<PAGE>
As filed with the Securities and Exchange Commission on September 10, 1997
Registration No. 333-31407
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
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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<CAPTION>
Delaware 8351 52-2044492
- -------------------------------------- ------------------------------------ ----------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
PHOENIX PRESCHOOL HOLDINGS, INC.
31st Floor
150 East 58th Street
New York, NY 10155
(212) 826-6130
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
MICHAEL C. KOFFLER
Chairman, Chief Executive Officer and President
Phoenix Preschool Holdings, Inc.
31st Floor
150 East 58th Street
New York, NY 10155
(212) 826-6130
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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FREDERICK D. LIPMAN, ESQUIRE JAY M. KAPLOWITZ, ESQUIRE
MICHAEL MEDVECKUS, ESQUIRE ARTHUR S. MARCUS, ESQUIRE
Blank Rome Comisky & McCauley Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
One Logan Square 101 East 52nd Street
Philadelphia, Pennsylvania 19103 New York, NY 10022-6018
(215) 569-5500 (212) 752-9700
</TABLE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective registration statement filed pursuant
to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434 please check the following box. [ ]
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 September 10, 1997
PROSPECTUS [LOGO]
PHOENIX PRESCHOOL HOLDINGS, INC.
1,300,000 Units
(Each Unit Representing One Share of Common Stock
and Two Warrants to Acquire One Share of 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 after the Effective Date, on not less than thirty (30)
days prior written notice to the holders of the Warrants, provided that the
closing sale price of the Common Stock has been at least $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--Absence of Public Trading Market." It is anticipated that the
Common Stock and Warrants will be separately traded. The Common Stock and
Warrants have been conditionally approved for quotation on The Nasdaq SmallCap
Market, under the proposed symbols "FENX" and "FENXW," respectively, and have
been conditionally approved for listing on the Boston Stock Exchange, under the
proposed symbols "FNX and FNXW," respectively. See "Market for Securities and
Related Stockholder Matters." 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
PAGES6 AND 19 OF THIS PROSPECTUS. ONLY INVESTORS WHO CAN
BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT IN
THE COMPANY SHOULD INVEST IN THE 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.
---------------------------------
<PAGE>
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=========================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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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. Underwriting discounts 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 ($99,984) at the closing of the Offering); and
(iv) a Warrant solicitation fee of 8% of the exercise price of each
Warrant exercised more than twelve (12) months after the Offering under
certain circumstances. The Company has agreed to indemnify the 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 and the Boston Stock Exchange, Member Services Department, One Boston
Place, Boston, MA 02108.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
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, following the reorganization described herein, became the
holding company for Phoenix Preschool Education Centers, Inc. References to the
"Company" in this Prospectus include, as the context requires, Phoenix Preschool
Education Centers, Inc., the subsidiary and predecessor of the Company through
the reorganization described herein. See "Reorganization."
The Company
Phoenix Preschool Holdings, Inc. (the "Company" or "Phoenix Preschool")
provides for-profit child care through 22 child care centers located in Florida,
Georgia and North Carolina. Center-based child care and preschool educational
services are provided five days a week throughout the year to children between
the ages of six weeks and 12 years. As of 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. See "Business -- Overview."
The Company's strategy is to offer an independently developed
educational curriculum within a stimulating environment in order to provide high
quality child care and to maximize development and preparation of children for
school. The Company emphasizes the recruitment, selection and ongoing training
of its child care center directors. Within a framework of centralized financial
and quality controls, the Company grants significant authority over center
operations to its center directors and rewards directors and assistant directors
on an incentive basis, tied to individual center performance.
According to Childcare Information Exchange (1996), the child care
industry is currently a $26 billion annual industry. The Company believes that
the market for center-based child care will continue to grow rapidly. The
Company believes the following factors will contribute to increased demand for
high quality child care centers: a growing number of women in the work force
with small children, single-parent homes, a shift in parental preference toward
the more structured and education-based environment provided by center-based
child care, as well as the effects of nationwide welfare reform, which
encourages entry by mothers into the workforce. See "Business -- Industry
Overview."
The percentage of mothers in the work force with children under age
six has increased from 39% in 1975 to 58% in 1990 and reached 67% by the end of
1996. In addition, the child care industry is highly fragmented, with
approximately 100,000 centers serving pre-school and/or school-age children in
the United States. According to Childcare Information Exchange, ownership of the
approximately 100,000 childcare centers breaks down as follows: (i) independent
for-profit - 29%; (ii) independent non-profit - 25%; (iii) church-housed - 15%;
(iv) head start - 9%; (v) public school - 8%; (vi) sponsored non-profit - 8%;
and (vii) for-profit chain - 6%. In total, 2,800 centers are owned by the six
largest national child care providers. The Company believes that many child care
centers are managed by individuals who lack the systems, financial
sophistication and professional management skills to operate their centers
profitably in an increasingly regulated industry. The Company believes that the
industry will experience consolidation, as these factors, coupled with
increasing competition from large, well capitalized and better known providers,
combine to create a more difficult operating environment for smaller child care
providers. See "Business -- Industry Overview."
<PAGE>
The Company has pursued a growth strategy that has focused on the
acquisition of existing centers. Upon formation in 1995, the Company acquired
eight units of a Florida entity in bankruptcy under Bankruptcy Court authority
and installed a new management team with experience in the fields of child care
and education. The Company then added eight centers through various acquisitions
during 1996 and an additional six centers to date in 1997. See "Business --
Growth Strategy."
The Company has developed a comprehensive education-based child care
program for its centers that is designed to respond to the increasing demand for
center-based care. Each of the Company's centers utilizes an age-appropriate,
education-based curriculum designed to promote each child's intellectual,
social, physical and emotional growth. In addition to the traditional areas of
language arts, mathematics, science and creative arts, the Company's curriculum
includes an incipient preschool computer science program and a foreign language
program. The Company's centers incorporate a number of features designed to
promote child safety and to support the Phoenix Preschool curriculum. In
addition to interactive learning aids and toys, several centers include swimming
pools. The Company's program also emphasizes continuous communication between
teachers and parents concerning each child's development. The Company believes
that this communication is critical to maintaining parental confidence and
satisfaction. See "Business -- Curriculum."
The Company has developed systems and methodologies with respect to its
operating, accounting and quality control procedures that help it to maintain
uniform quality standards. These systems and methodologies, which have been
compiled in a series of manuals that are periodically revised and updated, were
developed by the Company's management based upon its experience in the child
care industry.
Key to the operations of the Company is the implementation of a
recently licensed data processing system. This system keeps account of the
tuition and timesheets for staff and will utilize an internet routing system for
information and e-mail between preschool sites and the home office.
Additionally, a pilot program is in process to test the viability of using
computers in teaching children. The Company is testing Apple Macintosh computers
to gauge market responsiveness and is testing IBM-compatible personal computers
in one of its North Carolina centers. The Company is also pursuing the delivery
of preschool services to large employers, either contracted to Company sites, or
utilizing a sponsor's site. See "Business -- Management Information System" and
"-- Financial Planning; Budgeting and Cost Control."
The Company is a newly organized corporation formed under the laws of
the State of Delaware. Following the reorganization described herein, the
Company holds all of the outstanding capital stock of Phoenix Preschool
Education Centers, Inc., which was incorporated in May 1995 under the laws of
the State of Delaware. See "Reorganization." The Company's principal executive
offices are located at 150 East 58th Street, 31st Floor, New York, New York
10155, and its telephone number is (212) 826-6130.
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<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. See
"Description of Securities -- Warrants."
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"). See "Description of Securities -- Warrants."
Redemption......................... Warrants are redeemable by the Company at a redemption
price of $0.05 per Warrant upon not less than thirty (30)
days prior written notice to the holders of the Warrants at
any time commencing 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. See "Description of Securities-- Warrants."
Market for Securities....................... Prior to the Offering, there has been no public market for
the Common Stock or the Warrants, and there can be no
assurance that a public market for such securities will
develop or be sustained after completion of the Offering.
See "Risk Factors --Absence of Public Trading Market,"
and "Market for Securities and Related Stockholder
Matters."
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. See "Market
for Securities and Related Stockholder Matters."
Use of Proceeds............................. The net proceeds of the Offering will be used (i) to acquire
additional centers, (ii) to expand sales and marketing
efforts, (iii) to repay an outstanding officer note, (iv) to
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<PAGE>
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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) 1,527,277 shares reserved for
issuance under the Company's 1995 Employee Stock Option Plan; (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 Cappello and Linda S. Cappello, 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 Cappello and
Linda S. Cappello, 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 Cappello and Linda S. Cappello,
with an adjusted exercise price of $0.63 per share.
-4-
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following information has been derived from the Company's audited
consolidated financial statements for the years ended June 30, 1997 and 1996,
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."
Operating Statement Data:
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Year Ended June 30,
-----------------------------------------
1997 1996
--------------------- ---------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue............................................................ $ 5,608 $ 2,824
Gross profit....................................................... 2,104 1,196
Net loss........................................................... (288) (200)
Net loss per common share.......................................... (.17) (.16)
Weighted average number of common
shares outstanding ............................................. 1,649 1,243
</TABLE>
Balance Sheet Data:
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<CAPTION>
June 30, 1997
-----------------------------------------
Actual As Adjusted(1)
--------------------- ---------------
(In thousands)
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Working capital (deficiency)....................................... $ (426) $ 3,111
Total assets....................................................... 4,553 7,836
Total debt......................................................... 3,289 2,404
Stockholder's equity .............................................. 621 4,788
</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.
-5-
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Prospectus such as statements in
Management's Discussion and Analysis of Financial Condition and Results of
Operations concerning the Company's ability to meet its liquidity needs and
control costs; certain statements contained under the heading "Business" such as
statements concerning strategy and government regulation; statements with
respect to the Company's ability to acquire, integrate and achieve efficiencies
with respect to new centers; statements concerning the growth of the child care
and preschool education industry and other statements contained herein regarding
matters that are not historical facts are forward looking statements (as such
term is defined in the Securities Act) and because such statements involve risks
and uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. In many cases, forward looking
statements may be identified by the use of words such as "believe", "anticipate"
and "expect." Many aspects of the Company's operations are subject to influences
outside its control. Any one or any combination of these factors could have a
material adverse effect on the Company's business financial condition and
results of operations. These factors include competitive pressures, economic
conditions, governmental regulation and policies, and other conditions effecting
capital markets. Factors which could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors."
RISK FACTORS
In addition to the other information contained in this Prospectus,
the following risk factors should be considered by investors in evaluating the
Company and its business before purchasing the securities offered hereby. The
securities offered involve a high degree of risk and as such should be purchased
only by persons who can afford to sustain a total loss of their investment. The
risk factors reflected below and elsewhere in this Prospectus are not intended
to be an exhaustive list of all risks involved, but merely a representative
listing of those risks currently contemplated by the Company.
1. Ability to Implement Growth Strategy
The mission of the Company is to grow through acquisition of
additional preschool centers and internal growth of its preschool center
business. While there are a large number of other existing day care/preschool
centers currently in existence, it is not possible to guaranty that the
anticipated growth will be achieved due to the suitability and availability of
appropriate targets to the Company. Additionally, competition from rival
companies for acquisition of centers targeted by the Company may hamper the
Company's efforts depending upon the relative capital, financial resources and
strength of such competitors. Future acquisitions may result in dilution of the
Company's earnings and the ownership interests of then existing stockholders of
the Company if the Company issues securities as part of the consideration for
such acquisitions. The Company has historically obtained between 50% to 75%
seller financing for its center acquisitions. There is no assurance that sellers
will continue to provide this level of financing on terms that are acceptable to
the Company. See "Business -- Growth Strategy."
The Company does not presently have any pending acquisitions or plans,
proposals or understandings with respect to future acquisitions. The Company
does not presently expect to consider acquisitions involving entities related to
the Company, although there are no written policies, procedures or controls in
place which currently limit future transactions with parties related to the
Company. If undertaken, the Company intends to obtain an independent appraisal
in connection with any such transaction and would also require that such a
transaction was on terms and conditions no less favorable to the Company than
those which could be obtained from third parties. See "Certain Relationships and
Related Transactions."
-6-
<PAGE>
2. Demographic and Seasonal Fluctuations
Traditionally, education-oriented institutions experience dramatic
downturns during the summer months. The Company expects to continue experiencing
decreased revenues during the first quarter of its fiscal year, which quarter
ends on September 30, adversely impacting cash flow. In addition to the
decreased revenue during the summer season, demographic cycles could also
adversely impact revenue at times when children outgrow their need for the
Company's facilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality."
3. History of Losses/Future Uncertainty
The Company experienced net losses of approximately $288,000 and
approximately $200,000 for the fiscal years ending June 30, 1997 and 1996,
respectively. The Company had a working capital deficit of approximately
$426,000 at June 30, 1997. The Company's ability to attain, maintain or improve
profitability is dependent upon increased enrollment, acquisition of existing
centers and significant modernization of its operations. Despite the Company's
efforts to control expenses, because of unanticipated general economic
conditions and negative demographic trends, the Company cannot ensure that it
will be profitable in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
4. Ability to Manage Expanding Operations
The Company's anticipated future expansion may place a strain on its
management systems and resources. The Company expects that it will be required
to continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand and train its management personnel.
There can be no assurance that the Company will be able to manage these tasks
cost-effectively, and the failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Growth Strategy."
5. Availability of Suitable Locations
The Company's growth and expansion plans depend on successful
acquisitions of existing preschool centers and the ability to open additional
centers in areas that have the desired demographics. Demographic, strategic and
esthetic criteria are used in evaluating each targeted facility. The expenses of
appropriate site analysis, acquisition due diligence and transactional costs may
also adversely impact and operating results. See "Business -- Growth Strategy."
6. Competition
Competition for attracting and maintaining student enrollment among
child care facilities is significant. It is estimated that there are
approximately 100,000 licensed facilities for day care/preschool services
across the United States; approximately 2,800 of which are owned by the five
largest day care/preschool firms, including Kindercare Learning Centers, Inc.
and La Petite, Inc. Additional competition comes from small individually owned
facilities, small at-home sites and many religious/church sponsored child
care, day care or preschool centers. While several of the large national
chains have capital and financial resources significantly greater than those
of the Company, many of the small religious and other non-profit operated
centers benefit from significantly lower or no facility rental costs, and
receive private and/or community contributions to subsidize their operating
expenses. Curricula are also easily duplicated and are difficult to protect in
any meaningful proprietary sense. See "Business -- Competition."
7. Government Regulation; Reliance on Government Funding
The Company's operations are subject to a variety of laws and
regulations of federal, state and local authorities, including numerous state
and local governmental regulatory and licensing requirements applicable
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to child care/preschool centers governing, among other things, the Company's
buildings and facilities, discrimination on the basis of disability in public
accommodations, fire safety, sanitary conditions, day care activities, social
services requirements, food service requirements, staffing ratios, health,
record keeping and curricula standards. Sanctions may be imposed by regulatory
agencies consisting of probation, fines or, when warranted, suspension or
revocation of applicable licenses. The Company has been fined by licensing
agencies on different occasions for violations of certain requirements. Such
fines were not material in amount. The Company believes that it is currently
substantially in compliance with all material ordinances, regulations and laws
currently in effect within the jurisdictions in which it operates. However,
there can be no assurance that no additional restrictions will not be imposed
upon the Company's operations in the future which might have a material adverse
effect upon its business operating results.
Four of the Company's centers are currently in the process of being
licensed and four are operating under temporary licenses. There is no assurance
that final licenses will be approved for any of such centers. Failure to obtain
such final licenses could have a material adverse impact on the Company's
business.
For the fiscal year ended June 30, 1997, the Company generated
approximately 34% of its net revenues from federal food and/or childcare
assistance programs. Funding for such programs, is subject to changes in federal
and state political environments and governmental appropriation procedures, both
of which are unpredictable and are outside the Company's control. There is no
assurance that such funding will continue. Curtailment or diminution of the
programs may have an adverse financial impact on the Company. Additionally, it
is possible that provisions of the Internal Revenue Code of 1986, as amended,
authorizing certain tax deductions for parents utilizing child care programs
could change, adversely impacting the Company's business, financial condition
and results of operations. See "Business -- Government Regulation."
8. Dependence Upon Key Personnel/Conflicts of Interest
The Company's success and future performance will depend significantly
upon the efforts and abilities of Michael C. Koffler, Chairman, President and
Chief Executive Officer of the Company. The loss of Mr. Koffler could adversely
effect the Company's business and, coupled with the limited depth of management
as presently configured, such loss would likely result in a significant adverse
impact. The Company intends to obtain a key man life insurance policy in the
amount of $1,000,000 on the life of Michael Koffler within thirty (30) days
after the Effective Date. Mr. Koffler has a three (3) year employment agreement
with the Company, subject to earlier termination under certain circumstances.
See "Management -- Employment Agreement." The Company's ability to attract and
hire skilled personnel to supervise and manage the Company's present and future
activities is uncertain. The Company's ability to expand is dependent upon its
ability to hire and retain qualified supervisory and management personnel, all
of whom are in high demand and often subject to competing offers. There can be
no assurance that the Company will be able to attract and retain the qualified
personnel necessary for its business and planned growth. See "Management."
Michael C. Koffler manages other ventures including other ventures
related to preschool education. While Mr. Koffler anticipates spending an
average of at least thirty (30) hours per week on Company matters, Mr. Koffler
will not devote all of his time to the Company and will devote substantial
amounts of his time to ventures other than the Company, principally Williamsburg
Developmental School.
9. Principal Stockholder Control
Upon completion of the Offering, Michael C. Koffler, Chairman,
President and Chief Executive Officer of the Company, will own approximately 56%
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
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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."
10. Adverse Publicity/Insurance
As a result of reported incidents of alleged child physical and sexual
abuse against child care and educations providers throughout the nation, and the
adverse publicity attendant thereto, a heightened sensitivity to and significant
real exposure to legal liability currently exists in the child care/preschool
industry. Compounding this problem is the extended statute of limitations in
many jurisdictions for the bringing of child abuse and personal injury claims.
Bodily injury and sexual molestation issues have heightened the risks attendant
to serving young children and adversely affect the Company's activities. The
Company maintains $2,000,000 in general liability insurance. General liability
insurance premiums have risen appreciably and there is no assurance that such
premiums will not continue to increase in the future. The Company's current
coverage for child abuse claims is subject to an annual aggregate limitation of
$500,000 per child and $1,000,000 per occurrence. There is no assurance that the
Company will be able to maintain and/or obtain such insurance coverage in the
future. See "Business -- Insurance."
11. Broad Discretion as to Use of Proceeds/Repayment of Insider Debt
Approximately 70.9% of the net proceeds of the Offering have been
allocated to acquisition of new sites and will be used for such purposes as the
Company's management in its discretion may determine. Approximately $650,000, or
15.2%, of the net proceeds will be used to repay debt incurred by the Company in
a bridge financing. In addition, approximately $248,000, or 5.8%, of the net
proceeds will be applied to repay debt owed to Michael Koffler, a director,
officer and stockholder of the Company. Such amounts will therefore be
unavailable for use by the Company in future business activities. Net proceeds
will also be applied to expand sales and marketing efforts and for working
capital. Management will have broad discretion with respect to the utilization
of a significant portion of the net proceeds of the Offering. Additionally, the
estimated allocations for the use of the anticipated proceeds of this Offering
is subject to reapportionment among existing or new categories. Depending upon
the progress of the Company's growth plans and its overall operating
performance, market and general economic conditions, the timing and amount of
any anticipated expenditures may vary. See "Use of Proceeds."
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 $2.92 per share or 70% 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 1,330,000 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. In addition,
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stockholders purchasing Units in the Offering will pay substantially more per
share of Common Stock than existing stockholders invested per share of Common
Stock and will therefore bear substantially more of the financial risk of
investment in the Company. See "Dilution."
14. Future Capital Needs/Uncertainty of Additional Funding/No Line of
Credit
The Company has no established line of credit. The Company had a net
working capital deficit of approximately $426,000 at June 30, 1997. While the
Company anticipates that its existing capital resources, including the net
proceeds of the Offering and future earnings will be adequate to satisfy its
capital requirements on a short-term basis (i.e, for up to approximately twelve
(12) months) to the extent that the Company makes acquisitions, the Company's
working capital requirements may increase significantly. To the extent that the
funds raised in the Offering, together with existing capital resources and
future earnings, are insufficient to fund the Company's activities, the Company
may need to raise additional funds through debt or equity financing. No
assurance can be given that additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
15. Price to Public Not Necessarily Reflective of Market Value
The price of the Units 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."
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17. Absence of Public Trading Market
There has been no public or private market for the Common Stock or
the Warrants, and there can be no assurance that any such market will develop or
be sustained in the foreseeable future. No assurance can be given that the
Common Stock or Warrants can be resold in the future at or near the Offering
price to the public. See "Market for Securities and Related Stockholder
Matters."
18. Dilutive Effect of 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 Cappello Warrants described
under "Description of Securities -- Warrants") and options to purchase an
aggregate of 1,306,113 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 Common Stock and Warrants have been conditionally approved for
quotation on The Nasdaq SmallCap Market and conditionally approved 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 on the NASDAQ SmallCap Market, a company, among other
things, must have total assets of at least $2.0 million, a public float of at
least 500,000 shares with a market value of $1.0 million, two market makers, at
least 300 shareholders, and a minimum bid price of $1.00 per share. 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
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might otherwise wish to hold them, or to accept the redemption price, which may
be substantially less than the market value of the Warrants at the time of
redemption. The Warrants may not be exercised unless the registration statement
pursuant to the Securities Act covering the underlying shares of Common Stock is
current and such shares have been qualified for sale, or there is an exemption
from applicable qualification requirements, under the securities laws of the
state of residence of the holder of the Warrants. Although the Company does not
presently intend to do so, the Company reserves the right to call the Warrants
for redemption whether or not a current prospectus is in effect or such
underlying shares are not, or cannot be, registered in the applicable states.
Such restrictions could have the effect of preventing certain holders of
Warrants from liquidating their Warrants. See "Description of Securities --
Warrants."
21. Current Prospectus and State Blue Sky Registration Required to Exercise
Warrants
Holders of the Warrants will have the right to exercise the Warrants
for the purchase of shares of Common Stock only if a current prospectus relating
to such shares is then in effect and only if the shares qualified for sale under
the securities laws of the applicable state or states. The Company has
undertaken and intends to file and keep effective and current a prospectus which
will permit the purchase and sale of the Common Stock underlying the Warrants,
but there can be no assurance that the Company will be able to do so. Although
the Company intends to seek to qualify for sale the shares of Common Stock
underlying the Warrants in those states in which the securities are to be
offered, no assurance can be given that such qualifications will occur. The
Warrants may lose or be of no value if a prospectus covering the shares issuable
upon the exercise thereof is not kept current or if such underlying shares are
not, or cannot be, registered in the applicable states. See "Description of
Securities -- Warrants."
22. Penny Stock Regulation
In the event that the Company is unable to satisfy the respective
maintenance requirements for The Nasdaq SmallCap Market and Boston Stock
Exchange, trading would be conducted on the NASD's OTC Bulletin Board (i.e., the
"pink sheets"). In the absence of the Common Stock being quoted on The Nasdaq
SmallCap Market or the Boston Stock Exchange, the Common Stock may become a
"penny stock." Commission regulations generally define a penny stock to be any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. Such exceptions include an equity security listed on Nasdaq
or an exchange, or an equity security issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for three years, (ii) net tangible assets of at least $5,000,000, if
such issuer has been in continuous operation for less than three years, or (iii)
average revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the Commission regulations require the delivery, prior
to any transaction involving a penny stock, of a disclosure schedule explaining
the penny stock market and the risks associated therewith. Broker-dealers who
recommend such securities to persons other than established customers and
institutional accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale.
If the Company's securities were to become subject to the regulations
applicable to penny stocks, the market liquidity for the securities would be
severely affected, limiting the ability of broker-dealers to sell the securities
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There is no assurance that trading in the Company's securities
will not be subject to these or other regulations that would adversely affect
the market for such securities.
23. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants
Although the shares of Common Stock and Warrants will not knowingly
be sold to purchasers in jurisdictions in which they are not registered or
otherwise qualified for sale, purchasers may buy Warrants in the aftermarket
or may move to jurisdictions in which the shares of Common Stock issuable upon
exercise of the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In such
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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 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 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
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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" and "Risk Factors -- Continued Involvement of Underwriter;
Advisory Fees."
28. Absence of Independent Director Approval
The Offering and the Reorganization (described under "Reorganization"
below) were approved by Michael C. Koffler as the sole stockholder and director
of the Company. Hence, no independent director considered and approved any
aspect of the Offering and Reorganization.
29. Offering Proceeds to Benefit Affiliated Person
As further described under "Use of Proceeds," $248,000 of the net
proceeds of the Offering will be applied to the repayment of debt owed to
Michael C. Koffler, the Chief Executive Officer and President and a stockholder
and director of the Company. See "Use of Proceeds."
30. Continued Involvement of Underwriter; Advisory Fees
The Underwriter will have continued involvement and influence over the
Company following the Offering. Pursuant to an Advisory and Investment Banking
Agreement with the Underwriter, for period of two years after the Effective
Date, the Underwriter will provide certain financial advisory and investment
banking services to the Company. The Company will pay fees of $4,166 per month,
for a total of $99,984, under such agreement, payable in advance at the closing
of the Offering. This will reduce the amount of Offering proceeds available for
business operations. In addition, pursuant to its underwriting agreement with
the Underwriter, the Company has agreed to either use its best efforts to have a
designee of the Underwriter elected as a member of the Board of Directors or to
engage a designee of the Underwriter as a nonvoting advisor to the Board of
Directors for a period of three (3) years following the completion of the
Offering. See "Underwriting."
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REORGANIZATION
On the Effective Date of the Offering, the Company, Michael C. Koffler,
and Phoenix Preschool Education Centers, Inc., a Delaware corporation (the
"PPEC") completed a reorganization transaction (the "Reorganization") in
accordance with Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"). Pursuant to the Plan of Reorganization, dated as of July 7, 1997
(as amended), among Mr. Koffler, PPEC and the Company (the "Plan"), Mr. Koffler
contributed all of the 1,600,000 issued and outstanding shares of common stock
of PPEC to the Company, together with $500,000 in debt owed to him by PPEC. In
exchange therefor, the Company delivered 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, from proceeds of the Offering, the balance of its debt
owed to him, equal to approximately $248,000. See "Risk Factors -- Offering
Proceeds to Benefit Affiliated Person." As a result of the Reorganization, PPEC
became a wholly-owned subsidiary of the Company. In connection with the
Reorganization, the Company assumed the obligations of PPEC under all
outstanding warrants and options, which consequently relate solely to the Common
Stock (and not the common stock of PPEC).
Because the Company is a newly formed corporation, the financial data
contained herein, including data included in the Consolidated Financial
Statements which are included as part of this Prospectus, are those of PPEC.
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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 expects that the net proceeds of the
Offering, together with any cash flow from operations, will be adequate to meet
the Company's short-term cash requirements (i.e., for a period of up to
approximately twelve (12) months).
The Company anticipates that the net proceeds of the Offering will be
used (i) to acquire additional centers, (ii) to repay promissory notes issued in
connection with the Company's bridge financing closed on June 9, 1997, (iii) to
repay certain indebtedness to an officer, (iv) to expand the Company's sales and
marketing efforts, and (v) for working capital requirements and for other
general corporate purposes. The following table provides an approximate
allocation of the net proceeds of the Offering among such uses.
<TABLE>
<CAPTION>
Use Amount Percent
- ------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
Acquire additional centers................................... $ 3,039,500 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 $3.0 million 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.
-16-
<PAGE>
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 that are to be utilized for
working capital and general corporate purposes have not yet been specifically
determined by the Company.
The foregoing allocations represent the Company's best estimate of its
allocation of the net proceeds of this Offering and are subject to a
reapportionment of proceeds among the categories listed above or to new
categories. The amount and timing of expenditures will vary depending upon a
number of factors, including the progress of the Company's expansion plans, the
number of additional centers which are opened, the operating performance of such
centers, changing competitive conditions, and general economic conditions.
Pending the use of the proceeds as set forth above, the Company intends to
invest the net proceeds from this Offering in short-term interest-bearing,
investment grade securities, certificates of deposit or direct or guaranteed
obligations of the United States of America. See "Risk Factors -- Broad
Discretion as to Use of Proceeds/Repayment of Insider Debt."
-17-
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization
of the Company at June 30, 1997, and as adjusted to give effect to (i)
completion of the Reorganization, and (ii) the Company's sale of the Units
offered hereby. This table should be read in conjunction with the consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------
Actual As Adjusted
--------------- -----------------
<S> <C> <C>
Current maturities of long-term debt.................................. $ 440,012 $ 440,012
--------------- -----------------
Long-term debt:
Officer/stockholder loans.......................................... 247,831 ---
Notes payable - other.............................................. 2,601,123 1,963,623
--------------- -----------------
Total long-term debt............................................ 2,848,954 1,963,623
--------------- -----------------
Total debt................................................... $ 3,288,966 $ 2,403,635
--------------- -----------------
Stockholders' equity
Convertible Preferred Stock, $.10 par value; Authorized 1,000,000 shares;
Issued and outstanding 500,000 shares (1)...................... 50,000 50,000
Common stock, $.10 par value; Authorized 15,000,000 shares; Issued and
outstanding 1,600,000 shares actual,
2,900,000 shares as adjusted ................................ 20,276 150,276
Additional paid-in capital (2)................................... 1,056,282 4,708,560
Deficit (2)...................................................... (505,722) (120,510)
--------------- -----------------
Total stockholders' equity................................... 620,836 4,788,326
--------------- -----------------
Total capitalization.................................... $ 3,909,802 $ 7,191,961
=============== =================
</TABLE>
- ----------------------------
(1) See "Description of Securities" for conversion features.
(2) Deficit at June 30, 1997 transferred to additional paid-in capital upon
termination of "S" corporation tax status. Additionally, $120,510 of deferred
financing costs related to the Bridge Financing will be expensed upon repayment
of the Bridge Notes.
DIVIDEND POLICY
The Company intends to retain earnings, if any, to finance its
operations. Since its inception, the Company has not paid any cash dividends on
its Common Stock and does not anticipate paying such dividends in the
foreseeable future. The payment of dividends by the Company is within the
discretion of its Board of Directors and depends in part upon the Company's
earnings, capital requirements and financial condition. See "Risk Factors -- No
Dividends."
-18-
<PAGE>
DILUTION
At June 30, 1997, the net tangible book value of the Company was
$(711,132), or approximately $(0.44) 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 the issuance and sale of 1,300,000 shares of
Common Stock and 2,600,000 Warrants in the Offering, the pro forma net tangible
book value of the Company as of June 30, 1997 attributable to holders of Common
Stock would have been $3,711,422, or $1.28 per common share. This represents an
increase in net tangible book value per common share of $1.72 to the Company's
existing stockholders and an immediate dilution of $2.92 per common share (or
70% of the public offering price) to new stockholders purchasing shares of
Common Stock in the Offering. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Initial Public offering price per share........................... $4.20
Net tangible book value per share at June 30, 1997................ $(.44)
Increase attributable to new investors in the Offering ........... 1.72
-----------------
Pro forma net tangible book value per share after the
Offering ..................................................... 1.28
-----------------
Dilution per share to new investors............................... $2.92
-----------------
-----------------
</TABLE>
The information in the following table summarizes, through June 30,
1997, (i) the number and percentages of shares of Common Stock purchased from
the Company, (ii) the amount and percentage of consideration paid and (iii) the
average price per share paid to the Company, by existing stockholders and by new
investors pursuant to the Offering:
<TABLE>
<CAPTION>
Average
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) 57,822 shares reserved for
issuance upon exercise of outstanding options at an exercise price of $0.76 per
share, (vii) 47,346 shares reserved for issuance upon exercise of outstanding
options at an exercise price of $0.84 per share, (viii) 4,861 shares reserved
for issuance upon the exercise of outstanding options at an exercise price of
$2.53 per share, (ix) 1,130,000 shares reserved for issuance upon exercise of
outstanding options at an exercise price of $4.20 per share, (x) an aggregate of
462 shares reserved for issuance upon exercise of outstanding options at an
exercise price of $1.27 per share, and (xi) an aggregate of 87,678 shares
issuable upon exercise of two warrants issued to Gerard Cappello and Linda S.
