<PAGE>
As filed with the Securities and Exchange Commission on February 9,1998.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
The Havana Group, Inc.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
DELAWARE 5999 34-1454529
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
organization) Classification Code No.)
</TABLE>
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Address and telephone number of principal executive offices and
principal place of business.)
William L. Miller, Chief Executive Officer
The Havana Group, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<S> <C>
Steven Morse, Esq. Steven Gold, Esq.
Lester Morse P.C. Mintz & Gold, LLP
Suite 420 444 Park Ave. South
111 Great Neck Road New York, NY 10016
Great Neck, NY 11021 Phone: (212) 696-4848
Phone: (516) 487-1446 Fax: (212) 696-1231
Fax: (516) 487-1452
</TABLE>
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
<PAGE>
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: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
ii
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH AMOUNT OFFERING AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT PRICE (1) FEE
- ----------------------------------------------------- ---------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Units, each consisting of one share of Common Stock,
$.001 par value per share, and two Class A Warrants
each to purchase one share of Common Stock (2)..... 529,000 $ 6.00 $ 3,174,000 $ 961.82
Shares of Common Stock included in the Units......... 529,000 -- -- -(4)
Class A Warrants included in the Units............... 529,000 -- -- -(4)
Shares of Common Stock underlying Class A Warrants
(3)................................................ 1,058,000 $ 5.25 $ 5,554,500 1,683.18
Underwriters' Warrant Purchase Option ("Underwriters'
Option")........................................... 46,000 $ .001 $ 46 .01
Units to purchase one share of Common Stock and two
Class A Warrants each to purchase one share of
Common Stock in Underwriters' Option to be
purchased from a Selling Unit Holder............... 46,000 $ 9.00 $ 414,000 125.45
Class A Warrants to purchase one share of Common
Stock in Underwriters' Option...................... 92,000 -- -- --
Shares of Common Stock included in Underwriters'
Option (4)......................................... 46,000 -- -- --
Shares of Common Stock underlying Class A Warrants
included in the Underwriters' Option (5)........... 92,000 $ 7,875 $ 724,500 219.55
Common Stock of Selling Security Holders............. 400,000 $ 6.00 $ 2,400,000 727.27
Class A Warrants of Selling Security Holders......... 1,600,000 -- -- -(4)
Shares of Common Stock underlying Class A Warrants of
Selling Security Holders........................... 1,600,000 $ 5.25 $ 8,400,000 2,545.55
Total Registration Fee............................... $6,096.78
-----------
-----------
</TABLE>
- ------------------------
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Includes 69,000 Units which the Underwriters have the option to purchase
from a Selling Unit Holder to cover Over-Allotments, if any.
(3) Issuable upon the exercise of Class A Warrants to be offered to the public.
(4) No fee is required under Rule 457(g).
(5) Issuable upon the exercise of the Class A Warrants included in the 46,000
Units included in the Underwriters' Option.
iii
<PAGE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement covers the primary offering of securities of The
Havana Group, Inc. (the "Company") and up to 69,000 Units to be sold by Duncan
Hill Co., Ltd. ("Selling Unit Holder") pursuant to the Underwriters'
Over-Allotment Option and the offering of other securities by certain persons,
each as a selling security holder (the "Selling Security Holders"). The Company
is registering, under the primary prospectus (the "Primary Prospectus"), 529,000
Units, each Unit consisting of one share of Common Stock and two Class A
Warrants. The Company is registering on behalf of a bridge lender as a Selling
Security Holder under an alternate prospectus (the "Alternate Prospectus"), the
resale of 400,000 shares of Common Stock and 1,400,000 Class A Warrants issuable
by the Company to the Selling Security Holder upon the completion of the
Offering pursuant to a Convertible Note which provides for the automatic
conversion of the Convertible Note and the exercise of such 1,400,000 Class A
Warrants by the transferees of the bridge lender. The Alternate Prospectus also
covers the resale of 200,000 Class A Warrants owned by William Miller, the
Company's Chief Executive Officer, and the 200,000 shares issuable upon exercise
thereof by the transferees of Mr. Miller. The 200,000 Class A Warrants are
issuable by the Company pursuant to Warrants which provide for the automatic
conversion of the Warrants into Class A Warrants upon the completion of the
Offering. In the event that the Underwriters' Over-Allotment Option is not
exercised in full, the Alternate Prospectus will also cover any unsold Units up
to 69,000 Units and such shares of Common Stock underlying the exercise of the
Class A Warrants included in the Units. The Alternate Prospectus pages which
follow the Primary Prospectus, contain certain sections which are to be combined
with all of the sections contained in the Primary Prospectus, with the following
exceptions; the front cover page and the pages which precede "Available
Information," the back cover page and the sections entitled "Underwriting" and
"Selling Security Holders." In addition, the section entitled "Concurrent Sales"
and "Plan of Distribution" from the Alternate Prospectus pages will be added to
the Alternate Prospectus. The section entitled "Use of Proceeds" in the primary
Prospectus will be changed to read "Use of Proceeds of Company Offering."
Furthermore, all references contained in the Alternate Prospectus to "the
Offering" shall refer to the Company's offering under the Primary Prospectus and
all references to the "Concurrent Offering" shall refer to the Selling Security
Holders Offering in the Alternate Prospectus.
iv
<PAGE>
THE HAVANA GROUP, INC.
Cross-Reference Sheet
Showing Location in Prospectus of
Information Required by Items in Part I of Form SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Outside Front Cover of Prospectus
Front Cover Page of Prospectus
2. Inside Front and Outside Bank Cover Pages Inside Front and Outside Bank Cover Pages
of Prospectus of Prospectus; Additional Information
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution Dilution
7. Selling Securityholders Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Selling Security Holders; Underwriting
9. Legal Proceedings Business--Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal and Selling Stockholders
Owners and Management
12. Description of Securities Description of Securities; Dividends
13. Interest of Named Experts and Counsel Experts and Legal Matters
14. Disclosure of Commission Position on Underwriting
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years The Company and its Parent
16. Description of Business Prospectus Summary; The Company and its
Parent; Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business
18. Certain Relationships and Related Certain Transactions
Transactions
19. Market for Common Equity and Related Risk Factors; Unregistered Shares Eligible
Stockholder Matters for Immediate and Future Sale; Description
of Securities
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Not Applicable
</TABLE>
v
<PAGE>
PRELIMINARY PROSPECTUS DATED FEBRUARY 9, 1998
PROSPECTUS
THE HAVANA GROUP, INC.
460,000 Units
Each Unit Consisting of One Share of Common Stock
and Two Common Stock Class A Purchase Warrants
The Havana Group, Inc. (the "Company") is offering for sale 460,000 units
(the "Units"), each Unit consisting of one share of common stock, $.001 par
value (the "Common Stock") and two redeemable Class A Common Stock Purchase
Warrants (the "Class A Warrants") (the "Offering"). The Common Stock and the
Class A Warrants are not detachable or separately transferable until the
earlier of (i) __________, 1998 (six months from the date of this Prospectus)
or (ii) the date selected by the Representative (as defined herein) in
writing for separation (the "Separation Date"). After the Separation Date,
the Common Stock and Class A Warrants will be detachable and may trade
separately. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at a price of $5.25 and are exercisable from the Separation Date
until five years after the date of this Prospectus. The Company may redeem
the Class A Warrants at a price of $.10 per Warrant, at any time after one
year from the date of this Prospectus, upon not less than 30 days' prior
written notice, if the closing bid price of the Common Stock has been at
least $10.50 per share for 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given. See
"Description of Securities."
(Continued on page 3)
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE ___
AND "DILUTION" BEGINNING ON PAGE ___.
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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>
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE DISCOUNTS PROCEEDS TO SELLING
TO AND TO UNIT
PUBLIC COMMISSIONS(1) COMPANY (2) HOLDER
------------ --------------- ------------ -----------
<S> <C> <C> <C> <C>
Per Unit.......................... $ 6.00 $ 0.60 $ 5.40 $ 5.40
Total (3)......................... $ 2,760,000 $ 276,000 $2,484,000 $ -0-
</TABLE>
- ------------------------
(1) Does not include additional compensation to be received by the Underwriters
in the form of a non-accountable expense allowance equal to 3% of the public
offering price of the Units, the value of an option granted to the
Underwriters to purchase up to 46,000 Units at an exercise price of $9.00
per Unit ("Underwriters' Unit Purchase Option"), or a two-year financial
consulting agreement with the Representative at a cost to the Company of
$100,000 payable in advance at the Closing of the Offering. The Company has
also agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at approximately $434,000, including the non-accountable expense allowance
in the amount of $82,800 ($95,220 if the Underwriters' Over-Allotment option
is exercised in full), and the financial consulting fee referred to above.
After deducting such expenses, the net proceeds to the Company will be
approximately $2,050,000 (approximately $2,037,500 if the Underwriters'
Over-Allotment Option is exercised in full). See "Use of Proceeds."
(3) Duncan Hill Co. Ltd., the Company's sole stockholder (the "Selling Unit
Holder") has granted the Underwriters an option, exercisable within 30 days
from the date of this Prospectus, to purchase up to 69,000 additional Units,
solely to cover Over-Allotments, if any (the "Over-Allotment Option"). If
such Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Unit Holder will be approximately $3,174,000 and $317,400,
$2,484,000, and $372,600, respectively. See "Use of Proceeds" and
"Underwriting."
THIS LEGEND IN RED ON COVER 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.
VTR CAPITAL, INC.
The date of this Prospectus is , 1998.
