<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PHOENIX PRESCHOOL HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 8351 52-2044492
- ---------------------------------------- ---------------------------------------- ------------------------------------
(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) 826-6131
(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) 826-6131
(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 & Curtin, LLP
1200 Four Penn Center Plaza 101 East 52nd Street
Philadelphia, Pennsylvania 19103 New York, NY 10022-6018
(215) 569-5500 (212) 752-9700
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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 1993, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
<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 delivery of the prospectus is expected to be made pursuant to Rule
434 please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed maximum
Title of each class of Amount offering price Proposed maximum Amount of
securities to be registered to be registered per share offering price(2) registration fee
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Units, each consisting of one share of 1,495,000(1) $4.20 $ 6,727,500 $ 2,038.64
Common Stock and two Warrants........
- --------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of 2,990,000(3) $4.50(5) $ 13,455,000 $ 4,077.27
Warrants.............................
- --------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants.............. 130,000 ---- $ 10.00 (4)
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Units issuable pursuant to Underwriter's
Warrants (each Unit consisting of one
share of Common Stock and two
Warrants)............................ 130,000 $5.04(5) $ 655,200 $ 198.55
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Common Stock issuable upon exercise of
Warrants granted pursuant to
Underwriter's Warrants............... 260,000(3) $4.50(5) $ 1,170,000 $ 354.55
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Total Fee for Registration........... $ 6,669.01
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(1) Includes 195,000 units which the Underwriter has the option to purchase to
cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for purposes of calculating registration fee.
(3) 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 Underwriter's Warrants
(and the Warrants included therein).
(4) Pursuant to Rule 457(g) promulgated under the Securities Act of 1993, no
filing fee is required.
(5) Calculated pursuant to Rule 457(g).
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>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, Dated ______________, 1997
PROSPECTUS [LOGO]
PHOENIX PRESCHOOL HOLDINGS, INC.
1,300,000 Units
(Each Unit Representing One Share of Common Stock and Two Warrants to
Acquire Common Stock)
Phoenix Preschool Holdings, Inc. (the "Company"), a Delaware
corporation, is hereby offering 1,300,000 units ("Units"), each representing one
share of the Company's common stock (the "Common Stock"), par value $0.10 per
share, and two Warrants (each a " Warrant") to acquire one additional share of
Common Stock (the "Offering"). The Warrants are exercisable at an exercise price
of $4.50 per share for a period of four years commencing one year from the
effective date of the Company's registration statement 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 one year from 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 $8.00 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." The Company has applied for listing of the Common Stock and
Warrants on The Nasdaq SmallCap Market, under the proposed symbols "FENX" and
"FENXW," respectively, and on the Boston Stock Exchange, under the proposed
symbols "FNX and FNXW," respectively. The offering price per Unit has been
established through negotiations between Maidstone Financial, Inc. (the
"Underwriter") 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
______ AND ____ OF THIS PROSPECTUS. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS
OF THEIR ENTIRE INVESTMENT IN THE COMPANY SHOULD INVEST IN THE UNITS.
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.
---------------------------------
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===============================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------------------
Per Unit........... $4.20 $0.42 $3.78
- -------------------------------------------------------------------------------
Total (3).......... $5,460,000 $546,000 $4,914,000
===============================================================================
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(1) The Company has agreed to pay the Underwriter a sales commission of 10% of
the gross proceeds of the Offering. Amount shown excludes (i) a
non-accountable expense allowance equal to 3% ($0.126 per Unit or $163,800
in total) of the gross proceeds of the Offering payable to the Underwriter;
(ii) warrants (the "Underwriter's Warrants") entitling the Underwriter to
acquire up to 10% of the number of Units sold to the public in the Offering
(excluding the Over- allotment Option described in note 3 below) at an
exercise price of $5.04 per share (120% of the Price to Public); (iii) a
financial advisory fee of $4,166 per month payable to the Underwriter for
the twenty-four (24) months following the Offering (which is payable in
full 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 Underwriter against certain liabilities, including
certain liabilities under the federal securities laws. The Company has
agreed that the Underwriter will have, for a three (3) year period
commencing on the Effective Date, a right of first refusal with respect to
any public or private offering of securities by the Company in a
capital-raising transaction. See "Underwriting."
(2) After deducting the 10% sales commission payable to the Underwriter, but
before payment of the non-accountable expense allowance and legal,
accounting and other expenses of the Offering (estimated to be $626,000)
payable by the Company.
(3) The Company has granted the Underwriter an option, exercisable within
forty-five (45) calendar days of the date hereof, to purchase from the
Company up to 195,000 additional Units solely to cover over-allotments, if
any (the "Over-allotment Option"). To the extent that such option is
exercised, the Underwriter will offer the additional Units 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 $6,279,000, $627,900, and $5,651,100, respectively. See "Underwriting."
The Units are offered by the Underwriter on a "firm-commitment"
basis, subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, subject to the approval of certain legal matters by counsel for the
Underwriter. The Underwriter reserves 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 comprising the Units will be
made against payment therefor at the offices of Maidstone Financial, Inc., 101
East 52nd Street, New York, New York, on or about _____________, 1997.
[Logo]
MAIDSTONE FINANCIAL, INC.
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, Northwestern Atrium 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.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
UNITS, 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
UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<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 Delaware
corporation which will, following the reorganization described herein, be 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 June 30, 1997, the Company had
approximately 2,285 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.
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.
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 U.S. 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.
<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.
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.
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 has expertise in rendering
services to children with special needs such as developmental delays, and will
seek to implement special needs programming by contracting with local school
boards. The Company is also pursuing the delivery of preschool services to large
employers, either contracted to Company sites, or utilizing a sponsor's site.
The Company is a newly organized corporation formed under the laws of
the State of Delaware. Upon completion of the reorganization described herein
(see "Reorganization"), the Company will hold 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. 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) 826-6131.
-2-
<PAGE>
The Offering
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Securities Offered.......................... The Company is offering 1,300,000 Units (the "Offering").
Each Unit includes one share of the Company's common
stock, $0.10 par value per share ("Common Stock"), and
two Warrants each to acquire one additional share of
Common Stock. See "Description of Securities."
Offering Price .......................... $4.20 per Unit.
Warrants ................................... The Warrants included in each Unit each entitle the
investor to purchase one share of Common Stock.
Exercise Price..................... $4.50 per share of Common Stock, subject to
adjustment in certain events. See "Description
of Securities--Warrants."
Exercise Period.................... At any time during the four year period commencing one
year 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").
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 one year after the Effective Date, provided that the
closing sale price per share of Common Stock has been at least
$8.00 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.
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."
Proposed Nasdaq Smallcap
Market Symbols............................. The Company has applied for listing of the Common Stock and
Warrants on The Nasdaq SmallCap Market, under the proposed
symbols "FENX" and "FENXW," respectively, and on the Boston
Stock Exchange, under the proposed symbols "FNX" and "FNXW,"
respectively.
-3-
<PAGE>
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................... 1,600,000 shares (1)
After the Offering.................... 2,900,000 shares (1)
Warrants Outstanding:
Before the Offering................... 1,275,000(2)
After the Offering.................... 3,875,000(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."
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(1) Does not include (i) 147,058 shares issuable upon conversion of the
Company's Series A Preferred Stock, (ii) 397,277 shares reserved for
issuance under the Company's 1995 Employee Stock Option Plan (including
200,000 shares which were authorized under such plan in connection with the
Offering); (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); (v) 2,600,000 shares issuable pursuant to Warrants offered hereby;
(vi) an aggregate of 87,678 shares issuable upon exercise of two warrants
issued to Gerard Capello and Linda S. Capello, with an adjusted exercise
price of $0.63 per share; or (vii) 130,000 shares issuable upon exercise of
the Underwriter's Warrants. See "Certain Transactions."
(2) Figure shown reflects the number of shares of Common Stock which may be
acquired pursuant to Warrants. Includes 25.5 warrants (the "Bridge
Warrants"), issued by the Company in a bridge financing completed in June
1997. Each such Bridge Warrant provides 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 may be acquired pursuant
to Bridge Warrants. In the event that the Offering closes, then the Bridge
Warrants will automatically be converted into, and thereafter will have the
same terms and conditions as, 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 Capello and Linda S. Capello, with
an adjusted exercise price of $0.63 per share.
(3) Excludes 260,000 Warrants which may be acquired by the Underwriter pursuant
to the Underwriter's Warrant to acquire 130,000 Units. Does not include an
aggregate of 87,678 shares issuable upon the exercise of two unregistered
warrants issued to Gerard Capello and Linda S. Capello, 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 year ended June 30, 1996, and the
period from May 3, 1995 (the inception of the Company) through June 30, 1995 and
the Company's unaudited consolidated financial statements for the nine months
ended March 31, 1997 and March 31, 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."
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Operating Statement Data:
Period From Nine Months Ended March 31,
Year Ended May 3, 1995 to ------------------------------------
June 30, 1996 June 30, 1995 1997 1996
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Revenue.................................. $ 2,824,168 $ 131,549 $ 3,796,451 $ 1,816,606
Gross profit............................. 1,195,533 80,044 1,488,648 844,805
Net loss................................. (199,703) (18,252) (158,369) (164,279)
Net loss per common share................ (0.16) (0.02) (0.10) (0.16)
Weighted average number of common
shares outstanding ................... 1,243,347 837,901 1,648,791 1,108,197
Balance Sheet Data:
March 31, 1997
------------------------------------
June 30, 1996 (actual) (as adjusted)(1)
------------------ ------------------------------------
Working capital (deficiency)............. $ 110,435 $ (252,223) $ 3,689,077
Total assets............................. 2,375,706 2,917,603 6,957,603
Total debt............................... 1,849,565 2,363,847 1,615,847
Stockholders' equity .................... 408,603 250,234 5,038,234
</TABLE>
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(1) Gives effect to (a) the 1,300,000 shares of Common Stock and 2,600,000
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, (b) the issuance of an aggregate of 500,000 shares of Series A
Preferred Stock subsequent to March 31, 1997 in exchange for a debt of
$500,000 due to an officer of the Company from Phoenix Preschool Education
Centers, Inc; and (c) a bridge financing completed in June 1997. See "Use
of Proceeds" and "Reorganization."
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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 and internal
growth. 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 shareholders 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."
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."
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3. History of Losses/Future Uncertainty
The Company experienced net losses of approximately $18,000 for the
period from May 3, 1995 (inception) to June 30, 1995, approximately $200,000 for
the fiscal year ending June 30, 1996 and approximately $158,000 for the nine
month period ended March 31, 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."
7. Government Regulation
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
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<PAGE>
warranted, suspension or revocation of applicable licenses. The Company believes
that it is 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 addition, the Company's
ability to expand its curriculum to include new services, including but not
limited to special needs and the provision of speech pathologists, social
workers, physical therapists and special education teachers, which may be
dependent upon various governmental approvals and may subject the Company to
additional regulatory oversight.
The Company has participated in the Federal Food Program which
reimburses the Company for certain expenses attendant to breakfast and lunch
services and snacks supplied to enrolled students. 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 program 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'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.
Michael C. Koffler manages other ventures including other ventures
related to preschool education. Accordingly, 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.
9. Principal Stockholder Control
Upon completion of the Offering, Michael C. Koffler, Chairman,
President and Chief Executive Officer of the Company, will own approximately 57%
of the outstanding and voting Common Stock. 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, which has certain super-voting rights. By
virtue of ownership of the Series A Preferred Stock, Mr. Koffler may be able to
maintain control over the Company while holding little or no Common Stock in the
Company due to the super-voting rights of the Series A Preferred Stock. See
"Description of Securities -- Series A Preferred Stock - Voting Rights."
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<PAGE>
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
Approximately 70.9% of the net proceeds of this 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. Proceeds will also be
applied to repay debt owed to a stockholder/officer of the Company, to expand
sales and marketing efforts, to repay certain bridge financing and for working
capital. Management will have broad discretion with respect to the utilization
of a significant portion of the net proceeds of this 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."
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 $2.83 per share or 67% in the net tangible book
value of their investment from the initial offering price of $4.20 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 1995 Employee Stock Option Plan by an
additional 200,000 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. See "Dilution."
14. Future Capital Needs/Uncertainty of Additional Funding
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 one year) to the extent that the Company makes acquisitions, the
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<PAGE>
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."
15. Negotiated Price
The exercise price of the securities was determined in negotiations
between the Company and the Underwriter 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 Certificate of
Incorporation and By-laws
Mr. Koffler will hold all of the issued and outstanding Series A
Preferred Stock, which has certain super-voting rights. See "Description of
Securities - Series A Preferred Stock - Voting Rights." Following a Triggering
Date, the super-voting rights will entitle the holder of the Series A Preferred
to (a) one vote for each share of Common Stock issued by the Corporation on or
after the Triggering Date, including, but not limited to, shares of common stock
issued upon the exercise of the Warrants issued in connection with this Offering
or other options, warrants or convertible securities issued prior to the
Triggering Date, and (b) in the case of securities having multi-voting rights
thereafter issued by the Company, the number of votes equal to the total number
of votes that can be cast by such multi-voting securities. The Company's
certificate of incorporation authorizes 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."
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."
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<PAGE>
18. Dilutive Effect of Underwriter's Warrant and Other Options.
Upon completion of the Offering, the Company will sell to the
Underwriter a warrant to purchase up to 130,000 Units, at a price per Unit equal
to $5.04. The Underwriter's 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 Capello Warrants described
under "Description of Securities -- Warrants") and options to purchase an
aggregate of 176,114 shares of Common Stock. In addition, the Company's Series A
Preferred Stock is convertible into Common Stock at the rate of .294 of a share
of Common Stock per share of Series A Preferred Stock. If the Underwriter's
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 Underwriter's 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 for listing of the Common Stock and Warrants on
The Nasdaq SmallCap Market and for listing on the Boston Stock Exchange upon the
Effective Date. The Commission has approved rules imposing criteria for listing
of securities on The Nasdaq SmallCap Market, including standards for maintenance
of such listing. Currently, for continued listing, a company, among other
things, must have total assets of at least $2,000,000, total equity of at least
$1,000,000, a public float of at least $200,000 and a minimum bid price of $1.00
per share. 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
"Risk Factors--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 one year 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 $8.00; 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
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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."
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 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
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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
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. Underwriting Experience.
The Underwriter has served as the sole or managing underwriter of four
firm commitment public offerings and participated in two other underwritten
public offerings as a member of an underwriting syndicate. Since the
Underwriter's experience in underwriting firm commitment public offerings is
limited, there can be no assurance that its lack of experience may not adversely
affect the public offering of the Company's securities and the subsequent
development, if any, of a trading market for the Company's securities.
25. Limitation on Director Liability.
The Company's certificate of incorporation provides 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 Delaware law. This may discourage stockholders from bringing
suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation on brought by stockholders on behalf of the
Company against a director. In addition, the Company's certificate of
incorporation provides for mandatory indemnification of directors and officers.
See "Management -- Indemnification of Directors and Officers."
26. Informal Investigation of Underwriter.
The Company has been advised that the Underwriter is subject to an
informal investigation commenced in March 1996 by the Securities and Exchange
Commission. To date, the Commission has only requested certain documents from
the Underwriter and the Underwriter has not been advised of the status of the
investigation. There can be no assurance that a formal order of investigation
will not be issued, or if issued, that sanctions will not be imposed against the
Underwriter. In October 1996, the National Association of Securities Dealers,
Inc. (the "NASD") commenced an examination of certain of the Underwriter's
previous underwritings and has requested documents and information in connection
with those underwritings. The NASD examination is ongoing and no findings have
been made to date. There can be no assurance that such investigation or
examination may not affect the Underwriter's ability to maintain a market in the
Common Stock and Warrants. See "Underwriting."
27. Underwriter's 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 Underwriter. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Underwriter. The Underwriter has indicated that it intends to act as a market-
maker and otherwise effect transactions in the Common Stock and Warrants. To the
extent the Underwriter acts as a market-maker in the Common Stock and Warrants,
it may exert a dominating influence in the markets
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<PAGE>
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
Underwriter participates in such markets. Furthermore, the Underwriter may
discontinue such activities at any time or from time to time. The Underwriter
also has 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 of the Commission prohibit the Underwriter 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 Underwriter may have to receive a fee for
the solicitation of the Warrants. As a result, the Underwriter 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."
REORGANIZATION
Prior to, or simultaneously with, consummation of the Offering, the
Company, Michael C. Koffler, and Phoenix Preschool Education Centers, Inc., a
Delaware corporation (the "PPEC") will undertake 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, among Mr. Koffler, PPEC and the Company (the "Plan"),
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 therefor, the Company will deliver to Mr. Koffler
1,600,000 shares of Common Stock and 500,000 shares of the Company's Series A
Preferred Stock. PPEC will pay Mr. Koffler the balance of its debt owed 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, which shall thereafter
relate solely to the Common Stock (and not the common stock of PPEC).
Since its inception, PPEC has elected to be taxed as a Subchapter S
corporation pursuant to the Code. Therefore, the taxable income of the PPEC
would have been reported, for federal and state income tax purposes, directly by
Mr. Koffler, as its sole stockholder, rather than by the PPEC. Mr. Koffler will
have obligations for federal and state income taxes on the PPEC's 1997 taxable
income, if any, through the date of consummation of the Offering, at which time
PPEC's tax status will change to that of a Subchapter C corporation. Pursuant to
the Plan, prior to effecting the Reorganization, PPEC will pay a dividend to Mr.
Koffler equal to the undistributed Subchapter S income, if any, of PPEC for
periods prior to the closing date of the Offering.
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.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 Units
offered hereby at $4.20 per share, and after deducting underwriting discounts
and commissions and other expenses of this Offering (estimated at $626,000) will
be approximately $4,288,000 (or approximately $5,025,000 if the Over-allotment
Option is exercised in full).
The Company anticipates that the net proceeds of this 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 this Offering among such uses.
<TABLE>
<CAPTION>
Use Amount Percent
- ----------------------------------------------------------- ------------------- ----------------
<S> <C> <C>
Acquire additional centers................................. $3,039,500 70.9%
Repay Bridge Notes (1)..................................... 650,000 15.2
Repay officer note......................................... 248,000 5.8
Expand sales and marketing efforts ........................ 100,000 2.3
Working capital requirements and general
corporate purposes ............................... 250,500 5.8
------------------- ----------------
Total.................................... $4,288,000 100.0%
=================== ================
</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 $13,000. 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.
Acquisitions. The Company has allocated approximately $3,039,500 of the
net proceeds for the acquisition of new centers. 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 $100,000 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 $250,500 of
the net proceeds for working capital and general corporate purposes. Further
allocations of the portion of the Offering proceeds
-15-
<PAGE>
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.
-16-
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at March 31, 1997, and as adjusted to give effect to (i) completion
of the Reorganization, (ii) the Company's sale of the Units offered hereby, and
(iii) the Company's Bridge Financing completed in June 1997. This table should
be read in conjunction with the consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
--------------------------
Actual As Adjusted
----------- -----------
<S> <C> <C>
Current maturities of long-term debt ............................ $ 334,147 $ 334,147
----------- -----------
Long-term debt:
Officer/stockholder loans .................................... 747,831 --
Notes payable - other ........................................ 1,281,869 1,281,869
Notes payable - private placement ............................ -- --
----------- -----------
Total long-term debt ...................................... 2,029,700 1,281,869
----------- -----------
Total debt ............................................. 2,363,847 1,616,016
=========== ===========
Stockholders' equity
Convertible Preferred Stock, $.10 par value; Authorized
1,000,000 shares; Issued and outstanding -0- shares actual,
500,000 shares as adjusted (1) ............................... -- 50,000
Common stock, $.10 par value; Authorized 15,000,000 shares;
Issued and outstanding 1,600,000 shares actual, 2,900,000
shares as adjusted ........................................... 20,276 150,276
Additional paid-in capital(2)............................... 606,282 4,837,958
Deficit(2).................................................. (376,324) --
----------- -----------
Total stockholders' equity ............................. 250,234 5,038,234
----------- -----------
Total capitalization .............................. $ 2,614,081 6,654,250
=========== ===========
</TABLE>
- ----------------------------
(1) See "Description of Securities" for conversion features.
(2) Deficit transferred to additional paid-in capital upon termination of "S"
corporation tax status.
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."
-17-
<PAGE>
DILUTION
At March 31, 1997, the net tangible book value of the Company was
$(215,326), or approximately $(0.13) 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, attributing none of the public
offering price of the Units to the Warrants.
After giving effect to (i) the issuance and sale of 1,300,000 shares of
Common Stock and 2,600,000 Warrants in the Offering, (ii) the cancellation of
debt of $500,000 payable to an officer of the Company concurrently with the
Closing in exchange for the issuance of 500,000 shares of Preferred Stock, and
(iii) the issuance of the Bridge Notes, but without taking into account any
other changes in the net tangible book value subsequent to March 31, 1997, other
than those described in the immediately preceding paragraph, the pro forma net
tangible book value of the Company as of March 31, 1997 attributable to holders
of Common Stock would have been $3,973,947, or $1.37 per common share. This
represents an increase in net tangible book value per common share of $1.50 to
the Company's existing stockholders and an immediate dilution of $2.83 per
common share (or 67% 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>
<CAPTION>
<S> <C> <C>
Initial Public offering price per share..................... $ 4.20
Net tangible book value per share at March 31, 1997......... $ (0.13)
Increase attributable to new investors in the Offering 1.50
-----------
Pro forma net tangible book value per share after the
Offering.................................................... 1.37
----------
Dilution per share to new investors......................... $ 2.83
----------
</TABLE>
The information in the following table summarizes, through March 31,
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
Shares Purchased Total Consideration Paid Price Per Share
--------------------- -------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 1,600,000 55% $ 626,558 10% $ .39
New investors....................... 1,300,000 45% 5,460,000 90% $ 4.20
---------- ------ ---------- ------
2,900,000 100.0% $6,086,558 100.0%
</TABLE>
The information in the foregoing table does not give effect to (i)
43,748 shares reserved for issuance upon exercise of outstanding options, at an
exercise price of $2.53 per share, (ii) 21,874 shares reserved for issuance upon
exercise of outstanding options, at an exercise price of $3.55 per share, (iii)
3,875,000 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) 390,000 shares reserved for issuance pursuant to the Underwriter's
Warrants and the Warrants included therein, (vi) 58,290 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)
-18-
<PAGE>
4,861 shares reserved for issuance upon the exercise of outstanding options at
an exercise price of $2.53 per share, and (ix) an aggregate of 87,678 shares
issuable upon exercise of two warrants issued to Gerard Capello and Linda S.
Capello, with an adjusted exercise price of $0.63 per share.
-19-
<PAGE>
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
The selected financial data for the year ended June 30, 1996 and the
period May 3, 1995 (inception) through June 30, 1995, 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 for the nine month periods ended March 31, 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
the 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.
<TABLE>
<CAPTION>
Operating Statement Data:
Period From Nine Months Ended March 31,
Year Ended May 3, 1995 to ---------------------------------------
June 30, 1996 June 30, 1995 1997 1996
------------------ ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Revenue.................................. $ 2,824 $ 132 $ 3,796 $ 1,817
Gross profit............................. 1,196 80 1,489 845
Operating expenses....................... 1,288 98 1,525 940
Loss from operations..................... (92) (18) (37) (95)
Net loss................................. (200) (18) (158) (164)
Net loss per common share................ (.16) (.02) (.10) (.16)
Weighted average number of common
shares outstanding...................... 1,243 838 1,649 1,108
Balance Sheet Data:
June 30, 1996 June 30, 1995 March 31, 1997
------------------ ----------------- -------------------
Working capital (deficiency)............. $ 110 $ 13 $ (252)
Total assets............................. 2,376 1,329 2,918
Total debt............................... 1,850 1,324 2,364
Stockholders' equity (deficiency)........ 409 (8) 250
</TABLE>
-20-
<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 July 1997 in anticipation of the
Reorganization. See "Reorganization". 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. Existing child care centers acquired by
the Company usually contribute operating income soon after the acquisition.
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.
-21-
<PAGE>
Results of Operations and Financial Condition for the Nine Month Period Ended
March 31, 1997 Compared to March 31, 1996
The following table sets forth, for the periods indicated, certain data
derived from the Company's Consolidated Statement of Operations.
Nine Months Ended March 31,
-----------------------------------
1997 1996
---------- ----------
Revenues...................... $3,796,451 $1,816,606
Direct Costs.................. 2,307,803 971,801
Operating Expenses............ 1,525,183 939,761
Interest Expense.............. 119,875 71,278
Net Loss...................... (158,369) (164,279)
Revenues increased by $1.98 million during the nine months ended March
31, 1997 when compared to the corresponding period in the prior year. Of such
increase, approximately $932,000 was attributable to five new centers opened in
the 1997 fiscal year and $1.05 million was attributable to increased revenues in
existing centers, some of which were acquired during the nine months ended March
31, 1996. Of the increase in direct costs of $1.34 million in the comparative
periods, approximately $858,000 was attributable to new operations and
approximately $478,000 was attributable to existing operations, including those
acquired during the nine-month period ended March 31, 1996. Virtually all of the
increase experienced in operating costs of approximately $585,000 for the nine
months ended March 31, 1997 was attributed to the five new centers. Operating
expenses, as a percentage of revenues for the nine months ended in 1996 was
51.7% compared to 40.1% in 1997. The percentage decrease relates to the fixed
nature of certain operating expenses, while there was a substantial growth in
revenue. Higher interest expense was incurred in conjunction with additional
financing of centers acquired subsequent to March 31, 1996. The reduction in the
incurred loss is directly attributable to the above factors.
Results of Operations for Year Ended June 30, 1996
The fiscal year ended June 30, 1996 was the Company's first full fiscal
year of operations. The Company generated gross profit of approximately $1.20
million on revenues of $2.82 million during its fiscal year ended June 30, 1996.
The Company's revenues increased by $2.69 million for the year, including
revenues resulting from the three additional centers acquired in January, 1996.
The Company's operating expenses for fiscal year 1996 were $1.29 million, which
consisted primarily of general and administrative expenses of approximately
$1.25 million. The Company experienced a net loss for fiscal year 1996 of
approximately $200,000.
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.
-22-
<PAGE>
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 operations was approximately $58,000 during fiscal 1996 and
approximately $16,000 during the period ended June 30, 1995. During fiscal 1996,
cash was principally used to add three new centers and to make capital
improvements to existing centers (approximately $59,000). 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.
During fiscal 1996, the Company acquired three (3) 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
$322,000 for the nine months ended March 31, 1997. The major components of this
increase were non-cash charges for depreciation and amortization of $223,223.
Cash used in investing activities amounted to approximately $535,000 for the
nine months ended March 31, 1997, which includes acquisitions of property and
equipment of $266,782 and cash paid for assets of acquired businesses of
$225,000. Cash provided by financing activities was $74,282 for the nine months
ended March 31, 1997. Funds of $303,288 were provided by officer/stockholder
loans offset by repayments of other borrowings totaling $229,006.
In fiscal year 1997 to date, the Company has acquired eleven (11)
additional centers. 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."
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 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.
-23-
<PAGE>
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 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.
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".
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 in June 1998.
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.
-24-
<PAGE>
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. On June 30, 1997
the Company had approximately 2,285 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 has expertise in rendering services to children with
special needs (developmental delays), and will seek to implement special needs
programming by contracting with local school boards. The Company is also
pursuing the delivery of preschool services to large employers, either
contracted to Company sites, or utilizing a sponsor's site. 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.
-25-
<PAGE>
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.
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 U.S., 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
-26-
<PAGE>
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.
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, to
date in fiscal 1997, the Company has 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. For a more detailed description
of the Company's acquisitions, see Note 6 to the Consolidated Financial
Statements included in this Prospectus.
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.
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 heart of the Research Triangle Park.
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.
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<PAGE>
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 of the Company centers which
were open and operating as of June 30, 1997.
Open and
State Operating
- ------------------------------------- ---------------------------
Florida............................ 10
Georgia............................ 3
North Carolina..................... 9
---------------------------
Total........................ 22
---------------------------
As of June 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.
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<PAGE>
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."
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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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.
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
periodically. 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 nine months ended March 31, 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. Pending federal tax legislation may change Section 21
of the Code to reduce the amount of the allowable credit for some taxpayers.
While the existing Senate bill does not contain any amendments to Section 21,
the existing House bill would reduce the amount of the allowable credit by $25
for each $1,000 (or fraction thereof) by which the taxpayer's modified adjusted
gross income exceeds a threshold amount of $110,000 for a joint return, $75,000
for an unmarried individual return and $55,000 for a married individual filing a
separate return. The Company cannot predict at this time whether such
legislation will ultimately be adopted and, if adopted, whether the contents of
the law will differ materially from the existing proposals.
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<PAGE>
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.
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 has successfully competed 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
personal 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 June 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 June 30, 1997, the Company employed approximately 395 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 two field support persons (maintenance
personnel 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.
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<PAGE>
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."
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:
Name Age Office
Michael C. Koffler 41 Chairman of the Board of
Directors, Chief Executive
Officer and President
Michael E. Brown 51 Field Operations Officer
Robert Sloop 42 Chief Financial Officer
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.
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.
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.
Directors
Following the Offering, the Company's Board of Directors will consist
of:
Name Age (1) Position
- ---------------------- ------------- ------------------------------------
Michael C. Koffler 41 Chairman, President, Chief Executive
Officer, and Director
Ralph Manela, CPA 45 Director
David Lenefsky, Esq. 59 Director
Garo Armen, Ph.D. 44 Director
- ---------------
(1) Ages are as of June 30, 1997.
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<PAGE>
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
boards 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.
