions which are amended,
replaced or repealed by this Article shall continue to apply to any breach of
performance of duty or any failure of performance of duty by any director or
officer to which this Article does not apply by reason of Section 8367 of the
Directors' Liability Act.
ARTICLE VII. SHARES OF CAPITAL STOCK.
Section 701. Authority to Sign Share Certificates. Every share
certificate shall be signed by the President or one of the Vice Presidents and
by the Secretary or one of the Assistant Secretaries.
Section 702. Lost or Destroyed Certificates. Any person claiming a
share certificate to be lost, destroyed or wrongfully taken shall receive a
replacement certificate if said shareholder shall have: (a) requested such
replacement certificate before the Corporation has notice that the shares have
been acquired by a bona fide purchaser; (b) provided the Corporation with an
indemnity agreement satisfactory in form and substance to the Board of
Directors, or President or the Secretary; and (c) satisfied any other reasonable
requirements (including, without limitation, providing a surety bond) fixed by
the Board of Directors, or the President or the Secretary.
ARTICLE VIII. GENERAL.
Section 801. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 802. Signing Checks. All checks or demands for money and notes
of the Corporation shall be signed by such officer, officers, or other person or
persons as the Board of Directors may from time to time designate.
Section 803. Designation of Presiding and Recording Officers. The
directors or shareholders, at any meeting of directors or shareholders, as the
case may be, shall have the right to designate any person, whether or not an
officer, director or shareholder, to preside over or record the proceedings of
such meeting.
Section 804. Record Date. The Board of Directors may fix any time
whatsoever (whether or not the same is more than fifty days) prior to the date
of any meeting of shareholders, or the date fixed for the payment of any
dividend or distribution, or the date for the allotment of
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<PAGE>
rights, or the date when any change or conversion or exchange of shares will be
made or will go into effect, as a record date for the determination of the
shareholders entitled to notice of, or to vote at any such meeting, or entitled
to receive payment of any such dividend or distribution, or to receive any such
allotment of rights, or to exercise the rights in respect to any such change,
conversion or exchange of shares.
Section 805. Text of Proposed Resolution in Written Notice. Whenever
the language of a proposed resolution is included in a written notice to
shareholders, the shareholders' meeting considering the resolution may adopt it
with such clarifying or other amendments as do not enlarge its original purpose,
without further notice to shareholders not present in person or by proxy.
Section 806. Absentee Participation in Meetings. One or more directors
or shareholders may participate in a meeting of the Board of Directors, or of a
committee of the Board, or a meeting of the shareholders, by means of a
conference, telephone or similar communications equipment, by means of which all
persons participating in the meeting can hear each other.
Section 807. Emergency Bylaws. In the event of any emergency resulting
from warlike damage or an attack on the United States or any nuclear or atomic
disaster, and until the termination of such emergency, the following Bylaw
provisions shall be in effect, notwithstanding any other provisions of these
Bylaws:
(a) A special meeting of the Board of Directors may be called by any
officer or director upon one hour's notice, and
(b) The director or directors in attendance at the meeting shall
constitute a quorum.
Section 808. Severability. If any provision of these bylaws is illegal
or unenforceable as such, such illegality or unenforceability shall not affect
any other provision of these bylaws and such other provisions shall continue in
full force and effect.
ARTICLE IX. AMENDMENT OR REPEAL.
Section 901. Amendment or Repeal by Shareholders. These Bylaws may be
amended or repealed, in whole or in part, by a vote of two-thirds of all of the
shares of common stock of the Corporation issued and outstanding at any annual
or special meeting of the shareholders duly convened after notice to the
shareholders of that purpose.
Section 902. Amendment or Repeal by the Board of Directors. These
Bylaws may be amended or repealed, in whole or in part, by the affirmative vote
of a majority of the Board of Directors at any regular or special meeting of the
Board duly convened.
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<PAGE>
Section 903. Recording Amendments and Repeals. The text of all
amendments and repeals to these Bylaws shall be attached to the Bylaws with a
notation of the date of each such amendment or repeal and a notation of whether
such amendment or repeal was adopted by the shareholders or the Board of
Directors.
ARTICLE X. ADOPTION OF BYLAWS AND RECORD OF AMENDMENTS AND REPEALS.
Section 1001. Adoption and Effective Date. These Bylaws have been
adopted as the Bylaws of the Corporation as of the 14th day of November, 1997,
and shall be effective as of said date.
Section 1002. Amendments or Repeals.
Date Amended
Section Involved or Repealed Adopted By
---------------- ------------ ----------
10
<PAGE>
NUMBER ___________ SHARES _____________
COMMON STOCK
CUSIP No. 719122 10 3
See reverse for certain definitions
PHOENIX PRESCHOOL HOLDINGS, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF
Phoenix Preschool Holdings, Inc.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
DATED:______________________
____________________________ ______________________________
President and Chief Secretary
Executive Officer
[Seal]
Countersigned and Registered:
Continental Stock Transfer & Trust Co.
Transfer Agent and Registrar
By:_________________________
Authorized Signature
<PAGE>
PHOENIX PRESCHOOL HOLDINGS, INC.
The Corporation will furnish to any shareholder upon request and
without charge a full or summary statement of the designations, voting rights,
preferences, limitations and special rights of the shares of each class or
series authorized to be issued so far as they have been fixed and determined and
the authority of the board of directors to fix and determine the designations,
voting rights, preferences, limitations and special rights of the classes and
series of shares of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF TRAN MIN ACT______ Custodian________
TEN ENT - as tenants by the (Cust) (Minor)
entireties under the Uniform Transfers to
JT TEN - as joint tenants with Minors Act of ______________
right of survivorship (State)
and not as tenants
in common.
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________________ hereby sell,
assign and transfer unto (Name of Assignor)
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
|------------------------------------|
| |
|------------------------------------|
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the common stock represented by the within certificate and do hereby
irrevocably constitute and appoint____________________________________________
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated___________________ X______________________________________
X______________________________________
NOTICE: the signature(s) to this assignment
must correspond with the name(s) as written upon
the face of the certificate in every
particular, without alteration or enlargement
or any change whatever.
SIGNATURE(S) GUARANTEED:
____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
WARRANT AGREEMENT
AMONG
PHOENIX PRESCHOOL HOLDINGS, INC.,
a Pennsylvania corporation,
BRIARWOOD INVESTMENT COUNSEL,
DUKE & CO., INC.
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Section Page
1. Appointment of Warrant Agent.............................................1
2. Form of Warrant..........................................................2
3. Countersignature and Registration........................................2
4. Transfers and Exchanges..................................................3
5 Exercise of Warrants; Payment of Warrant Solicitation Fee................3
6. Payment of Taxes.........................................................5
7. Mutilated or Missing Warrants............................................5
8. Reservation of Common Stock..............................................5
9. Adjustments of Warrant Price and Number of Securities....................6
10. Fractional Interests.....................................................8
11. Notices to Warrantholders................................................8
12. Disposition of Proceeds on Exercise of Warrants..........................9
13. Redemption of Warrants...................................................9
14. Merger or Consolidation or Change of Name of Warrant Agent...............9
15. Duties of Warrant Agent.................................................10
16. Change of Warrant Agent.................................................11
17. Identity of Transfer Agent..............................................12
18. Notices.................................................................12
19. Supplements and Amendments..............................................13
20. New York Contract.......................................................13
21. Benefits of this Agreement..............................................13
22. Successors..............................................................13
<PAGE>
Warrant Agreement
THIS WARRANT AGREEMENT, dated as of __________ ___, 1997, is among
Phoenix Preschool Holdings, Inc., a Pennsylvania corporation (the "Company"),
Briarwood Investment Counsel and Duke & Co., Inc. (together, the "Underwriters")
and Continental Stock Transfer & Trust Company, as warrant agent (the "Warrant
Agent").
The Company proposes to issue and sell through an initial public
offering (the "IPO") underwritten by the Underwriters, an aggregate of up to (a)
1,275,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), (b) for the account of certain selling securityholders, 1,275,000
redeemable Common Stock purchase warrants ("Warrants") and, (c) pursuant to the
Underwriters' over-allotment option (the "Over-allotment Option"), up to an
additional 191,250 shares of Common Stock and 191,250 Warrants.
In connection with the IPO the Company proposes to sell to the
Underwriters warrants (the "Underwriters' Warrants") to purchase up to 127, 500
shares of Common Stock and up to 127,500 warrants (the "Underlying Warrants").
The Company has issued and sold warrants to purchase an aggregate of up to
1,275,000 shares of Common Stock (the "Bridge Warrants") in a private placement
of its securities completed in June 1997. The Bridge Warrants automatically will
be converted into Warrants having terms identical to the Warrants being offered
in the IPO on the date the Company's registration statement under the Securities
Act of 1933 registering the securities to be offered in the IPO is declared
effective by the Securities and Exchange Commission. (the "Effective Date")
Each Warrant will entitle the holder to purchase one share of Common
Stock. The Company desires the Warrant Agent to act on behalf of the Company,
and the Warrant Agent is willing so to act, in connection with the issuance,
registration, transfer, exchange and exercise of the Warrants.
THEREFORE, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints
the Warrant Agent to act as Warrant Agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Upon the execution of this Agreement, certificates representing
1,275,000 Warrants to purchase up to an aggregate of 1,275,000 shares of Common
Stock (subject to modification and adjustment as provided in Section 9 hereof)
shall be executed by the Company and delivered to the Warrant Agent.
Upon the exercise of the Over-allotment Option, certificates
representing up to 191,250 Warrants to purchase up to an aggregate of 191,250
shares of Common Stock (subject to modification and adjustment as provided in
Section 9 hereof) shall be executed by the Company and delivered to the Warrant
Agent.
<PAGE>
Upon exercise of the Underwriters' Warrant as provided therein,
certificates representing up to 127,500 Warrants to purchase up to an aggregate
of 127,500 shares of Common Stock (subject to modification and adjustment as
provided in Section 9 hereof) shall be executed by the Company and delivered to
the Warrant Agent.
Section 2. Form of Warrant. The text of the Warrants and the form of
election to purchase Common Stock to be printed on the reverse thereof shall be
substantially as set forth in Exhibit A attached hereto (the provisions of which
are hereby incorporated herein). All of the certificates for the Warrants may
have such letters, numbers or other marks of identification or designation and
such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. Each Warrant shall initially entitle the registered holder thereof to
purchase one share of Common Stock at a purchase price of FIVE DOLLARS AND TEN
CENTS ($5.10) (as adjusted as hereinafter provided, the "Warrant Price"), at any
time during the period (the "Exercise Period") commencing on __________ __ 1999
[the second anniversary of the date of the Company's prospectus (the
"Prospectus") pursuant to which the Warrants are being sold in the IPO] and
expiring at 5:00 p.m. New York time, on __________ __, 2002 [the fifth
anniversary of the date of the Prospectus]. The Warrant Price and the number of
shares of Common Stock issuable upon exercise of the Warrants are subject to
adjustment upon the occurrence of certain events, all as hereinafter provided.
The Warrants shall be executed on behalf of the Company by the manual or
facsimile signature of the present or any future Chief Executive Officer, Chief
Financial Officer, President or Vice President of the Company, and attested to
by the manual or facsimile signature of the present or any future Secretary or
Assistant Secretary of the Company.
Warrants shall be dated as of the date of issuance by the Warrant Agent
either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants falls on a
day that is not a business day, then the Warrants shall expire at 5:00 p.m. New
York time on the next succeeding business day. For purposes hereof, the term
"business day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions in New York City, New York, are authorized or
obligated by law to be closed.
Section 3. Countersignature and Registration. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective holders thereof. The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement) and
shall not be valid for any purpose unless so countersigned. The Warrants may,
however, be so countersigned by the Warrant Agent (or by its successor as
Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
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<PAGE>
Section 4. Transfers and Exchanges. The Warrant Agent shall transfer,
from time to time, any outstanding Warrants upon the books to be maintained by
the Warrant Agent for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant shall be issued to the transferee and the surrendered
Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be
delivered by the Warrant Agent to the Company from time to time upon request.
Warrants may be exchanged at the option of the holder thereof, when surrendered
at the office of the Warrant Agent, for another Warrant, or other Warrants of
different denominations of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock. No certificates for
Warrants shall be issued except for (i) Warrants initially issued hereunder in
accordance with Section 1 hereof, (ii) Warrants issued upon any transfer or
exchange of Warrants, (iii) Warrants issued in replacement of lost, stolen,
destroyed or mutilated certificates for Warrants pursuant to Section 7 hereof,
and (iv) at the option of the Board of Directors of the Company, Warrants in
such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Warrant Price or the number of shares of Common
Stock purchasable upon exercise of the Warrants made pursuant to Section 9
hereof.
Section 5. Exercise of Warrants; Payment of Warrant Solicitation Fee.