2
<PAGE>
INSERT COLOR PHOTOS
3
<PAGE>
The Registration Statement of which this Prospectus forms a part also
includes an Alternate Prospectus that covers a "Concurrent Offering" by certain
Selling Security Holders (as defined below). The Concurrent Offering includes an
offering of 400,000 shares of Common Stock and 1,400,000 Class A Warrants owned
by a bridge lender (the "Bridge Lender") and the exercise of the Common Stock
underlying the 1,400,000 Class A Warrants by the transferees of the bridge
lender. The Alternate Prospectus also covers the resale of 200,000 Class A
Warrants owned by William L. Miller ("Miller"), the Company's Chief Executive
Officer and the exercise of such 200,000 Class A Warrants by the transferees of
Mr. Miller. In addition to the foregoing, the Alternate Prospectus includes up
to 69,000 Units (identical to those sold in the Offering) to be offered by
Duncan Hill Co., Ltd., the Company's sole stockholder (the "Selling Unit Holder"
or "Duncan Hill") prior to the Offering including the exercise of 138,000 Class
A Warrants by the transferees of the Selling Unit Holder. To the extent that the
Underwriters exercise the Over-Allotment Option as described herein, then the
number of Units to be offered by the Selling Unit Holder in the Concurrent
Offering will be proportionately reduced. (The Bridge Lender, Miller, and the
Selling Unit Holder are hereinafter collectively referred to as the "Selling
Security Holders.") The securities offered as part of the Concurrent Offering
may be sold concurrently with or after the Offering. The Class A Warrants held
by the Selling Security Holders are identical to the Class A Warrants being
offered by the Company. Sales of such securities or even the potential of such
sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See'Certain Transactions" and "Selling Security
Holders."
Prior to the Offering, there has been no public market for the Units and
there can be no assurance that any such market will develop. VTR Capital,
Inc. will act as the representative of the Underwriters named herein (the
"Representative"). For information regarding the factors considered in
determining the initial public offering price of the Units and the exercise
price of the Warrants, see "Underwriting." The Units, Common Stock and
Warrants are expected to be approved for quotation on the Over-the-Counter
("OTC") Electronic Board under the symbols "_______," "_______," and
"_______," respectively. See "Risk Factors - Certain Implications of Trading
Over-The-Counter; "Penny Stock Regulations." There is no assurance, however,
that the Company's securities will be approved for listing on the OTC
Electronic Bulletin Board or elsewhere. The Company anticipates that the
Units offered hereby will be qualified for sale by the Company in a limited
number of states. See "Risk Factors--Limits on Secondary Trading; Current
Prospectus and State Sky Registration Required to Exercise Warrants."
Upon completion of the Offering, the Selling Unit Holder and Miller will
beneficially own approximately 89% of the Company's outstanding voting capital
stock (not including Class A Warrants and options to be owned by them). See
"Risk Factors - Control by Parent and Parent's Controlling Stockholders."
The Units being offered for sale by the Company are being offered on a "firm
commitment" basis, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters. The Underwriters reserve the right to withdraw,
cancel or modify the offering and to reject any order in whole or in part. It is
expected that delivery of certificates
4
<PAGE>
representing the Units will be made against payment therefor on or about
____________________, 1998 at the office of the Representative at 17 Battery
Place, New York, New York 10004.
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THE OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITERS. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS AND/OR THE SECURITIES
INCLUDED THEREIN WITH OR THROUGH THE UNDERWRITERS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK AND/OR CLASS A WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
5
<PAGE>
AVAILABLE INFORMATION
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company can be inspected and copied
(at prescribed rates) at the Commission's Public Reference section, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the New York Regional Office,
Seven World Trade Center, New York, NY. The Commission maintains a Web site on
the Internet (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the commission through the Electronic Data Gathering, Analysis, and Retrieval
System (EDGAR).
The Company has filed with the Commission a registration statement on
Form SB-2, File No. 333-______ (herein together with all amendments and
exhibits referred to as the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), of which this Prospectus
forms a part. This Prospectus does not contain all of the information set
forth in the registration Statement, certain parts of which have been omitted
in accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified by such reference.
6
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Financial Statements (including the notes thereto) appearing elsewhere in this
Prospectus. In addition, unless otherwise indicated to the contrary, all
information appearing herein does not give effect to the exercise of (i) the
Over-Allotment Option; (ii) the Class A Warrants (including Class A Warrants
included in the Over-Allotment Option and those owned by the Selling Security
Holders); or (iii) the Underwriters' Unit Purchase Option. All share and per
share amounts in this Prospectus give retroactive effect to a 10,000 for 1
forward stock split effective December 8, 1997. See "Description of Securities,
"Bridge Financing," and "Underwriting." Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
The Havana Group, Inc. (the "Company") is a direct marketer which publishes
a catalog selling pipes, tobacco and smoking products. The Company's
wholly-owned subsidiary, Monarch Pipe Company ("Monarch") also operates a pipe
manufacturing company which produces pipes almost exclusively for the Company.
The Company also operates a retail store in Canton, Ohio, opened in December
1997 (the "Smokeshop"), which sells cigars, smoking products, and fine beers and
wines.
The Company's predecessor, E. A. Carey of Ohio, Inc. ("Carey"), formed the
Company as a Delaware subsidiary on November 26, 1997 and merged Carey into the
Company for the purpose of its reincorporation in Delaware, which merger was
effective December 5, 1997. Unless otherwise indicated, all references in this
Prospectus to the Company include the Company, Monarch and its predecessor,
Carey.
Carey, which has been in business for over 40 years, was formed to sell the
patented Carey "Magic Inch" smoking pipe exclusively through mail order during
the 1960's and 1970's. Duncan Hill purchased Carey in 1984 and the Company has
operated as a subsidiary under Duncan Hill's control since then.
Currently, the Company derives its revenues from three sources; retail sales
from the Smokeshop, direct mail of catalogs and from the operation of its Carey
Tobacco Club. During the nine months ended September 30, 1997, the Company
mailed 252,562 catalogs and generated sales of $759,102, approximately 73% of
total gross revenue. Carey Tobacco Club, a monthly program of tobacco shipments
that supplies pipe tobacco to individual Club members, generated $283,321 in
gross sales, approximately 27% of total gross revenue. The Smokeshop was
recently opened on December 8, 1997.
The Company believes that its expertise in the marketing and merchandising
of smoking products and the recent introduction of the Smokeshop will provide
the basis for future growth by use of the following strategies:
7
<PAGE>
DEVELOPMENT OF THE HAVANA GROUP DIRECT. The Company plans to create and
develop The Havana Group (hereinafter referred to as "The Havana Group Direct"),
a direct marketing cigar club patterned after popular retail cigar clubs. The
Company would develop its member base using the same marketing methods it has
historically used in the smaller pipe and tobacco business as described under
"Business-Marketing."
THE HAVANA GROUP RETAIL. The Company had operated a smokeshop named
"Carey's Smokeshop" from 1984 to 1996 to maintain a retail presence and provide
the Company with a factory outlet for its products. In October 1996, the Company
closed its retail store, leased an off-mall retail location in Canton, Ohio, and
reopened as "The Havana Group" (hereinafter referred to as the "Smokeshop") on
December 8, 1997. The Smokeshop offers product groups proven historically in the
smokeshop industry, and also other product lines, including fine wines, imported
beers, and limited clothing to reinforce the Havana Group logo. The Company may
expand the number of retail stores depending upon the success of its existing
store and available external financing, if any.
MAINTAIN CAREY'S SMOKESHOP CATALOG. The Company believes that its catalog
operations "Carey's Smokeshop Catalog" provide a good initial revenue base.
However, the Company believes that it must maintain and expand this initial
customer base.
RELATED PARTIES. The Company is a subsidiary of Duncan Hill. a publicly
held corporation which also controls a majority interest in Kids Stuff, Inc.
("Kids Stuff"), which is traded on the OTC Electronic Bulletin Board under the
symbol "KDST." Since January 1, 1997, the telemarketing, order fulfillment,
warehousing, data processing and administrative functions of the Company have
been provided by Kids Stuff. The Company has recently executed an agreement with
Kids Stuff for Kids Stuff to continue to provide such services on a fee basis.
See "The Company and its Parent" and "Certain Transactions."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, Ohio 44718, and the Company's telephone number
is (330) 492-8090.
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company......... 460,000 Units, each Unit consisting of one share
of Common Stock and two Class A Warrants. The
Common Stock and Class A Warrants are not
detachable or separately transferable until the
earlier of (i)______, 1998 (six months from the
date of this Prospectus) or (ii) the date selected
by the Representative in writing for separation
(the "Separation Date"). After the Separation
Date, the Common Stock and Class A Warrants will
be detachable and may trade separately. Each Class
A Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of
$5.25 and are exercisable from the Separation Date
until five years after the date of this
Prospectus. The Company may redeem the Warrants at
a price of $.10 per Class A Warrant at any time
after they become exercisable upon not less than
30 days' prior written notice if the closing bid
price of the Common Stock has been at least $10.50
per share for the 20 consecutive trading days
ending on the 15th day prior to the date on which
the notice of redemption is given. See
"Description of Securities."
Securities Offered by Sole
Stockholder of the Company............... 69,000 Units. In the event that the Over-Allotment
Option is exercised in whole or in part, these
Units will be purchased by the Underwriters from
the Selling Unit Holder. See "Principal and
Selling Stockholder" and "Certain Transactions."
Concurrent Offering by Selling Security
Holders.................................. The Registration Statement of which this
Prospectus forms a part also includes an Alternate
Prospectus that covers a "Concurrent Offering" by
certain Selling Security Holders (as defined
below). The Concurrent Offering includes an
offering of 400,000 shares of Common Stock and
1,400,000 Class A Warrants owned by the Bridge
Lender and the exercise of the Common Stock
underlying the 1,400,000 Class A Warrants by the
transferees of the Bridge Lender. The Alternate
Prospectus also covers the resale of 200,000 Class
A Warrants owned by Miller and the exercise of
such 200,000 Class A Warrants by the transferees
of Mr. Miller. In addition to the foregoing, the
Alternate Prospectus includes up to 69,000 Units
(identical to those sold in the Offering) to be
offered by Duncan Hill including the exercise of
138,000 Class A Warrants by the transferees of
Duncan Hill. To the extent
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
that the Underwriters exercise the Over-Allotment
Option as described herein, then the number of
Units to be offered by Duncan Hill in the
Concurrent Offering will be proportionately
reduced. (The Bridge Lender, Miller, and Duncan
Hill are hereinafter collectively referred to as
the "Selling Security Holders.") The securities
offered as part of the Concurrent Offering may be
sold concurrently with or after the Offering. The
Class A Warrants held by the Selling Security
Holders are identical to the Class A Warrants
being offered by the Company. Sales of such
securities or even the potential of such sales at
any time may have an adverse effect on the market
prices of the securities offered hereby.