Board Size and Classification
The Company's Certificate of Incorporation fixes the number of
Directors to between one and fifteen as determined by resolution of the Board of
Directors. The Board of Directors of the Company is currently comprised of
Michael C. Koffler. Upon or prior to the closing of the Offering, however, three
additional directors will be appointed.
The Company's Certificate of Incorporation provides that the Board of
Directors shall be divided into three classes following the closing of the
Offering. Accordingly, following the close of the Offering, the initial
directors of Class I will serve until the first annual meeting of stockholders
following the Offering; at such first annual meeting of stockholders, the
directors of Class I shall be elected for a term of three years, and after
expiration of such term, shall thereafter be elected every three years for
three-year terms. The initial directors of Class II 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 II shall
be elected for a term of three years and, after the expiration of such term,
shall thereafter be elected every three years for three-year terms. The initial
directors of Class III 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 III shall be elected for a term
of three years and after the expiration of such term, shall thereafter be
elected every three years for three-year terms. Upon the consummation of the
Offering, the Board shall determine the composition of each class.
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<PAGE>
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. Following the Offering,
Directors will receive options to acquire Common Stock as part of the Company's
non-employees stock option program 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 during fiscal year 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) The Company has not separately compensated Michael C. Koffler as an
officer or director, although the Board of Directors may determine to
provide cash and other compensation to Mr. Koffler in the future.
(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 $0.76 per share granted pursuant to the 1995 Employee Stock Option
Plan.
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<PAGE>
Aggregated Options/SAR Exercised in Last Fiscal Year
and Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options/ In-the-Money
SARs at Options/SARs at Fiscal
Fiscal Year End Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) 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 33-1/3% exercisable at the first anniversary of the grant date.
No options were granted to Mr. Koffler in fiscal year 1997. No stock
appreciation rights ("SARs") have been granted by the Company.
1995 Employee Stock Option Plan
In December, 1995, the Company adopted an Employee Stock Option Plan,
(the "Plan"). Pursuant to the 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 Plan.
Incentive stock options for a total of 100,816 shares of Common Stock
have been issued by the Company prior to the date of this Prospectus to 42
employees. Set forth below is a summary of the provisions of the Plan.
Nonqualified stock options for a total of 47,346 shares have been issued by the
Company prior to the date of this Prospectus to Michael C. Koffler.
Administration. After the public offering, the Plan will be
administered by an Option Committee ("Committee") which is appointed by the
Board of Directors and consists only of Directors who are not eligible to
receive options under the Plan. 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 nonqualified 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.
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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 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 Plan is 397,277 shares of Common
Stock, which includes 200,000 shares authorized under the Plan in connection
with the Offering. 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 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 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 Plan.
Option Price. The option price for options issued under the 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 public offering, the fair market value
of the Common Stock was determined by Michael C. Koffler, the sole member of the
Board of Directors. The incentive stock options granted to Michael C. Koffler
have an option price equal to 110% of the fair market value of the Common Stock
on the date of grant.
Payment. Payment of the option price on exercise of options granted
under the 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. Options granted under the 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. None of
the options were exercisable prior to the date of the initial public offering.
In the event of a "change in control" of the Company, as defined in the
Plan, each optionee may exercise the total number of shares then subject to the
option. Consequently, the Plan may be deemed to have certain "anti-takeover" and
"anti-greenmail" effects. See also Potential Anti-takeover Effect of Certain
Provisions of the Certificate of Incorporation and Bylaws of the Company.
The Committee has the authority to provide for a different rate of
option exercisability for any optionee.
Option Expiration and Termination. Stock options granted under the 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 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.
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Amendment or Termination; 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 Plan, without shareholder approval, except
to the extent that shareholder approval of the 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 Plan. Any such action will not
affect options previously granted. If the Committee voluntarily submits a
proposed amendment, supplement, suspension or termination for shareholder
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 shareholder 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
price of $2.53 per share. These options contain terms substantially similar to
those contained in nonqualified stock options issued pursuant to the 1995
Employee Stock Option Plan.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits
indemnification by a corporation of certain officers, directors, employees and
agents. Consistent therewith, the Company's Certificate of Incorporation
requires that the Company indemnify all persons whom it may indemnify pursuant
thereto to the fullest extent permitted by Section 145.
In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable for monetary damages to
the Company or its stockholders for a breach of fiduciary duty as a director,
except for liability as a result of (i) a breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) an act related to the unlawful stock repurchase or payment of a dividend
under Section 174 of Delaware General Corporation Law, and (iv) transactions
from which the director derived an improper personal benefit.
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 and
relationships which occurred during the last two years or which are presently
proposed.
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Through June 1, 1997, the Company has borrowed from Michael C. Koffler,
President, Chairman, Chief Executive Officer and a stockholder of the Company,
$1,364,389 to fund certain of the Company's working capital needs and
acquisitions and their related expenses. During the nine months ended March 31,
1997, outstanding officer loans payable of $616,528 were exchanged for 810,890
shares of Common Stock. Of the remaining outstanding loans of $747,831 at March
31, 1997, $247,831 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. In
addition, Michael C. Koffler advanced $434,000 to the Company for center
acquisitions subsequent to March 31, 1997 as described in Note 6 to the
Consolidated Financial Statements included herein. The Company repaid such
advances with proceeds of the Bridge Financing. In the Reorganization described
herein (see "Reorganization"), the Company will issue 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. The Convertible Note matures
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 $68,000 was paid by the Company for such rent
and advances. 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.
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<PAGE>
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 Beneficial
Name Ownership Before Offering After Offering
- ---------------------------------------------- ------------------------ ----------------------- ----------------------
<S> <C> <C> <C>
Michael C. Koffler 1,694,692 100% 57%
Chairman, Chief Executive Officer
and President
Robert Sloop
Chief Financial Officer -0- 0% 0%
Michael E. Brown
Field Operations Officer 9,721(2) (3) (3)
Garo Armen, Ph.D.
Director -0- 0% 0%
David Lenefsky, Esq.
Director -0- 0% 0%
Ralph Manela
Director -0- 0% 0%
Directors and Executive Officers as a Group 1,704,413 100% 57%
</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 one year
after the Effective Date) or (ii) Warrants (which may not be exercised
prior to one year 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) Reflects 14,583 shares of Common Stock which may be acquired by Mr. Brown
pursuant to stock options which become exercisable at the closing of the
Offering.
(3) Less than 1%.
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<PAGE>
DESCRIPTION OF SECURITIES
The Company is offering 1,300,000 Units at a subscription price of
$4.20 per Unit. Each Unit consists of one share of Common Stock and two Warrants
each to acquire one additional share of Common Stock. 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 Certificate of Incorporation and Bylaws and Delaware law.
Common Stock
The Company will issue 1,300,000 shares of Common Stock in the Offering
and up to 2,600,000 shares of Common Stock upon exercise of the Warrants
(including Warrants issued pursuant to the Underwriter's 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.
Warrants
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at $4.50 per share, subject to adjustment in certain
events, described below, for a period of four years commencing twelve (12)
months 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 twelve (12) months after the
Effective Date, provided the closing bid quotation of the Common Stock has been
at least $8.00 per share during the period of 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
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<PAGE>
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 Capello and Linda S. Capello (investors) for
43,835 shares of common stock of the Company and 43,843 shares of common stock
of the Company, respectively ("Capello Warrants"). The exercise price for the
Capello Warrants is $0.63 per share or, if higher, the cost per share of common
stock to Michael C. Koffler. The Capello 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. As of
the date of this Prospectus, no shares of Preferred Stock are issued and
outstanding. In connection with the Reorganization, the Company has authorized
the issuance of 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 Underwriter 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 Underwriter.
Series A Preferred Stock
The Board of Directors authorized the issuance of up to 500,000 shares
of Series A Preferred Stock, all of which have been issued 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 Certificate of Designation filed with the Office of the
Secretary of the State for the State of Delaware 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
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involuntary liquidation, dissolution or winding-up of the Company, $1.00 per
share, plus accrued and unpaid dividends. 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 approximately
.294 of a share of Common Stock for each share of Preferred Stock, subject to
adjustment in certain events, at the option of the holder thereof. Upon
conversion, no payment or allowance will be made in respect of any accrued but
unpaid dividends on the Series A Preferred Stock.
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.
Voting Rights. Prior to the Triggering Event (as hereafter defined),
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. On or after the Triggering Date (as hereinafter defined) the Series
A Preferred Stock will have the same voting rights as existed prior to the
Triggering Date, plus a super-voting right equal to (a) one vote for each share
of Common Stock issued by the Corporation on or after the Triggering Date,
including, but not limited to, shares of common stock issued upon the exercise
of the Warrants issued in connection with this Offering or other options,
warrants or convertible securities issued prior to the Triggering Date, and (b)
in the case of securities having multi-voting rights thereafter issued by the
Company, the number of votes equal to the total number of votes that can be cast
by such multi-voting securities. Such super-voting rights may be exercised by a
single share of Series A Preferred Stock then outstanding which is designated by
the holders of the majority of the then-outstanding Series A Preferred Stock or,
if only one share of Series A Preferred Stock is then outstanding, by the holder
thereof.
The term "Triggering Date" refers to the earliest of the following
dates: (a) the issuance of any voting stock, or securities convertible into or
warrants to purchase voting stock, after the final closing date for the Offering
(but excluding (i) the issuance or exercise of employee stock options and (ii)
any issuances to an affiliate) or (b) the issuance of any share of Common Stock
upon the exercise of any Warrant issued in connection with this Offering.
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
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<PAGE>
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 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 having terms identical to the Warrants
being offered in the Offering on the date of the Prospectus.
Certain Provisions of Delaware Law
The Company is a Delaware corporation and is subject to Section 203 of
the Delaware General Corporation Law ("Section 203"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon completion of the transaction
that resulted in the interested stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the Company
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) on or following the date on which that person became an interested
stockholder, the business combination is approved by the Company's Board and
authorized at a meeting of stockholders by the affirmative vote of the holders
of at least 66 2/3% of the outstanding voting stock of the Company not owned by
the interested stockholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors (but not
less than one) who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
Pursuant to Section 161 of the Delaware General Corporation Law, the
Board of Directors of the Company can, without stockholder approval, issue
shares of capital stock, which may have the effect of delaying, deferring or
preventing a change of control of the Company. Other than pursuant to the
Offering, the Company has no plan or arrangement for the issuance of any shares
of capital stock other than in the ordinary course or pursuant to the Company's
stock-based plans.
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Certain Certificate of Incorporation and Bylaw Provisions
Certain provisions of the Company's Certificate 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 Certificate and Bylaws. See "Additional
Information" for information regarding how to obtain a copy of these documents.
The Company's Certificate 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 Certificate 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 five
members. Prior to the closing of the Offering, all directors were elected each
year for a one-year term and until their successors were elected and qualified.
The Company's Certificate of Incorporation provides that the Board
shall be divided into three classes following the closing of the Offering of the
Company's Common Stock. Accordingly, following the close of the Offering, the
initial directors of Class I will serve until the first annual meeting of
stockholders following the Offering; at such first annual meeting of
stockholders, the directors of Class I shall be elected for a term of three
years, and after expiration of such term, shall thereafter be elected every
three years for three-year terms. The initial directors of Class II 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 II shall be elected for a term of three years and, after the expiration of
such term, shall thereafter be elected every three years for three-year terms.
The initial directors of Class III 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 III shall be elected for a term
of three years and after the expiration of such term, shall thereafter be
elected every three years for three-year terms. Upon the consummation of the
Offering the Board shall determine the composition of each class.
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, the Board of Directors of the Company will own approximately 1,600,000
shares of Common Stock constituting approximately 55% 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 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 50% of the votes entitled to be cast at a particular
meeting.
The Certificate of Incorporation and Bylaws of the Company contain
certain provisions permitted under the Delaware General 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 Certificate of Incorporation and
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<PAGE>
Bylaws also contain provisions which provide for the indemnification of its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law.
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 for listing of the Common Stock and Warrants on
The Nasdaq SmallCap Market, under the symbols "FENX" and "FENXW," respectively,
and on the Boston Stock Exchange, under the proposed symbols "FNX" and "FNXW,"
respectively, upon completion of the Offering.
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 Delaware 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 176,114 shares of Common Stock
subject to options (including 14,583 shares issuable under the Non-Employee
Stock Option Plan) and 397,277 shares are reserved for issuance under the 1995
Employee Stock Option Plan. The Company increased the number of options reserved
for issuance under the Company's 1995 Employee Stock Option Plan by 200,000
shares in connection with the Offering. See "Management."
The 1,300,000 shares of Common Stock to be sold in the Public Offering
(1,495,000 shares if the Underwriter's 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 (29,000 shares immediately after the Offering
assuming no exercise of the Underwriter's 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.
The Company's current stockholder has entered into an agreement with
the Underwriter not to offer, sell, contract to sell or grant any option to
purchase or otherwise dispose of the shares held by him without the prior
written consent of the Underwriter for a period of two years from the Effective
Date.
-49-
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the Underwriter,
and the Underwriter has agreed to purchase, 1,300,000 Units. The Underwriting
Agreement provides that the obligations of the Underwriter is subject to certain
conditions precedent. The Underwriter is committed to purchase all of the Units
offered hereby, if any are purchased.
The Underwriter has advised the Company that the Underwriter proposes
initially to offer the 1,300,000 Units 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 Underwriter 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 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 Underwriter may designate, including expenses of counsel retained
for such purpose by the Underwriter.
Pursuant to the Over-allotment Option, which is exercisable for a
period of 45 days after the closing of the Offering, the Underwriter may
purchase up to fifteen (15%) of the total number of shares of Common Stock and
Warrants offered hereby, solely to cover over-allotments.
The Company has agreed to sell to the Underwriter, for nominal
consideration, the Underwriter's 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 Underwriter's Warrants shall be exercisable for
a period of five years commencing ____________, 1998 (one year after the
Effective Date) at an exercise price equal to 120% of the offering price of the
shares of the Units sold to the public in the Offering. The Underwriter's
Warrants are not transferable prior to _____________, 1998, except to officers
of the Underwriter, members of the selling group and their officers and
partners.
The Company has agreed that the Underwriter will have, for a three (3)
year period commencing on the Effective Date, a right of first refusal with
respect to any public or private offering of securities by the Company in a
capital-raising transaction.
The Company has agreed that, upon written request of the then holder(s)
of a majority of the Underwriter's Warrants and the shares of Common Stock
issued and/or issuable upon exercise of the Underwriter's Warrants (the
"Underwriter's Warrant Shares") which were originally issued to the Underwriter
or to its 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 Underwriter's Warrant Shares. The Company has
agreed to use its best efforts to cause the registration statement to become
effective. The holders of the Underwriter's Warrants may demand registration
without exercising the Underwriter's Warrants and, in fact, are never required
to exercise such warrants.
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
-50-
<PAGE>
to the Securities Act, regardless of whether some of the holders of the
Underwriter's Warrants and the Underwriter's 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 Underwriter's 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 Underwriter's Warrants and
Underwriter's Warrant Shares in the preparation and execution of any
registration statement required in order to sell or transfer the Underwriter's
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 Underwriter's Warrants and Underwriter's Warrant
Shares according to the aggregate sales price of the securities being issued.
For the life of the Underwriter's 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
Underwriter's 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
Underwriter's Warrants.
In connection with this Offering, the Underwriter 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 Underwriter may also create a short position for
the account of the Underwriter 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 Underwriter may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Underwriter 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 Underwriter, except as contemplated by
or as disclosed in the Prospectus. Officers, directors and all other 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 Underwriter. See "Market for
Securities and Related Stockholder Matters."
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter 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 Underwriter in
-51-
<PAGE>
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 Underwriter has informed the Company that it does not expect sales
to discretionary accounts to exceed 2% of the shares of Common Stock and
Warrants offered hereby.
The Underwriter has served as the sole or managing underwriter of four
firm commitment public offerings and participated in two other underwritten
public offerings as a member of the underwriting syndicate. Since the
Underwriters' experience in underwriting firm commitment public offerings is
limited, there can be no assurance that its lack of experience may not adversely
affect the public offering of the Company's securities and the subsequent
development, if any, of a trading market for the Company's securities. See "Risk
Factors -- Underwriter's Influence on the Market; Possible Limitations on Market
Making Activities."
The Company has been advised that the Underwriter is subject to an
informal investigation commenced in March 1996 by the Securities and Exchange
Commission. To date, the Commission has only requested certain documents from
the Underwriter and the Underwriter has not been advised of the status of the
investigation. There can be no assurance that a formal order of investigation
will not be issued, or if issued, that sanctions will not be imposed against the
Underwriter. In October 1996, the NASD commenced an examination of certain of
the Underwriter's previous underwritings and has requested documents and
information in connection with those underwritings. The NASD examination is
ongoing and no findings have been made to date. There can be no assurance that
such investigation or examination may not affect the Underwriter's ability to
maintain a market in 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 years, engage a designee of the Underwriter as
advisor to the Board. In addition and in lieu of the Underwriter's right to
designate an advisor, the Company has agreed, if requested by the Underwriter
during such three year period, to nominate and use its best efforts to cause the
election of a designee of the Underwriter as a director of the Company. The
Underwriter has not yet designated any such person.
The Underwriter intents to act as a market maker for the Common Stock
and Warrants after the closing of the Offering.
The Company will pay the Underwriter 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 Underwriter is designated in writing as the
soliciting NASD member. The Underwriter 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 Underwriter and any other soliciting
broker/dealer may have to receive a fee for the solicitation of the exercise of
the Warrants.
-52-
<PAGE>
The Underwriter acted as placement agent for the Bridge Financing, for
which it received selling commissions of $63,750 and a non-accountable expense
allowance of $19,125.
The Company has agreed to retain the Underwriter, upon closing of the
Offering, as a management and financial advisor 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 Underwriter 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 Underwriter is 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 Underwriter. The public relations
firm will not be associated with the Underwriter or any of its 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 Units offered hereby and the
initial exercise price and other terms of the Warrants have been determined by
negotiation between the Company and the Underwriter 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 Units 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, Four Penn Center Plaza,
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 Underwriter by Gersten, Savage, Kaplowitz, Fredericks &
Curtin, 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.
-53-
<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, 1996 and 1995
and March 31, 1997 (unaudited) F-4
Consolidated statements of operations for the year
ended June 30, 1996, the period from May 3, 1995 (inception)
through June 30, 1995 and for the nine months ended March 31,
1997 and 1996 (unaudited) F-6
Consolidated statements of stockholder's equity for the period
from May 3, 1995 (inception) through June 30, 1995,
for the year ended June 30, 1996 and for the nine months ended
March 31, 1997 (unaudited) F-7
Consolidated statements of cash flows for the year ended June 30, 1996,
the period from May 3, 1995 (inception) through June 30, 1995
and for the nine months ended March 31, 1997 and 1996
(unaudited) F-8
Notes to consolidated financial statements F-10
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
</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 sheets of Phoenix
Preschool Holdings, Inc. and subsidiary as of June 30, 1996 and 1995, and the
related consolidated statements of operations, stockholder's equity and cash
flows for the year ended June 30, 1996 and the period from May 3, 1995
(inception) through June 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1996 and 1995, and the results of
their operations and their cash flows for the year ended June 30, 1996 and the
period from May 3, 1995 (inception) through June 30, 1995 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
October 1, 1996,
except for Note 9(a) which
is as of June 5, 1997 and
the Reorganization described in
Note 1(l) which is as
of ______, 1997
F-3
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Balance Sheets
===============================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current
Cash $ 157,271 $ 108,010 $ 18,968
Accounts receivable (Note 2) 173,525 - 340,345
Other receivables 18,915 - -
Prepaid expenses and supplies 146,355 99,098 26,133
- -------------------------------------------------------------------------------------------------------------------
Total current assets 496,066 207,108 385,446
Property and equipment, net (Notes 3 and 5) 1,540,665 953,426 2,061,031
Intangible assets, net of accumulated amortization
of $21,787, $1,145 and $95,530, respectively 333,503 167,295 438,260
Deferred offering costs - - 27,300
Other assets 5,472 1,035 5,566
- -------------------------------------------------------------------------------------------------------------------
$ 2,375,706 $ 1,328,864 $ 2,917,603
===================================================================================================================
</TABLE>
F-4
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Balance Sheets
==============================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities
Current maturities of long-term debt (Note 5) $ 268,093 $ 181,040 $ 334,147
Accounts payable 21,928 13,024 256,192
Accrued expenses 87,404 - 35,126
Deferred revenue 8,206 - 12,204
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 385,631 194,064 637,669
Loans payable, officer/stockholder (Note 4) 444,543 468,775 747,831
Long-term debt (Note 5) 1,136,929 674,277 1,281,869
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,967,103 1,337,116 2,667,369
- -------------------------------------------------------------------------------------------------------------------
Commitments (Note 7)
Stockholder's equity (Notes 4, 8, 9 and 10)
Preferred stock, $.10 par value
Authorized 1,000,000 shares
Issued and outstanding - none
Common stock, $.10 par value
Authorized 15,000,000 shares
Issued and outstanding 1,600,000, 789,110
and 1,600,000, respectively 20,276 10,000 20,276
Additional paid-in capital 606,282 - 606,282
Deficit (217,955) (18,252) (376,324)
- -------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 408,603 (8,252) 250,234
- -------------------------------------------------------------------------------------------------------------------
$ 2,375,706 $ 1,328,864 $ 2,917,603
===================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Operations
===============================================================================
<TABLE>
<CAPTION>
Period from
May 3, 1995
Year (Inception) Nine months
ended through ended
June 30, June 30, March 31,
1996 1995 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 2,824,168 $ 131,549 $3,796,451 $ 1,816,606
Direct costs 1,628,635 51,505 2,307,803 971,801
- -------------------------------------------------------------------------------------------------------------------
Gross profit 1,195,533 80,044 1,488,648 844,805
- -------------------------------------------------------------------------------------------------------------------
Operating expenses
Marketing 41,215 1,925 75,332 27,267
General and administrative 1,246,533 96,371 1,449,851 912,494
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,287,748 98,296 1,525,183 939,761
- -------------------------------------------------------------------------------------------------------------------
(Loss) from operations (92,215) (18,252) (36,535) (94,956)
- -------------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest expense (89,464) - (119,875) (71,278)
Interest income 2,711 - 1,234 1,955
Loss on disposal of equipment (20,735) - (3,193) -
- -------------------------------------------------------------------------------------------------------------------
Total other (expense) (107,488) - (121,834) (69,323)
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (199,703) $(18,252) $ (158,369) $ (164,279)
===================================================================================================================
Net loss per common share $ (.16) $ (.02) $ (.10) $ (.16)
===================================================================================================================
Weighted average
common shares outstanding 1,243,347 837,901 1,648,791 1,108,197
===================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<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, May 3, 1995 - $ - 789,110 $10,000 $ - $ - $ 10,000
Net loss - - - - - (18,252) (18,252)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 - - 789,110 10,000 - (18,252) (8,252)
Officer loans payable exchanged
for common stock (Note 4) - - 810,890 10,276 606,282 - 616,558
Net loss - - - - - (199,703) (199,703)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 - - 1,600,000 20,276 606,282 (217,955) 408,603
Net loss (unaudited) - - - - - (158,369) (158,369)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 (unaudited) - $ - 1,600,000 $20,276 $ 606,282 $ (376,324) $ 250,234
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
===============================================================================
<TABLE>
<CAPTION>
Period from
May 3, 1995
Year (Inception) Nine months
ended through ended
June 30, June 30, March 31,
1996 1995 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(199,703) $ (18,252) $ (158,369) $(164,279)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities
Depreciation and amortization 178,860 13,245 223,223 121,183
Loss on sale of equipment 20,735 - 3,193 -
Amortization of intangible assets 20,642 1,145 73,743 13,798
(Increase) decrease in
Receivables (192,440) - (147,905) (82,750)
Other assets (4,437) (1,035) (94) (4,437)
Prepaid expenses and supplies 13,378 (24,098) 142,722 20,994
Increase in
Accounts payable and accrued expenses 96,308 13,024 181,986 29,915
Deferred revenue 8,206 - 3,998 6,604
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (58,451) (15,971) 322,497 (58,972)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisitions of property and equipment (59,475) (96,359) (266,782) (15,240)
Proceeds from sale of property and equipment 7,400 - - -
Cash payments for assets of acquired businesses (215,000) (250,000) (225,000) (215,000)
Organization costs (16,855) (8,435) (16,000) (16,855)
Deferred offering costs - - (27,300) -
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (283,930) (354,794) (535,082) (247,095)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Repayments of long-term debt (200,684) - (229,006) (154,732)
Proceeds of officer/stockholder loan 592,326 468,775 303,288 432,353
Issuance of common stock - 10,000 - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 391,642 478,775 74,282 277,621
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
===============================================================================
<TABLE>
<CAPTION>
Period from
May 3, 1995
Year (Inception) Nine months
ended through ended
June 30, June 30, March 31,
1996 1995 1997 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net increase (decrease) in cash $ 49,261 $ 108,010 $ (138,303) $ (28,446)
Cash, beginning of year/period 108,010 - 157,271 108,010
- -------------------------------------------------------------------------------------------------------------------
Cash, end of year/period $ 157,271 $ 108,010 $ 18,968 $ 79,564
===================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year/period for
Interest $ 89,464 $ - $ 100,768 $ 56,597
===================================================================================================================
Noncash transactions
Acquisition of financed assets $ 750,389 $ 855,317 $ 440,000 $ 733,369
Officer loans payable exchanged
for common stock $ 616,558 $ - $ - $ 616,558
===================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-9
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 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 June 30, 1996 and 1995,
the Company was operating eleven and eight centers,
respectively. At March 31, 1997, the Company was
operating 16 centers.
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) Interim Financial Information
The consolidated financial information as of March 31,
1997 and for the nine months ended March 31, 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.
e) Depreciation and Amortization
Property and equipment are stated at cost or at fair
values assigned to the assets at the time of business
acquisition.
F-10
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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.
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 March 31, 1997,
there has been no impairment of asset carrying values.
f) 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.
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
PPEC had elected S corporation status under the
Internal Revenue Code and the tax regulations in the
states which it operates. As a result, PPEC's loss is
reported on the personal income tax returns of the
stockholder and, accordingly, no corporate income taxes
were imposed at the corporate level (see
"Reorganization").
F-11
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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.
l) Reorganization
In connection with the Company's proposed initial
public offering of common stock (see Note 10), certain
events have occurred or will occur (the
"Reorganization"). Prior to, or simultaneously with,
consummation 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, among Mr. Koffler, PPEC and
the Company. Mr. Koffler will contribute all of the
F-12
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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 1,600,000 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.
Concurrently with the Reorganization, PPEC will
terminate its Subchapter S corporation status and
become subject to federal and state income taxes. No
pro forma income tax adjustments are required to the
accompanying financial statements since PPEC has
incurred net tax losses since its inception and any
deferred tax assets or liabilities resulting from the
differences in the financial statement and income tax
bases of assets and liabilities are immaterial.
According to the Plan of Reorganization, PPEC will pay
to Mr. Koffler a dividend equal to the accumulated
undistributed Subchapter S income, if any, through the
closing date of the offering.
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 initial public
offering price during the twelve months immediately
preceding the initial filing of the offering
contemplated by this Prospectus, 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 warrants and options, to
repurchase shares of the Company's common stock at the
initial public offering price.
F-13
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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 in
June 1998.
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-14
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
2. Accounts Accounts receivable are detailed as follows:
Receivable
June 30, March 31,
1996 1997
---------------------------------------------------------
Governmental agencies $ 153,396 $ 324,674
Non-subsidized students 20,129 15,671
---------------------------------------------------------
Total $ 173,525 $ 340,345
=========================================================
3. Property Property and equipment consist of:
and
Equipment
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
----------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture and equipment $ 531,038 $532,286 $1,016,055
Vehicles 330,695 195,317 398,732
Leasehold improvements 866,940 239,073 1,055,814
----------------------------------------------------------------------------
1,728,673 966,676 2,470,601
Less accumulated
depreciation and amortization 188,008 13,250 409,570
----------------------------------------------------------------------------
$1,540,665 $953,426 $2,061,031
============================================================================
</TABLE>
4. Related Through March 31, 1997, the Company has borrowed from
Party Michael C. Koffler, President, Chairman, Chief Executive
Transactions Officer and sole stockholder of the Company, $1,364,389 to
fund certain of the Company's working capital needs and
acquisitions. During the nine months ended March 31, 1996,
outstanding officer loans payable of $616,558 were
exchanged for 810,890 shares of common stock. Of the
remaining outstanding loans of $747,831 at March 31, 1997,
$247,831 represents a non-interest bearing promissory 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
F-15
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
annum, into shares of common stock of the Company, at a
price of $.76 per share. Pursuant to the Reorganization
described in Note 1 to the financial statements, the
remaining $500,000 of indebtedness to Mr. Koffler will be
exchanged for 500,000 shares of Series A Convertible
Preferred Stock at the rate of .294 shares of common stock
for each share of preferred stock. In addition, PPEC will
pay to Mr. Koffler the balance of its debt to him equal to
approximately $248,000. Additionally, Michael Koffler
advanced funds to the Company totaling $434,000 for
acquisitions subsequent to March 31, 1997 as described in
Note 6 to the financial statements. These advances were
repaid in June 1997 with the proceeds from the Bridge
Financing described in Note 8 to the financial statements.
Outstanding 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
$68,000 was paid by the Company for such rent and
advances. Effective January 1, 1997, the Company leased
office space directly from the landlord and directly paid
all salary and benefits.