Subject to the provisions of this Agreement, each registered holder of Warrants
shall have the right, at any time during the Exercise Period, to exercise such
Warrants and purchase the number of fully paid and non-assessable shares of
Common Stock specified in such Warrants upon presentation and surrender of such
Warrants to the Company at the corporate office of the Warrant Agent, with the
exercise form on the reverse thereof duly executed, and upon payment to the
Company of the Warrant Price, determined in accordance with the provisions of
Sections 2, 9 and 10 of this Agreement, for the number of shares of Common Stock
in respect of which such Warrants are then exercised. Payment of such Warrant
Price shall be made in cash or by certified or bank check payable to the
Company. Subject to Section 6 hereof, upon such surrender of Warrants and
payment of the Warrant Price, the Warrant Agent on behalf of the Company shall
cause to be issued and delivered with all reasonable dispatch to or upon the
written order of the registered holder of such Warrants and in such name or
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<PAGE>
names as such registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares of Common Stock immediately prior to the close
of business on the date of the surrender of such Warrants and payment of the
Warrant Price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable during the Exercise Period, at the election of the
registered holders thereof, either as an entirety or from time to time for a
portion of the shares specified therein and, in the event that any Warrant is
exercised in respect of less than all of the shares of Common Stock specified
therein at any time prior to the date of expiration of the Warrants, a new
Warrant or Warrants will be issued to the registered holder for the remaining
number of shares of Common Stock specified in the Warrant so surrendered, and
the Warrant Agent is hereby irrevocably authorized to countersign and to deliver
the required new Warrants pursuant to the provisions of this Section and of
Section 3 of this Agreement and the Company, whenever requested by the Warrant
Agent, will supply the Warrant Agent with Warrants duly executed on behalf of
the Company for such purpose. Upon the exercise of any one or more Warrants, the
Warrant Agent shall promptly notify the Company in writing of such fact and of
the number of securities delivered upon such exercise and, subject to the
provisions below, shall cause all payments of an amount, in cash or by check
made payable to the order of the Company, equal to the aggregate Warrant Price
for such Warrants, less any amounts payable to the Underwriters, as provided
below, to be deposited promptly in the Company's bank account. The Company and
Warrant Agent shall determine, in their sole and absolute discretion, whether a
Warrant certificate has been properly completed for exercise by the registered
holder thereof.
Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable and the Company shall not be obligated to deliver any
securities pursuant to the exercise of any warrant unless at the time of
exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the securities issuable upon exercise of such Warrant and such
registration statement shall have been declared and shall remain effective and
shall be current, and such shares have been registered or qualified or be exempt
under the securities laws of the state or other jurisdiction of residence of the
holder of such Warrant and the exercise of such Warrant in any such state or
other jurisdiction shall not otherwise be unlawful. During the Exercise Period,
the Company shall use its best efforts to have a current registration statement
on file with the Securities and Exchange Commission covering the issuance of
Common Stock underlying the Warrants so as to permit the Company to deliver to
each person exercising a Warrant a prospectus meeting the requirements of
Section 10(a) (3) of the Act and otherwise complying therewith, and will deliver
such prospectus to each such person. During the Exercise Period, the Company
shall also use its best efforts to effect appropriate qualifications of the
Common Stock underlying the Warrants under the laws and regulations of the
states and other jurisdictions in which the Common Stock and Warrants are sold
by the Underwriters in the IPO in order to comply with applicable laws in
connection with the exercise of the Warrants.
(a) If at the time of exercise of any Warrant (i) the market
price of the Common Stock is equal to or greater than the then exercise price of
the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriters
at such time as it is a member of the National Association of Securities
Dealers, Inc. ("NASD") , (iii) the Warrant is not held in a discretionary
account, (iv) disclosure of the compensation arrangement is made in documents
provided to the holders of the Warrants, and (v) the solicitation of the
exercise of the Warrant is not in violation of Rule 10b-6 (as such rule or any
successor rule may be in effect as of such time of exercise) promulgated under
the Securities Exchange Act of 1934, as amended, then the Underwriters shall be
entitled to receive from the Company following exercise of each of the Warrants
so exercised a fee of eight percent (8%) of the aggregate exercise price of the
Warrants so exercised (the "Exercise Fee"). The procedures for payment of the
Exercise Fee are set forth in Section 5(b) below.
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(b) (i) Within five (5) days after the last day of each month
commencing with __________ ___, 1999, the Warrant Agent will notify the
Underwriters of each Warrant certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Warrant Agent will
provide the Underwriters with such information, in connection with the exercise
of each Warrant, as the Underwriters shall reasonably request.
(ii) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriters the Exercise Fee, if payable, in
respect of each exercise of Warrants, promptly after receipt by the Warrant
Agent from the Company of a check payable to the order of the Underwriters in
the amount of such Exercise Fee. In the event that an Exercise Fee is paid to
the Underwriters with respect to a Warrant which the Company or the Warrant
Agent determines is not properly completed for exercise or in respect of which
the Underwriters are not entitled to an Exercise Fee, the Underwriters will
return such Exercise Fee to the Warrant Agent which shall forthwith return such
fee to the Company.
The Underwriters and the Company may at any time during business hours
examine the records of the Warrant Agent, including its ledger of original
Warrant certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraph 5 (a)
and 5 (b) may not be modified, amended or deleted without the prior written
consent of the Underwriters.
Section 6. Payment of Taxes. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; 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 or delivery of any certificates for shares of Common Stock in a name
other than that of the registered holder of Warrants in respect of which such
shares are issued, and in such case neither the Company nor the Warrant Agent
shall be required to issue or deliver any certificate for shares of Common Stock
or any Warrant until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid or that no such tax is required to be paid.
Section 7. Mutilated or Missing Warrants. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction and, in case of a lost, stolen or destroyed
Warrant, indemnity or bond, if requested, also satisfactory to them. Applicants
for such substitute Warrants shall also comply with such other reasonable
regulations and pay such reasonable charges as the Company or the Warrant Agent
may prescribe.
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Section 8. Reservation of Common Stock. There have been reserved, and
the Company shall at all times keep reserved, out of its authorized shares of
Common Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the shares of Common Stock and every subsequent transfer agent for any
shares of Common Stock issuable upon the exercise of any of the aforesaid rights
of purchase are irrevocably authorized and directed at all times to reserve such
number of authorized shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates for such
shares against payment of the Warrant Price therefor, validly issued, fully paid
and nonassessable and listed on any national securities exchange or included in
any interdealer automated quotation system upon or in which the other shares of
outstanding Common Stock are then listed or included. The Company will keep a
copy of this Agreement on file with the transfer agent for the shares of Common
Stock (which may be the Warrant Agent) and with every subsequent transfer agent
for any shares of Common Stock issuable upon the exercise of the rights of
purchase represented by the Warrants. The Warrant Agent is irrevocably
authorized to requisition from time to time from such transfer agent stock
certificates required to honor outstanding Warrants. The Company will supply
such transfer agent with duly executed stock certificates for that purpose. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
cancelled by the Warrant Agent and shall thereafter be delivered to the Company,
and such cancelled Warrants shall constitute sufficient evidence of the number
of shares of Common Stock which have been issued upon the exercise of such
Warrants. Promptly after the date of expiration of the Warrants, the Warrant
Agent shall certify to the Company the total aggregate amount of Warrants then
outstanding, and thereafter no shares of Common Stock shall be subject to
reservation in respect of such Warrants which shall have expired.
Section 9. Adjustments of Warrant Price and Number of Securities.
The Warrant Price in effect at any time and the number of shares upon
the exercise of this Warrant shall be subject to adjustment from time to time
upon the happening of certain events as follows:
(a) In case the Company shall (i) issue shares of Common Stock as a
dividend or distribution on its outstanding shares of Common Stock, (ii)
subdivide or reclassify its outstanding shares of Common Stock into a greater
number of shares, (iii) combine or reclassify its outstanding shares of Common
Stock into a smaller number of shares, or (iv) the outstanding shares of Common
Stock are at any time changed into or exchanged for a different number or kind
of shares or other security of the Company or of another corporation through
reorganization, merger, consolidation, liquidation or recapitalization, then
appropriate adjustments in the number and kind of such securities subject to
this Warrant shall be made and 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, reclassification, reorganization, merger,
consolidation, liquidation or recapitalization shall be proportionately adjusted
so that the holder of this Warrant exercised after such date shall be entitled
to receive the aggregate number and kind of shares of which, if this Warrant had
been exercised by such Holder immediately prior to such date, he would have
owned upon such exercise and been entitled to receive upon such dividend,
distribution, subdivision, combination, liquidation or recapitalization. For
example, if the Company declares a 2 for 1 stock distribution and the Exercise
Price immediately prior to such event was $5.10 per share and the number of
shares purchasable upon exercise of this Warrant was 10, the adjusted Warrant
Price immediately after such event would be $2.55 per share and the adjusted
number of shares purchasable upon exercise of this Warrant would be 20 shares.
Such adjustment shall be made successively whenever any event listed above shall
occur.
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(b) Whenever the Warrant Price payable upon exercise of this Warrant is
adjusted pursuant to Subparagraph (a) above, the number of shares purchasable
upon exercise of this Warrant shall simultaneously be adjusted by multiplying
the number of shares issuable upon exercise of this Warrant by the Warrant Price
in effect on the date hereof and dividing the product so obtained by the Warrant
Price, as adjusted.
(c) No adjustment in the Warrant Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which by reason of this
Subparagraph (c) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 9 shall be made to the nearest cent or
one-hundredth of a share, as the case may be. Anything in this Section 9 to the
contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Warrant Price, in addition to those
required by this Section 9, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal income tax liability to the
holders of Common Stock or securities convertible into or exercisable for Common
Stock.
(d) Whenever the Warrant Price is adjusted as herein provided, the
Company shall compute the adjusted Warrant Price in accordance with this Section
9 and shall prepare a certificate signed by the chief financial officer or
accounting officer of the Company setting forth the adjusted Warrant Price, and
shall promptly cause a notice setting forth the adjusted Warrant Price and
adjusted number of shares issuable upon exercise of this Warrant to be mailed to
the Holder, at its address set forth herein, and shall cause a certified copy
thereof to be mailed to the Company's transfer agent, if any. The Company may
(but shall not be required to) retain a firm of independent certified public
accountants selected by the Board of Directors (which may be the regular
accountants employed by the Company) to make any computation required by this
Section 9, and a certificate signed by such firm shall be conclusive evidence of
the correctness of such adjustment.
(e) In the event that at any time, as a result of an adjustment made
pursuant to the provisions of this Section 9, the Holder of this Warrant
thereafter shall become entitled to receive any shares of the Company other than
Common Stock thereafter the number of such other shares so receivable upon
exercise of this Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Subparagraphs (a) to (c), inclusive,
above.
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(f) Notwithstanding any adjustment in the Warrant Price or the number
or kind of shares of Common Stock purchasable upon the exercise of this Warrant,
certificates for Warrants issued prior or subsequent to such adjustment may
continue to express the same price and number and kind of shares of Common Stock
as are initially issuable pursuant to this Warrant.
(g) The Company may, but under no circumstances is obligated to, modify
the terms of this Warrant to provide for an earlier commencement of the Exercise
Period, or to extend the Exercise Period or to lower the Warrant Price, at any
time prior to the expiration of this Warrant.
Section 10. Fractional Interests. The Warrants may only be exercised to
purchase full shares of Common Stock and the Company shall not be required to
issue fractions of shares of Common Stock on the exercise of Warrants. However,
if a Warrantholder exercises all Warrants then owned of record by him and such
exercise would result in the issuance of a fractional share, the Company will
pay to such Warrantholder, in lieu of the issuance of any fractional share
otherwise issuable, an amount of cash based on the Market Price on the last
trading day prior to the exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and the number of
shares of Common Stock issuable upon exercise of a Warrant, then and in each
such case, the Company shall give written notice thereof to the Warrant Agent,
which notice shall state the Warrant Price resulting from such adjustment and
the increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of a Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Company shall also mail such notice to the holders of the Warrants at their
respective addresses appearing in the Warrant register. Failure to give or mail
such notice, or any defect therein, shall not affect the validity of the
adjustments.
(b) In case at any time after the Closing Date:
(i) the Company shall pay dividends payable in stock upon
its Common Stock or make any distribution (other than regular cash dividends) to
the holders of Common Stock; or
(ii) the Company shall offer for subscription pro rata to
all of the holders of Common Stock any additional shares of stock of any class
or other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with, or sale of substantially all of its assets to another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; then in any one or more of such cases,
the Company shall give written notice to the Warrant Agent and the holders of
the Warrants in the manner set forth in Section 11(a) of the date on which (A) a
record shall be taken for such dividend, distribution or subscription rights, or
(B) such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up shall take place, as the case may be.
Such notice shall also specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up, as the case
may be. Such notice shall be given at least ten (10) days prior to the action in
question and not less than ten (10) days prior to the record date in respect
thereof. Failure to give such notice, or any defect therein, shall not affect
the legality or validity of any of the matters set forth in this Section 11(b).
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(c) The Company shall cause copies of all financial statements
and reports, proxy statements and other documents that are sent to its
stockholders to be sent by an identical class of mail, postage prepaid, on the
date of mailing to such stockholders, to each registered holder of Warrants at
his address appearing in the Warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of Warrants.
(a) The Warrant Agent shall promptly forward to the Company all
monies received by the Warrant Agent for the purchase of shares of Common Stock
through the exercise of these Warrants.