Cappello, with an adjusted exercise price of $0.63 per share.
-19-
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following are, under currently applicable law, the material United
States federal income tax considerations applicable to the purchase of the
Units. The tax treatment described herein may vary depending upon each
stockholder's particular circumstances and tax position. Certain stockholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, persons who are not citizens or
residents of the United States, and stockholders who do not acquire their shares
as capital assets may be subject to special rules not discussed below. No ruling
from the Internal Revenue Service ("IRS") will be applied for with respect to
the federal income tax consequences discussed herein and, accordingly, there can
be no assurance that the IRS will agree with the conclusions stated herein. The
discussion below is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified, possibly on a retroactive basis, so as to result in United States
federal income tax consequences different from those discussed below. In
addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws. Each purchaser of a Unit should consult
his or her own tax advisor as to the particular tax consequences to him or her
of the investment, including the applicability and effect of any foreign, state,
local or other tax laws, any recent changes in applicable tax laws and any
proposed legislation.
Under present law, the Company will not recognize any gain or loss for
federal income tax purposes upon the issuance of the Common Stock or the
issuance, exercise or expiration of the Warrants. For federal income tax
purposes, the purchase of the Common Stock and the purchase, exercise or
expiration of the Warrants will involve the following tax consequences to a
holder thereof:
1. The exercise of a Warrant will not give rise to taxable gain or loss
to the holder of such Warrant. However, the holder of a Warrant or of Common
Stock (including Common Stock acquired upon the exercise of a Warrant) generally
will recognize gain or loss on the sale or disposition of such Warrant or Common
Stock equal to the difference between the amount realized from such sale or
other disposition and the adjusted tax basis for such Warrant or Common Stock.
This gain or loss generally will be capital gain or loss, and will be long-term
capital gain or loss if the applicable holding period is satisfied.
2. If a Warrant if not exercised and is allowed to expire, the Warrant
will be deemed to have been sold or exchanged on the expiration date. Any loss
to the holder of a Warrant will be capital loss if the Warrant was held as a
capital asset and if the Common Stock underlying the Warrant would have been a
capital asset had such Warrant been exercised. The classification of the loss as
long-term or short-term will depend upon the date the Warrant was acquired and
the length of time the Warrant was held.
3. For purposes of determining the tax basis and holding period for the
Warrant or the Common Stock issued as part of a Unit, a Purchaser must generally
allocate the cost of the Unit between each of its components (i.e., the Warrants
and the Stock) based on their relative fair market values at the time of
issuance. It is anticipated that the portion of the cost for the Unit properly
allocable to the Warrants will be a de minimus amount. A Purchaser's adjusted
tax basis of the Common Stock acquired upon exercise of a Warrant will include
both the tax basis of the Warrant and the exercise price thereof. With respect
to the Warrants and Common Stock acquired as a Unit, the holding period will
begin on the day after the Warrants and Common Stock are acquired. With respect
to any Common Stock acquired upon exercise of a Warrant, the holding period will
begin on the date such Warrant is exercised.
-20-
<PAGE>
4. Common Stock issued in the Offering may be "qualified small business
stock" eligible for certain special tax benefits under the Code. Under the
Revenue Reconciliation Act of 1993, an exclusion from gross income is allowed to
certain taxpayers of 50% of any gain from the sale of qualified small business
stock held for at least five years and acquired in an original issue. A number
of conditions apply in determining whether stock is eligible for the 50%
exclusion. The Taxpayer Relief Act of 1997 added to the Code a special rollover
provision whereby gain from the sale of qualified small business stock held for
more than six months may be deferred at election of the taxpayer if other
qualified small business stock is purchased during a sixty day period beginning
on the date of sale, if the cost of the replacement stock exceeds the amount
realized on the prior sale. Accordingly, a taxpayer who holds stock acquired in
the offering for more than six months and recognizes a gain on the disposition
of such stock may be able to defer such recognition indefinitely, and a taxpayer
may be able to defer the recognition of gain from the sale of other qualified
small business stock held for more than six months by purchasing stock in the
Offering.
ALTHOUGH THE FOREGOING ARE THE MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSIDERATIONS GENERALLY APPLICABLE TO AN INVESTMENT IN THE UNITS, THE
FOREGOING DISCUSSION DOES NOT ADDRESS EVERY FEDERAL INCOME TAX CONCERN WHICH MAY
BE APPLICABLE TO A PARTICULAR STOCKHOLDER. EACH STOCKHOLDER IS URGED TO CONSULT
SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO SUCH
STOCKHOLDER, IN THE LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES.
-21-
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the years ended June 30, 1997 and 1996
have been derived from the Company's consolidated financial statements which
have been audited by BDO Seidman LLP, independent certified public accountants.
The selected financial data should be read in conjunction with, and are
qualified in their entirety by, the consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus.
Operating Statement Data:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1997 1996
---------------------- ----------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue................................................ $ 5,608 $ 2,824
Gross profit......................................... 2,104 1,196
Operating expenses................................... 2,243 1,308
Loss from operations................................... (139) (113)
Net loss............................................... (288) (200)
Net loss per common share............................ (.17) (.16)
Weighted average number of common
shares outstanding................................. 1,649 1,243
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
1997 1996
---------------------- ----------------
(In thousands)
<S> <C> <C>
Working capital (deficiency)........................... $ (426) $ 110
Total assets......................................... 4,553 2,376
Total debt........................................... 3,289 1,850
Stockholder's equity................................. 621 409
</TABLE>
-22-
<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.
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.
-23-
<PAGE>
Results of Operations and Financial Condition for the Year Ended June 30, 1997
Compared to Year Ended June 30, 1996
The following table sets forth, for the years indicated, certain data
derived from the Company's Consolidated Statement of Operations.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996
--------------------- ---------------------
<S> <C> <C>
Revenue.............................................. $ 5,608,092 $ 2,824,168
Direct Costs......................................... 3,504,466 1,628,635
Operating Expenses................................... 2,242,535 1,308,483
Interest Expense..................................... 150,113 89,464
Net Loss............................................. (287,767) (199,703)
</TABLE>
Revenue increased $2.8 million, or 100%, to $5.6 million for the year
ended June 30, 1997 from $2.8 million for the year ended June 30, 1997. Of such
increase, approximately $1.6 million was attributable to revenue generated by
the eleven new centers acquired in the 1997 fiscal year and $1.2 million was
attributable to increased revenue from existing centers, including centers that
were acquired during the year ended June 30, 1996.
Direct costs consist primarily of preschool center compensation costs.
Direct costs increased $1.9 million, or 119%, to $3.5 million for the year ended
June 30, 1997 from $1.6 million for the year ended June 30, 1996. Of the $1.9
million increase in direct costs, approximately $978,000 was attributable to the
eleven new centers acquired during fiscal 1997 and approximately $902,000 was
attributable to existing centers, including centers that were acquired during
the year ended June 30, 1996. Direct costs, as a percentage of revenue, were
62.5% for the year ended June 30, 1997 as compared to 57.7% for the year ended
June 30, 1996.
Operating expenses increased $934,000, or 71%, to $2.2 million for the
year ended June 30, 1997 from $1.3 million for the year ended June 30, 1996. The
increase in operating expenses was primarily due to an increase in general and
administrative expenses as a result of the acquisition of eleven new centers.
Operating expenses, as a percentage of revenue was 40.5% for the year ended June
30, 1997 as compared to 46.3% for the year ended June 30, 1996. The percentage
decrease experienced resulted from the fixed nature of certain operating
expenses, while there was a substantial growth in revenue. Based upon the
Company's current growth strategy, it is anticipated that operating expenses
will continue to increase in the future as the Company acquires additional
centers but will decrease as a percentage of revenue.
Interest expense increased $61,000, or 68%, to $150,000 for the year
ended June 30, 1997 from $89,000 for the year ended June 30, 1996. The increase
in interest expense was the result of additional financing of centers acquired
during fiscal 1997.
The Company had a net loss of $288,000 for the year ended June 30,
1997, as compared to a loss of $200,000 for the year ended June 30, 1996. This
represents a loss per share of $0.17 for the year ended June 30, 1997 based upon
weighted average common shares outstanding of 1,648,792.
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.
-24-
<PAGE>
While the Company believes that cash flow from operations and proceeds of the
Offering will be sufficient to satisfy the Company's anticipated cash
requirements on a short-term basis (i.e., up to approximately one year), to the
extent that the Company makes acquisitions, the Company's working capital
requirements may increase significantly. No assurance can be given that
additional financing will be available or that, if available, it can be obtained
on terms favorable to the Company.
During the fiscal year 1996, available cash was principally used to add
three new centers and to make capital improvements to existing centers. Net cash
(used in) provided by operations was approximately $(58,000) during fiscal 1996
and approximately $585,000 during fiscal 1997. The Company also, from time to
time, borrowed from its officers to fund acquisitions. See "Certain
Relationships and Related Transactions." The Company has no established line of
credit with a bank. The financial impact of acquired centers will vary with the
economic impact and size of each transaction. The Company's estimated total cash
requirements for center expansion and ongoing maintenance of existing centers
should approximate $390,000 in fiscal 1997. An acquisition of a larger
multi-unit operator could increase these cash requirements. See "Use of
Proceeds."
During fiscal 1997, the Company acquired eleven (11) new centers. The
costs for the Company's acquisitions vary considerably depending, in part, upon
the profitability and maturity of the centers to be acquired, as well as their
size and number. The Company has historically targeted an acquisition price
ranging from $100,000 to $200,000 per center and provides for cash down payments
ranging from 25% to 30% of the acquisition price. On occasion, the Company has
been required to invest additional amounts of $10,000 to $35,000 improve certain
acquired centers up to the Company's standards.
Cash provided by operating activities amounted to approximately
$585,000 for the fiscal year 1997. The major components of this increase were
non-cash charges for depreciation and amortization of $447,980. Cash used in
investing activities amounted to approximately $1,106,000 for the year ended
June 30, 1997, which includes acquisitions of property and equipment of $315,000
and cash paid for assets of acquired businesses of $659,000. Cash provided by
financing activities was approximately $523,000 for the year ended June 30,
1997. Funds of $303,000 were provided by officer/stockholder loans offset by
repayments of other borrowings totaling approximately $312,000.
In June 1997, the Company sold an aggregate of 25.5 units in a private
placement, each unit consisting of the Company's 8% promissory note (the "Bridge
Notes") in the principal amount of $25,000 per unit and a warrant to acquire up
to 50,000 shares of Common Stock. The net proceeds of the Bridge Financing were
approximately $555,000 and were used primarily to repay stockholder loans used
to finance preschool center acquisitions subsequent to March 31, 1997. The
Bridge Notes are payable upon the earlier of October 9, 1998 or the consummation
of an initial public offering ("IPO") or private placement of the Company's debt
and/or equity securities resulting in gross proceeds to the Company of at least
$5,000,000.
Plan of Operation
Over the next six fiscal quarters, the Company intends to attempt to
locate, and attempt to acquire additional preschool operations. The acquisitions
could involve up to 40 sites. This would likely result in up to 400 additional
employees, and the establishment of three to four additional geographical
regional operating divisions (some of which may be located in new markets while
others may be in the Company's existing markets). The Company plans to continue
efforts to upgrade its marketing capabilities and information management system
as needed. There is no assurance that the Company's efforts in these endeavors
will be successful. See "Risk Factors" -- Ability to Implement Growth Strategy"
and "Business-- Growth Strategy."
-25-
<PAGE>
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 for its
quarter ending December 31, 1997.
Statement of Financial Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129") effective for periods ending after December
15, 1997, establishes standards for disclosing information about an entity's
capital structure. SFAS 129 requires disclosure of the pertinent rights and
privileges of various securities outstanding (stocks, options, warrants,
preferred stock, debt and participation rights) including dividend and
liquidation preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 will have
no effect on the Company as it currently discloses the information specified.
In October 1995, the Financial Accounting Standards Board issued
statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995. During fiscal year 1997, the
Company adopted only the disclosure provisions of SFAS 123 and accounted for
stock-based compensation using the intrinsic value method set forth in
Accounting Principle Board Opinion 25.
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
-26-
<PAGE>
SFAS No 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
SFAS No. 130 and No. 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
-27-
<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 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.
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
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Apple Macintosh machines to gauge market responsiveness, and is testing
IBM-compatible personal computers in one of its North Carolina centers.
The Company maintains a growth strategy to expand its business by
acquiring additional existing child care centers. The Company believes that its
ability to grow through the acquisition of existing child care centers affords
it the flexibility to sustain its controlled growth strategy in various
geographic markets. Upon formation in 1995, the Company acquired eight centers
from an entity in bankruptcy and installed a new management team with experience
in the fields of child care and education. The Company then added eight centers
through various acquisitions during 1996 and an additional six centers to date
in 1997. See "Business--Growth Strategy."
Industry Overview
According to Childcare Information Exchange (1996), the child care
industry is currently a $26 billion annual industry. The Company believes that
the market for center-based child care will continue to grow rapidly. The
Company believes that the following factors will contribute to increased demand
for high quality child care include: a growing number of women in the work force
with small children, single-parent homes, a shift in parental preference toward
the more structured and education-based environment provided by center-based
child care, as well as the effects of nationwide welfare reform, which
encourages mothers to enter the workforce.
The child care industry in the United States is experiencing steady
growth in demand driven by demographic and market changes. The percentage of
mothers in the work force with children under age six has increased from
approximately 39% in 1975 to approximately 58% in 1990 and reached approximately
67% at the end of 1996. In addition, the child care industry is highly
fragmented, with over 57,000 licensed sites in the United States, approximately
2,800 of which are owned by the five largest national child care providers. The
Company believes that many child care centers are managed by individuals who
lack the systems, financial sophistication and professional management skills to
operate their centers profitably in an increasingly regulated industry. The
Company believes that the industry will experience consolidation as these
factors, coupled with increasing competition from large, well capitalized and
better known providers, combine to create a more difficult operating environment
for smaller child care providers.
According to Childcare Information Exchange (Insider's Report #3,
1996), as of 1996, there were approximately 100,000 commercial, nonprofit and
"in-home" day-care facilities in the United States. See "Risk Factors --
Competition."
The child care industry is highly fragmented, with national child care
providers holding less than five percent of the industry's licensed capacity and
the 50 largest providers accounting for less than 10% of licensed capacity.
Substantially all of the industry's licensed centers are owned by single center
and other small providers. Among the multi-unit operators, most own fewer than
five centers. Although there are a number of regional multi-unit operators,
there are only a few national providers operating more than 50 centers. Among
the many child care providers, there is a wide range of educational quality. The
Company believes that parents are becoming increasingly aware of this disparity
in quality, resulting in a greater demand for the services of higher quality
providers. At the same time, in home, single center and other small providers
are facing increased state regulation and difficulty in obtaining insurance. The
Company believes that many child care centers are managed by individuals who
lack the systems, financial sophistication and professional management to
operate their centers profitably in this increasingly regulated industry.
Consequently, the Company believes that the industry will experience
consolidation as these factors, coupled with increasing competition from large,
well capitalized and better known providers, combine to create a more difficult
operating environment for smaller child care providers.
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Growth Strategy
The Company's strategy is to (i) acquire new high quality centers in
convenient areas which meet its specific demographic requirements; (ii) maintain
and enhance profitability through a program of financial planning, budgeting and
cost control; (iii) continue to invest in its centers to maintain and improve
quality; (iv) emphasize its sales and marketing programs aimed at increasing new
enrollments and promoting customer loyalty; (v) offer programs to better utilize
its centers on a year-round basis; and (vi) continue to improve the quality of
its staff through recruitment, training and incentive programs.
The success of new centers will depend on various factors, including
the availability of suitable centers, the negotiation of acceptable terms,
permitting and regulatory compliance, the ability to meet schedules, the ability
of the Company to manage this expansion, the hiring of additional personnel, and
general economic and business conditions. There can be no assurance that the
Company will be able to achieve these goals or that the Company's strategy will
result in improved earnings. See "Risk Factors -- Availability of Suitable
Locations" and "--Ability to Implement Growth Strategy".
The Company added three (3) additional centers in fiscal 1996, and in
fiscal 1997, the Company added eleven (11) centers. The Company seeks to add
units in its existing markets in order to increase market concentration and to
leverage administrative and advertising expenses. Entry into new markets is also
considered, but only if these regional markets can eventually support a minimum
of eight centers.
The following is a summary of the material terms of the Company's
acquisitions. For further information, see Note 6 to the Consolidated Financial
Statements included in this Prospectus.
In June 1995, the Company acquired the assets of Phoenix Preschool
Education Centers, Inc. (primarily the fixed assets and supplies of eight
existing Florida preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $1,000,000, which was financed
by a $250,000 cash deposit and a $750,000 five year note payable with interest
at 9% per annum.
In January 1996, the Company acquired the assets of Pollack
Enterprises, Inc. (primarily the fixed assets and supplies of three existing
North Carolina preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $875,000, which was financed by
a $215,000 cash deposit and a $660,000 ten year note payable with interest at 9%
per annum.
In July 1996, the Company acquired the assets of Coastal Kiddie
College, Inc. (primarily the fixed assets and supplies of three existing North
Carolina preschool centers) in a business combination accounted for as a
purchase. The total cost of the acquisition was $365,000, which was allocated
among the fair market value of the current assets, property and equipment, and
intangible assets acquired. The purchase was financed by a $115,000 cash deposit
and a $250,000 eight year note payable with interest at 8% per annum.
In October 1996, the Company acquired the assets of Libbus, Inc.
(primarily the fixed assets and supplies of two existing North Carolina
preschool centers) in a business combination accounted for as a purchase. The
total cost of the acquisition was $300,000, which was allocated among the fair
market value of the current assets, property and equipment, and intangible
assets acquired. The purchase was financed by a $110,000 cash deposit and a
$190,000 ten year note payable with interest at 8% per annum.
In April 1997, the Company acquired the assets of Brighter Day Care
Center, Inc. (primarily the fixed assets and supplies of an existing preschool
center) in a business combination accounted for as a purchase. The total cost of
the acquisition was $130,000, which was allocated among the fair market value of
the current assets, property and equipment, and intangible assets acquired. The
purchase was financed by a $44,000 cash payment and an $86,000 ten-year note
payable with interest at 8% per annum.
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In May 1997, the Company acquired the assets of Gingham Goose School,
Inc. (primarily the fixed assets and supplies of an existing preschool center)
in a business combination accounted for as a purchase. The total cost of the
acquisition was $100,000, which was allocated among the fair market value of the
current assets, property and equipment and intangible assets acquired. The
purchase price was financed by a $25,000 cash payment and a $75,000 ten-year
note payable with interest at 8% per annum.
In May 1997, the Company acquired the assets of Reelsboro Christian Day
Care, Inc. (primarily the fixed assets and supplies of an existing preschool
center) in a business combination accounted for as a pur chase. The total cost
of the acquisition was $60,000, which was allocated among the fair market value
of the current assets, property and equipment and intangible assets acquired.
The purchase price was financed by a $15,000 cash payment and a $45,000 ten-year
note payable with interest at 7.5% per annum.
In May 1997, the Company acquired the assets of TLC Recreation Center,
Inc. (primarily the fixed assets and supplies of an existing preschool center)
in a business combination accounted for as a purchase. The total cost of the
acquisition was $815,000, which was allocated among the fair market value of the
current assets, property and equipment and intangible assets acquired. The
purchase was financed by a $300,000 cash payment and a $515,000 eight-year note
payable with interest at 8% per annum.
In June 1997, the Company acquired the assets of Humpty Dumpty Play
School, Inc. (primarily the fixed assets and supplies of two existing pre-school
centers) in a business combination accounted for as a purchase. The total cost
of the acquisition was $180,000, which was allocated among the fair market value
of the current assets, property and equipment and intangible assets acquired.
The purchase was financed by a $50,000 cash payment and a $130,000 eight-year
note payable with interest at 8.5% per annum.
In choosing locations for new centers, the Company considers a number
of factors, emphasizing suburban neighborhoods with growing populations of young
families. Management looks for sites in proximity to newly developed or
developing residential areas on heavily traveled local streets. The Company
performs a detailed analysis of the demographics of the area surrounding the
proposed site and focuses on several site selection criteria: an above-average
concentration in the percentage of children under age six; a minimum population
density of 20,000 people within a ten-mile radius surrounding a proposed site;
and an average household income in excess of $35,000. The Company also analyzes
the percentage of the population consisting of college-educated, dual income
families, as well as the average home value in the target area. The Company
believes that parents in more affluent areas are more willing to pay a premium
for higher quality child care services.
In addition to acquiring centers in residential areas, the Company is
also actively pursuing contracts with employers and office complex managers to
operate centers in at-work locations. One currently owned site, in Morrisville,
North Carolina, is located in the Research Triangle Park area. Historically,
public agencies and hospitals have been the principal employers providing or
otherwise arranging for child care services for their employees. A number of
private sector employers have begun to offer this benefit, as they recognize
that reduction of employee absenteeism due to a lack of reliable and available
child care can significantly offset the cost to employers in offering such
benefits. The Company expects to capitalize on this trend by actively pursuing
contracts with employers, as well as selectively acquiring existing at-work
centers.
The Company's acquisition activity is generally limited to child care
centers in market areas showing growth potential and to sites which the Company
believes it can conform to its standard facility and educational format.
Historically, the Company has targeted its acquisition activities on less
profitable centers which meet its demographic criteria. After consummation of
the Offering, the Company will be able to focus its acquisition program toward
more profitable centers and larger multi-unit operations in addition to its
historical targets. The Company believes that it can continue to acquire centers
on terms which compare favorably with the costs and risks of establishing new
facilities. Management is continually reviewing possible acquisition candidates,
although there can be no assurance that the Company will be able to continue
acquiring acceptable centers. The Company, from time to time, reviews the
possible acquisition of multi-unit
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child care operations consisting of more than five centers. There can be no
assurance that an acquisition of this size will be consummated.
Phoenix Preschool Centers
Safety
The Company's primary concern is the care and safety of children
enrolled at its centers. Precautions are taken at each Phoenix Preschool center
to insure the safety and well-being of all Phoenix Preschool students. In most
centers, the Center Director's office is located adjacent to the entrance-way of
the center which enables the Center Director to monitor any individuals who
enter or leave the building. Additional safety precautions vary from center to
center depending on factors such as the center's floor plan, surrounding area
and size, and may include photo identification badges, parent sign-in logs,
video camera monitors, door alarms and system-wide criminal background checks on
center personnel. It is the Company's policy, upon the occurrence of any
allegations of child abuse, to report such allegations to the appropriate
authorities, to investigate all such allegations and, if appropriate, suspend
any accused employee pending resolution of the incident. The Company's
procedures are designed to prevent child abuse and, historically, the Company
believes it has been successful in its efforts to prevent any such abuse. No
assurances can be made that allegations of abuse will not occur in the future.
Locations
The following table shows the locations by state of the Company centers
which were open and operating as of June 30, 1997.
Open and
State Operating
- ---------------------------------------------- ----------------
Florida....................................... 10
Georgia....................................... 3
North Carolina................................ 9
----------------
Total................................ 22
----------------
Addresses for the Company's centers are as follows:
2623 W. Michigan Avenue, Pensacola, FL 32526
2406 Langley Avenue, Pensacola, FL 32504
7525 West Fairfield Drive, Pensacola, FL 32506
1338 Florida Avenue, Panama City, FL 32401
3905 West Highway 390, Panama City, FL 32405
5705 Hickory Street, Panama City, FL 32404
967 Raymond Diehl Road, Tallahassee, FL 32308
2881 E. Park Avenue, Tallahassee, FL 32301
1883 Granada Street, Navarre, FL 32566
502 Schneider Drive, Ft. Walton Beach, FL 32547
P.O. Box 828/469 Lakes Boulevard, Lake Park, GA 31636
104 Kelly Drive, Valdosta, GA 31636
3737 Perimeter Road, Valdosta, GA 31602
270 Highway 70 West, Havelock, NC 28532
204 N. Shepard Street, Havelock, NC 28532
204 N. 18th Street, Morehead City, NC 28557
6458 Highway 55 E, New Bern, NC 28560
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928 Henderson Drive, Jacksonville, NC 28540
312 Brynn Marr Road, Jacksonville, NC 28540
783 West Corbett Avenue, Swansboro, NC 28584
580 E. Chatham Street, Cary, NC 27511
4823 Hopson Road, Morrisville, NC 27560
As of 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.
The leases have terms (including renewal options) expiring as
follows:
<TABLE>
<CAPTION>
Number of
Fiscal Year Leases Expiring
- ------------------------------------------------------------------ ------------------------
<S> <C>
2000-2003......................................................... 1
2004 and later.................................................... 21
</TABLE>
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
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training program. The Company assists Center Directors with the training of
other center personnel. It is the Company's policy that all centers must comply
with, and in some cases exceed, states' recommendations and guidelines
pertaining to teacher-to-child ratios. These ratios vary from state to state and
depend upon the age group of children under supervision. In general, a Phoenix
Preschool center employs one teacher or assistant for every four to five infants
under 12 months, one teacher or assistant for every four to eight toddlers
between 12 and 23 months, one teacher or assistant for every six to seven
two-year-olds, one teacher or assistant for every 10 three-years-olds, one
teacher or assistant for every 10 to 15 children between four and five years of
age and one teacher or assistant for every 15 to 20 children over age five. A
typical Phoenix Preschool Center employs one Center Director, one Assistant
Director, eight teachers, nine assistants and one additional staff member.
Curriculum
The Phoenix Preschool curriculum incorporates two basic principles of
learning: (i) preschool age children learn through direct experience by the use
of their own creative abilities to manipulate objects in an environment which
encourages curiosity and exploration, and (ii) teachers must emphasize verbal
skills in order to develop the child's ability to understand, recall and analyze
information conveyed to them. The Phoenix Preschool curriculum encourages
children to construct, move and interact and supplies teachers with the tools to
communicate information in a manner appropriate for various age groups. The
curriculum is supported by both the design and layout of each center and the
supplies and equipment available in each center. The Phoenix Preschool
curriculum emphasizes more structured academics during the traditional
school-year months (September through June) and recreation and socialization
through athletic activities and field trips during the summer months (July and
August). During the school year, monthly themes are established and divided into
specific weekly programs and daily projects, all of which directly relate to the
monthly theme. As children advance through Phoenix Preschool's curriculum, the
specific skills learned at each succeeding age build upon the foundation
established in the previous year or years.
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.
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Three-Year-Old Program
The three-year-old program is designed to promote the child's
development of imagination and language. Three-year-olds are encouraged to speak
in sentences of six or more words, listen to short stories, identify colors and
shapes and to begin to recognize the letters of the alphabet.
Four-Year-Old Program
The four-year-old program focuses on the development of pre-reading
skills, such as recognition of the child's name in written form, improvement of
fine motor abilities and increase in verbal interaction through socio-dramatic
role play. Emphasis is placed on the individual child's readiness for school in
different areas of development.
Five-Year-Old Program
In the five-year-old program, activities enable the children to apply
concepts, thought processes, content and skills during planned learning
experiences. Emphasis is placed on recognition of upper and lower case letters,
printing of the child's own name, auditory sound discrimination of letters,
recognition of the child's home address and telephone number, recognition of
body parts and identification of the child's family members.
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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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.
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
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Company believes that the types of insurance and amounts of coverage it
maintains are customary of businesses of comparable size in its industry. The
Company has not experienced difficulty in obtaining insurance coverage, but
there can be no assurances that adequate insurance coverage will be available in
the future, or that the Company's current coverage will protect it against all
possible claims.
Within thirty (30) days after the Effective Date, the Company will
obtain a $1,000,000 key man life insurance policy on the life of Michael C.
Koffler.
Government Regulation
Child care centers are subject to numerous state and local regulations
and licensing requirements. Although these regulations vary by jurisdiction,
governmental agencies typically review the fitness and adequacy of buildings and
equipment, the ratio of staff to enrolled children, the dietary program, the
daily curriculum, staff training and compliance with health and safety
standards. In most jurisdictions, these agencies conduct both scheduled and
unscheduled inspections of the centers and licenses must be renewed
periodically. Licenses for certain of the Company's centers are in the process
of renewal or have been issued on a temporary basis pending final licensing.
There is no assurance that final licenses will be obtained for such centers.
In a few jurisdictions, new legislation or regulations have been
enacted or are being considered which establish requirements for employee
background checks or other clearance procedures for new employees of child care
centers. Repeated failures by a center to comply with applicable regulations can
subject it to state imposed sanctions, which might include fines, corrective
orders, being placed on probation or, in more serious cases, suspension or
revocation of the center's license to operate. The Company has been fined by
licensing agencies on different occasions for violations of certain
requirements. Such fines were immaterial in amount. Management has never
experienced a license revocation and believes the Company is in substantial
compliance with all material regulations applicable to its business.
For the year ended June 30, 1997, approximately 34% of the Company's
net revenues were generated from federal food and/or child care assistance
programs. These programs are typically designed to assist low-income families
with child care expenses and are administered through various state agencies.
Although no federal license is required at this time, there are minimum
standards which must be met to qualify for participation in certain federal
programs. There is no assurance that funding for such federal and state programs
will continue at current levels and a significant reduction in such funding may
have an adverse impact on the Company. All of the Company's schools meet all the
objective standards to participate in the program; however, certain schools do
not currently have enough eligible students in order to participate.
There are certain tax incentives for parents utilizing child care
programs. Section 21 of the Code provides a federal income tax credit ranging
from 20% to 30% of certain child care expenses for "qualifying individuals" (as
defined therein). The fees paid to the Company for child care services by
eligible taxpayers qualify for the tax credit, subject to the limitations of
Section 21. The amount of the qualifying child care expenses is limited to
$2,400 for one child and $4,800 for two or more children and, therefore, the
maximum credit ranges from $480 to $720 for one child and from $960 to $1,440
for two or more children.
The Code also allows for exclusion from income up to $5,000 per year
in employer-paid qualifying child care expenses (including amounts deducted by
the employer pre-tax from employee compensation and used to reimburse employee
expenses). The ceiling on expenses against which the tax credit may be claimed
is reduced dollar for dollar by employer-paid expenses excluded from income.
The Company must also comply with the Americans with Disabilities Act
("ADA"), which prohibits discrimination on the basis of disability in public
accommodations and employment. Costs incurred to date by the Company to comply
with the ADA have not been significant. A determination that the Company is not
in compliance with the ADA, however, could result in the imposition of fines or
an award of damages to
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<PAGE>
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 competes in its markets by maintaining its
facilities in a clean, healthy, safe and well-equipped manner, devoting
significant resources to training and qualifying all of its personnel and by
establishing a highly developed curricula and state of the art age-appropriate
learning tools while keeping its prices competitive. The Company's preschool
license capacity as of 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 August 24, 1997, the Company employed approximately 399 persons
(including part-time and substitute caregivers), of whom six are employed at
corporate headquarters. One is a national field operations director, three are
regional directors and the remainder are employed at the Company's child care
centers. The Company also employs three field support persons (maintenance,
marketing and administrative personnel) at various locations. Center employees
include Center Directors and Assistant Directors, regular full-time and
part-time caregivers, substitute caregivers and aides and other staff, including
cooks and van drivers. All Center Directors and corporate supervisor personnel
are salaried; all other employees are paid on an hourly basis or part-time
salary basis. The Company does not have an agreement with any labor union and
believes that its relations with its employees are good.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime compensation and working
conditions. A portion of the Company's personnel are paid at the Federal minimum
wage.