5. Long-Term Long-term debt is detailed as follows:
Debt
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
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 June 1999. The notes are
collateralized by vehicles. $161,522 $105,317 $114,891
</TABLE>
F-16
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
----------------------------------------------------------------------
<S> <C> <C> <C>
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. $643,500 $ -- $594,000
A five year note is payable to an
individual 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. 600,000 750,000 487,500
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. -- -- 234,375
</TABLE>
F-17
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
<TABLE>
<CAPTION>
June 30, March 31,
1996 1995 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
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. $ -- $ -- $ 185,250
---------------------------------------------------------------------------
1,405,022 855,317 1,616,016
Less current maturities 268,093 181,040 334,147
---------------------------------------------------------------------------
$1,136,929 $ 674,277 $1,281,869
===========================================================================
</TABLE>
At March 31, 1997, long-term debt matures as follows:
Year ending June 30,
----------------------------------------------
1997 $ 82,824
1998 336,104
1999 295,026
2000 266,250
2001 116,250
Thereafter 519,562
----------------------------------------------
$1,616,016
==============================================
F-18
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
6. Acquisitions Operations of acquired entities, which are described
below, are included in the accompanying financial
statements from the dates of acquisition. Cash down
payments were provided through stockholder loans (see
Note 4).
o 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 (see Note 5).
The cost of the acquisition was allocated among the
fair market value of the current assets, property and
equipment and intangible assets acquired.
o 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 (see Note 5). The cost of the
acquisition was allocated among the fair market value
of the current assets, property and equipment and
intangible assets acquired.
o In July 1996, the Company acquired the assets of
Coastal Kiddie College, 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 $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 (see Note 5).
o In October 1996, the Company acquired the assets of
Libbus, 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 $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 (see Note
5).
F-19
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
Subsequent to March 31, 1997, the Company acquired the
following entities:
o In April 1997, the Company acquired the assets of
Brighter Day Care Center, Inc. (primarily the fixed
assets and supplies of an existing pre-school 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 connection
with the acquisition, the Company entered into a
five-year lease agreement for the acquired center at
an aggregate annual rental of approximately $38,000.
o In May 1997, the Company acquired the assets of
Gingham Goose School, Inc. (primarily the fixed assets
and supplies of an existing pre-school 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 connection
with the acquisition, the Company entered into a
five-year lease agreement for the acquired center at
an aggregate annual rental of approximately $21,000.
o 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 connection with the acquisition, the Company
entered into a five-year lease agreement for the
acquired center at an aggregate annual rental of
approximately $19,000.
F-20
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
o 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 connection with the
acquisition, the Company entered into a five-year
lease agreement for the acquired center at an
aggregate annual rental of approximately $80,000.
o 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 connection with the acquisition, the Company
entered into a five-year lease agreement for the
acquired centers at an aggregate annual rental of
approximately $40,000.
The following unaudited pro forma results gives effect to
significant acquisitions prior to March 31, 1997 as if
they had occurred on July 1, 1995:
(in thousands, except common per share amounts)
Year ended Nine months
ended ended
June 30, March 31,
1996 1997
---------------------------------------------------------
Revenue $ 3,781 $ 3,906
Net loss $ (261) $ (158)
Net loss per common share $ (.17) $ (.10)
F-21
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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 original 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 year ended
June 30, 1996 and the period ended June 30, 1995 was
approximately $336,000 and $-0-, respectively. Rent
expense for the nine months ended March 31, 1997 and 1996
was approximately $430,000 and $231,000, respectively.
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 2,653,000
---------------------------------------------------------
$6,647,000
=========================================================
8. Bridge In June 1997, the Company sold an aggregate of 25.5 units,
Financing 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
F-22
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
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. In the event of an IPO, the Bridge
Warrants automatically will be converted into warrants
having terms and conditions identical to any warrants
being offered as part of an offering (see Note 10).
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.
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, the Company will authorize the issuance
of 500,000 shares of Series A Preferred Stock, which is
convertible into shares of common stock at a conversion
rate of approximately .294 of a share of common stock
for each share of preferred stock.
b) Stock Split
In June 1997, the Board of Directors of PPEC authorized
a 7.8911027 to 1 common stock split with no change in
par value. All references in the financial statements
to number of common shares and per share amounts of
PPEC have been retroactively restated to reflect the
stock splits and the corresponding increased number of
shares outstanding.
F-23
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
c) Stock Options and Warrants
In December 1995, the Company adopted an employee stock
option plan which 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 197,277.
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 March 31, 1997 and for the nine
months ended March 31, 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>
Balance, June 30, 1995 - $ - $ -
Granted 71,651 .76 to 1.27 .83
--------------------------------------------------------------------------------------------
Balance, June 30, 1996 71,651 .76 to 1.27 .83
Granted 42,533 2.53 to 3.55 2.73
Canceled (13,368) .76 to 1.27 .85
--------------------------------------------------------------------------------------------
Balance, March 31, 1997 100,816 $.76 to 3.55 $ 1.63 9 yrs.
============================================================================================
Number of
Non-Qualified Options Shares
--------------------------------------------------------------------------------------------
Balance, June 30, 1995 47,346 $ .76 $ .76
Granted -
--------------------------------------------------------------------------------------------
Balance, June 30, 1996 47,346 .76 .76
Granted -
--------------------------------------------------------------------------------------------
Balance, March 31, 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, March 31, 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 March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
Options may first be exercised on the later of (a) one
year from date of grant or (b) the first closing date of
the initial public offering of the stock. At March 31,
1997, none of the options are currently 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.
Subsequent to March 31, 1997, the Company issued qualified
employee incentive stock options for an additional 13,368
shares of common stock at an option price of $3.55 per
share.
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
Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Nine months Nine months
ended ended ended
June 30, March 31, March 31,
1996 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) - as reported $(199,703) $ (158,369) $(164,279)
Net (loss) - pro forma $(614,003) $ (250,796) $(536,766)
Net (loss) - per common
share - as reported $ (.16) $ (.10) $ (.15)
Net (loss) per common
share - pro forma $ (.49) $ (.15) $ (.48)
</TABLE>
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 $4.20) 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.
F-26
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
(Information as of March 31, 1997 and for the nine
months ended March 31, 1997 and 1996 is unaudited)
===============================================================================
10. Proposed Initial The Company's proposed IPO calls for the Company to offer
Public Offering for public sale up to 1,300,000 units at $4.20 a unit
consisting of one share common stock and two Class A
warrants to acquire an additional share of common stock at
an exercise price of $4.50 per share of common stock
during a four-year exercise period commencing one year
from the closing date of the IPO. The warrants may be
redeemed by the Company after one year following the
commencement of the IPO, upon 30 days' prior written
notice, at a price of $.05 per warrant, provided that the
closing sale price per share of common stock has been at
least $8.00 for 20 consecutive trading days ending on the
3rd business day prior to the date upon which the Company
gives notice of redemption, subject to adjustment in
certain events. 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 independent auditors' report and 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 independent auditors' report and 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 independent auditors' report and 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 from the
Transaction 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
===============================================================================
<TABLE>
<CAPTION>
Year Nine months
ended ended
December 31, September 30,
1995 1996
- ------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
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 preschool
Policies 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>
===============================================================================
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....................................
Prospectus Summary.......................................
Risk Factors.............................................
Reorganization...........................................
Use of Proceeds..........................................
Capitalization...........................................
Dividend Policy..........................................
Dilution.................................................
Selected Financial Data..................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........
Business.................................................
Management...............................................
Certain Relationships and Related Transactions...........
Security Ownership of Certain Beneficial Owners
and Management........................................
Description of Securities................................
Market for Securities and Related
Stockholder Matters...................................
Underwriting.............................................
Legal Matters............................................
Experts..................................................
Transfer Agent and Registrar.............................
Index to Financial Statements............................
Financial Statements.....................................
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>
================================================================
1,300,000 Units
PHOENIX PRESCHOOL
HOLDINGS, INC.
[LOGO]
----------------
PROSPECTUS
----------------
MAIDSTONE FINANCIAL, INC.
_______________, 1997
================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Certificate of Incorporation (the "Certificate of Incorporation") and
the Bylaws (the "Bylaws") of Phoenix provide for indemnification of its
directors and officers to the full extent permitted by Delaware law. In the
event that the Delaware General Corporation Law (the "Corporation Law") is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors and officers, the Certificate of Incorporation
and Bylaws provide the personal liability of the directors and officers of
Phoenix shall be so eliminated or limited.
Section 145 of the Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right of
the corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding.
Section 145 of the Corporation Law provides that a company may pay the
expenses incurred by an officer or director 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 an undertaking by or
on behalf of such director or officer to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the corporation.
The Certificate of Incorporation and Bylaws of Phoenix provide that Phoenix
shall pay such expenses.
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-1
<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 . $163,800
Printing and Engraving ........................... $ 75,000
Legal Fees and Expenses (other than blue sky) .... $125,000
Accounting Fees and Expenses ..................... $100,000
Transfer Agent and Warrant Agent Fees and Expenses $ 5,000
Blue Sky Fees and Expenses ....................... $ 35,000
Investment Advisor Fee ........................... $ 99,984
Miscellaneous .................................... $ 2,847
--------
TOTAL ................................... $626,000
========
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, 1996 and 1995
and March 31, 1997 (unaudited)
Consolidated statements of operations for the year
ended June 30, 1996, the period from May 3, 1995
(inception) through June 30, 1995 and for the nine
months ended March 31, 1997 and 1996 (unaudited)
Consolidated statements of stockholder's equity for the period
from May 3, 1995 (inception) through June 30, 1995, for
the year ended June 30, 1996 and for the nine months
ended March 31, 1997 (unaudited)
Consolidated statements of cash flows for the year ended
June 30, 1996, the period from May 3, 1995 (inception)
through June 30, 1995 and for the nine months ended
March 31, 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
II-2
<PAGE>
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 year ended December 31, 1995
and for the nine months ended
September 30, 1996 (unaudited)
Notes to financial statements
(b) Exhibits:
Regulation S-B
Exhibit Number Description
1.1 Form of Underwriting Agreement*
1.2 Form of Advisory Agreement*
2.1 Form of Plan of Reorganization
3.1 Certificate 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-employees Stock Option.**
10.2 1995 Employee 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.
21 Subsidiaries (Phoenix Preschool Education Centers, Inc.
is the sole subsidiary)
23.1 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)*
23.2 Consent of BDO Seidman LLP.
II-3
<PAGE>
24 Power of attorney (included on signature page)
27 Financial Data Schedule*
- ------------------
* To be filed by amendment.
** Compensatory Plan
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.
(d) The undersigned small business issuer hereby undertakes that
it will:
II-4
<PAGE>
(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-5
<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 July 16,
1997.
PHOENIX PRESCHOOL HOLDINGS, INC.
Date: July 16, 1997 By: /s/ Michael C. Koffler
-----------------------------------
Michael C. Koffler, Chairman, Chief
Executive Officer and President
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 July 16, 1997
- ------------------------------- President, Chief Operating Officer (Principal
Michael C. Koffler Executive and Operating Officer) and Director
/s/ Robert Sloop Chief Financial Officer (Principal Financial and July 16, 1997
- ------------------------------ Accounting Officer)
Robert Sloop
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
S-B Exhibit Numbers Description
- ------------------- -------------
1.1 Form of Underwriting Agreement*
1.2 Form of Advisory Agreement*
2.1 Form of Plan of Reorganization
3.1 Certificate 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-employees Stock Option.**
10.2 1995 Employee 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.
21 Subsidiaries (Phoenix Preschool Education Centers, Inc.
is the sole subsidiary)
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*
- ---------------------
*To be filed by amendment.
**Compensatory Plan
II-7
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 7, 1997
Page -1-
July 7, 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 Delaware corporation ("Holdings"). 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 first closing date under the contemplated underwriting
agreement ("First Closing Date") for the 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.
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
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 7, 1997
Page -2-
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 Capello warrants.
Prior to the First Closing 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 First Closing 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 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 within four (4)
months after the date hereof.
In exchange, Koffler will receive 1,600,000 shares of the common stock
of Holdings and 500,000 shares of Series A Preferred Stock of Holdings.
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.
Holdings agrees to assume, effective as of the First Closing Date, the
obligations of Education Centers, Inc. under all outstanding warrants and
options of Education Centers, Inc. and, subsequent to the First Closing Date,
these warrants and options shall relate solely to the common stock of Holdings.
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 7, 1997
Page -3-
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 First
Closing 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,
----------------------------------------
MICHAEL C. KOFFLER
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
By:
--------------------------------------
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 7, 1997
Page -4-
Agreed:
PHOENIX PRESCHOOL HOLDINGS, INC.
BY:
--------------------------------------
<PAGE>
CERTIFICATE OF INCORPORATION
PHOENIX PRESCHOOL HOLDINGS, INC.
--------------------------------
Article 1. Name. The name of the corporation is Phoenix Preschool
Holdings, Inc. (the "Corporation").
Article 2. Registered Office and Agent. The address of the registered
office in the State of Delaware is 2 West Loockerman Street, Dover, County of
Kent, Delaware 19903. The name of its registered agent at such address is
Barros, McNamara, Scanlon, Malkiewicz & Taylor, P.A.
Article 3. Purposes. The purposes for which the Corporation was formed
are to engage in any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law.
Article 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 designation, relative rights, preferences and liabilities of each
class of stock, itemized by class, shall be as follows:
(1) Common Stock. Each share of Common Stock shall be entitled
to one vote on all matters submitted to a vote of stockholders except as the
right to exercise such vote may be limited by the provisions of this Amended and
Restated Certificate of Incorporation or of any class or series of Preferred
Stock or undesignated stock 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 stockholders, and remaining after the payment to holders of
Preferred Stock or undesignated stock 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. The holders of the Common Stock are not entitled to
preemptive rights.
(2) Preferred Stock. The Board of Directors of the Corporation
is hereby expressly authorized, subject to any limitations prescribed by law, to
provide for the issuance of the shares of Preferred Stock in series, and by
filing a certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each
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such series, and to fix by resolution the powers, designations, preferences and
relative, participating, optional or other special rights (if any), and the
qualifications, limitations or restrictions (if any), of the shares of each such
series. The authority of the Board of Directors shall include, but not be
limited to, determination of the following:
(i) The voting rights and powers (if any) of the
Preferred Stock and each series thereof:
(ii) 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;
(iii) 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;
(iv) 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
(v) 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.
(3) Undesignated Stock. The Board of Directors is authorized
to adopt, without stockholder approval, at any time, or from time to time,
amendments to this Amended and Restated Certificate 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 designation of the Preferred Stock as described in Article 4 (b)
above.
(b) Authorization of Board to Set Terms in Respect of Corporation's
Securities. To the fullest extent permitted by applicable law, the Board of
Directors may set forth in any security, contract, warrant or other instrument
evidencing any shares, option or warrant rights, or securities having conversion
or option or warrant rights, such terms as it deems appropriate, including,
without limiting the generality of such authority, conditions that preclude or
limit any Person (as defined in Article 15) or any transferee(s) (either direct
or remote) of such Person (i) from owning
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or offering to acquire a specified number or percentage of the outstanding
common shares, other shares, option or warrant rights, securities having
conversion or option or warrant rights, or obligations of the Corporation or
(ii) from exercising, converting, transferring or receiving such shares, option
or warrant rights, securities having conversion or option or warrant rights, or
obligations, and which invalidate any rights or options or warrants beneficially
owned by such Person or any transferee(s) (either direct or remote) of such
Person. This Article is intended to validate, to the extent permitted by
applicable law, the adoption by the Board of Directors of stockholder rights
plans or so-called "poison pills," including both call and put "poison pills."
Nothing contained herein shall be deemed to limit or restrict the powers of the
Board of Directors as provided in the Delaware General Corporation Law, as
amended, or otherwise under Delaware law.
Article 5. Incorporator and Director. The name and mailing address of
the sole incorporator is as follows:
Michael C. Koffler
150 East 58th Street 31st Floor
New York, NY 10155
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. Michael C. Koffler shall serve
as the initial director of the Corporation.
Article 6. Classified Board. Effective sixty (60) days after the
completion of the initial public offering of the Common Stock of the Corporation
(the "IPO"), the directors shall be divided into three (3) classes, as nearly
equal in number as reasonably possible, designated as Class I, Class II, and
Class III. Class I directors shall serve until the first annual meeting of
stockholders to be held after the IPO. At the first annual meeting of
stockholders to be held after the IPO, Class I directors shall be elected for a
term of three (3) years and, after expiration of such term, shall thereafter be
elected every three (3) years for three (3) year terms. Class II directors shall
serve until the second annual meeting of stockholders to be held after the IPO.
At the second annual meeting of stockholders to be held after the IPO, Class II
directors shall be elected for a term of three (3) years and, after the
expiration of such term shall thereafter be elected every three (3) years for
three (3) year terms. Class III directors shall serve until the third annual
meeting of stockholders to be held after the IPO. At the third annual meeting of
stockholders to be held after the IPO, the Class III directors shall be elected
for a term of three (3) years and, after the expiration of such term, shall
thereafter be elected every three (3) years for three (3) year terms. Each
director shall serve until his successor shall have been elected and qualified,
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 6, 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.
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Article 7. Removal of Directors
--------------------
(a) By Stockholders. The entire Board of Directors, or a class
of the Board, if the Board is classified with respect to the power to elect
directors, or any individual director, may be removed from office by the
stockholders only for cause (as defined herein) and only with the vote of
stockholders entitled to cast at least eighty (80%), or such higher percentage
as may be required by law, of the votes which all stockholders would be entitled
to cast at any annual election of directors or of such class of directors. The
term 'cause', as used herein, shall refer only to one of the following events:
(1) conviction of the director of a felony; (2) declaration by order of court
that the director is of unsound mind; or (3) gross abuse of trust committed in
bad faith.
(b) By Board of Directors. The Board of Directors may, without
stockholder approval, declare vacant the office of any director for any proper
cause (whether or not similar to those listed in subparagraph (a) above)
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.
Article 8. Actions by Consent. Section 228 of the Delaware General
Corporation Law shall not be applicable unless the resolution or other matter
contained in the written consent or consents from stockholders has been
previously approved by all of the then members of the Board of Directors.
Article 9. 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 Delaware General
Corporation Law. In the event that the Delaware General Corporation Law is
amended, after the date of this Certificate, 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 Delaware General Corporation Law, 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 Delaware General Corporation Law.
Any amendment or repeal of this Article 9 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 from
supplementing the indemnification provisions contained herein by Bylaw
4
<PAGE>
provisions, contracts with directors or officers, insurance or otherwise.
Article 10. Limited Liability. To the fullest extent permitted by the
laws of the State of Delaware as presently in effect or as hereafter amended
from time to time, a director shall have no personal liability to the
Corporation or stockholders for monetary damages for breach of fiduciary duty as
a director. Any amendment to or repeal of this Article 10 shall not adversely
affect any right or protection of a director of this Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
Article 11. Bylaw Changes. In furtherance and not in limitation of the
powers conferred by the laws of the State of Delaware, the Board of Directors of
the Corporation is expressly authorized and empowered to adopt, amend or repeal
the Bylaws of the Corporation. Any amendment to the Bylaws of the Corporation
which is proposed by stockholders, 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 eighty percent (80%) of the votes which all
stockholders are entitled to cast thereon, in addition to any other approval
which is required by law, this Amended and Restated Certificate of
Incorporation, the Bylaws of the Corporation or otherwise.
Article 12. Certificate Changes. The Corporation reserves the right at
any time and from time to time to amend or repeal (1) any provision contained in
this Certificate of Incorporation and (2) other provisions authorized by the
laws of the State of Delaware at the time in force, in the manner now or
hereafter prescribed by the laws of the State of Delaware; and all rights,
preferences and privileges of whatsoever nature conferred upon stockholders,
directors or any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
this reservation.
Article 13. 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 15) and the community which they serve.
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<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.
Article 14. Separability. In the event that all, some or any part of
any provision contained in this Amended and Restated Certificate 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 this Amended and Restated Certificate 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 this Amended and Restated
Certificate of Incorporation. If and to the extent that any provision contained
in this Amended and Restated Certificate 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.
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Article 15. 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).
Article 16. 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 this Amended
and Restated Certificate of Incorporation.
The undersigned, being the sole incorporator hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, does make this certificate and does hereby declare and
certify that it is his act and deed and the facts stated herein are true, and
accordingly does hereunto set his hand this 1st day of July, 1997.
/s/ Michael C. Koffler
-----------------------------
Michael C. Koffler
Incorporator
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BYLAWS
OF
PHOENIX PRESCHOOL HOLDINGS, INC.
These Bylaws are supplemental to the Delaware General
Corporation Law, as the same shall from time to time be in
effect, and are subject to any contrary provisions contained
in the Certificate of Incorporation of this Corporation, as
amended from time to time.
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 State of Delaware.
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 shall be located within the State of Delaware, at such place as the
Board of Directors shall, from time to time, determine.
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 State of Delaware, as the Board of Directors may from time to time
determine or as the business of the Corporation may require.
<PAGE>
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 State
of Delaware, as shall be determined by the Board of Directors from time to time.
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 in each calendar
year at such place and at such time as the Board of Directors shall fix, or if
the Board of Directors fails to set a date and time, on the third Wednesday of
May at ten o'clock a.m., if not a legal holiday, and if such day is a legal
holiday, then such meeting shall be held on the next business day. 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 Chairman
of the Board, or by shareholders entitled to cast at least fifty percent (50%)
of the vote which all shareholders are entitled to cast at the particular
meeting.
Section 304. Conduct of Shareholders' Meetings. The Chairman
of the Board shall preside at all shareholders' meetings, or, in his absence,
the Chief Executive Officer, or in his absence, the President. The officer
presiding over a shareholders' meeting shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meetings at
which he presides, including, without limitation, the establishment of the
procedures for the maintenance of order, safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to any such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls. 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,
subject to any contrary provisions contained in the Certificate of
Incorporation, as amended from time to time. 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 Certificate of Incorporation (as amended from time to
time) or by these Bylaws directed or required to be exercised or done by the
shareholders.
Section 402. Nomination for Directors. Nominations for
election to the Board of Directors may be made by the Board of Directors or by
any stockholder of any outstanding class of capital stock of the Corporation
entitled to vote for the election of Directors, subject to any contrary
provisions contained in the Certificate of Incorporation, as amended from time
to time.
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Nominations, other than those made by or on behalf of the existing
management of the Corporation, shall be made in writing, and shall be delivered
to the Chairman of the Board of the Corporation not less than 14 days nor more
than 50 days prior to any meeting of shareholder called for the election of
directors; shall be accompanied by the written consent of the proposed nominee;
and shall contain the following information to the extent known to the notifying
shareholder:
(a) The name and address of each proposed nominee;
(b) The principal occupation of each proposed nominee;
(c) The total number of shares of capital stock of the Corporation that will
be voted for each of the proposed nominees;
(d) The name and residence address of the notifying shareholder;
(e) The number of shares of capital stock of the corporation owned by the
notifying shareholder;
(f) The information regarding the proposed nominee which would be
required to be disclosed in a proxy statement filed under the Securities
Exchange Act of 1934.
Nominations not made in accordance herewith may be disregarded
by the Chairman of the meeting and, upon his instructions, the judges of
elections may disregard all votes cast for each such nominee.
Section 403. Number of Directors and Terms. The number of directors
and terms of the directors shall be as set forth in the Certificate of
Incorporation, as amended from time to time.
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.
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. A regular meeting of the Board
of Directors shall be held annually, immediately following the annual meeting of
shareholders at the place where such meeting of the shareholders is held or at
such other place, date and hour as the new Board of Directors may designate. At
such meeting the Board of Directors shall elect officers of the Corporation. In
addition to such regular meeting, the Board of Directors shall have the power to
fix by resolution the place, date and hour of other regular meetings of the
Board of Directors. Notice of a regular meeting of the Board of Directors need
not be given unless the same is held at other than the time or place for holding
such meetings as fixed in accordance with this Section, in which event notice
shall be given at least 24 hours (in the case of notice by telephone, telex, TWX
or telecopier) or 48 hours (in the case of notice by telegraph, courier service
or express mail) or five days (in the case of notice by first class mail) before
the time at which the meeting is to be held.
Section 407. Special Meetings. Special meetings of the Board
of Directors shall be held whenever called by the Chairman of the Board or
directors entitled to cast two or more votes at a meeting of directors. Notice
of every special meeting of the Board of Directors shall be given
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to each director by telephone or in writing at least 24 hours (in the case of
notice by telephone, telex, TWX or telecopier) or 48 hours (in the case of
notice by telegraph, courier service or express mail) or five days (in the case
of notice by first class mail) before the time at which the meeting is to be
held. Every such notice shall state the time and place of the meeting. Neither
the business to be transacted at, nor the purpose of, any regular or special
meeting of the Board of Directors need be specified in a notice of the 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.
ARTICLE V. OFFICERS.
Section 501. Election and Office. The officers of the
Corporation shall be the Chairman of the Board, the Chief Executive Officer, the
President, one or more other Vice-Presidents, the Secretary and the Treasurer,
who shall be elected by the Board of Directors. The Board of Directors may also
elect one or more Executive Vice-Presidents and one or more assistant officers
to any office named herein. Any two or more offices may be held by the same
person.
Section 502. Term. The officers and any elected assistant
officer shall each serve at the pleasure of the Board of Directors until the
next annual meeting of the Board of Directors following the annual meeting of
shareholders and, if later, 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 or removal.
Section 503. Powers and Duties of the Chairman of the Board.
Unless otherwise determined by the Board of Directors, the Chairman of the Board
of Directors, if any, shall preside at all meetings of the Board of Directors
and shareholders. He shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meetings at which he presides,
including, without limitation, the establishment of the procedures for the
maintenance of order, safety, limitations on the time allotted to questions or
comments on the affairs of the Corporation, restrictions on entry to
4
<PAGE>
any such meeting after the time prescribed for the commencement thereof, and the
opening and closing of the voting polls. In the event of the absence or
disability of the Chief Executive Officer, the Chairman of the Board shall
perform the duties and have the powers and authorities of the Chief Executive
Officer. He shall have such other powers and duties as may be assigned to him by
the Board of Directors.
Section 504. Powers and Duties of the Chief Executive Officer.
The Chief Executive Officer shall have general supervision of all of the
departments and business of the Corporation. The Chief Executive Officer shall
be responsible for having all orders and resolutions of the Board of Directors
carried into effect. The Chief Executive Officer shall execute on behalf of the
Corporation and may affix or cause to be affixed a seal to all authorized
documents and instruments requiring such execution, except to the extent that
signing and execution thereof shall have been delegated to some other officer or
agent of the Corporation by the Board of Directors or by the Chief Executive
Officer. The Chief Executive Officer shall be a member of the Board of
Directors.
Section 505. Powers and Duties of the President. The President
shall perform such duties as are prescribed by the Board of Directors or the
Chief Executive Officer. In the event of the absence or disability of the Chief
Executive Officer and the Chairman of the Board, the President shall perform the
duties and have the powers and authorities of the Chief Executive Officer. The
President shall execute on behalf of the Corporation and may affix or cause to
be affixed a seal to all authorized documents and instruments requiring such
execution, except to the extent that signing and execution thereof shall have
been delegated to some other officer or agent of the Corporation by the Board of
Directors or the Chief Executive Officer. The President need not be a member of
the Board of Directors.
Section 506. Powers and Duties of the Vice-Presidents. Each
Vice-President shall have the powers and perform the duties as may be designated
by the Board of Directors. Any Vice-President designated as having
responsibility for a specific area of the Corporation's affairs shall rank
superior to the other Vice-Presidents in relation to matters within that area.
Section 507. Powers and Duties of the Secretary. The Secretary
shall be responsible for the keeping of the minutes of all meetings of the Board
of Directors, shareholders and all committees, in books provided for that
purpose, and for the giving and serving of all notices for the Corporation. He
shall have charge of the corporate seal, the certificate books, transfer books
and stock ledgers, and other such books and papers as the Board of Directors may
direct. He shall perform all other duties ordinarily incident to the office of
Secretary and shall have such other powers and perform such other duties as may
be assigned to him by the Board of Directors.
Section 508. Powers and Duties of the Treasurer. Unless
otherwise determined by the Board of Directors, the Treasurer shall have charge
of all the funds and securities of the Corporation which may come into his
hands. When necessary or proper, unless otherwise determined by the Board of
Directors, he shall endorse for collection on behalf of the Corporation checks,
notes, and other obligations, and shall deposit the same to the credit of the
Corporation in such banks or depositories as the Board of Directors may
designate and shall sign all receipts and
5
<PAGE>
vouchers for payments made to the Corporation. He shall be responsible for the
regular entry, in books of the Corporation to be kept for such purpose, of a
full and accurate account of all funds and securities received and paid by him
on account of the Corporation. Whenever required by the Board of Directors, he
shall render a statement of the financial condition of the Corporation. He shall
have such other powers and shall perform such other duties as may be assigned to
him from time to time by the Board of Directors.
Section 509. Powers and Duties of the Assistant Officers.
Unless otherwise determined by the Board of Directors, each assistant officer,
if elected, shall have the powers and perform the duties as may be designated by
his respective superior officer.
Section 510. Delegation of Office. The Board of Directors may
delegate the powers or duties of any officer of the Corporation to any other
person from time to time.
Section 511. Vacancies. The Board of Directors shall have the
power to fill any vacancies in any officer occurring from whatever reason.
Section 512. Compensation. The Board of Directors shall
determine the compensation of the Chief Executive Officer and President.
ARTICLE VI. PERSONAL LIABILITY OF DIRECTORS AND INDEMNIFICATION.