(b) The Warrant Agent shall keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 13. Redemption of Warrants. The Warrants are redeemable by the
Company commencing on the second anniversary of the date of the Prospectus (with
the consent of the Underwriters), in whole or in part, on not less than thirty
(30) days' prior written notice at a redemption price of $.05 per Warrant,
provided the average closing bid quotation of the Common Stock as reported on
the Nasdaq Stock Market, if traded thereon, or if not traded thereon, the
average closing sale price if listed on a national securities exchange (or other
reporting system that provides last sale prices), has been at least $7.00 per
share, for a period of 20 consecutive trading days ending on the third day prior
to the date on which the Company gives notice of redemption. Any redemption in
part shall be made pro rata to all Warrant holders. The redemption notice shall
be mailed to the holders of the Warrants at their respective addresses appearing
in the Warrant register. Any such notice mailed in the manner provided herein
shall be conclusively presumed to have been duly given in accordance with this
Agreement whether or not the registered holder receives such notice. No failure
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to a
registered holder of a Warrant (i) to whom notice was not mailed or (ii) whose
notice was defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. Holders of the Warrants will have exercise rights until the close of
business on the day immediately preceding the date fixed for redemption.
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Section 14. Merger or Consolidation or Change of Name of Warrant Agent.
Any corporation or company which may succeed to the corporate trust business of
the Warrant Agent by any merger or consolidation or otherwise shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto; provided,
that such corporation would be eligible for appointment as a successor Warrant
Agent under the provisions of Section 16 of this Agreement. In case at the time
such successor to the Warrant Agent shall succeed to the agency created by this
Agreement any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned. In all such cases such Warrants shall
have the full force provided in the Warrants and in this Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and in
the Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same except as such
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
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(f) The Warrant Agent shall be under no obligation to institute
any action, suit or legal proceeding or to take any other action likely to
involve expenses unless the Company or one or more registered holders of
Warrants shall furnish the Warrant Agent with reasonable security and indemnity
for any costs and expenses which may be incurred, but this provision shall not
affect the power of the Warrant Agent to take such action as the Warrant Agent
may consider proper, whether with or without any such security or indemnity. All
rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrants or
the production thereof at any trial or other proceeding. Any such action, suit
or proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrants, as their respective rights and interests
may appear.
(g) The Warrant Agent and any stockholder, director, officer,
partner or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent and
its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees, and the Warrant Agent shall
not be answerable or accountable for any such attorneys, agents or employees or
for any loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of the
Company shall be sufficiently evidenced by an instrument signed in the name of
the Company by its President or a Vice President or its Secretary or an
Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
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Section 16. Change of Warrant Agent. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving to the Company
notice in writing, and to the holders of the Warrants notice by mailing such
notice to the holders at their respective addresses appearing on the Warrant
register, of such resignation, specifying a date when such resignation shall
take effect. The Warrant Agent may be removed by like notice to the Warrant
Agent from the Company and the like mailing of notice to the holders of the
Warrants. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of action, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
thirty (30) days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
or after the Company has received such notice from a registered holder of a
Warrant (who shall, with such notice, submit his Warrant for inspection by the
Company), then the registered holder of any Warrant may apply to any court of
competent jurisdiction for the appointment of a successor to the Warrant Agent.
Any successor Warrant Agent, whether appointed by the Company or by such a
court, shall be a bank or trust company, in good standing, incorporated under
New York or federal law. After appointment, the successor Warrant Agent shall be
vested with the same powers, rights, duties and responsibility as if it had been
originally named as Warrant Agent without further act or deed and the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent all
canceled Warrants, records and property at the time held by it hereunder, and
execute and deliver any further assurance or conveyance necessary for this
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant Agent or the appointment of the successor Warrant
Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the appointment
of any transfer agent (other than Continental Stock Transfer & Trust Company)
for the shares of Common Stock or of any subsequent transfer agent for the
shares of Common Stock, the Company will file with the Warrant Agent a statement
setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to be given
by the Warrant Agent or the registered holder of any Warrant to the Company,
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another is filed in writing by the Company with the Warrant
Agent) as follows:
PHOENIX PRESCHOOL HOLDINGS, INC.,
31st Floor
150 East 58th Street
New York, New York 10155
Attention: Michael C. Koffler, Chairman,
Chief Executive Officer and President
and a copy thereof to:
Blank Rome Comisky & McCauley.
One Logan Square
Philadelphia, PA 19103
Attention: Frederick D. Lipman, Esq.
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Any notice pursuant to this Agreement to be given by the Company or the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attention: Executive Vice President
Any notice pursuant to this Agreement to be given by the Warrant Agent
or the Company to the Underwriters shall be sufficiently given if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Warrant Agent) as follows:
Briarwood Investment Counsel
c/o Dean Petkanas
100 Stone Hill Road
Old Westbury, New York 11568
and a copy thereof to:
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
101 East 52nd Street
New York, New York 10022
Attention: Arthur Marcus, Esq.
Section 19. Supplements and Amendments. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
materially adversely affect the interest of the holders of Warrants; and in
addition the Company and the Warrant Agent may modify, supplement or alter this
Agreement with the consent in writing of the registered holders of the Warrants
representing not less than a majority of the Warrants then outstanding.
Section 20. New York Contract. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York without
regard to the conflicts of law principles thereof.
Section 21. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
Section 22. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
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IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
PHOENIX PRESCHOOL HOLDINGS, INC.,
By:__________________________________________
Name: Michael C. Koffler
Title: Chairman, Chief Executive Officer
and President
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By:__________________________________________
Name:
Title:
BRIARWOOD INVESTMENT COUNSEL.
By:__________________________________________
Name: Dean Petkanas
Title:
DUKE & CO., INC.
By:__________________________________________
Name:
Title:
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No. W_______________________ VOID AFTER_____________, 2001
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE COMMON STOCK
PHOENIX PRESCHOOL HOLDINGS, INC.
CUSIP [ ]
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the
number of Redeemable Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one (1) fully paid and non-assessable share of Common
Stock, par value $0.10 per share (the "Common Stock"), of PHOENIX PRESCHOOL
HOLDINGS, INC., a Pennsylvania corporation (the "Company"), at any time from
_________ __, 1999 (the "Initial Warrant Exercise Date"), and prior to the
Expiration Date (as hereinafter defined) upon the presentation and surrender of
this Warrant Certificate with the Exercise Form on the reverse hereof duly
executed, at the corporate office of Continental Stock Transfer & Trust Company,
2 Broadway, New York, New York 10004, as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of $5.10, subject to adjustment (the
"Warrant Price"), in lawful money of the United States of America in cash or by
certified or bank check made payable to the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement, dated as of ___________ ___, 1997 (the "Warrant
Agreement"), among the Company, Briarwood Investment Counsel and Duke & Co.,
Inc. (together, the "Underwriters") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Warrant Price and the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares will be issued. In the case of the
exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
<PAGE>
The term "Expiration Date" shall mean 5:00 p.m. (New York time)
on_________ ___, 2002 [the date which is the fifth anniversary of the Initial
Warrant Exercise Date]; provided, that if such date is not a business day, it
shall mean 5:00 p.m., New York City time, on the next following business day.
For purposes hereof, the term "business day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in New York City, New
York, are authorized or obligated by law to be closed.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented hereby unless at the time of
exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the securities issuable upon exercise of the Warrants represented
hereby and such registration statement has been declared and shall remain
effective and shall be current, and such securities have been registered or
qualified or be exempt under the securities laws of the state or other
jurisdiction of residence of the Registered Holder and the exercise of the
Warrants represented hereby in any such state or other jurisdiction shall not
otherwise be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon the presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder, as such, shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, in whole or in part, at a redemption
price of $.05 per Warrant, at any time commencing __________ ___, 1999 [the
second anniversary of the date of the Prospectus] provided that the average
closing sales price of the Common Stock as reported on The Nasdaq stock Market,
if traded thereon, or if not traded thereon, the average closing sale price if
listed on national exchange (or other reporting system that provides last sale
prices), shall have for a period of 20 consecutive days on which such market is
open for trading ending on the third day prior to the date on which the Company
gives the Notice of Redemption (as defined below) has been at least $7.00.
Notice of redemption (the "Notice of Redemption") shall be given by the Company
no less than thirty days before the date fixed for redemption, all as provided
in the Warrant Agreement. On and after the date fixed for redemption, the
Registered Holder shall have no right with respect to this Warrant except to
receive the $0.05 per Warrant upon surrender of this Certificate.
<PAGE>
Under certain circumstances described in the Warrant Agreement, the
Underwriters shall be entitled to receive as a solicitation fee an aggregate of
eight percent (8%) of the Warrant Price of the Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of law principles thereof.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated __________ ___, 1997
SEAL PHOENIX PRESCHOOL HOLDINGS, INC.
By:___________________________________
Chairman, Chief Executive Officer
and President
By:___________________________________
Secretary
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, as Warrant Agent
By:________________________________
Authorized Officer
<PAGE>
EXERCISE FORM
To Be Executed by the Registered Holder
in order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
_________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER:_____________
___________________________
___________________________
___________________________
(please print or type name and address)
and be delivered to
___________________________
___________________________
___________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was solicited by Briarwood
Investment Counsel or Duke & Co., Inc., please check the following box. [ ]
2. THE EXERCISE OF THIS WARRANT WAS SOLICITED BY
________________________________________
<PAGE>
3. IF THE EXERCISE OF THIS WARRANT WAS NOT SOLICITED, PLEASE CHECK THE
FOLLOWING BOX. [ ]
Dated: _____________________________ X__________________________________
__________________________________
__________________________________
Address
__________________________________
Social Security or Taxpayer
Identification Number
__________________________________
Signature Guaranteed
<PAGE>
ASSIGNMENT
To be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER:_____________
___________________________
___________________________
___________________________
(please print or type name and address)
________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
______________________________________ as its/his/her attorney-in-fact to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ______________________ X_______________________________
Signature Guaranteed:______________
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
<PAGE>
PHOENIX PRESCHOOL HOLDINGS, INC.
AND
DUKE & CO., INC.
AND
BRIARWOOD INVESTMENT COUNSEL
UNDERWRITERS'
WARRANT AGREEMENT
<PAGE>
UNDERWRITERS' WARRANT AGREEMENT dated as of ______________,
1997 by and between PHOENIX PRESCHOOL HOLDINGS, INC. (the "Company") and DUKE &
CO., INC. and BRIARWOOD INVESTMENT COUNSEL (the "Underwriters").
WITNESSETH:
WHEREAS, the Company proposes to issue to the Underwriters
warrants (the "Underwriters' Warrants") to purchase up to 127,500 shares of the
Company's common stock, $.10 par value per share (the "Common Stock") and/or up
to 127,500 Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants")
each exercisable to purchase one share of Common Stock.
WHEREAS, the Underwriters have agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _____________, 1997,
by and between the Underwriters and the Company, to act as the underwriters in
connection with the Company's proposed initial public offering (the "Initial
Public Offering") of 1,275,000 shares of Common Stock and 1,275,000 Redeemable
Warrants (the "Offering Securities"), such Offering Securities being; identical
to the securities issuable upon exercise of the Underwriters' Warrants (the
"Securities"); and
WHEREAS, the Underwriters' Warrants to be issued pursuant to
this Agreement will be issued on the First Closing Date (as such term is defined
in the Underwriting Agreement) by the Company to the Underwriters in
consideration for, and as part of, the Underwriters' compensation in connection
with the Underwriters acting as the underwriters pursuant to the Underwriting
Agreement;
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<PAGE>
NOW, THEREFORE, in consideration of the promises, the payment
by the Underwriters to the Company of Ten Dollars ($10.00), 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. The Holder (as defined in Section 3 below) is hereby
granted the right to purchase, at any time from ____________, 1998 until 5:00
p.m., New York time, on __________, 2002, an aggregate of up to 127,500 shares
of Common Stock and/or 127,500 Redeemable Warrants, at an initial purchase price
(subject to adjustment as provided in Section 8 hereof) of $5.10 per share of
Common Stock and $.15 per Redeemable Warrant (120% of the Initial Public
Offering price per Offering Security), subject to the terms and conditions of
this Agreement. The Securities issuable upon exercise of the Underwriters'
Warrants are sometimes referred to herein as the "Underwriters' Securities."
2. Warrant Certificates. The warrant certificate (the
"Underwriters' Warrant Certificate") to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. Exercise of Underwriters' Warrants. The Underwriters'
Warrants are exercisable during the term set forth in Section 1 hereof payable
by certified or cashier's check or money order in lawful money of the United
States. Upon surrender of an Underwriter's Warrant Certificate with the annexed
Form of Election to Purchase duly executed, together with payment of the
Purchase Price (as defined in Section 6 hereof) for the Underwriters' Securities
(and such other amounts, if any, arising pursuant to Section 4 hereof) at the
Company's principal
2
<PAGE>
office in New York located at 150 East 58th Street, New York, New York 10155,
the registered holder of an Underwriters' Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Underwriters' Securities so purchased. The purchase rights represented by each
Underwriters' Warrant Certificate are exercisable at the option of the Holder or
Holders thereof, in whole or in part as to Underwriters' Securities. The
Underwriters' Warrants may be exercised to purchase all or any part of the
Underwriters' Securities represented thereby. In the case of the purchase of
less than all the Underwriters' Securities purchasable on the exercise of the
Underwriters' Warrants represented by an Underwriters' Warrant Certificate, the
Company shall cancel the Underwriters' Warrant Certificate represented thereby
upon the surrender thereof and shall execute and deliver a new Underwriters'
Warrant Certificate of like tenor for the balance of the Underwriters'
Securities purchasable thereunder.