See'Certain Transactions" and "Selling Security
Holders."
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION
- --------------
<S> <C>
Common Stock Outstanding prior to the Offering (1)...... 1,000,000 Shares
Common Stock to be Outstanding after the Offering (2)... 1,860,000 Shares
Class A Warrants Outstanding before Offering (3)........ -0- Class A Warrants
Class A Warrants to be Outstanding after Offering (3)... 3,118,000 Class A Warrants
Series A Non-Convertible Preferred Stock (4)............ 5,000,000 Shares
Series B Convertible Preferred Stock (5)................ 1,100,000 Shares
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Proposed OTC Symbols
Units
Common Stock
Warrants
Use of Proceeds............................ The Company intends to apply the net proceeds
of the Offering primarily for the purchase of
inventory, humidor construction, the
repayment of $102,000 in principal and
interest of a non-convertible note held by a
Selling Security Holder, the payment of the
first year's Preferred Stock dividends of
$110,000 to Duncan Hill and for working
capital and general corporate purposes. See
"Use of Proceeds."
Risk Factors............................... The Offering involves a high degree of risk
and immediate and substantial dilution. These
risks include, without limitation, the
following: The Company's History of Operating
and Net Losses and Uncertainty as to Future
Operating Results; Company Guarantee of Kids
Stuff Line-of-Credit; Dependence Upon Kids
Stuff; Dependence on Offering
Proceeds--Payments to the Bridge Lender and
Duncan Hill; Possible Need for Additional
Financing; Constraints on Ability to Satisfy
Demand for Premium Cigars; Declining Market
for Cigars and Tobacco Through 1993; Limited
Experience in Opening Retail Smokeshops;
Potential Product Liability; Competition;
Extensive and Increasing Regulation of
Tobacco Products; Tobacco Industry
Litigation; Dependence Upon key Personnel;
Need for Additional Personnel; Chief
Executive Officer will not be Required to
Work Full Time; Potential Conflicts of
Interest; State Sales Tax Collection; Social,
Political and Economic Risks Associated with
International Trade; Technological Changes in
Distribution and Marketing Methods; and
Control by Duncan Hill and Miller. See "Risk
Factors" and "Dilution."
</TABLE>
- ------------------------
(1) Does not include (i) options to purchase 260,000 shares of Common Stock
owned by certain directors of the Company; (ii) warrants to purchase
138,000 shares of Common Stock owned by the Selling Unit Holder and
Warrants to purchase 200,000 shares of Common Stock owned by Miller,
which warrants upon the completion of the Offering automatically convert
into Class A Warrants identical to the Class A Warrants sold in the
Offering; (iii) a convertible note owned by the Bridge Lender convertible
into a total of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants, such note automatically converts upon the completion of the
Offering; and (iv) up to 1,100,000 shares issuable upon conversion of the
Series B Preferred Stock (see Note 3).
(2) The 1,860,000 shares of Common Stock includes 400,000 shares of Common Stock
to be issued to a Bridge Lender automatically upon the completion of the
Offering pursuant to a convertible note. The 1,860,000 shares do not
include: (i) 920,000 shares of Common Stock issuable upon the exercise of
the Class A Warrants included in the Units offered hereby; (ii) options to
purchase up to 260,000 shares of Common Stock owned by certain directors of
11
<PAGE>
the Company; (iii) warrants to purchase 138,000 shares of Common Stock owned
by the Selling Unit Holder and warrants to purchase 200,000 shares of Common
Stock owned by Miller, which warrants upon the completion of the Offering
automatically convert into warrants identical to the Class A Warrants; (iv)
1,400,000 shares of Common Stock issuable upon the exercise of 1,400,000
Class A Warrants attributable to the Bridge Lender; (v) 1,100,000 shares
issuable upon conversion of the Series B Preferred Stock (see Note 5); and
(vi) 138,000 shares of Common Stock issuable upon exercise of the
Underwriters' Unit Purchase Option and underlying warrants.
(3) Prior to the Offering, the Company has no Class A Warrants outstanding.
However, it has outstanding warrants and a convertible note which upon the
completion of the Offering automatically convert into an aggregate of
1,738,000 Class A Warrants.
(4) The Selling Unit Holder, the Holder of the Series A Preferred Stock, has the
right to vote each share of Preferred Stock on the same basis as each share
of Common Stock. See "Description of Securities."
(5) The Selling Unit Holder, the Holder of the Series B Preferred Stock, has the
right to convert each share of Preferred Stock into one share of Common
Stock commencing any time after the Company has achieved pre-tax earnings of
at least $500,000 during any fiscal year.
12
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data is derived from the historical financial
statements of the Company. The adjusted financial statements of the Company
are derived from the historical financial statements of the Company and gives
effect to the completion of a $200,000 bridge financing in January 1998. The
pro forma financial statements are derived from the adjusted financial
statements and gives effect to the sale of 460,000 Units offered hereby and
the automatic conversion of a convertible note upon the completion of the
Offering into a total of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants. The financial statements of the Company for dates and periods prior
to December 5, 1997 are those of its predecessor, Carey. This summary
financial data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as the
Company's historical financial statements and the related notes thereto, and
the Company's pro forma financial statements and the related notes thereto,
included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operational Data:
Net Sales.............................................. $1,668,927 $1,656,316 $1,217,523 $1,015,416
Loss from Operations................................... (91,351) (106,338) (97,541) (3,354)
Net Loss............................................... (64,626) (115,523) (116,845) (23,308)
Net Loss per common share.............................. $ (.06) $ (.12) $ (.12) $ (.02)
Weighted average number of shares outstanding during the
period (1)........................................... 1,000,000 1,000,000 1,000,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------
AS ADJUSTED
ACTUAL (2) PRO FORMA (3)
------------ -------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets...................................................... $1,106,684 $1,306,684 $3,254,637
Net Tangible Assets............................................... 421,005 521,005 2,568,958
Working Capital................................................... 445,543 545,543 2,593,496
Total Liabilities................................................. 145,107 245,107 145,107
Stockholder's Equity.............................................. 961,577 1,061,577 3,109,530
</TABLE>
- ------------------------
(1) Reflects the reincorporation and recapitalization of Carey in Delaware. See
"The Company and its Parent--Reorganization."
(2) Reflects the completion of $200,000 of bridge financing. See "Use of
Proceeds--Bridge Financing."
(3) Reflects the sale of 460,000 Units offered hereby, and the receipt of the
net proceeds and repayment of $102,000 of indebtedness including estimated
accrued interest.
13
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and involve a
high degree of risk and substantial dilution and should only be purchased by
investors who can afford to lose their entire investment. Each prospective
investor should carefully consider the following risk factors inherent in, and
affecting the business of, the Company and the Offering, together with the other
information in his prospectus, before making an investment decision.
HISTORY OF OPERATING AND NET LOSSES/UNCERTAINTY AS TO FUTURE OPERATING
RESULTS. The Company experienced losses for the years ended December 31, 1996
and the nine months ended September 30, 1997. For 1996, the Company incurred an
operating loss of $106,338 and a net loss of $115,523. For the first nine
months of 1997, the Company incurred an operating loss of $3,354 and a net loss
of $23,308. The Company believes that in order to achieve profitability, it must
expand its retail operations, and capitalize on the growing market of premium
cigar sales. The Company's revenue growth and future profitability will depend
on its ability to increase retail sales, to expand the membership of The Havana
Group Direct and to effectively monitor and control costs. Accordingly, there
can be no assurance that the Company will operate profitably in the future.
Furthermore, future operating results depend upon many factors, including
general economic conditions, the level of competition and the ability of the
Company to continue to attract and retain customers successfully. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
COMPANY GUARANTEE OF KIDS STUFF LINE OF CREDIT. The assets of the Company
are pledged as collateral along with the assets of Duncan Hill to guarantee an
$800,000 revolving bank line of credit in the name of Kids Stuff, a subsidiary
of Duncan Hill. The bank line of credit, which had a balance of $671,000 at
January 1, 1998, is for an open term, payable on demand. The repayment of this
credit facility is also guaranteed by Miller. In the event that Kids Stuff is
unable to meet the terms and conditions of the line of credit and the bank were
to collect against the Company as guarantor, this could adversely affect the
Company's operations. In this respect, at November 30, 1997, Kids Stuff has a
working capital deficit of $803,789 and a deficit net worth of $900,180. For the
eleven months ended November 30, 1997 and for the years ended December 31, 1996
and 1995, Kids Stuff incurred a net profit (loss) of $69,270, $(521,640) and
$(536,992), respectively. See "Certain Transactions," "The Company and Its
Parent", and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE UPON KIDS STUFF, AN AFFILIATE OF THE COMPANY. The Company's
ability to effectively promote products, manage inventory, efficiently purchase,
sell and ship products, and maintain cost-effective operations are each
dependent upon the accuracy, capability and proper utilization of the Company's
outside data processing and telephone systems. The Company's telemarketing, data
processing, customer service and management information systems functions are
performed by and purchased from Kids Stuff, an affiliate of the Company,
pursuant to an agreement. A significant disruption or
14
<PAGE>
loss affecting the telephone or computer systems or any significant damage to
Kids Stuff's facilities could have a material adverse effect on the Company's
business. The Company has an agreement with Kids Stuff to also provide the
Company with order fulfillment, warehousing, and administrative services.