Section 601. Personal Liabilities of Directors. The personal
liability of directors shall be limited as stated in the Certificate of
Incorporation, as amended from time to time.
Section 602. Mandatory Indemnification of Directors and
Officers. The Corporation shall, to the fullest extent permitted by applicable
law, indemnify its directors and executive 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 executive officer is or was a director or executive 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 executive officer of the Corporation
entitled to indemnification under this Section 602 is hereafter called a "person
covered by Section 602 hereof." The term "executive officer" as used herein
shall refer to the Chairman of the Board, Chief Executive
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Officer, President and other officers as the Board of Directors may by
resolution designate as "executive officers" for purposes of this Article VI.
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 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 the Delaware General
Corporation Law 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.
ARTICLE VII. SHARES OF CAPITAL STOCK.
Section 701. Authority to Sign Share Certificates. Every share
certificate shall be signed by the Chairman of the Board, Chief Executive
Officer, 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; and (c) satisfied any other reasonable requirements (including,
without limitation, providing a surety bond) fixed by the Board of Directors.
ARTICLE VIII. GENERAL.
Section 801. Fiscal Year. The fiscal year of the Corporation
shall be determined by the Board of Directors. In the absence of such
determination, the fiscal year shall be the calendar year.
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. 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 804. 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.
9
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Section 805. 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 806. 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.
Section 807. Gender. The masculine gender of pronouns includes
the feminine and neuter.
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 the affirmative vote of a
majority 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 votes cast by all members of the Board of Directors at
any regular or special meeting of the Board duly convened.
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 this 2nd day of July, 1997, and
shall be effective as of said date.
Section 1002. Amendments or Repeals.
Date Amended
10
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Section Involved or Repealed Adopted By
11
<PAGE>
NUMBER ________
COMMON STOCK
CUSIP No. ____________
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PHOENIX PRESCHOOL HOLDINGS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.10 PER
SHARE OF
Phoenix Preschool Holdings, Inc. (the "Corporation"), a Delaware corporation.
The shares represented by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
DATED
------------------------
- ----------------------------- -------------------------------
Michael C. Koffler
Corporate Secretary Chairman, President and Chief Executive Officer
[Seal]
Countersigned and Registered:
Continental Stock Transfer & Trust Company
Transfer Agent and Registrar
By:
-----------------------------------------------
<PAGE>
Phoenix Preschool Holdings, Inc.
The shares represented by this certificate are issued subject to all
the provisions of the Certificate of Incorporation (Certificate of
Incorporation) and the Bylaws ("Bylaws") of Phoenix Preschool Holdings, Inc.
(the "Company") as from time to time amended (copies of which are on file at the
principal executive offices of the Company).
The Company will furnish to any stockholder upon request and without
charge a full statement of the powers, designations, preferences and relative
participating, optional or other special rights of each authorized class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights, to the extent that the same have been fixed, and
of the authority of the board of directors to designate the same with respect to
other series. Such request may be made to the Company or to its Transfer Agent
and Registrar.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT_____ Custodian_____
TEN ENT - as tenants by the entirety (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gift to Minors Act- ________
survivorship and not as tenants (State)
in common. UNIF TRANS MIN ACT_____Custodian_____
(Cust) (Minor)
Under Uniform Transfers to Minors Act-______
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received,_____________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
___________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
___________________________________________________________________________________________________________________
_____________________________________________________________________________________________________________Shares
of 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 Company with full power of substitution in the premises.
Dated_______________________________________ _____________________________________________________
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED:
By ______________________________________________________________________
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.
</TABLE>
<PAGE>
WARRANT AGREEMENT
AMONG
PHOENIX PRESCHOOL HOLDINGS, INC.,
a Delaware corporation,
MAIDSTONE FINANCIAL, INC.
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
<S> <C> <C>
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
</TABLE>
i
<PAGE>
Warrant Agreement
THIS WARRANT AGREEMENT, dated as of __________ ___, 1997, is among
Phoenix Preschool Holdings, Inc., a Delaware corporation (the "Company"),
Maidstone Financial, Inc. (the "Underwriter") 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 Underwriter, an aggregate of up to
1,300,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), and 2,600,000 redeemable Common Stock purchase warrants ("Warrants")
and, pursuant to the Underwriter's over-allotment option (the "Over-allotment
Option"), up to an additional 195,000 shares of Common Stock and 390,000
Warrants.
In connection with the IPO the Company proposes to sell to the
Underwriter warrants (the "Underwriter's Warrants") to purchase up to 130,000
shares of Common Stock and up to 260,000 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
3,875,000 Warrants to purchase up to an aggregate of 3,875,000 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 390,000 Warrants to purchase up to an aggregate of 390,000
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.
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<PAGE>
Upon exercise of the Underwriters' Warrant as provided therein,
certificates representing up to 260,000 Warrants to purchase up to an aggregate
of 260,000 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.
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 FOUR DOLLARS AND FIFTY
CENTS ($4.50) (as adjusted as hereinafter provided, the "Warrant Price"), at any
time during the period (the "Exercise Period") commencing on __________ __ 1998
[the first 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 fourth
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.
2
<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.
Notwithstanding the foregoing, Warrants which were
automatically converted from Bridge Warrants may not be transferred by the
initial holders thereof until expiration of the twenty-four (24) month period
commencing on the Effective Date, unless an earlier transfer is approved in
advance and in writing by Maidstone Financial, Inc. Accordingly, such Warrants
may certain legends and be subject to stop transfer and other restrictions
limiting transfers during such 24 month period.
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
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
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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 Underwriter, 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 Underwriter 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 Underwriter 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 Underwriter 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
Underwriter 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 Underwriter with such information, in connection with the exercise
of each Warrant, as the Underwriter shall reasonably request.
(ii) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Underwriter 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 Underwriter in the
amount of such Exercise Fee. In the event that an Exercise Fee is paid to the
Underwriter 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
Underwriter is not entitled to an Exercise Fee, the Underwriter will return such
Exercise Fee to the Warrant Agent which shall forthwith return such fee to the
Company.
The Underwriter 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 Underwriter.
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.
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
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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 $4.50 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 $2.25 per share and the adjusted
number of shares purchasable upon exercise of this
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Warrant would be 20 shares. Such adjustment shall be made successively whenever
any event listed above shall occur.
(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.
(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.
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(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)
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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).
(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 first anniversary of the date of the Prospectus (with
the consent of the Underwriter), 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 $8.00 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.
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
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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.
(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
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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.
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,
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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.
4 Penn Center Plaza
Philadelphia, PA 19103
Attention: Frederick D. Lipman, Esq.
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
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Any notice pursuant to this Agreement to be given by the Warrant Agent
or the Company to the Underwriter 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:
Maidstone Financial, Inc.
101 East 52nd Street
New York, New York 10022
Attention: Marshall Bernstein
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.
13
<PAGE>
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:
MAIDSTONE FINANCIAL, INC.
By:_______________________________________________
Name: Marshall Bernstein
Title: Chairman of the Board
14
<PAGE>
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 Delaware 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 $4.50, 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, Maidstone Financial, Inc.
(the "Underwriter") 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 fourth 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 __________ ___, 1998 [the
first 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 $8.00.
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
Underwriter 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 Maidstone
Financial, 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>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED
EFFECTIVE UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF SUCH ACT IS AVAILABLE.
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
8% Promissory Note
$25,000
PHOENIX PRESCHOOL EDUCATION CENTERS, INC., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to the order of
________________________________ (the "Payee), residing at ____________________,
on the earlier of 16 months following the closing for the sale of up to 48
Units, each consisting of the Company's eight percent Promissory Note and
Warrants to purchase 50,000 shares of Common Stock, 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 principal sum of Twenty-Five Thousand ($25,000) Dollars (or such lesser
principal amount as may then be outstanding), together with unpaid interest
(computed on the basis of a 360-day year of twelve 30-day months) (i) on the
unpaid balance at the rate of eight percent per annum from the date hereof and
(ii) to the extent legally enforceable, on any overdue installment of interest
at the rate of eight percent per annum until the principal hereof and interest
thereon shall have been paid. Interest on the principal amount of the Note shall
be due and payable annually, with the first such interest payment due and
payable one year from the date hereof. The principal amount of the Note may be
prepaid by the Company, in whole or in part, without premium or penalty, at any
time. Upon any prepayment of this Note, all accrued but unpaid interest on the
principal amount being prepaid shall be paid to the holder on the date of
prepayment. All payments hereunder shall be applied first to interest then to
principal.
If the Company shall fail to make a payment of principal or interest
when due; or shall make an assignment for the benefit of creditors, file a
petition in bankruptcy, be adjudicated insolvent or bankrupt, suffer an order
for relief under any federal bankruptcy law, petition or apply to any tribunal
for the appointment of a custodian, receiver or any trustee for the Company or
any substantial part of his assets, or shall commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
affect; or if there shall have been filed any such petition or application, or
any such proceeding shall have been commenced against the Company, which remains
undismissed for a period of sixty (60) days or more; or if the Company, by any
act or
1
<PAGE>
omission shall indicate consent to, approve of or acquiescence in any such
petition, application or proceeding or the appointment of, a custodian, receiver
or any trustee for all or any substantial part of its properties, or if the
Company shall suffer such custodianship, receivership, or trusteeship to
continue undischarged for a period of sixty (60) days or more, or the Company
violates any term or provision of this Note and same remains uncured for a
period of 15 days after notice thereof by any Noteholder, then and in any such
event (each such event, an "Event of Default"), the outstanding principal amount
of this Note, together with all accrued and unpaid interest thereon, shall be
and become immediately due and payable.
This Note is issued pursuant to a Subscription Agreement, dated as of
the date hereof, between the Company and the Payee (the "Subscription
Agreement").
Payments of principal, premium, if any, and interest are to be made in
lawful money of the United States of America at the principal office of the
Company.
1. Restrictions on Transfer.
The holder acknowledges that he has been advised by the Company that
this Note has not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), that the Note is being issued, on the basis of the
statutory exemptions provided by Sections 4(2) and 4(6) of the Securities Act
and Regulation D promulgated under Section 4(2) of the Securities Act
("Regulation D) relating to transactions by an issuer not involving any public
offering, and that the Company's reliance upon these statutory exemptions are
based in part upon the representations made by the holder in the holder's
Subscription Agreement, including the representation that the holder is an
"accredited investor" (as defined in Rule 501(a) of Regulation D). The holder
acknowledges that he has been informed by the Company of, or is otherwise
familiar with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder on the transfer of securities. In
particular, the holder agrees that no sale, assignment, hypothecation or
transfer of this Note shall be valid or effective, and the Company shall not be
required to give any effect to any such sale, assignment, hypothecation or
transfer, unless (i) the sale, assignment, hypothecation or transfer of this
Note is registered under the Securities Act (and the Company has no obligation
or intention to so register the Note) or (ii) the Note is sold, assigned,
hypothecated or transferred in accordance with all the requirements and
limitations of Rule 144 under the Securities Act, or such sale, assignment, or
transfer is otherwise exempt from registration under the Securities Act.
2. Covenants of Company.
The Company covenants and agrees that, so long as this Note shall be
outstanding, it will:
(i) Promptly pay and discharge all lawful taxes,
assessments and governmental charges or
levies imposed upon the Company or upon
2
<PAGE>
its income and profits, or upon any of its
property, before the same shall become in
default, as well as all lawful claims for
Labor, materials and supplies which, if
unpaid, might become a lien or charge upon
such properties or any part thereof;
provided, however, that the Company shall
not be required to pay and discharge any
such tax, assessment, charge, levy or claim
so long as the validity thereof shall be
contested in good faith by appropriate
Proceedings, and the Company shall set aside
on its books adequate reserves with respect
to any such tax, assessment, charge, levy or
claim so contested
(ii) Do or cause to be done all things necessary
to preserve and keep in full force and
effect its corporate existence, rights and
franchises and comply with all laws
applicable to the Company as its counsel may
advise;
(iii) At all times maintain, preserve, protect and
keep its property used and useful in the
conduct of its business in good repair,
working order and conditions, and from time
to time make all needful and proper repairs,
renewals, replacements, betterments and
improvements thereto, so that the business
carried on in connection therewith may be
properly and advantageously conducted at all
times;
(iv) Other than indebtedness incurred in
connection with the presently proposed or
future acquisition of preschool centers, the
Company will not issue or incur any
indebtedness which is senior to or in parity
with the Company's obligations under this
Note, except for certain Notes of which this
Note forms a part of a series aggregating a
principal amount not in excess of
$1,200,000.
(v) Keep adequately insured by financially sound
insurers, all property of a character
usually insured by similar corporations and
carry such other insurance as is usually
carried by similar corporations; and
(vi) At all times keep true and correct books,
records and accounts.
3. Miscellaneous.
3.1 All the covenants and agreements made by the Company in
this Note shall bind its successors and assigns.
3.2 No recourse shall be had for the payment of the principal,
interest or
3
<PAGE>
premium, if any, on this Note or for any claim based hereon or otherwise in any
manner in respect hereof, against any incorporator, stockholder, officer or
director, past, present or future, of the Company or of any predecessor
corporation, whether by virtue of any constitutional provision or statute or
rule of law, or by the enforcement of any assessment or penalty or in any other
manner, all such liability being expressly waived and released by the acceptance
hereof and as part of the consideration for the issue hereof.
3.3 No course of dealing between the Company and the holder
hereof shall operate as a waiver of any right of any holder hereof, and no delay
on the part of the holder in exercising any right hereunder shall so operate.
Any such waiver must be in writing and signed by the Holder and the Company.
3.4 This Note may be amended only by a written instrument
executed by the Company and the holder hereof. Any amendment shall be endorsed
upon this Note, and all future holders shall be bound thereby.
3.5 All communications provided for herein shall be sent,
except as may be otherwise specifically provided, by registered or certified
mail if to the holder of this Note, to the address shown on the books of the
Company; and if to the Company, to: PHOENIX PRESCHOOL EDUCATION CENTERS, INC.,
150 East 58th Street, 31st Floor, New York, New York, 10155, Attention:
President, or to such other address as the Company may advise the holder of this
Note in writing. Notices shall be deemed given when mailed.
3.6 The provisions of this Note shall in all respects be
construed according to, and the rights and liabilities of the parties hereto
shall in all respects be governed by, the laws of the State of New York.
3.7 In the event that this Note is placed in the hands of an
attorney for collection, or in the event that any action be instituted on this
Note, or any action is taken with respect to a default hereunder, the holder
hereof shall be entitled to the payment by the Company and any other party
liable for the obligations of the Company hereunder of all expenses in
connection therewith, including, without limitation, reasonable attorney fees.
3.8 The headings of the Sections of this Note are inserted for
convenience only and shall not be deemed to constitute a part of this Note.
4
<PAGE>
IN WITNESS WHEREOF, PHOENIX PRESCHOOL EDUCATION CENTERS, INC. caused
this Note to be executed in its corporate name by its Chairman, President and
Chief Executive Officer, and its seal to be affixed hereto.
Dated: 1997
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
By:____________________________
Michael C. Koffler
Chairman, President and Chief Executive Officer
[Seal]
- ----------------------------
Secretary
<PAGE>
No. PBW-_______ Warrant to Purchase _______ shares of
Common Stock
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
Common Stock Purchase Warrant
, 1997
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR OTHERWISE
DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED
EFFECTIVE UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE ACT IS AVAILABLE.
THIS CERTIFIES THAT ___________________ (hereinafter
sometimes called the "Holder"), residing at _______________________is entitled
to purchase from Phoenix Preschool Education Centers, Inc., a Delaware
corporation (the "Company"), at the price and during the period hereinafter
specified, up to __________ shares of the Company's common stock, $.10 par value
(the "Common Stock"). Capitalized terms used herein without definition shall
have the meanings assigned to them in the Company's Confidential Private
Placement Memorandum dated __________________, 1997 (the "Memorandum").
This Warrant, together with warrants of like tenor, is subject to
adjustment in accordance with Paragraph 7 of this Warrant.
1. (a) The rights represented by this Warrant shall be exercisable at
any time during the period commencing 12 months following the date of the
Closing and ending on the fifth anniversary of the date of the Closing (the
"Expiration Date") at a purchase price of $4.50 per share (the "Exercise
Price"), subject to adjustment in accordance with Paragraph 7. After the
Expiration Date, the Holder shall have no right to purchase any shares of Common
Stock ("Public Warrant ") purchasable upon exercise of this Warrant.
(b) Notwithstanding anything herein contained to the contrary,
the Company and the Holder agree that in the event that the terms and conditions
of the redeemable warrants to be registered in the registration statement for
the Company's Initial Public Offering are not
1
<PAGE>
identical to the terms and conditions of this Warrant, this Warrant will be
modified upon the closing of such Initial Public Offering to conform exactly to
the terms and conditions of the Public Warrants offered pursuant to such
registration statement.
2. The rights represented by this Warrant may be exercised at any time
prior to the Expiration Date, in whole or in part, by (i) the surrender of this
Warrant (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); and (ii) payment to the
Company of the Exercise Price then in effect for the number of shares specified
in the above-mentioned purchase form together with applicable stock transfer
taxes, if any. This Warrant shall be deemed to have been exercised, in whole or
in part to the extent specified, immediately prior to the close of business on
the date this Warrant is surrendered and payment is made in accordance with the
foregoing provisions of this Paragraph 2, and the person or persons in whose
name or names the certificates for shares of Common Stock shall be issuable upon
such exercise shall become the holder or holders of record of such Common Stock
at that time and date. The certificate or certificates for the Common Stock so
purchased shall be delivered to such person or persons within a reasonable time,
not exceeding thirty (30) days, after the rights represented by this Warrant
shall have been so exercised.
3. Neither this Warrant nor the shares of Common Stock issuable upon
exercise hereof have been registered under the Securities Act of 1933, as
amended (the "1933 Act"), nor under any state securities law and shall not be
sold, transferred, assigned hypothecated or otherwise disposed of until a
registration statement with respect thereto becomes or is declared effective
under the 1933 Act or the Company receives an opinion of counsel satisfactory to
the Company stating that an exemption from the registration requirements of the
1933 Act and such state securities laws is available.
4. The Company shall not be obligated to register this Warrant or the
shares of Common Stock issuable upon exercise of this Warrant in accordance with
the 1933 Act.
5. The Company covenants and agrees that all shares of Common Stock
which may be issued upon exercise of this Warrant will, upon issuance, be duly
and validly issued, fully paid and nonassessable and no personal liability will
attach to the Holder thereof. The Company further covenants and agrees that
until the Expiration Date, the Company will at all times have authorized and
reserved a sufficient number of shares of its Common Stock to provide for the
exercise of this Warrant.
6. This Warrant shall not entitle the Holder to any rights, including,
without limitation, voting rights, as a stockholder of the Company.
7. The Exercise 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:
2
<PAGE>
(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 $4.50 per share and the number of
shares purchasable upon exercise of this Warrant was 50,000, the adjusted
Exercise Price immediately after such event would be $2.25 per share and the
adjusted number of shares purchasable upon exercise of this Warrant would be
100,000 shares. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) Whenever the Exercise 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 Exercise
Price in effect on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(c) No adjustment in the Exercise 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 Paragraph 7 shall be made to the nearest cent or
one-hundredth of a share, as the case may be. Anything in this Paragraph 7 to
the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Exercise Price, in addition to those
required by this Paragraph 7, 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.
3
<PAGE>
(d) Whenever the Exercise Price is adjusted as herein provided, the
Company shall compute the adjusted Exercise Price in accordance with this
Paragraph 7 and shall prepare a certificate signed by the chief financial
officer or accounting officer of the Company setting forth the adjusted Exercise
Price, and shall promptly cause a notice setting forth the adjusted Exercise
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 7, 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 Paragraph 7, 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.
(f) Notwithstanding any adjustment in the Exercise 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 Exercise Price, at any
time prior to the expiration of this Warrant.
8. Upon the consummation of an initial public offering of the Company's
Common Stock and the Public Warrants underwritten by Maidstone Financial, Inc.,
this Warrant automatically will be converted into the same number of Public
Warrants as the number of shares of Common Stock purchasable upon exercise of
this Warrant immediately prior thereto.
9. This Agreement shall be governed by and in accordance with the laws
of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, Phoenix Preschool Education Centers, Inc. has
caused this Warrant to be signed by its duly authorized officer as of the date
set forth below.
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
By:___________________________________
Michael C. Koffler
Chairman, President and Chief Executive Officer
Dated: 1997
5
<PAGE>
EXERCISE FORM
To Be Executed by the Holder
In Order to Exercise Warrant
The undersigned Holder hereby irrevocably elects to exercise this
Warrant and to purchase shares of the Company's Common Stock issuable upon the
exercise of such Warrant, and requests that certificates for such securities
shall be issued in name of:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
(please print or type name and address)
---------------------------------------------------------
(please insert social security or other identifying number)
and be delivered:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
(please print or type name and address)
---------------------------------------------------------
(please insert social security or other identifying number)
and if such number of shares of Common Stock shall not be all the shares
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such shares be registered in the name of, and delivered to, the
Holder.
6
<PAGE>
EXHIBIT C
FINANCIAL STATEMENTS
<PAGE>
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
NON-QUALIFIED STOCK OPTION FOR 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 ("Common Stock"), of
Phoenix Preschool Education Centers, Inc., a Delaware corporation (the
"Company") at a price of $___________ per share pursuant to the Company's
Non-Employee Stock Option Plan (the "Plan").
Your option does not become vested prior to the later of (a) your
exercisability dates described in the next succeeding paragraph or (b) the first
closing date for the initial public offering of the Common Stock of the Company
(or of a holding company owning all of the Company's outstanding Common Stock)
in which the Company (or such holding company) raises at least $5 million (the
"IPO Date"). In the event that the IPO Date does not occur prior to the
termination of this option (whether such termination occurs on the Scheduled
Termination Date as described in the next succeeding paragraph or on an earlier
termination date described hereafter in this option), this option shall
terminate and be of no force or effect, regardless of whether or not this option
has otherwise become exercisable.
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,
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<PAGE>
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. No
fractional shares shall be issued or delivered. 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 hereafter defined) of the
Company after the IPO Date, 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 to be similar circumstances)
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 a majority of
the members of the board of directors of the Company;
2. A change within a twelve-month period in the holders of
more than 50% of the outstanding voting stock of the Company; or
3. 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
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<PAGE>
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 consultancy with 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 your consultancy due to
disability or death (but in no event later than the Scheduled Termination Date).
After the date your consultancy 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 consultancy terminated.
If you die while a consultant with 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
consultancy 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
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<PAGE>
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.
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 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
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<PAGE>
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
(i) all federal, state and local income tax withholding required to be withheld
by the Company in connection with the option exercise and (ii) your 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:
(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, acknowledgements 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
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<PAGE>
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.
Nothing herein shall modify your status as an at-will consultant of the
Company. Further, nothing herein guarantees you retention as a consultant for
any specified period of time. This means that either you or the Company may
terminate your consultancy at any time for any reason, or no reason. You
recognize that, for instance, you may terminate your consultancy or the Company
may terminate your consultancy 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.
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<PAGE>
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 EDUCATION CENTERS, 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. This further confirms that this option reflects a
verbal commitment made by the Company to me on the date of its grant as
reflected hereon and discharges any obligation which the Company may have to
grant a stock option to me.
____________________________________________ _________________
(Signature) (Date)
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<PAGE>
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
1995 EMPLOYEE STOCK OPTION PLAN
1. Purpose of Plan
The purpose of this 1995 Employee Stock Option Plan (the "Plan") is to
provide additional incentive to officers and other key employees of Phoenix
Preschool Education Centers, 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 ("Common Stock"),
and thereby acquire a proprietary interest in the Company and an increased
personal interest in the Company's continued success and progress, to the mutual
benefit of officers, employees and shareholders.
2. Aggregate Number of Shares
25,000 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. 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.
4. Administration of Plan
(a) Prior to the registration of the Company's common stock under
Section 12 of the Securities Exchange Act of 1934, this Plan shall be
administered by the Company's Board of Directors and, after such such
registration, by an Option Committee ("Committee") appointed by the Company's
Board of Directors. The Committee 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 the meaning of Rule 16b-3(c)(2)(i) under the
Securities Exchange Act of 1934, as amended, or any future corresponding rule.
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. The term "Committee", as used in
this Plan and the options granted hereunder, refers to the Board of Directors
prior to the registration of the Company's common
<PAGE>
stock under Section 12 of the Securities Exchange Act of 1934 and, after such
registration, to the Committee.
(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 Small Cap 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 Small
Cap 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
none of the foregoing, a price determined by the Committee.
(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. 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
<PAGE>
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 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. 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 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."
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 modified or amended
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.
<PAGE>
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) Corporate action constituting an offer of stock for sale
to any employee 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 employee, regardless of when the option is actually delivered to
the employee or acknowledged or agreed to by him.
(c) 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.
(d) References in this Plan to the Code shall be deemed to
also refer to the corresponding provisions of any future United States revenue
law.
(e) The use of the masculine pronoun shall include the
feminine gender whenever appropriate.
<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 ("Common Stock"), of
Phoenix Preschool Education Centers, Inc., a Delaware corporation (the
"Company") at a price of $2.50 per share pursuant to the Company's 1995 Employee
Stock Option Plan (the "Plan").
Your option does not become vested prior to the later of (a) your
exercisability dates described in the next succeeding paragraph or (b) the first
closing date for the initial public offering of the Common Stock of the Company
(or of a holding company owning all of the Company's outstanding Common Stock)
in which the Company (or such holding company) raises at least $5 million (the
"IPO Date"). In the event that the IPO Date does not occur prior to the
termination of this option (whether such termination occurs on the Scheduled
Termination Date as described in the next succeeding paragraph or on an earlier
termination date described hereafter in this option), this option shall
terminate and be of no force or effect, regardless of whether or not this option
has otherwise become exercisable.
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. No fractional shares shall be
issued or delivered. 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 hereafter defined) of the
Company after the IPO Date, your option may, from and after the date of the
change of control, and notwithstanding the immediately
<PAGE>
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 to be
similar circumstances) 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 a majority of the members
of the board of directors of the Company;
2. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
3. 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
<PAGE>
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.
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.
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
(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:
(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
<PAGE>
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, acknowledgements 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, 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.
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.
<PAGE>
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 EDUCATION
CENTERS, 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>
APPENDIX II
NON-QUALIFIED 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 ("Common Stock"), of
Phoenix Preschool Education Centers, Inc., a Delaware corporation (the
"Company") at a price of $2.50 per share pursuant to the Company's 1995 Employee
Stock Option Plan (the "Plan").
Your option does not become vested prior to the later of (a) your
exercisability dates described in the next succeeding paragraph or (b) the first
closing date for the initial public offering of the Common Stock of the Company
(or of a holding company owning all of the Company's outstanding Common Stock)
in which the Company (or such holding company) raises at least $5 million (the
"IPO Date"). In the event that the IPO Date does not occur prior to the
termination of this option (whether such termination occurs on the Scheduled
Termination Date as described in the next succeeding paragraph or on an earlier
termination date described hereafter in this option), this option shall
terminate and be of no force or effect, regardless of whether or not this option
has otherwise become exercisable.
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. No fractional shares shall be
issued or delivered. 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 hereafter defined) of the
Company after the IPO Date,
<PAGE>
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 to be similar circumstances) 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 a majority of the members
of the board of directors of the Company;
2. A change within a twelve-month period in the holders of more than
50% of the outstanding voting stock of the Company; or
3. 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
<PAGE>
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.
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.
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 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
(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:
<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, representations, acknowledgements 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.
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.
<PAGE>
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 EDUCATION
CENTERS, 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>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
COASTAL KIDDIE COLLEGE, INC.
AND
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
<PAGE>
ASSET PURCHASE AGREEMENT dated as of the day of June 1996, by and among
Coastal Kiddie College, Inc., a corporation formed under the laws of the State
of North Carolina, whose mailing address is 112 John L. Hurst Drive, Swansboro,
North Carolina (hereinafter sometimes referred to as the "Company") and Phoenix
Preschool Education Centers, Inc., a corporation formed under the laws of the
State of Delaware, whose address is 150 East 58th Street, 31st Floor, New York,
New York (hereinafter sometimes referred to as the "Purchaser").
WHEREAS the Company is engaged in the business of providing day care
services to children from age of infancy through age five (5) at four (4)
locations details of which is indicated and incorporated herein, listed in
Exhibit "A" (hereinafter sometimes referred to as the "Business");
WHEREAS in connection with the operation of the Business, the Company
owns certain assets, including, but not limited to, machinery, equipment,
furniture, fixtures, vehicles, inventories and supplies;
WHEREAS the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company certain assets necessary for the operation
of the Business, upon the terms and subject to the conditions set forth herein;
and
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements and covenants hereinafter set forth, the Company and the Purchaser
hereby agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such definitions to be
equally applicable to both the singular and plural forms of the terms defined):
-1-
<PAGE>
"Ancillary Agreements" means the other agreements, documents and
instruments to be executed and delivered by the Purchaser or the Company,
pursuant hereto, including, without limitation, the Bill of Sale and Restrictive
Covenant.
"Assumed Liabilities" means, and shall consist only of, the following:
(a) all Liabilities arising out of or accruing from ownership,
possession or use of the Transferred Assets or operation of the Business from
and after the Closing Date; provided, however, that in no event shall the term
"Assumed Liabilities" include any Liabilities for Taxes of the Company of any of
the foregoing that are on, based on, or imposed with respect to gross, adjusted
gross or net income, or are alternative or add-on minimum Taxes, franchise
Taxes, sales Taxes, payroll Taxes, similar Taxes or contingent liabilities for
any suit for personnel injury instituted in a court of competent jurisdiction.