Properties
The Company's corporate headquarters are located in approximately 1,875
square feet of leased office space in New York City, New York. See "Certain
Relationships and Related Transactions." The Company considers this space for
its corporate headquarters to be in good condition and adequate for its current
needs.
The Company leases the land and buildings for all of its centers, which
are located in Florida, Georgia and North Carolina. Centers leased by the
Company are typically leased under "triple net" leases that require the Company
to pay real estate taxes, maintenance costs and insurance premiums. See "Certain
Relationships and Related Transactions," and "Business -- Phoenix Preschool
Centers -- Locations."
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<PAGE>
Legal Proceedings
The Company is involved from time to time in routine litigation arising
out of the ordinary course of its business, most of which is covered by
insurance. In managements's opinion, none of such litigation that the Company is
currently involved is material to its financial condition or results of
operations.
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<PAGE>
MANAGEMENT
Executive Officers
The executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Michael C. Koffler 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
</TABLE>
Michael C. Koffler has been President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its formation. Mr.
Koffler entered the preschool business in New York in 1986 by founding a
facility for preschool age children with special needs, which is now licensed as
a "School" by the State of New York. Mr. Koffler received a Bachelor of Science
degree in Business Administration from State University of New York at Buffalo.
Mr. Koffler manages or is involved in ventures other than the Company, including
ventures related to preschool education, principally Williamsburg Developmental
School. While Mr. Koffler anticipates spending an average of at least thirty
hours a week on Company matters, Mr. Koffler will not devote all of his time to
the Company and will devote substantial amounts of time to ventures other than
the Company. See "Risk Factors -- Dependence Upon Key Personnel/Conflicts of
Interest."
The Company intends to obtain a $1,000,000 key man life insurance
policy on the life of Mr. Koffler within thirty (30) days after the Effective
Date.
Michael E. Brown has been the Field Operation Officer of the Company
since June, 1996. From January 1991 to May 1996, Mr. Brown served as a Region
Manager for Kindercare Learning Centers, Inc. Mr. Brown has experience in
managing child care facilities for 16 years. In addition, Mr. Brown served as a
teacher and Assistant Principal in the Charlotte-Mecklenburg School District
(Charlotte, NC) for 12 years. Mr. Brown received a Bachelor of Science degree in
Education from Appalachian State University and a Masters of Education degree
from the University of North Carolina at Charlotte.
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
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<PAGE>
Services, Inc. Mr. Sloop received a Bachelor of Science and a Masters in
Business Administration from Pace University.
Employment Agreement
The Company and Michael C. Koffler are parties to an employment
agreement (the "Employment Agreement"), dated as of September 3, 1997, pursuant
to which the Company has agreed to employ Mr. Koffler as the Chief Executive
Officer and President of the Company during the three (3) year period commencing
on the date of the agreement, unless terminated earlier pursuant to its
provisions. Pursuant to such Employment Agreement, Mr. Koffler will receive as
compensation 5% of the Company's earnings, if any, before giving effect to
interest, taxes, amortization and depreciation. In addition, immediately prior
to the Effective Date of the Offering, Mr. Koffler will receive a non-qualified
employee stock option for up to 1,000,000 shares of Common Stock. The Employment
Agreement may terminate early if Mr. Koffler dies, becomes disabled or is
dismissed for "cause," which generally includes conviction for any felony, fraud
or embezzlement or willful or malicious misconduct. Mr. Koffler may voluntarily
terminate the Employment Agreement at any time after the first year of the term
upon sixty (60) days notice to the Company. Mr. Koffler has agreed to maintain
the confidentiality of the Company's proprietary information and covenanted not
to directly compete with the Company during the term of the Agreement. The
Company may elect to extend the covenants contained in the Employment Agreement
related to confidentiality or competition for a period of one year from the
expiration of the term of the Employment Agreement upon payment to Mr. Koffer of
an amount equal to the highest annual compensation paid under such agreement.
For a more complete discussion, investors should refer to the complete
Employment Agreement which has been filed as an exhibit to the Company's
Registration Statement.
Board Size and Classification
The Company's 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 the closing of the Offering, however, three additional
directors will be appointed.
Following completion of the Offering, the Company's Board of Directors
will consist of:
<TABLE>
<CAPTION>
Name Age (1) Position
- --------------------------------------- ------------------- -----------------------------------------------
<S> <C> <C>
Michael C. Koffler 41 Chairman, President, Chief Executive
Officer, and Director
Ralph Manela, CPA 45 Director
David Lenefsky, Esq. 59 Director
Garo H. Armen, Ph.D. 44 Director
</TABLE>
- ----------------------
(1) Ages are as of June 30, 1997.
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
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<PAGE>
as Chairman of the Brooklyn Navy Yard Development Corporation. From 1983-1994,
he served on the Board of the United Nations Association - U.S.A. Mr. Lenefsky
has authored many articles for various law reviews, and The New York Law
Journal. His Bachelors and Masters of Law Degrees are from New York University
School of Law, 1963 and 1964.
Garo H. Armen, Ph.D., has been the Managing General Partner of Armen
Partners, L.P. since 1989. Armen Partners specializes in public and private
healthcare investments. He has been the Chairman and Chief Executive Officer of
Antigenetics, Inc., a pharmaceutical firm, since 1994. In addition, Dr. Armen
has engaged in investment banking and venture capital activities. He sits on the
board of a publicly held company, Elan Corporation, plc. Dr. Armen was the
architect of the merger between Immunex Corporation and Lederle Oncology (a
division of American Cyanamid). He originated and developed the structure for
this merger and served as an advisor to both Immunex and American Cynamid. From
1986 to 1989, Dr. Armen was a Senior Vice President of Research at Dean Witter
Reynolds, Inc. His responsibilities there included research analysis, investment
banking, and merchant banking. From 1981 to 1986, he served as a Vice President
at E.F. Hutton & Company. Dr. Armen received his Ph.D. degree in physical
chemistry from the City University of New York in 1979. Thereafter he was
appointed as a Research Associate at the Brookhaven National Laboratory, in
charge of conducting research in the field of Physical Biochemistry. In 1994,
Dr. Armen founded Antigenics along with Dr. Pramud Srivastava, Antigenic's
founding scientist. Antigenics is a biopharmaceutical company creating an
innovative therapeutics for the treatment of cancers and infectious diseases.
The Company's 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.
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-employee 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.
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<PAGE>
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 Mr. Koffler will receive 5% of the
Company's earnings before interest, taxes, depreciation and
amortization and will receive a stock option under his Employment
Agreement with the Company. See "Management --Employment Agreement."
(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 $0.76 per share granted pursuant to the 1995
Employee Stock Option Plan.
Aggregated Options/SAR Exercised in Last Fiscal Year
and Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options/ In-the-Money
SARs at Options/SARs at Fiscal
Fiscal Year End Year End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) 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
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<PAGE>
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 114,184 shares of Common Stock
have been issued by the Company prior to the date of this Prospectus to 43
employees. Set forth below is a summary of the provisions of the Plan.
Non-qualified stock options for a total of 1,177,346 shares have been issued by
the Company prior to the date of this Prospectus to two employees.
Immediately preceding the Effective Date, the Company issued a
non-qualified employee stock option to acquire up to 130,000 shares of Common
Stock to an employee of the Company in consideration for financial advice,
acquisition assistance and other services to be rendered by such employee during
the two years following the Effective Date. The exercise price under such option
is $4.20 per share subject to adjustment. During the two year period commencing
on the Effective Date and prior to registration of the Common Stock subject to
such option, the holder of the option may reprice the option (up to two times)
if the closing sale price of the Common Stock is below $3.36 per share for any
ten consecutive trading days. The reset exercise price would be the average sale
price per share of Common Stock for the three trading days immediately preceding
the day the holder elects to reprice his option.
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 non-qualified stock options, or
both) to be granted, the number of shares subject to each option, the rate of
option exercisability, and, subject to certain other provisions to be discussed
below, the option price and duration of the option.
The Committee may, in its discretion, amend or supplement any of the
option terms hereafter described, provided that if an incentive option is
granted under the 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 1,527,277 shares of
Common Stock. In the event of any change in the capitalization of the Company,
such as by stock dividend, or what the Committee deems in its sole discretion to
be similar circumstances, the aggregate number and kind of shares which may be
issued under the 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.
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<PAGE>
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.
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 stockholder approval, except
to the extent that stockholder 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 stockholder
approval, such submission will not require any future amendments, supplements,
suspensions or terminations (whether or not relating to the same provision or
subject matter) to be similarly submitted for stockholder approval.
1996 Non-Employee Stock Option Plan
The Company adopted in June, 1996 a Non-Employee Stock Option Plan and
in 1996 granted options for 14,583 shares to one consultant having an option
price of $2.53 per share. These options contain terms substantially similar to
those contained in non-qualified 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
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<PAGE>
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or employee connection with
the securities being offered hereby, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of competent jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, the Company has engaged in various transactions
with its directors, executive officers and other affiliated parties. The
following paragraphs summarize certain information concerning certain
transactions involving $60,000 or more and relationships which occurred during
the last two years or which are presently proposed.
From inception through June 30, 1997, the Company has borrowed from
Michael C. Koffler, President, Chairman, Chief Executive Officer and a
stockholder of the Company, $1,798,398 to fund certain of the Company's working
capital needs and acquisitions and their related expenses. During the year ended
June 30, 1996, outstanding officer loans payable of $616,528 were exchanged for
810,890 shares of Common Stock. During the year ended June 30, 1997, $434,000
was repaid with proceeds of the Bridge Financing. In connection with the
Reorganization described herein (see "Reorganization"), the Company issued an
aggregate of 500,000 shares of Series A Preferred Stock ("Series A Preferred
Stock") to Michael C. Koffler in exchange for $500,000 of indebtedness and will
also repay Mr. Koffler the balance of the Convertible Note (defined below) which
matures on July 1, 1998. The outstanding loan balance of $247,831 at June 30,
1997, represents a non-interest bearing promissory note ("Convertible Note")
payable to Michael C. Koffler, which is, at his option, convertible, in whole or
in part with respect to any portion of the unpaid balance of the note plus an
amount equal to an interest factor (utilized solely for calculating conversion
into common stock) of 10% per annum, into shares of common stock of the Company,
at a conversion rate of $.76 per share.
Until December 31, 1996, an affiliate of Michael C. Koffler (i) sublet
office space to the Company for its headquarters at cost, (ii) advanced a
portion of the Company's salary expenses and (iii) advanced a portion of the
Company's medical benefits. For the period from May 3, 1995 (inception) to
December 31, 1996, approximately $134,300 was paid by the Company for such rent
and expenses. Effective January 1, 1997, the Company leased office space
directly from the landlord and directly paid all salary and benefits.
The Company believes that each of the above transactions were on terms
no less favorable to the Company than those which were available through third
parties. The Company expects that future transactions with affiliated parties
will be on terms which are no less favorable to the Company than those which
could be obtained from unaffiliated third parties and will be approved by a
majority of disinterested directors, and any forgiveness of loans from the
Company to affiliates will be approved by a majority of the Company's
independent directors who will have the benefit of independent counsel at the
Company's expense. Since Michael C. Koffler was the sole director of the Company
during the relevant periods, none of the foregoing transactions were approved by
independent directors.
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<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
Amount and Beneficially Owned(1)
Nature of Beneficial ---------------------------------------------
Name Ownership Before Offering After Offering
- --------------------------------------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Michael C. Koffler 1,631,564(2) 100% 56%
Chairman, Chief Executive Officer
and President
Robert Sloop
Chief Financial Officer 6,481(3) (5) (5)
Michael E. Brown
Field Operations Officer 4,861(4) (5) (5)
Garo Armen, Ph.D.
Director -0- --- ---
David Lenefsky, Esq.
Director -0- --- ---
Ralph Manela, CPA
Director -0- --- ---
Directors and Executive Officers as a Group 1,642,906 100% 56%
(six persons)
</TABLE>
- ---------------------------
(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated, subject to community
property laws, where applicable. The address for each individual
indicated is 31st Floor, 150 East 58th Street, New York, New York
10155. For purposes of computing the percentage of outstanding shares
held by each person or group of persons named above as of the date of
the Prospectus, any security which such person or group of persons has
the right to acquire within 60 days after such date is deemed to be
outstanding for the purpose of computing the percentage ownership for
such person or persons, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
Accordingly, the information presented in the foregoing table does not
include shares of Common Stock issuable upon (i) conversion of the
Series A Preferred Stock (which may not be converted prior to 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) 1,094,692 shares may be acquired by Mr. Koffler pursuant to stock
options of which 31,564 become exercisable on the Effective Date.
Employee stock options issued under the Company's plans become 1/3
exercisable after one year from the grant date and an additional 1/3
each year thereafter. See "Management -- 1995 Employee Stock Option
Plan -- Exercisability."
(3) 19,444 shares of Common Stock may be acquired by Mr. Sloop pursuant
to stock options which become 1/3 exercisable (i.e., exercisable for up
to 6,481.3 shares) on December 2, 1997. Employee stock options issued
under the Company's plans become 1/3 exercisable after one year from
the grant date and an additional 1/3 each year thereafter. See
"Management -- 1995 Employee Stock Option Plan -- Exercisability."
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<PAGE>
(4) 14,583 shares of Common Stock may be acquired by Mr. Brown pursuant
to stock options which become 1/3 exercisable (i.e., exercisable for up
to 4,861 shares) on the Effective Date. Stock options issued under the
Company's Non-employee Stock Option Plan become 1/3 exercisable after
one year from the grant date and an additional 1/3 each year
thereafter. See "Management -- Non-employee Stock Option Plan --
Exercisability."
(5) Less than 1%.
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. Following the Offering it
is anticipated that such Common Stock and Warrants will be separately tradeable.
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.
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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 sale price of the Common Stock has been at
least $8.00 per share for the 20 consecutive trading days ending on the third
day prior to the date upon which the notice of redemption is given, as reported
on The Nasdaq SmallCap Market (or if the Common Stock is not traded thereon, the
closing sale price of the Common Stock on the Nasdaq National Market or other
principal securities exchange upon which the Common Stock is then quoted or
listed, or such other reporting system that provides closing sale prices for the
Common Stock). The Warrants will be exercisable until the close of business on
the day immediately preceding the date fixed for the redemption of the warrants
in the notice of redemption.
The Company has authorized and reserved for issuance a number of shares
of Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable. Holders
of Warrants will not have any voting or other rights as stockholders of the
Company unless and until Warrants are exercised and shares of Common Stock are
issued upon such exercise.
In addition to warrants described above, on June 1, 1995, the Company
issued a warrant to each of Gerard Cappello and Linda S. Cappello (investors)
for 43,835 shares of common stock of the Company and 43,843 shares of common
stock of the Company, respectively ("Cappello Warrants"). The exercise price for
the Cappello Warrants is $0.63 per share or, if higher, the cost per share of
Common Stock to Michael C. Koffler. The Cappello Warrants may be exercised at
any time prior to May 1, 1999.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors ("Preferred Stock"). Accordingly, the
Board of Directors is empowered, without further stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could decrease the amount of earnings and assets available for distribution
to holders of Common Stock or adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. In
connection with the Reorganization, the Company issued 500,000 shares of Series
A Preferred Stock, par value $.10 per share, to Michael C. Koffler in exchange
for certain indebtedness of Phoenix Preschool Education Centers, Inc. See
"Certain Relationships and Related Transactions." Except for the Series A
Preferred Stock, the Company has no present intention to issue any shares of
Preferred Stock. The Company has agreed with the 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 issued 500,000 shares of Series A Preferred
Stock to Michael C. Koffler in exchange for debt of Phoenix Preschool Education
Centers, Inc. to Mr. Koffler in the principal amount of $500,000. The terms of
the Series A Preferred Stock, established in a 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 involuntary
liquidation, dissolution or winding-up of the Company, $1.00 per share, plus
accrued and unpaid
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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 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
Effective Date.
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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.
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 one
member. Prior to the Offering, the director was elected for a one-year term.
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
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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% (excluding options) of the
issued and outstanding Common Stock which may allow it to control actions taken
by stockholders, including the election of directors. See "Security Ownership of
Certain Beneficial Owners and Management" and "Risk Factors -- Voting Control of
the Board of Directors of the Company."
The Company's Bylaws provide that special meetings of stockholders may
only be called by the Board of Directors, the Chairman or by stockholders
entitled to cast at least 10% of the votes entitled to be cast at a particular
meeting.
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
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.
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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 Common Stock and Warrants have been conditionally approved for
quotation on The Nasdaq SmallCap Market, under the symbols "FENX" and "FENXW,"
respectively, and conditionally approved for listing 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 1,306,113 shares of Common Stock
subject to options (including 14,583 shares issuable under the Non-Employee
Stock Option Plan) and 1,527,277 shares are reserved for issuance under the 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 1,330,000
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.
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
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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 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 such date, 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 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
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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 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."
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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 (3) years, engage a designee of the Underwriter
as a non-voting 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.
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.
-56-
<PAGE>
LEGAL MATTERS
The law firm Blank Rome Comisky & McCauley, One Logan Square,
Philadelphia, Pennsylvania 19103 will render its opinion to the effect that the
shares of Common Stock and Warrants offered by the Company, when issued and paid
for as contemplated in this Prospectus, will be legally issued, fully paid and
nonassessable. Certain legal matters in connection with the Offering will be
passed upon for the 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.
-57-
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Phoenix Preschool Holdings, Inc.
Report of Independent Certified Public Accountants F-3
Consolidated balance sheet as of June 30, 1997 F-4
Consolidated statements of operations for the years
ended June 30, 1997 and 1996 F-5
Consolidated statements of stockholder's equity for the
years ended June 30, 1997 and 1996 F-6
Consolidated statements of cash flows for the years
ended June 30, 1997 and 1996 F-7
Notes to consolidated financial statements F-9
Pollack Enterprises, Inc.
Report of Independent Certified Public Accountants F-28
Statement of income for the year ended December 31, 1995 F-29
Statement of stockholder's equity for the year ended
December 31, 1995 F-30
Statement of cash flows for the year ended December 31, 1995 F-31
Notes to financial statements F-32
</TABLE>
F-1
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Libbus, Inc.
Report of Independent Certified Public Accountants F-33
Statements of income for the year ended December 31,
1995 and for the nine months ended September 30,
1996 (unaudited) F-34
Statements of stockholder's equity for the year ended
December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited) F-35
Statements of cash flows for the year ended December 31,
1995 and for the nine months ended September 30,
1996 (unaudited) F-36
Notes to financial statements F-37
TLC Recreation Center, Inc
Report of Independent Certified Public Accountants F-38
Statement of income for the year ended January 31, 1997 F-39
Statement of stockholder's equity for the
year ended January 31, 1997 F-40
Statement of cash flows for the year
ended January 31, 1997 F-41
Notes to financial statements F-42
F-2
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
[The following is the form of the opinion that BDO Seidman, LLP will be in a
position to issue upon completion of the Reorganization described in Note
1(l)].
To the Board of Directors
and Stockholder of
Phoenix Preschool Holdings, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Phoenix Preschool
Holdings, Inc. and subsidiary as of June 30, 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for the years
ended June 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phoenix Preschool
Holdings, Inc. and subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the years ended June 30, 1997 and 1996, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 13, 1997,
except for Note 1(l) which is
as of ___________________, 1997
F-3
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Balance Sheet
================================================================================
<TABLE>
<CAPTION>
June 30, 1997
- ------------------------------------------------------------------------------------------------------
Assets
<S> <C>
Current
Cash $ 159,568
Accounts receivable (Note 2) 424,697
Prepaid expenses and supplies 72,980
- ------------------------------------------------------------------------------------------------------
Total current assets 657,245
Property and equipment, net (Notes 3 and 5) 3,058,587
Intangible assets, net of accumulated amortization of $120,886 576,904
Deferred financing costs, net 120,510
Deferred offering costs 134,554
Other assets 5,566
- ------------------------------------------------------------------------------------------------------
$ 4,553,366
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity
Current liabilities
Current maturities of long-term debt (Note 5) $ 440,012
Accounts payable 316,548
Accrued expenses 309,921
Deferred revenue 17,095
- ------------------------------------------------------------------------------------------------------
Total current liabilities 1,083,576
Loans payable, officer/stockholder (Note 4) 247,831
Long-term debt (Notes 5 and 8) 2,601,123
- ------------------------------------------------------------------------------------------------------
Total liabilities 3,932,530
- ------------------------------------------------------------------------------------------------------
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 500,000 shares 50,000
Common stock, $.10 par value
Authorized 15,000,000 shares
Issued and outstanding 1,600,000 shares 20,276
Additional paid-in capital 1,056,282
Deficit (505,722)
- ------------------------------------------------------------------------------------------------------
Total stockholder's equity 620,836
- ------------------------------------------------------------------------------------------------------
$ 4,553,366
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 5,608,092 $ 2,824,168
Direct costs 3,504,466 1,628,635
- -----------------------------------------------------------------------------------------------
Gross profit 2,103,626 1,195,533
- -----------------------------------------------------------------------------------------------
Operating expenses
Marketing 91,972 41,215
General and administrative 2,150,563 1,267,268
- -----------------------------------------------------------------------------------------------
Total operating expenses 2,242,535 1,308,483
- -----------------------------------------------------------------------------------------------
(Loss) from operations (138,909) (112,950)
- -----------------------------------------------------------------------------------------------
Other income (expense)
Interest expense (150,113) (89,464)
Interest income 1,255 2,711
- -----------------------------------------------------------------------------------------------
Total other (expense) (148,858) (86,753)
- -----------------------------------------------------------------------------------------------
Net loss $ (287,767) $ (199,703)
- -----------------------------------------------------------------------------------------------
Net loss per common share $ (.17) $ (.16)
- -----------------------------------------------------------------------------------------------
Weighted average common shares outstanding 1,648,792 1,243,347
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------ Paid-In
Shares Amount Shares Amount Capital Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 - $ - 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
Officer loans payable exchanged for
preferred stock (Notes 1, 4 and 9) 500,000 50,000 - - 450,000 - 500,000
Net loss - - - - - (287,767) (287,767)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 500,000 $ 50,000 1,600,000 $ 20,276 $ 1,056,282 $ (505,722) $ 620,836
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (287,767) $ (199,703)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 343,640 178,860
Loss on sale of equipment 3,193 20,735
Amortization of intangible assets and deferred costs 104,340 20,642
(Increase) decrease in
Receivables (232,257) (192,440)
Other assets (94) (4,437)
Prepaid expenses and supplies 128,375 13,378
Increase in
Accounts payable and accrued expenses 517,137 96,308
Deferred revenue 8,889 8,206
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 585,456 (58,451)
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisitions of property and equipment (315,063) (59,475)
Proceeds from sale of property and equipment 2,807 7,400
Cash payments for assets of acquired businesses (659,000) (215,000)
Organization costs - (16,855)
Deferred offering costs (134,554) -
- ----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (1,105,810) (283,930)
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Phoenix Preschool Holdings, Inc.
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended June 30,
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities
Repayments of long-term debt $ (311,570) $ (200,684)
Proceeds of officer/stockholder loan 303,288 592,326
Proceeds of long-term debt 656,683 -
Deferred financing costs (125,750) -
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 522,651 391,642
- ----------------------------------------------------------------------------------------------
Net increase in cash 2,297 49,261
Cash, beginning of year 157,271 108,010
- ----------------------------------------------------------------------------------------------
Cash, end of year $ 159,568 $ 157,271
- ----------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 145,001 $ 89,464
- ----------------------------------------------------------------------------------------------
Noncash transactions
Acquisition of financed assets $ 1,291,000 $ 750,389
Officer loans payable exchanged for:
Common stock $ - $ 616,558
Preferred stock $ 500,000 $ -
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
1. Summary of
Significant
Accounting
Policies
a) Business
Phoenix Preschool Holdings, Inc. ("Phoenix" or the "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, 1997 and 1996, the Company was operating 22 and
11 centers, respectively.
b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared as if Phoenix
and PPEC had operated as a single consolidated group since inception of
PPEC. Any intercompany balances and transactions have been eliminated.
c) Revenue Recognition
Revenue from preschool and daycare services is recognized when the
service has been provided. Non-subsidized students are billed on a
weekly basis in advance. Governmental agencies acting on behalf of
subsidized students are billed on a monthly basis in arrears.
d) Depreciation and Amortization
Property and equipment are stated at cost or at fair values assigned to
the assets at the time of business acquisition.
Depreciation of leasehold improvements is computed on the straight-line
method over the lives of the related leases. Furniture, equipment and
vehicles are depreciated using the straight-line method over 5-7 years.
Intangible assets, which consist of customer lists, restrictive
covenants, organization costs and goodwill, all principally arising
from acquisitions, are being amortized over a five year period using
the straight-line method.
F-9
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
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 June 30, 1997, there has been no
impairment of asset carrying values.
e) Deferred Offering Costs
Direct costs incurred in connection with a proposed initial public
offering have been deferred and will be charged to additional paid-in
capital upon completion of the offering or expensed if the offering is
unsuccessful.
f) Deferred Financing Costs
Direct costs incurred in connection with Bridge Financing (see Note 8)
are being amortized over the sixteen month term of the related debt.
g) Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
are highly liquid investments with an original maturity of three months
or less.
h) Income Taxes
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-10
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
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 the effective
date of the proposed Offering, the Company, Michael C. Koffler (sole
shareholder) and PPEC will undertake a reorganization transaction in
accordance with Section 351 of the Internal Revenue Code of 1986, as
amended, pursuant to the Plan of Reorganization, dated as of July 7,
1997 (amended on August 30, 1997), among Mr. Koffler, PPEC and the
Company. Mr. Koffler will contribute all of the 1,600,000 issued and
outstanding shares of common stock of PPEC to the Company, together
with $500,000 in debt owed to him by PPEC. In exchange, the Company
will deliver to Mr. Koffler 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
F-11
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
to him equal to approximately $248,000. As a result of the
Reorganization, the Company will own all of PPEC's issued and
outstanding shares and PPEC will become a wholly-owned subsidiary of
the Company. The Company will assume the obligations of PPEC under all
outstanding warrants and options.
The exchange of stockholder debt for preferred stock as described in
the previous paragraph has been reflected historically in the
accompanying financial statements.
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-12
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
n) Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 provides a different method of calculating
earnings per share than is currently used in Accounting Principle Board
Opinion 15. SFAS 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares. Diluted earnings per share
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to existing fully diluted earnings per
share. The Company believes adopting SFAS 128 will not have a material
effect on its calculation of earnings per share. The Company will adopt
the provisions for computing earnings per share set forth in SFAS 128
for its quarter ending December 31, 1997.
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129") effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and
participation rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise
prices and redemption requirements. Adoption of SFAS 129 will have no
effect on the Company as it currently discloses the information
specified.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for
transactions entered into in fiscal years beginning after December 15,
1995. During fiscal year 1997, the Company adopted only the disclosure
provisions of SFAS 123 and accounted for stock-based compensation using
the intrinsic value method set forth in Accounting Principle Board
Opinion 25.
F-13
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated. Due to the recent issuance of these standards, management has been
unable to fully evaluate the impact, if any, they may have on future financial
statement disclosures.
F-14
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
2. Accounts
Receivable
Accounts receivable are detailed as follows:
June 30, 1997
--------------------------------------------------------------------
<S> <C>
Governmental agencies $ 398,077
Non-subsidized students 26,620
--------------------------------------------------------------------
Total $ 424,697
--------------------------------------------------------------------
3. Property
and
Equipment
Property and equipment consist of:
June 30, 1997
--------------------------------------------------------------------
Furniture and equipment $ 1,579,386
Vehicles 508,642
Leasehold improvements 1,499,707
Other 1,500
--------------------------------------------------------------------
3,589,235
Less accumulated depreciation
and amortization 530,648
--------------------------------------------------------------------
$ 3,058,587
--------------------------------------------------------------------
4. Related
Party
Transactions
From inception through June 30, 1997, the Company borrowed from Michael
C. Koffler, President, Chairman, Chief Executive Officer and sole
stockholder of the Company, $1,798,389 to fund certain of the Company's
working capital needs and acquisitions. During the year ended June 30,
1996, outstanding officer loans payable of $616,558 were exchanged for
810,890 shares of common stock. During the year ended June 30, 1997,
$434,000 was repaid with proceeds of the Bridge Financing described in
Note 8. Of the remaining outstanding loans of $747,831 at June 30,
1997, $247,831 represents a noninterest 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
</TABLE>
F-15
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
equal to an interest factor (utilized solely for calculating conversion into
common stock) of 10% per annum, into shares of common stock of the Company, at a
price of $.76 per share. Pursuant to the Reorganization described in Note 1(l)
to the financial statements, the accompanying financial statements reflect the
exchange of the remaining $500,000 of indebtedness to Mr. Koffler for 500,000
shares of Series A Convertible Preferred Stock 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.
Officer loans mature on July 1, 1998.
Until December 31, 1996, an affiliate of Michael C. Koffler (i) sublet office
space to the Company for its headquarters at cost, (ii) advanced a portion of
the Company's salary expenses and (iii) advanced a portion of the Company's
medical benefits. For the period from May 3, 1995 (inception) to December 31,
1996, approximately $134,300 was paid on behalf of the Company for such rent and
expenses. Effective January 1, 1997, the Company leased office space directly
from the landlord and directly paid all salary and benefits.
The Company and Michael C. Koffler entered into an Employment Agreement,
pursuant to which the Company has agreed to employ Mr. Koffler as
the Chief Executive Officer and President of the Company during the three
(3) year period commencing on September 3, 1997, unless terminated earlier
pursuant to its provisions. Pursuant to such Employment Agreement,
Mr. Koffler will receive as compensation 5% of the Company's earnings, if
any, before giving effect to interest, taxes, amortization and depreciation. In
addition, upon an initial public offering by the Company, the Company will
issue Mr. Koffler a nonqualified stock option to acquire up to 1,000,000
shares of common stock at an exercise price of $4.20 per share.
F-16
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
5. Long-Term
Debt
<TABLE>
<CAPTION>
Long-term debt is detailed as follows:
<S> <C> <C>
June 30, 1997 1996
-------------------------------------------------------------------------------
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. $ 118,078 $ 161,522
A ten year note is payable to a corporation in
quarterly principal installments of $16,500 plus
interest at 9% per annum. The final payment is due
February 1, 2006. The note is collateralized by
the assets of three acquired preschool centers in
North Carolina. 577,500 643,500
A five year note is payable to a corporation in
quarterly principal installments of $37,500 plus
interest at 9% per annum. The final payment is due
June 1, 2000. The note is collateralized by the
assets of eight acquired preschool centers in
Florida. 450,000 600,000
</TABLE>
F-17
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
June 30, 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
An eight year note is payable to a corporation in
quarterly principal installments of $7,813 plus
interest at 8% per annum. The final payment is due
August 1, 2004. The note is collateralized by the
assets of two acquired preschool centers in North
Carolina. $ 226,563 $ -
A ten-year note is payable to a corporation in
quarterly principal installments of $4,750 plus
interest at 8% per annum. The final payment is due
October 1, 2006. The note is collateralized by the
assets of three acquired preschool centers in North
Carolina. 180,500 -
A ten year note is payable to a corporation in
quarterly principal installments of $2,150 plus
interest at 8% per annum. The final payment is due
May 1, 2007. The note is collateralized by the
assets of an acquired preschool center in Georgia. 86,000 -
A ten year note is payable to a corporation in
quarterly principal installments of $1,875 plus
interest of 8% per annum. The final payment is due
May 1, 2007. The note is collateralized by the
assets of an acquired preschool center in Florida. 75,000 -
</TABLE>
F-18
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
June 30, 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
A ten year note is payable to a corporation in
quarterly principal installments of $1,125 plus
interest at 7.5% per annum. The final payment is due
May 1, 2007. The note is collateralized by the
assets of an acquired preschool center in North
Carolina. $ 45,000 $ -
An eight year note is payable to a corporation in
monthly principal installments of $5,365 plus
interest at 8% per annum. The final payment is due
June 1, 2005. The note is collateralized by the
assets of an acquired preschool center in Florida. 515,000 -
A ten year note is payable to a corporation in
quarterly principal installments of $3,250 plus
interest at 8.5% per annum. The final payment is due
June 1, 2007. The note is collateralized by the
assets of two acquired preschool centers in Georgia. 130,000 -
Notes are payable to individuals in connection with
the bridge financing described in Note 8. The entire
principal amount plus accrued interest at 8% per
annum is payable on the earlier of October 9, 1998
or the consummation of an initial public offering or
private placement. 637,494 -
-------------------------------------------------------------------------------------
3,041,135 1,405,022
Less current maturities 440,012 268,093
-------------------------------------------------------------------------------------
$ 2,601,123 $ 1,136,929
-------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
At June 30, 1997, long-term debt matures as follows:
Year ending June 30,
- --------------------------------------------------------------------------------
1998 $ 440,012
1999 1,037,177
2000 371,073
2001 214,230
2002 214,230
Thereafter 764,413
- --------------------------------------------------------------------------------
$3,041,135
- --------------------------------------------------------------------------------
6. Acquisitions Operations of acquired entities, which are described
below, are included in the accompanying financial
statements from the dates of acquisition. The costs
of the acquisitions were allocated among the fair
market value of the current assets, property and
equipment and intangible assets acquired. Cash down
payments were provided through stockholder loans with
the balances of the purchase acquisition costs
financed through seller notes (see Notes 4 and 5).
o In June 1995, the Company acquired the assets of
Phoenix Preschool Education Centers, Inc. in a
business combination accounted for as a purchase.