4. Issuance of Certificates. Upon the exercise of the
Underwriters' Warrants and payment of the Purchase Price therefor, the issuance
of certificates representing the Underwriters Securities or other securities,
properties or rights underlying such Underwriters' Warrants, shall be made
forthwith (and in any event within five (5) business days thereafter) without
further charge to the Holder thereof, and such certificates shall (subject to
the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof, provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction
3
<PAGE>
of the Company that such tax has been paid. The Underwriters' Warrant
Certificates and the certificates representing the Underwriters Securities or
other securities, property or rights (if such property or rights are represented
by certificates) shall be executed on behalf of the Company by the manual or
facsimile signature of the then present Chairman or Vice Chairman of the Board
of Directors or President or Vice President of the Company, attested to by the
manual or facsimile signature of the then present Secretary or Assistant
Secretary or Treasurer or Assistant Treasurer of the Company. Underwriters'
Warrant Certificates shall be dated the date of issuance thereof by the Company
upon initial issuance, transfer or exchange.
5. Restriction On Transfer of Underwriters' Warrants. The
Holder of an Underwriters' Warrant Certificate (and its Permitted Transferee, as
defined below), by its acceptance thereof, covenants and agrees that the
Underwriters' Warrants are being acquired as an investment and not with a view
to the distribution thereof; that the Underwriters' Warrants may be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, to any person (a "Permitted Transferee"), provided such transfer,
assignment, hypothecation or other disposition is made in accordance with the
provisions of the Securities Act of 1933, as amended (the "Act"); and provided,
further, that until ____________, 1998 (one year following the effective date of
the Initial Public Offering), only officers and partners of the Underwriters, or
any Initial Public Offering selling group member and their respective officers
and partners, shall be Permitted Transferees.
4
<PAGE>
6. Purchase Price.
(a) Initial and Adjusted Purchase Price. Except as
otherwise provided in Section 8 hereof, the initial purchase price of the
Underwriters' Securities shall be $5.10 per share of Common Stock and $.15 per
Redeemable Warrant. The adjusted purchase price shall be the price which shall
result from time to time from any and all adjustments of the initial purchase
price in accordance with the provisions of Section 8 hereof.
(b) Purchase Price. The term "Purchase Price" herein
shall mean the initial purchase price or the adjusted purchase price, depending
upon the context.
7. Registration Rights.
(a) Registration Under the Securities Act of 1933.
The Underwriters' Warrants have not been registered under the Act. The
Underwriters' Warrant Certificates shall bear the following legend:
The securities represented by this certificate have
not been registered under the Securities Act of 1933,
as amended (the "Act"), and may not be offered for
sale or sold except pursuant to (i) an effective
registration statement under the Act, or (ii) an
opinion of counsel, if such opinion and counsel shall
be reasonably satisfactory to counsel to the issuer,
that an exemption from registration under the Act is
available.
(b) Demand Registration. (1) At any time commencing
on the first anniversary of and expiring on the fifth anniversary of the
effective date of the Company's Registration Statement relating to the Initial
Public Offering (the "Effective Date"), the Holders of a Majority (as
hereinafter defined) in interest of the Underwriters' Warrants, or the Majority
in interest of the Underwriters' Securities (assuming the exercise of all of the
Underwriters'
5
<PAGE>
Warrants) shall have the right, exercisable by written notice to the Company, to
have the Company prepare and file with the U.S. Securities and Exchange
Commission (the "Commission"), solely on one (1) occasion, a registration
statement on Form SB-2 (or other appropriate form), 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, for a period of nine (9)
months, of the Underwriters' Securities by such Holders and any other Holders of
the Underwriters' Warrants and/or the Underwriters' Securities who notify the
Company within fifteen (15) business days after receipt of the notice described
in Section 7(b)(2). The Holders of the Underwriters' Warrants may demand
registration without exercising the Underwriters' Warrants, and are never
required to exercise same.
(2) The Company covenants and agrees to give written
notice of any registration request under this Section 7(b) by any Holders to all
other registered Holders of the Underwriters' Warrants and the Underwriters'
Securities within ten (10) business days from the date of the receipt of any
such registration request.
(3) For purposes of this Agreement, the term
"Majority" in reference to the Holders of the Underwriters' Warrants or
Underwriters' Securities, shall mean in excess of fifty percent (50%) of the
then outstanding Underwriters' Warrants or Underwriters' Securities that (i) are
not held by the Company, an affiliate, officer, 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.
6
<PAGE>
(c) Piggyback Registration. (1) If, at any time within the
period commencing on the first anniversary and expiring on the fifth anniversary
of the Effective Date, the Company should file a registration statement with the
Commission under the Act (other than in connection with a merger or other
business combination transaction or pursuant to Form S-8) it will give written
notice at least thirty (30) calendar days prior to the filing of each such
registration statement to the Underwriters and to all other Holders of the
Underwriters' Warrants and/or the Underwriters' Securities of its intention to
do so. If either of the Underwriters or other Holders of the Underwriters'
Warrants and/or the Underwriters' Securities notify the Company within twenty
(20) calendar days after receipt of any such notice of its or their desire to
include any Underwriters' Securities in such proposed registration statement,
the Company shall afford the Underwriters and such Holders of the Underwriters'
Warrants and/or Underwriters' Securities the opportunity to have any such
Underwriters' Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7(c)(1) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c)(1) (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.
(2) If the underwriter of an offering to which the above
piggyback rights apply objects to such rights, such objection shall preclude
such inclusion. However, in such event, the Company will, within nine (9) months
of completion of such subsequent underwriting, file at the expense of the
Company, a registration statement so as to permit a public offering and sale,
for a period of nine (9) months, of such excluded Underwriters'
7
<PAGE>
Securities, which shall be in addition to any registration statement required to
be filed pursuant to Section 7(b).
(d) Covenants of the Company With Respect to Registration. In
connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:
(1) The Company shall use its best efforts
to file a registration statement within forty-five (45) calendar days of receipt
of any demand therefor pursuant to Section 7(b); provided, however, that the
Company shall not be required to produce audited or unaudited financial
statements for any period prior to the date such financial statements are
required to be filed in a report on Form 10-KSB or Form 10-QSB, as the case may
be. The Company shall use its best efforts to have any registration statement
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Underwriters' Securities such number of prospectuses as shall
reasonably be requested.
(2) The Company shall pay all costs
(excluding fees and expenses of Holders' counsel and any underwriting discounts
or selling fees, expenses or commissions), fees and expenses in connection with
the first registration statement filed pursuant to Sections 7(b) and 7(c) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses.
(3) The Company will use its best efforts to
qualify or register the Underwriters' Securities 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 Holders, provided that the Company
shall not be obligated to execute or file any general consent to service of
process or
8
<PAGE>
to qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(4) The Company shall indemnify the Holders
of the Underwriters' Securities 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 (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from such
registration statement, but only to the same extent and with the same effect as
the provisions pursuant to which the Company has agreed to indemnify the
Underwriters contained in Section 8 of the Underwriting Agreement.
(5) The Holders of the Underwriters'
Securities to be sold pursuant to a registration statement, and their successors
and assigns, shall 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 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 8 of the Underwriting Agreement pursuant to
which the Underwriters have agreed to indemnify the Company.
(6) Nothing contained in this Agreement
shall be construed as requiring the Holders to exercise their Underwriters'
Warrants prior to the initial filing of any registration statement or the
effectiveness thereof.
9
<PAGE>
(7) The Company shall not be entitled to
include any securities other than the Underwriters' Securities in any
registration statement filed pursuant to Section 7(b) hereof without the prior
written consent, which consent shall not be unreasonably withheld, of the
Holders of the Underwriters' Warrants and Underwriters' Securities representing
a Majority of such securities (assuming exercise of all of the Underwriters'
Warrants).
(8) The Company shall furnish to a
designated representative of the Holders participating in the offering and to
each underwriter, if any, a signed counterpart, addressed to the Company or the
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) if such registration includes an underwritten
public offering a copy of the "cold comfort" letter dated the effective date of
such registration statement signed by each independent public accountant who has
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' letters. with respect to events
subsequent to the date of such financial statements, as are duly covered in
opinions of issuer's counsel and in accountants' letters, with respect to
customary 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.
(9) 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
10
<PAGE>
available to its security holders" (within the meaning of Rule 158 under the
Act) an earnings statement (which need not be audited) complying with Section 1
(a) of the Act and covering a period of at least 12 consecutive months beginning
after the effective date of the registration statement.
(10) The Company shall deliver promptly to
each Holder participating in the offering requesting the correspondence
described below and any managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors with respect to
the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
(11) The Company shall enter into an
underwriting agreement with the managing underwriter selected for such
underwriting by Holders holding a Majority of the Underwriters' Securities
requested to be included in such underwriting, provided, however that (i) such
managing underwriter shall be reasonably acceptable to the Company, except that
in connection with an offering for which the Holders have piggyback rights, the
Company shall have the sole right to select the managing underwriter or
underwriters, and (ii) the Holders shall be responsible for any selling fees or
commissions in connection with such underwriting. Such
11
<PAGE>
underwriting agreement shall be satisfactory in form and substance to the
Company, a Majority of such Holders (in respect of a registration under Section
7(b) only) and such managing underwriter, 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 Underwriters' Securities and may, at their
option, require that any or all the representations, warranties and covenants of
the Company to or for the benefit of such underwriters shall also be made to and
for the benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
e. Further Registrations. The Company will cooperate
with the Holders of the Underwriters' Warrants and Underwriters' Securities in
preparing and signing any registration statement, in addition to the
registration statements discussed above, required in order to sell or transfer
the Underwriters' Securities and will supply all information required therefor,
but all of such additional registration statement expenses including legal and
accounting fees will be prorated between the Company and the Holders of the
Underwriters' Warrants and Underwriters' Securities according to the aggregate
sales price of the securities being issued, and if the Company is not issuing
any securities pursuant to such registration statement, such expenses will be
borne entirely by the Holders of the Underwriters' Warrants and the
Underwriters' Securities. The provisions of Section 7(d) other than subsection
(2) shall apply to any such registration statement.
12
<PAGE>
8. Adjustments to Purchase Price and Number of Securities.
(a) Price Computation of Adjusted Purchase. Except as
hereinafter provided, in case the Company shall at any time after the date
hereof issue or sell any shares of Common Stock (other than the issuances
referred to in Section 8(g) hereof), including shares held in the Company's
treasury, for a consideration per share less than the lesser of the Purchase
Price in effect immediately prior to the issuance or sale of such shares or the
"Market Price" (as defined in Section 8(a)(6) hereof) per share of Common Stock
on the date immediately prior to the issuance or sale of such shares, or without
consideration, then forthwith upon any such issuance or sale, the Purchase Price
shall (until another such issuance or sale) be reduced to the price (calculated
to the nearest full cent) determined by dividing (1) the product of (a) the
Purchase Price in effect immediately before such issuance or sale and (b) the
sum of (i) the total number of shares of Common Stock outstanding immediately
prior to such issuance or sale, and (ii) the number of shares determined by
dividing (A) the aggregate consideration, if any, received by the Company upon
such sale or issuance, by (B) the lesser of (x) the Market Price, and (y) the
Purchase Price, in effect immediately prior to such issuance or sale; by (2) the
total number of shares of Common Stock outstanding immediately after such
issuance or sale provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock, as provided by Section 8(c)
hereof.
For the purposes of this Section 8, the term "Purchase Price"
shall mean the Purchase Price of the Underwriters' Securities set forth in
Section 6 hereof, as adjusted from time to time pursuant to the provisions of
this Section 8.
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<PAGE>
For the purposes of any computation to be made in accordance
with this Section 8(a), the following provisions shall be applicable:
(1) In case of the issuance or sale of
shares of Common Stock for a consideration part or all of which shall be cash,
the amount of the cash consideration therefor shall be deemed to be the amount
of cash received by the Company for such shares (or, if shares of Common Stock
are offered by the Company for subscription, the subscription price), before
deducting therefrom any compensation paid or discount allowed in the sale or
purchase thereof by underwriters or dealers or others performing similar
services, or any expenses incurred in connection therewith.
(2) In case of the issuance or sale
(otherwise than as a dividend or other distribution on any stock of the Company)
of shares of Common Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash shall
be deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Company.
(3) Shares of Common Stock issuable by way
of dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(4) The reclassification of securities of
the Company other than shares of Common Stock into securities including shares
of Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash
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<PAGE>
immediately prior to the close of business on the date fixed for the
determination of security holders entitled to receive such shares, and the value
of the consideration allocable to such shares of Common Stock shall be
determined as provided in Section 8(a)(2).
(5) The number of shares of Common Stock at
any one time deemed to be issued and outstanding, as determined for the purposes
of Sections 8(b)(1) and 8(b)(2) hereof, shall include the aggregate number of
shares of Common Stock issued or issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise of options, rights, warrants and upon
the conversion or exchange of convertible or exchangeable securities.
(6) As used herein, the phrase "Market
Price" at any date shall be deemed to be the last reported sale price, or, in
the case no such reported sale takes place on such day, the average of the last
reported sales 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 bid
price as furnished by the NASD through the NASD Automated Quotation System
("NASDAQ") or similar organization if NASDAQ is no longer reporting such
information, or if the Common Stock is not quoted on NASDAQ, as determined in
good faith by resolution of the Board of Directors of the Company, based on the
best information available to it.