"Bill of Sale" means the bill of sale and assignment, providing for,
among other things, the transfer of the Transferred Assets by the Company as the
case may be, to the Purchaser.
"Business Day" means any day other than a day on which banks in New
York are authorized or required to be closed.
"Encumbrance" means any and all liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges, instruments, licenses,
encroachments, options, rights-of-recovery, judgments, orders and decrees of any
court of governmental entity, interests, product, environmental, Tax and other
liabilities and claims, in each case, of any kind or nature, whether secured or
unsecured, filed or unfiled, scheduled or unscheduled, noticed or unnoticed,
recorded or unrecorded, contingent or non-contingent, liquidated or
unliquidated, matured or unmatured, known or unknown.
"Excluded Assets" means all the assets of the Company not included in
the Transferred Assets, including, without limitation, all of the following:
-2-
<PAGE>
(a) all the cash on hand, deposits in bank accounts and marketable
securities;
(b) all the Receivables and prepaid expenses;
(c) all Actions, claims and contracts of the Company not assigned to
the Purchaser;
(d) all rights, title and interest in any refunds and credits for
prepaid amounts from Governmental Authorities with respect to Taxes that are the
responsibility of, and have been paid by, the Company under the terms of this
Agreement or prior to signing this Agreement;
(e) all rights, title and interests of the Company to and under this
Agreement and the Ancillary Agreements.
"Governmental Authority" means any United States Federal, state or
local or any foreign government, governmental commission, court, tribunal or
arbitrating body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"Inventory" means all inventory, merchandise and goods held for resale.
"Liabilities" means any and all debts, liabilities, losses, claims,
damages, costs expenses, interest, awards, judgments, penalties and obligations,
whether accrued or fixed, absolute or contingent, mature or unmatured,
determined or determinable, including, without limitation, those arising under
any law, rule, regulation or Action of any Governmental Authority and those
arising under any contract, commitment or undertaking.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
"Receivables" means any and all accounts receivable, notes and other
amounts receivable owed to the Company from third parties, including, without
limitation, third-party credit card
-3-
<PAGE>
companies, state and federal agencies, customers, vendors and employees, arising
from the Company's conduct of the Business, together with any unpaid financing
charges accrued thereon, including, without limitation, all deposits and
prepayments made by the Company.
"Retained Liabilities" means all Liabilities of the Company other than
the Assumed Liabilities, including, without limitation, the following:
(a) any litigation or claims with respect to any of the Transferred
Assets or the operation of the Business arising or accrued prior to the Closing
Date;
(b) except as set forth in Section 5.04, all Liabilities of the
Company;
(c) Liabilities for any Taxes imposed on the Transferred Assets that
are attributable to any period or portion thereof ending on or prior to the
Closing Date;
(d) any Liabilities arising or accrued with respect to ownership,
possession or use of any of the Transferred Assets or operation of the Business
prior to the Closing Date including all accounts payable of the Company as of
the Closing Date; and
"Tax" or "Taxes" means any and all taxes, imposts, duties, levies,
charges, withholdings, fees or excises imposed by any Governmental Authority or
instrumentality and any penalties or interest thereon, including, without
limitation, any gross, adjusted gross or net income tax, alternative or add-on
minimum tax, franchise, sales tax, employment-related tax (including, without
limitation, employee withholding, employment, social security, workers'
compensation, unemployment compensation and employer payroll taxes), or real or
personal property tax, together with any and all interest, penalties, additions
to tax or additional amounts imposed with respect to any of the foregoing.
"Transferred Assets" means any and all of the following:
-4-
<PAGE>
(a) all of the Company's rights and interests in and to the vehicles
all of which are owned by the Company (not leased) and are free and clear of
encumbrances, a list of said vehicles is attached hereto as Exhibit "B";
(b) all of the Company's rights, title and interest in the furnishings,
furniture, office supplies, signs, machinery, equipment, and all other tangible
assets and properties, real, personal or mixed, of every kind and description
physically located at or used by the Business, not specifically excluded, owned
by the Company;
(c) all rights, title and interest to the client list, including names,
address, telephone numbers and fees charged by the Business;
(d) all rights, title and interest in the existing telephone numbers
for the Business;
(e) all rights, title and interest in the names "Coastal Kiddie
College", "Coastal Kiddie College Early Learning Center", and any variations
thereof currently used by the Business for a period of ten (10) years from the
Closing Date;
(f) computer software and licenses presently used or owned by the
Business; and
(g) all of the assets listed in Exhibit D attached hereto.
ARTICLE II
Purchase and Sale
SECTION 2.01 Purchase and Sale; Assumption of Liabilities.
(a) On the terms and subject to the conditions set forth in this
Agreement, on the Closing Date, the Company shall sell, assign, transfer, convey
and deliver to the Purchaser the Transferred Assets, free and clear of all
liabilities, claims, duties, obligations and Encumbrances other than the Assumed
Liabilities, and the Purchaser shall purchase from the Company the Transferred
Assets and assume the Assumed Liabilities.
-5-
<PAGE>
(b) Except for the Assumed Liabilities or as expressly referred to in
any instrument of conveyance or assignments executed and delivered pursuant to
this Agreement, the Purchaser shall not assume or otherwise be responsible to
third parties for any Liabilities of the Company, or any Liabilities relating to
the Transferred Assets (including, but not limited to, the Retained
Liabilities).
SECTION 2.02
(a) Purchase Price. The aggregate consideration to be rendered for the
Transferred Assets which is based upon past performances and future exceptions
of the Business shall be three hundred sixty five thousand ($365,000.00) dollars
(the "Purchase Price").
(b) The Purchase Price is payable as follows:
(i) $115,000 to be paid at closing, ($10,000.00 of which shall
be deposited into an escrow account, to be returned to the Purchaser in the
event this transactions is terminated for any reason and not to be interpreted
as liquidated damages);
(ii) A note executed by the Purchaser to the Company in the
amount of $250,000.00 providing for payments to commence ninety (90) days from
the Closing Date and to provide for thirty two (32) equal payments of principal
with interest on the unpaid principal balance, paid quarterly until fully paid.
Interest will be calculated at an annual rate of eight (8%) percent.
(c) The Purchase Price is allocated as follows:
(i) Furniture and fixtures $ 40,000.00
(ii) Vehicles 50,000.00
(iii) Playground equipment 40,000.00
(iv) Equipment 60,000.00
(v) Inventory 15,000.00
(vi) Leasehold improvements 90,000.00
(vii) Customer list 20,000.00
(viii) Restrictive Covenant 50,000.00
-----------
Total $365,000.00
===========
-6-
<PAGE>
(c) The Purchase Price shall also include the services of Mr. David
Wells to train and help manage the Business and assist in locating future
businesses for the Purchaser to acquire subsequent to the Closing Date for a
period of three (3) months, for an average of five (5) hours per week, with the
actual amount of hours to vary on a week by week basis. Mr. David Wells will not
be entitled to any compensation for these services.
SECTION 2.03 Closing.
(a) The sale and purchase of the Transferred Assets and the assumption
of the Assumed Liabilities contemplated hereby shall take place at a closing
(the "Closing"), on or before July 15, 1996, (the "Closing Date").
(b) Notwithstanding the foregoing, the Closing may be held at a place
or at such other time or on such other date as the Company and the Purchaser
shall mutually agree upon in writing.
SECTION 2.04 Closing Deliveries.
(a) At the Closing the Company shall deliver, or cause to be delivered,
to the Purchaser the following:
(i) a Bill of Sale;
(ii) Leases for all of the locations of the Business. The
Leases will provide for an annual rent not to exceed $110,000.00 for year one of
the lease term, $120,000.00 for year two of the lease term, $140,000.000 for
year three of the lease term, $147,000.00 per year for years four and five of
the lease term and $150,000.00 per year for years six through ten of the lease
term. Additionally, the Leases will contain three options to renew the Leases,
at the election of the
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Purchaser, each for five year increments at an annual rental cost of $157,500.00
per year for the first five year option, $165,375.00 per year for the second
five year option and $173,643.75 per year for the third and final five year
option. All of said leases shall contain a Right of First Refusal for the
Purchaser to meet any offer for both the amount of consideration and terms of
the offer for sale of any or all of the leased property;
(iii) a Restrictive Covenant for a period of ten (10) years
and a radius of fifty (50) miles from the Business, executed by the Company, Mr.
David Wells and Mrs. Wanda Wells;
(iv) Motor Vehicle Title to all of the vehicles listed in
Exhibit B;
(v) Clear title to all of the Transferred Assets;
(vi) such other instruments as may be reasonably requested by
the Purchaser to transfer the Transferred Assets to the Purchaser or evidence
such transfers in the public records.
(b) At the Closing, the Purchaser shall deliver to the Company the
following:
(i) a note for the balance of the Purchase Price;
(ii) any such other instruments as may be reasonably requested
by the Company.
ARTICLE III
Representations and Warranties of the Company
As an inducement to the Purchaser to enter into this Agreement, the
Company represents and warrants to the Purchaser as follows:
SECTION 3.01. Authority of the Company. The execution and delivery of
this Agreement and the Ancillary Agreements by the Company, the performance by
them of their obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of the Company. This Agreement has been duly
executed and delivered by the Company and upon its execution and
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delivery the Ancillary Agreements will be, duly executed and delivered by the
Company, and (assuming due authorization, execution and delivery by the
Purchaser) this Agreement constitutes, and, upon their execution, the Ancillary
Agreements will constitute, legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
SECTION 3.02 No Conflict. The execution, delivery and performance of
this Agreement by the Company, and each of the Ancillary Agreements by the
Company, as the case may be, does not and will not (a) violate or conflict with
any statute, ordinance, law, rule, regulation or Governmental Order applicable
to the Company or the Transferred Assets, or (b) result in any breach of,
constitute a default (or event which with the giving of notice or lapse of time,
or both, would become a default) or require any consent under, or give to others
any rights of termination, amendment (including, without limitation, the
termination or diminution of any right to extend or renew any term), revocation,
acceleration or cancellation of, or result in the creation of any Encumbrance on
the Transferred Assets pursuant to, any note, bond, mortgage, indenture,
contract, agreement, license, permit, or other instrument relating to the
Transferred Assets to which the Company is a party or by which any of them or
any of the Transferred Assets are bound or affected, except such conflicts,
violations, breaches or defaults with respect to clauses (a) and (b) above that,
individually or in the aggregate, would not materially adversely affect the
value of any of the Transferred Assets or the Purchaser's ability to operate the
Business subsequent to the Closing or the Company's ability to transfer the
Transferred Assets to the Purchaser.
SECTION 3.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Company does not and will not, and the
execution, delivery and performance of the Ancillary Agreements by the Company,
as the case may be, will not, require any consent, approval, authorization or
other action by, or filing with or notification to, any Governmental Authority.
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SECTION 3.04 Inventory. The Company has good and marketable title to
the Inventory, all of which is located at the Business, free and clear of all
liens and Encumbrances and, following the consummation of the transactions
contemplated hereby, such title will be held by the Purchaser free and clear of
all Encumbrances.
SECTION 3.05 Brokers. Any amounts due to any broker, finder or
investment banker in connection with the transactions contemplated by this
Agreement, including Mr. Mark Hockenyos and The Institute For Small Business
Development, Inc., shall be paid solely by the Company. The Company agrees to
indemnify the Purchaser for any claims made by any such broker, finder or
investment banker against the Purchaser.
SECTION 3.06 Personal Property Lease. There are no personal property
leases for property or equipment used by the Company in connection with the
Business.
SECTION 3.07 Liabilities. Except for Taxes not yet due or payable, the
Company has no material liabilities due to any creditor or vendor. Any liability
that does exist will be fully satisfied, evidence of which will be supplied to
the Purchaser on or before the Closing Date. In the event a franchise or
corporate search should reveal any liability of the Company, Purchaser shall
have the right to set-off said liability against any payments due Company under
the note referenced in Section 2.04 of this Agreement. Company shall be
responsible to pay to any vendor the amount due for inventory or supplies
ordered by the Company prior to the Closing Date not received by the Closing
Date.
SECTION 3.08 Maintenance of Books and Records. The books and records of
the Company are complete and accurate in all material respects. All copies,
information, representation (oral and in writing) were true and correct on the
date made and continue to be true and correct as of the Closing Date.
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SECTION 3.09 Taxes. All federal, state and local income, ad valorem,
excise, sales, use, franchise, payroll, personal property, premium and other
Taxes and assessments of any kind, including any penalty payments and interest
thereon which have become due and payable by the Company have been properly
computed, duly reported, fully paid and discharged. There are no unpaid taxes
which are or could become a lien on the properties or assets of the Company,
including the Transferred Assets, except for current taxes not yet due and
payable. There are no pending assessments or proposed adjustments or audits
presently in progress with respect to such returns.
SECTION 3.10 Disclosed information. The Company represents and warrants
that it has disclosed, in writing, to the Purchaser any and all factors known or
that should have been known by it's officers that would have an adverse affect
on the future profitability of the Business subsequent to the Closing date. This
includes factors that are both regulatory or otherwise.
SECTION 3.11 Current Repairs To Be Made By The Company. The Company
agrees to make the following repairs at it's own costs, independent of SECTION
3.10 herein, prior to the Closing Date:
(i) repair the parking lot at the Bryn Mawr Building; and
(ii) replace the required kitchen equipment (stove and
refrigerator) in each of the buildings to meet NSF code that would be
satisfactory for all building, fire, sanitary and day care authorities for the
Purchaser.
ARTICLE IV
Representations and Warranties of the Purchaser
As an inducement to the Company to enter into this Agreement, the
Purchaser represents and warrants to the Company as follows:
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SECTION 4.01 Authority of the Purchaser. The execution and delivery by
the Purchaser of this Agreement and the Ancillary Agreement to which it is a
party, the performance by it of its obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of the Purchaser. This Agreement
has been duly executed and delivered by the Purchaser, and upon their execution
the Ancillary Agreements to which it is a party will be duly executed and
delivered by the Purchaser, and (assuming due authorization, execution and
delivery by the Company as the case may be) this Agreement constitutes, and upon
their execution and Ancillary Agreements to which it is a part will constitute,
legal valid and binding obligations of the Purchaser enforceable against the
Purchaser in accordance with their terms.
SECTION 4.02 No Conflict. The execution, delivery and performance by
the Purchaser of this Agreement and the Ancillary Agreements to which it is a
party do not and will not conflict with or violate any statute ordinance, law,
rule, regulation or Governmental Order applicable to the Purchaser.
SECTION 4.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Purchaser does not and will not, and the
execution, delivery and performance of the Ancillary Agreements to which it is a
party by the Purchaser will not, require any consent, approval, authorization or
other action by, or filing with or notification to, any Governmental Authority.
SECTION 4.04 Litigation. No action is pending against the Purchaser
which seeks to delay or prevent the consummation of the transactions
contemplated hereby or which may adversely affect or restrict the Purchaser's
ability to consummate the transactions contemplated hereby.
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ARTICLE V
Additional Agreements
SECTION 5.01 Conduct of Business Prior to the Closing.
(a) Between the date of this Agreement and the Closing Date, unless the
Company shall have obtained the Purchaser's prior written consent, the Company
shall use best efforts to continue in full force and effect without material
modification all existing policies or binders of insurance presently maintained
in respect of the Business.
(b) Except as contemplated by this Agreement, between the date of this
Agreement and the Closing Date the Company shall not directly or indirectly, do,
or propose or agree to do any of the following, without the prior written
consent of the Purchaser:
(i) increase the compensation payable or to become payable to
any of the employees or agents engaged in the operation of the Business.
(ii) sell, transfer, assign, pledge, encumber, lease,
sublease, license or otherwise dispose or any of the Transferred Assets, other
than the normal selling of Inventory in the ordinary course;
(iii) fail to defend, initiate or proceed with any material
matter before any Governmental Authority that is necessary to protect the
Transferred Assets;
(iv) fail to (A) maintain the Transferred Assets in their
condition as of the date hereof (ordinary wear and tear excepted), (B) maintain
insurance for the Transferred Assets in effect on the date of this Agreement or
(C) in the event of a casualty, loss or damage to any of the Transferred Assets
prior to the Closing Date either repair or replace such damaged assets with an
item of equal value and quality or at the option of the Purchaser, transfer the
proceeds of any insurance payable with respect to such casualty, loss or damage,
to the Purchaser.
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SECTION 5.02 Regulatory and other Authorizations. Each party hereto
will use its best efforts to obtain all authorizations, consents, orders and
approvals of all Governmental Authorities and officials that may be or become
necessary for its execution and delivery of, and the performance of its
obligations pursuant to, this Agreement or the Ancillary Agreements and will
cooperate fully with each other party in promptly seeking to obtain all such
authorizations, consents, orders and approvals. The parties hereto will not take
any action that will have the effect of delaying, impairing or impeding the
receipt of any required approvals.
SECTION 5.03 Notice of Developments. Prior to the Closing, each party
shall (a) give prompt notice to the other of any material development affecting
the ability of the parties to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements and (b) promptly notify the other party
in writing of any events, facts and occurrences arising subsequent to the date
hereof which could reasonably be expected to result in any material breach of
any representation, warrantee or agreement covenant contained in this Agreement.
SECTION 5.04 Conveyance Taxes. The Purchaser shall be liable for and
shall hold the Company harmless against any sales or use taxes that become
payable in connection with any of the transactions contemplated hereby;
provided, however, that the Purchaser shall not be liable under any
circumstances for any Taxes of the Company that are on or based upon the
Company's gross or net income and the Company will indemnify the Purchaser from
all losses, damages, liabilities and costs (including attorney's fees) relating
thereto. The Parties hereto shall reasonably cooperate in preparing and filing
all returns, reports and forms relative to all such Taxes and in resolving any
disputes or audits with respect to any taxable periods relating to such taxes.
SECTION 5.05 Further Action. Each of the parties hereto shall execute
such documents (including, without limitation, the Ancillary Agreements) and
other papers and take such further
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actions as may be reasonably required or desirable to carry out the provisions
hereof and the transactions contemplated hereby or, at or after the Closing, to
evidence the consummation of the transactions consummated pursuant to this
Agreement. Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use its best efforts to take, or cause to be taken, all
actions and to do or cause to be done, all other things necessary proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement and to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
SECTION 5.06 Cash in Business. The Company shall be entitled to all the
cash in the Business at the close of business on the day preceding the Closing
Date.
SECTION 5.07 Transferred Employees. On or prior to the Closing Date,
the Company shall pay or cause to be paid (or establish arrangements for prompt
payment acceptable to the Purchaser in its sole discretion) all base salary,
overtime, bonuses, commissions, benefits and other compensation due to the
existing employees, agents and consultants of the Company and payroll and
similar Taxes thereon for all periods up to and including the date immediately
preceding the Closing Date. Immediately prior to the Closing, the Company shall
terminate all of the employees of the Business and as of the Closing the
Purchaser may offer at-will employment to one or all of such employees
("Transferred Employees"). As of the Closing Date the Purchaser shall be
responsible to the Transferred Employees for all base salary overtime, bonuses,
commissions, benefits and payroll and similar Taxes thereon for all periods
beginning on or after the Closing Date.
SECTION 5.08 Necessary Modifications To Buildings. The Company shall be
responsible to make any and all modifications and repairs (in excess of five
hundred dollars ($500.00) per center) to the locations of the Business that are
required to be made by any licensing agency or
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governmental authority in order to be certifiable as licensed day care centers
for the capacity presently authorized as indicated in Exhibit A.
SECTION 5.09 Re-determination of Purchase Price. The parties hereto
agree that the Purchase Price was determined based upon the current earnings of
the Business and the reasonable expectation of the future earnings of the
Business. In the event any change shall occur, whether regulatory or otherwise,
prior to the Closing Date that materially adversely affects the potential income
of the Business, the parties hereto agree to re-negotiate the Purchase Price in
good faith. Any modifications to the Purchase Price shall be made by a decrease
in the note payable to the Company or any subsequent holder or holder in due
course (as defined in the Uniform Commercial Code). This modification shall not
alter or amend any other provision of the Agreement or the Ancillary Agreements,
nor the rights of the parties thereunder.
SECTION 5.10 Environmental Matters. (i) There are no outstanding
allegations that the Company is in violation of any federal, state or local law,
regulation, rule, order, decree, ordinance or permit relating to pollution
control or environmental matters, (ii) there are no administrative or judicial
proceedings or actions pending or threatened against the Company pursuant to
such laws, regulations, rules, orders, decrees, ordinances or permits and (iii)
there are no claims outstanding against the Company which are asserted pursuant
to such laws, regulations, rules, orders, decrees, ordinances or permits. The
Company has never been, and currently is not, in violation of any Federal, state
or local law, regulation, rule, order, decree, ordinance or permit relating to
pollution control or environmental matters.
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ARTICLE VI
Conditions to Closing
SECTION 6.01 Conditions to Obligations of the Company. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment, at or prior to the Closing Date of each of
the following conditions:
(i) Representations and Warranties. The representations and
warranties of the Purchaser contained in this Agreement shall have been true and
correct in all material respects when made (other than such representations and
warranties as are made as of another specified date) and shall be true and
correct in all material respects as of the Closing Date.
(ii) Covenants. The covenants and agreements contained in this
Agreement to be complied with by the Purchaser on or before the Closing Date
shall have been complied with in all material respects.
(iii) No Order, Proceeding or Litigation. No Governmental
Authority shall have enacted, issued, promulgated, enforced or entered any
Governmental Order (whether temporary, preliminary or permanent) which is in
effect and has the effect of making the transactions contemplated hereby illegal
or otherwise prohibiting the consummation of the transactions contemplated by
this Agreement.
SECTION 6.02 Conditions to Obligations of the Purchaser. The
obligations of the Purchaser to consummate the transactions contemplated hereby
shall be subject to the fulfillment, at or prior to the Closing, of each of the
following conditions:
(i) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and in all of the
documents and financial records provided by the Company shall have been true and
correct in all material respects when made (other than such
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representations and warranties as are made as of another specified date) and
shall be true and correct in all material respects as of the Closing Date.
Included in, but not limited to, the financial documents that the Company
warrants to be true and correct are the documents attached hereto as Exhibit C.
This representation shall survive the Closing Date.
(ii) Covenants. All the covenants and agreements contained in
this Agreement to be complied with by the Company on or before the Closing Date
shall have been complied with.
(iii) No Order, Proceeding or Litigation. No Governmental
Authority shall have enacted, issued, promulgated, enforced or entered any
Governmental Order (whether temporary, preliminary or permanent) which is in
effect and has the effect of making the transactions contemplated hereby illegal
or otherwise prohibiting the consummation of the transactions contemplated by
this Agreement.
(iv) Liabilities. The Company shall have no material
liabilities, except for liabilities for Taxes not yet due and payable and
vendors in the ordinary course of business which will be fully paid and
satisfied by the Closing Date and evidence of which will be supplied to the
Purchaser. Any and all Encumbrances relating to the Transferred Assets shall be
removed by said date.
ARTICLE VII
Termination
SECTION 7.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by either the Company or the Purchaser in the event of a material
breach or misrepresentation under this Agreement by the other party that is not
cured or is not in the progress of being cured within ten days after written
notice thereof is given by the party alleging such material
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breach or misrepresentation, in either case must be cured within fifteen days
after written notice;
(b) by the mutual written consent of the Company and the Purchaser;
(c) At the sole election of the Purchaser, in the event of any change
in law either within the State of North Carolina or under Federal Law or other
change relating to the Business that adversely affects the operation of Day Care
Centers or affect the operation of the Business after the Closing Date.
SECTION 7.02 Effect of Termination. In the event of the termination of
this Agreement as provided in Section 7.01(b) and (c), this Agreement shall
forthwith become void and there shall be no liability on the part of any party
hereto. Termination by either party in accordance with Section 7.01 (a) & (c)
shall be effective immediately upon the receipt of notice thereof and Section
7.01 (b) by a statement signed by both parties indicating mutual consent.
ARTICLE VIII
General Provisions
SECTION 8.01 Expenses. Except as otherwise provided in this Agreement,
all costs and expenses, including without limitation, fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses whether or not the Closing shall have
occurred.
SECTION 8.02 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered if delivered personally or by telecopy
(during regular business hours of Monday through Friday, 9 a.m. through 5 p.m.
excluding legal holidays) or five days after being mailed by registered, Federal
Express, U.S. Postal Service Overnight Mail or certified mail (postage prepaid,
return receipt
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requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice, except that notices of changes
of address shall be effective upon receipt):
(a) if to the Company:
Mr. David E. Wells
112 John L. Hurst Drive
Swansboro, North Carolina 28584
Telephone: (910) 326-7705
Telecopy: ( ) -
With a copy to:
Carl S. Milsted, Esq.
P.O. Box 766
320 New Bridge Street
Jacksonville, North Carolina 28541-0766
Telephone: (910) 455-1215
Telecopy: (910) 455-4702
(b) if to the Purchaser:
Mr. Michael C. Koffler
150 East 58th Street 31st Floor
New York, New York 10155
Telephone: (212) 826-6131
Telecopy: (212) 421-5887
With a copy to:
Craig S. Peligri, Esq.
54 Main Street
Hackensack, New Jersey 07601
Telephone: (201) 489-6500
Telecopy: (201) 489-6056
SECTION 8.03 Amendment. This Agreement may not be amended, modified,
terminated or discharged except by an instrument in writing signed by the
parties hereto.
SECTION 8.04 Waiver. At the time prior to any Closing, either the
Company or the Purchaser hereto may (a) extend the time for the performance of
any of the obligations or other acts
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of the other party hereto (b) waive any inaccuracies in the representations and
warranties made by the other party and contained herein or in any document
delivered by the other party pursuant hereto and (c) waive compliance by the
other party hereto with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by the party to be bound thereby.
SECTION 8.05 Headings. The headings contained in this agreement are for
reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.
SECTION 8.06 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
North Carolina or Federal law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect.
Upon such determination that any term or other provision is invalid, illegal or
incapable or being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are consummated as originally contemplated to the greatest
extent possible.
SECTION 8.07 Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and undertakings, both written and oral, with
respect to the subject matter hereof.
SECTION 8.08 Assignments. This Agreement may not be assigned by
operation of law or otherwise without the express written consent of the other
parties hereto (which consent may be granted or withheld in the sole discretion
of such other parties).
SECTION 8.09 No Third-Party Beneficiaries. This Agreement is for the
sole benefit of the parties hereto and their permitted assigns and nothing
herein, expressed or implied, shall give or be
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construed to give to any person or entity, other that the parties hereto, and
Indemnitee and such assigns, any legal or equitable rights hereunder.
SECTION 8.10 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of North Carolina.
SECTION 8.11 Counterparts. This Agreement maybe executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 8.12 Consent to Jurisdiction. Each of the parties hereto hereby
agree to the jurisdiction of the State court located within Onslow County, North
Carolina for the purposes of enforcing the other parties' rights under this
Agreement and consent that service of any and all process upon it may be made as
set forth in Section 8.02 hereof.
SECTION 8.13 Confidentiality. For purposes of this paragraph
"Confidential Information" shall mean all information, data and knowledge
(whether in the form of documents, know-how or otherwise) relating, directly or
indirectly, to any party which is disclosed to another party and which is not
publicly available. Each party shall keep the Confidential Information of the
other parties to any person except to such of its advisors who need to know for
the purposes of advising it on this proposed transaction. The provisions of this
Section shall not apply to any Confidential Information that is (i) or hereafter
becomes, in the public domain as a result of causes other than the acts or
omissions of the party hereto under the duty of confidentiality or (ii) required
by law to be disclosed. If the Closing does not occur, each party will promptly
return all documents containing Confidential Information furnished to it by any
other party.
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IN WITNESS WHEREOF, The Company and the Purchaser have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
Witness: COASTAL KIDDIE COLLEGE, INC.
("Company")
By:
- ------------------------------- -------------------------------------
David Wells, President
- ------------------------------- -------------------------------------
DAVID WELLS, Individual
- ------------------------------- -------------------------------------
WANDA WELLS, Individual
PHOENIX PRESCHOOL EDUCATION
CENTERS, INC. ("Purchaser")
By:
- ------------------------------- -------------------------------------
Michael C. Koffler, President
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ASSET PURCHASE AGREEMENT
BY AND BETWEEN
LIBBUS, INC.
AND
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
1
<PAGE>
business under the name Just-Us-Kids, whose mailing address is P.O. Box 224,
Cary, North Carolina 27511 (hereinafter sometimes referred to as the "Company")
and Phoenix Preschool Education Centers, Inc., a corporation formed under the
laws of the State of Delaware, whose address is 150 East 58th Street, 31st
Floor, New York, New York (hereinafter sometimes referred to as the
"Purchaser").
WHEREAS the Company is engaged in the business of providing day care
services to children from age of infancy through age twelve (12) at three (3)
locations details of which is indicated and incorporated herein, listed in
Exhibit "A" (hereinafter sometimes referred to as the "Business");
WHEREAS in connection with the operation of the Business, the Company
owns certain assets, including, but not limited to, machinery, equipment,
furniture, fixtures, vehicles, inventories and supplies;
WHEREAS the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company certain assets necessary for the operation
of the Business, upon the terms and subject to the conditions set forth herein;
and
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements and covenants hereinafter set forth, the Company and the Purchaser
hereby agree as follows:
ARTICLE I Definitions
SECTION 1.01. Certain Defined Terms.
As used in this Agreement, the following terms shall have the following
meanings (such definitions to be equally applicable to both the singular and
plural forms of the terms defined):
"Ancillary Agreements" means the other agreements, documents and
instruments to be executed and delivered by the Purchaser or the Company,
pursuant hereto, including, without limitation, the Bill of Sale and Restrictive
Covenant.