The total cost of the acquisition was $1,000,000,
which was financed by a $250,000 cash deposit and a
$750,000 five year note payable with interest at 9%
per annum.
o In January 1996, the Company acquired the assets of
Pollack Enterprises, Inc. in a business combination
accounted for as a purchase. The total cost of the
acquisition was $875,000, which was financed by a
$215,000 cash deposit and a $660,000 ten year note
payable with interest at 9% per annum.
o In July 1996, the Company acquired the assets of
Coastal Kiddie College, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $365,000, which was
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.
F-20
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
o In October 1996, the Company acquired the assets of
Libbus, Inc. in a business combination accounted
for as a purchase. The total cost of the
acquisition was $300,000, which was 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.
o In April 1997, the Company acquired the assets of
Brighter Day Care Center, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $130,000, which was
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.
o In May 1997, the Company acquired the assets of
Gingham Goose School, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $100,000, which was
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.
o In May 1997, the Company acquired the assets of
Reelsboro Christian Day Care, Inc. in a business
combination accounted for as a purchase. The total
cost of the acquisition was $60,000, which was
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.
o In May 1997, the Company acquired the assets of TLC
Recreation Center, Inc. in a business combination
accounted for as a purchase. The total cost of the
acquisition was $815,000, which was 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.
F-21
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
o In June 1997, the Company acquired the assets of Humpty Dumpty Play
School, Inc. in a business combination accounted for as a purchase. The
total cost of the acquisition was $180,000, which was 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.
The following unaudited pro forma results gives effect to significant
acquisitions prior to June 30, 1997 as if they had occurred on July 1, 1995:
(in thousands, except common per share amounts)
Year ended June 30, 1997 1996
- -----------------------------------------------------------------------------
Revenue $ 6,610 $ 4,669
Net loss (331) (346)
Net loss per common share (.20) (.28)
The pro forma results include certain adjustments such as additional
amortization expense as a result of goodwill and other intangible assets and
increased interest expense on acquisition debt. The pro forma results are not
necessarily indicative of what the actual results of operations might have been
if the acquisitions had been effective at the beginning of fiscal 1996 or of
future operations of the combined companies under the ownership and management
of the Company.
7. Commitments
The Company leases space for its corporate headquarters and its preschool center
facilities under operating leases with initial lease terms of 5-10 years, which
expire through September 30, 2006. All leases contain a minimum 5-year renewal
option. Rent expense for the years ended June 30, 1997 and 1996 was
approximately $614,000 and $336,000, respectively.
F-22
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
Future minimum rental payments as of June 30, 1997 are approximately as follows:
Year ending June 30,
- --------------------------------------------------------------------------------
1998 $ 811,000
1999 835,000
2000 829,000
2001 766,000
2002 753,000
Thereafter 2,082,000
- --------------------------------------------------------------------------------
$6,076,000
- --------------------------------------------------------------------------------
8. Bridge
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 and a warrant to acquire up to 50,000 shares of common
stock. The net proceeds of Bridge financing were approximately $555,000 and were
used primarily to repay stockholder loans used to finance preschool center
acquisitions (see Note 4). The Bridge Notes are payable upon the earlier of
October 9, 1998 or the consummation of an initial public offering ("IPO") or
private placement of the Company's debt and/or equity securities resulting in
gross proceeds to the Company of at least $5,000,000. Each Bridge Warrant
entitles the registered holder thereof to purchase one share of common stock at
an exercise price of $4.50 per share, subject to adjustment in certain events,
at any time during the period commencing June 9, 1998 and ending June 9, 2002.
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
Equity
a) Organization
The Company was organized on July 2, 1997. The Company's Board of
Directors has authorized the issuance of up to 15,000,000 shares of $.10
par value common stock.
F-23
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
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 authorized 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. The conversion has been
reflected historically in the accompanying financial statements.
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.
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 1,527,277.
The plan is administered by the Company's Board of Directors ("Board"),
which grants all options and determines their terms. Options are
non-transferable and are only granted to officers and key employees to be
determined by the Board. The maximum term of any option under the plan is
ten years and future grants will be at a price not less than 100% of the
fair market value of the Company's common stock on the date the option is
granted.
In December 1996, the Company adopted a non-employee stock option plan.
These options contain terms substantially similar to those contained in
options issued pursuant to the 1995 Employee Stock Option Plan.
F-24
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
Employee Stock Options
<TABLE>
<CAPTION>
Weighted
Average
Option Option Remaining
Price Price Average
Incentive Number of Per Per Contractual
Options Shares Share Share Life
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1995 -
Granted 71,651 $ .76 to 1.27 $ .83
- -------------------------------------------
Balance, June 30, 1996 71,651 $ .76 to 1.27 $ .83
Granted 55,901 $2.53 to 3.55 $ 2.93
Canceled (13,368) $ .76 to 1.27 $ .85
- -------------------------------------------
Balance, June 30, 1997 114,184 $ .76 to 3.55 $ 1.86 9 yrs.
- -------------------------------------------------------------------------------------------------------------
Number of
Non-Qualified Options Shares
- -------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 -
Granted 47,346 $ .76 $ .76
- -------------------------------------------
Balance, June 30, 1996 47,346 $ .76 $ .76
Granted -
- -------------------------------------------
Balance, June 30, 1997 47,346 $ .76 $ .76 8.3 yrs.
- -------------------------------------------------------------------------------------------------------------
Non-Employee Stock Options
- -------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 -
Granted 4,861 $ 2.53 $ 2.53
- -------------------------------------------
Balance, June 30, 1996 4,861 $ 2.53 $ 2.53
Granted 9,722 $ 2.53 $ 2.53
- -------------------------------------------
Balance, June 30, 1997 14,583 $ 2.53 $ 2.53 9.3 yrs.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
The options become fully exercisable over a three year period with 33 1/3%
exercisable on the later of (a) one year from date of grant or (b) the first
closing date of an initial public offering of the stock and an additional
33 1/3% become exercisable each year thereafter. At June 30, 1997, none of the
options were exercisable.
On June 1, 1995, the Company issued warrants to purchase 87,678 shares of its
common stock at $.63 per share, subject to adjustment. The warrants are
exercisable at anytime through May 1, 1999.
Immediately preceding the effective date of an initial public offering, the
Company will issue a nonqualified employee stock option to acquire up to 130,000
shares of Common Stock to an employee of the Company in consideration for
financial advice, acquisition assistance and other services to be rendered by
such employee during the two years following this effective date. The exercise
price under such option is $4.20 per share subject to adjustment. During the
two-year period commencing on the effective date and prior to registration of
the Common Stock subject to such option, the holder of the option may reprice
the option subject to certain conditions.
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:
Year ended June 30, 1997 1996
- -----------------------------------------------------------------------------
Net loss - as reported $ (287,767) $ (199,703)
Net loss - pro forma $ (815,457) $ (614,003)
Net loss per common
share - as reported $ (.17) $ (.16)
Net loss per common
share - pro forma $ (.49) $ (.49)
F-26
<PAGE>
Phoenix Preschool Holdings, Inc.
Notes to Consolidated Financial Statements
================================================================================
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.
10. Proposed Initial
Public Offering
The Company's proposed IPO calls for the Company to offer 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 effective 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.
/s/ BDO SEIDMAN, LLP
-----------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
June 9, 1997
F-28
<PAGE>
Pollack Enterprises, Inc.
Statement of Income
================================================================================
Year ended December 31, 1995
- ----------------------------------------------------------------------------
Net revenue $ 1,014,130
Operating expenses 966,605
- ----------------------------------------------------------------------------
Operating income 47,525
Interest expense 2,362
- ----------------------------------------------------------------------------
Net income $ 45,163
- ----------------------------------------------------------------------------
See accompanying notes to financial statements.
F-29
<PAGE>
Pollack Enterprises, Inc.
Statement of Income
================================================================================
- ------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- ------------------------------------------------------------------------------
Balance, January 1, 1995 $ 5,000 $ - $ 5,000
Net income - 45,163 45,163
Stockholder distributions - (31,000) (31,000)
- ------------------------------------------------------------------------------
Balance, December 31, 1995 $ 5,000 $ 14,163 $ 19,163
- ------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-30
<PAGE>
Pollack Enterprises, Inc.
Statement of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
Pollack Enterprises, Inc.
Notes to Financial Statements
================================================================================
1. Summary of
Significant
Accounting
Policies
Business
Pollack Enterprises, Inc. (the "Company") provided 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
Transaction
The Company leased facilities for $10,947 per month from the shareholder. Total
rent expense in 1995 was $131,364.
3. Subsequent
Event
In January 1996, the assets of the Company were sold to Phoenix Preschool
Education Centers, Inc. for $875,000.
F-32
<PAGE>
Pollack Enterprises, Inc.
Statement of Income
================================================================================
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.
/s/ BDO SEIDMAN, LLP
-----------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
June 20, 1997
F-33
<PAGE>
Libbus, Inc.
Statement of Income
================================================================================
<TABLE>
<CAPTION>
Year Nine months
ended ended
December 31, September 30,
1995 1996
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
Libbus, Inc.
Statements of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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
Significant
Accounting
Policies
Business
Libbus, Inc. (the "Company") provided for-profit preschool educational
services in three childcare centers located in North Carolina. These centers
are set up in classroom style and staffed by licensed teachers and administra-
tive 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
Transaction
The Company leased facilities for $6,200 per month from the sole shareholder.
Total rent expense in 1995 was $74,400.
3. Subsequent
Event
In October 1996, the assets of the Company were sold to Phoenix Preschool
Education Centers, Inc. for $300,000.
F-37
<PAGE>
Report of Independent Certified Public Accountants
TLC Recreation Center, Inc.
Fort Walton Beach, Florida
We have audited the accompanying statements of income, stockholder's equity and
cash flows of TLC Recreation Center, Inc. for the year ended January 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of TLC
Recreation Center, Inc. for the year ended January 31, 1997, in conformity with
generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
-----------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
August 27, 1997
F-38
<PAGE>
TLC Recreation Center, Inc.
Statement of Income
================================================================================
<TABLE>
<CAPTION>
Year ended January 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Net revenue $ 891,226
Operating expenses 831,875
- -------------------------------------------------------------------------------------------------------------------
Operating income 59,351
Interest expense 25,261
- -------------------------------------------------------------------------------------------------------------------
Income before taxes 34,090
Income tax expense 5,846
- -------------------------------------------------------------------------------------------------------------------
Net income $ 28,244
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE>
TLC Recreation Center, Inc.
Statement of Stockholder's Equity
================================================================================
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, February 1, 1996 $ 500 $ 178,602 $ 179,102
Net income - 28,244 28,244
- -------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 $ 500 $ 206,846 $ 207,346
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
TLC Recreation Center, Inc.
Statement of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended January 31, 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities
Net income $ 28,244
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 17,498
Changes in assets and liabilities
Decrease in receivables 3,555
Decrease in prepaid expense 11,853
(Decrease) in accounts payable (577)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 60,573
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Repayment of shareholder loans 17,323
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Principal payments on long-term debt (46,255)
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 31,641
Cash and cash equivalents, beginning of year 74,634
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 106,277
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 25,261
Income taxes $ 3,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
TLC Recreation Center, Inc.
Notes to Financial Statements
================================================================================
1. Summary of
Significant
Accounting
Policies
Business
TLC Recreation Center, Inc. (the "Company") provided for-profit preschool
educational and daycare services in a childcare center located in Florida. The
center is set up in classroom style and staffed by licensed teachers and
administrative directors.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed using
accelerated methods for financial statement and income tax purposes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reports in the financial statements and accompanying notes.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
2. Related Party
Transaction
The Company leased facilities for $93,484 from the shareholder during the year.
3. Subsequent
Event
In June 1997, the assets of the Company were sold to Phoenix Preschool
Education Centers, Inc. for $800,000.
F-42
<PAGE>
================================================================================
No person is authorized to give any information or to make any representation
not contained or incorporated by reference in this Prospectus, and if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any sale
made in connection herewith shall, under any circumstances, create any
implication that there has been no change in the facts set forth in this
Prospectus or in the affairs of the Company since the date hereof. This
Prospectus, does not constitute an offer to sell or solicitation of any offer to
buy the Common Stock by anyone in any jurisdictions in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation of any offer to buy the Common Stock is not qualified to do so, or
to any person to whom it is unlawful to make such an offer or solicitation.
-------------------
TABLE OF CONTENTS
Page
----
Available Information.......................................................(i)
Prospectus Summary...........................................................1
Cautionary Statement Regarding Forward Looking Statements....................6
Risk Factors.................................................................6
Reorganization..............................................................15
Use of Proceeds.............................................................16
Capitalization..............................................................18
Dividend Policy.............................................................18
Dilution....................................................................19
Certain Federal Income Tax Consequences.....................................20
Selected Financial Data.....................................................22
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................23
Business ...................................................................28
Management..................................................................40
Certain Relationships and Related Transactions..............................46
Security Ownership of Certain Beneficial
Owners and Management.......................................................47
Description of Securities...................................................48
Market for Securities and Related Stockholder Matters.......................53
Underwriting................................................................53
Legal Matters...............................................................57
Experts ...................................................................57
Transfer Agent and Registrar................................................57
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 under writing 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 Fees..................................... 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 sheet as of June 30, 1997
Consolidated statements of operations for the years
ended June 30, 1997 and 1996
II-2
<PAGE>
Consolidated statements of stockholder's equity for the
years ended June 30, 1997 and 1996
Consolidated statements of cash flows for the years ended
June 30, 1997 and 1996
Notes to consolidated financial statements
Pollack Enterprises, Inc.
Report of Independent Certified Public Accountants
Statement of income for the year ended December 31, 1995
Statement of stockholder's equity for the year ended
December 31, 1995
Statement of cash flows for the year ended December 31, 1995
Notes to financial statements
Libbus, Inc.
Report of Independent Certified Public Accountants
Statements of income for the year ended December 31, 1995 and for the
nine months ended September 30, 1996 (unaudited)
Statements of stockholder's equity for the year ended December 31,
1995 and for the nine months ended September 30, 1996 (unaudited)
Statements of cash flows for the years ended December 31, 1995 and
for the nine months ended September 30, 1996 (unaudited)
Notes to financial statements
TLC Recreation Center, Inc.
Report of Independent Certified Public Accountants
Statement of income for the year ended January 31, 1997
Statement of stockholder's equity for the year ended January 31, 1997
Statement of cash flows for the year ended January 31, 1997
II-3
<PAGE>
Notes to financial statements
(b) Exhibits:
<TABLE>
<CAPTION>
Regulation S-B
Exhibit Number Description
-------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Advisory Agreement
2.1 Form of Amended Plan of Reorganization
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Specimen Common Stock Certificate*
4.2 Form of Warrant Agreement and Certificate*
4.3 Form of 8% Promissory Note*
4.4 Form of Bridge Warrant*
4.5 Form of Underwriter's Warrant
5 Opinion of Blank Rome Comisky & McCauley
10.1 Form of Non-employee Stock Option** (previously filed)
10.2 1995 Employee Stock Option Plan (as amended)**
10.3 Form of Lock-up Agreement
10.4 Asset Purchase Agreement, by and between Coastal Kiddie College, Inc.
and Phoenix Preschool Education Centers, Inc.*
10.5 Asset Purchase Agreement, by and between Libbus, Inc. and Phoenix
Preschool Education Centers, Inc.*
10.6 Asset Purchase Agreement, by and between TLC Recreation Center, Inc.
and Phoenix Preschool Education Centers, Inc.*
10.7 Asset Purchase Agreement, by and between Pollack Enterprises, Inc. and
Phoenix Preschool Education Centers, Inc.*
10.8 Form of Employment Agreement**
21 Subsidiaries
23.1 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)
23.2 Consent of BDO Seidman LLP
24 Power of attorney (included on signature page)
27 Financial Data Schedule
99 Consents of Directors To Be Appointed
</TABLE>
- ----------------------
*Previously filed.
**Compensatory Plan
Exhibit numbers correspond to the exhibits required by Item 601
of Regulation S-B for a Registration Statement on Form SB-2.
II-4
<PAGE>
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:
(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-5
<PAGE>
(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-6
<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
September 10, 1997.
PHOENIX PRESCHOOL HOLDINGS, INC.
Date: September 10, 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 September 10, 1997
- ------------------------------ President, Chief Operating Officer (Principal
Michael C. Koffler Executive and Operating Officer) and Director
/s/ Robert Sloop Chief Financial Officer (Principal Financial September 10, 1997
- ------------------------------ and Accounting Officer)
Robert Sloop
</TABLE>
II-7
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
EXHIBITS
TO
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PHOENIX PRESCHOOL HOLDINGS, INC.
(Exact name of issuer as specified in its charter)
---------------------
================================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
S-B Exhibit Numbers Description
------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Advisory Agreement
2.1 Form of Amended Plan of Reorganization
3.1 Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Specimen Common Stock Certificate*
4.2 Form of Warrant Agreement and Certificate*
4.3 Form of 8% Promissory Note*
4.4 Form of Bridge Warrant*
4.5 Form of Underwriter's Warrant
5 Opinion of Blank Rome Comisky & McCauley
10.1 Form of Non-Employee Stock Option** (previously filed)
10.2 1995 Employee Stock Option Plan (as amended)**
10.3 Form of Lock-up Agreement
10.4 Asset Purchase Agreement, by and between Coastal Kiddie College, Inc.
and Phoenix Preschool Education Centers, Inc.*
10.5 Asset Purchase Agreement, by and between Libbus, Inc. and Phoenix
Preschool Education Centers, Inc.*
10.6 Asset Purchase Agreement, by and between TLC Recreation Center, Inc.
and Phoenix Preschool Education Centers, Inc.*
10.7 Asset Purchase Agreement, by and between Pollack Enterprises, Inc. and
Phoenix Preschool Education Centers, Inc.*
10.8 Form of Employment Agreement**
21 Subsidiaries
23.1 Consent of Blank Rome Comisky & McCauley (See Exhibit 5)
23.2 Consent of BDO Seidman LLP
24.1 Power of attorney (included on signature page)
27 Financial Data Schedule
99 Consents of Directors to be Appointed
</TABLE>
- ----------------------
*Previously filed.
**Compensatory Plan
<PAGE>
PHOENIX PRESCHOOL HOLDINGS, INC.
UNDERWRITING AGREEMENT
New York, New York
Dated: , 1997
MAIDSTONE FINANCIAL, INC.
101 East 52nd Street
New York, New York 10022
Gentlemen:
The undersigned, PHOENIX PRESCHOOL HOLDINGS, INC., a Delaware
corporation (the "Company"), proposes to issue and sell to Maidstone Financial,
Inc. ("Maidstone" or "Underwriter") pursuant to this Underwriting Agreement
("Agreement"), an aggregate of 1,300,000 Units (the "Units"), each consisting of
one share of the common stock, par value $0.10 per share, of the Company (the
"Common Stock"), and two Class A Redeemable Common Stock Purchase Warrants (the
"Warrants"). The Warrants are each exercisable to purchase one share of Common
Stock, at any time commencing one year from the date on which the Registration
Statement (as defined in Section 1(a) hereof), shall have become or been
declared effective (the "Effective Date"), and ending on the sixth anniversary
of the Effective Date. The Warrant exercise price, subject to adjustment as
described in the agreement providing for the Warrants (the "Warrant Agreement"),
shall be $4.50 per share, subject to adjustment as described in the Warrant
Agreement.
The shares of Common Stock and the Warrants included in the
Units will be detachable and separately transferable immediately upon issuance.
Commencing one year after the Effective Date, the Warrants are subject to
redemption by the Company at $0.10 per Warrant, provided that (a) prior notice
of not less than 30 days is given to the holders of the Warrants (the
"Warrantholders"), and (b) the closing sale price per share of Common Stock, if
traded on The NASDAQ Stock Market, or the last sale price per share of Common
Stock, if traded on a national exchange, for the 20 consecutive trading days
ending on the third day prior to the date on which notice of redemption is
given, has been at least $8.00.
<PAGE>
In addition, the Company proposes to grant to Maidstone the
Over-Allotment Option (as defined in Section 2(c) hereof) to purchase all or any
part of an aggregate of 195,000 additional Units, and to issue to you the
Underwriter's Unit Purchase Options (as defined in Section 11 hereof) to
purchase certain further additional Units.
The aggregate of 1,300,000 shares of Common Stock comprising
the Units to be sold by the Company, together with the aggregate of 195,000
additional shares of Common Stock comprising the Units that are the subject of
the Over-allotment Option, are herein collectively called the "Shares." The
Units, the Shares, the Warrants (including the Warrants included in the Units,
the additional Warrants included in the Units subject to the Over-Allotment
Option and the Warrants issuable upon exercise of the Underwriter's Unit
Purchase Options), the shares of Common Stock issuable upon exercise of the
Warrants and the shares of Common Stock issuable upon exercise of the
Underwriter's Unit Purchase Option, are herein collectively called the
"Securities." The term "Underwriter's Counsel" shall mean the firm of Gersten,
Savage, Kaplowitz, Fredericks & Curtin, LLP, counsel to the Underwriter, and the
term "Company Counsel" shall mean the firm of Blank Rome Comisky & McCauley,
counsel to the Company. Unless the context otherwise requires, all references
herein to a "Section" shall mean the appropriate Section of this Agreement.
You have advised the Company that you desire to purchase the
Units as herein provided. The Company confirms the agreements made by it with
respect to the purchase of the Units by you, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) Registration Statement; Prospectus; A registration
statement (File No. 33-_______) on Form SB-2 relating to the public offering of
the Securities (the "Offering"), including a preliminary form of prospectus,
copies of which have heretofore been delivered to you, has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933 (the
"Act"), and the rules and regulations of the Securities and Exchange Commission
(the "Commission") promulgated thereunder (the "Rules and Regulations"), and has
been filed with the Commission under the Act. As used herein, the term
"Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule 430
or Rule 424(a) of the Rules and Regulations. The Preliminary Prospectus bore the
legend required by Item 501 of Regulation S-B under the Act and the Rules and
Regulations. Such registration statement (including all financial statements,
schedules and exhibits) as amended at the time it becomes effective and the
final prospectus included therein are herein respectively called the
"Registration Statement" and the "Prospectus," except that (i) if the prospectus
filed by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and
Regulations shall differ from such final prospectus as then amended, then the
term "Prospectus" shall instead mean the prospectus first filed pursuant to said
Rule 424(b) or Rule 430A, and (ii) if such registration statement is amended or
such prospectus is amended or supplemented after the effective date of such
registration statement and prior to the Option Closing Date (as defined in
Section 2(c) hereof), then (unless the context necessarily requires otherwise)
the term "Registration Statement" shall include such registration statement as
so amended, and the term "Prospectus" shall include such prospectus as so
amended or supplemented, as the case may be.
2
<PAGE>
(b) Contents of Registration Statement. On the Effective
Date, and at all times subsequent thereto for so long as the delivery of a
prospectus is required in connection with the offering or sale of any of the
Securities, (i) the Registration Statement and the Prospectus shall in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and (ii) neither the Registration Statement nor the Prospectus
shall include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary or make statements
therein in light of the circumstances in which they were made, not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, the
material set forth under the caption "UNDERWRITING," the information on the
cover page of the Prospectus regarding the underwriting arrangements and the
identity of the Underwriter's Counsel under the caption "LEGAL MATTERS," which
information the Underwriter hereby represents and warrants to the Company is
true and correct in all material respects and does not omit to state any
material fact required to be stated therein or necessary to make statements
therein, in light of the circumstances in which they were made, not misleading,
constitute the only information furnished in writing by or on behalf of the
Underwriter for inclusion in the Registration Statement and Prospectus, as the
case may be.
Except for the registration rights granted under the
Underwriter's Unit Purchase Options, to the Selling Security Holders named in
the Registration Statement, or as disclosed in the Prospectus, no holders of any
securities of the Company or of any options, warrants or convertible or
exchangeable securities of the Company exercisable for or convertible or
exchangeable for securities of the Company, have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company.
(c) Organization, Standing, Etc. The Company is duly
incorporated and validly exists as a corporation in good standing under the laws
of its jurisdiction of incorporation, with full power and corporate authority to
own its properties and conduct its business as described in the Prospectus, and
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in each other jurisdiction in which the nature of its business or
the character or location of its properties requires such qualification, except
where failure so to qualify will not have a material adverse effect on the
business, properties or financial condition of the Company, as the case may be.
3
<PAGE>
(d) Capitalization. The authorized, issued and outstanding
capital stock of the Company as of the date of the Prospectus is as set forth in
the Prospectus under the caption "CAPITALIZATION". The shares of Common Stock
issued and outstanding on the Effective Date have been duly authorized, validly
issued and are fully paid and non-assessable. No options, warrants or other
rights to purchase, agreements or other obligations to issue, or agreements or
other rights to convert any obligation into, any shares of capital stock of the
Company or the Subsidiary have been granted or entered into by the Company or
the Subsidiary, except as expressly described in the Prospectus. The Securities
conform to all statements relating thereto contained in the Registration
Statement or the Prospectus.
(e) Securities. The Securities conform, or will conform
when issued, in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. The Securities have
been duly authorized and, when issued and delivered against payment therefor
pursuant to this Agreement, the Warrant Agreement or the Underwriter's Unit
Purchase Option, as the case may be, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of any of the Securities as contemplated by this Agreement
gives rise to any rights, other than those which have been waived or satisfied,
for or relating to the registration of any securities of the Company, except as
described in the Registration Statement.
(f) Authority, Etc. This Agreement, the Warrant Agreement,
the Underwriter's Unit Purchase Option, and the Financial Consulting Agreement
(as hereinafter defined), have been duly and validly authorized, executed and
delivered by the Company and, assuming due execution of this Agreement and such
other agreements by the other party or parties hereto and thereto, constitute
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms. The Company has full right, power and
lawful authority to authorize, issue and sell the Securities and the
Underwriter's Unit Purchase Option on the terms and conditions set forth herein.
All consents, approvals, authorizations and orders of any court or governmental
authority which are required in connection with the authorization, execution and
delivery of such agreements, the authorization, issue and sale of the Securities
and the Underwriter's Unit Purchase Option, and the consummation of the
transactions contemplated hereby have been obtained.
(g) No Conflict. Except as described in the Prospectus,
neither the Company nor the Subsidiary is in violation, breach or default of or
under, and consummation of the transactions hereby contemplated and fulfillment
of the terms of this Agreement will not conflict with or result in a breach of,
any of the terms or provisions of, or constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance pursuant to the
terms of, any contract, indenture, mortgage, deed of trust, loan agreement or
other material agreement or instrument to which the Company or the Subsidiary is
a party or by which the Company or the Subsidiary may be bound or to which any
of the property or assets of the Company or the Subsidiary are subject, nor will
such action result in any violation of the provisions of the Certificate of
Incorporation or the By-laws of the Company, or the certificate of incorporation
or by-laws of the Subsidiary, or any statute or any order, rule or regulation
applicable to the Company or the Subsidiary, or of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or the Subsidiary.
4
<PAGE>
(h) Assets. Subject to the qualifications stated in the
Prospectus: (i) the Company and the Subsidiary, as the case may be, has good and
marketable title to all properties and assets described in the Prospectus as
owned by it, including without limitation intellectual property, free and clear
of all liens, charges, encumbrances or restrictions, except such as do not
materially affect the value of such properties or assets and do not interfere
with the use made or proposed to be made of such assets or properties by the
Company or the Subsidiary or are not materially significant or important in
relation to the business of the Company or the Subsidiary, as the case may be;
(ii) all of the material leases and subleases under which the Company or the
Subsidiary is the lessor or sublessor of properties or assets or under which the
Company or the Subsidiary hold properties or assets as lessee or sublessee, as
described in the Prospectus, are in full force and effect and, except as
described in the Prospectus, neither the Company nor the Subsidiary is in
default in any material respect with respect to any of the terms or provisions
of any of such leases or subleases, and no claim has been asserted by any party
adverse to the rights of the Company or the Subsidiary as lessor, sublessor,
lessee or sublessee under any such lease or sublease, or affecting or
questioning the right of the Company or the Subsidiary to continued possession
of the leased or subleased premises or assets under any such lease or sublease,
except as described or referred to in the Prospectus; and (iii) the Company and
the Subsidiary, as the case may be, owns or leases all such assets and
properties, described in the Prospectus, as are necessary to its operations as
now conducted and, except as otherwise stated in the Prospectus, as proposed to
be conducted as set forth in the Prospectus.
The outstanding debt, the property and the business of the
Company conforms in all material respects to the descriptions thereof contained
in the Registration Statement and Prospectus.
(i) Independent Accountants. BDO Seidman LP, who have given
their report on certain financial statements filed or to be filed with the
Commission as a part of the Registration Statement, and which are included in
the Prospectus, are with respect to the Company, independent public accountants
as required by the Act and the Rules and Regulations.
(j) Financial Statements. The consolidated financial
statements, together with related notes, set forth in the Registration Statement
and the Prospectus present fairly the consolidated financial position, results
of operations, changes in stockholders' equity and cash flows of the Company and
the Subsidiary on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Such
financial statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the entire period involved, except to the extent disclosed therein.
The Summary Financial Data and Selected Financial Data included in the
Registration Statement and the Prospectus present fairly the information shown
therein and have been prepared on a basis consistent with that of the financial
statements included in the Registration Statement and the Prospectus.
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(k) No Material Change. Except as otherwise set forth in
the Prospectus, subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company nor
the Subsidiary has: (i) incurred any liability or obligation, direct or
contingent, or entered into any transaction, which is material to its business;
(ii) effected or experienced any change in its capital stock or incurred any
long-term debt; (iii) issued any options, warrants or other rights to acquire
its capital stock; (iv) declared, paid or made any dividend or distribution of
any kind on its capital stock; or (v) effected or experienced any adverse
change, or development involving a prospective adverse change, in its financial
position, net worth, results of operations, business or business prospects,
assets or properties or key personnel.
(l) Litigation. Except as set forth in the Prospectus,
there is not now pending nor, to the knowledge of the Company, threatened, any
action, suit or proceeding (including any related to environmental matters or
discrimination on the basis of age, sex, religion or race), whether or not in
the ordinary course of business, to which the Company or the Subsidiary is a
party or its business or property is subject, before or by any court or
governmental authority, which, if determined adversely to the Company, would
have a material adverse effect on the financial position, net worth, or results
of operations, business or business prospects, assets or property of the Company
or the Subsidiary; and no labor disputes involving the employees of the Company
or the Subsidiary exist which would affect materially adversely the business,
property, financial position or results of operations of the Company or the
Subsidiary.