15
<PAGE>
(b) Options, Rights, Warrants and Convertible and
Exchangeable Securities. Except in the case of the Company issuing rights to
subscribe for shares of Common Stock distributed to all the stockholders of the
Company and Holders of Underwriters' Warrants, if the Company shall at any time
after the date hereof issue options, rights or warrants to purchase shares of
Common Stock, or issue any securities convertible into or exchangeable for
shares of Common Stock (other than the issuances referred to in Section 8(g)
hereof), (i) for a consideration per share less than the lessor of (a) the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities or (b) the
Market Price, or (ii) without consideration, the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making a computation in accordance with the provisions of
Section 8(a) hereof, provided that:
(1) The aggregate maximum number of shares
of Common Stock issuable under such options, rights or warrants shall be deemed
to be issued and outstanding at the time such options, rights or warrants were
issued, and for a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time of issuance, plus
the consideration (determined in the same manner as consideration received on
the issue or sale of shares in accordance with the terms of the Underwriters'
Warrants), if any, received by the Company for such options, rights or warrants;
provided, however, that upon the expiration or other termination of such
options, rights or warrants, if any thereof shall not have been exercised, the
number of shares of Common Stock deemed to be issued and outstanding pursuant to
this Section 8(b)(1) (and for the purposes of Section 8(a)(5) hereof) shall be
reduced by such
16
<PAGE>
number of shares as to which options, warrants and/or rights shall have expired
or terminated unexercised, and such number of shares shall no longer be deemed
to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not be expired or terminated unexercised.
(2) The aggregate maximum number of shares
of Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the time
of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Common Stock in accordance with the terms of the
Underwriters' Warrants) received by the Company for such securities, plus the
minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the termination of the right to
convert or exchange such convertible or exchangeable securities (whether by
reason of redemption or otherwise), the number of shares deemed to be issued and
outstanding pursuant to this Section 8(b)(2) (and for the purpose of Section
8(a)(5) hereof) shall be reduced by such number of shares as to which the
conversion or exchange rights shall have expired or terminated unexercised, and
such number of shares shall no longer be deemed to be issued and outstanding and
the Purchase Price then in effect shall forthwith be readjusted and thereafter
be the price which it would have been had adjustment been made on the basis of
the issuance only of the shares actually issued or issuable upon the conversion
or exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall
17
<PAGE>
not have expired or terminated unexercised.
(3) If any change shall occur in the price
per share provided for in any of the options, rights or warrants referred to in
Section 8(b)(1), or in the price per share at which the securities referred to
in Section 8(b)(2) are convertible or exchangeable, such options, rights or
warrants or conversion or exchange rights, as the case may be, shall be deemed
to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
(c) Subdivision and Combination. In case the Company
shall at any time issue any shares of Common Stock in connection with a stock
dividend in shares of Common Stock or subdivide or combine the outstanding
shares of Common Stock, the Purchase Price shall forthwith be proportionately
decreased in the case of a stock dividend or a subdivision or increased in the
case of a combination.
(d) Adjustment in Number of Securities. Upon each
adjustment of the Purchase Price pursuant to the provisions of this Section 8,
the number of Underwriters' Securities issuable upon the exercise of the
Underwriters' Warrant shall be adjusted to the nearest whole share by
multiplying a number equal to the Purchase Price in effect immediately prior to
such adjustment by the number of Underwriters' Securities issuable upon exercise
of the Underwriters' Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Purchase Price.
18
<PAGE>
(e) Definition of Common Stock. For the purpose of
this Agreement, the term "Common Stock" shall mean the class of stock designated
as Common Stock in the Articles of Incorporation, of the Company as it may be
amended as of the date hereof.
(f) Reclassification, Merger or Consolidation. The
Company will not merge, reorganize or take any other action which would
terminate the Underwriters' Warrants without first making adequate provision for
the Underwriters' Warrants. In case of any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value to no par
value, or from no par value to par value, or as a result of a subdivision or
combination), or in case of any consolidation of the Company with, or merger of
the Company with, or merger of the Company into, another corporation (other than
a consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification or change of the outstanding
Common Stock except a change as a result of a subdivision or combination of such
shares or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation or other entity of the property of the Company
as an entirety, the Holders of each Underwriters' Warrant then outstanding or to
be outstanding shall have the right thereafter (until the expiration of such
Underwriters' Warrant) to purchase, upon exercise of such Underwriters' Warrant,
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holders were the owner of the shares of Common Stock
underlying the Underwriters' Warrants immediately prior to any such events at a
price equal to the product of (x) the number of shares issuable upon exercise of
the Underwriters' Warrants and (y) the Purchase
19
<PAGE>
Price in effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance, as if such Holders had
exercised the Underwriters' Warrants. In the event of a consolidation, merger,
sale or conveyance of property, the corporation formed by such consolidation or
merger, or acquiring such property, shall execute and deliver to the Holders a
supplemental underwriter's warrant agreement to such effect. Such supplemental
underwriter's warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided for in this Section 8. The provisions of
this Section 8(f) shall similarly apply to successive consolidations or mergers.
(g) No Adjustment of Purchase Price in Certain Cases.
Notwithstanding any provision to the contrary contained herein, no adjustment of
the Purchase Price shall be made:
(1) Upon the issuance or sale of (i) the
Underwriters' Warrants or the securities underlying the Underwriters' Warrants,
(ii) the securities sold pursuant to the Initial Public Offering or securities
underlying securities sold in the Initial Public Offering or securities to be
sold in a bona fide public offering pursuant to a firm commitment underwriting
or securities underlying securities sold in such firm commitment underwriting
and (iii) the shares issuable pursuant to the options, warrants, rights, stock
purchase agreements or convertible or exchangeable securities outstanding or in
effect on the date hereof as described in the prospectus relating to the Initial
Public Offering.
(2) If the amount of said adjustments shall
aggregate less than five ($.05) cents for one (1) share of Common Stock;
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
20
<PAGE>
adjustment so carried forward, shall aggregate at least five ($.05) cents for
one (1) share of Common Stock.
9. Exchange and Replacement of Warrant Certificates. Each
Underwriters' Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Underwriters' Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
Underwriters' Securities in such denominations as shall be designated by the
Holders 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
Underwriters' 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 Underwriters' Warrant Certificates, if mutilated, the
Company will make and deliver a new Underwriters' Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock and/or Redeemable Warrants upon the exercise of the Underwriters'
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests; provided, however, that if a Holder exercises all
Underwriters' Warrants held of record by such Holder the fractional interests
shall be eliminated by rounding any fraction to the nearest whole number of
shares of Common Stock or other securities, properties or rights.
21
<PAGE>
11. 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 Underwriters'
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof and the exercise of the
Redeemable Warrants. The Company covenants and agrees that, upon exercise of the
Underwriters' Warrants and payment of the Purchase Price therefor, all the
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 Underwriters' Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock to be listed (subject to official notice of issuance) on all securities
exchanges on which the Common Stock issued in the Initial Public Offering may
then be listed or quoted.
12. Notices to Underwriters' 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 Underwriters' Warrants and
their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable 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
22
<PAGE>
(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) calendar days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
23
<PAGE>
(a) If to the registered Holders of the Underwriters'
Warrants, to the address of such Holders as shown on the books of the Company;
or
(b) If to the Company to the address set forth in
Section 3 hereof or to such other address as the Company may designate by notice
to the Holders.
14. Supplements and Amendments. The Company and the
Underwriters may from time to time supplement or amend this Agreement without
the approval of any Holders of Underwriters' Warrant Certificates (other than
the Underwriters) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriters may deem
necessary or desirable and which the Company and the Underwriters deem shall not
adversely affect the interests of the Holders of Underwriters' Warrant
Certificates.
15. Binding Effect; Successors. All the covenants and
provisions of this Agreement shall be binding upon and inure to the benefit of
the Company, the Underwriters, the Holders and their respective successors and
assigns hereunder.
16. Termination. This Agreement shall terminate at the close
of business on ______________, 2002. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on the expiration of any applicable statute of limitations.
17. Governing Law; Submission to Jurisdiction. This Agreement
and each Underwriters' Warrant Certificate issued hereunder shall be deemed to
be a contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the
24
<PAGE>
laws of said state without giving effect to the rules of said state governing
the conflicts of laws. The Company, the Underwriters and the Holders hereby each
agree that any action, proceeding or claim against it arising out of, or
relating in any way to, this Agreement shall be brought and enforced in the
courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company, the Underwriters and the
Holders hereby irrevocably waive any objection to such exclusive Jurisdiction or
inconvenient forum. Any such process or summons to be served upon any of the
Company, the Underwriters and the Holders (at the option of the party bringing
such action, proceeding or claim) may be served by transmitting a copy thereof,
by registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim.
18. Entire Agreement, Modification. This Agreement (including
the Underwriting Agreement, to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and thereof. Subject to Section 14, this
Agreement may not be modified or amended except by a writing duly signed by the
Company and the Holders of a Majority in Interest of the Underwriters'
Securities (for this purpose, treating all then outstanding Underwriters'
Warrants as if they had been exercised).
19. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
25
<PAGE>
20. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
21. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Underwriters and any other registered Holders of the Underwriters'
Warrant Certificates or Underwriters' Securities 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 Holders
of the Underwriter's Warrant Certificates or Underwriters' Securities.
22. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
PHOENIX PRESCHOOL HOLDINGS, INC.
By: ______________________________
Michael Koffler
President
DUKE & CO., INC.
By:_______________________________
Name:
Title:
BRIARWOOD INVESTMENT COUNSEL
By:_______________________________
Name:
Title:
27
<PAGE>
EXHIBIT A
PHOENIX PRESCHOOL HOLDINGS, INC.
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED FOR
SALE OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT, OR (ii) AN OPINION OF COUNSEL, IF SUCH OPINION AND COUNSEL SHALL BE
REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER THE ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING ________________, 1998 THROUGH
5:00 P.M., NEW YORK TIME ON ____________, 2002
No. UW- __________ Warrants
This Warrant Certificate certifies that registered holder of
__________ Warrants to purchase initially, at any time from ______________,
1998, until 5:00 p.m., New York time on ______________, 2002 (the "Expiration
Date"), up to 127,500 shares of Phoenix Preschool Holdings, Inc.'s (the
"Company") Common Stock, $.10 par value per share (the "Common Stock"), and/or
up to 127,500 Redeemable Warrants each exercisable to purchase one share of
Common Stock (the "Common Stock Warrants"), at a purchase price of $5.10 per
share of Common Stock and $.15 per Redeemable Warrant (the "Purchase Price"),
upon the surrender of this Warrant Certificate and payment of the applicable
Purchase Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the underwriters' warrant agreement, dated as
of ______________, 1997 (the "Warrant Agreement"), by and between the Company
and Duke & Co., Inc. and Briarwood Investment Counsel (the "Underwriters") named
in the Underwriting Agreement, dated ______________, 1997 between the Company
and the Underwriters. Payment of the Purchase Price shall be made by certified
or cashier's check or money order payable to the order of the Company.
No Warrant may be exercised after 5:00 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
28
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement
between the Company and the Underwriters, 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 Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the respective Purchase Prices and the type and/or number of the
Company's securities issuable upon the exercise of these Warrants, 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 Purchase Price and the number and/or type of securities issuable upon the
exercise of the Warrants; 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 Warrants shall be issued to the transferee(s) in
exchange as provided herein, 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 Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
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.
[THE REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
29
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
certificate this _____ day of _______________, 1997.
PHOENIX PRESCHOOL HOLDINGS, INC.
By: __________________________________
Michael Koffler, President
ATTEST:
By: __________________________
30
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________________ hereby sells,
assigns and transfers unto _________________________________
(Please print name and address 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 Phoenix
Preschool Holdings, Inc., with full power of substitution.
Dated: _________________________
Signature ______________________________
(Signature must conform in all respects
to the name of the holder as specified
on the face of the Warrant Certificate.)
___________________________________
(Insert Social Security or Other
Identifying Number of Holders)
31
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase shares of Common Stock and/or Redeemable
Warrants and herewith tenders in payment of such securities a certified or
cashier's check or money order payable to the order of Phoenix Preschool
Holdings, Inc. in the amount of $ _________, all in accordance with the terms
hereof. The undersigned requests that certificates for such securities be
registered in the name of ___________________________________ whose address is
__________________________________ and that such certificates be delivered to
_________________________________________ whose address is _____________________
____________________________.
Dated: _________________________
Signature ______________________________
(Signature must conform in all respects
to the name of the holder as specified
on the face of the Warrant Certificate.)
___________________________________
(Insert Social Security or Other
Identifying Number of Holders)
<PAGE>
BLANK ROME COMISKY & McCAULEY
COUNSELORS AT LAW
ONE LOGAN SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-2599
215-569-5500
TWX 710-670-1073-BLARCOM
FAX 215-569-5555
1620 POND ROAD, SUITE 200 1220 MARKET STREET, 8TH FLOOR
ALLENTOWN, PA 18104-2255 WILMINGTON, DE 19801-2535
610-395-1010 302-425-6400
1400 NORTH PROVIDENCE ROAD 1156 15TH STREET, NW, SUITE 550
MEDIA, PA 19063-2051 WASHINGTON, DC 20005-1704
610-891-7800 202-785-4100
210 LAKE DRIVE EAST 1401 FORUM WAY
CHERRY HILL, NJ 08002-1164 WEST PALM BEACH, FL
609-779-3600 33401-2353
407-686-8100
November 20, 1997
Board of Directors
Phoenix Preschool Holdings, Inc.