"Assumed Liabilities" means, and shall consist only of, the following:
(a) all Liabilities arising out of or accruing from ownership,
possession or use of the Transferred Assets or operation of the Business from
and after the Closing Date; provided, however, that in no event shall the term
"Assumed Liabilities" include any Liabilities for Taxes of the Company of any of
the foregoing that are on, based on, or imposed with respect to gross, adjusted
gross or net income, or are alternative or add-on minimum Taxes, franchise
Taxes, sales Taxes, payroll Taxes, similar Taxes or contingent liabilities for
any suit for personnel injury instituted in a court of competent jurisdiction.
"Bill of Sale" means the bill of sale and assignment, providing for,
among other things, the transfer of the Transferred Assets by the Company as the
case may be, to the Purchaser.
2
<PAGE>
"Business Day" means any day other than a day on which banks in New
York are authorized or required to be closed.
"Encumbrance" means any and all liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges, instruments, licenses,
encroachments, options, rights-of-recovery, judgments, orders and decrees of any
court of governmental entity, interests, product, environmental, Tax and other
liabilities and claims, in each case, of any kind or nature, whether secured or
unsecured, filed or unfiled, scheduled or unscheduled, noticed or unnoticed,
recorded or unrecorded, contingent or non-contingent, liquidated or
unliquidated, matured or unmatured, known or unknown.
"Excluded Assets" means all the assets of the Company not included in
the Transferred Assets, including, without limitation, all of the following:
(a) all the cash on hand, deposits in bank accounts and
marketable securities;
(b) all the Receivables and prepaid expenses;
(c) all Actions, claims and contracts of the Company not
assigned to the Purchaser;
(d) all rights, title and interest in any refunds and credits
for prepaid amounts from Governmental Authorities with respect to Taxes that are
the responsibility of, and have been paid by, the Company under the terms of
this Agreement or prior to signing this Agreement;
(e) all rights, title and interests of the Company to and
under this Agreement and the Ancillary Agreements.
"Governmental Authority" means any United States Federal, state or
local or any foreign government, governmental commission, court, tribunal or
arbitrating body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"Inventory" means all inventory, merchandise and goods held for resale.
"Liabilities" means any and all debts, liabilities, losses, claims,
damages, costs expenses, interest, awards, judgments, penalties and obligations,
whether accrued or fixed, absolute or contingent, mature or unmatured,
determined or determinable, including, without limitation, those arising under
any law, rule, regulation or Action of any Governmental Authority and those
arising under any contract, commitment or undertaking.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
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"Receivables" means any and all accounts receivable, notes and other
amounts receivable owed to the Company from third parties, including, without
limitation, third-party credit card companies, state and federal agencies,
customers, vendors and employees, arising from the Company's conduct of the
Business, together with any unpaid financing charges accrued thereon, including,
without limitation, all deposits and prepayments made by the Company. Any
Receivables received by the Purchaser subsequent to the Closing Date will be
promptly remitted to the Company, provided Company does not owe any money to
Purchaser.
"Retained Liabilities" means all Liabilities of the Company other than
the Assumed Liabilities, including, without limitation, the following:
(a) any litigation or claims with respect to any of the
Transferred Assets or the operation of the Business arising or accrued prior to
the Closing Date;
(b) except as set forth in Section 5.04, all Liabilities of
the Company;
(c) Liabilities for any Taxes imposed on the Transferred
Assets that are attributable to any period or portion thereof ending on or prior
to the Closing Date;
(d) any Liabilities arising or accrued with respect to
ownership, possession or use of any of the Transferred Assets or operation of
the Business prior to the Closing Date including all accounts payable of the
Company as of the Closing Date; and
"Tax" or "Taxes" means any and all taxes, imposts, duties, levies,
charges, withholdings, fees or excises imposed by any Governmental Authority or
instrumentality and any penalties or interest thereon, including, without
limitation, any gross, adjusted gross or net income tax, alternative or add-on
minimum tax, franchise, sales tax, employment-related tax (including, without
limitation, employee withholding, employment, social security, workers'
compensation, unemployment compensation and employer payroll taxes), or real or
personal property tax, together with any and all interest, penalties, additions
to tax or additional amounts imposed with respect to any of the foregoing.
"Transferred Assets" means any and all of the following:
(a) all of the Company's rights and interests in and to the
vehicles all of which are owned by the Company (not leased) and are free and
clear of encumbrances, a list of said vehicles is attached hereto as Exhibit
"B";
(b) all of the Company's rights, title and interest in the
furnishings, furniture, office supplies, signs, machinery, equipment, and all
other tangible assets and properties, real, personal or mixed, of every kind and
description physically located at or used by the Business, not specifically
excluded, owned by the Company;
(c) all rights, title and interest to the client list,
including names, address, telephone numbers and fees charged by the Business;
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(d) all rights, title and interest in the existing telephone
numbers for the Business;
(e) all rights, title and interest in the names
"Just-Us-Kids", and any variations thereof currently used by the Business and
any names used for a period of ten (10) years prior to the Closing Date by
Company.
(f) computer software and licenses presently used or owned by
the Business.
ARTICLE II Purchase and Sale
SECTION 2.01 Purchase and Sale; Assumption of Liabilities.
(a) On the terms and subject to the conditions set forth in
this Agreement, on the Closing Date, the Company shall sell, assign, transfer,
convey and deliver to the Purchaser the Transferred Assets, free and clear of
all liabilities, claims, duties, obligations and Encumbrances other than the
Assumed Liabilities, and the Purchaser shall purchase from the Company the
Transferred Assets and assume the Assumed Liabilities.
(b) Except for the Assumed Liabilities or as expressly
referred to in any instrument of conveyance or assignments executed and
delivered pursuant to this Agreement, the Purchaser shall not assume or
otherwise be responsible to third parties for any Liabilities of the Company, or
any Liabilities relating to the Transferred Assets (including, but not limited
to, the Retained Liabilities).
SECTION 2.02 (a) Purchase Price.
The aggregate consideration to be rendered for the Transferred Assets
which is based upon past performances and future exceptions of the Business
shall be three hundred thousand ($300,000.00) dollars (the "Purchase Price").
(a) The Purchase Price is payable as follows:
(i) $ 110,000.00 to be paid at Closing;
(ii) A note executed by the Purchaser to the Company
in the amount of $190,000.00 providing for payments to commence ninety (90) days
from the Closing Date and to provide for forty (40) equal quarterly payments of
principal with interest on the unpaid principal balance, paid quarterly until
fully paid. Interest will be calculated at an annual rate of eight (8%) percent
for a period of ten (10) years compounded quarterly.
(b) The Purchase Price is allocated as follows:
(i) Furniture and fixtures $ 35,000.00
(ii) Vehicles 25,000.00
(iii) Playground equipment 25,000.00
(iv) Equipment 50,000.00
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(v) Inventory 15,000.00
(vi) Leasehold improvements 57,500.00
(vii) Customer list 25,000.00
(viii) Goodwill 17,500.00
(ix) Restrictive Covenant 50,000.00
-----------
Total $300,000.00
(c) The Purchase Price shall also include the services of Mr.
Jihad Libbus to train and help manage the Business and assist in locating future
businesses for the Purchaser to acquire subsequent to the Closing Date for a
period of three (3) months, for an average of five (5) hours per week, with the
actual amount of hours to vary on a week by week basis but not to exceed forty
(40) hours per week. Mr. Jihad Libbus will not be entitled to any compensation
for these services.
SECTION 2.03 Closing.
(a) The sale and purchase of the Transferred Assets and the
assumption of the Assumed Liabilities contemplated hereby shall take place at a
closing (the "Closing"), on or before October 1, 1996, (the "Closing Date").
(b) Notwithstanding the foregoing, the Closing may be held at
a place or at such other time or on such other date as the Company and the
Purchaser shall mutually agree upon in writing.
SECTION 2.04 Closing Deliveries.
(a) At the Closing the Company shall deliver, or cause to be
delivered, to the Purchaser the following:
(i) a Bill of Sale;
(ii) Leases for all of the locations of the Business.
The Leases will provide for an annual rent not to exceed $114,000.00 for years
one through year ten of the lease term. Additionally, the Leases will contain
four options to renew the Leases, at the election of the Purchaser. The first
option shall be for three (3) years at a rental cost of $120,000.00 per year,
the second option shall be for two (2) years at a rental cost of $125,000.00 per
year, the third option shall be for five (5) years at a rental cost of $
130,000.00 per year and the fourth option shall be for five (5) years at a
rental cost of $ 135,000.00 per year. If during the first and second option
periods, the Consumer Price Index rises by an average of more than 4% per year,
then the rent for the following two option periods will be increased by $
5,000.00 per year. All of said leases shall contain a Right of First Refusal for
the Purchaser to meet any bona fide, good faith, third party offer which is
acceptable to Libbus, for both the amount of consideration and terms of the
offer for sale of any or all of the leased property; depending upon the offer
and which properties are contained in this offer. If the offer is for all
properties, the Purchaser must exercise his option to purchase all of the
properties.
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(iii) a Restrictive Covenant for a period of ten (10)
years and fifty (50) miles executed by the Company, Mr. Jihad Libbus for any
daycare or preschool facilities; and
(iv) Motor Vehicle Title to all of the vehicles
listed in Exhibit B;
(v) Clear title to all of the Transferred Assets;
(vi) such other instruments as may be reasonably
requested by the Purchaser to transfer the Transferred Assets to the Purchaser
or evidence such transfers in the public records; and
(b) At the Closing, the Purchaser shall deliver to the
Company the following:
(i) a note for the balance of the Purchase Price,
secured by all of the tangible and intangible assets of the Purchaser related to
Transferred Assets located at the premises of the Business.
(ii) any such other instruments as may be reasonably
requested by the Company.
ARTICLE III Representations and Warranties of the Company
As an inducement to the Purchaser to enter into this Agreement, the
Company represents and warrants to the Purchaser as follows:
SECTION 3.01. Authority of the Company.
The execution and delivery of this Agreement and the Ancillary
Agreements by the Company, the performance by them of their obligations
hereunder and thereunder and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all requisite action on the part
of the Company. This Agreement has been duly executed and delivered by the
Company and upon its execution and delivery the Ancillary Agreements will be,
duly executed and delivered by the Company, and (assuming due authorization,
execution and delivery by the Purchaser) this Agreement constitutes, and, upon
their execution, the Ancillary Agreements will constitute, legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms.
SECTION 3.02 No Conflict.
The execution, delivery and performance of this Agreement by the
Company, and each of the Ancillary Agreements by the Company, as the case may
be, does not and will not (a) violate or conflict with any statute, ordinance,
law, rule, regulation or Governmental Order applicable to the Company or the
Transferred Assets, or (b) result in any breach of, constitute a default (or
event which with the giving of notice or lapse of time, or both, would become a
default) or require any consent under, or give to others any rights of
termination, amendment (including, without limitation,
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the termination or diminution of any right to extend or renew any term),
revocation, acceleration or cancellation of, or result in the creation of any
Encumbrance on the Transferred Assets pursuant to, any note, bond, mortgage,
indenture, contract, agreement, license, permit, or other instrument relating to
the Transferred Assets to which the Company is a party or by which any of them
or any of the Transferred Assets are bound or affected, except such conflicts,
violations, breaches or defaults with respect to clauses (a) and (b) above that,
individually or in the aggregate, would not materially adversely affect the
value of any of the Transferred Assets or the Purchaser's ability to operate the
Business subsequent to the Closing or the Company's ability to transfer the
Transferred Assets to the Purchaser.
SECTION 3.03 Consents and Approvals.
The execution, delivery and performance of this Agreement by the
Company does not and will not, and the execution, delivery and performance of
the Ancillary Agreements by the Company, as the case may be, will not, require
any consent, approval, authorization or other action by, or filing with or
notification to, any Governmental Authority.
SECTION 3.04 Inventory.
The Company has good and marketable title to the Inventory, all of
which is located at the Business, free and clear of all liens and Encumbrances
and, following the consummation of the transactions contemplated hereby, such
title will be held by the Purchaser free and clear of all Encumbrances.
SECTION 3.05 Brokers.
Any amounts due to any broker, finder or investment banker in
connection with the transactions contemplated by this Agreement, including Mr.
Mark Hockenyos and Brookhurst Associates shall be paid solely by the Company.
The Company agrees to indemnify the Purchaser for any claims made by any such
broker, finder or investment banker against the Purchaser.
SECTION 3.06 Personal Property Lease.
There are no personal property leases for property or equipment used by
the Company in connection with the Business.
SECTION 3.07 Liabilities.
Except for Taxes not yet due or payable, the Company has no material
liabilities due to any creditor or vendor. Any liability that does exist will be
fully satisfied, evidence of which will be supplied to the Purchaser on or
before the Closing Date. In the event a franchise or corporate search should
reveal any liability of the Company, Purchaser shall have the right to set-off
said liability against any payments due Company under the note referenced in
Section 2.04 of this Agreement provided, however, Purchaser shall first give
advance written notice of the debt and allow thirty (30) days for Company to
resolve the debt prior to exercising the right to offset. Company shall be
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responsible to pay to any vendor the amount due for inventory or supplies
ordered by the Company prior to the Closing Date not received by the Closing
Date. Additionally, if the Purchaser waives a condition of having certain
repairs completed prior to the Closing Date, but reserves the right to offset
this amount against the first payment due under the Note if the repairs are not
completed or paid for by January 1, 1997.
SECTION 3.08 Maintenance of Books and Records.
The books and records of the Company are complete and accurate in all
material respects. All copies, information, representation (oral and in writing)
were true and correct on the date made and continue to be true and correct as of
the Closing Date.
SECTION 3.09 Taxes.
All federal, state and local income, ad valorem, excise, sales, use,
franchise, payroll, personal property, premium and other Taxes and assessments
of any kind, including any penalty payments and interest thereon which have
become due and payable by the Company have been properly computed, duly
reported, fully paid and discharged. There are no unpaid taxes which are or
could become a lien on the properties or assets of the Company, including the
Transferred Assets, except for current taxes not yet due and payable. There are
no pending assessments or proposed adjustments or audits presently in progress
with respect to such returns.
SECTION 3.10 Necessary Repairs or Renovations to the Property.
The Company warrants that there exists no repairs or renovations
required to any of the leased premises' in order to make the premises in
compliance with all existing governmental health and safety requirements upon
the Purchaser as a new operator. In the event it is determined that certain
repairs need to be made in order for the premises to be in compliance with the
existing governmental health and safety requirements for a new operator, upon
reasonable notification to the Company, Purchaser will make the appropriate
repairs and or renovations and shall seek reimbursement from the Company or use
the right of set-off against the outstanding principal due under the Note. The
Purchaser shall be responsible only for the first $ 500.00 of repairs at each
licensed facility, excluding kitchens.
SECTION 3.11 Current Repairs To Be Made By The Company.
The Company agrees to make the following repairs at it's own costs,
independent of SECTION 3.10 herein, prior to the Closing Date:
(i) repair, replace, or install the required kitchen
equipment, (stove and refrigerator) in each of the buildings to meet NSF code
that would be satisfactory for all building, fire, sanitary and day care
authorities for the Purchaser. This request would include installing a new
kitchen, if a kitchen doesn't presently exist, and insuring that the kitchen
installed satisfies NSF Code.
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(ii) The Company will only be responsible for the
first $ 6,000.00 of repairs, renovations and replacements to the kitchens as a
whole. In the event said repairs, renovations and replacements are expected to
exceed $ 6,000.00, then the Company must first obtain consent of the Purchaser
before said repairs and as to the products used.
ARTICLE IV Representations and Warranties of the Purchaser
As an inducement to the Company to enter into this Agreement, the
Purchaser represents and warrants to the Company as follows:
SECTION 4.01 Authority of the Purchaser.
The execution and delivery by the Purchaser of this Agreement and the
Ancillary Agreement to which it is a party, the performance by it of its
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Purchaser. This Agreement has been duly executed and
delivered by the Purchaser, and upon their execution the Ancillary Agreements to
which it is a party will be duly executed and delivered by the Purchaser, and
(assuming due authorization, execution and delivery by the Company as the case
may be) this Agreement constitutes, and upon their execution and Ancillary
Agreements to which it is a part will constitute, legal valid and binding
obligations of the Purchaser enforceable against the Purchaser in accordance
with their terms.
SECTION 4.02 No Conflict.
The execution, delivery and performance by the Purchaser of this
Agreement and the Ancillary Agreements to which it is a party do not and will
not conflict with or violate any statute ordinance, law, rule, regulation or
Governmental Order applicable to the Purchaser.
SECTION 4.03 Consents and Approvals.
The execution, delivery and performance of this Agreement by the
Purchaser does not and will not, and the execution, delivery and performance of
the Ancillary Agreements to which it is a party by the Purchaser will not,
require any consent, approval, authorization or other action by, or filing with
or notification to, any Governmental Authority.
SECTION 4.04 Litigation.
No action is pending against the Purchaser which seeks to delay or
prevent the consummation of the transactions contemplated hereby or which may
adversely affect or restrict the Purchaser's ability to consummate the
transactions contemplated hereby.
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ARTICLE V Additional Agreements
SECTION 5.01 Conduct of Business Prior to the Closing.
(a) Between the date of this Agreement and the Closing Date,
unless the Company shall have obtained the Purchaser's prior written consent,
the Company shall use best efforts to continue in full force and effect without
material modification all existing policies or binders of insurance presently
maintained in respect of the Business.
(b) Except as contemplated by this Agreement,between the date
of this Agreement and the Closing Date the Company shall not directly or
indirectly, do, or propose or agree to do any of the following, without the
prior written consent of the Purchaser:
(i) increase the compensation payable or to become
payable to any of the employees or agents engaged in the operation of the
Business.
(ii) sell, transfer, assign, pledge, encumber, lease,
sublease, license or otherwise dispose or any of the Transferred Assets, other
than the normal selling of Inventory in the ordinary course;
(iii) fail to defend, initiate or proceed with any
material matter before any Governmental Authority that is necessary to protect
the Transferred Assets;
(iv) fail to (A) maintain the Transferred Assets in
their condition as of the date hereof (ordinary wear and tear excepted), (B)
maintain insurance for the Transferred Assets in effect on the date of this
Agreement or (C) in the event of a casualty, loss or damage to any of the
Transferred Assets prior to the Closing Date either repair or replace such
damaged assets with an item of equal value and quality or at the option of the
Purchaser, transfer the proceeds of any insurance payable with respect to such
casualty, loss or damage, to the Purchaser.
SECTION 5.02 Regulatory and other Authorizations
Each party hereto will use its best efforts to obtain all
authorizations, consents, orders and approvals of all Governmental Authorities
and officials that may be or become necessary for its execution and delivery of,
and the performance of its obligations pursuant to, this Agreement or the
Ancillary Agreements and will cooperate fully with each other party in promptly
seeking to obtain all such authorizations, consents, orders and approvals. The
parties hereto will not take any action that will have the effect of delaying,
impairing or impeding the receipt of any required approvals.
SECTION 5.03 Notice of Developments.
Prior to the Closing, each party shall (a) give prompt notice to the
other of any material development affecting the ability of the parties to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements and (b) promptly notify the other party in writing of any
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events, facts and occurrences arising subsequent to the date hereof which could
reasonably be expected to result in any material breach of any representation,
warrantee or agreement covenant contained in this Agreement.
SECTION 5.04 Conveyance Taxes.
The Purchaser shall be liable for and shall hold the Company harmless
against any sales or use taxes that become payable in connection with any of the
transactions contemplated hereby; provided, however, that the Purchaser shall
not be liable under any circumstances for any Taxes of the Company that are on
or based upon the Company's gross or net income and the Company will indemnify
the Purchaser from all losses, damages, liabilities and costs (including
attorney's fees) relating thereto. The Parties hereto shall reasonably cooperate
in preparing and filing all returns, reports and forms relative to all such
Taxes and in resolving any disputes or audits with respect to any taxable
periods relating to such taxes.
SECTION 5.05 Further Action.
Each of the parties hereto shall execute such documents (including,
without limitation, the Ancillary Agreements) and other papers and take such
further actions as may be reasonably required or desirable to carry out the
provisions hereof and the transactions contemplated hereby or, at or after the
Closing, to evidence the consummation of the transactions consummated pursuant
to this Agreement. Upon the terms and subject to the conditions hereof, each of
the parties hereto shall use its best efforts to take, or cause to be taken, all
actions and to do or cause to be done, all other things necessary proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement and to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
SECTION 5.06 Cash in Business.
The Company shall be entitled to all the cash in the Business at the
close of business on the day preceding the Closing Date.
SECTION 5.07 Transferred Employees.
On or prior to the Closing Date, the Company shall pay or cause to be
paid (or establish arrangements for prompt payment acceptable to the Purchaser
in its sole discretion) all base salary, overtime, bonuses, commissions,
benefits and other compensation due to the existing employees, agents and
consultants of the Company and payroll and similar Taxes thereon for all periods
up to and including the date immediately preceding the Closing Date. Immediately
prior to the Closing, the Company shall terminate all of the employees of the
Business and as of the Closing the Purchaser may offer at-will employment to one
or all of such employees ("Transferred Employees"). As of the Closing Date the
Purchaser shall be responsible to the Transferred Employees for all base salary
overtime, bonuses, commissions, benefits and payroll and similar Taxes thereon
for all periods beginning on or after the Closing Date.
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SECTION 5.08 Re-determination of Purchase Price.
The parties hereto agree that the Purchase Price was determined based
upon the current earnings of the Business and the reasonable expectation of the
future earnings of the Business. In the event the annual gross revenue for the
three (3) centers are less than $ 575,000.00 on average for the twenty four (24)
months succeeding the Closing Date, the Purchase Price will be reduced by 50% of
the amount revenues are less than said amount. Any modifications to the Purchase
Price shall be made by a decrease in the note payable to the Company or any
subsequent holder or holder in due course (as defined in the Uniform Commercial
Code). This modification shall not alter or amend any other provision of the
Agreement or the Ancillary Agreements, nor the rights of the parties thereunder.
SECTION 5.09 Environmental Matters.
(i) There are no outstanding allegations that the Company is in
violation of any federal, state or local law, regulation, rule, order, decree,
ordinance or permit relating to pollution control or environmental matters, (ii)
there are no administrative or judicial proceedings or actions pending or
threatened against the Company pursuant to such laws, regulations, rules,
orders, decrees, ordinances or permits and (iii) there are no claims outstanding
against the Company which are asserted pursuant to such laws, regulations,
rules, orders, decrees, ordinances or permits. The Company has never been, and
currently is not, in violation of any Federal, state or local law, regulation,
rule, order, decree, ordinance or permit relating to pollution control or
environmental matters.
ARTICLE VI Conditions to Closing
SECTION 6.01 Conditions to Obligations of the Company.
The obligations of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to the Closing Date of each of the following conditions:
(i) Representations and Warranties. The
representations and warranties of the Purchaser contained in this Agreement
shall have been true and correct in all material respects when made (other than
such representations and warranties as are made as of another specified date)
and shall be true and correct in all material respects as of the Closing Date.
(ii) Covenants. The covenants and agreementscontained
in this Agreement to be complied with by the Purchaser on or before the Closing
Date shall have been complied with in all material respects.
(iii) No Order, Proceeding or Litigation.
NoGovernmental Authority shall have enacted, issued, promulgated, enforced or
entered any Governmental Order (whether temporary, preliminary or permanent)
which is in effect and has the effect of making the transactions contemplated
hereby illegal or otherwise prohibiting the consummation of the transactions
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contemplated by this agreement.
SECTION 6.02 Conditions to Obligations of thePurchaser.
The obligations of the Purchaser to consummate the transactions
contemplated hereby shall be subject to the fulfillment, at or prior to the
Closing, of each of the following conditions:
(i) Representations and Warranties.
Therepresentations and warranties of the Company contained in this Agreement
shall have been true and correct in all material respects when made (other than
such representations and warranties as are made as of another specified date)
and shall be true and correct in all material respects as of the Closing Date.
(ii) Covenants. All the covenants and agreements
contained in this Agreement to be complied with by the Company on or before the
Closing Date shall have been complied with.
(iii) No Order, Proceeding or Litigation.
NoGovernmental Authority shall have enacted, issued, promulgated, enforced or
entered any Governmental Order (whether temporary, preliminary or permanent)
which is in effect and has the effect of making the transactions contemplated
hereby illegal or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement.
(iv) Liabilities. The Company shall have no material
liabilities, except for liabilities for Taxes not yet due and payable and
vendors in the ordinary course of business which will be fully paid and
satisfied by the Closing Date and evidence of which will be supplied to the
Purchaser. Any and all Encumbrances relating to the Transferred Assets shall be
removed by said date.
ARTICLE VII Termination
SECTION 7.01 Termination.
This Agreement may be terminated at any time prior to the Closing:
(a) by either the Company or the Purchaser in the event of a
material breach or misrepresentation under this Agreement by the other party
that is not cured or is not in the progress of being cured within ten days after
written notice thereof is given by the party alleging such material breach or
misrepresentation, in either case must be cured within fifteen days after
written notice;
(b) by the mutual written consent of the Company and the
Purchaser;
(c) At the sole election of the Purchaser, in the event of any
change in law which occurs prior to the Closing Date either within the State of
North Carolina or under Federal Law or other change relating to the Business
that adversely affects the operation of Day Care Centers or which would affect
the operation of the Business after the Closing Date.
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SECTION 7.02 Effect of Termination.
In the event of the termination of this Agreement as provided in
Section 7.01(b), this Agreement shall forthwith become void and there shall be
no liability on the part of any party hereto. Termination by either party in
accordance with Section 7.01 (a) & (c) shall be effective immediately upon the
receipt of notice thereof and Section 7.01 (b) by a statement signed by both
parties indicating mutual consent.
ARTICLE VIII General Provisions
SECTION 8.01 Expenses.
Except as otherwise provided in this Agreement, all costs and expenses,
including without limitation, fees and disbursements of counsel, financial
advisors and accountants, incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses whether or not the Closing shall have occurred.
SECTION 8.02 Notices.
All notices and other communications given or made pursuant hereto
shall be in writing and shall be deemed to have been duly given or made as of
the date delivered if delivered personally or by telecopy (during regular
business hours of Monday through Friday, 9 a.m. through 5 p.m. excluding legal
holidays) or five days after being mailed by registered, Federal Express, U.S.
Postal Service Overnight Mail or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice, except that notices of changes
of address shall be effective upon receipt:
(a) if to the Company:
Mr. Jihad Libbus
P.O. Box 350
Morrisville, North Carolina 27560
Telephone: (919) 481-1229
Telecopy: ( ) -
With a copy to:
Brent D. Barringer, Esq.
P.O Box 5566
Cary, North Carolina 27512
Telephone: (919) 467-6700
Telecopy: (919) 481-9190
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(b) if to the Purchaser:
Mr. Michael C. Koffler
150 East 58th Street 31st Floor
New York, New York 10155
Telephone: (212) 826-6131
Telecopy: (212) 421-5887
With a copy to:
Craig S. Peligri, Esq.
54 Main Street
Hackensack, New Jersey 07601
Telephone: (201) 489-6500
Telecopy: (201) 489-6056
SECTION 8.03 Amendment.
This Agreement may not be amended, modified, terminated or discharged
except by an instrument in writing signed by the parties hereto.
SECTION 8.04 Waiver.
At the time prior to any Closing, either the Company or the Purchaser
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto (b) waive any inaccuracies in the
representations and warranties made by the other party and contained herein or
in any document delivered by the other party pursuant hereto and (c) waive
compliance by the other party hereto with any of the agreements or conditions
contained herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party to be bound thereby.
SECTION 8.05 Headings.
The headings contained in this agreement are for reference purposes
only and shall not effect in any way the meaning or interpretation of this
Agreement.
SECTION 8.06 Severability.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of North Carolina or Federal law, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect. Upon such determination that any term or other provision
is invalid, illegal or incapable or being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are consummated
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as originally contemplated to the greatest extent possible.
SECTION 8.07 Entire Agreement.
This Agreement constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof and supersede all prior agreements and
undertakings, both written and oral, with respect to the subject matter hereof.
SECTION 8.08 Assignments.
This Agreement may not be assigned by operation of law or otherwise
without the express written consent of the other parties hereto (which consent
may be granted or withheld in the sole discretion of such other parties).
SECTION 8.09 No Third-Party Beneficiaries.
This Agreement is for the sole benefit of the parties hereto and their
permitted assigns and nothing herein, expressed or implied, shall give or be
construed to give to any person or entity, other that the parties hereto, and
Indemnitee and such assigns, any legal or equitable rights hereunder.
SECTION 8.10 Governing Law.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of North Carolina.
SECTION 8.11 Counterparts.
This Agreement maybe executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
SECTION 8.12 Consent to Jurisdiction.
Each of the parties hereto hereby agree to the jurisdiction of the
State court located within Wake County, North Carolina for the purposes of
enforcing the other parties' rights under this Agreement and consent that
service of any and all process upon it may be made as set forth in Section 8.02
hereof.
SECTION 8.13 Confidentiality.
For purposes of this paragraph "Confidential Information" shall mean
all information, data and knowledge (whether in the form of documents, know-how
or otherwise) relating, directly or indirectly, to any party which is disclosed
to another party and which is not publicly available. Each party shall keep the
Confidential Information of the other parties to any person except to such of
its advisors who need to know for the purposes of advising it on this proposed
transaction. The
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provisions of this Section shall not apply to any Confidential Information that
is (i) or hereafter becomes, in the public domain as a result of causes other
than the acts or omissions of the party hereto under the duty of confidentiality
or (ii) required by law to be disclosed. If the Closing does not occur, each
party will promptly return all documents containing Confidential Information
furnished to it by any other party.