These services are essential to the Company's operations. If for any reason
whatsoever Kids Stuff were unable to provide these services, the Company's
operations may be materially adversely affected until such time as the
Company is able to provide these services, itself or through an independent
third party. See "Certain Transactions", "The Company and Its Parent", and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON OFFERING PROCEEDS--PAYMENTS TO THE BRIDGE LENDER AND DUNCAN
HILL. As a result of its operating results and lack of working capital, the
Company needs the proceeds of the Offering primarily for the purchase of
inventory, humidor construction and for working capital. Further, approximately
$110,000 of the net proceeds of the Offering will be paid to an affiliate of the
Company and approximately an additional $102,000 will be paid to the Selling
Security Holder. See "Use of Proceeds," "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
POSSIBLE NEED FOR ADDITIONAL FINANCING. The proceeds of the Offering are
estimated to be applied over a period of at least twelve months following the
completion of the Offering. The Company may require additional financing during
such twelve month period due to unforeseen events or to open additional retail
smoke shops. The Company does not currently have the capital to open such
additional retail smoke shops and is expected to be dependent upon external
financing beyond the proceeds of the Offering to meet this potential objective.
No assurances can be given that such financing will be available or, if
available, that such financing can be obtained on terms satisfactory to the
Company. See Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CONSTRAINTS ON ABILITY TO SATISFY DEMAND FOR PREMIUM CIGARS. The Company
has experienced, and may from time-to-time experience a shortage of certain
cigars, especially premium cigars. Although many premium cigar manufacturers
have taken measures to increase production, there can be no assurance that the
Company will have access to sufficient supplies of premium cigars to meet its
customers expressed demands. The Company is not a party to long-term supply
contracts with any manufacturers. The Company relies upon the strength of its
relationships with leading manufacturers to meet its supply requirements. There
can be no assurance that the Company will be able to continue to maintain these
relationships or that such relationships will be sufficient to enable the
Company to meet future demand for its proprietary cigars and other premium
branded cigars which the Company sells. Any material inability of the Company to
expand its current supply of cigars in a timely manner would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Cigar manufacturers have experienced, and continue to experience, shortages
of properly aged and blended tobacco ready for manufacturing, and shortages in
skilled
15
<PAGE>
employees for blending and rolling premium cigars. In general, the aging
process for tobacco requires that tobacco be purchased several years in advance
of actual use in the manufacturing process. Tobacco shortages may prevent the
Company from purchasing sufficient cigars to meet demand, maintaining its growth
expectations or even maintaining its current level of sales. These factors are
all outside the control of the Company, may significantly impact the ability of
the Company to secure an adequate supply of premium cigars in a timely fashion
and could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business."
DECLINING MARKET FOR CIGARS AND TOBACCO THROUGH 1993. According to industry
sources, the cigar industry experienced declining unit sales between 1964 and
1993. While the cigar industry has experienced increasing annual unit sales
since 1993, there can be no assurance that recent positive trends will continue
on a long-term basis or that new customers will remain cigar smokers in the
future. In addition, the market for premium cigars, and consequently the
Company's sales and results of operations, will be subject to fluctuations based
upon general economic conditions in the United States. If there were to be a
general economic downturn or recession in the United States, the Company expects
that the market for luxury related items such as premium cigars would decrease.
In the event of such an economic downturn or recession, there can be no
assurance that the Company's business, results of operations and financial
condition would not be materially adversely affected.
LIMITED EXPERIENCE IN OPENING RETAIL SMOKESHOPS. The Company has operated
only one retail outlet store opened in December 1997 (the "smokeshop") and may
open additional retail cigar stores depending upon the success of its existing
store and available external financing. No assurance can be given that the
retail smokeshop will sustain profitability in the future or that any additional
Company stores will be opened and achieve profitability. The profitable
operation of any new retail stores is dependent on a number of factors,
including obtaining sufficient financing, identifying appropriate geographic
markets, evaluating the suitability of specific locations within such markets,
hiring, training and assimilating management and store level employees,
negotiating acceptable lease terms and constructing and opening new stores in a
timely and cost effective manner. There can be no assurance that the Company
will be able to successfully identify, open, finance and operate additional
retail stores. See "Business."
POTENTIAL PRODUCT LIABILITY. There is a possibility that someone could
claim personal injury or property damage resulting from the use of products
purchased from the Company. As a seller of tobacco products, the Company is
exposed to potential liability. Since 1990, Duncan Hill has maintained, for
itself and its subsidiaries (including the Company), product liability
insurance. Currently, the amount of coverage is $1 million per occurrence and $2
million in the aggregate. The policies are for a period of one year and are
currently in effect through September 17, 1998. Although the Company believes
that its present insurance coverage is sufficient for its current level of
business operations, there is no assurance that such insurance will be
sufficient to cover potential claims, or that adequate, affordable insurance
coverage will be available to the Company in the future. An uninsured successful
claim against the Company or a successful claim in excess of the
16
<PAGE>
liability limits or relating to an injury excluded under the policy could
have a material adverse effect on the Company. See "Business--Product
Liability Insurance."
COMPETITION. The retail and mail order catalog business is highly
competitive. The Company's catalogs compete with several other cigar mail order
catalogs. The retail stores will compete with other smokeshops, estimated at
over 1,000 in the United States. Many of the Company's competitors have greater
financial, distribution and marketing resources than the Company. There can be
no assurance that the Company will be able to compete effectively with existing
or potential competitors. See "Business-- Competition."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS. The tobacco
industry is subject to regulation in the United States at the federal, state and
local levels, and the recent trend is toward increasing regulation. A variety of
bills relating to tobacco issues have been recently introduced in the United
States Congress, including bills that, if passed, would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the United States Federal Trade Commission (the "FTC") to the United States
Food and Drug Administration (the "FDA") and require the tobacco industry to
fund the FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the
access to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with tobacco
related diseases. Although hearings have been held on certain of these
proposals, to date, none of such proposals have been passed by Congress. Future
enactment of such proposals or similar bills may have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business."
In August 1996, the FDA determined that nicotine is a drug. Accordingly, the
FDA determined that it had jurisdiction over cigarettes and smokeless tobacco
products, pursuant to the FDA determination that cigarette and smokeless tobacco
products are drug delivery devices used for the delivery of nicotine. Although
certain legal challenges to the FDA's determination are pending, there can be no
assurance that such determination will not be upheld, nor that in the future,
the FDA will not prevail in an attempt to extend such jurisdiction to cigars. In
addition, a majority of states restrict or prohibit smoking in certain public
places and restrict sale of tobacco products (including cigars) to minors. Local
legislative and regulatory bodies have increasingly moved to curtail smoking by
prohibiting smoking in certain buildings or areas or by requiring designated
"smoking" areas. Individual establishments such as bars and restaurants have
further prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Further restrictions of a similar nature could
have a material adverse effect on the business, results of operations and
financial condition of the Company. Numerous
17
<PAGE>
proposals have also been considered at the state and local level restricting
smoking in certain public areas. See "Business."
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation
has been introduced in other states. In addition, effective January 1, 1998,
smoking, including cigar smoking, has been banned by the State of California
in all bars, taverns and clubs where food and alcohol is served. Other
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. The states of Minnesota and Texas have enacted
legislation which require cigar manufacturers to provide information on the
levels of certain substances in their cigars to these states on an annual
basis. There can be no assurance that such legislation introduced in other
states will not be passed in the future or that other states will not enact
similar or more restrictive legislation. Consideration at both the federal
and state level also has been given to consequences of second hand smoke.
There can be no assurance that regulations relating to second hand smoke will
not be adopted or that such regulations or related litigation would not have
a material adverse effect on the Company's business, results of operations
and financial condition. See "Business."
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation of cigars. Increased publicity may
prompt research studies by various agencies such as the National Cancer
Institute, the American Cancer Society, and others. Such research can, by its
ultimate content, influence additional regulation of cigars by federal, state,
and local regulatory bodies. There can be no assurance that any such legislation
or regulation would not have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business."
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation. Private plaintiffs in such
litigation are seeking compensatory and, in some cases, punitive damages, for
various injuries claimed to result from the use of tobacco products or exposure
to tobacco smoke, and some of these actions have named cigarette distributors as
well as manufacturers as defendants. Over 40 states have filed lawsuits against
the major United States cigarette manufacturers to recover billions of dollars
in damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorneys General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things, the
tobacco companies would pay hundreds of billions of dollars to the various
states; the FDA could regulate nicotine as a "drug" and tobacco products as
"drug delivery devices;" all outdoor advertising, sports event
18
<PAGE>
advertising and advertising on non-tobacco products would be banned and
certain class action lawsuits and punitive damage claims against tobacco
companies would be prohibited. President Clinton recently announced that he
would not support the Proposed Settlement unless significant changes were
incorporated. Therefore, the potential impact of the Proposed Settlement on
the cigar industry in general and the Company in particular is uncertain.
There can be no assurance that similar litigation will not be brought against
cigar manufacturers and distributors. The potential costs to the Company of
defending prolonged litigation and any settlement or successful prosecution
of any health-related litigation could have a material adverse effect on the
Company's business, results of operations and financial condition. The State
of Florida has entered into a separate settlement agreement with major United
States cigarette manufacturers with respect to tobacco products, including
roll-your-own and little cigars. This settlement agreement provides, in part,
for a ban on billboard and transit advertising, significant document
disclosure by the settling cigarette companies, billions of dollars in
settlement payments and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved the
Proposed Settlement will supersede the Mississippi settlement. The recent
increase in the sales of cigars and the publicity of such increases may
increase the probability of legal claims. See "Business."
DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL. The success
of the Company is highly dependent upon the continued services of William L.
Miller ("Miller"), the Company's only executive officer who is Chairman of
the Board and Chief Executive Officer and a part-time employee of the
Company. Miller, one of the co-founders of the Company's parent who is also
an employee of Duncan Hill and Kids Stuff, is principally responsible for the
strategic planning and development of the Company. However, if the employment
by the Company of Miller is either terminated or not renewed, or if he is
unable to perform his duties, there could be a material adverse effect upon
the business of the Company until a suitable replacement was found. The
Company will attempt to obtain a $1 million key man life insurance policy on
Miller's life. The success of the Company's future growth and profitability
will depend, in part, on the Company's ability to recruit and retain
additional qualified personnel over time, including a suitable candidate to
succeed Miller, who is 61 years of age, as Chief Executive Officer. There can
be no assurance, however, that the Company will be able to retain such
additional qualified personnel, once recruited, or recruit other qualified
personnel. See "Management."