31st Floor
150 East 50th Street
New York, NY 10155
Re: Phoenix Preschool Holdings, Inc.
Registration Statement on Form SB-2
File No. 333-31407
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Phoenix Preschool Holdings, Inc. (the
"Company") in connection with the preparation of its Registration Statement on
Form SB-2, as amended ("Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the offer and sale by the Company, in a firm commitment underwritten offering,
of (i) up to 1,270,500 shares of its common stock, par value $0.10 per share
("Common Stock") and (ii) on behalf of the selling securityholders identified in
the Registration Statement, 1,275,000 redeemable stock purchase warrants
("Redeemable Warrants") (each to purchase an additional share of such Common
Stock); (iii) up to 191,250 shares of Common Stock and Warrants to be purchased
at the option of the Underwriters (as defined in the Registration Statement) to
cover over-allotments, if any (the "Over-allotment Securities"), and (iv)
warrants to the Underwriters ("Underwriters' Warrants") to purchase an
additional 127,500 shares of Common Stock and Warrants. The shares of Common
Stock to be sold as part of the firm commitment underwriting are referred to as
the "Firm Commitment Shares." The shares of Common Stock to be issued pursuant
to Redeemable Warrants are referred to as the "Warrant Shares." The shares of
Common Stock to be issued pursuant to Underwriters' Warrants, including Common
Stock to be received upon exercise of Redeemable Warrants which are acquirable
under the Underwriters' Warrants, are referred to as "Underwriters' Shares."
<PAGE>
Although as counsel to the Company we have advised the Company in
connection with a variety of matters referred to us by it, our services are
limited to specific matters so referred. Consequently, we may not have knowledge
of many transactions in which the Company engaged or its day-to-day operations.
In rendering this opinion, we have examined only the following
documents: (i) the Company's Articles of Incorporation and Bylaws; (ii)
resolutions adopted by the Company's Board of Directors and its sole stockholder
as contained in the Company's minute books; and (iii) the Registration
Statement.
We have not made any independent investigation in rendering this
opinion other than the document examination described above. Our opinion is
therefore qualified in all respects by the scope of that document examination.
We make no representation as to the sufficiency of our investigation for any
particular purposes. We have assumed and relied on the truth, completeness,
authenticity and due authorization of all documents and records examined and the
genuineness of all signatures. This opinion is limited to the Pennsylvania
Business Corporation Law. In rendering this opinion, we have assumed compliance
with all other laws, including federal laws.
Based upon and subject to the limitations stated herein, we are of the
opinion that when sold in the manner and for the consideration contemplated by
the Registration Statement (including the exhibits attached thereto), and when
all securities laws have been complied with:
1. The Firm Commitment Shares have been duly authorized and when
issued, delivered and paid for in the manner described in the Registration
Statement, will be legally issued, fully paid and non-assessable.
2. The Over-allotment Securities have been duly authorized, and when
issued, delivered and paid for in the manner described in the Registration
Statement, will be legally issued, fully paid and non-assessable.
3. The Warrant Shares have been duly authorized, and when issued,
delivered and paid for upon exercise of the Redeemable Warrants in the manner
described in the form of Warrant Agreement filed as Exhibit 4.2 to the
Registration Statement (the "Warrant Agreement"), will be legally issued, fully
paid and non-assessable.
4. The Underwriters' Shares have been duly authorized and when issued,
delivered and paid for in the manner described in the Underwriters' Warrants
filed as Exhibit 4.5 to the Registration Statement and, in the case of
Redeemable Warrants issued to Underwriters, the Warrant Agreement, will be
legally issued, fully paid and non-assessable.
5. The Redeemable Warrants, including Redeemable Warrants obtained upon
exercise of the Underwriters' Warrants, and the Underwriters' Warrants, have
been duly authorized and when issued, delivered and paid for in the manner
described in the Registration Statement, will be legally issued, fully paid and
non-assessable.
<PAGE>
This opinion is given as of the date hereof. We assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that is a part of the Registration Statement.
Sincerely,
/s/ Blank Rome Comisky & McCauley
-------------------------------------
BLANK ROME COMISKY & McCAULEY
<PAGE>
PHOENIX PRESCHOOL HOLDINGS, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
1. Purpose of Plan
The purpose of this Amended and Restated Stock Option Plan (the "Plan")
is to provide additional incentive to officers, other key employees, and
directors of, and important consultants to, Phoenix Preschool Holdings, Inc., a
Delaware Corporation (the "Company"), and each present or future parent or
subsidiary corporation, by encouraging them to invest in shares of the Company's
common stock, $.10 par value per share ("Common Stock"), and thereby acquire a
proprietary interest in the Company and an increased personal interest in the
Company's continued success and progress.
2. Aggregate Number of Shares
1,527,277 shares of the Company's Common Stock shall be the aggregate
number of shares which may be issued under this Plan. Notwithstanding the
foregoing, in the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee (defined in Section 4(a)),
deems in its sole discretion to be similar circumstances, the aggregate number
and kind of shares which may be issued under this Plan shall be appropriately
adjusted in a manner determined in the sole discretion of the Committee.
Reacquired shares of the Company's Common Stock, as well as unissued shares, may
be used for the purpose of this Plan. Common Stock of the Company subject to
options which have terminated unexercised, either in whole or in part, shall be
available for future options granted under this Plan.
3. Class of Persons Eligible to Receive Options
All officers and key employees of the Company and of any present or
future Company parent or subsidiary corporation are eligible to receive an
option or options under this Plan. All directors of, and important consultants
to, the Company and of any present or future Company parent or subsidiary
corporation are also eligible to receive an option or options under this Plan.
The individuals who shall, in fact, receive an option or options shall be
selected by the Committee, in its sole discretion, except as otherwise specified
in Section 4 hereof. No individual may receive options under this Plan for more
than the total number of shares of the Company's Common Stock authorized for
issuance under this Plan.
4. Administration of Plan
(a) This Plan shall be administered either by the Company's
Board of Directors or an option committee appointed by the Company's Board of
Directors. The Committee appointed to administer the Plan, if any, shall consist
of a minimum of two and a maximum of five members of the Board of Directors,
each of whom shall be a "disinterested person" within
<PAGE>
the meaning of Rule 16b-3(c)(2)(i) under the Securities Exchange Act of 1934, as
amended, or any future corresponding rule. The term "Committee," as used herein,
shall refer to either the Company's Board of Directors or such Committee,
depending upon who is administering the Plan. The Committee shall, in addition
to its other authority and subject to the provisions of this Plan, determine
which individuals shall in fact be granted an option or options, whether the
option shall be an Incentive Stock Option or a Non-Qualified Stock Option (as
such terms are defined in Section 5(a)), the number of shares to be subject to
each of the options, the time or times at which the options shall be granted,
the rate of option exercisability, and, subject to Section 5 hereof, the price
at which each of the options is exercisable and the duration of the option.
(b) The Committee shall adopt such rules for the conduct of
its business and administration of this Plan as it considers desirable. A
majority of the members of the Committee shall constitute a quorum for all
purposes. The vote or written consent of a majority of the members of the
Committee on a particular matter shall constitute the act of the Committee on
such matter. The Committee shall have the right to construe the Plan and the
options issued pursuant to it, to correct defects and omissions and to reconcile
inconsistencies to the extent necessary to effectuate the Plan and the options
issued pursuant to it, and such action shall be final, binding and conclusive
upon all parties concerned. No member of the Committee or the Board of Directors
shall be liable for any act or omission (whether or not negligent) taken or
omitted in good faith, or for the exercise of an authority or discretion granted
in connection with the Plan to a Committee or the Board of Directors, or for the
acts or omissions of any other members of a Committee or the Board of Directors.
Subject to the numerical limitations on Committee membership set forth in
Section 4(a) hereof, the Board of Directors may at any time appoint additional
members of the Committee and may at any time remove any member of the Committee
with or without cause. Vacancies in the Committee, however caused, may be filled
by the Board of Directors, if it so desires.
5. Incentive Stock Options and Non-Qualified Stock Options
(a) Options issued pursuant to this Plan may be either
Incentive Stock Options granted pursuant to Section 5(b) hereof or Non-Qualified
Stock Options granted pursuant to Section 5(c) hereof, as determined by the
Committee. An "Incentive Stock Option" is an option which satisfies all of the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") and the regulations thereunder, and a "Non-Qualified Stock Option"
is an option which either does not satisfy all of those requirements or the
terms of the option provide that it will not be treated as an Incentive Stock
Option. The Committee may grant both an Incentive Stock Option and a
Non-Qualified Stock Option to the same person, or more than one of each type of
option to the same person. The option price for options issued under this Plan
shall be equal at least to the fair market value (as defined below) of the
Company's Common Stock on the date of the grant of the option. The fair market
value of the Company's Common Stock on any particular date shall mean the last
reported sale price of a share of the Company's Common Stock on any stock
exchange on which such stock is then listed or admitted to trading, or on the
NASDAQ National Market System or SmallCap NASDAQ, on such date, or if no sale
took place on such day, the last such date on which a sale took place, or if the
Common Stock is not then quoted on the NASDAQ National Market System or SmallCap
NASDAQ, or listed or admitted to trading on any stock exchange, the average of
the bid and asked prices in the over-the-counter market on such date, or if
2
<PAGE>
none of the foregoing, a price determined in good faith by the Committee to
equal the fair market value per share of the Common Stock.
(b) Subject to the authority of the Committee set forth in
Section 4(a) hereof, Incentive Stock Options issued pursuant to this Plan shall
be issued substantially in the form set forth in Appendix I hereof, which form
is hereby incorporated by reference and made a part hereof, and shall contain
substantially the terms and conditions set forth therein. Incentive Stock
Options shall not be exercisable after the expiration of ten years from the date
such options are granted, unless terminated earlier under the terms of the
option, except that options granted to individuals described in Section
422(b)(6) of the Code shall conform to the provisions of Section 422(c)(5) of
the Code. At the time of the grant of an Incentive Stock Option hereunder, the
Committee may, in its discretion, amend or supplement any of the option terms
contained in Appendix I for any particular optionee, provided that the option as
amended or supplemented satisfies the requirements of Section 422 of the Code
and the regulations thereunder. Each of the options granted pursuant to this
Section 5(b) is intended, if possible, to be an "Incentive Stock Option" as that
term is defined in Section 422 of the Code and the regulations thereunder. In
the event this Plan or any option granted pursuant to this Section 5(b) is in
any way inconsistent with the applicable legal requirements of the Code or the
regulations thereunder for an Incentive Stock Option, this Plan and such option
shall be deemed automatically amended as of the date hereof to conform to such
legal requirements, if such conformity may be achieved by amendment.
(c) Subject to the authority of the Committee set forth in
Section 4(a) hereof, Non-Qualified Stock Options issued to officers and other
key employees pursuant to this Plan shall be issued substantially in the form
set forth in Appendix II hereof, which form is hereby incorporated by reference
and made a part hereof, and shall contain substantially the terms and conditions
set forth therein. Subject to the authority of the Committee set forth in
Section 4(a) hereof, Non-Qualified Stock Options issued to directors and
important consultants pursuant to this Plan shall be issued substantially in the
form set forth in Appendix III hereof, which form is hereby incorporated by
reference and made a part hereof, and shall contain substantially the terms and
conditions set forth therein. Non-Qualified Stock Options shall expire ten years
after the date they are granted, unless terminated earlier under the option
terms. At the time of granting a Non-Qualified Stock Option hereunder, the
Committee may, in its discretion, amend or supplement any of the option terms
contained in Appendix II or Appendix III for any particular optionee.
(d) Neither the Company nor any of its current or future
parent, subsidiaries or affiliates, nor their officers, directors, shareholders,
stock option plan committees, employees or agents shall have any liability to
any optionee in the event (i) an option granted pursuant to Section 5(b) hereof
does not qualify as an "Incentive Stock Option" as that term is used in Section
422 of the Code and the regulations thereunder; (ii) any optionee does not
obtain the tax treatment pertaining to an Incentive Stock Option; or (iii) any
option granted pursuant to Section 5(c) hereof is an "Incentive Stock Option."
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<PAGE>
6. Amendment, Supplement, Suspension and Termination
Options shall not be granted pursuant to this Plan after the
expiration of ten years from the date the Plan is adopted by the Board of
Directors of the Company. The Board of Directors reserves the right at any time,
and from time to time, to amend or supplement this Plan in any way, or to
suspend or terminate it, effective as of such date, which date may be either
before or after the taking of such action, as may be specified by the Board of
Directors; provided, however, that such action shall not affect options granted
under the Plan prior to the actual date on which such action occurred. If an
amendment or supplement of this Plan is required by the Code or the regulations
thereunder to be approved by the shareholders of the Company in order to permit
the granting of "Incentive Stock Options" (as that term is defined in Section
422 of the Code and regulations thereunder) pursuant to the amended or
supplemented Plan, such amendment or supplement shall also be approved by the
shareholders of the Company in such manner as is prescribed by the Code and the
regulations thereunder. If the Board of Directors voluntarily submits a proposed
amendment, supplement, suspension or termination for shareholder approval, such
submission shall not require any future amendments, supplements, suspensions or
terminations (whether or not relating to the same provision or subject matter)
to be similarly submitted for shareholder approval.