IN WITNESS WHEREOF, The Company and the Purchaser have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
Witness: LIBBUS, INC.,
d/b/a JUST-US-KIDS
("Company")
__________________________ by: ________________________
Jihad Libbus, President
PHOENIX PRESCHOOL EDUCATION
CENTERS, INC.
("Purchaser")
_________________________ by: ________________________
Michael C. Koffler,
President
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
TLC RECREATION CENTER, INC.
AND
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
<PAGE>
ASSET PURCHASE AGREEMENT dated as of the day of May 1997, by and among
TLC Recreation Center, Inc., a corporation formed under the laws of the State of
Florida, whose mailing address is 502 Schneider Drive, Ft. Walton Beach, Florida
32547 (hereinafter sometimes referred to as the "Company") and Phoenix Preschool
Education Centers, Inc., a corporation formed under the laws of the State of
Delaware, whose address is 150 East 58th Street, 31st Floor, New York, New York
(hereinafter sometimes referred to as the "Purchaser").
WHEREAS the Company is engaged in the business of providing day care
services to children at 502 Schneider Drive, Ft. Walton Beach, Florida
(hereinafter sometimes referred to as the "Business").
WHEREAS in connection with the operation of the Business, the Company
owns certain assets, including, but not limited to, machinery, equipment,
furniture, fixtures, vehicles, client lists, supplies, small animals and their
habitats and five (5) horses.
WHEREAS the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company certain assets necessary for the operation
of the Business, upon the terms and subject to the conditions set forth herein;
and
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements and covenants hereinafter set forth, the Company and the Purchaser
hereby agree as follows:
ARTICLE I Definitions
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such definitions to be
equally applicable to both the singular and plural forms of the terms defined):
"Ancillary Agreements" means the other agreements, documents and
instruments to be
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executed and delivered by the Purchaser or the Company, pursuant hereto,
including, without limitation, the Bill of Sale, Lease Agreement and Restrictive
Covenant.
"Assumed Liabilities" means, and shall consist only of, the following:
(a) all Liabilities arising out of or accruing from ownership,
possession or use of the Transferred Assets or operation of the Business from
and after the Closing Date; provided, however, that in no event shall the term
"Assumed Liabilities" include any Liabilities for Taxes of the Company of any of
the foregoing that are on, based on, or imposed with respect to gross, adjusted
gross or net income, or are alternative or add-on minimum Taxes, franchise
Taxes, sales Taxes, payroll Taxes, similar Taxes or contingent liabilities for
any suit for personnel injury instituted in a court of competent jurisdiction.
"Bill of Sale" means the bill of sale and assignment, providing for,
among other things, the transfer of the Transferred Assets by the Company as the
case may be, to the Purchaser.
"Business Day" means any day other than a day on which banks in New
York are authorized or required to be closed.
"Encumbrance" means any and all liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges, instruments, licenses,
encroachments, options, rights-of-recovery, judgments, orders and decrees of any
court of governmental entity, interests, product, environmental, tax and other
liabilities and claims, in each case, of any kind or nature, whether secured or
unsecured, filed or unfiled, scheduled or unscheduled, noticed or unnoticed,
recorded or unrecorded, contingent or non-contingent, liquidated or
unliquidated, matured or unmatured, known or unknown.
"Excluded Assets" means all the assets of the Company not included in
the Transferred Assets, including, without limitation, all of the following:
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<PAGE>
(a) all the cash on hand, deposits in bank accounts and
marketable securities;
(b) all the Receivables and prepaid expenses;
(c) all Actions, claims and contracts of the Company not
assigned to the Purchaser;
(d) all rights, title and interest in any refunds and credits
for prepaid amounts from Governmental Authorities with respect to Taxes that are
the responsibility of, and have been paid by, the Company under the terms of
this Agreement or prior to signing this Agreement;
(e) all rights, title and interests of the Company to and
under this Agreement and the Ancillary Agreements.
"Governmental Authority" means any United States Federal, state or
local or any foreign government, governmental commission, court, tribunal or
arbitrating body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"Liabilities" means any and all debts, liabilities, losses, claims,
damages, costs expenses, interest, awards, judgments, penalties and obligations,
whether accrued or fixed, absolute or contingent, mature or unmatured,
determined or determinable, including, without limitation, those arising under
any law, rule, regulation or Action of any Governmental Authority and those
arising under any contract, commitment or undertaking.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
"Receivables" means any and all accounts receivable, notes and other
amounts receivable owed to the Company from third parties, including, without
limitation, third-party credit card companies, state and federal agencies,
customers, vendors and employees, arising from the
4
<PAGE>
Company's conduct of the Business, together with any unpaid financing charges
accrued thereon, including, without limitation, all deposits and prepayments
made by the Company.
"Retained Liabilities" means all Liabilities of the Company other than
the Assumed Liabilities, including, without limitation, the following:
(a) any litigation or claims with respect to any of the
Transferred Assets or the operation of the Business arising or accrued prior to
the Closing Date;
(b) except as set forth in Section 5.04, all Liabilities of
the Company;
(c) Liabilities for any Taxes imposed on the Transferred
Assets that are attributable to any period or portion thereof ending on or prior
to the Closing Date;
(d) any Liabilities arising or accrued with respect to
ownership, possession or use of any of the Transferred Assets or operation of
the Business prior to the Closing Date including all accounts payable of the
Company as of the Closing Date; and
"Tax" or "Taxes" means any and all taxes, imposts, duties, levies,
charges, withholdings, fees or excises imposed by any Governmental Authority or
instrumentality and any penalties or interest thereon, including, without
limitation, any gross, adjusted gross or net income tax, alternative or add-on
minimum tax, franchise, sales tax, employment-related tax (including, without
limitation, employee withholding, employment, social security, workers'
compensation, unemployment compensation and employer payroll taxes), or real or
personal property tax, together with any and all interest, penalties, additions
to tax or additional amounts imposed with respect to any of the foregoing.
"Transferred Assets" means any and all of the following:
(a) all of the Company's rights and interests in and to the
vehicles all of which are owned by the Company (not leased) and are free and
clear of encumbrances, a list of said vehicles is attached hereto as Exhibit
"A";
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<PAGE>
(b) all of the Company's rights, title and interest in the
furnishings, furniture, office supplies, signs, machinery, equipment, and all
other tangible assets and properties, real, personal or mixed, of every kind and
description physically located at or used by the Business, not specifically
excluded, owned by the Company;
(c) all rights, title and interest in and to various small
animals and five (5) horses all located at the Business;
(d) all rights, title and interest to the client list,
including names, address, telephone numbers and fees charged by the Business;
(e) all rights, title and interest in the existing telephone
numbers for the Business; (f) all rights, title and interest in the name "TLC
Recreation Center", and any variations thereof currently used by the Business or
for a period of ten (10) years prior to the Closing Date.
(g) computer software and licenses presently used or owned by
the Business.
ARTICLE II Purchase and Sale
SECTION 2.01 Purchase and Sale; Assumption of Liabilities. (a) On the
terms and subject to the conditions set forth in this Agreement, on the Closing
Date, the Company shall sell, assign, transfer, convey and deliver to the
Purchaser the Transferred Assets, free and clear of all liabilities, claims,
duties, obligations and Encumbrances other than the Assumed Liabilities and a
first Mortgage on the Leasehold Improvements, and the Purchaser shall purchase
from the Company the Transferred Assets and assume the Assumed Liabilities.
(b) Except for the Assumed Liabilities or as expressly
referred to in any instrument
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<PAGE>
of conveyance or assignments executed and delivered pursuant to this Agreement,
the Purchaser shall not assume or otherwise be responsible to third parties for
any Liabilities of the Company, or any Liabilities relating to the Transferred
Assets (including, but not limited to, the Retained Liabilities).
SECTION 2.02 (a) Purchase Price. The aggregate consideration to be
rendered for the Transferred Assets which is based upon past performances and
future expectations of the Business shall be eight hundred fifteen thousand
dollars ($815,000.00) (the "Purchase Price").
(a) The Purchase Price is payable as follows:
(i) $25,000.00 to be paid upon execution of this
Agreement to be held in the Attorney Escrow Account of Craig S. Peligri,
Attorney at Law.
(ii) $275,000.00 to be paid at Closing;
(iii) A note executed by the Purchaser to the Company
in the amount of $515,000.00 providing for payments to commence thirty (30) days
from the Closing Date and to provide for ninety-six (96) equal payments of
principal with interest on the unpaid principal balance, paid monthly until
fully paid. Interest will be calculated at an annual rate of eight (8%) percent
compounded quarterly. The Note will provide for a late payment penalty of 5% of
the payment for payments made later than the tenth (10th) day of the month.
(b) The Purchase Price is allocated as follows:
(i) Furniture and fixtures $ 50,000.00
(ii) Vehicles 30,000.00
(iii) Playground equipment 85,000.00
(iv) Equipment 100,000.00
(v) Supplies 20,000.00
(vi) Horses and equipment 50,000.00
(vii) Leasehold improvements 380,000.00
(viii) Customer list 50,000.00
(ix) Restrictive Covenant 50,000.00
-----------
Total $815,000.00
7
<PAGE>
(c) The Purchase Price shall also include the services of Ms.
Dara Dobson for one (1) month to train and help manage the Business for an
average of fifteen (15) hours per week, with the actual amount of hours to vary
on a week by week basis. Ms. Dara Dobson will not be entitled to any
compensation for these services.
SECTION 2.03 Closing. (a) The sale and purchase of the Transferred
Assets and the assumption of the Assumed Liabilities contemplated hereby shall
take place at a closing (the "Closing"), on or before June 1, 1997, (the
"Closing Date").
(b) Notwithstanding the foregoing, the Closing may be held at
a place or at such other time or on such other date as the Company and the
Purchaser shall mutually agree upon in writing.
SECTION 2.04 Closing Deliveries. (a) At the Closing the Company shall
deliver, or cause to be delivered, to the Purchaser the following:
(i) a Bill of Sale;
(ii) a Lease for the location of the Business.
The Lease will provide for an annual rent of $80,000.00 per year for the first
five (5) years of the lease term. Additionally, the Lease will contain four
options to renew the Lease, at the election of the Purchaser, each for five year
increments with the rental cost to increase by 5% at each renewal period. The
annual rental cost will be $84,000.00 per year for the first five year renewal
period, $88,200.00 per year for the second five year renewal, $92,610.00 per
year for the third five year renewal period and $97,240.50 per year for the
fourth five year renewal period. Said lease shall contain a Right of First
Refusal for the Purchaser to meet any offer for both the amount of consideration
and terms of the offer for sale of the leased property during the lease term or
any
8
<PAGE>
renewal thereof. Said Lease will be on a triple net basis, including sales tax,
with the exception of the HVAC System and Pool Filtration System, both which
shall be guaranteed by the Company for all repairs and maintenance, for a period
of one (1) year from the lease commencement date.
(iii) a Restrictive Covenant for a period of five (5)
years executed by the Company, Ms. Dara Dobson and Mr. Lloyd Dobson,
individually.
(iv) Motor Vehicle Title to all of the vehicles
listed in Exhibit A; and
(v) Appropriate documentation for the transferred
horses;
(vi) Clear title to all of the Transferred Assets.
(vii) such other instruments as may be reasonably
requested by the Purchaser to transfer the Transferred Assets to the Purchaser
or evidence such transfers in the public records; and
(b) At the Closing, the Purchaser shall deliver to the Company
the following:
(i) a note for the balance of the Purchase Price;
(ii) any such other instruments as may be reasonably
requested by the Company.
ARTICLE III Representations and Warranties of the Company
As an inducement to the Purchaser to enter into this Agreement, the
Company represents and warrants to the Purchaser as follows:
SECTION 3.01. Authority of the Company. The execution and delivery of
this Agreement and the Ancillary Agreements by the Company, the performance by
them of their obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of the Company. This
9
<PAGE>
Agreement has been duly executed and delivered by the Company and upon its
execution and delivery the Ancillary Agreements will be, duly executed and
delivered by the Company, and (assuming due authorization, execution and
delivery by the Purchaser) this Agreement constitutes, and, upon their
execution, the Ancillary Agreements will constitute, legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms.
SECTION 3.02 No Conflict. The execution, delivery and performance of
this Agreement by the Company, and each of the Ancillary Agreements by the
Company, as the case may be, does not and will not (a) violate or conflict with
any statute, ordinance, law, rule, regulation or Governmental Order applicable
to the Company or the Transferred Assets, or (b) result in any breach of,
constitute a default (or event which with the giving of notice or lapse of time,
or both, would become a default) or require any consent under, or give to others
any rights of termination, amendment (including, without limitation, the
termination or diminution of any right to extend or renew any term), revocation,
acceleration or cancellation of, or result in the creation of any Encumbrance on
the Transferred Assets pursuant to, any note, bond, mortgage, indenture,
contract, agreement, license, permit, or other instrument relating to the
Transferred Assets to which the Company is a party or by which any of them or
any of the Transferred Assets are bound or affected, except such conflicts,
violations, breaches or defaults with respect to clauses (a) and (b) above that,
individually or in the aggregate, would not materially adversely affect the
value of any of the Transferred Assets or the Purchaser's ability to operate the
Business subsequent to the Closing or the Company's ability to transfer the
Transferred Assets to the Purchaser.
SECTION 3.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Company does not and will not, and the
execution, delivery and performance of the Ancillary Agreements by the Company,
as the case may be, will not, require any consent,
10
<PAGE>
approval, authorization or other action by, or filing with or notification to,
any Governmental Authority.
SECTION 3.04 Supplies. The Company has good and marketable title to the
Supplies, all of which is located at the Business, free and clear of all liens
and Encumbrances and, following the consummation of the transactions
contemplated hereby, such title will be held by the Purchaser free and clear of
all Encumbrances.
SECTION 3.05 Brokers. Any amounts due to any broker, finder or
investment banker in connection with the transactions contemplated by this
Agreement shall be paid solely by the Company. The Company agrees to indemnify
the Purchaser for any claims made by any such broker, finder or investment
banker against the Purchaser.
SECTION 3.06 Personal Property Lease. There are no personal property
leases for property or equipment used by the Company in connection with the
Business except for a copy machine, a copy of said lease is attached hereto as
Exhibit B.
SECTION 3.07 Liabilities. Except for Taxes not yet due or payable, the
Company has no material liabilities due to any creditor or vendor. Any liability
that does exist will be fully satisfied, evidence of which will be supplied to
the Purchaser on or before the Closing Date. In the event a franchise or
corporate search should reveal any liability of the Company, Purchaser shall
have the right to set-off said liability against any payments due Company under
the note referenced in Section 2.04 of this Agreement. Company shall be
responsible to pay to any vendor the amount due for inventory or supplies
ordered by the Company prior to the Closing Date not received by the Closing
Date.
SECTION 3.08 Maintenance of Books and Records. The books and records of
the Company are complete and accurate in all material respects. All copies,
information, representation (oral and
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<PAGE>
in writing) were true and correct on the date made and continue to be true and
correct as of the Closing Date.
SECTION 3.09 Taxes. All federal, state and local income, ad valorem,
excise, sales, use, franchise, payroll, personal property, premium and other
Taxes and assessments of any kind, including any penalty payments and interest
thereon which have become due and payable by the Company have been properly
computed, duly reported, fully paid and discharged. There are no unpaid taxes
which are or could become a lien on the properties or assets of the Company,
including the Transferred Assets, except for current taxes not yet due and
payable. There are no pending assessments or proposed adjustments or audits
presently in progress with respect to such returns.
SECTION 3.10 Necessary Repairs or Renovations to the Property. The
Company warrants that there exists no repairs or renovations required to the
leased premises in order to make the premises in compliance with all existing
governmental health and safety requirements. In the event it is determined that
certain repairs need to be made in order for the premises to be in compliance
with the existing governmental health and safety requirements, upon reasonable
notification to the Company, Purchaser will make the appropriate repairs and or
renovations and shall seek reimbursement from the Company or use the right of
set-off against the outstanding principal due under the Note.
ARTICLE IV Representations and Warranties of the Purchaser
As an inducement to the Company to enter into this Agreement, the
Purchaser represents and warrants to the Company as follows:
SECTION 4.01 Authority of the Purchaser. The execution and delivery by
the Purchaser of this Agreement and the Ancillary Agreement to which it is a
party, the performance by it of its
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<PAGE>
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all requisite
action on the part of the Purchaser. This Agreement has been duly executed and
delivered by the Purchaser, and upon their execution the Ancillary Agreements to
which it is a party will be duly executed and delivered by the Purchaser, and
(assuming due authorization, execution and delivery by the Company as the case
may be) this Agreement constitutes, and upon their execution and Ancillary
Agreements to which it is a part will constitute, legal valid and binding
obligations of the Purchaser enforceable against the Purchaser in accordance
with their terms.
SECTION 4.02 No Conflict. The execution, delivery and performance by
the Purchaser of this Agreement and the Ancillary Agreements to which it is a
party do not and will not conflict with or violate any statute ordinance, law,
rule, regulation or Governmental Order applicable to the Purchaser.
SECTION 4.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Purchaser does not and will not, and the
execution, delivery and performance of the Ancillary Agreements to which it is a
party by the Purchaser will not, require any consent, approval, authorization or
other action by, or filing with or notification to, any Governmental Authority.
SECTION 4.04 Litigation. No action is pending against the Purchaser
which seeks to delay or prevent the consummation of the transactions
contemplated hereby or which may adversely affect or restrict the Purchaser's
ability to consummate the transactions contemplated hereby.
ARTICLE V Additional Agreements
SECTION 5.01 Conduct of Business Prior to the Closing. (a) Between the
date of this
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<PAGE>
Agreement and the Closing Date, unless the Company shall have obtained the
Purchaser's prior written consent, the Company shall use best efforts to
continue in full force and effect without material modification all existing
policies or binders of insurance presently maintained in respect of the
Business.
(b) Except as contemplated by this Agreement, between the date
of this Agreement and the Closing Date the Company shall not directly or
indirectly, do, or propose or agree to do any of the following, without the
prior written consent of the Purchaser:
(i) increase the compensation payable or to become
payable to any of the employees or agents engaged in the operation of the
Business.
(ii) sell, transfer, assign, pledge, encumber, lease,
sublease, license or otherwise dispose or any of the Transferred Assets, other
than the normal selling of Inventory in the ordinary course;
(iii) fail to defend, initiate or proceed with any
material matter before any Governmental Authority that is necessary to protect
the Transferred Assets;
(iv) fail to (A) maintain the Transferred Assets in
their condition as of the date hereof (ordinary wear and tear excepted), (B)
maintain insurance for the Transferred Assets in effect on the date of this
Agreement or (C) in the event of a casualty, loss or damage to any of the
Transferred Assets prior to the Closing Date either repair or replace such
damaged assets with an item of equal value and quality or at the option of the
Purchaser, transfer the proceeds of any insurance payable with respect to such
casualty, loss or damage, to the Purchaser.
SECTION 5.02 Regulatory and other Authorizations Each party hereto will
use its best efforts to obtain all authorizations, consents, orders and
approvals of all Governmental Authorities and officials that may be or become
necessary for its execution and delivery of, and the performance
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<PAGE>
of its obligations pursuant to, this Agreement or the Ancillary Agreements and
will cooperate fully with each other party in promptly seeking to obtain all
such authorizations, consents, orders and approvals. The parties hereto will not
take any action that will have the effect of delaying, impairing or impeding the
receipt of any required approvals.
SECTION 5.03 Notice of Developments. Prior to the Closing, each party
shall (a) give prompt notice to the other of any material development affecting
the ability of the parties to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements and (b) promptly notify the other party
in writing of any events, facts and occurrences arising subsequent to the date
hereof which could reasonably be expected to result in any material breach of
any representation, warrantee or agreement covenant contained in this Agreement.
SECTION 5.04 Conveyance Taxes. The Purchaser shall be liable for and
shall hold the Company harmless against any sales or use taxes that become
payable in connection with any of the transactions contemplated hereby;
provided, however, that the Purchaser shall not be liable under any
circumstances for any Taxes of the Company that are on or based upon the
Company's gross or net income and the Company will indemnify the Purchaser from
all losses, damages, liabilities and costs (including attorney's fees) relating
thereto. The Parties hereto shall reasonably cooperate in preparing and filing
all returns, reports and forms relative to all such Taxes and in resolving any
disputes or audits with respect to any taxable periods relating to such taxes.
SECTION 5.05 Further Action. Each of the parties hereto shall execute
such documents (including, without limitation, the Ancillary Agreements) and
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby or, at or after the Closing, to evidence the consummation of the
transactions consummated pursuant to this Agreement. Upon the terms and subject
to the conditions
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<PAGE>
hereof, each of the parties hereto shall use its best efforts to take, or cause
to be taken, all actions and to do or cause to be done, all other things
necessary proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and to obtain in a
timely manner all necessary waivers, consents and approvals and to effect all
necessary registrations and filings.
SECTION 5.06 Cash in Business. The Company shall be entitled to all the
cash in the Business at the close of business on the day preceding the Closing
Date.
SECTION 5.07 Transferred Employees. On or prior to the Closing Date,
the Company shall pay or cause to be paid (or establish arrangements for prompt
payment acceptable to the Purchaser in its sole discretion) all base salary,
overtime, bonuses, commissions, benefits and other compensation due to the
existing employees, agents and consultants of the Company and payroll and
similar Taxes thereon for all periods up to and including the date immediately
preceding the Closing Date. Immediately prior to the Closing, the Company shall
terminate all of the employees of the Business and as of the Closing the
Purchaser may offer at-will employment to one or all of such employees
("Transferred Employees"). As of the Closing Date the Purchaser shall be
responsible to the Transferred Employees for all base salary overtime, bonuses,
commissions, benefits and payroll and similar Taxes thereon for all periods
beginning on or after the Closing Date.
SECTION 5.08 Necessary Modifications To Buildings. The Company shall be
responsible to make any and all modifications and repairs to the location of the
Business that is required to be made by any licensing agency or governmental
authority in order to be certifiable as licensed day care centers and the
facility shall be left in such a condition that the local governmental
authorities will issue a permanent license for 312 students as of the date of
Closing.
SECTION 5.09 Intentionally omitted.
16
<PAGE>
SECTION 5.10 Environmental Matters. (i) There are no outstanding
allegations that the Company is in violation of any federal, state or local law,
regulation, rule, order, decree, ordinance or permit relating to pollution
control or environmental matters, (ii) there are no administrative or judicial
proceedings or actions pending or threatened against the Company pursuant to
such laws, regulations, rules, orders, decrees, ordinances or permits and (iii)
there are no claims outstanding against the Company which are asserted pursuant
to such laws, regulations, rules, orders, decrees, ordinances or permits. The
Company has never been, and currently is not, in violation of any Federal, state
or local law, regulation, rule, order, decree, ordinance or permit relating to
pollution control or environmental matters.
ARTICLE VI Conditions to Closing
SECTION 6.01 Conditions to Obligations of the Company. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment, at or prior to the Closing Date of each of
the following conditions:
(i) Representations and Warranties. The
representations and warranties of the Purchaser contained in this Agreement
shall have been true and correct in all material respects when made (other than
such representations and warranties as are made as of another specified date)
and shall be true and correct in all material respects as of the Closing Date.
(ii) Covenants. The covenants and agreements
contained in this Agreement to be complied with by the Purchaser on or before
the Closing Date shall have been complied with in all material respects.
(iii) No Order, Proceeding or Litigation. No
Governmental Authority shall have enacted, issued, promulgated, enforced or
entered any Governmental Order (whether
17
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temporary, preliminary or permanent) which is in effect and has the effect of
making the transactions contemplated hereby illegal or otherwise prohibiting the
consummation of the transactions contemplated by this agreement.
SECTION 6.02 Conditions to Obligations of the Purchaser. The
obligations of the Purchaser to consummate the transactions contemplated hereby
shall be subject to the fulfillment, at or prior to the Closing, of each of the
following conditions:
(i) Representations and Warranties. The
representations and warranties of the Company contained in this Agreement shall
have been true and correct in all material respects when made (other than such
representations and warranties as are made as of another specified date) and
shall be true and correct in all material respects as of the Closing Date.
(ii) Covenants. All the covenants and agreements
contained in this Agreement to be complied with by the Company on or before the
Closing Date shall have been complied with.
(iii) No Order, Proceeding or Litigation. No
Governmental Authority shall have enacted, issued, promulgated, enforced or
entered any Governmental Order (whether temporary, preliminary or permanent)
which is in effect and has the effect of making the transactions contemplated
hereby illegal or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement.
(iv) Liabilities. The Company shall have no material
liabilities, except for liabilities for Taxes not yet due and payable and
vendors in the ordinary course of business which will be fully paid and
satisfied by the Closing Date and evidence of which will be supplied to the
Purchaser. Any and all Encumbrances relating to the Transferred Assets shall be
removed by said date.
18
<PAGE>
ARTICLE VII Termination
SECTION 7.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by either the Company or the Purchaser in the event of a
material breach or misrepresentation under this Agreement by the other party
that is not cured or is not in the process of being cured within ten days after
written notice thereof is given by the party alleging such material breach or
misrepresentation, in either case must be cured within fifteen days after
written notice;
(b) by the mutual written consent of the Company and the
Purchaser;
(c) At the sole election of the Purchaser, in the event of any
change in law either within the State of Florida or under Federal Law or other
change relating to the Business that adversely affects the operation of Day Care
Centers or affect the operation of the Business after the Closing Date.
SECTION 7.02 Effect of Termination. In the event of the termination of
this Agreement as provided in Section 7.01(b) & (c), this Agreement shall
forthwith become void and there shall be no liability on the part of any party
hereto. Termination by either party in accordance with Section 7.01 (a) & (c)
shall be effective immediately upon the receipt of notice thereof and Section
7.01 (b) by a statement signed by both parties indicating mutual consent. Under
any circumstance of termination of this Agreement, any money held in Escrow
toward the Purchased Price will be returned to the Purchaser and the Escrow
Agent shall be released from any obligations and liabilities regarding the sum
held in Escrow.
ARTICLE VIII General Provisions
SECTION 8.01 Expenses. Except as otherwise provided in this Agreement,
all costs and
19
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expenses, including without limitation, fees and disbursements of counsel,
financial advisors and accountants, incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses whether or not the Closing shall have occurred.
SECTION 8.02 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered if delivered personally or by telecopy
(during regular business hours of Monday through Friday, 9 a.m. through 5 p.m.
excluding legal holidays) or five days after being mailed by registered, Federal
Express, U.S. Postal Service Overnight Mail or certified mail (postage prepaid,
return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice, except that
notices of changes of address shall be effective upon receipt):
(a) if to the Company:
Ms. Dara Dobson
TLC Recreation Center, Inc.
502 Schneider Drive
Ft. Walton Beach, Florida 32547
Telephone: ( ) -
Telecopy: ( ) -
With a copy to:
Edward Bryant, Esq.
Sun Bank Building
Suite 205
3301 Davis Boulevard
Naples, Florida 33940
Telephone: (941) 643-4888
Telecopy: (941) 643-4458
20
<PAGE>
(b) if to the Purchaser:
Mr. Michael C. Koffler
Phoenix Preschool Education Centers, Inc.
150 East 58th Street 31st Floor
New York, New York 10155
Telephone: (212) 826-6131
Telecopy: (212) 421-5887
With a copy to:
Craig S. Peligri, Esq.
54 Main Street
Hackensack, New Jersey 07601
Telephone: (201) 489-6500
Telecopy: (201) 489-6056
SECTION 8.03 Amendment. This Agreement may not be amended, modified,
terminated or discharged except by an instrument in writing signed by the
parties hereto.
SECTION 8.04 Waiver. At the time prior to any Closing, either the
Company or the Purchaser hereto may (a) extend the time for the performance of
any of the obligations or other acts of the other party hereto (b) waive any
inaccuracies in the representations and warranties made by the other party and
contained herein or in any document delivered by the other party pursuant hereto
and (c) waive compliance by the other party hereto with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party to be bound thereby.
SECTION 8.05 Headings. The headings contained in this agreement are for
reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.
SECTION 8.06 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
Georgia or Federal law or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain in full force and effect.
21
<PAGE>
Upon such determination that any term or other provision is invalid, illegal or
incapable or being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that transactions
contemplated hereby are consummated as originally contemplated to the greatest
extent possible.
SECTION 8.07 Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and undertakings, both written and oral, with
respect to the subject matter hereof.
SECTION 8.08 Assignments. This Agreement may not be assigned by
operation of law or otherwise without the express written consent of the other
parties hereto (which consent may be granted or withheld in the sole discretion
of such other parties).
SECTION 8.09 No Third-Party Beneficiaries. This Agreement is for the
sole benefit of the parties hereto and their permitted assigns and nothing
herein, expressed or implied, shall give or be construed to give to any person
or entity, other that the parties hereto, any legal or equitable rights
hereunder.
SECTION 8.10 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Florida.
SECTION 8.11 Counterparts. This Agreement maybe executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 8.12 Consent to Jurisdiction. Each of the parties hereto hereby
agree to the jurisdiction of the State court located within __________ County,
Florida for the purposes of enforcing the other parties' rights under this
Agreement and consent that service of any and all process upon it may be made as
set forth in Section 8.02 hereof.