(m) Employee and Independent Contractor Matters. The
Company and the Subsidiary have generally enjoyed satisfactory employer/employee
relationships with their respective employees and are in compliance in all
material respects with all Federal, state and local laws and regulations,
including but not limited to, applicable tax laws and regulations, respecting
the employment of their respective employees and employment practices, terms and
conditions of employment and wages and hours relating thereto. To the knowledge
of the Company or the Subsidiary, there are no pending or threatened
investigations involving the Company or the Subsidiary by the U.S. Department of
Labor or corresponding foreign agency, or any other governmental agency
responsible for the enforcement of such Federal, state or local laws and
regulations. To the knowledge of the Company or the Subsidiary, there are no
unfair labor practice charges or complaints against the Company or the
Subsidiary pending before the National Labor Relations Board or corresponding
foreign agency or any strikes, picketing, boycotts, disputes, slowdowns or
stoppages pending or threatened against or involving the Company or the
Subsidiary, or any predecessor entity, and none has occurred. No representation
question exists respecting the employees of the Company or the Subsidiary. No
collective bargaining agreements or modifications thereof are currently in
effect or being negotiated by the Company or the Subsidiary and their respective
employees. No grievance or arbitration proceeding is pending under any expired
or existing collective bargaining agreements of the Company or the Subsidiary.
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Neither the Company nor the Subsidiary: (i) maintain nor
have maintained, sponsored or contributed to any program or arrangement that is
an "employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), except for the Stock Option Plan described in the Prospectus;
(ii) presently maintain or contribute nor at any time in the past, have they
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA; or (iii) has ever completely or partially withdrawn from a
"multi-employer plan."
The Company and the Subsidiary have generally enjoyed
satisfactory relationships with their respective independent contractors and are
in compliance in all material respects with all federal, state and local laws
and regulations, including but not limited to applicable tax laws and
regulations, respecting the engagement of their respective independent
contractors.
(n) No Unlawful Prospectuses. The Company has not
distributed any prospectus or other offering material in connection with the
Offering contemplated herein, other than any Preliminary Prospectus, the
Prospectus or other material permitted by the Act and the Rules and Regulations.
(o) Taxes. Except as disclosed in the Prospectus, the
Company and the Subsidiary have filed all necessary federal, state, local and
foreign income and franchise tax returns and has paid all taxes shown as due
thereon on or before the date such taxes are due to be paid; and there is no tax
deficiency which has been or, to the knowledge of the Company, might be asserted
against the Company or the Subsidiary.
(p) Licenses, Etc. The Company and the Subsidiary have in
effect all necessary licenses, permits and other governmental authorizations
currently required for the conduct of its business or the ownership of its
property, as described in the Prospectus, and is in all material respects in
compliance therewith. To the knowledge of the Company, none of the activities or
business of the Company or the Subsidiary is in violation of, or would cause the
Company or the Subsidiary to violate, any law, rule, regulation or order of the
United States, any country, state, county or locality, the violation of which
would have a material adverse effect upon the financial position, net worth,
results of operations, business or business prospects, assets or property of the
Company or the Subsidiary.
(q) No Prohibited Payments. Neither the Company, the
Subsidiary, nor, to the knowledge of the Company or the Subsidiary, any of their
respective employees or officers or directors, agents or any other person acting
on behalf of the Company or the Subsidiary has, directly or indirectly,
contributed or agreed to contribute any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer, supplier, or official
or governmental agency or instrumentality of any government (domestic or
foreign) or any political party or candidate for office (domestic or foreign) or
other person who was, is, or may be in a position to help or hinder the business
of the Company or the Subsidiary (or assist it in connection with any actual or
proposed transaction) which (i) could reasonably be expected to subject the
Company
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or the Subsidiary to any material damage or penalty in any civil, criminal or
governmental litigation or proceeding, (ii) if not given in the past, could
reasonably be expected to have had a materially adverse effect on the assets,
business or operations of the Company or the Subsidiary as reflected in any of
the financial statements contained in the Prospectus, or (iii) if not continued
in the future, could reasonably be expected to materially adversely affect the
assets, business, operations or prospects of the Company or the Subsidiary. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(r) Transfer Taxes. On the Closing Dates (as defined in
Section 2(d) hereof), all transfer and other taxes (including franchise, capital
stock and other taxes, other than income taxes, imposed by any jurisdiction), if
any, which are required to be paid in connection with the sale and transfer of
the Units to the Underwriter hereunder shall have been fully paid or provided
for by the Company, and all laws imposing such taxes shall have been fully
complied with.
(s) Exhibits. All contracts and other documents of the
Company or the Subsidiary described in the Registration statement or the
Prospectus or to be filed as exhibits to the Registration Statement, have been
described in the Registration Statement or the Prospectus or filed with the
Commission, as required under the Rules and Regulations.
(t) Shareholder Agreements, Registration Rights. Except as
described in the Prospectus, no security holder of the Company has any rights
with respect to the purchase, sale or registration of any Securities, and all
registration rights with respect to the Offering have been waived.
(u) No Stabilization or Manipulation. Neither the Company
nor, to the Company's knowledge, any of its officers or directors or any of its
employees or stockholders, have taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, under the Exchange Act or otherwise,
the stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Securities.
(v) No Finders. Except as described in the Prospectus, to
the knowledge of the Company or the Subsidiary, there are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, commitments, payments or
issuances of securities with respect to the Company that may affect the
Underwriter's compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
(w) Lock-up Agreements. The Company has obtained from each
director, officer and existing stockholder of the Company (the "Existing
Shareholders"), a Lock-Up Agreement (as defined in Section 3(r) hereof) in the
form previously delivered.
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(x) Licensing and Accreditation. The Company has at all
times since the commencement of its business been in compliance with all federal
state and local laws, rules and regulations applicable to the nature of its
business and operation. The Company has all necessary licenses to operate its
business.
(aa) No Adverse Effect of Transaction Contemplated Hereby.
Neither the completion of the Offering nor any of the transactions contemplated
herein or in the Prospectus, including but not limited to the issuance of any of
the Securities, will result in a "change of control" or the loss of, or have any
adverse effect on, the maintenance in good standing of the Company's licenses.
2. PURCHASE, DELIVERY AND SALE OF UNITS
(a) Purchase Price for Units. The Units shall be sold to
and purchased by the Underwriter at the purchase price of $3.78 per Unit (that
being the public offering price of $4.20 per Unit less an underwriting discount
of 10 percent) (the "Purchase Price").
(b) Firm Units.
(i) Subject to the terms and conditions of this
Agreement, and on the basis of the representations, warranties and agreements
herein contained the Company agrees to issue and sell to the Underwriter and the
Underwriter, agrees to buy from the Company at the Purchase Price (the "Firm
Units").
(ii) Delivery of the Firm Units against payment
therefor shall take place at the offices of Maidstone Financial, Inc., 101 East
52nd Street, New York, New York 10022 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m., New York
Time, on , 1997, or at such later time and date, not later than eight business
days after the Effective Date, as you may designate (such time and date of
payment and delivery for the Firm Units being herein called the "First Closing
Date"). Time shall be of the essence and delivery of the Firm Units at the time
and place specified in this Section 2(b)(ii) is a further condition to the
obligations of the Underwriter hereunder.
(c) Option Units.
(i) In addition, subject to the terms and conditions of
this Agreement, and on the basis of the representations, warranties and
agreements herein contained, the Company hereby grants to Maidstone an option
(the "Over-Allotment Option"), to purchase from the Company all or any part of
an aggregate of an additional 195,000 Units at the Purchase Price (the "Option
Units").
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(ii) The Over-Allotment Option may be exercised by
Maidstone, in whole or in part, within forty-five days after the Effective Date,
upon written notice by Maidstone to the Company advising it of the number of
Option Units as to which the Over-Allotment Option is being exercised, the names
and denominations in which the certificates for the Shares and the Warrants
comprising such Option Units are to be registered, and the time and date when
such certificates are to be delivered. Such time and date shall be determined by
you but shall not be less than two nor more than ten business days after
exercise of the Over-Allotment Option, nor in any event prior to the First
Closing Date (such time and date being herein called the "Option Closing Date").
Delivery of the Option Units against payment therefor shall take place at
Maidstone's offices. Time shall be of the essence and delivery at the time and
place specified in this Section 2(c)(ii) is a further condition to the
obligations of the Underwriter hereunder.
(iii) The Over-Allotment may be exercised only to cover
over-allotments in the sale by the Underwriter of Firm Units.
(d) Delivery of Certificates; Payment.
(i) The Company shall make the certificates for the
Shares and the Warrants comprising the Units to be purchased hereunder available
to you for checking at least two full business days prior to the First Closing
Date or the Option Closing Date (each, a "Closing Date"), as the case may be.
The certificates shall be in such names and denominations as you may request at
least two business days prior to the relevant Closing Date. Time shall be of the
essence and the availability of the certificates at the time and place specified
in this Section 2(d)(i) is a further condition to the obligations of the
Underwriter hereunder.
(ii) On the First Closing Date the Company shall
deliver to you for the account of the Underwriter definitive engraved
certificates in negotiable form representing all of the Shares and the Warrants
comprising the Firm Units to be sold by the Company, against payment of the
Purchase Price therefor by you for the several account of the Underwriter, by
certified or bank cashier's checks payable in New York Clearing House funds to
the order of the Company.
(iii) In addition, if and to the extent that Maidstone
exercises the Over-Allotment Option, then on the Option Closing Date the
Company shall deliver to you for the account of Maidstone or its designees
definitive engraved certificates in negotiable form representing the Shares and
the Warrants comprising the Option Units to be sold by the Company, against
payment of the Purchase Price therefor by Maidstone for the account of Maidstone
or its designees, by certified or bank cashier's checks payable in next day
funds to the order of the Company.
(iv) It is understood that the Underwriter proposes to
offer the Units to be purchased hereunder to the public, upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement becomes effective.
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3. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Underwriter that:
(a) Registration.
(i) The Company shall use its best efforts to cause the
Registration Statement to become effective and, upon notification from the
Commission that the Registration Statement has become effective, shall so advise
you and shall not at any time, whether before or after the Effective Date, file
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus of which you shall not previously have been advised and furnished
with a copy, or to which you or Underwriter's Counsel shall have objected in
writing, or which is not in compliance with the Act and the Rules and
Regulations.
(ii) Promptly after you or the Company shall have been
advised thereof, you shall advise the Company or the Company shall advise you,
as the case may be, and confirm such advice in writing, of (A) the receipt of
any comments of the Commission, (B) the effectiveness of any post-effective
amendment to the Registration Statement, (C) the filing of any supplement to the
Prospectus or any amended Prospectus, (D) any request made by the Commission for
amendment of the Registration Statement or amendment or supplementing of the
Prospectus, or for additional information with respect thereto, or (E) the
issuance by the Commission or any state or regulatory body of any stop order or
other order denying or suspending the effectiveness of the Registration
Statement, or preventing or suspending the use of any Preliminary Prospectus, or
suspending the qualification of the Securities for offering in any jurisdiction,
or otherwise preventing or impairing the Offering, or the institution or threat
of any proceeding for any of such purposes. The Company and you shall not
acquiesce in such order or proceeding, and shall instead actively defend such
order or proceeding, unless the Company and you agree in writing to such
acquiescence.
(iii) The Company has caused to be delivered to you
copies of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriter and selected dealers to use the Prospectus in
connection with the sale of the Units for such period as in the opinion of
Underwriter's Counsel the use thereof is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer, of any event of
which the Company has knowledge and which materially affects the Company or the
Securities, or which in the opinion of Company Counsel or of Underwriter's
Counsel should be set forth in an amendment to the Registration Statement or an
amendment or supplement to the Prospectus in order to make the statement made
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is required to be delivered to a purchaser of the Units, or in
case it shall be necessary to amend or supplement the
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Prospectus to comply with the Act or the Rules and Regulations, the Company
shall notify you promptly and forthwith prepare and furnish to the Underwriter
copies of such amended Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request, in order that the
Prospectus, as so amended or supplemented, shall not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of each such amendment to the Registration Statement, amended
Prospectus or supplement to be attached to the Prospectus shall be without
expense to the Underwriter, except that in the case that the Underwriter is
required, in connection with the sale of the Units, to deliver a prospectus nine
months or more after the Effective Date, the Company shall upon your request and
at the expense of the Underwriter, amend the Registration Statement and amend or
supplement the Prospectus, or file a new registration statement, if necessary,
and furnish the Underwriter with reasonable quantities of prospectuses complying
with section 10(a)(3) of the Act.
(iv) The Company will deliver to you at or before the
First Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto. The Company will deliver to or upon your order, from time to time until
the Effective Date as many copies of any Preliminary Prospectus filed with the
Commission prior to the Effective Date as the Underwriter may reasonably
request. The Company will deliver to you on the Effective Date and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriter may from time to time reasonably
request.
(v) The Company shall comply with the Act, the Rules
and Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations promulgated thereunder in connection with the
offering and issuance of the Securities in all material respects.
(b) Blue Sky. The Company shall, at its own expense, use
its best efforts to qualify or register the Securities for sale (or obtain an
exemption from registration) under the securities or "blue sky" laws of such
jurisdictions as you may designate, and shall make such applications and furnish
such information to Underwriter's Counsel as may be required for that purpose,
and shall comply with such laws; provided, however, that the Company shall not
be required to qualify as a foreign corporation or a dealer in securities or to
execute a general consent to service of process in any jurisdiction in any
action other than one arising out of the offering or sale of the Units. The
Company shall bear all of the expense of such qualifications and registrations,
including without limitation the legal fees and disbursements of Underwriter's
Counsel, which fees, exclusive of disbursements, shall not exceed $35,000
(unless otherwise agreed). After each Closing Date the Company shall, at its own
expense, from time to time prepare and file such statements and reports as may
be required to continue each such qualification (or maintain such exemption from
registration) in effect for so long a period as required by law, regulation or
administrative policy in connection with the offering of the Securities.
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(c) Exchange Act Registration. The Company shall at its own
expense, prepare and file with the Commission a registration statement (on Form
8-A or Form 10) under section 12 of the Exchange Act, and shall use its best
efforts to cause such registration statement to be declared effective by the
Commission on an accelerated basis on the Effective Date and maintained in
effect for at least five years from the Effective Date.
(d) Prospectus Copies. The Company shall deliver to you on
or before the First Closing Date a copy of the Registration Statement including
all financial statements, schedules and exhibits filed therewith, and of all
amendments thereto. The Company shall deliver to or on the order of the
Underwriter, from time to time until the Effective Date, as many copies of any
Preliminary Prospectus filed with the Commission prior to the Effective Date as
the Underwriter may reasonably request. The Company shall deliver to the
Underwriter on the Effective Date, and thereafter for so long as a prospectus is
required to be delivered under the Act, from time to time, as many copies of the
Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriter may from time to time reasonably request.
(e) Amendments and Supplements. The Company shall, promptly
upon your request, prepare and file with the Commission any amendments to the
Registration Statement, and any amendments or supplements to the Preliminary
Prospectus or the Prospectus, and take any other action which in the reasonable
opinion of Underwriter's Counsel and Company Counsel may be reasonably necessary
or advisable in connection with the distribution of the Units, and shall use its
best efforts to cause the same to become effective as promptly as possible.
(f) Certain Market Practices. The Company has not taken,
and shall not take, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result in, or which has constituted, the
stabilization or manipulation of the price of the Securities to facilitate the
sale or resale thereof.
(g) Certain Representations. Neither the Company nor any
representative of the Company has made or shall make any written or oral
representation in connection with the Offering and sale of the Securities or the
Underwriter's Unit Purchase Option which is not contained in the Prospectus,
which is otherwise inconsistent with or in contravention of anything contained
in the Prospectus, or which shall constitute a violation of the Act, the Rules
and Regulations, the Exchange Act or the rules and regulations promulgated under
the Exchange Act.
(h) Continuing Registration of Warrants and Underlying
Common Stock. For so long as any Warrant is outstanding, the Company shall, at
its own expense: (i) use its reasonable best efforts to cause post-effective
amendments to the Registration Statement, or new registration statements
relating to the Warrants and the Common Stock underlying the Warrants to become
effective in compliance with the Act and without any lapse of time between
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the effectiveness of the Registration Statement and of any such post-effective
amendment or new registration statement; provided, however, that the Company
shall have no obligation to maintain the effectiveness of such Registration
Statement or file a new Registration Statement, or to keep available a
prospectus at any time at which such registration or prospectus is not then
required; (ii) cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Warrant; (iii) furnish to the Underwriter and
dealers as many copies of each such Prospectus as the Underwriter or dealers may
reasonably request; and (iv) maintain the "blue sky" qualification or
registration of the Warrants and the Common Stock underlying the Warrants, or
have a currently available exemption therefrom, in each jurisdiction in which
the Securities were so qualified or registered for purposes of the Offering.
(i) Use of Proceeds. The Company shall apply the net
proceeds from the sale of the Units substantially for the purposes set forth in
the Prospectus under the caption "USE OF PROCEEDS," and shall file such reports
with the Commission with respect to the sale of the Units and the application of
the proceeds therefrom as may be required pursuant to Rule 463 of the Rules and
Regulations.
(j) Twelve Months' Earnings Statement. The Company shall
make generally available to its security holders and deliver to you as soon as
it is practicable so to do, but in no event later than ninety days after the end
of twelve months after the close of its current fiscal quarter, an earnings
statement (which need not be audited) covering a period of at least twelve
consecutive months beginning after the Effective Date, which shall satisfy the
requirements of section 11(a) of the Act.
(k) NASDAQ Exchange Listings, Etc. The Company shall
immediately make all filings required to seek approval for the quotation of the
Securities on the NASDAQ SmallCap Market ("NASDAQ") and shall use its best
efforts to effect and maintain such approval for at least five years from the
Effective Date. Within 10 days after the Effective Date, the Company shall also
use its best efforts to list itself, on an expedited basis, in Moody's OTC
Industrial Manual, Standard and Poor's Corporation Descriptions or other
recognized securities manuals acceptable to the Underwriter and to cause such
listing to be maintained for five years from the Effective Date.
(l) Board of Directors. For a period of three (3) years
after the Fist Closing Date, the Company shall nominate and use its best efforts
to engage a designee of Maidstone as a nonvoting advisor to the Company's Board
of Directors (the "Advisor") or, in lieu thereof, to designate an individual for
election as a director, in which case the Company shall use its best efforts to
have such individual elected as a director. The designee may be a director,
officer, partner, employee or affiliate of an Underwriter, and Maidstone shall
designate such person in writing to the Board. In the event Maidstone shall not
have designated such individual at the time of any meeting of the Board or such
person is unavailable to serve, the Company shall notify Maidstone of each
meeting of the Board. An individual, if any, designated by Maidstone shall
receive all notices and other correspondence and communications sent by the
Company to
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members of the Board. Such Advisor shall be entitled to receive reimbursement
for all reasonable costs incurred in attending such meetings including, but not
limited to, food, lodging, and transportation. In addition, such Advisor shall
be entitled to the same compensation as the Company gives to other non-employee
directors for acting in such capacity. The Company further agrees that, during
said three (3) year period, it shall schedule no less than four (4) formal and
"in person" meetings of its Board of Directors in each such year at which
meetings such Advisor shall be permitted to attend as set forth herein; said
meetings shall be held quarterly each year and thirty (30) days advance notice
of such meetings shall be given to the Advisor. Further, during such three (3)
year period, the Company shall give notice to Maidstone with respect to any
proposed acquisitions, mergers, reorganizations or other similar transactions.
The Company agrees to indemnify and hold harmless the
Underwriter and the Advisor against any and all claims, actions, damages, costs
and expenses, and judgments arising solely out of the attendance and
participation of the Advisor at any such meeting described herein. In the event
the Company maintains a liability insurance policy affording coverage for the
acts of its officers and directors, it agrees, if possible, to include the
Advisor as an insured under such policy.
(m) Periodic Reports. For so long as the Company is a
reporting company under section 12(g) or section 15(d) of the Exchange Act, the
Company shall, at its own expense, hold an annual meeting of stockholders for
the election of directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years, and furnish to its stockholders an annual report (including financial
statements audited by certified public accountants) in reasonable detail. In
addition, during the period ending five years from the date hereof, the Company
shall, at its own expense, furnish to you: (i) within 90 days of the end of each
fiscal year, a balance sheet of the Company and the Subsidiary as at the end of
such fiscal year, together with statements of income, stockholders' equity and
cash flows of the Company and the Subsidiary as at the end of such fiscal year,
all in reasonable detail and accompanied by a copy of the certificate or report
thereon of certified public accountants; (ii) as soon as they are available, a
copy of all reports (financial or otherwise) distributed to security holders;
(iii) as soon as they are available, a copy of all non-confidential reports and
financial statements furnished to or filed with the Commission; and (iv) such
other information as you may from time to time reasonably request. The financial
statements referred to herein shall be on a consolidated basis to the extent the
accounts of the Company and the Subsidiary are consolidated in reports furnished
to its stockholders generally.
(n) Form S-8 Registrations. For a period of two years
following the First Closing Date, the Company shall not, without Maidstone's
prior written consent, register or otherwise facilitate the registration of any
of its securities issuable upon the exercise of options, warrants (other than up
to 450,000 options issued pursuant to the Company's Stock Option Plan, the
Warrants and the Underwriter's Unit Purchase Options) or other rights, whether
by means of a Registration Statement on Form S-8 or otherwise.
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(o) Future Sales. For a period of two years following the
First Closing Date, the Company shall not, without Maidstone's prior written
consent, sell or otherwise dispose of any securities of the Company, including
but not limited to the issuance of any Common Stock, and the granting of any
options or warrants. Notwithstanding the foregoing, the Company may at any time
issue shares of Common Stock pursuant to the exercise of the Warrants, the
Underwriter's Unit Purchase Option, the Warrants underlying the Underwriter's
Unit Purchase Option, and options, warrants or conversion rights issued and
outstanding on the Effective Date and described in the Prospectus.
(p) Regulation S Sales. For a period of two years following
the First Closing Date, the Company shall not issue or sell any securities
pursuant to Regulation S of the Rules and Regulations under the Act, without
Maidstone's prior written consent.
(q) Agreements with Stockholders, Directors and Officers.
The Company shall cause each of the Company's existing stockholders, directors
and officers to enter into written agreements with Maidstone (the "Lock-up
Agreements") prior to the Effective Date, that, for a period of twenty-four
months from the Effective Date, they will not, without the consent of Maidstone,
(i) publicly sell any securities of the Company owned directly or indirectly by
them or owned beneficially by them (as defined in the Exchange Act), or (ii)
otherwise sell, or transfer such securities unless the transferee agrees in
writing to be bound by an identical lock-up.
(r) Warrant Solicitation. Upon the exercise of any Warrants
on or after the first anniversary of the Effective Date, the Company shall pay
to Maidstone a commission of five (5%) percent of the aggregate exercise price
of such Warrants, a portion of which may be reallowed by Maidstone to the dealer
who solicited the exercise (which may also be you), if: (i) the market price of
the Common Stock is greater than the exercise price of the Warrant on the date
of exercise; (ii) the exercise of the Warrant was solicited by a member of the
NASD; (iii) the Warrant is not held in a discretionary account; (iv) the
disclosure of the compensation arrangements has been made in documents provided
to customers, both as part of the Offering and at the time of exercise; and (v)
the solicitation of the Warrant was not in violation of Regulation M promulgated
under the Exchange Act. No commission shall be paid to you on any Warrant
exercise prior to the first anniversary of the Effective Date, or on any Warrant
exercised at any time without solicitation by Maidstone or a soliciting dealer.
(s) Available Shares. The Company shall reserve and at all
times keep available that maximum number of it authorized but unissued shares of
Common Stock which are issuable upon exercise of options pursuant to the
Company's Stock Option Plan, the Warrants, the Underwriter's Unit Purchase
Option, and the Warrants issuable upon exercise of the Underwriter's Unit
Purchase Option, in each case taking into account the anti-dilution provisions
thereof.
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(t) Financial Consulting Agreement. On the First Closing
Date and simultaneously with the delivery of the Firm Units, the Company shall
execute and deliver to Maidstone an agreement with Maidstone, or its
representative, in the form previously delivered to the Company by Maidstone,
regarding the services of Maidstone or its representative a financial consultant
to the Company (the "Financial Consulting Agreement"), for a twenty-four month
period commencing as of the date hereof at a fee equal to $4,166 per month which
shall be paid in its entirety on the First Closing Date.
(u) Management. On each Closing Date, the Chief Executive
Officer of the Company shall be Michael C. Koffler. Prior to the Effective Date,
the Company shall have obtained "key-employee" life insurance coverage in the
amount of $1,000,000 on Mr. Koffler. Prior to the Effective Date, the Company
shall have entered into an employment agreement with Mr. Koffler as set forth in
the Registration Statement.
(v) Stock Transfer Sheets. The Company shall instruct its
Transfer Agent (as defined in Section 4(h) hereto) to deliver to you copies of
all advice sheets showing the daily transfer of the outstanding shares of Common
Stock and Warrants sold by the Company in the public offering and shall, at its
own expense, furnish you weekly for the first six weeks following the First
Closing Date and monthly thereafter during the period ending three years
following the First Closing Date with Depository Trust Company stock transfer
sheets.
(w) Public Relations. Prior to the Effective Date the
Company shall have retained a public relations firm reasonably acceptable to
you, and shall continue to retain such firm, or an alternate firm reasonably
acceptable to Maidstone, for a period of twelve (12) months.
(x) Additional Representations. The Company shall engage
the Underwriter's Counsel to provide the Underwriter, at the First Closing Date
and quarterly thereafter, until such time as the Common Stock is listed on the
New York Stock Exchange or the American Stock Exchange or quoted on NASDAQ
National Market System, with an opinion, setting forth those states in which the
Common Stock may be traded in non-issuer transactions under the blue sky laws of
the fifty states. The Company shall pay the Underwriter's Counsel a one-time fee
of $12,500 at the First Closing Date for such opinions.
(aa) Bound Volumes. Within a reasonable time after the
First Closing Date, the Company shall deliver to you, at the Company's expense,
five bound volumes in form and content acceptable to Maidstone, containing the
Registration Statement and all exhibits filed therewith and all amendments
thereto, and all other agreements, correspondence, filings, certificates and
other documents filed and/or delivered in connection with the Offering.
4. CONDITIONS TO UNDERWRITER'S OBLIGATIONS. The obligations of
the Underwriter to purchase and pay for the Units which you have agreed to
purchase hereunder are subject to the accuracy (as of the date hereof and as of
each Closing Date) of and compliance with the representations and warranties of
the Company contained herein, the performance by the Company of all of their
respective obligations hereunder and the following further conditions:
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(a) Effective Registration Statement; No Stop Order. The
Registration Statement shall have become effective and you shall have received
notice thereof not later than 6:00 p.m., New York time, on the date of this
Agreement, or at such later time or on such later date as to which you may agree
in writing. In addition, on each Closing Date (i) no stop order denying or
suspending the effectiveness of the Registration Statement shall be in effect,
and no proceedings for that or any similar purpose shall have been instituted or
shall be pending or, to your knowledge or to the knowledge of the Company, shall
be contemplated by the Commission, and (ii) all requests on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Underwriter's Counsel.
(b) Opinion of Company Counsel. On the First Closing Date,
you shall have received the opinion, dated as of the First Closing Date, of
Company Counsel, in form and substance satisfactory to the Underwriter's
Counsel, to the effect that:
(i) the Company and the Subsidiary have been duly
incorporated and validly exist as corporations in good standing under
the laws of their respective jurisdictions of incorporation, with full
corporate power and authority to own their properties and conduct their
business as described in the Prospectus, and are duly qualified or
licensed to do business as foreign corporations and are in good
standing in each other jurisdiction in which the nature of their
business or the character or location of their properties requires such
qualification, except where failure to so qualify will not have a
material adverse affect on the business, properties or financial
condition of the Company or the Subsidiary, as the case may be;
(ii) (A) the authorized capitalization of the Company
as of the date of the Prospectus was as is set forth in the Prospectus
under the caption "CAPITALIZATION;" (B) all of the shares of Common
Stock now outstanding have been duly authorized and validly issued, are
fully paid and non-assessable, conform in all material respects to the
description thereof contained in the Prospectus, have not been issued
in violation of the preemptive rights of any stockholder and, except as
described in the Prospectus, are not subject to any restrictions upon
the voting or transfer thereof; (C) all of the Shares and all of the
Warrants comprising the Units have been duly authorized and, when
issued and delivered to the Underwriter against payment therefor as
provided herein, shall be validly issued, fully paid and
non-assessable, shall not have been issued in violation of the
preemptive rights of any stockholder, and no personal liability shall
attach to the ownership thereof; (D) the stockholders of the Company do
not have any preemptive rights or other rights to subscribe for or
purchase, and except for the transfer restrictions imposed by Rule 144
of the Rules and Regulations
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promulgated under the Act or contained in the Lock-up Agreements
executed with the Underwriter, there are no restrictions upon the
voting or transfer of, any of the Securities; (E) the Shares and the
Warrants comprising the Units, the Warrant Agreement and the
Underwriter's Unit Purchase Option conform in all material respects to
the respective descriptions thereof contained in the Prospectus; (F)
all issuances of the Company's securities have been made in compliance
with, or under an exemption from, the Act and applicable state
securities laws; (G) a sufficient number of shares of Common Stock has
been reserved, for all times when any of the Warrants (including the
Warrants issuable upon exercise of the Underwriter's Unit Purchase
Option) are outstanding, for issuance upon exercise of all of the
Warrants; and (H) to the knowledge of such counsel, neither the filing
of the Registration Statement nor the offering or sale of the Units as
contemplated by this Agreement gives rise to any registration rights or
other rights, other than those which have been effectively waived or
satisfied or described in the Prospectus, for or relating to the
registration of any securities of the Company;
(iii) the certificates evidencing the Shares and the
Warrants comprising the Units are each in valid and proper legal form;
and the Warrants are exercisable for shares of Common Stock in
accordance with the terms of the Warrants and at the prices therein
provided for;
(iv) this Agreement, the Warrant Agreement, the
Underwriter's Unit Purchase Option, and the Financial Consulting
Agreement have been duly and validly authorized, executed and delivered
by the Company and (assuming due execution and delivery thereof by the
Underwriter and/or Continental Stock Transfer & Trust Company, as the
case may be) all of such agreements are, or when duly executed shall
be, the valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms (except as
enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally); provided, however, that
no opinion need to be expressed as to the enforceability of the
indemnity provisions contained in Section 6 or the contribution
provisions contained in Section 7;
(v) to the knowledge of such counsel, other than as
described in the Prospectus (A) there is no pending, threatened or
contemplated legal or governmental proceeding affecting the Company or
the Subsidiary which could materially and adversely affect the
business, property, operations, condition (financial or otherwise) or
earnings of the Company or the Subsidiary, or which questions the
validity of the Offering, the Securities, this Agreement, the Warrant
Agreement, the Underwriter's Unit Purchase Option, or the Financial
Consulting Agreement or of any action taken or to be taken by the
Company pursuant thereto; and (B) there is no legal or governmental
regulatory proceeding required to be described or referred to in the
Registration Statement which is not so described or referred to;
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(vi) to the knowledge of such counsel, (A) the Company
is not in violation of or default under this Agreement, the Warrant
Agreement, the Underwriter's Unit Purchase Option, or the Financial
Consulting Agreement; and (B) to the knowledge of such counsel, the
execution and delivery hereof and thereof and consummation of the
transactions herein or therein contemplated shall not result in a
material violation of, or constitute a default under, the Certificate
of Incorporation or By-laws of the Company or the certificate of
incorporation or by-laws of the Subsidiary, or any material obligation,
agreement, covenant of condition contained in any bond, debenture, note
or other evidence of indebtedness, or in any material contract,
indenture, mortgage, loan agreement, lease, joint venture or other
agreement or instrument to which the Company or the Subsidiary is a
party or by which the assets of the Company or the Subsidiary are
bound, or any material order, rule, regulation, writ, injunction or
decree of any government, governmental instrumentality or court
applicable to the Company or the Subsidiary;
(vii) to the knowledge of such counsel, (a) the Company
and the Subsidiary have obtained, or are in the process of obtaining,
all licenses, permits and other governmental authorizations necessary
to the conduct of its business as described in the Prospectus, (b) such
obtained licenses, permits and other governmental authorizations are in
full force and effect, and (c) the Company and the Subsidiary are in
all material respects complying therewith;
(viii) the Registration Statement has become effective
under the Act, and to the knowledge of such counsel, no stop order
denying or suspending the effectiveness of the Registration Statement
is in effect, and no proceedings for that or any similar purpose have
been instituted or are pending before or threatened by the Commission;
(ix) the Registration Statement and the Prospectus
(except for the financial statements, notes thereto and other financial
information and statistical data contained therein, as to which counsel
need not express an opinion) comply as to form in all material respects
with the Act and the Rules and Regulations;
(x) all descriptions contained in the Registration
Statement and the Prospectus, and any amendments or supplements
thereto, of contracts and other documents are accurate and fairly
present the information required to be described, and such counsel is
familiar with all contracts and other documents referred to in the
Registration Statement and the Prospectus, and any such amendment or
supplement, or filed as exhibits to the Registration Statement and, to
the knowledge of such counsel, no contract, document, license or permit
of a character required to be summarized or described therein or to be
filed as an exhibit thereto is not so summarized, described or filed.