7. Effectiveness of Plan
This Plan shall become effective on the date of its adoption
by the Company's Board of Directors, subject however to approval by the holders
of the Company's Common Stock in the manner as prescribed in the Code and the
regulations thereunder. Options may be granted under this Plan prior to
obtaining shareholder approval, provided such options shall not be exercisable
until shareholder approval is obtained.
8. General Conditions
(a) Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any employee the right to continue in
the employ of the Company or any affiliated or subsidiary corporation or
interfere in any way with the rights of the Company or any affiliated or
subsidiary corporation to terminate his employment in any way.
(b) Nothing contained in this Plan or any option granted
pursuant to this Plan shall confer upon any director or consultant the right to
continue as a director of, or consultant to, the Company or any affiliated or
subsidiary corporation or interfere in any way with the rights of the Company or
any affiliated or subsidiary corporation, or their respective shareholders, to
terminate the directorship of any such director or the consultancy relationship
of any such consultant.
(c) Corporate action constituting an offer of stock for sale
to any person under the terms of the options to be granted hereunder shall be
deemed complete as of the date when the Committee authorizes the grant of the
option to the such person, regardless of when the option is actually delivered
to such person or acknowledged or agreed to by him.
4
<PAGE>
(d) The terms "parent corporation" and "subsidiary
corporation" as used throughout this Plan, and the options granted pursuant to
this Plan, shall (except as otherwise provided in the option form) have the
meaning that is ascribed to that term when contained in Section 422(b) of the
Code and the regulations thereunder, and the Company shall be deemed to be the
grantor corporation for purposes of applying such meaning.
(e) References in this Plan to the Code shall be deemed to
also refer to the corresponding provisions of any future United States revenue
law.
(f) The use of the masculine pronoun shall include the
feminine gender whenever appropriate.
5
<PAGE>
APPENDIX I
INCENTIVE STOCK OPTION
To: ____________________________________
Name
____________________________________
Address
Date of Grant: _________________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $.10 par value per share ("Common
Stock"), of Phoenix Preschool Holdings, Inc., a Delaware corporation (the
"Company") at a price of $_____ per share pursuant to the Company's Amended and
Restated Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to two years
from the date of grant, your option may be exercised for up to 33 1/3% of the
total number of shares subject to the option minus the number of shares
previously purchased by exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Each
succeeding year thereafter, your option may be exercised for up to an additional
33 1/3% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Thus, this
option is fully exercisable on and after three years after the date of grant,
except if terminated earlier as provided herein. This option shall terminate and
is not exercisable after ten years from the date of its grant (the "Scheduled
Termination Date"), except if terminated earlier as hereafter provided.
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems in
its sole discretion) and your vesting date may accelerate accordingly. A "Change
of Control" shall be deemed to have occurred upon the happening of any of the
following events:
6
<PAGE>
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). Any assignment of stock shall be
in a form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes if the Secretary
deems such guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which your employment by the Company or
a Company subsidiary corporation is terminated (whether such termination be
voluntary or involuntary) other than by reason of disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder, or death, in which case your option will
terminate one year from the date of termination of employment due to disability
or death (but in no event later than the Scheduled Termination Date). After the
date your employment is terminated, as aforesaid, you may exercise this option
only for the number of shares which you had a right to purchase and did not
purchase on the date your employment terminated. If you are employed by a
Company subsidiary corporation, your employment shall be deemed to have
terminated on the date your employer ceases to be a Company subsidiary
corporation, unless you are on that date transferred to the Company or another
Company subsidiary corporation. Your employment shall not be deemed to have
terminated if you are transferred from the Company to a Company subsidiary
corporation, or vice versa, or from one Company subsidiary corporation to
another Company subsidiary corporation.
If you die while employed by the Company or a Company subsidiary
corporation, your executor or administrator, as the case may be, may, at any
time within one year after the date of your death (but in no event later than
the Scheduled Termination Date), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
employment with the Company or a Company parent or subsidiary corporation is
terminated by reason of your becoming disabled (within the meaning of Section
22(e)(3) of the Code and the regulations thereunder), you or your legal guardian
or custodian may at any time within one year after the date of such termination
(but in no event later than the Scheduled Termination Date), exercise the option
as to any shares which you had a right to purchase and did not purchase prior to
such termination. Your executor, administrator, guardian or custodian must
present proof of his authority satisfactory to the Company prior to being
allowed to exercise this option.
7
<PAGE>
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
In the event of a liquidation of the Company, including (but not
limited to) a transfer of assets followed by a liquidation of the Company, the
Committee shall have the right to terminate this option upon thirty (30) days
prior written notice to you, notwithstanding anything to the contrary contained
in this option.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of the Company in the manner prescribed by the Code
and the regulations thereunder;
(b) Until this option and the optioned shares are approved
and/or registered with such federal, state and local regulatory bodies or
agencies and securities exchanges as the Company may deem necessary or
desirable; or
(c) During any period of time in which the Company deems that
the exercisability of this option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay
(which may include payment through the surrender of Common Stock, unless
prohibited by the Committee) (i) all federal, state and local income tax
withholding required to be withheld by the Company in connection with the option
exercise and (ii) the employee's portion of other federal, state and local
payroll and other taxes due in connection with the option exercise.
The following two paragraphs shall be applicable if, on the
date of exercise of this option, the Common Stock to be purchased pursuant to
such exercise has not been registered under
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<PAGE>
the Securities Act of 1933, as amended, and under applicable state securities
laws, and shall continue to be applicable for so long as such registration has
not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, rep, deem advisable to avoid any violation of federal,
state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall, if
possible, be an "Incentive Stock Option" as that term is used in Section 422 of
the Code and the regulations thereunder. In the event this option is in any way
inconsistent with the legal requirements of the Code or the regulations
thereunder for an "Incentive Stock Option," this option shall be deemed
automatically amended as of the date hereof to conform to such legal
requirements, if such conformity may be achieved by amendment.
Nothing herein shall modify your status as an at-will employee of the
Company. Further, nothing herein guarantees you employment for any specified
period of time. This means that either you or the Company may terminate your
employment at any time for any reason, or no reason. You recognize that, for
instance, you may terminate your employment
9
<PAGE>
or the Company may terminate your employment prior to the date on which your
option becomes vested.
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
PHOENIX PRESCHOOL HOLDINGS, INC.
By:______________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
_________________________________________ _______________________
(Signature) (Date)
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<PAGE>
APPENDIX II
NON-QUALIFIED STOCK OPTION FOR OFFICERS AND OTHER KEY EMPLOYEES
To: ____________________________________
Name
____________________________________
Address
Date of Grant: _________________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $.10 par value per share ("Common
Stock"), of Phoenix Preschool Holdings, Inc., a Delaware corporation (the
"Company") at a price of $ per share pursuant to the Company's Amended and
Restated Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to two years
from the date of grant, your option may be exercised for up to 33 1/3% of the
total number of shares subject to the option minus the number of shares
previously purchased by exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Each
succeeding year thereafter, your option may be exercised for up to an additional
33 1/3% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Thus, this
option is fully exercisable on and after three years after the date of grant,
except if terminated earlier as provided herein. This option shall terminate and
is not exercisable after ten years from the date of its grant (the "Scheduled
Termination Date"), except if terminated earlier as hereafter provided.
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems
11
<PAGE>
in its sole discretion) and your vesting date may accelerate accordingly. A
"Change of Control" shall be deemed to have occurred upon the happening of any
of the following events:
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). Any assignment of stock shall be
in a form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes if the Secretary
deems such guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which your employment by the Company or
a Company subsidiary corporation is terminated (whether such termination be
voluntary or involuntary) other than by reason of disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder, or death, in which case your option will
terminate one year from the date of termination of employment due to disability
or death (but in no event later than the Scheduled Termination Date). After the
date your employment is terminated, as aforesaid, you may exercise this option
only for the number of shares which you had a right to purchase and did not
purchase on the date your employment terminated. If you are employed by a
Company subsidiary corporation, your employment shall be deemed to have
terminated on the date your employer ceases to be a Company subsidiary
corporation, unless you are on that date transferred to the Company or another
Company subsidiary corporation. Your employment shall not be deemed to have
terminated if you are transferred from the Company to a Company subsidiary
corporation, or vice versa, or from one Company subsidiary corporation to
another Company subsidiary corporation.
If you die while employed by the Company or a Company subsidiary
corporation, your executor or administrator, as the case may be, may, at any
time within one year after the date of your death (but in no event later than
the Scheduled Termination Date), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
employment with the Company or a Company parent or subsidiary corporation is
terminated by reason of your becoming disabled (within the meaning of Section
22(e)(3) of the Code and the regulations thereunder), you or your legal guardian
or custodian may at any time within one year after the date of such termination
(but in no event later than the Scheduled Termination Date),
12
<PAGE>
exercise the option as to any shares which you had a right to purchase and did
not purchase prior to such termination. Your executor, administrator, guardian
or custodian must present proof of his authority satisfactory to the Company
prior to being allowed to exercise this option.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
In the event of a liquidation of the Company, including (but not
limited to) a transfer of assets followed by a liquidation of the Company, the
Committee shall have the right to terminate this option upon thirty (30) days
prior written notice to you, notwithstanding anything to the contrary contained
in this option.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of the Company in the manner prescribed by the Code
and the regulations thereunder;
(b) Until this option and the optioned shares are approved
and/or registered with such federal, state and local regulatory bodies or
agencies and securities exchanges as the Company may deem necessary or
desirable; or
(c) During any period of time in which the Company deems that
the exercisability of this option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay
(which may include payment through the surrender of Common Stock, unless
prohibited by the Committee) (i) all federal, state and local income tax
withholding required to be withheld by the Company in connection with the option
exercise and (ii) the employee's portion of other federal, state and local
payroll and other taxes due in connection with the option exercise.
13
<PAGE>
If in any year in which this option is exercised the Company
is entitled to a corporate federal income tax deduction for the excess of the
fair market value of the stock acquired under this option over the option price,
the Company agrees to pay to you, within ten days after the date of exercise, an
amount equal to 25% of such excess in order to assist you in paying your federal
and state income taxes resulting from the exercise of this option.
The following two paragraphs shall be applicable if, on the
date of exercise of this option, the Common Stock to be purchased pursuant to
such exercise has not been registered under the Securities Act of 1933, as
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
14
<PAGE>
Nothing herein shall modify your status as an at-will employee of the
Company. Further, nothing herein guarantees you employment for any specified
period of time. This means that either you or the Company may terminate your
employment at any time for any reason, or no reason. You recognize that, for
instance, you may terminate your employment or the Company may terminate your
employment prior to the date on which your option becomes vested.
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
PHOENIX PRESCHOOL HOLDINGS, INC.
By: ___________________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
________________________________________ ___________________________
(Signature) (Date)
15
<PAGE>
APPENDIX III
NON-QUALIFIED STOCK OPTION FOR DIRECTORS
AND IMPORTANT CONSULTANTS
To: ______________________________
Name
______________________________
Address
Date of Grant: ___________________
You are hereby granted an option, effective as of the date hereof, to
purchase __________ shares of common stock, $.10 par value per share ("Common
Stock"), of Phoenix Preschool Holdings, Inc., a Delaware corporation (the
"Company") at a price of $_____ per share pursuant to the Company's Amended and
Restated Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to two years
from the date of grant, your option may be exercised for up to 33 1/3% of the
total number of shares subject to the option minus the number of shares
previously purchased by exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Each
succeeding year thereafter, your option may be exercised for up to an additional
33 1/3% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Thus, this
option is fully exercisable on and after three years after the date of grant,
except if terminated earlier as provided herein. This option shall terminate and
is not exercisable after ten years from the date of its grant (the "Scheduled
Termination Date"), except if terminated earlier as hereafter provided.
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee
16
<PAGE>
deems in its sole discretion) and your vesting date may accelerate accordingly.
A "Change of Control" shall be deemed to have occurred upon the happening of any
of the following events:
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). Any assignment of stock shall be
in a form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes if the Secretary
deems such guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which you cease for any reason to be a
director of, or consultant to, the Company or a subsidiary corporation (whether
by death, disability, resignation, removal, failure to be reappointed, reelected
or otherwise, or the expiration of any consulting arrangement, and regardless of
whether the failure to continue as a director or consultant was for cause or
without cause or otherwise), but in no event later than ten years from the date
this option is granted. After the date you cease to be a director or consultant,
you may exercise this option only for the number of shares which you had a right
to purchase and did not purchase on the date you ceased to be a director or
consultant. If you are a director of a subsidiary corporation, your directorship
shall be deemed to have terminated on the date such company ceases to be a
subsidiary corporation, unless you are also a director of the Company or another
subsidiary corporation, or on that date became a director of the Company or
another subsidiary corporation. Your directorship or consultancy shall not be
deemed to have terminated if you cease being a director of, or consultant to,
the Company or a subsidiary corporation but are or concurrently therewith become
a director of, or consultant to, the Company or another subsidiary corporation.
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject
17
<PAGE>
to this option and the option price of such shares shall be appropriately
adjusted in a manner to be determined in the sole discretion of the Committee.