CHIEF EXECUTIVE OFFICER WILL NOT BE REQUIRED TO WORK FULL TIME; POTENTIAL
CONFLICTS OF INTEREST. Miller, is a co-founder of Duncan Hill, which is a
publicly held holding corporation that controls the Company and Kids Stuff.
Miller is currently the President of Duncan Hill, as well as Chairman of the
Board of Directors and Chief Executive Officer of Kids Stuff and the Company.
Miller's employment agreement with the Company provides that he shall be
permitted to devote such time to managing Duncan Hill and Kids Stuff as he deems
appropriate. Accordingly, Miller will not be devoting his full-time attention to
managing the operations of the Company and the Company has no plans to hire
additional management personnel. Thus, conflicts of interest could potentially
develop (i) to the
19
<PAGE>
extent that Mr. Miller is not able to devote his full-time and attention to a
matter that would otherwise require the full-time and attention of a
business' chief executive officer, (ii) involving competition for business
opportunities, and (iii) involving transactions between the Company and its
affiliated companies. The Company has not adopted any procedure for dealing
with such conflicts of interest, except that the Company's Board of Directors
has adopted a policy that all new transactions between the Company and Duncan
Hill, Kids Stuff or any other affiliated company must be approved by at least
a majority of the Company's disinterested directors. Currently, the Company
has only one disinterested director. See "Management" and "The Company and
it's Parent."
STATE SALES TAX COLLECTION. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
(e.g. offices) without collecting sales tax. Congress, however, has the power to
change these laws. Since 1987, legislation has been introduced periodically in
the U.S. Congress which would permit states to require sales tax collection by
mail order companies. To date, this proposed legislation has not been passed.
Should Congress, however, pass such legislation in the future, most states could
be expected to require sales tax collection by out-of-state mail order
companies. This would increase the cost of purchasing the Company's products in
those states and eliminate whatever competitive advantage that the Company may
currently enjoy with respect to in-state competitors in terms of sales taxation,
as well as increasing the administrative and overhead costs to the Company in
connection with the collection of such sales tax. There can be no assurances
given that these state sales tax laws will not be changed in the future to the
detriment of the Company.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL TRADE.
The cigars sold by the Company are manufactured outside the United States,
principally in the Dominican Republic, Honduras, and Nicaragua. As a result, the
Company is exposed to the risk of changes in social, political and economic
conditions inherent in foreign operations and international trade including
changes in the law and policies that govern foreign investment and international
trade in such countries, as well as, to a lesser extent, changes in United
States laws and regulations relating to foreign investment and trade. Any such
social, political or economic changes could pose, among other things, the risk
of supply interruption or significant increases in the prices of tobacco
products. Any such changes in social, political or economic conditions may have
a material adverse effect on the Company's business, results of operations or
financial conditions.
TECHNOLOGICAL CHANGES IN DISTRIBUTION AND MARKETING METHODS. The retail and
direct marketing industry may be affected by ongoing technological developments
in distribution and marketing methods such as on-line catalogs and Internet
shopping. As a result, the Company's future success will depend on its ability
to keep pace with technological developments and respond to new customer
requirements. There can be no assurance that the Company's current marketing
methods will remain competitive in light of future technological innovations.
See "Business Marketing."
CONTROL BY DUNCAN HILL AND MILLER. Upon completion of the Offering, Duncan
Hill and Miller (the "Control Group"), will beneficially own and control (not
including outstanding
20
<PAGE>
Class A Warrants and options) approximately 54% of the Company's outstanding
Common Stock (approximately 50% if the Underwriters' Over-Allotment Option is
exercised in full), 100% of the Company's outstanding Series A Preferred
Stock (5,000,000 shares) which has the same voting privileges as the Common
Stock, and 100% of the Company's Series B Convertible Preferred Stock
(1,100,000 shares) which also has the same voting privileges as the Common
Stock and is convertible into the Company's Common Stock if certain criteria
are met. Accordingly, while the new investors in the Offering will have
provided approximately 93% of the total consideration paid for the Company's
outstanding Common Stock, the Control Group will beneficially own
approximately 89% of the Company's outstanding voting capital stock. As a
result, the Control Group will remain in a position to effectively elect all
of the directors of the Company and control its affairs and policies. Miller
and his wife beneficially own an aggregate of approximately 64% of the shares
of the outstanding common stock of Duncan Hill, and thus are in a position to
exercise effective control over the affairs of the Company through their
control over the affairs of Duncan Hill. Ultimate voting control by Miller
may discourage certain types of transactions involving actual or potential
control of the Company, including transactions in which the public holders of
the Common Stock might receive a premium for their shares over prevailing
market prices. See "Principal and Selling Stockholders."
PATENTS, TRADE NAMES AND TRADEMARKS. The Company owns two patents: one for
the Aerosphere Smoking systems; and one for the Carey Magic Inch Smoking System.
The Company also owns the registered trademarks of the Duncan Hill smoking pipe,
"Carey" the registered trade name for the Carey smoking pipe, and "Magic Inch",
the registered trade name of the Carey smoking system. All trademarks and
patents are currently maintained in effect, with the exception of the U.S.
patent for the Carey Magic Inch Smoking System which has expired. There can be
no assurance as to the extent of the protection that will be provided to the
Company as a result of having such patents, trademarks and trade names or that
the Company will be able to afford the expenses of any complex litigation which
may be necessary to enforce the proprietary rights. See "Business--Patents,
Trade Names and Trademarks."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may vary
significantly from period to period depending on changes in the expansion plans
of the retail segment and in the circulation plans of the Company's catalog. See
"Business--Marketing."
IMMEDIATE AND SUBSTANTIAL DILUTION TO PUBLIC INVESTORS. The Offering will
result in an immediate and substantial dilution of the public's investment in
the Company because the $1.38 adjusted net tangible book value per share of the
Common Stock upon the completion of the Offering will be $4.62 per share (77%)
less than the $6.00 per share offering price of the share of Common Stock
without giving any value to the Class A Warrant included in the Unit. See
"Dilution."
LIMITATION ON DIRECTOR LIABILITY. As permitted by Delaware corporation law,
the Company's Certificate of Incorporation limits the liability of Directors to
the Company or its stockholders to monetary damages for breach of a Director's
fiduciary duty except for
21
<PAGE>
liability in certain instances. As a result of the Company's charter
provision and Delaware law, stockholders may have a more limited right to
recover against Directors for breach of their fiduciary duty other than as
existed prior to the enactment of the law. See "Management-Limitation of
Directors' Liability and Indemnification Matters."
ABSENCE OF INDEPENDENT DIRECTORS AND COMMITTEES THEREOF. The Company has
three directors, one of whom is the only executive officer of the Company and
another director is a director of Duncan Hill, an affiliate of the Company. The
absence of at least two outside or disinterested directors and committees
composed of such disinterested directors may result in less objectivity and an
increased risk for conflicts of interest with respect to decisions made by the
Board of Directors. See "Management."
NO CASH DIVIDENDS. The Company has not paid cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The Company intends to retain future earnings, if any, to finance its growth.
See "Dividend Policy."
NO PRIOR PUBLIC MARKET; MARKET VOLATILITY. Prior to the Offering, there has
been no public market for the Company's Units, Common Stock or Class A Warrants.
There is no assurance that following the Offering an active public trading
market will develop or be sustained or that the Units, Common Stock or Class A
Warrants will be resold at or above the initial public offering price. Further,
in the Concurrent Offering, the Company has registered for resale 400,000 shares
of Common Stock, 1,738,000 Class A Warrants and 1,738,000 shares of Common Stock
underlying such Warrants. The sale of the aforesaid securities may affect
adversely any market for the Company's securities that may develop.
Additionally, if a market does develop, the market price of the Company's
securities may trade below the initial public offering price in response to
changes in the general condition of the economy or the retail and catalog
business, as a whole, as well as the Company's periodic financial results which
may fluctuate quarterly as a result of several factors, including the timing of
catalog mailings, and changes in the selection of merchandise offered and sold.
CERTAIN IMPLICATIONS OF TRADING-OVER-THE-COUNTER; "PENNY STOCK" REGULATIONS.
The Company expects to receive approval for the quotation of its Units, Common
Stock and Class A Warrants on the Over-the-Counter ("OTC") Electronic Bulletin
Board, although no assurances can be given in this regard. An investor may find
it more difficult to dispose of, or to obtain quotations as to the price of, the
Company's securities trading over-the-counter than had the Company qualified for
its securities to be listed for quotation on a national securities exchange or
the National Association of Securities Dealers Automated Quotation System
("NASDAQ").
The Securities and Exchange Commission has adopted "penny stock" regulations
which applies to securities traded over-the-counter. These regulations generally
define "penny stock" to be any equity security that has a market price of less
than $5.00 per share or a warrant that has an exercise price of less than $5.00
per share or an equity security of an issuer with a net tangible book value of
less than $2,000,000 if the corporation has
22
<PAGE>
been in business for at least three years. Subject to certain limited
exceptions, the rules for any transaction involving a "penny stock" require
the delivery, prior to the transaction, of a risk disclosure document
prepared by the Commission that contains certain information describing the
nature and level of risk associated with investments in the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative and current quotations
for the securities. Monthly account statements must be sent by the
broker-dealer disclosing the estimated market value of each penny stock held
in the account or indicating that the estimated market value cannot be
determined because of the unavailability of firm quotes. In addition, the
rules impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and
institutional accredited investors (generally institutions with assets in
excess of $5,000,000). These practices require that, prior to the purchase,
the broker-dealer determined that transactions in penny stocks were suitable
for the purchaser and obtained the purchaser's written consent to the
transaction. Consequently, the "penny stock" rules may restrict the ability
of broker-dealers to sell the Company's securities and may affect the ability
of purchasers in the Offering to sell the Company's securities in the
secondary market.
ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public offering
price of the Units and the exercise price and other terms of the Warrants have
been arbitrarily determined by the Company and the Representative and do not
necessary bear any relationship to the assets, book value or net worth of the
Company or any other recognized criteria of value. Accordingly, such prices
should not be considered an indication of the Company's actual value. See
"Underwriting."
REPRESENTATIVE'S INFLUENCE ON THE MARKET; RESTRICTIONS ON MARKET MAKING
ACTIVITIES DURING WARRANT SOLICITATION. The Representative intends to make a
market in the Company's Units, Common Stock and Class A Warrants following
the Offering, although it is not obligated to do so. The Representative has
advised the Company that it anticipates that other broker dealers also will
make a market in the Company's securities, although no assurance can be given
that this will be the case. To the extent that the Representative acts as
market maker in the Company's securities, there may be dominating influences
in that market. The price and liquidity of the securities may be affected by
the degree, if any, of the Underwriters' participation in the market, because
a significant portion of those securities may be sold to customers of the
Underwriters. Such customers may subsequently engage in transactions for the
sale or purchase of the Company's securities through or with the Underwriter.
In the event that market making activities are commenced by the Underwriter,
there is no obligation for it to continue those activities.
The Representative has the right to act as the Company's sole agent in
connection with any future solicitation of Warrant Holders to exercise their
Class A Warrants. Unless granted an exemption by the Securities and Exchange
Commission from Regulation M promulgated under the Exchange Act, the
Representative will be prohibited from engaging in any market-making activities
with regard to the Company's securities until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of
23
<PAGE>
any right that the Underwriter may have to receive a fee for soliciting the
exercise of the Class A Warrants. Such limitation could impair the liquidity
and market prices of the Common Stock and Class A Warrants. See
"Underwriting."
LIMITS ON SECONDARY TRADING. The Company will make application to register
or has or will seek to obtain an exception from registration to offer the Units
and intends to conduct its selling efforts in Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland,
New York, Rhode Island, Utah and Virginia (the "Primary Distribution States").
Purchasers of the Units in the Offering must be residents of such jurisdictions.
In addition, the Units, Common Stock and Class A Warrants will be immediately
eligible for resale in the secondary market, in the event that one does develop,
in each of the Primary Distribution States and in the state of Pennsylvania.
Purchasers of any of these securities in any secondary trading market which may
develop must be residents of such jurisdictions. Several additional states will
permit secondary market sales of these securities (i) once or after certain
financial and other information with respect to the Company is published in a
recognized securities manual such as Standard & Poor's Records Corporation; (ii)
after a certain period has elapsed from the date hereof; or (iii) pursuant to
exemptions applicable to certain institutional investors. The Company intends to
apply for listing in a recognized securities manual on or about the date of this
Prospectus, although there can be no assurance that it will be accepted for such
listing. Purchasers of Units in the Offering and future purchasers of the
Company's securities in the secondary market, in the event that one does
develop, may be restricted or prohibited from re-selling the securities in
particular states as a result of applicable blue sky laws. These restrictions
may reduce the liquidity of the securities and including their market price.
UNDERWRITERS' UNIT PURCHASE OPTION. In connection with the Offering, the
Company will sell the Underwriters an option to purchase 46,000 Units (the
"Underwriters' Unit Purchase Option"). The Underwriters' Unit Purchase Option
will be exercisable commencing one year from the date of this Prospectus and for
four years thereafter at an exercise price of $9.00 per Unit. For the life of
the Underwriters' Unit Purchase Option, the holders thereof will have the
opportunity to profit from a rise in the market price of the Common Stock and/or
the Warrants without assuming the risk of ownership. The Company may find it
more difficult to raise additional capital if it should be needed for the
business of the Company while the Underwriters' Unit Purchase Option is
outstanding. At any time when the holders thereof might be expected to exercise
them, the Company would probably be able to obtain additional capital on terms
more favorable than those provided by the Underwriters' Unit Purchase Option.
The Company has also agreed to register the Underwriters' Unit Purchase Option
and the underlying securities covered thereunder in any future registration
statement that the Company may file during the four-year exercise period of the
Underwriters' Unit Purchase Option. This obligation could interfere with the
Company's ability to obtain financing under any future registration statement
filing. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OR EXERCISE OF WARRANTS. The Class A
Warrants may be redeemed by the Company under certain circumstances. Should the
Company provide a notice of redemption of the Class A Warrants, the holders
thereof
24
<PAGE>
would be forced to either exercise the Class A Warrants at a time when it may
be disadvantageous for them to do so, sell the Class A Warrants at the then
current market price, or accept the redemption price, which will likely be
substantially less than the market value of the Class A Warrants. In
addition, the exercise of the Class A Warrants, may have an adverse effect on
the market price of the Company's securities should a public trading market
develop. Also, while the Class A Warrants are outstanding, the Company may
find it more difficult to raise additional capital upon favorable terms
because of the potential for the exercise of the Class A Warrants to be
dilutive to future investors. See "Description of Securities."
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FOR FUTURE SALE. As of the
date of this Prospectus, the Company's outstanding unregistered securities
include 931,000 shares of the Company's Common Stock, 5,000,000 shares of the
Company's Series A Preferred Stock, 1,100,000 shares of the Company's Series B
Convertible Preferred Stock, and options to purchase 260,000 shares of the
Company's Common Stock (collectively the "Restricted Securities"). The
Restricted Securities are owned by Duncan Hill or the Company's directors and
are "restricted securities" as that term is defined by Rule 144 of the
Securities Act, and may only be sold in compliance with the provision of Rule
144 unless otherwise registered by the Company. These stockholders may elect to
sell some or all of these shares as soon as they are permitted to do so.
Ordinarily, under Rule 144, a person holding restricted securities for a period
of one year may, every three months thereafter, sell in ordinary brokerage
transactions or in transactions directly with a market maker, an amount of
shares equal to the greater of one percent of the Company's then outstanding
Common Stock or the average weekly trading volume in the same securities during
the four calendar weeks prior to such sale. For non-affiliated persons who own
the Company's securities for at least two years, the aforementioned volume
restrictions are not applicable to sales by such person. Furthermore, Duncan
Hill and the directors of the Company have agreed with the Underwriter not to
sell or transfer the Restricted Securities within 24 months of the date of this
Prospectus unless earlier permitted by the Representative. The possible or
actual future sales of the Restricted Securities under Rule 144 may have an
adverse effect on the market price of the Company's Common Stock should a public
trading market develop for such shares. See "Shares Eligible for Future Sale."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
CLASS A WARRANTS. The Company will be able to issue shares of its Common Stock
upon exercise of the Class A Warrants only if there is a then current prospectus
relating to the shares of Common Stock issuable upon the exercise of the Class A
Warrants under an effective registration statement filed with the Securities and
Exchange Commission, and only if such shares of Common Stock are qualified for
sale or exempt from qualification under applicable state securities laws of the
jurisdiction in which the various holders of the Class A Warrants reside.
Although the Company has agreed to use its best efforts to meet such regulatory
requirements, there can be no assurance that the Company will be able to do so.
The Class A Warrants may be deprived of any value if a prospectus covering the
shares of Common Stock issuable upon their exercise is not kept effective or
replaced or if such shares of Common Stock are not or cannot be qualified or
exempt from qualification in the jurisdictions in which the holders of the Class
A Warrants reside. See "Description
25
<PAGE>
of Securities--Warrants." As of the date of this Prospectus, the Company
anticipates that its securities will be qualified for sale or exempt from
qualification only in the Primary Distribution States. See "Risk
Factors--Limits on Secondary Trading."
ANTI-TAKEOVER MEASURES. The Company is subject to a Delaware statute
regulating business combinations that may serve to hinder or delay a change
in control of the Company, in addition to those matters relating to control
of the Company discussed immediately, above. Also, pursuant to the Company's
certificate of incorporation, the Company's Board of Directors may from time
to time authorize the issuance of additional shares preferred stock in one or
more series having such preferences, rights and other provisions as the Board
of Directors may decide. Any such issuances of preferred stock could, under
certain circumstances, have the effect of delaying or preventing a change in
control of the Company and may adversely affect the rights of the holders of
the Company's Common Stock and the market for those shares. There are no
other provisions, however, in the Company's certificate of incorporation or
bylaws that would serve to delay, defer, or prevent a takeover of the
Company. See "Description of Securities."
Investigations Involving VTR Capital, Inc.
Possible Adverse Effect on Liquidity and Price of the Company's Securities
due to an Investigation by the SEC Involving VTR Capital, Inc.
The Company has been advised by VTR Capital, Inc., ("VTR"), the
Representative of the Offering, that the Securities and Exchange Commission
("SEC") has issued an order directing a private investigation by the staff of
the SEC. Such order empowers the SEC staff to investigate whether, from June
1995 to the present, VTR and certain other persons and/or entities may have
engaged in fraudulent acts or practices in connection with the purchase or sale
of securities of certain other companies in violation of Sections 10(b) and
15(c)(1) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and Section 17(a) of the Securities of 1933, as amended. These acts or practices
include whether VTR and certain other brokers or dealers effected transactions
or induced transactions by making untrue statements of material fact and whether
VTR and certain others have engaged in manipulative, deceptive or other
fraudulent devices. The formal order also concerns whether VTR and certain
others who have agreed to participate in a distribution have violated Rule 10b-6
of the Exchange Act by having bid for or purchased securities for accounts in
which it had a beneficial interest or which is the subject of such distribution.
As of February 1, 1998, VTR understands that the SEC investigation is ongoing.
VTR cannot predict whether this investigation will result in any type of
enforcement action against VTR. The Company has been advised that VTR intends to
make a market in the Company's Units and components thereof following the
Offering in the over-the-counter market, subject to compliance with Regulation M
of the Exchange Act. An unfavorable resolution of the SEC investigation
concerning the sales and trading activities and practices of VTR could have the
effect of limiting VTR's ability to make a
26
<PAGE>
market in the Company's securities in which case the market for and liquidity
of the Company's securities may be adversely affected. See "Underwriting."