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(xi) the statements in the Registration Statement and
the Prospectus under the captions "Risk Factors," "Use of Proceeds,"
"Business," "Management," and "Description of Securities," which
purport to summarize the provisions of agreements, licenses, statutes
or rules and regulations, have been reviewed by such counsel and are
accurate summaries in all material respects;
(xii) except for registration under the Act and
registration or qualification of the Securities under applicable state
or foreign securities or blue sky laws, no authorization, approval,
consent or license of any governmental or regulatory authority or
agency is necessary in connection with: (A) the authorization,
issuance, sale, transfer or delivery of the Securities by the Company
in accordance with this Agreement; (B) the execution, delivery and
performance of this Agreement by the Company or the taking of any
action contemplated herein; (C) the issuance of the Underwriter's Unit
Purchase Option in accordance with this Agreement or the Securities
issuable upon exercise thereof; or the taking of any action
contemplated herein.
Such opinion shall also state that Company Counsel's examination of the
Registration Statement and its discussions with the Company and its independent
auditors did not disclose any information which gives Company Counsel reason to
believe that the Registration Statement (other than the financial statements and
other financial and statistical information as to which counsel need not express
an opinion) at the time it became effective contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus (other than the schedules, financial statements and other financial
and statistical information as to which no view is expressed) at the time it
became effective contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (other than the
financial statements and other financial and statistical information as to which
counsel need not express an opinion) contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. In addition, such opinion shall also cover such matters incident to
the transactions contemplated hereby as you or Underwriter's Counsel shall
reasonably request. In rendering such opinion, Company Counsel may rely as to
matters of fact upon certificates of officers of the Company, and of public
officials, and may rely as to all matters of law other than the law of the
United States or the State of New York and the General Corporation Law of the
State of Delaware upon opinions of counsel satisfactory to you, in which case
the opinion shall state that they have no reason to believe that you and they
are not entitled so to rely.
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(c) Corporate Proceedings. All corporate proceedings
and other legal matters relating to this Agreement, the Registration Statement,
the Prospectus and other related matters shall be reasonably satisfactory to or
approved by Underwriter's Counsel.
(d) Comfort Letter. Prior to the Effective Date, and
again on and as of the First Closing Date, you shall have received a letter from
BDO Seidman LP, certified public accountants for the Company, satisfactory in
form and substance to the Underwriter's Counsel.
(e) Bring Down. At each of the Closing Dates, (i) the
representations and warranties of the Company contained in this Agreement shall
be true and correct with the same effect as if made on and as of such Closing
Date, and the Company shall have performed all of its obligations hereunder and
satisfied all the conditions to be satisfied at or prior to such Closing Date;
(ii) the Registration Statement and the Prospectus shall contain all statements
which are required to be stated therein in accordance with the Act and the Rules
and Regulations, and shall in all material respects conform to the requirements
of the Act and the Rules and Regulations, and neither the Registration Statement
nor the Prospectus shall contain any untrue statement of a material fact or omit
to state any material fact required to be stated or which they were made, not
misleading; (iii) there shall have been, since the respective dates as of which
information is given, no material adverse change in the business, property,
operations, condition (financial or otherwise), earnings, capital stock,
long-term or short-term debt or general affairs of the Company from that set
forth in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the Effective
Date, and the Company shall not have incurred any material liabilities nor
entered into any material agreement other than as referred to in the
Registration Statement and Prospectus; and (iv) except as set forth in the
Prospectus, no action, suit or proceeding shall be pending or threatened against
the Company before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or finding
would materially adversely affect the business, property, operations, condition
(financial or otherwise), earnings or general affairs of the Company. In
addition, you shall have received, at the First Closing Date, a certificate
signed by the principal executive officer and by the principal financial officer
of the Company, dated as of the First Closing Date, evidencing compliance with
the provisions of this Section 4(g).
(f) Transfer and Warrant Agent. On or before the
Effective Date, the Company shall have appointed Continental Stock Transfer &
Trust Company (or other agent mutually acceptable to the Company and Maidstone),
as its transfer agent and warrant agent ("Transfer Agent") to transfer all of
the Shares and Warrants issued in the Offering, as well as to transfer other
shares of the Common Stock outstanding from time to time.
(g) NASD Approval Of Underwriter's Compensation. By the
Effective Date, the Underwriter shall have received clearance from the NASD as
to the amount of compensation allowable or payable to the Underwriter, as
described in the Registration Statement.
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(h) Certain Further Matters. On each Closing Date,
Underwriter's Counsel shall have been furnished with all such other documents
and certificates as they may reasonably request for the purpose of enabling them
to render their legal opinion to the Underwriter and in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants, or the fulfillment of any
of the conditions, herein contained.
(i) All proceedings taken in connection with the
authorization, issuance or sale of the Securities, as herein contemplated shall
be reasonably satisfactory in form and substance to the Underwriter and to
Underwriter's Counsel;
(ii) On each Closing Date there shall have been
duly tendered to you for your account the appropriate number of Securities;
(iii) No order suspending the sale of the
Securities in any jurisdiction designated by you pursuant to Section 3(b) hereof
shall have been issued on either Closing Date, and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Underwriter or
the Company, shall be contemplated;
(iv) Prior to each Closing Date there shall not
have been received or provided by the Company's independent public accountants
or attorneys, qualifications to the effect of either difficulties in furnishing
certifications as to material items including, without limitation, information
contained within the footnotes to the financial statements, or as affecting
matters incident to the issuance and sale of the Securities or as to corporate
proceedings or other matters;
(v) On or prior to the First Closing Date, the
Underwriter's Unit Purchase Option, the Warrant Agreement and the Financial
Consulting Agreement shall have been executed and delivered by the Company, and
the Lock-Up Agreements shall have been executed and delivered by all of the
Company's officers, directors and existing stockholders, to the Underwriter.
(i) Additional Conditions. Upon exercise of the
Over-Allotment Option, Maidstone's obligations to purchase and pay for the
Option Units shall be subject (as of the date hereof and as of the Option
Closing Date) to the following conditions:
(i) The Registration Statement shall remain
effective at the Option Closing Date, no stop order denying or suspending the
effectiveness thereof shall have been issued, and no proceedings for that or any
similar purpose shall have been instituted or shall be pending or, to your
knowledge or the knowledge of the Company, shall be contemplated by the
Commission, and all reasonable requests on the part of the Commission for
additional information shall have been complied with to the satisfaction of
Underwriter's Counsel.
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(ii) On the Option Closing Date there shall have
been delivered to you the signed opinion of Company Counsel, dated as of the
Option Closing Date, in form and substance satisfactory to Underwriter's
Counsel, which opinion shall be substantially the same in scope and substance as
the opinion furnished to you on the First Closing Date pursuant to Section 4(b),
except that such opinion, where appropriate, shall cover the Option Units rather
than the Firm Units. If the First Closing Date is the same as the Option Closing
Date, such opinions may be combined.
(iii) All proceedings taken at or prior to the
Option Closing Date in connection with the sale and issuance of the Option Units
shall be satisfactory in form and substance to you, and you and Underwriter's
Counsel shall have been furnished with all such documents, certificates and
opinions as you may reasonably request in connection with this transaction in
order to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company or its compliance with any of the
covenants or conditions contained herein.
(iv) On the Option Closing Date there shall have
been delivered you a letter in form and substance satisfactory to Maidstone from
BDO Seidman LP, dated the Option Closing Date addressed to you, confirming the
information in their letter referred to in Section 4(f) as of the date thereof
and stating that, without any additional investigation required, nothing has
come to their attention during the period from the ending date of their review
referred to in such letter to a date not more than five banking days prior to
the Option Closing Date which would require any change in such letter if it were
required to be dated the Option Closing Date.
Any certificate signed by any officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein. If any of the conditions herein provided for in this
Section shall not have been completely fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriter under this Agreement may be
canceled at, or at any time prior to, each Closing Date by your notifying the
Company of such cancellation in writing or by telecopy at or prior to the
applicable Closing Date. Any such cancellation shall be without liability of any
Underwriter to the Company, except as otherwise provided herein.
5. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to sell and deliver the Units are subject to the
following conditions:
(a) Effective Registration Statement. The Registration
Statement shall have become effective not later than 6:00 p.m. New York Time, on
the date of this Agreement, or at such later time or on such later date as the
Company and you may agree in writing.
(b) No Stop Order. On the applicable Closing Date, no stop
order denying or suspending the effectiveness of the Registration Statement
shall have been issued under the Act or any proceedings therefor initiated or
threatened by the Commission.
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(c) Payment for Units. On the applicable Closing Date, you
shall have made payment, for the several accounts of the Underwriter, of the
aggregate Purchase Price for the Units then being purchased by certified or bank
cashier's checks payable in next day funds to the order of the Company.
If the conditions to the obligations of the Company provided by this Section 5
have been fulfilled on the First Closing Date but are not fulfilled after the
First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Units upon exercise of
the Over-Allotment Option shall be affected.
6. INDEMNIFICATION.
(a) Indemnification by the Company. As used in this
Agreement, the term "Liabilities" shall mean any and all losses, claims, damages
and liabilities, and actions and proceedings in respect thereof (including
without limitation all reasonable costs of defense and investigation and all
attorneys' fees) including without limitation those asserted by any party to
this Agreement against any other party to this Agreement. The Company hereby
indemnifies and holds harmless the Underwriter and each person, if any, who
controls the Underwriter within the meaning of the Act, from and against all
Liabilities, joint or several, to which the Underwriter or such controlling
person may become subject, under the Act or otherwise, insofar as such
Liabilities arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of any material fact, in light of the circumstances in which it
was made, contained in (A) the Registration Statement or any amendment thereto,
or the Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or (B) any "blue sky" application or other document executed by the
Company specifically for that purpose, or based upon written information
furnished by the Company, filed in any state or other jurisdiction in order to
qualify any or all of the Securities under the securities laws thereof (any such
application, document or information being herein called a "Blue Sky
Application"); or (ii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, or in any Blue
Sky Application, a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which it was made,
not misleading; provided, however, that the Company shall not be liable in any
such case to the extent, but only to the extent, that any such Liabilities arise
out of or are based upon an untrue statement or alleged untrue statement or
omission or alleged omission (x) made in reliance upon and in conformity with
written information furnished to the Company through you by or on behalf of the
Underwriter specifically for use in the preparation of the Registration
Statement or any such amendment thereto, or the Prospectus or any such
Preliminary Prospectus, or any such amendment or supplement thereto, or any such
Blue Sky Application or (y) corrected by the final Prospectus and the failure of
the Underwriter to deliver the final Prospectus. The foregoing indemnity shall
be in addition to any other liability which the Company may otherwise have.
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(b) Indemnification by Underwriter. The Underwriter hereby
indemnifies and holds harmless the Company, each of its directors, each nominee
(if any) for director named in the Prospectus, each of its officers who have
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, from and against all Liabilities to which
the Company or any such director, nominee, officer or controlling person may
become subject under the Act or otherwise, insofar as such Liabilities arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
or the Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or (ii) the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
any such Liabilities arise out of or are based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or any amendment thereto, or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto, in reliance upon
and in conformity with written information furnished to the Company through you,
by or on behalf of such Underwriter, specifically for use in the preparation
thereof. In no event shall the Underwriter be liable under this Section 6(b) for
any amount in excess of the compensation received by the Underwriter, in the
form of underwriting discounts or otherwise, pursuant to this Agreement or any
other agreement contemplated hereby. The foregoing indemnity shall be in
addition to any other liability which the Underwriter may otherwise have.
(c) Procedure. Promptly after receipt by an indemnified
party under this Section 6 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify in writing the indemnifying
party of the commencement thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 6 unless the rights of
the indemnifying party have been prejudiced by such omission or delay. In case
any such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions hereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided,
however, that the fees and expenses of such counsel shall be at the expense of
the indemnifying party if (i) the employment of such counsel has been
specifically
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authorized in writing by the indemnifying party, or (ii) the named parties to
any such action (including any impleaded parties) include both such indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it which are different
from or in addition to those available to the indemnifying party or that the
indemnified and indemnifying party have conflicting interests which would make
it inappropriate for the same counsel to represent both of them (in which case
the indemnifying party shall into have the right to assume the defense of such
action on behalf of the indemnified party, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnified party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnified party.
7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (a) any indemnified party makes
claims for indemnification pursuant to Section 6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (b) contribution under the Act may be required on the part of any
indemnified party, then such indemnified party and each indemnifying party (if
more than one) shall contribute to the aggregate Liabilities to which it may be
subject, in either such case (after contribution from others) in such proportion
that the Underwriter is responsible in the aggregate for the portion of such
Liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public Offering
price per Unit appearing thereon, and the Company shall be responsible for the
remaining portion; provided, however, that if such allocation is not permitted
by applicable law, then the relative fault of the Company, and the Underwriter
in connection with the statements or omissions which resulted in such
Liabilities and other relevant equitable considerations shall also be
considered. The relative fault shall be determined by reference to, among other
things, whether in the case of an untrue statement of material fact or the
omission to state a material fact, such statement or omission relates to
information supplied by the Company, or the Underwriter, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriter agree
that it would not be just and equitable if the respective obligations of the
Company, and the Underwriter to contribute pursuant to this Section 7 were to be
determined by pro rata or per capita allocation of the aggregate Liabilities or
by any other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 7. Moreover,
the contribution of the Underwriter shall not be in excess of the cash
compensation received by the Underwriter, in the form of underwriting discounts
or otherwise, pursuant to this agreement or any other agreement contemplated
hereby. No person guilty of a fraudulent misrepresentation (within the meaning
of section 11(f) of the Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent
27
<PAGE>
misrepresentation. As used in this Section 7, the term "Company" shall include
any officer, director or person who controls the Company within the meaning of
section 15 of the Act. If the full amount of the contribution specified in this
Section 7 is not permitted by law, then each indemnified party and each person
who controls an indemnified party shall be entitled to contribution from each
indemnifying party to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under section 11 of the Act other than the Company
and the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the settlement;
provided, however, that such consent shall not be unreasonably withheld in light
of all factors of importance to such party.
8. COSTS AND EXPENSES.
(a) Certain Costs and Expenses. Whether or not this
Agreement becomes effective or the sale of the Units to the Underwriter is
consummated, the Company shall pay all costs and expense incident to the
issuance, offering, sale and delivery of the Units and the performance of its
obligations under this Agreement, including without limitation: (i) all fees and
expenses of the Company's legal counsel and accountants; (ii) all costs and
expenses incident to the preparation, printing, filing and distribution of the
Registration Statement (including the financial statements contained therein and
all exhibits and amendments thereto), each Preliminary Prospectus and the
Prospectus, each as amended or supplemented, this Agreement and the other
underwriting documents, as well as the other agreements and documents referred
to herein and the Blue Sky Memorandum; each in such quantities as you shall deem
necessary; (iii) all fees of NASD required in connection with the filing
required by NASD to be made by the Underwriter with respect to the Offering;
(iv) all expenses, including fees (but not in excess of the amount set forth in
Section 3(b)) and disbursements of Underwriter's Counsel in connection with the
qualification of the Securities under the "blue sky" laws which you shall
designate; (v) all costs and expenses of printing the respective certificates
representing the Shares and the Warrants; (vi) the expense of placing one or
more "tombstone" advertisements or promotional materials as directed by you
(provided, however, that the aggregate amount thereof shall not exceed $10,000)
and of offering memorabilia; (vii) all costs and expenses of the Company and its
employees (but not of the Underwriter or its employees) associated with due
diligence meetings and presentations (including the payment for road show
conference centers); (viii) all costs and expenses associated with the
preparation of a seven to ten minute professional video presentation concerning
the Company, its products and its management for broker due diligence purposes;
(ix) any and all taxes (including without limitation any transfer, franchise,
capital stock or other tax imposed by any jurisdiction) on sales of the Units to
the Underwriter hereunder; and (x) all costs and expenses incident to the
furnishing of any amended Prospectus or any supplement to be attached to the
Prospectus as required by Sections 3(a) and 3(d), except as otherwise provided
by said Sections. In addition, the Company shall engage Underwriter's Counsel to
provide the Underwriter, at the Closing and quarterly thereafter, until such
time as the Common Stock is listed on the New York Stock Exchange or the
American Stock Exchange or quoted on NASDAQ/NMS, with a memorandum, setting
forth those states in which the Common Stock and the Warrants may be traded in
non-issuer transactions under the blue sky laws of the 50 states. The Company
shall pay such counsel a one-time fee of $12,500 at the Closing for such
opinions.
28
<PAGE>
(b) Underwriter's Expense Allowance. In addition to the
expenses described in Section 8(a), the Company shall on the First Closing Date
pay to Maidstone the balance of a non-accountable expense allowance, which shall
include fees of Underwriter's Counsel, exclusive of the fees referred to in
Section 3(b), of $163,800 (that being an amount equal to three percent (3%) of
the gross proceeds received upon sale of the Firm Units). In the event that the
Over-Allotment Option is exercised, then the Company shall, on the Option
Closing Date, pay to Maidstone, based on the number of Option Units to be sold
by the Company, an additional amount equal to three percent (3%) of the gross
proceeds received upon sale of any of the Option Units, in the amount of $24,570
if the Over-Allotment Option is exercised in full.
(c) No Finders. No person is entitled either directly or
indirectly to compensation from the Company, the Underwriter or any other person
for services as a finder in connection with the Offering, and the Company hereby
indemnifies and holds harmless the Underwriter, and the Underwriter hereby
indemnifies and hold harmless the Company from and against all Liabilities,
joint or several, to which the indemnified party may become subject insofar as
such Liabilities arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the Offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
9. EFFECTIVE DATE. The Agreement shall become effective upon
its execution, except that you may, at your option, delay its effectiveness
until 10:00 a.m., New York time, on the first full business day following the
Effective Date, or at such earlier time after the Effective Date as you in your
discretion shall first commence the initial public offering by the Underwriter
of any of the Units. The time of the initial public offering shall mean the time
of release by you of the first newspaper advertisement which is subsequently
published with respect to the Units, or the time when the Units are first
generally offered by you to dealers by letter or telegram, whichever shall first
occur. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that the provisions of Sections 3(x), 6, 7,
8, 12, 13, 14 and 15 shall remain in effect notwithstanding such termination.
10. TERMINATION.
(a) Grounds for Termination.
(i) This Agreement, except for Sections 3(x), 6, 7, 8,
12, 13, 14 and 15, may be terminated at any time prior to the First Closing
Date, and the Over-Allotment Option, if exercised, may be canceled at any time
prior to the Option Closing Date, by you if in your sole judgment it is
impracticable to offer for sale or to enforce contracts made by you for the
resale of the Units agreed to be purchased hereunder, by reason of: (A) the
Company having
29
<PAGE>
sustained a material loss, whether or not insured, by reason of fire,
earthquake, flood, accident or other calamity, or from any labor dispute or
court or government action, order or decree; (B) trading in securities on the
New York Stock Exchange or the American Stock Exchange having been suspended or
limited; (C) material governmental restrictions having been imposed on trading
in securities generally which are not in force and effect on the date hereof;
(D) a banking moratorium having been declared by federal or New York State
authorities; (E) an outbreak or significant escalation of major international
hostilities or other national or international calamity having occurred; (F) the
passage by the Congress of the United States or by any state legislative body of
similar impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
you to have a material adverse impact on the business, financial condition or
financial statements of the Company; (G) any material adverse change in the
financial or securities markets beyond normal fluctuations in the United States
having occurred since the date of this Agreement; or (H) any material adverse
change having occurred, since the respective dates for which information is
given in the Registration Statement and Prospectus, in the earnings, business,
prospects or condition (financial or otherwise) of the Company, whether or not
arising in the ordinary course of business.
(ii) Maidstone shall have the right, in its sole
discretion, to terminate this Agreement, including without limitation, the
obligation to purchase the Firm Units and the obligation to purchase the Option
Units after the exercise of the Over-Allotment Option, by notice given to the
Company prior to delivery and payment for all the Firm Units or the Option
Units, as the case may be, if any of the conditions enumerated in Section 4 are
not either fulfilled or waived by the Underwriter on or before any Closing Date.
(iii) Anything herein to the contrary notwithstanding,
if this Agreement shall not be carried out within the time specified herein, or
any extensions thereof granted by the Underwriter, by reason of any failure on
the part of the Company to perform any undertaking or satisfy any condition of
this Agreement by it to be performed or satisfied then, in addition to the
obligations assumed by the Company pursuant to Section 8(a) hereof, the
Underwriter shall provide the Company with, and the Company shall pay, a
statement of the Underwriter's accountable expenses.
(b) Notification. If you elect to prevent this Agreement
from becoming effective or to terminate this Agreement as provided by this
Section 10 or by Section 9, the Company shall be promptly notified by you, by
telephone or telegram, confirmed by letter.
11. Underwriter's Unit Purchase Option. On the First Closing
Date, the Company shall issue and sell to you, for $10.00, and upon the terms
and conditions set forth in the form of Underwriter's Unit Purchase Options
filed as an exhibit to the Registration Statement, an option entitling you to
purchase 130,000 Units at an exercise price equal to 120% of the initial public
offering price per unit exercisable for a period of four years commencing one
year from the Effective Date (the "Underwriter's Unit Purchase Option"). The
Underwriter's Unit Purchase
30
<PAGE>
Option grant to the holders thereof certain "piggyback" registration rights for
a period of seven years, and demand registration rights for a period of four
years, commencing one year from the Effective Date with respect to the
registration under the Securities Act of the Securities issuable upon exercise
thereof. In the event of conflict in the terms of this Agreement and the
Underwriter's Unit Purchase Option, the terms and conditions of the
Underwriter's Unit Purchase Option shall control.
12. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations, warranties,
covenants and other statements of the Company and the Underwriter set forth in
Sections 3, 6, 7 and 8 of this Agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of any other party, and
shall survive delivery of and payment for the Units and the termination of this
Agreement. The Company hereby indemnifies and holds harmless the Underwriter
from and against all Liabilities, joint or several, to which the Underwriter may
become subject insofar as such Liabilities arise out of or are based upon the
breach or failure of any of the provisions of Sections 3, 6, 7 and 8.
13. NOTICES. All communications hereunder shall be in writing
and, except as otherwise expressly provided herein, if sent to you, shall be
mailed, delivered or telegraphed and confirmed to you at Maidstone Financial,
Inc., 101 East 52nd Street, New York, New York 10022, with a copy sent to Jay M.
Kaplowitz, Esq., Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP, 101 East
52nd Street, New York, New York 10022; or if sent to the Company, shall be
mailed, delivered, or telegraphed and confirmed to it at Phoenix Preschool
Education Centers, Inc., 150 East 50th Street, 31st Floor, New York, New York
10155, with a copy sent to Frederick D. Lipman, Esq., Blank Rome Comisky &
McCauley, 1200 Four Penn Center Plaza, Philadelphia, Pennsylvania 19103.
14. PARTIES IN INTEREST. This Agreement is made solely for the
benefit of the Underwriter, the Company, and, to the extent expressed, any
person controlling the Company or the Underwriter, as the case may be, and the
directors of the Company, nominees for directors of the Company (if any) named
in the Prospectus, officers of the Company who have signed the Registration
Statement, and their respective executors, administrators, successors and
assigns; and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" shall not include any
purchaser, as such, from the Underwriter of the Units.
15. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without giving effect to conflict of laws. The parties agree to submit
themselves to the jurisdiction of the courts of the State of New York or of the
United States of America for the Southern District of New York, which shall be
the sole tribunals in which any parties may institute and maintain a legal
proceeding against the other party arising from any dispute in this Agreement.
In the event either party initiates a legal proceeding in a jurisdiction other
than in the courts of the State of New York or
31
<PAGE>
of the United States of America for the Southern District of New York, the other
party may assert as a complete defense and as a basis for dismissal of such
legal proceeding that the legal proceeding was not initiated and maintained in
the courts of the State of New York or of the United States of America for the
Southern District of New York, in accordance with the provisions of this Section
15.
16. ENTIRE AGREEMENT. This Agreement, the Underwriter's Unit
Purchase Option, and the Financial Consulting Agreement contain the entire
agreement between the parties hereto in connection with the subject matter
hereof and thereof.
17. COUNTERPARTS. This Agreement may be executed in two or
more counterpart copies, each of which shall be deemed and an original but all
of which together shall constitute one and the same instrument.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return this Agreement, whereupon it will become a
binding agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
PHOENIX PRESCHOOL HOLDINGS,
INC.
By:________________________
Name:
Title:
Accepted as of the date
first above written:
New York, New York
MAIDSTONE FINANCIAL, INC.
By:_______________________
Name:
Title:
32
<PAGE>
ADVISORY AND INVESTMENT BANKING AGREEMENT
This Agreement is made and entered into as of the __ day of
_______________, 1997 by and between Maidstone Financial, Inc., a New York
corporation ("Maidstone"), and Phoenix Preschool Holdings, Inc., a Delaware
corporation (the "Company").
In consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages Maidstone for the term
specified in Paragraph 2 hereof to render consulting advice to the Company as an
investment banker relating to financial and similar matters upon the terms and
conditions set forth herein.
2. Term: Except as otherwise specified in paragraph 4 hereof,
this Agreement shall be effective from ______________, 1997 to _______________,
1999.
3. Duties of Maidstone: During the term of this Agreement,
Maidstone shall seek out Transactions (as hereinafter defined) on
<PAGE>
behalf of the Company and shall furnish advice to the Company in connection with
any such Transactions.
4. Compensation: In consideration for the services rendered by
Maidstone to the Company pursuant to this Agreement (and in addition to the
expenses provided for in Paragraph 5 hereof), the Company shall compensate
Maidstone as follows:
(a) The Company shall pay Maidstone a fee of $4,166 per month
during the term of this Agreement. The sum of $99,984 shall be payable in full
on the date of this Agreement;
(b) In the event that any Transaction (as hereinafter defined)
occurs during the term of this Agreement or one year thereafter, the Company
shall pay fees to Maidstone as follows:
Consideration Fee
------------- ---
$ - 0 - to $ 500,000 Minimum fee of $25,000
$ 500,000 to $5,000,000 5% of Consideration
$5,000,000 or more $250,000 plus 1% of the
Consideration in excess of
$5,000,000
-2-
<PAGE>
For the purposes of this Agreement, "Consideration" shall mean
the total market value on the day of the closing of stock, cash, assets and all
other property (real or personal) exchanged or received, directly or indirectly
by the Company or any of its security holders in connection with any
Transaction. Any co-broker retained by Maidstone shall be paid by Maidstone.
For the purposes of the Agreement, a "Transaction" shall mean
(a) any transaction originated by Maidstone, other than in the ordinary course
of trade or business of the Company, whereby, directly or indirectly, control of
or a material interest in the Company or any of its businesses or any of their
respective assets, is transferred for Consideration, (b) any transaction
originated by Maidstone whereby the Company acquires any other company or the
assets of any other company or an interest in any other company (an
"Acquisition") or (c) any sale or Acquisition in connection with which the
Company engages an investment banker other than Maidstone and pays such
investment banker a fee in respect of such Transaction.
In the event Maidstone originates a line of credit with a
lender, the Company and Maidstone will mutually agree on a satisfactory fee and
the terms of payment of such fee; provided, however, that in the event the
Company is introduced to a corporate
-3-
<PAGE>
partner by Maidstone in connection with a merger, acquisition or financing and a
credit line develops directly as a result of the introduction, the appropriate
fee shall be the amount set forth in the schedule above. In the event Maidstone
introduces the Company to a joint venture partner or customer and sales develop
as a result of the introduction, the Company agrees to pay a fee of five percent
(5%) of total sales generated directly from this introduction during the first
two years following the date of the first sale. Total sales shall mean cash
receipts less any applicable refunds, returns, allowances, credits and shipping
charges and monies paid by the Company by way of settlement or judgment arising
out of claims made by or threatened against the Company. Commission payments
shall be paid on the 15th day of each month following the receipt of customers'
payment. In the event any adjustments are made to the total sales after the
commission has been paid, the Company shall be entitled to an appropriate refund
or credit against future payments under this Agreement. All fees to be paid
pursuant to this Agreement, except as otherwise specified, are due and payable
to Maidstone in cash at the closing or closings of any transaction specified in
Paragraph 4 hereof. In the event that this Agreement shall not be renewed or if
terminated for any reason, notwithstanding any such non-renewal or termination,
Maidstone shall
-4-
<PAGE>
be entitled to a full fee as provided under Paragraphs 4 and 5 hereof, for any
transaction for which the discussions were initiated during the term of this
Agreement and which is consummated within a period of twelve months after
non-renewal or termination of this Agreement.
5. Expenses of Maidstone: In addition to the fees payable
hereunder, and regardless of whether any transaction set forth in Paragraph 4
hereof is proposed or consummated the Company shall reimburse Maidstone for all
fees and disbursements of Maidstone's counsel and Maidstone's travel and
out-of-pocket expenses incurred in connection with the services performed by
Maidstone pursuant to this Agreement, including without limitation, hotels, food
and associated expenses and long-distance telephone calls.
6. Liability of Maidstone:
(1) The Company acknowledges that all opinions and advice
(written or oral) given by Maidstone to the Company in connection with
Maidstone's engagement are intended solely for the benefit and use of the
Company in considering the transaction to which they relate, and the Company
agrees that no person or entity other than the Company shall be entitled to make
use of or rely upon the advice of
-5-
<PAGE>
Maidstone to be given hereunder, and no such opinion or advice shall be used
for any other purpose or reproduced, disseminated, quoted or referred to at
any time, in any manner or for any purpose, nor may the Company make any
public references to Maidstone, or use Maidstone's name in any annual reports
or any other reports or releases of the Company without Maidstone's prior
written consent.
(2) The Company acknowledges that Maidstone makes no
commitment whatsoever as to making a market in the Company's securities or to
recommending or advising its clients to purchase the Company's securities.
Research reports or corporate finance reports that may be prepared by Maidstone
will, when and if prepared, be done solely on the merits or judgment of analysis
of Maidstone or any senior corporate finance personnel of Maidstone.
7. Maidstone's Services to Others: The Company acknowledges
that Maidstone's or its affiliates are in the business of providing financial
services and consulting advice to others. Nothing herein contained shall be
construed to limit or restrict Maidstone in conducting such business with
respect to others, or in rendering such advice to others.
-6-
<PAGE>
8. Company Information:
(a) The Company recognizes and confirms that, in advising
the Company and in fulfilling its engagement hereunder, Maidstone will use and
rely on data, material and other information furnished to Maidstone by the
Company. The Company acknowledges and agrees that in performing its services
under this engagement, Maidstone may rely upon the data, material and other
information supplied by the Company without independently verifying the
accuracy, completeness or veracity of same.