In the event of a liquidation of the Company, including (but not
limited to) a transfer of assets followed by a liquidation of the Company, the
Committee shall have the right to terminate this option upon thirty (30) days
prior written notice to you, notwithstanding anything to the contrary contained
in this option.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is
approved by the shareholders of the Company in the manner prescribed by the Code
and the regulations thereunder;
(b) Until this option and the optioned shares are approved
and/or registered with such federal, state and local regulatory bodies or
agencies and securities exchanges as the Company may deem necessary or
desirable; or
(c) During any period of time in which the Company deems that
the exercisability of this option, the offer to sell the shares optioned
hereunder, or the sale thereof, may violate a federal, state, local or
securities exchange rule, regulation or law, or may cause the Company to be
legally obligated to issue or sell more shares than the Company is legally
entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay
(which may include payment through the surrender of Common Stock, unless
prohibited by the Committee) (i) all federal, state and local income tax
withholding required to be withheld by the Company in connection with the option
exercise and (ii) the employee's portion of other federal, state and local
payroll and other taxes due in connection with the option exercise.
The following two paragraphs shall be applicable if, on the
date of exercise of this option, the Common Stock to be purchased pursuant to
such exercise has not been registered under the Securities Act of 1933, as
amended, and under applicable state securities laws, and shall continue to be
applicable for so long as such registration has not occurred:
18
<PAGE>
(a) The optionee hereby agrees, warrants and represents that
he will acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, rep, deem advisable to avoid any violation of federal,
state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for
19
<PAGE>
the decision and award and shall be binding and conclusive on you and the
Company. Further, neither you nor the Company shall appeal any such award.
Judgment of a court of competent jurisdiction may be entered upon the award and
may be enforced as such in accordance with the provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
PHOENIX PRESCHOOL HOLDINGS, INC.
By: ____________________________________
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
________________________________________ ____________________
(Signature) (Date)
20
<PAGE>
NON-QUALIFIED STOCK OPTION
To: Michael Koffler
Name
150 East 58th Street
New York, New York 10155
Address
Date of Grant: December __, 1997
You are hereby granted an option, effective as of the date hereof, to
purchase 1,000,000 shares of common stock, $.10 par value per share ("Common
Stock"), of Phoenix Preschool Holdings, Inc., a Delaware corporation (the
"Company") at a price of $ 4.25 per share pursuant to the Company's Amended and
Restated Stock Option Plan (the "Plan").
Your option may first be exercised on and after one year from the date
of grant, but not before that time. On and after one year and prior to two years
from the date of grant, your option may be exercised for up to 33 1/3% of the
total number of shares subject to the option minus the number of shares
previously purchased by exercise of the option (as adjusted for any change in
the outstanding shares of the Common Stock of the Company by reason of a stock
dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Each
succeeding year thereafter, your option may be exercised for up to an additional
33 1/3% of the total number of shares subject to the option minus the number of
shares previously purchased by exercise of the option (as adjusted for any
change in the outstanding shares of the Common Stock of the Company by reason of
a stock dividend, stock split, combination of shares, recapitalization, merger,
consolidation, transfer of assets, reorganization, conversion or what the
Committee deems in its sole discretion to be similar circumstances). Thus, this
option is fully exercisable on and after three years after the date of grant,
except if terminated earlier as provided herein. This option shall terminate and
is not exercisable after ten years from the date of its grant (the "Scheduled
Termination Date"), except if terminated earlier as hereafter provided.
In the event of a "Change of Control" (as defined below) of the
Company, your option may, from and after the date of the Change of Control, and
notwithstanding the immediately preceding paragraph, be exercised for up to 100%
of the total number of shares then subject to the option minus the number of
shares previously purchased upon exercise of the option (as adjusted for stock
dividends, stock splits, combinations of shares and what the Committee deems in
its sole discretion) and your vesting date may accelerate accordingly. A "Change
of Control" shall be deemed to have occurred upon the happening of any of the
following events:
1. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
<PAGE>
2. Any other event deemed to constitute a "Change of Control" by the
Committee.
You may exercise your option by giving written notice to the Secretary
of the Company on forms supplied by the Company at its then principal executive
office, accompanied by payment of the option price for the total number of
shares you specify that you wish to purchase. The payment may be in any of the
following forms: (a) cash, which may be evidenced by a check and includes cash
received from a stock brokerage firm in a so-called "cashless exercise"; (b)
(unless prohibited by the Committee) certificates representing shares of Common
Stock of the Company, which will be valued by the Secretary of the Company at
the fair market value per share of the Company's Common Stock (as determined in
accordance with the Plan) on the date of delivery of such certificates to the
Company, accompanied by an assignment of the stock to the Company; or (c)
(unless prohibited by the Committee) any combination of cash and Common Stock of
the Company valued as provided in clause (b). Any assignment of stock shall be
in a form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes if the Secretary
deems such guarantees necessary or desirable.
Your option will, to the extent not previously exercised by you,
terminate three months after the date on which your employment by the Company or
a Company subsidiary corporation is terminated (whether such termination be
voluntary or involuntary) other than by reason of disability as defined in
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the regulations thereunder, or death, in which case your option will
terminate one year from the date of termination of employment due to disability
or death (but in no event later than the Scheduled Termination Date). After the
date your employment is terminated, as aforesaid, you may exercise this option
only for the number of shares which you had a right to purchase and did not
purchase on the date your employment terminated. If you are employed by a
Company subsidiary corporation, your employment shall be deemed to have
terminated on the date your employer ceases to be a Company subsidiary
corporation, unless you are on that date transferred to the Company or another
Company subsidiary corporation. Your employment shall not be deemed to have
terminated if you are transferred from the Company to a Company subsidiary
corporation, or vice versa, or from one Company subsidiary corporation to
another Company subsidiary corporation.
If you die while employed by the Company or a Company subsidiary
corporation, your executor or administrator, as the case may be, may, at any
time within one year after the date of your death (but in no event later than
the Scheduled Termination Date), exercise the option as to any shares which you
had a right to purchase and did not purchase during your lifetime. If your
employment with the Company or a Company parent or subsidiary corporation is
terminated by reason of your becoming disabled (within the meaning of
Section 22(e)(3) of the Code and the regulations thereunder), you or your legal
guardian or custodian may at any time within one year after the date of such
termination (but in no event later than the Scheduled Termination Date),
exercise the option as to any shares which you had a right to purchase and did
not purchase prior to such termination. Your executor, administrator, guardian
or custodian must present proof of his authority satisfactory to the Company
prior to being allowed to exercise this option.
<PAGE>
In the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee deems in its sole discretion to
be similar circumstances, the number and kind of shares subject to this option
and the option price of such shares shall be appropriately adjusted in a manner
to be determined in the sole discretion of the Committee.
IN THE EVENT OF A LIQUIDATION OF THE COMPANY, INCLUDING (BUT NOT
LIMITED TO) A TRANSFER OF ASSETS FOLLOWED BY A LIQUIDATION OF THE COMPANY, THE
COMMITTEE SHALL HAVE THE RIGHT TO TERMINATE THIS OPTION UPON THIRTY (30) DAYS
PRIOR WRITTEN NOTICE TO YOU, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED
IN THIS OPTION.
This option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during your lifetime only by you,
including, for this purpose, your legal guardian or custodian in the event of
disability. Until the option price has been paid in full pursuant to due
exercise of this option and the purchased shares are delivered to you, you do
not have any rights as a shareholder of the Company. The Company reserves the
right not to deliver to you the shares purchased by virtue of the exercise of
this option during any period of time in which the Company deems, in its sole
discretion, that such delivery would violate a federal, state, local or
securities exchange rule, regulation or law.
Notwithstanding anything to the contrary contained herein, this option
is not exercisable until all the following events occur and during the following
periods of time:
(a) Until the Plan pursuant to which this option is granted is approved
by the shareholders of the Company in the manner prescribed by the Code and the
regulations thereunder;
(b) Until this option and the optioned shares are approved and/or
registered with such federal, state and local regulatory bodies or agencies and
securities exchanges as the Company may deem necessary or desirable; or
(c) During any period of time in which the Company deems that the
exercisability of this option, the offer to sell the shares optioned hereunder,
or the sale thereof, may violate a federal, state, local or securities exchange
rule, regulation or law, or may cause the Company to be legally obligated to
issue or sell more shares than the Company is legally entitled to issue or sell.
(d) Until you have paid or made suitable arrangements to pay (which may
include payment through the surrender of Common Stock, unless prohibited by the
Committee) (i) all federal, state and local income tax withholding required to
be withheld by the Company in connection with the option exercise and (ii) the
employee's portion of other federal, state and local payroll and other taxes due
in connection with the option exercise.
If in any year in which this option is exercised the Company is
entitled to a corporate federal income tax deduction for the excess of the fair
market value of the stock acquired under this option over the option price, the
Company agrees to pay to you, within ten days after the date of exercise, an
amount equal to 25% of such excess in order to assist you in paying your federal
and state income taxes resulting from the exercise of this option.
<PAGE>
The following two paragraphs shall be applicable if, on the date of
exercise of this option, the Common Stock to be purchased pursuant to such
exercise has not been registered under the Securities Act of 1933, as amended,
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) The optionee hereby agrees, warrants and represents that he will
acquire the Common Stock to be issued hereunder for his own account for
investment purposes only, and not with a view to, or in connection with, any
resale or other distribution of any of such shares, except as hereafter
permitted. The optionee further agrees that he will not at any time make any
offer, sale, transfer, pledge or other disposition of such Common Stock to be
issued hereunder without an effective registration statement under the
Securities Act of 1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company to the effect that the
proposed transaction will be exempt from such registration. The optionee shall
execute such instruments, representations, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the optionee
hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
NOTHING HEREIN SHALL MODIFY YOUR STATUS AS AN AT-WILL EMPLOYEE OF THE
COMPANY. FURTHER, NOTHING HEREIN GUARANTEES YOU EMPLOYMENT FOR ANY SPECIFIED
PERIOD OF TIME. THIS MEANS THAT EITHER YOU OR THE COMPANY MAY TERMINATE YOUR
EMPLOYMENT AT ANY TIME FOR ANY REASON, OR NO REASON. YOU RECOGNIZE THAT, FOR
INSTANCE, YOU MAY TERMINATE YOUR EMPLOYMENT OR THE COMPANY MAY TERMINATE YOUR
EMPLOYMENT PRIOR TO THE DATE ON WHICH YOUR OPTION BECOMES VESTED.
<PAGE>
Any dispute or disagreement between you and the Company with respect to
any portion of this option or its validity, construction, meaning, performance
or your rights hereunder shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association or its
successor, as amended from time to time. However, prior to submission to
arbitration you will attempt to resolve any disputes or disagreements with the
Company over this option amicably and informally, in good faith, for a period
not to exceed two weeks. Thereafter, the dispute or disagreement will be
submitted to arbitration. At any time prior to a decision from the arbitrator(s)
being rendered, you and the Company may resolve the dispute by settlement. You
and the Company shall equally share the costs charged by the American
Arbitration Association or its successor, but you and the Company shall
otherwise be solely responsible for your own respective counsel fees and
expenses. The decision of the arbitrator(s) shall be made in writing, setting
forth the award, the reasons for the decision and award and shall be binding and
conclusive on you and the Company. Further, neither you nor the Company shall
appeal any such award. Judgment of a court of competent jurisdiction may be
entered upon the award and may be enforced as such in accordance with the
provisions of the award.
This option shall be subject to the terms of the Plan in effect on the
date this option is granted, which terms are hereby incorporated herein by
reference and made a part hereof. In the event of any conflict between the terms
of this option and the terms of the Plan in effect on the date of this option,
the terms of the Plan shall govern. This option constitutes the entire
understanding between the Company and you with respect to the subject matter
hereof and no amendment, supplement or waiver of this option, in whole or in
part, shall be binding upon the Company unless in writing and signed by the
President of the Company. This option and the performances of the parties
hereunder shall be construed in accordance with and governed by the laws of the
State of Delaware.
Please sign the copy of this option and return it to the Company's
Secretary, thereby indicating your understanding of and agreement with its terms
and conditions.
PHOENIX PRESCHOOL HOLDINGS, INC.
By:
I hereby acknowledge receipt of a copy of the foregoing stock option
and, having read it hereby signify my understanding of, and my agreement with,
its terms and conditions.
(Signature) (Date)
<PAGE>
Consent of Independent Certified Public Accountants
Phoenix Preschool Holdings, Inc.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Amendment No. 2 to the Registration Statement (Form SB-2 No. 333-31407) of our
report dated August 13, 1997, except for the Reorganization as described in Note
1(1) which is as of ____________, 1997, relating to the consolidated financial
statements of Phoenix Preschool Holdings, Inc., our report dated June 9, 1997
relating to the statements of income, stockholder's equity and cash flows of
Pollack Enterprises, Inc., our report dated June 20, 1997 relating to the
statements of income, stockholder's equity and cash flows of Libbus, Inc., and
our report dated August 27, 1997, relating to the statement of income,
stockholder's equity and cash flows of TLC Recreation Center, Inc., which is
contained in that Prospectus.
We also consent in the references to us under the caption "Experts" and
"Selected Financial Data" in the Prospectus.
/s/ BDO Seidman, LLP
----------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
November 20, 1997