NASD INVESTIGATION
The Company has also been advised by VTR that during 1996 and 1997, the
staff of the NASD conducted an inquiry into the trading and sales practices of
securities of another company in and around April 1995. In connection with the
inquiry, the NASD staff obtained documents from VTR and conducted on-the-record
interviews of, among others, VTR's Chief Executive Officer, Head Trader and
Chief Financial Officer. In late 1997, the NASD staff advised VTR's counsel that
it had completed its investigation and that it intended to recommend that a
formal disciplinary proceeding be instituted against VTR, its Chief Executive
Officer and Head Trader, as well as certain other individuals not affiliated
with VTR for fraudulent market manipulation in connection with a purported
unregistered distribution as well as for violation of VTR's restriction
agreement. As of February 1, 1998, to VTR's knowledge, no complaint has been
issued in this matter. VTR has cooperated fully with this investigation and
intends to vigorously defend itself and its employees if any formal action is
taken. An unfavorable resolution of the NASD investigation could have the effect
of limiting VTR's ability to make a market in the Company's securities in which
case the market for and liquidity of the Company's securities may be adversely
affected. See "Underwriting."
USE OF PROCEEDS
The net proceeds to be received from the sale of the 460,000 Units
offered by the Company (after deducting underwriting discounts, a 3%
non-accountable expense allowance and other estimated offering expenses) will
be approximately $2,050,000 ($2,037,500 if the Underwriters' Over-Allotment
option is exercised in full). The Company intends to use the net proceeds of
the Offering over at least the next twelve months approximately as follows:
27
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
------------ ---------------
<S> <C> <C>
Inventory............................... $ 600,000 30%
Preferred Stock Dividend
to Duncan Hill (1)...................... 110,000 5%
Payment of Bridge Lender
Indebtedness (2)........................ 102,000
Humidor Construction (3)................ 5%
740,000 36%
Working Capital (4)..................... 498,000 24%
---------- ----
TOTAL............................... $2,050,000 100%
---------- ----
---------- ----
</TABLE>
- ------------------------
(1) The Company has allocated approximately $110,000 to be paid to Duncan Hill.
The $110,000 represents the first year's cash dividend on the Series B
Preferred Stock. See "Description of Securities."
(2) The Company has also allocated $102,000 to be paid to the Bridge Lender, who
is also a Selling Security Holder, in satisfaction of a non-convertible note
(including accrued interest at the rate of 8% per annum) which becomes due
and payable upon the completion of the Offering. See "Bridge Financing."
(3) The Company intends to construct its own climate controlled warehouse in
which each Havana Group member would receive an allocated portion serving as
such members personal humidor, capable of storing up to 50 boxes of cigars.
See "Business--Marketing."
(4) The Company intends to use such funds for general working capital purposes.
In the event that the Over-Allotment Option is exercised in full by the
Underwriters, working capital and the estimated net proceeds of the Offering
will be reduced by $12,420 which represents the amount of the expense
allowance which the Company has agreed to pay for the benefit of the Selling
Unit Holder. See "Underwriting."
BRIDGE FINANCING
On January 23, 1998, the Company raised $200,000 in bridge financing from
ARO Trust #1, 1970 Trust (Linda Gallenberger, Trustee), a non-affiliated
investor, (the "Bridge Lender"). In exchange for the Bridge Lender making such
loan, the Company issued to the Bridge Lender a non-convertible note due the
earlier of the completion of the Offering or December 31, 1998 in the principal
amount of $100,000 (the "Non-Convertible Note")
28
<PAGE>
and a convertible note in the principal amount of $100,000 due December 31,
1998 (the "Convertible Note"). The Convertible Note and Non-Convertible Note
are collectively referred to as the "Notes." Each Note bears interest at the
rate of eight (8%) percent per annum. The Convertible Note automatically
converts into 400,000 shares of the Company's Common Stock and 1,400,000
Class A Warrants upon the consummation of the Offering. The 1,400,000 Class A
Warrants are identical to the Class A Warrants offered hereby. The proceeds
of the bridge offering were used by the Company to pay certain expenses in
connection with the Offering and to increase working capital.
The Registration Statement, of which this Prospectus is a part, covers the
sale of the 400,000 shares of the Company's Common Stock and 1,400,000 Class A
Warrants (and the exercise of the Class A Warrants by the transferees of the
Bridge Lender) that will be acquired by the Bridge Lender pursuant to the
conversion of the Convertible Note. See "Selling Security Holders."
DIVIDEND POLICY
The Company currently intends to retain any earnings to finance the
development and expansion of the Company's business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future,
although it intends to pay cash dividends to holders of the Series B Preferred
Stock. The declaration and payment of cash dividends by the Company are subject
to the discretion of the Board of Directors of the Company. Any future
determination to pay cash dividends will depend on the Company's results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed relevant at the time by the Board of Directors. The
Company is not currently subject to any contractual arrangements which restricts
its ability to pay cash dividends. The Company's Certificate of Incorporation
prohibits the payment of cash dividends on the Company's Common Stock in excess
of $.05 per share per year so long as any Serial Preferred Stock remains
outstanding unless all accrued and unpaid dividends on Serial Preferred Stock
has been set apart and there are no arrearages with respect to the redemption of
any Series Preferred Stock
29
<PAGE>
DILUTION
The net tangible book value per share of the Company as of September 30,
1997 was approximately $.42 per share of Common Stock. Net tangible book value
per share is determined by dividing the tangible net worth of the Company
(tangible assets less all liabilities) by the total number of outstanding shares
of Common Stock (1,000,000 at September 30, 1997). The Company's tangible assets
consists of all of its balance sheet assets except for intangible assets which
consists of customer lists and deferred catalog costs. After giving effect to
the sale by the Company of 460,000 Units and the receipt of the net proceeds
therefrom and the conversion of the Convertible Note into 400,000 shares of
Common Stock, the adjusted net tangible book value per share of the Company as
of September 30, 1997 would have been approximately $1.38. This represents an
immediate increase in the adjusted net tangible book value per share of $0.96 to
existing Common Stockholders and an immediate dilution (the difference between
the price to the public per share of Common Stock and the adjusted net tangible
book value per share of Common Stock after the Offering) in the adjusted
tangible book value of $4.62 per share of Common Stock to new investors
(assuming for this discussion that the share of Common Stock comprising a $6.00
Unit is valued at $6.00 per share, and the Class A Warrant included in the Unit
has no value).
30
<PAGE>
The following table illustrates this per share of Common Stock dilution:
<TABLE>
<S> <C> <C>
The initial price of a share of Common
Stock paid by new investors...................... $6.00
Adjusted net tangible book value per share
of Common Stock before the Offering.............. $0.42
Increase in adjusted net tangible book
value per share of Common Stock
attributable to new investors.................... 0.96
---------
Adjusted net tangible book value per share
of Common Stock after the Offering............... 1.38
---------
Dilution in adjusted net tangible book value
per share of Common Stock to new
investors....................................... $4.62
---------
---------
</TABLE>
The following table summarizes, as of the completion of the Offering, the
differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company and the total
and average cash consideration paid per share.
<TABLE>
<CAPTION>
APPROXI-
MATE APPROXIMATE
PERCENTAGE TOTAL CASH PERCENTAGE OF AVERAGE
SHARES OF TOTAL CONSIDERATION TOTAL PRICE PER
PURCHASED SHARES $ CONSIDERATION % SHARE $
---------- ------------- -------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Public Stockholders........................ 460,000 25 2,760,000 93 6.00
---------- --- -------------- --- ---
Present Stockholders (1)................... 1,400,000 75 210,000 7 .15
---------- --- -------------- --- ---
Total...................................... 1,860,000 100 2,970,000 100
---------- --- -------------- --- ---
---------- --- -------------- --- ---
</TABLE>
- ------------------------
(1) Upon the completion of the Offering, the Convertible Note in the principal
amount of an aggregate of $100,000 will automatically convert into 400,000
shares of the Company's Common Stock and 1,400,000 Class A Warrants. These
shares, but not the shares of Common Stock underlying the warrants, are
included as owned by present stockholders.
31
<PAGE>
The foregoing does not include the following: (i) 920,000 shares of Common
Stock issuable upon the exercise of the Class A Warrants included in the Units
offered hereby; (ii) options to purchase 260,000 shares of Common Stock owned by
certain directors of the Company; (iii) warrants to purchase 138,000 shares of
Common Stock owned by the Selling Unit Holder and warrants to purchase 200,000
shares of Common Stock owned by Miller, which warrants upon the completion of
the Offering automatically convert into warrants identical to the Class A
Warrants; (iv) 1,400,000 shares of Common Stock issuable upon the exercise of
1,400,000 Class A Warrants attributable to a Selling Security Holder; (v)
1,100,000 shares issuable upon conversion of the Series B Preferred Stock; and
(vi) 138,000 shares of Common Stock issuable upon exercise of the Underwriters'
Unit Purchase Option and underlying warrants.
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (i) the actual
capitalization of the Company's receipt of $200,000 in bridge funds, and (ii)
the pro forma capitalization of the Company, including the issuance of
400,000 shares of Common Stock and 1,400,000 Class A Warrants to the Selling
Security Holder upon conversion of the Convertible Note and the sale of
460,000 Units offered hereby and the receipt of the estimated net proceeds
therefrom. The table below should be read in conjunction with the financial
statements of the Company and notes thereto included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
PRO
ACTUAL FORMA(1)
--------- ----------
<S> <C> <C>
Stockholders' Equity:
Common Stock, The Havana Group, Inc. $.001 par
value, 25,000,000 shares authorized, 1,000,000
shares issued actual, 1,400,000
shares issued and outstanding,
1,860,000 shares issued and outstanding
pro forma............................................... 1,000 1,860
Series A Preferred Stock, $.001 par value,
10,000,000 shares authorized, 5,000,000 shares
issued and outstanding actual, and
pro forma............................................... 5,000 5,000
Series B Convertible Preferred Stock, $.001 par value
10,000,000 shares authorized, 1,100,000 shares
issued and outstanding actual, and pro forma.............. 1,100 1,100
Additional Paid-in-capital.................................. 292,900 2,441,993
Retained Earnings........................................... 661,577 659,577
--------- ----------
Total Stockholders' Equity.................................. 961,577 3,109,530
--------- ----------
</TABLE>
32
<PAGE>
- ------------------------
(1) Does not include the following: (i) 920,000 shares of Common Stock issuable
upon the exercise of the Class A Warrants included in the Units offered
hereby; (ii) options to purchase 260,000 shares of Common Stock owned by
certain directors of the Company; (iii) warrants to purchase 138,000 shares
of Common Stock owned by the Selling Unit Holder and warrants to purchase
200,000 shares of Common Stock owned by Mr. Miller, which warrants upon the
completion of the Offering automatically convert into warrants identical to
the Class A Warrants; (iv) 1,400,000 shares of Common Stock issuable upon
the exercise of 1,400,000 Class A Warrants attributable to a Selling
Security Holder; (v) 1,100,000 shares issuable upon conversion of the Series
B Preferred Stock; and (vi) 138,000 shares of Common Stock issuable upon
exercise of the Underwriters' Unit Purchase Option and underlying warrants.