(b) Except as contemplated by the terms hereof or as
required by applicable law, Maidstone shall keep confidential all material
non-public information provided to it by the Company, and shall not disclose
such information to any third party, other than such of its employees and
advisors as Maidstone determines to have a need to know.
9. Indemnification:
a. The Company shall indemnify and hold Maidstone harmless
against any and all liabilities, claims, lawsuits, including any and all awards
and/or judgments to which it may become subject under the Securities Act of
1933, as amended (the "1933 Act"), the
-7-
<PAGE>
Securities Exchange Act of 1934, as amended (the "Act") or any other federal or
state statute, at common law or otherwise, insofar as said liabilities, claims
and lawsuits (including awards and/or judgments) arise out of or are in
connection with the services rendered by Maidstone or any transactions in
connection with this Agreement, except for any liabilities, claims and lawsuits
(including awards and/or judgments), arising out of acts or omissions of
Maidstone. In addition, the Company shall also indemnify and hold Maidstone
harmless against any and all costs and expenses, including reasonable counsel
fees, incurred or relating to the foregoing.
Maidstone shall give the Company prompt notice of any such
liability, claim or lawsuit which Maidstone contends is the subject matter of
the Company's indemnification and the Company thereupon shall be granted the
right to take any and all necessary and proper action, at its sole cost and
expense, with respect to such liability, claim and lawsuit, including the right
to settle, compromise and dispose of such liability, claim or lawsuit, excepting
therefrom any and all proceedings or hearings before any regulatory bodies
and/or authorities.
Maidstone shall indemnify and hold the Company harmless
against any and all liabilities, claims and lawsuits, including any
-8-
<PAGE>
and all awards and/or judgments to which it may become subject under the 1933
Act, the Act or any other federal or state statute, at common law or otherwise,
insofar as said liabilities, claims and lawsuits (including awards and/or
judgments) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact required to be stated or necessary to make the
statement therein, not misleading, which statement or omission was made in
reliance upon information furnished in writing to the Company by or on behalf of
Maidstone for inclusion in any registration statement or prospectus or any
amendment or supplement thereto in connection with any transaction to which this
Agreement applies. In addition, Maidstone shall also indemnify and hold the
Company harmless against any and all costs and expenses, including reasonable
counsel fees, incurred or relating to the foregoing.
The Company shall give to Maidstone prompt notice of any such
liability, claim or lawsuit which the Company contends is the subject matter of
Maidstone's indemnification and Maidstone thereupon shall be granted the right
to a take any and all necessary and proper action, at its sole cost and expense,
with respect to such liability, claim and lawsuit, including the right to
settle, compromise or dispose of such liability, claim or lawsuit, excepting
therefrom any
-9-
<PAGE>
and all proceedings or hearings before any regulatory bodies and/or authorities.
b. In order to provide for just and equitable contribution
under the Act in any case in which (i) any person entitled to indemnification
under this Section 9 makes claim for indemnification pursuant hereto but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 10, then, and in each such case, the Company and Maidstone shall
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after any contribution from others) in such proportion taking
into consideration the relative benefits received by each party from the
offering covered by the prospectus with respect to any transactions in
connection with this Agreement (taking into account the portion of the proceeds
of the offering realized by each), the parties' relative knowledge and access to
information concerning the matter with respect
-10-
<PAGE>
to which the claim was assessed, the opportunity to correct and prevent any
statement or omission and other equitable considerations appropriate under the
circumstances; provided, however, that notwithstanding the above in no event
shall Maidstone be required to contribute any amount in excess of 10% of the
public offering price of any securities to which such Prospectus applies; and
provided, that, in any such case, no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit or proceeding, such party will, if a claim for contribution in respect
thereof is to be made against another party (the "Contributing Party"), notify
the Contributing Party of the commencement thereof, but the omission so to
notify the Contributing Party will not relieve it from any liability which it
may have to any other party other than for contribution hereunder. In case any
such action, suit or proceeding is brought against any party, and such party
notifies a Contributing Party or his or its representative of the commencement
thereof within the aforesaid fifteen (15) days, the
-11-
<PAGE>
Contributing Party will be entitled to participate therein with the notifying
party and any other Contributing Party similarly notified. Any such Contributing
Party shall not be liable to any party seeking contribution on account of any
settlement of any claim, action or proceeding effected by such party seeking
contribution without the written consent of the Contributing Party. The
indemnification provisions contained in this Section 10 are in addition to any
other rights or remedies which either party hereto may have with respect to the
other or hereunder.
10. Maidstone an Independent Contractor: Maidstone shall
perform its services hereunder as an independent contractor and not as an
employee of the Company or an affiliate thereof. It is expressly understood and
agreed to by the parties hereto that Maidstone shall have no authority to act
for, represent or bind the Company or any affiliate thereof in any manner,
except as may be agreed to expressly by the Company in writing from time to
time.
11. Miscellaneous:
(1) This Agreement between the Company and Maidstone
constitutes the entire agreement and understanding of the parties
-12-
<PAGE>
hereto, and supersedes any and all previous agreements and understandings,
whether oral or written, between the parties with respect to the matters set
forth herein.
(2) Any notice or communication permitted or required
hereunder shall be in writing and shall be deemed sufficiently given if
hand-delivered or sent (i) postage prepaid by registered mail, return receipt
requested, or (ii) by facsimile, to the respective parties as set forth below,
or to such other address as either party may notify the other in writing:
If to the Company, to: Phoenix Preschool Holdings,
Inc.
150 East 50th Street, 31st Fl.
New York, New York 10155
with a copy to: Frederick D. Lipman
Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
If to Maidstone, to: Maidstone Financial Inc.
101 East 52nd Street
New York, New York 10022
with a copy to: JAY M. KAPLOWITZ
Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP
101 East 52nd Street
New York, New York 10022
-13-
<PAGE>
(3) This Agreement shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors, legal
representatives and assigns.
(4) This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same original
document.
(5) No provision of this Agreement may be amended,
modified or waived, except in a writing signed by all of the parties hereto.
(6) This Agreement shall be construed in accordance with
and governed by the laws of the State of New York, without giving effect to
conflict of law principles. The parties hereby agree that any dispute which may
arise between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in New York City, and they hereby submit to
the exclusive jurisdiction of the courts of the State of New York located in New
York, New York and of the federal courts in the Southern District of New York
with respect to any action or legal proceeding commenced by any party, and
irrevocably waive any objection they now or hereafter may have respecting the
venue of any such action or proceeding brought in such a court or respecting the
fact that such court is an
-14-
<PAGE>
inconvenient forum, relating to or arising out of this Agreement, and consent to
the service of process in any such action or legal proceeding by means of
registered or certified mail, return receipt requested, in care of the address
set forth in Paragraph 11(b) hereof.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
MAIDSTONE FINANCIAL, INC.
By:_______________________________________
PHOENIX PRESCHOOL HOLDINGS, INC.
By:_______________________________________
-16-
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -1-
July 7, 1997
(as amended August 30, 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 effective date (the "Effective Date")for the
contemplated firm-commitment underwritten initial public offering of the
common stock of Holdings, Koffler will contribute to Holdings all of his
common stock of Education Centers, Inc. and $500,000 of principal amount of
indebtedness owed to Koffler by Education Centers, Inc. in a transaction
(hereafter called the "Section 351 Transaction") effectuated pursuant to
Section 351 of the Internal Revenue Code of 1986, as amended, and Holdings
will thereupon own all of the outstanding common stock of Education Centers,
Inc.
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -2-
Koffler hereby warrants and represents to Holdings that he is, as of
the date hereof, the sole owner of record and beneficially (as such term is
defined in Rule 13d-3 of the Securities Exchange Act of 1934) of all of the
outstanding shares of the common stock of Education Centers, Inc. To the best
of Koffler's knowledge, there are no other shareholders of Education Centers,
Inc. and that, and no person has the right to acquire shares of Education
Centers, Inc. except for certain employees, consultants, bridge
note holders, and the holders of the Capello warrants.
Prior to the Effective Date, Education Centers, Inc. shall declare a
dividend to Koffler equal to the undistributed Subchapter S income (if any) of
Education Centers, Inc. for periods prior to the Effective Date. Holdings
hereby guarantees all payments to be made by Education Centers, Inc. pursuant
hereto and agrees to contribute to Education Centers, Inc. a sufficient amount
of cash to fund all payments due to Koffler hereunder.
Koffler hereby agrees that he will contribute to Holdings all of his
shares of common stock of Education Centers, Inc., and $500,000 of the
principal amount of indebtedness owed by Education Centers, Inc. to Koffler,
on either the Effective Date of the registration statement of the contemplated
public offering of Holdings common stock or at such later date, but not later
than the First Closing Date (as defined in the underwriting agreement entered
into with Maidstone Financial, Inc. in connection with the offering
contemplated hereby), as is requested by Holdings. Koffler agrees not to
convert the Convertible Promissory Note, dated as of January 1, 1996, of which
Education Centers, Inc. is the maker and Koffler is the payee (the "Note"),
prior to the First Closing Date, assuming that the First Closing Date occurs
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
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -3-
evidenced in part by the Note) is hereby extended until July 1, 1998.
Holdings agrees to assume, effective as of the Effective Date, the
obligations of Education Centers, Inc. under all outstanding warrants and
options of Education Centers, Inc. and, subsequent to the Effective Date,
these warrants and options shall relate solely to the common stock of
Holdings.
It is understood that the consent of holders of warrants and options
to purchase common stock of Education Centers, Inc. may be required by
Holdings in order to confirm that their sole rights under the warrants and
options are to receive common stock of Holdings, rather than common stock of
Education Centers, Inc. If for any reason these consents are not obtained
prior to the Effective Date, Holdings may require the transaction to be
structured as a merger in which a subsidiary of Holdings is merged into
Education Centers, Inc., rather than a Section 351 Transaction.
This letter agreement shall automatically become null and void if for
any reason there is no closing of the underwriting agreement for the
contemplated public offering of Holdings common stock within four months from
the date hereof or if there are substantial changes from the proposed initial
public offering described in this letter agreement. Any Section 351
Transaction consummated hereunder shall become null and void, and
automatically rescinded, if the First Closing Date does not occur.
This letter agreement represents the entire understanding of the
parties with respect to the subject matter, may not be amended, supplemented,
terminated or waived except by written instrument signed by all parties
hereto, may be executed in one or more counterparts, each of which shall be
deemed an original against any party whose signature appears thereon, and
shall be construed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed solely in Delaware. This
agreement shall be binding upon and inure to the benefit of the signatories
hereto and their heirs, legal and other personal representatives (similar or
dissimilar), estates, executors,
<PAGE>
Phoenix Preschool Education Centers, Inc.
July 3, 1997
Page -4-
administrators, successors and assigns. The signatories hereto,
intend to be legally bound hereby.
Very truly yours,
/s/ Michael C. Koffler
---------------------------------------
MICHAEL C. KOFFLER
PHOENIX PRESCHOOL EDUCATION CENTERS, INC.
By: /s/ Michael C. Koffler
-----------------------------------
Agreed:
PHOENIX PRESCHOOL HOLDINGS, INC.
BY: /s/ Michael C. Koffler
-------------------------------
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
PHOENIX PRESCHOOL HOLDINGS, INC.
This is to certify that the Certificate of Incorporation of Phoenix
Preschool Holdings, Inc., originally filed with the Secretary of State of the
State of Delaware on July 2, 1997, is hereby amended in accordance with the
provisions of Section 242 of the Delaware General Corporation Law and restated
in accordance with the provisions of Section 245(c) of such law to read in
full as follows:
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.
1
<PAGE>
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 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
2
<PAGE>
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 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. Directors. The Board of Directors shall consist of not
less than one (1) nor more than fifteen (15) persons, the exact number to be
fixed and determined from time to time by resolution of the Board of
Directors.
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.
3
<PAGE>
Article 7. Removal of Directors
(a) By Stockholders. The entire Board of Directors, or any
individual director, may be removed from office by the stockholders with or
without cause with the vote of stockholders entitled to cast at least a
majority of the votes which all stockholders would be entitled to cast at any
annual election of directors.
(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
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
4
<PAGE>
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 sixty-six and two thirds (66-2/3%)
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.
(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
5
<PAGE>
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.
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
6
<PAGE>
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 Corporation's Certificate of Designations filed with the Secretary
of State of the State of Delaware on July 8, 1997, shall remain in full force
and effect.
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 22nd day of August, 1997.
/s/ Michael C. Koffler
-------------------------------------
Michael C. Koffler
Chief Executive Officer and Director
7
<PAGE>
AMENDED AND RESTATED 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 STOCKHOLDERS.
Section 301. Place of Meetings. All meetings of the
stockholders 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
stockholders 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 stockholder 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
stockholders may be called at any time by the Board of Directors, the Chairman
of the Board, or by stockholders entitled to cast at least ten percent (10%)
of the vote which all stockholders are entitled to cast at the particular
meeting.
Section 304. Conduct of Stockholders' Meetings. The Chairman
of the Board shall preside at all stockholders' meetings, or, in his absence,
the Chief Executive Officer, or in his absence, the President. The officer
presiding over a stockholders' 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 stockholders.
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
2
<PAGE>
provisions contained in the Certificate of Incorporation, as amended from time
to time. 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 stockholder 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 stockholder:
(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
stockholder;
(e) The number of shares of capital stock of the
corporation owned by the notifying stockholder;
(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 stockholders at the place where such meeting of the stockholders 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.
Section 411. The entire Board of Directors, or any
individual director, may be removed from office by the stockholders with or
without cause with the vote of stockholders entitled to cast at least a
majority of the votes which all stockholders would be entitled to cast at any
annual election of directors.
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
stockholders 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
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at all meetings of the Board of Directors and stockholders. 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 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, stockholders 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.
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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 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
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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 stockholders 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 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
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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
stockholders, 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.
(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
stockholders) 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 stockholders) 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 stockholders 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.
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(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.
(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 stockholder 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 stockholders, the stockholders' meeting considering the resolution may
adopt it with such clarifying or other amendments as do not enlarge its
original purpose, without further notice to stockholders not present in person
or by proxy.
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Section 804. Absentee Participation in Meetings. One or more
directors or stockholders may participate in a meeting of the Board of
Directors, or of a committee of the Board, or a meeting of the stockholders,
by means of a conference, telephone or similar communications equipment, by
means of which all persons participating in the meeting can hear each other.
Section 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.
Section 808. Inspection of Records. To the extent permitted
by federal and state laws, any stockholder or holder of a voting trust
certificate with respect to the voting capital stock of the Corporation may
inspect, in person or by attorney or agent, at the Corporation's principal
executive office, the accounting books and records, minutes of proceedings of
the stockholders, the board of directors or any committee thereof, of the
Corporation during the Company's normal business hours. Such inspection
includes the right to copy such books and records and to make extracts,
subject to reasonable charge for duplication at the cost to the Company.
ARTICLE IX. AMENDMENT OR REPEAL.
Section 901. Amendment or Repeal by Stockholders. 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 stockholders
duly convened after notice to the stockholders 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.
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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 stockholders or the Board
of Directors.
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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 22nd day of August, 1997,
and shall be effective as of such date.
Section 1002. Amendments or Repeals.
Date Amended
Section Involved or Repealed Adopted By
- ---------------- ----------- ----------
301, 302, 303, 304 August 22, 1997 Board of Directors and
Sole Stockholder
401, 402, 406, 411 August 22, 1997 Board of Directors and
Sole Stockholder
502, 503, 507 August 22, 1997 Board of Directors and
Sole Stockholder
602, 606 August 22, 1997 Board of Directors and
Sole Stockholder
702 August 22, 1997 Board of Directors and
Sole Stockholder
803, 804, 808 August 22, 1997 Board of Directors and
Sole Stockholder
901 August 22, 1997 Board of Directors and
Sole Stockholder
1001 August 22, 1997 Board of Directors and
Sole Stockholder
<PAGE>
UPO-1
- -----
UNDERWRITER'S UNIT PURCHASE OPTION
Dated: _________________, 1997
THIS CERTIFIES THAT _________________________ is entitled to
purchase from PHOENIX PRESCHOOL HOLDINGS, INC., a Delaware corporation (the
"Company"), Units at a purchase price of $________ per Unit (the "Exercise
Price"), subject to adjustment as provided in paragraph 8 hereof, at any time
during the four-year period commencing one (1) year from the date hereof. Each
Unit consists of one (1) share of the Company's common stock, par value $0.10
per share (the "Common Stock"), and two (2) Class A redeemable common stock
purchase warrants (the "Warrants"), each Warrant exercisable to purchase one
share of Common Stock at an initial exercise price of $4.50 per share (the
"Redeemable Warrant Exercise Price"). This Underwriter's Warrant (the
"Underwriter's Warrant") is one of a series of Underwriter's Warrants to
purchase, in the aggregate, up to 130,000 Units issued pursuant to an
Underwriting Agreement dated __________________, 1997, among the Company and
Maidstone Financial, Inc. (the "Underwriters"), in connection with a public
offering, through the Underwriter, of 1,300,000 Units as therein described
(and up to 195,000 additional Units covered by an over-allotment option
granted by the Company to the Underwriters, hereinafter referred to together
with the 1,300,000 Units, as the "Public Units") and in consideration of
$10.00 received by the Company for the Underwriter's Warrants. Each Public
Unit consists of one share of Common Stock and two redeemable common stock
purchase warrants each to purchase one share of common stock (the "Public
Warrants"). Except as specifically otherwise provided herein, the Units, as
well as the shares of Common Stock and Redeemable Warrants included in the
Units issuable pursuant to the Underwriter's Warrant shall have same terms and
conditions as the Public Units, the Common Stock and the Public Warrants,
respectively, as described under the caption "Description of Securities" in
the Company's Registration Statement on Form SB-2, File No. 33-_______ (the
"Registration Statement"), except that the Holders shall have registration
rights under the Securities Act of 1933, as amended (the "Act"), for the
Underwriter's Warrant, the Common Stock and Redeemable Warrants included in
the Units, and the Common Stock purchasable upon exercise of the Redeemable
Warrants, as more fully described in paragraph 6 herein.
1. The rights represented by the Underwriter's Warrant shall
be exercised at the price, subject to adjustment in accordance with paragraph 8
hereof, and during the periods as follows:
(a) During the period from the date hereof to ____________,
1998 (the "First Anniversary Date"), inclusive, the
Holders shall have no right to purchase any Units
hereunder, except that in the event of any merger,
consolidation or sale of substantially all the assets
of the
<PAGE>
Company as an entirety prior to the First Anniversary
Date, the Holders shall have the right to exercise
the Underwriter's Warrant at such time and into the
kind and amount of shares of stock and other
securities and property (including cash) receivable
by a holder of the number of shares of Common Stock
and Redeemable Warrants into which the Underwriter's
Warrant might have been exercisable immediately prior
thereto.
(b) Between ______, 1998 and ______, 2002 (the "Expiration
Date") inclusive, the Holders shall have the option
to purchase Units hereunder at a price of $5.04 per
Unit (120% of the initial public offering price),
subject to adjustment as provided in paragraph 8
hereof.
(c) After the Expiration Date, the Holders shall have no
right to purchase any Units hereunder.
2. (a) The rights represented by the Underwriter's Warrant may
be exercised at any time within the periods above specified, in whole or in
part, by (i) the surrender of the Underwriter's 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 Holders at the addresses of the Holders appearing on
the books of the Company); (ii) payment to the Company of the exercise price
then in effect for the number of Units specified in the above-mentioned purchase
form together with applicable stock transfer taxes, if any; and (iii) delivery
to the Company of a duly executed agreement signed by the person(s) designated
in the purchase form to the effect that such person(s) agree(s) to be bound by
the provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7
hereof. The Underwriter's 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 the Underwriter's 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 and Redeemable Warrants shall be issuable upon such exercise shall become
the holder or holders of record of such Common Stock and Redeemable Warrants at
that time and date. Certificates representing the Common Stock and Redeemable
Warrants so purchased shall be delivered to the Holders within a reasonable
time, not exceeding ten (10) days, after the rights represented by this Warrant
shall have been so exercised.
(b) Notwithstanding anything to the contrary
contained in subparagraph (a) of paragraph 2, the Holders may elect to
exercise this Underwriter's Warrant in whole or in part by receiving Units
equal to the value (as determined below) of this Underwriter's Warrant at the
principal office of the Company together with notice of such election in which
event the Company shall issue to the Holders a number of Units computed using
the following formula:
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<PAGE>
X = Y(A-B)
------
A
Where: X = the number of Units to be issued to the Holders;
Y = the number of Units to be exercised under this
Underwriter's Warrant;
A = the current fair market value of one share of
Common Stock (calculated as described below); and
B = the Exercise Price.
As used herein, the current fair market value of Common Stock
shall mean the greater of (x) the average of the closing prices of the Company's
Common Stock sold on all securities exchanges on which the Common Stock may at
the time be listed and the NASDAQ National Market, or, if there have been no
sales on any such exchange or the NASDAQ National Market on such day, the
average of the highest bid and lowest asked price on such day on The Nasdaq
SmallCap Market or otherwise in the domestic over-the-counter market as reported
by the National Quotation Bureau, Incorporated, or any similar successor
organization (the "Market Price"), on the trading day immediately preceding the
date notice of exercise of this Underwriter's Warrant is given or (y) the
average of the Market Price per share of Common Stock for the five trading days
immediately preceding the date notice of exercise of this Underwriter's Warrant
is given. If on any date for which the Market Price per share of Common Stock is
to be determined the Common Stock is not listed on any securities exchange or
quoted on the NASDAQ National Market or on The Nasdaq SmallCap Market or
otherwise in the over-the-counter market, the Market Price per share of Common
Stock shall be the highest price per share which the Company could then obtain
from a willing buyer (not a current employee or director) for shares of Common
Stock sold by the Company, from authorized but unissued shares, as determined in
good faith by the Board of Directors of the Company, unless prior to such date
the Company has become subject to a merger, acquisition or other consolidation
pursuant to which the Company is not the surviving party, in which case the
Market Price per share of Common Stock shall be deemed to be the value received
by the holders of the Company's Common Stock for each share thereof pursuant to
the Company's acquisition.
3. The Underwriter's Warrant and the securities issuable upon
exercise thereof shall not be transferred, sold, assigned, or hypothecated for a
period of one year commencing on the Effective Date except that it may be
transferred to successors of the Holders, and may be assigned in whole or in
part to any person who is an officer of either of the Holders or to any member
of the selling group and/or the officers or partners thereof during such period.
In the event that the Underwriter's Warrant is transferred after one year from
the Effective Date, it must be exercised immediately upon such transfer and, if
not exercised immediately upon transfer, the Underwriter's Warrant shall lapse.
Any such assignment shall be effected by the Holders by (i)
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<PAGE>
executing the form of assignment at the end hereof and (ii) surrendering the
Underwriter's Warrant for cancellation at the office or agency of the Company
referred to in paragraph 2 hereof, accompanied by a certificate (signed by an
officer of each of the Holders if the Holders are corporations), stating that
each transferee is a permitted transferee under this paragraph 3; whereupon the
Company shall issue, in the name or names specified by the Holders (including
the Holders) a new Underwriter's Warrant or Warrants of like tenor and
representing in the aggregate rights to purchase the same number of Units
(consisting of the same number of shares of Common Stock and Redeemable
Warrants) as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common
Stock which may be purchased hereunder or upon exercise of the Redeemable
Warrants will, upon issuance against payment of the purchase price therefor, 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, during the periods within which the Underwriter's Warrant may be
exercised, 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
the Underwriter's Warrant and the Redeemable Warrants.
5. The Underwriter's Warrant shall not entitle the Holders to
any voting rights or other rights as stockholders of the Company.
6. (a)(i) The Company shall advise the Holders or its
transferees, whether the Holders hold the Underwriter's Warrant or have
exercised the Underwriter's Warrant and hold shares of Common Stock and/or
Redeemable Warrants by written notice at least four weeks prior to the filing of
any post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Act
covering any securities of the Company, for its own account or for the account
of others, except for any registration statement filed on Form S-4 or S-8, and
will, for a period of seven years from the Effective Date, upon the request of
the Holders, and subject to subparagraph (a)(ii) of this paragraph 6, include in
any such post-effective amendment to the Registration Statement or in any new
registration statement such information as may be required to permit a public
offering of the Underwriter's Warrant, the Common Stock issuable upon the
exercise thereof or upon exercise of the Redeemable Warrants or the Redeemable
Warrants (collectively, the "Registrable Securities"). The Company shall supply
prospectuses and such other document as the Holders may reasonably request in
order to facilitate the public sale or other disposition of the Registrable
Securities, use its best efforts to register and qualify any of the Registrable
Securities for sale in such states as such Holders designate and do any and all
other acts and things which may be necessary or desirable to enable such Holders
to consummate the public sale or other disposition of the Registrable
Securities, all at no expense to the Holders or the Underwriter, and furnish
indemnification in the manner provided in paragraph 7 hereof. The Holders shall
furnish information and indemnification as set forth in paragraph 7.
4
<PAGE>
(ii) If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to subparagraph (a)(i) of this paragraph 6. If the
managing underwriter determines that a limitation of the number of shares to
be underwritten is required, the underwriter may exclude some or all
Registrable Securities from such registration (the "Excluded Registrable
Securities"); provided, however, that no other security-holder may include any
such securities in such Registration Statement if any of the Registrable
Securities have been excluded from such registration; and further provided
that the Company will file a new Registration Statement covering the Excluded
Registrable Securities, at the Company's expense, within six months after the
completion of such underwritten offering.
(b) If any 50% Holder (as defined below) shall give
notice to the Company at any time to the effect that such Holder desires to
register under the Act any or all of the Registrable Securities under such
circumstances that a public distribution (within the meaning of the Act) of
any such securities will be involved, then the Company will promptly, but no
later than four weeks after receipt of such notice, file a post-effective
amendment to the current Registration Statement or a new registration
statement pursuant to the Act, so that such designated Registrable Securities
may be publicly sold under the Act as promptly as practicable thereafter and
the Company will use its best efforts to cause such registration to become and
remain effective (including the taking of such steps as are necessary to
obtain the removal of any stop order) within 90 days after the receipt of such
notice, provided, that such Holder shall furnish the Company with appropriate
information in connection therewith as the Company may reasonably request in
writing. The 50% Holder may, at its option, request the filing of a
post-effective amendment to the current Registration Statement or a new
registration statement under the Act on two occasions during the four-year
period beginning one year from the Effective Date. The 50% Holder may, at its
option, request the registration of the Underwriter's Warrant and/or any of
the securities underlying the Underwriter's Warrant in a registration
statement made by the Company as contemplated by subparagraph (a) of this
paragraph 6 or in connection with a request made pursuant to this subparagraph
(b) of paragraph 6 prior to acquisition of the shares of Common Stock and
Redeemable Warrants issuable upon exercise of the Underwriter's Warrant. The
50% Holder may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the
Underwriter's Warrant, or separately as to the Common Stock and Redeemable
Warrants issuable upon the exercise of the Underwriter's Warrant, and such
registration rights may be exercised by the 50% Holder prior to or subsequent
to the exercise of the Warrant. Within ten days after receiving any such
notice pursuant to this subparagraph (b) of paragraph 6, the Company shall
give notice to any other Holders of the Underwriter's Warrant, advising that
the Company is proceeding with such post-effective amendment or registration
statement and offering to include therein the securities underlying that part
of the Warrant held by the other Holders, provided that they shall furnish the
Company with such appropriate information (relating to the intentions of such
Holders) in connection therewith as the Company shall reasonably request in
writing. All costs and expenses of the first post-effective amendment or new
registration statement shall be borne by the Company, except that the
Holder(s) shall bear the fees of their own counsel and any underwriting
discounts or commissions
5
<PAGE>
applicable to any of the securities sold by them. All costs and expenses of the
second such post-effective amendment or new registration statement shall be
borne by the Holder(s). The Company will maintain such registration statement or
post-effective amendment current under the Act for a period of at least six
months (and for up to an additional three months if requested by the Holder(s))
from the effective date thereof. The Company shall provide prospectuses, and
such other documents as the Holder(s) may request in order to facilitate the
public sale or other disposition of the Registrable Securities, use its best
efforts to register and qualify any of the Registrable Securities for sale in
such states as such Holder(s) designate and furnish indemnification in the
manner provided in paragraph 7 hereof.
(c) The term "50% Holder" as used in this paragraph 6
shall mean the Holder(s) of at least 50% of the Underwriter's Warrant and/or
the Common Stock underlying the Underwriter's Warrant and the Redeemable
Warrants and shall include any owner or combination of owners of such
securities, which ownership shall be calculated by determining the number of
shares of Common Stock held by such owner or owners as well as the number of
shares then issuable upon exercise of the Underwriter's Warrant and the
Redeemable Warrants.
(d) If at any time prior to the effectiveness of the
registration statement filed in connection with an offering pursuant to this
paragraph 6 the 50% Holder shall determine not to proceed with the
registration, upon notice to the Company and the payment to the Company by the
50% Holder of the Company's expenses, if any, theretofore incurred in
connection with the registration statement, the 50% Holder may terminate its
participation in the offering, and the registration statement previously filed
shall not be counted against the number of demand registrations permitted
under this paragraph 6. The 50% Holder need not pay to the Company its
expenses incurred in connection with the registration statement, however, if
such 50% Holder shall have determined not to proceed because of material
adverse developments on the part of the Company of which such 50% Holder
obtained knowledge subsequent to the giving to the Company of the written
request to register Registrable Securities pursuant to this paragraph 6.
(e) Notwithstanding the foregoing, if the Company
shall furnish to such 50% Holder a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company or its stockholders for a
registration statement to be filed in the near future containing the
disclosure of material information required to be included therein by reason
of the federal securities laws, then the Company's obligation to use its best
efforts to file a registration statement shall be deferred for a period during
which such disclosure would be seriously detrimental, provided that this
period will not exceed 30 days and provided further, that the Company shall
not defer its obligation in this matter more than once in any 12 month period.
7. (a) Whenever pursuant to paragraph 6 a registration
statement relating to the Underwriter's Warrant or any Common Stock issued or
issuable upon the exercise of the Underwriter's Warrant or the Redeemable
Warrants, or any Redeemable Warrants is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each Holder
6
<PAGE>
of the securities covered by such registration statement, amendment or
supplement (such Holder being hereinafter called the "Distributing Holder"), and
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each underwriter (within the meaning of the Act) of
such securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or liabilities,
joint or several, to which the Distributing Holder, any such controlling person
or any such underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities, or actions in respect thereof,
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading and will
reimburse the Distributing Holder or such controlling person or underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus or said amendment or supplement in
reliance upon and in conformity with written information furnished by such
Distributing Holder or any other Distributing Holder for use in the preparation
thereof.
(b) The Distributing Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed said registration statement and such amendments and supplements
thereto, and each person, if any, who controls the Company (within the meaning
of the Act) against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director, officer or controlling
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities, or actions in respect thereof, arise out of or
are based upon any untrue or alleged untrue statement of any material fact
contained in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement, or arises out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
said registration statement, said preliminary prospectus, said final
prospectus or said amendment or supplement in reliance upon and in conformity
with written information furnished by such Distributing Holder for use in the
preparation thereof; and will reimburse the Company or any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party
under this paragraph 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party, give the indemnifying party notice of the
7
<PAGE>
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this paragraph 7.
(d) In case any such action is brought against any
indemnified party, and it notified an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel reasonably satisfactory
to such indemnified party, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. The Exercise Price in effect at any time and the number and
kind of securities purchasable upon the exercise of each Warrant shall be
subject to adjustment from time to time upon the happening of certain events
hereinafter described; provided, however, that no adjustment shall be required
in respect of the Redeemable Warrants.