22
<PAGE>
SECTION 8.13 Confidentiality. For purposes of this paragraph
"Confidential Information" shall mean all information, data and knowledge
(whether in the form of documents, know-how or otherwise) relating, directly or
indirectly, to any party which is disclosed to another party and which is not
publicly available. Each party shall keep the Confidential Information of the
other parties to any person except to such of its advisors who need to know for
the purposes of advising it on this proposed transaction. The provisions of this
Section shall not apply to any Confidential Information that is (i) or hereafter
becomes, in the public domain as a result of causes other than the acts or
omissions of the party hereto under the duty of confidentiality or (ii) required
by law to be disclosed. If the Closing does not occur, each party will promptly
return all documents containing Confidential Information furnished to it by any
other party.
23
<PAGE>
IN WITNESS WHEREOF, The Company and the Purchaser have caused this Agreement
to be executed as of the date first written above by their respective officers
thereunto duly authorized.
Witness: TLC RECREATION CENTER, INC.
("Company")
__________________________ by: /s/ Dara Dobson
----------------------
Dara Dobson, President
DARA DOBSON
(Individually)
__________________________ /s/ Dara Dobson
----------------------
Dara Dobson
LLOYD DOBSON
(Individually)
_________________________ /s/ Lloyd Dobson
----------------------
Lloyd Dobson
PHOENIX PRESCHOOL EDUCATION
CENTERS, INC.
("Purchaser")
_________________________ by: /s/ Michael C. Koffler
----------------------
Michael C. Koffler,
President
24
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
POLLACK ENTERPRISES, INC.
AND
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
1
<PAGE>
ASSET PURCHASE AGREEMENT dated as of the 19th day of January 1996, by
and among Pollack Enterprises, Inc., a corporation formed under the laws of the
State of North Carolina, whose mailing address is 1800 Arendell Street, Morehead
City, North Carolina (hereinafter sometimes referred to as the "Company") and
Phoenix Preschool Education Centers, Inc., a corporation formed under the laws
of the State of Delaware, whose address is 150 East 58th Street, 31st Floor, New
York, New York (hereinafter sometimes referred to as the "Purchaser").
WHEREAS the Company is engaged in the business of providing day care
services to children from age of infancy through age five (5) at three (3)
locations, listed and included herein as Exhibit "A" (hereinafter sometimes
referred to as the "Business");
WHEREAS in connection with the operation of the Business, the Company
owns certain assets, including, but not limited to, machinery, equipment,
furniture, fixtures, vehicles, inventories and supplies;
WHEREAS the Company desires to sell to the Purchaser and the Purchaser
desires to purchase from the Company certain assets necessary for the operation
of the Business, upon the terms and subject to the conditions set forth herein;
and
2
<PAGE>
NOW, THEREFORE, in consideration of the promises and of the mutual
agreements and covenants hereinafter set forth, the Company and the Purchaser
hereby agree as follows:
ARTICLE I - Definitions
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such definitions to be
equally applicable to both the singular and plural forms of the terms defined):
"Ancillary Agreements" means the other agreements, documents and
instruments to be executed and delivered by the Purchaser or the Company,
pursuant hereto, including, without limitation, the Bill of Sale and Restrictive
Covenant.
"Assumed Liabilities" means, and shall consist only of, the following:
(a) all Liabilities arising out of or accruing from ownership,
possession or use of the Transferred Assets or operation of the Business from
and after the Closing Date; provided, however, that in no event shall the term
"Assumed Liabilities" include any Liabilities for Taxes of the Company of any of
the foregoing that are on, based on, or imposed with respect to gross, adjusted
gross or net income, or are alternative or add-on minimum Taxes, franchise
Taxes, sales Taxes, payroll Taxes, similar Taxes or contingent liabilities for
any suit for personnel injury instituted in a court of competent jurisdiction.
"Bill of Sale" means the bill of sale and assignment, providing for,
among other things, the transfer of the Transferred Assets by the Company as the
case may be, to the Purchaser.
3
<PAGE>
"Business Day" means any day other than a day on which banks in New
York are authorized or required to be closed.
"Encumbrance" means any and all liens, security interests,
encumbrances, mortgages, pledges, restrictions, charges, instruments, licenses,
encroachments, options, rights-of-recovery, judgments, orders and decrees of any
court of governmental entity, interests, product, environmental, Tax and other
liabilities and claims, in each case, of any kind or nature, whether secured or
unsecured, filed or unfiled, scheduled or unscheduled, noticed or unnoticed,
recorded or unrecorded, contingent or non-contingent, liquidated or
unliquidated, matured or unmatured, known or unknown.
"Excluded Assets" means all the assets of the Company not included in
the Transferred Assets, including, without limitation, all of the following:
(a) all the cash on hand, deposits in bank accounts and marketable
securities;
(b) all the Receivables and prepaid expenses;
(c) all Actions, claims and contracts of the Company not assigned to
the Purchaser;
(d) any and all computer and office equipment located at 1800 Arendell
Street, Morehead City, North Carolina;
(e) all rights, title and interest in any refunds and credits for
prepaid amounts from Governmental Authorities with respect to Taxes that are the
responsibility of, and have been paid by, the Company under the terms of this
Agreement or prior to signing this Agreement;
(f) all rights, title and interests of the Company to and under this
Agreement and the Ancillary Agreements.
"Governmental Authority" means any United States Federal, state or
local or any
4
<PAGE>
foreign government, governmental commission, court, tribunal or arbitrating
body.
"Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Authority.
"Inventory" means all inventory, merchandise and goods held for use at
the facilities.
"Liabilities" means any and all debts, liabilities, losses, claims,
damages, costs expenses, interest, awards, judgments, penalties and obligations,
whether accrued or fixed, absolute or contingent, mature or unmatured,
determined or determinable, including, without limitation, those arising under
any law, rule, regulation or Action of any Governmental Authority and those
arising under any contract, commitment or undertaking.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d) (3)
of the Securities Exchange Act of 1934, as amended.
"Receivables" means any and all accounts receivable, notes and other
amounts receivable owed to the Company from third parties, including, without
limitation, third-party credit card companies, state and federal agencies,
customers, vendors and employees, arising from the Company's conduct of the
Business, together with any unpaid financing charges accrued thereon, including,
without limitation, all deposits and prepayments made by the Company.
"Retained Liabilities" means all Liabilities of the Company other than
the Assumed Liabilities, including, without limitation, the following:
5
<PAGE>
(a) any litigation or claims with respect to any of the Transferred
Assets or the operation of the Business arising or accrued prior to the Closing
Date;
(b) except as set forth in Section 5.04, all Liabilities of the
Company;
(c) Liabilities for any Taxes imposed on the Transferred Assets that
are attributable to any period or portion thereof ending on or prior to the
Closing Date;
(d) any Liabilities arising or accrued with respect to ownership,
possession or use of any of the Transferred Assets or operation of the Business
prior to the Closing Date including all accounts payable of the Company as of
the Closing Date; and
"Tax" or "Taxes" means any and all taxes, imposts, duties, levies,
charges, withholdings, fees or excises imposed by any Governmental Authority or
instrumentality and any penalties or interest thereon, including, without
limitation, any gross, adjusted gross or net income tax, alternative or add-on
minimum tax, franchise, sales tax, employment-related tax (including, without
limitation, employee withholding, employment, social security, workers'
compensation, unemployment compensation and employer payroll taxes), or real or
personal property tax, together with any and all interest, penalties, additions
to tax or additional amounts imposed with respect to any of the foregoing.
"Transferred Assets" means any and all of the following:
(a) all of the Company's rights and interests in and to the vehicles
owned by the Business, a list of said vehicles is attached hereto as Exhibit
"B";
(b) all of the Company's rights, title and interest in the furnishings,
furniture, office supplies, signs, machinery, equipment, and all other tangible
assets and properties, real, personal or mixed, of every kind and description
physically located at or used by the
6
<PAGE>
Business, not specifically excluded, owned by the Company;
(c) all rights, title and interest to the client list, including names,
address, telephone numbers and fees charged by the Business;
(d) all rights, title and interest in the existing telephone numbers
for the Business;
(e) all rights, title and interest in the name "Miss Nancy's" currently
used by the Business for a period of two (2) years from the Closing Date.
(f) computer software presently used by the Business.
ARTICLE II - Purchase and Sale
SECTION 2.01 Purchase and Sale; Assumption of Liabilities. (a) On the
terms and subject to the conditions set forth in this Agreement, on the Closing
Date, the Company shall sell, assign, transfer, convey and deliver to the
Purchaser the Transferred Assets, free and clear of all liabilities, claims,
duties, obligations and Encumbrances other than the Assumed Liabilities, and the
Purchaser shall purchase from the Company the Transferred Assets and assume the
Assumed Liabilities.
(b) Except for the Assumed Liabilities or as expressly referred to in
any instrument of conveyance or assignments executed and delivered pursuant to
this Agreement, the Purchaser shall not assume or otherwise be responsible to
third parties for any Liabilities of the Company, or any Liabilities relating to
the Transferred Assets (including, but not limited to, the Retained
Liabilities).
SECTION 2.02 (a) Purchase Price. The aggregate consideration to be
rendered for
7
<PAGE>
the Transferred Assets shall be eight hundred seventy-five thousand
($875,000.00) dollars (the "Purchase Price").
(a) The Purchase Price is payable as follows:
(i) $215,000 to be paid at closing;
(ii) A note executed by the Purchaser to the Company providing
for payments to commence ninety (90) days from the Closing Date and to provide
for forty (40) equal payments of principal with interest on the unpaid principal
balance, paid quarterly until fully paid. Interest will be calculated at an
annual rate of nine (9%) percent.
(iii) Purchaser will also execute a security agreement wherein
Company and the Pollacks will have a security interest in all of the equipment,
fixtures, vehicles, inventory, lease hold improvements and customer lists.
Company will execute in addition thereto financing statements in recordable form
to be recorded in the Register of Deeds of Carteret County and filed with the
Secretary of State of North Carolina in order to perfect their security
interest.
(b) The Purchase Price is allocated as follows:
(i) Furniture and fixtures $ 900.00
(ii) Vehicles 33,590.00
(iii) Equipment 875.00
(iv) Inventory 60,635.00
(v) Leasehold improvements 724,000.00
(vi) Customer list 5,000.00
(viii) Restrictive Covenant 50,000.00
-----------
Total $875,000.00
8
<PAGE>
(c) The Purchase Price shall also include the services of J. David
Pollack and Nancy B. Pollack to train and help manage the Business and assist in
locating future businesses for the Purchaser to acquire subsequent to the
Closing Date for a period of three (3) months. J. David Pollack and Nancy B.
Pollack will not be entitled to any compensation for these services.
(d) Purchaser has made an examination of the premises and finds that
all of the furniture, fixtures, vehicles, equipment, inventory and lease hold
improvements are there, and that it is satisfied with them and they are in
substantially the same condition they were when first inspected. By closing
today, Purchaser accepts all of these items and the values. After closing,
Purchaser will make no further claims against the Company concerning same unless
there is a lien or encumbrance on any of these items which would be the
responsibility of Company.
SECTION 2.03 Closing.
(a) The sale and purchase of the Transferred Assets and the assumption
of the Assumed Liabilities contemplated hereby shall take place at a closing
(the "Closing"), on February 1, 1996, (the "Closing Date").
(b) Notwithstanding the foregoing, the Closing may be held at a place
or at such other time or on such other date as the Company and the Purchaser
shall mutually agree upon in writing.
9
<PAGE>
SECTION 2.04 Closing Deliveries.
(a) At the Closing the Company shall deliver, or cause to be delivered,
to the Purchaser the following:
(i) a Bill of Sale;
(ii) Leases for all of the locations of the Business (with an
annual rent not to exceed $85,000.00 for a period of ten (10) years with an
option to renew for an additional ten (10) years at an annual rent of
$93,500.00). Said Leases shall contain a cross default provision with the
Promissory Note;
(iii) a Restrictive Covenant for a period of ten (10) years
executed by the Company, J. David Pollack and Nancy B. Pollack; and
(iv) such other instruments as may be reasonably requested by
the Purchaser to transfer the Transferred Assets to the Purchaser or evidence
such transfers in the public records; and
(b) At the Closing, the Purchaser shall deliver to the Company the
following:
(i) a note for the balance of the Purchase Price;
(ii) Security Agreements; and
(iii) any such other instruments as may be reasonably
requested by the Company.
ARTICLE III - Representations and Warranties of the Company
As an inducement to the Purchaser to enter into this Agreement, the
Company represents and warrants to the Purchaser as follows:
10
<PAGE>
SECTION 3.01. Authority of the Company. The execution and delivery of
this Agreement and the Ancillary Agreements by the Company, the performance by
them of their obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite action on the part of the Company. This Agreement has been duly
executed and delivered by the Company and upon its execution and delivery the
Ancillary Agreements will be, duly executed and delivered by the Company, and
(assuming due authorization, execution and delivery by the Purchaser) this
Agreement constitutes, and, upon their execution, the Ancillary Agreements will
constitute, legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms.
SECTION 3.02 No Conflict. The execution, delivery and performance of
this Agreement by the Company, and each of the Ancillary Agreements by the
Company, as the case may be, does not and will not (a) violate or conflict with
any statute, ordinance, law, rule, regulation or Governmental Order applicable
to the Company or the Transferred Assets, or (b) result in any breach of,
constitute a default (or event which with the giving of notice or lapse of time,
or both, would become a default) or require any consent under, or give to others
any rights of termination, amendment (including, without limitation, the
termination or diminution of any right to extend or renew any term), revocation,
acceleration or cancellation of, or result in the creation of any Encumbrance on
the Transferred Assets pursuant to, any note, bond, mortgage, indenture,
contract, agreement, license, permit, or other instrument relating to the
Transferred Assets to which the Company is a party or by
11
<PAGE>
which any of them or any of the Transferred Assets are bound or affected, except
such conflicts, violations, breaches or defaults with respect to clauses (a) and
(b) above that, individually or in the aggregate, would not materially adversely
affect the value of any of the Transferred Assets or the Purchaser's ability to
operate the Business subsequent to the Closing or the Company's ability to
transfer the Transferred Assets to the Purchaser.
SECTION 3.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Company does not and will not, and the
execution, delivery and performance of the Ancillary Agreements by the Company,
as the case may be, will not, require any consent, approval, authorization or
other action by, or filing with or notification to, any Governmental Authority.
SECTION 3.04 Inventory. The Company has good and marketable title to
the Inventory, all of which is located at the Business, free and clear of all
liens and Encumbrances and, following the consummation of the transactions
contemplated hereby, such title will be held by the Purchaser free and clear of
all Encumbrances.
SECTION 3.05 Brokers. Any amounts due to any broker, finder or
investment banker in connection with the transactions contemplated by this
Agreement, based upon arrangements made by the Company, shall be paid solely by
the Company. The Company agrees to indemnify the Purchaser for any claims made
by any such broker, finder or investment banker against the Purchaser.
12
<PAGE>
SECTION 3.06 Personal Property Lease. There are no personal property
leases for property or equipment used by the Company in connection with the
Business.
SECTION 3.07 Liabilities. Except for Taxes not yet due or payable, the
Company has no material liabilities due to any creditor or vendor. Any liability
that does exist will be fully satisfied, evidence of which will be supplied to
the Purchaser on or before the Closing Date. In the event a franchise or
corporate search should reveal any liability of the Company, Purchaser shall
have the right to set-off said liability against any payments due Company under
the note referenced in Section 2.04 of this Agreement. Purchaser shall be
responsible to pay to any vendor the amount due for inventory or supplies
ordered by the Company prior to the Closing Date not received by the Closing
Date. Purchaser shall not have the right to set-off for these obligations,
provided the inventory or supplies are ordered in the ordinary course of
business by the Company.
SECTION 3.08 Maintenance of Books and Records. The books and records of
the Company are complete and accurate in all material respects. The Company
represents and warrants that all copies of any portion of the accounting records
supplied to the Purchaser by the Company or its' representatives were true as of
the date provided and remain true as of the date of Closing without material
deviation.
SECTION 3.09 Taxes. All federal, state and local income, ad valorem,
excise, sales, use, franchise, payroll, personal property, premium and other
Taxes and assessments of any
13
<PAGE>
kind, including any penalty payments and interest thereon which have become due
and payable by the Company have been properly computed, duly reported, fully
paid and discharged. There are no unpaid taxes which are or could become a lien
on the properties or assets of the Company, including the Transferred Assets,
except for current taxes not yet due and payable. There are no pending
assessments or proposed adjustments or audits presently in progress with respect
to such returns.
ARTICLE IV - Representations and Warranties of the Purchaser
As an inducement to the Company to enter into this Agreement, the
Purchaser represents and warrants to the Company as follows:
SECTION 4.01 Authority of the Purchaser. The execution and delivery by
the Purchaser of this Agreement and the Ancillary Agreement to which it is a
party, the performance by it of its obligations hereunder and thereunder and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all requisite action on the part of the Purchaser. This Agreement
has been duly executed and delivered by the Purchaser, and upon their execution
the Ancillary Agreements to which it is a party will be duly executed and
delivered by the Purchaser, and (assuming due authorization, execution and
delivery by the Company as the case may be) this Agreement constitutes, and upon
their execution and Ancillary Agreements to which it is a part will constitute,
legal valid and binding obligations of the Purchaser enforceable against the
Purchaser in accordance with their terms.
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SECTION 4.02 No Conflict. The execution, delivery and performance by
the Purchaser of this Agreement and the Ancillary Agreements to which it is a
party do not and will not conflict with or violate any statute ordinance, law,
rule, regulation or Governmental Order applicable to the Purchaser.
SECTION 4.03 Consents and Approvals. The execution, delivery and
performance of this Agreement by the Purchaser does not and will not, and the
execution, delivery and performance of the Ancillary Agreements to which it is a
party by the Purchaser will not, require any consent, approval, authorization or
other action by, or filing with or notification to, any Governmental Authority.
SECTION 4.04 Litigation. No action is pending against the Purchaser
which seeks to delay or prevent the consummation of the transactions
contemplated hereby or which may adversely affect or restrict the Purchaser's
ability to consummate the transactions contemplated hereby.
ARTICLE V - Additional Agreements
SECTION 5.01 Conduct of Business Prior to the Closing. (a) Between the
date of this Agreement and the Closing Date, unless the Company shall have
obtained the Purchaser's prior written consent, the Company shall use best
efforts to continue in full force and effect without material modification all
existing policies or binders of insurance
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presently maintained in respect of the Business.
(b) Except as contemplated by this Agreement, between the date of this
Agreement and the Closing Date the Company shall not directly or indirectly, do,
or propose or agree to do any of the following, without the prior written
consent of the Purchaser:
(i) increase the compensation payable or to become payable to
any of the employees or agents engaged in the operation of the Business.
(ii) sell, transfer, assign, pledge, encumber, lease,
sublease, license or otherwise dispose or any of the Transferred Assets, other
than the normal selling of Inventory in the ordinary course;
(iii) fail to defend, initiate or proceed with any material
matter before any Governmental Authority that is necessary to protect the
Transferred Assets;
(iv) fail to (A) maintain the Transferred Assets in their
condition as of the date hereof (ordinary wear and tear excepted), (B) maintain
insurance for the Transferred Assets in effect on the date of this Agreement or
(C) in the event of a casualty, loss or damage to any of the Transferred Assets
prior to the Closing Date either repair or replace such damaged assets with an
item of equal value and quality or at the option of the Purchaser, transfer the
proceeds of any insurance payable with respect to such casualty, loss or damage,
to the Purchaser.
SECTION 5.02 Regulatory and other Authorizations. Each party hereto
will use its best efforts to obtain all authorizations, consents, orders and
approvals of all Governmental Authorities and officials that may be or become
necessary for its execution and delivery of,
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and the performance of its obligations pursuant to, this Agreement or the
Ancillary Agreements and will cooperate fully with each other party in promptly
seeking to obtain all such authorizations, consents, orders and approvals. The
parties hereto will not take any action that will have the effect of delaying,
impairing or impeding the receipt of any required approvals.
SECTION 5.03 Notice of Developments. Prior to the Closing, each party
shall (a) give prompt notice to the other of any material development affecting
the ability of the parties to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements and (b) promptly notify the other party
in writing of any events, facts and occurrences arising subsequent to the date
hereof which could reasonably be expected to result in any material breach of
any representation, warrantee or agreement covenant contained in this Agreement.
SECTION 5.04 Conveyance Taxes. The Purchaser shall be liable for and
shall hold the Company harmless against any sales or use taxes that become
payable in connection with any of the transactions contemplated hereby;
provided, however, that the Purchaser shall not be liable under any
circumstances for any Taxes of the Company that are on or based upon the
Company's gross or net income and the Company will indemnify the Purchaser from
all losses, damages, liabilities and costs (including attorney's fees) relating
thereto. The Parties hereto shall reasonably cooperate in preparing and filing
all returns, reports and forms relative to all such Taxes and in resolving any
disputes or audits with
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respect to any taxable periods relating to such taxes.
SECTION 5.05 Further Action. Each of the parties hereto shall execute
such documents (including, without limitation, the Ancillary Agreements) and
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby or, at or after the Closing, to evidence the consummation of the
transactions consummated pursuant to this Agreement. Upon the terms and subject
to the conditions hereof, each of the parties hereto shall use its best efforts
to take, or cause to be taken, all actions and to do or cause to be done, all
other things necessary proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
obtain in a timely manner all necessary waivers, consents and approvals and to
effect all necessary registrations and filings.
SECTION 5.06 Cash in Business. The Company shall be entitled to all the
cash in the Business at the close of business on the day preceding the Closing
Date.
SECTION 5.07 Transferred Employees. On or prior to the Closing Date,
the Company shall pay or cause to be paid (or establish arrangements for prompt
payment acceptable to the Purchaser in its sole discretion) all base salary,
overtime, bonuses, commissions, benefits and other compensation due to the
existing employees, agents and consultants of the Company and payroll and
similar Taxes thereon for all periods up to and
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including the date immediately preceding the Closing Date. Immediately prior to
the Closing, the Company shall terminate all of the employees of the Business
and as of the Closing the Purchaser may offer at-will employment to one or all
of such employees ("Transferred Employees"). As of the Closing Date the
Purchaser shall be responsible to the Transferred Employees for all base salary
overtime, bonuses, commissions, benefits and payroll and similar Taxes thereon
for all periods beginning on or after the Closing Date.
ARTICLE VI - Conditions to Closing
SECTION 6.01 Conditions to Obligations of the Company. The obligations
of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment, at or prior to the Closing Date of each of
the following conditions:
(i) Representations and Warranties. The representations and warranties
of the Purchaser contained in this Agreement shall have been true and correct in
all material respects when made (other than such representations and warranties
as are made as of another specified date) and shall be true and correct in all
material respects as of the Closing Date.
(ii) Covenants. The covenants and agreements contained in this
Agreement to be complied with by the Purchaser on or before the Closing Date
shall have been complied with in all material respects.
(iii) No Order, Proceeding or Litigation. No Governmental Authority
shall have enacted, issued, promulgated, enforced or entered any Governmental
Order (whether
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temporary, preliminary or permanent) which is in effect and has the effect of
making the transactions contemplated hereby illegal or otherwise prohibiting the
consummation of the transactions contemplated by this agreement.
SECTION 6.02 Conditions to Obligations of the Purchaser. The
obligations of the Purchaser to consummate the transactions contemplated hereby
shall be subject to the fulfillment, at or prior to the Closing, of each of the
following conditions:
(i) Representations and Warranties. There presentations and warranties
of the Company contained in this Agreement shall have been true and correct in
all material respects when made (other than such representations and warranties
as are made as of another specified date) and shall be true and correct in all
material respects as of the Closing Date.
(ii) Covenants. All the covenants and agreements contained in this
Agreement to be complied with by the Company on or before the Closing Date shall
have been complied with.
(iii) No Order, Proceeding or Litigation. No Governmental Authority
shall have enacted, issued, promulgated, enforced or entered any Governmental
Order (whether temporary, preliminary or permanent) which is in effect and has
the effect of making the transactions contemplated hereby illegal or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement.
(iv) Liabilities. The Company shall have no material liabilities,
except for liabilities for Taxes not yet due and payable and vendors in the
ordinary course of business which will
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be fully paid and satisfied by the Closing Date and evidence of which will be
supplied to the Purchaser. Any and all Encumbrances relating to the Transferred
Assets shall be removed by said date.
ARTICLE VII - Termination
SECTION 7.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by either the Company or the Purchaser in the event of a material
breach or misrepresentation under this Agreement by the other party that is not
cured or is not in the progress of being cured within ten days after written
notice thereof is given by the party alleging such material breach or
misrepresentation, in either case must be cured within fifteen days after
written notice;
(b) by the mutual written consent of the Company and the Purchaser.
SECTION 7.02 Effect of Termination. In the event of the termination of
this Agreement as provided in Section 7.01(b), this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto.
Termination by either party in accordance with Section 7.01 (a) shall be
effective immediately upon the receipt of notice thereof and Section 7.01 (b) by
a statement signed by both parties indicating mutual consent.
ARTICLE VIII - General Provisions
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SECTION 8.01 Expenses. Except as otherwise provided in this Agreement,
all costs and expenses, including without limitation, fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses whether or not the Closing shall have
occurred.
SECTION 8.02 Notices. All notices and other communications given or
made pursuant hereto shall be in writing and shall be deemed to have been duly
given or made as of the date delivered if delivered personally or by telecopy
(during regular business hours of Monday through Friday, 9 a.m. through 5 p.m.
excluding legal holidays) or five days after being mailed by registered, Federal
Express, U.S. Postal Service Overnight Mail or certified mail (postage prepaid,
return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice, except that
notices of changes of address shall be effective upon receipt):
(a) if to the Company:
Mr. J. David Pollack
1800 Arendell Street
Morehead City, North Carolina 28557
Telephone: (919) 247-2005
With a copy to: Claud Wheatly III, Esq.
Wheatly, Wheatly, Nobles & Weeks
410 Front Street
Beaufort, North Carolina 28516
Telephone: (919) 728-3158
Telecopy: (919) 728-5282
(b) if to the Purchaser:
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Mr. Michael C. Koffler
150 East 58th Street 31st Floor
New York, New York 10155
Telephone: (212) 826-6131
Telecopy: (212) 421-5887
With a copy to:
Craig S. Peligri, Esq.
54 Main Street
Hackensack, New Jersey 07601
Telephone: (201) 489-6500
Telecopy: (201) 489-6056
SECTION 8.03 Amendment. This Agreement may not be amended, modified,
terminated or discharged except by an instrument in writing signed by the
parties hereto.
SECTION 8.04 Waiver. At the time prior to any Closing, either the
Company or the Purchaser hereto may (a) extend the time for the performance of
any of the obligations or other acts of the other party hereto (b) waive any
inaccuracies in the representations and warranties made by the other party and
contained herein or in any document delivered by the other party pursuant hereto
and (c) waive compliance by the other party hereto with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party to be bound thereby.
SECTION 8.05 Headings. The headings contained in this agreement are for
reference purposes only and shall not effect in any way the meaning or
interpretation of this Agreement.
SECTION 8.06 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of New
York or Federal law or public policy, all other conditions and provisions of
this Agreement shall nevertheless remain
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in full force and effect. Upon such determination that any term or other
provision is invalid, illegal or incapable or being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
SECTION 8.07 Entire Agreement. This Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and undertakings, both written and oral, with
respect to the subject matter hereof.
SECTION 8.08 Assignments. This Agreement may not be assigned by
operation of law or otherwise without the express written consent of the other
parties hereto (which consent may be granted or withheld in the sole discretion
of such other parties).
SECTION 8.09 No Third-Party Beneficiaries. This Agreement is for the
sole benefit of the parties hereto and their permitted assigns and nothing
herein, expressed or implied, shall give or be construed to give to any person
or entity, other that the parties hereto, and Indemnitee and such assigns, any
legal or equitable rights hereunder.
SECTION 8.10 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of North Carolina.
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SECTION 8.11 Counterparts. This Agreement maybe executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 8.12 Consent to Jurisdiction. Each of the parties hereto hereby
agree to the jurisdiction of the State court located within Carteret County,
North Carolina for the purposes of enforcing the other parties' rights under
this Agreement and consent that service of any and all process upon it may be
made as set forth in Section 8.02 hereof.
SECTION 8.13 Confidentiality. For purposes of this paragraph
"Confidential Information" shall mean all information, data and knowledge
(whether in the form of documents, know-how or otherwise) relating, directly or
indirectly, to any party which is disclosed to another party and which is not
publicly available. Each party shall keep the Confidential Information of the
other parties to any person except to such of its advisors who need to know for
the purposes of advising it on this proposed transaction. The provisions of this
Section shall not apply to any Confidential Information that is (i) or hereafter
becomes, in the public domain as a result of causes other than the acts or
omissions of the party hereto under the duty of confidentiality or (ii) required
by law to be disclosed. If the Closing does not occur, each party will promptly
return all documents containing Confidential Information furnished to it by any
other party.
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IN WITNESS WHEREOF, The Company and the Purchaser have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
Witness: POLLACK ENTERPRISES, INC.
("Company")
__________________________ by: ___________________________
J. David Pollack, President
PHOENIX PRESCHOOL EDUCATION
CENTERS, INC.
("Purchaser")
_________________________ by: ___________________________
Michael C. Koffler,
President
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Subsidiaries
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Phoenix Preschool Education Centers, Inc.
<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
Registration Statement of our report dated October 1, 1996, except for Note 9(a)
which is as of June 5, 1997 and the Reorganization as described in Note 1(l)
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. and our report dated June 20, 1997 relating
to the statements of income, stockholder's equity and cash flows of Libbus,
Inc., which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
-----------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
July 15, 1997