(a) In case the Company shall (i) declare a
dividend or make a distribution on its outstanding shares of Common Stock in
shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or reclassify
its outstanding shares of Common Stock into a smaller number of shares, or
(iv) the outstanding shares of Common Stock of the Company 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 Holders of this Warrant exercised after such date shall
be entitled to receive the aggregate number and kind of securities which, if
this Warrant had been exercised by such Holders immediately prior to such
date, they would have owned upon such exercise and been entitled to receive
upon such dividend, distribution, subdivision, combination, reclassification,
reorganization, merger, consolidation, liquidation or recapitalization. For
example, if the Company declares a 2 for 1 stock distribution and the Exercise
Price immediately prior to such event was $5.04 per Unit [120% of the initial
public offering price of the Public Units] and the number of Units purchasable
upon exercise of this Warrant was 130,000, the adjusted Exercise Price
immediately after such event would be $2.52 per Unit and the adjusted number
of Units purchasable upon exercise of this Warrant would be 260,000. Such
adjustment shall be made successively whenever any event listed above shall
occur.
8
<PAGE>
(b) In case the Company shall hereafter distribute
without consideration to all holders of its Common Stock evidence of its
indebtedness or assets (excluding cash dividends or distributions and
dividends or distributions referred to in subparagraph (a) of this paragraph
8, or subscription rights or warrants, then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the number of
Units issuable upon exercise of the Underwriter's Warrant by the Exercise
Price in effect immediately prior thereto, multiplied by a fraction, the
numerator of which shall be the total number of shares of Common Stock then
outstanding multiplied by the current Exercise Price, less the fair market
value (as determined by the Company's Board of Directors) of said assets, or
evidence of indebtedness so distributed or of such rights or warrants, and the
denominator of which shall be the total number of shares of Common Stock
outstanding multiplied by the current Exercise Price. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such distribution.
(c) In case the Company shall issue shares of its
Common Stock [excluding shares issued (i) in any of the transactions described
in subparagraphs(a) or (b) of this paragraph 8; (ii) as part of the Public
Units, (iii) upon conversion or exchange of securities convertible into or
exchangeable for Common Stock, (iv) upon exercise of options granted under the
Company's Stock Option Plan, as amended to date, if such shares would
otherwise be included in this subsection (c), (v) upon exercise of the
Underwriter's Warrant or the Public Warrants or the Units or (vi) upon
exercise of rights or warrants issued to the holders of the Common Stock, but
only if no adjustment is required pursuant to this paragraph 8 (without regard
to subsection (g) of this paragraph 8) with respect to the transaction giving
rise to such rights] for a consideration per share less than the current
Redeemable Warrant Exercise Price on the date the Company fixes the offering
price of such additional shares, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price determined by
multiplying the Exercise Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the total number of shares of Common
Stock outstanding immediately prior to the issuance of such additional shares
plus the number of shares of Common Stock which the aggregate consideration
received (determined as provided in subparagraph (f) of this paragraph 8) for
the issuance of such additional shares would purchase at the current
Redeemable Warrant Exercise Price, and of which the denominator shall be the
number of shares of Common Stock outstanding immediately after the issuance of
such additional shares. Such adjustment shall be made successively whenever
such an issuance is made.
(d) In case the Company shall issue any securities
convertible into or exchangeable for its Common Stock (excluding securities
issued in transactions described in subparagraph (b) of paragraph 8) for a
consideration per share of Common Stock initially deliverable upon conversion
or exchange of such securities (determined as provided in subparagraph (f) of
paragraph 8) less than the current Redeemable Warrant Exercise Price in effect
immediately prior to the issuance of such securities, the Exercise Price shall
be adjusted immediately thereafter so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior thereto by a
fraction, of which the numerator shall be the number of
9
<PAGE>
shares of Common Stock outstanding immediately prior to the issuance of such
securities plus the number of shares of Common Stock which the aggregate
consideration received (determined as provided in subparagraph (f) of paragraph
8) for such securities would purchase at the current Redeemable Warrant Exercise
Price, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to such issuance plus the maximum number of
shares of Common Stock of the Company deliverable upon conversion of or in
exchange for such securities at the initial conversion or exchange price or
rate. Such adjustment shall be made successively whenever such an issuance is
made.
(e) Whenever the Exercise Price payable upon
exercise of the Underwriter's Warrant is adjusted pursuant to subparagraphs
(a), (b), (c) or (d) of paragraph 8, the number of shares of Common Stock
purchasable upon exercise of this Underwriter's Warrant shall simultaneously
be adjusted by multiplying the number of shares of Common Stock issuable upon
exercise of this Underwriter's Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
(f) For purposes of any computation respecting
consideration received pursuant to subparagraphs (c) and (d) of paragraph 8,
the following shall apply:
(i) in the case of the issuance of shares of
Common Stock for cash, the consideration shall be the
amount of such cash, provided that in no case shall
any deduction be made for any commissions, discounts
or other expenses incurred by the Company for any
underwriting of the issue or otherwise in connection
therewith;
(ii) in the case of the issuance of shares
of Common Stock for a consideration in whole or in
part other than cash, the consideration other than
cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board of
Directors of the Company (irrespective of the
accounting treatment thereof), whose determination
shall be conclusive; and
(iii) in the case of the issuance of
securities convertible into or exchangeable for
shares of Common Stock, the aggregate consideration
received therefor shall be deemed to be the
consideration received by the Company for the
issuance of such securities plus the additional
minimum consideration, if any, to be received by the
Company upon the conversion or exchange thereof (the
consideration in each case to be determined in the
same manner as provided in clauses (i) and (ii) of
this subparagraph (f) of paragraph 8.
(g) 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 (g) are not required
10
<PAGE>
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
8 shall be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be. Anything in this Section 8 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 Section 8, 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 Common Stock (including the Redeemable
Warrants issuable upon exercise of the Underwriter's Warrant).
(h) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly cause a notice setting forth the
adjusted Exercise Price and adjusted number of shares of Common Stock or other
securities purchasable upon exercise of the Underwriter's Warrant to be mailed
to the Holders, at their addresses set forth herein, and shall cause a
certified copy thereof to be mailed to the Company's transfer agent, if any.
The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants
employed by the Company) to make any computation required by this paragraph 8,
and a certificate signed by such firm shall be conclusive evidence of the
correctness of such adjustment.
(i) In the event that at any time, as a result of
an adjustment made pursuant to the provisions of this paragraph 8, the Holders
of the Underwriter's Warrant thereafter shall become entitled to receive any
securities of the Company, other than Common Stock and the Redeemable Warrants
included in the Units, thereafter the number of such other securities so
receivable upon exercise of the Underwriter's 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 (g), inclusive of this paragraph (i).
9. This Agreement shall be governed by and in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, PHOENIX PRESCHOOL HOLDINGS, INC. has
caused this Underwriter's Warrant to be signed by its duly authorized
officers, and this Underwriter's Warrant to be dated __________________, 1997.
PHOENIX PRESCHOOL HOLDINGS, INC.
By: ______________________________________
Name:
Title:
11
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Underwriter's Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, ______________ Units of PHOENIX
PRESCHOOL HOLDINGS, INC., each Unit consisting of one (1) share of Common Stock,
par value $0.10 per share, and two (2) Redeemable Common Stock Purchase Warrants
each to purchase one (1) share of Common Stock, and herewith makes payment of
$_____________________ therefor (or hereby surrenders and delivers that portion
of the Underwriter's Warrant having equivalent value (as determined in
accordance with the provisions of subparagraph (d) of paragraph 2 of the
Underwriter's Warrant)), and requests that the certificates for shares of Common
Stock and Redeemable Warrants be issued in the name(s) of, and delivered to
_____________________, whose address(es) is (are):
Dated: _________________________, 19_________
___________________________________________________
Signature
(Print name under signature)
(Signature must conform in all respects to the name
of holder as specified on the face of the
Underwriter's Warrant).
==================================================
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant)
FOR VALUE RECEIVED __________________________________________
hereby sells, assigns and transfers unto ______________________________________
(Please print name and address of transferee)
this Warrant, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ____________________________________
Attorney, to transfer the within Warrant on the books of PHOENIX PRESCHOOL
HOLDINGS, INC., with full power of substitution.
Dated: ____________________________
Signature __________________________________
(Print name under signature)
(Signature must conform in
all respects to the name of
holder as specified on the
face of the Underwriter's
Warrant).
==============================
(Insert Social Security or Other
Identifying Number of Holders)
<PAGE>
[Letterhead of Blank Rome Comisky & McCauley]
September 9, 1997
Board of Directors
Phoenix Preschool Holdings, Inc.
31st Floor
150 East 50th Street
New York, NY 10155
Re: Phoenix Preschool Holdings, Inc.
Registration Statement on Form SB-2
File No. 333-31407
--------------------------------------------
Gentlemen:
We have acted as counsel to Phoenix Preschool Education Centers, Inc.
(the "Company") in connection with the preparation of its Registration Statement
on Form SB-2, as amended ("Registration Statement") filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, relating
to the offer and sale by the Company of (i) up to 1,300,000 units ("Units") each
consisting of one share of the Company's common stock, par value $0.10 per share
("Common Stock") and two redeemable warrants ("Redeemable Warrants") (each to
purchase an additional share of such Common Stock) in a firm commitment
underwritten offering; (ii) up to 195,000 Units to be purchased at the option of
the Underwriters (as defined in the Registration Statement) to cover
over-allotments, if any (the "Over-allotment Securities"), (iii) warrants
("Underwriters' Warrants") to purchase an additional 130,000 Units, and (iv)
130,000 Redeemable Warrants to be issued to a finder (the "Finder's Warrants").
The shares of Common Stock to be sold as part of the firm commitment
underwriting are referred to as the "Firm Commitment Shares." The shares of
Common Stock to be issued pursuant to Redeemable Warrants are referred to as the
"Warrant Shares." The shares of Common Stock to be issued pursuant to
Underwriters' Warrants, including Common Stock to be received upon exercise of
Redeemable Warrants which are acquirable under the Underwriters' Warrants, are
referred to as "Underwriters' Shares."
<PAGE>
Although as counsel to the Company we have advised the Company in
connection with a variety of matters referred to us by it, our services are
limited to specific matters so referred. Consequently, we may not have knowledge
of many transactions in which the Company engaged or its day-to-day operations.
In rendering this opinion, we have examined only the following
documents: (i) the Company's Certificate of Incorporation and Bylaws; (ii)
resolutions adopted by the Company's Board of Directors and its sole stockholder
as contained in the Company's minute books; and (iii) the Registration
Statement.
We have not made any independent investigation in rendering this
opinion other than the document examination described above. Our opinion is
therefore qualified in all respects by the scope of that document examination.
We make no representation as to the sufficiency of our investigation for any
particular purposes. We have assumed and relied on the truth, completeness,
authenticity and due authorization of all documents and records examined and
the genuineness of all signatures. This opinion is limited to the Delaware
General Corporation Law. In rendering this opinion, we have assumed compliance
with all other laws, including federal laws.
Based upon and subject to the limitations stated herein, we are of the
opinion that when sold in the manner and for the consideration contemplated by
the Registration Statement (including the exhibits attached thereto), and when
all securities laws have been complied with:
1. The Firm Commitment Shares have been duly authorized and when
issued, delivered and paid for in the manner described in the Registration
Statement, will be legally issued, fully paid and non-assessable.
2. The Over-allotment Securities have been duly authorized, and when
issued, delivered and paid for in the manner described in the Registration
Statement, will be legally issued, fully paid and non-assessable.
3. The Warrant Shares have been duly authorized, and when issued,
delivered and paid for upon exercise of the Redeemable Warrants in the manner
described in the form of Warrant Agreement filed as Exhibit 4.2 to the
Registration Statement (the "Warrant Agreement"), will be legally issued, fully
paid and non-assessable.
4. The Underwriters' Shares have been duly authorized and when issued,
delivered and paid for in the manner described in the Underwriters' Warrants
filed as Exhibit 4.5 to the Registration Statement and, in the case of
Redeemable Warrants issued to Underwriters, the Warrant Agreement, will be
legally issued, fully paid and non-assessable.
5. The Redeemable Warrants, including Redeemable Warrants obtained upon
exercise of the Underwriters' Warrants and the Finder's Warrants, and the
Underwriters' Warrants, have been duly authorized and when issued, delivered and
paid for in the manner described in the Registration Statement, will be legally
issued, fully paid and non-assessable.
<PAGE>
This opinion is given as of the date hereof. We assume no obligation to
update or supplement this opinion to reflect any facts or circumstances which
may hereafter come to our attention or any changes in laws which may hereafter
occur.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus that is a part of the Registration Statement.
Sincerely,
/s/ Blank Rome Comisky & McCauley
-------------------------------------------
BLANK ROME COMISKY & McCAULEY
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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
1,527,277 shares of the Company's Common Stock shall be the aggregate
number of shares which may be issued under this Plan. Notwithstanding the
foregoing, in the event of any change in the outstanding shares of the Common
Stock of the Company by reason of a stock dividend, stock split, combination of
shares, recapitalization, merger, consolidation, transfer of assets,
reorganization, conversion or what the Committee (defined in Section 4(a)),
deems in its sole discretion to be similar circumstances, the aggregate number
and kind of shares which may be issued under this Plan shall be appropriately
adjusted in a manner determined in the sole discretion of the Committee.
Reacquired shares of the Company's Common Stock, as well as unissued shares, may
be used for the purpose of this Plan. Common Stock of the Company subject to
options which have terminated unexercised, either in whole or in part, shall be
available for future options granted under this Plan.
3. Class of Persons Eligible to Receive Options
All officers and key employees of the Company and of any present or
future Company parent or subsidiary corporation are eligible to receive an
option or options under this Plan. 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 registration,
by an Option Committee ("Committee") appointed by the Company's Board of
Directors. The Committee shall consist of a minimum of two members of the
Board of Directors, each of whom shall be a "non-employee" director within the
meaning of Rule 16b-3 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 stock under Section 12 of the Securities Exchange Act of 1934 and,
after such registration, to the Committee.
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(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 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.
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(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.
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.
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(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.
As Amended and Restated Effective September 8, 1997.
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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
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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
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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 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
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
<PAGE>
statement under the Securities Act of 1933, as amended, and under any
applicable state securities laws or an opinion of counsel acceptable to the
Company to the effect that the proposed transaction will be exempt from such
registration. The optionee shall execute such instruments, representations,
acknowledgments and agreements as the Company may, in its sole discretion,
deem advisable to avoid any violation of federal, state, local or securities
exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall, 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.
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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.
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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 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
<PAGE>
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, acknowledgments and agreements as the
Company may, in its sole discretion, deem advisable to avoid any violation of
federal, state, local or securities exchange rule, regulation or law.
(b) The certificates for Common Stock to be issued to the
optionee hereunder shall bear the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or under
applicable state securities laws. The shares have been acquired for
investment and may not be offered, sold, transferred, pledged or
otherwise disposed of without an effective registration statement under
the Securities Act of 1933, as amended, and under any applicable state
securities laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Securities Act of 1933, as amended, and under any applicable state
laws or upon receipt of any opinion of counsel acceptable to the Company that
said registration is no longer required.
The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Securities Act of 1933, as amended, and any applicable state
securities laws.
It is the intention of the Company and you that this option shall not
be an "Incentive Stock Option" as that term is used in Section 422 of the Code
and the regulations thereunder.
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>
Maidstone Financial, Inc.
101 East 52nd Street
New York, NY 10022
Re: Phoenix Preschool Holdings Inc.
-------------------------------
Gentlemen:
The undersigned is or may become the beneficial owner of shares of the
common stock, par value $0.10 per share (the "Common Stock"), of Phoenix
Preschool Holdings, Inc.(the "Company"). The undersigned understands that the
Company has filed a Registration Statement on Form SB-2 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") for
the registration of 1,459,000 units, each representing one share of Common Stock
and two warrants to acquire one additional share of Common Stock (including
195,000 units subject to an over-allotment option) (the "Offering"). The
undersigned further understands that you are contemplating entering into an
Underwriting Agreement with the Company in connection with the Offering. All
terms not otherwise defined herein shall have the same meaning as in the
Underwriting Agreement.
In order to induce the Company and you to enter into the Underwriting
Agreement and to proceed with the Offering, the undersigned agrees, for the
benefit of the Company and you, that should the Offering be effected on or prior
to _____________, 1997, the undersigned will not, without the prior written
consent of Maidstone Financial, Inc., directly or indirectly, sell, contract to
sell or grant any option to purchase any shares of Common Stock beneficially
owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as amended) by the undersigned on the date hereof or hereafter acquired
for a period of two years subsequent to the date of the final Prospectus filed
with the Commission pursuant to Rule 424(b) of the Securities Act of 1933, as
amended (the "Act") promulgated by the Commission or if no filing under Rule
424(b) is made, the date of the final Prospectus included in the Registration
Statement when declared effective under the Act.
Further, the undersigned agrees that prior to the effective date of the
Registration Statement (provided that the Registration Statement is declared
effective on or prior to ____________, 1997), the undersigned will not, without
the prior written consent of Maidstone Financial, Inc., directly or indirectly,
sell, contract to sell or grant any option to purchase any shares of Common
Stock beneficially owned (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) by the undersigned on the date hereof or
hereafter acquired without first requiring any such offering or acquiring
parties to execute and deliver to you an agreement of substantially the tenor
hereof.
<PAGE>
The provisions of this agreement shall not preclude the undersigned
from transferring shares of Common Stock or other securities of the Company by
gift, by will or the laws of the descent and distribution or to any person or
entity who agrees in writing to be bound by the provisions of this agreement.
The obligations of the undersigned under this Agreement shall terminate
(i) in the event the Registration Statement is withdrawn by the Company, or (ii)
if the Offering is not consummated by _____________, 1997.
The undersigned, whether or not participating in the Offering,
confirms that he, she or it understands that Maidstone Financial, Inc. and the
Company will rely upon the representations set forth in this agreement in
proceeding with the Offering. This agreement shall be binding on the
undersigned and his, her or its respective successors, heirs, personal
representatives and assigns.
Very truly yours,
_________________________________ By: ______________________________
Print Stockholder's Name
The foregoing is accepted and agreed to
as of the date first above written:
MAIDSTONE FINANCIAL, INC.
By: _______________________________
Name:
Title:
<PAGE>
EMPLOYMENT AGREEMENT
Agreement made as of this 3rd day of September, 1997, by and
between Phoenix Preschool Holdings, Inc. a Delaware corporation (the "Company"),
and Michael C. Koffler, an individual (the "Executive").
BACKGROUND
The Executive is currently employed by the Company in the
position of Chief Executive Officer and President. The Company and the Executive
desire to provide for the future employment of the Executive as more fully set
forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties agree as
follows:
1. Duties. During the Term (as hereinafter defined), the Executive
shall be the Chief Executive Officer and President of the Company, shall have
such executive duties as are reasonably determined from time to time by the
Company's Board of Directors, and shall be entitled to the powers and authority
normally incident to the office of Chief Executive Officer and President. The
Executive shall devote substantial time and attention to the business of the
Company and use his best efforts to promote the interests of the Company. The
principal place of business of the Executive shall be located within 20 miles of
150 East 58th Street, New York City, New York.
2. Term.
(a) This Agreement shall continue for a period beginning on the date
hereof and ending on the earliest of the following dates (the "Term"): (i) the
date the Executive dies or becomes permanently disabled (as hereinafter
defined); (ii) the date of termination of the Executive's employment with the
Company for cause (as hereinafter defined); (iii) the date of the voluntary
termination by the Executive of the Executive's employment with the Company by
resignation as provided in Section 5 hereof; (iv) the date the Executive reaches
70 years of age; or (v) three years after the date hereof.
(b) For purposes of this Agreement the Executive shall be deemed to be
disabled upon his failure, even after reasonable accommodation, to render
services of the character which he had previously rendered to the Company
because of his physical or mental illness or other incapacity beyond his control
for a continuous period of twelve months or for shorter periods aggregating
twelve months in any two year period);
(c) For purposes of this Agreement, the term "cause" shall mean (i)
conviction of the Executive for any felony, fraud or embezzlement or (ii) the
Executive being guilty of willful or malicious misconduct in connection with the
performance of his duties for the Company and the
Page 1 of 7
<PAGE>
Executive continues such misconduct within twenty days after receiving written
notice from the Company's Board of Directors specifying such misconduct.
3. Compensation. During the Term, the Executive shall be entitled to an
annual salary equal to at least 5% of the Company's earnings before giving
effect to interest, taxes, depreciation and amortization. In addition,
immediately prior to the effective date for the contemplated firm-commitment
underwritten initial public offering of the common stock of the Company, the
Company shall issue to the Executive a non-qualified stock option to acquire up
to 1,000,000 shares of common stock at an exercise price of $4.20 per share. The
Executive shall also be entitled to such cash or other bonuses, stock options
and other incentive payments as are determined from time to time by the
Company's Board of Directors.
4. Other Benefits. During the Term, in addition to the compensation set
forth in Section 3 hereof, the Executive shall be entitled, at a minimum, to the
following benefits from the Company:
(i) a leased car at a rental cost to the Company not exceeding
$1,000 per month (as adjusted for changes in the cost of living as
provided in Section 3 hereof) plus insurance, gasoline and maintenance
costs (it being understood that the Executive may choose to contribute
to any cost exceeding such figure);
(ii) doctor, hospital, life and disability insurance for
Executive and his family which are no less than the amount of these
benefits received by the Executive immediately prior to the date
hereof; and
(iii) reimbursement for all reasonable expenses incurred by
the Executive in the performance of his duties under this Agreement.
If the Executive becomes permanently disabled (as defined in Section
2(b) hereof) during the Term, the Company shall pay to the Executive (even
though the Term of this Agreement has otherwise expired) during the period of
such disability but not beyond the date the Executive reaches age 65, monthly
disability benefits in an amount computed as follows: (i) compute the
Executive's base annual salary immediately prior to such disability; (ii) divide
the figure set forth in clause (i) by 12; (iii) reduce the result of clause (ii)
by the amount of the monthly disability benefits received by the Executive under
any disability insurance paid for in whole or in part by the Company.
5. Voluntary Resignation. The Executive may not voluntarily resign at
any time during the first year of the Term. The Executive may voluntarily resign
at any time after the first year of the Term, by giving the Company sixty (60)
days prior written notice.
Page 2 of 7
<PAGE>
6. Confidentiality and Non-Competition.
(a) The Executive covenants and agrees that, so long as the Company
complies with its obligations hereunder, he will not, during the Term or at any
time thereafter, except with the express prior written consent of the Company or
pursuant to the lawful order of any judicial or administrative agency of
government, directly or indirectly, disclose, communicate or divulge to any
person, or use for the benefit of any person, any knowledge or information with
respect to the conduct or details of the Company's business which he, acting
reasonably, believes or should believe to be of a confidential nature and the
disclosure of which not to be in the Company's interest.
(b) The Executive covenants and agrees that, so long as the Company
complies with its obligations hereunder, he will not, during the Term except
with the express prior written consent of the Company, directly or indirectly,
whether as employee, owner, partner, consultant, agent, director, officer,
shareholder or in any other capacity, engage in or assist any person to engage
in any act or action which he, acting reasonably, believes or should believe
would be harmful or inimical to the interests of the Company.
(c) The Executive covenants and agrees that, so long as the Company
complies with its obligations hereunder, he will not, during the Term except
with the express prior written consent of the Company, in any capacity
(including, but not limited to, owner, partner, shareholder, consultant, agent,
employee, officer, director or otherwise), directly or indirectly, for his own
account or for the benefit of any person, engage or participate in or otherwise
be connected with any competitor, except that the foregoing shall not prohibit
the Executive from owning as a shareholder less than 1% of the outstanding stock
of an issuer whose stock is publicly traded.
(d) The Company may elect to extend the period of the covenants set
forth in Section 6(b) and Section 6(c) for a period ending one year after the
last day of the Term, provided the Company has previously complied with the
provisions of this Agreement and provided the Company during such one year
period continues to pay to the Executive the highest annual compensation
(consisting of annual base salary and cash bonus) the Executive previously
received for any fiscal year during the Term.
(e) The parties agree that any breach by the Executive of any of the
covenants or agreements contained in this Section 6 will result in irreparable
injury to the Company for which money damages could not adequately compensate
the Company and therefore, in the event of any such breach, the Company shall be
entitled (in addition to any other rights and remedies which it may have at law
or in equity) to have an injunction issued by any competent court enjoining and
restraining the Executive and/or any other person involved therein from
continuing such breach. The existence of any claim or cause of action which the
Executive may have against the Company or any other person (other than a claim
for the Company's breach of this Agreement for failure to make payments
hereunder) shall not constitute a defense or bar to the enforcement of such
covenants. In the event of an alleged breach by the Executive of any of the
covenants or agreements contained in
Page 3 of 7
<PAGE>
this Section 6, the Company shall continue any and all of the payments due the
Executive under this Agreement until such time as a Court shall enter a final
and unappealable order finding such a breach; provided, that the foregoing shall
not preclude a Court from ordering the Executive to repay such payments made to
him for the period after the breach is determined to have occurred or from
ordering that payments hereunder be permanently terminated in the event of a
material and willful breach.
(f) If any portion of the covenants or agreements contained in this
Section 6, or the application hereof, is construed to be invalid or
unenforceable, the other portions of such covenant(s) or agreement(s) or the
application thereof shall not be affected and shall be given full force and
effect without regard to the invalid or enforceable portions to the fullest
extent possible. If any covenant or agreement in this Section 6 is held
unenforceable because of the area covered, the duration thereof, or the scope
thereof, then the court making such determination shall have the power to reduce
the area and/or duration and/or limit the scope thereof, and the covenant or
agreement shall then be enforceable in its reduced form.
(g) For purposes of this Section 6, the term "the Company" shall
include the Company, any successor to the Company under Section 7 hereof, and
all present and future direct and indirect subsidiaries and affiliates of the
Company.
7. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Company which will
acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of the Company, and shall
otherwise inure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Nothing in the Agreement shall preclude the Company from consolidating or merger
into or with or transferring all or substantially all of its assets to another
person. In that event, such other person shall assume this Agreement and all
obligations of the Company hereunder. Upon such a consolidation, merger, or
transfer of assets and assumption, the term "the Company" as used herein, shall
mean such other person and this Agreement shall continue in full force and
effect.
8. Withholding. The Company may withhold from any benefits payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or governmental regulation or ruling.
9. (a) Nonassignability. Neither this Agreement or any right or
interest hereunder shall be assignable by the Executive or his legal
representatives without the Company's prior written consent.
(b) Attachment. Except as required by law, the right to receive
payments under this Agreement shall not be subject to anticipation, sale,
encumbrance, charge, levy, or similar process or assignment by operation of law.
Page 4 of 7
<PAGE>
10. Waivers Not to be Continued. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver or
as a consent to any subsequent breach by the other party.
11. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed, certified or registered mail, return receipt
requested, with postage prepaid, to the following addresses or to such other
address as either party may designate by like notice:
A. If to the Executive, to:
Michael C. Koffler, Chairman
Phoenix Preschool Holdings, Inc.
150 East 58th Street - 31st Floor
New York, New York 10155
B. If to the Company, to:
Phoenix Preschool Holdings, Inc.
150 East 58th Street - 31st Floor
New York, New York 10155
Attn: Board of Directors
With a copy to: Frederick D. Lipman, Esquire
Blank Rome Comisky & McCauley
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103-6998
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
12. Jurisdiction. Company and the Executive consent to the exclusive
jurisdiction of the courts of the State of New York and the United States
District Court for the Southern District of New York in any and all actions
arising hereunder and irrevocably consent to service of process as set forth in
Section 11 hereof.
13. Acceleration. If the Company fails to pay the Executive any of the
amounts due to him under Sections 3 or 4 hereof, thirty (30) days after having
received written notice from the Executive of such failure to pay, the Executive
shall have the right to accelerate future payments of all sums due the Executive
under Sections 3 or 4 hereof, without discount.
Page 5 of 7
<PAGE>
14. Indemnity; No Mitigation. If the Company fails to pay the Executive
any of the amounts due to him under Sections 3 hereof or fails to provide the
Executive with any of the benefits due to him under Section 4 hereof, thirty
(30) days after having received written notice from the Executive of such
failure, the Executive shall be entitled to full reimbursement from the Company
for all costs and expenses (including reasonable attorneys fees) incurred by the
Executive in enforcing his rights under this Agreement, plus interest at the
rate of 9% per annum on the improperly withheld amounts or improperly withheld
benefits due to the Executive under Sections 3 or 4 hereof. In the event of a
material breach of this Agreement by the Company, the Executive shall have no
duty to mitigate damages and any income earned by the Executive from other
employment after such breach shall not reduce the damages otherwise due to the
Executive by reason of such breach.
15. General Provisions.
(a) This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof, and supersedes and replaces
all prior agreements between the parties. No amendment, supplement, waiver or
termination of any of the provisions hereof shall be effective unless in writing
and signed by the party against whom it is sought to be enforced. Any written
amendment, supplement, waiver or termination hereof executed by the Company and
the Executive shall be binding upon them and upon all other persons, without the
necessity of securing the consent of any other person and no person shall be
deemed to be a third party beneficiary under this Agreement.
(b) The term "person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any other
legally cognizable entity.
(c) This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
(d) No failure on the part of any party hereto to exercise and no
delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other rights, power or remedy.
(e) The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions hereof.
(f) This Agreement shall be governed and construed and the legal
relationships of the parties determined in accordance with the laws of the State
of New York applicable to contracts executed and to be performed solely in the
State of New York.
Page 6 of 7
<PAGE>
PHOENIX PRESCHOOL HOLDINGS,
(Corporate Seal) By:_________________________________
Witness:_________________________
____________________________________
MICHAEL C. KOFFLER
Page 7 of 7
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF
PARENT SUBSIDIARY INCORPORATION
Phoenix Preschool Phoenix Preschool Delaware
Holdings, Inc. 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
Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-31407) of our
report dated August 13, 1997, except for the Reorganization as described in
Note 1(1) which is as of ____________, 1997, relating to the consolidated
financial statements of Phoenix Preschool Holdings, Inc., our report dated
June 9, 1997 relating to the statements of income, stockholder's equity and
cash flows of Pollack Enterprises, Inc., our report dated June 20, 1997
relating to the statements of income, stockholder's equity and cash flows of
Libbus, Inc., and our report dated August 27, 1997., relating to the statement
of income, stockholder's equity and cash flows of TLC Recreation Center, Inc.,
which is contained in that Prospectus.
We also consent in the references to us under the caption "Experts" and
"Selected Financial Data" in the Prospectus.
/s/ BDO Seidman, LLP
--------------------
BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
September 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Phoenix Preschool Holdings, Inc. as of June
30, 1997 and for the year then ended and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 159,568
<SECURITIES> 0
<RECEIVABLES> 424,697
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 657,245
<PP&E> 3,589,235
<DEPRECIATION> 530,648
<TOTAL-ASSETS> 4,553,368
<CURRENT-LIABILITIES> 1,083,578
<BONDS> 2,601,123
0
50,000
<COMMON> 20,278
<OTHER-SE> 550,560
<TOTAL-LIABILITY-AND-EQUITY> 4,553,368
<SALES> 0
<TOTAL-REVENUES> 5,608,092
<CGS> 0
<TOTAL-COSTS> 5,747,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150,113
<INCOME-PRETAX> (287,787)
<INCOME-TAX> 0
<INCOME-CONTINUING> (287,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (287,787)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
<PAGE>
Exhibit 99
Consent of Persons to Become Directors
Each of the undersigned, to be appointed directors of Phoenix
Preschool Holdings, Inc., a Delaware corporation, does hereby consent to the
reference to him as a person about to become a director of the Company in the
Company's Registration Statement on Form SB-2 (No. 333-31407) filed with the
U.S. Securities and Exchange Commission.
/s/ David Lenefsky
- ---------------------------------
David Lenefsky
/s/ Garo H. Armen
- ---------------------------------
Garo H. Armen
/s/ Ralph Manela
- ---------------------------------
Ralph Manela
Dated: August 28, 1997