SELECTED FINANCIAL DATA
Set forth below are the selected financial data of the Company as of and
for the years ended December 31, 1995 and 1996, and for the nine months ended
September 30, 1996 and 1997. This selected financial data as of and for the
years ended December 31, 1995 and 1996 has been derived from the historical
financial statements of the Company, which include the financial statements
of its predecessor, Carey, and which have been audited by Hausser +Taylor
LLP, whose report with respect to such financial statements appears elsewhere
in the Prospectus. The selected financial data as of and for the nine months
ended September 30, 1996 and 1997 have been derived from the unaudited books
and records of the Company and includes in the opinion of Management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position and results of operations of the Company for
such periods. The results of operations for the nine-month periods are not
necessarily an indication of results for a full fiscal year. Also set forth
below are (i) adjusted selected financial data for the nine months ended
September 30, 1997, which data has been derived from the Company's historical
financial statements (unaudited), included elsewhere in the Prospectus and
reflects the completion of a $200,000 bridge financing on January 23, 1998
and (ii) the pro forma financial statements which give effect to the sale of
460,000 Units offered hereby and the automatic conversion of the Convertible
Note upon the completion of the Offering into a total of 400,000 shares and
1,400,000 Class A Warrants. The pro forma selected financial data for the
nine months ended September 30, 1997 is derived from the pro forma balance
sheet (unaudited), included elsewhere in this Prospectus, and include, in the
opinion of management, all adjustments necessary to present fairly the
unaudited pro forma financial position. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as the Company's historical
financial statements and the related notes, included elsewhere in the
Prospectus.
33
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operational Data:
Net Sales ................................. $ 1,668,927 $ 1,656,316 $ 1,217,523 $ 1,015,416
Loss from Operations.......................... (91,351) (106,338) (97,541) (3,354)
Net Loss...................................... (64,626) (115,523) (116,845) (23,308)
Net Loss per common share..................... $ (.06) $ (.12) $ (.12) $ (.02)
Weighted average number of shares
outstanding during the period (1)........... 1,000,000 1,000,000 1,000,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------- --------------
AS ADJUSTED
1995 1996 ACTUAL (2) PRO FORMA (3)
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets................. $ 1,557,547 $ 1,550,754 $ 1,106,684 $ 1,306,684 $ 3,254,637
Working Capital.............. 229,947 153,130 445,543 545,543 2,593,496
Total Liabilities............ 756,639 865,369 145,107 245,107 145,107
Stockholder's Equity......... 800,908 685,385 961,577 1,061,577 3,109,530
</TABLE>
- ------------------------
(1) Reflects the reincorporation and recapitalization of Carey in Delaware. "The
Company and its Parent--Reorganization."
(2) Reflects the completion of $200,000 of bridge financing. See "Management's
Discussion and analysis of Financial Condition and Results of Operation,
"Use of Proceeds-Bridge Financing" and "Certain Transactions."
(3) Reflects the sale of 460,000 units offered hereby, and the receipt of the
net proceeds and repayment of $102,000 including estimated accrued interest.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion should be read in conjunction with the information in the
financial statements of the Company and notes thereto appearing elsewhere in
this Prospectus.
Overview
The Company currently derives its revenues from three sources; retail sales
from the Smokeshop, direct mail of catalogs and from the operation of its Carey
Tobacco Club. During the nine months ended September 30, 1997, the Company
mailed 252,562 catalogs and generated sales of $759,102, approximately 73% of
total gross revenue. Carey Tobacco Club, a monthly program of tobacco shipments
that supply pipe tobacco to individual Club members, generated $283,321 in gross
sales, approximately 27% of total gross revenue. The Smokeshop was opened on
December 8, 1997.
Results of Operations
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996.
Total net sales for the nine months ended September 30, 1997 decreased
$202,107 or 16.6%, to $1,015,416, compared with $1,217,523 during the nine
months ended September 30, 1996. Net sales include sales from merchandise,
shipping and handling charges and mailing list rental. This decrease was largely
attributable to two items. First, net sales from tobacco club members decreased
$207,783, or 42.3%, from $491,104 to $283,321 for the nine months ended
September 30, 1996 and 1997, respectively. Tobacco club memberships decreased
from approximately 2,700 at September 30, 1996 to approximately 2,160 at
September 30, 1997. The Company has not created any new promotions recently to
gain new members and believes that new promotional materials and offers will be
required to generate new members. Second, the Company operated a retail outlet
store, "Carey's Smokeshop", until October 1996. Net sales through September 30,
1996 were $57,389, compared to no sales for the nine months ended September 30,
1997. The Company has decided to terminate the outlet store concept and
concentrate on an upscale retail store, "The Havana Group" (the "Smokeshop".)
The Company recently opened the Smokeshop store during December 1997 in an
off-mall location in Canton, Ohio.
The above mentioned decreases were partially offset by an increase in
catalog sales. Net sales attributable to the catalog increased 9.2%, from
$665,661 for the nine months ended September 30, 1996, to $726,873 for the same
nine months of 1997. This increase came from an increase in net revenue per
catalog mailed of $.70, from $1.77 to $2.47 for the nine months ended September
30, 1996 and 1997, respectively.
35
<PAGE>
Cost of sales, as a percentage of net sales, decreased 6.7%, from 58.8% to
52.1%, for the nine months ended September 30, 1996 and 1997, respectively. The
largest factor for this was the decrease in merchandise costs, as a percentage
of net sales. Merchandise costs decreased 6.2%, from 38.1% to 31.9% of net
sales, for the nine months ended September 30, 1996 and 1997, respectively. The
Company attributes this decrease to increased prices, which it believes helped
produce increased margins.
Selling expenses, as a percentage of net sales, decreased 1.8%, from 22.8%
to 21%, for the nine months ended September 30, 1996 and 1997, respectively. The
largest component was a decrease in advertising expenses. Advertising expense
decreased 2.4% from 18.4% to 16% for the same periods of 1996 and 1997,
respectively. The advertising decrease is attributed to the increased net
revenue per catalog mentioned above. Telephone expenses offset the advertising
decrease with an increase of 1%. Telephone expenses increased due to an increase
in average talk time per customer call from 3.1 minutes to 4.4 minutes, for the
nine months ended September 30, 1996 and 1997, respectively. The Company
believes that this increase in average call time is a result of better customer
service, which the Company supports.
General and administrative expenses were $276,971, or 27.3% of net sales,
for the nine months ended September 30, 1997, and $321,847, or 26.4% of net
sales, for the same period of 1996. This dollar decrease is attributable to a
decrease in the allocation from the affiliate handling administrative functions
for the Company. General and administrative expenses for 1996 were incurred by
Duncan Hill, and allocated to the Company and Kid Stuff based on the percentage
of assets of each operating subsidiary to the total assets for both operating
subsidiaries, exclusive of the assets of Duncan Hill. For 1996, the Company's
and Kid Stuff's allocation was 31% and 69%, respectively, of Duncan Hill's total
general and administrative expenses. Effective January 1, 1997, the Company
began purchasing administrative functions from Kids Stuff. General and
administrative expenses incurred by Kids Stuff were allocated to the Company, on
a pro rata basis determined by the respective percentage of total assets of the
Company and Kids Stuff. For the six months ended June 30, 1997, the Company's'
allocation was 33% of the total general and administrative expenses. For the six
months ended December 31, 1997, the Company's' allocation was 21% of the
consolidated total general and administrative expenses, due to the acquisition
of a catalog by Kids Stuff. See "Certain Transactions" and "The Company and
Its Parent."
Net loss for the nine months ended September 30, 1997 was $23,308, or 2.3%
of net sales. Net loss for the same period of 1996 was $116,845, or 9.6% of net
sales. This improvement is attributable to decreased cost of sales and selling
expenses noted above.
36
<PAGE>
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995.
Net sales for the year ended December 31, 1996 were $1,656,316 compared to
$1,668,927 for the year ended December 31, 1995. This was a slight decrease of
$12,611, or .8%.
Cost of sales, as a percentage of net sales, decreased 7.2% from 64.4% to
57.2% for the years ended December 31, 1995 and 1996, respectively. The largest
decrease was in merchandise costs, which decreased from 42.1%, as a percentage
of net sales, to 37.4%, for the same periods of 1995 and 1996, respectively.
The decrease in merchandise costs is attributable to volume discounts obtained
from the vendor and price increases which it believes helped produce higher
margins, started in the first quarter of 1996. Another factor in the decrease
was fulfillment labor costs. As a percentage of net sales, labor costs decreased
from 8.7% in 1995 to 7.2% in 1996. This can be attributed to a lower labor cost
per order of $2.10 in 1996 compared to $2.51 in 1995. Labor costs for the
Company were incurred by Duncan Hill, and charged to the Company on an actual
cost basis. Duncan Hill was able to lower labor costs by redesigning the
warehouse and improving efficiency.
Selling expenses, as a percentage of net sales, increased 4.6%, from 18% in
1995 to 22.6% in 1996. The largest impact came from an increase in advertising
expense, which increased 5.3%, from 13.5% in 1995 to 18.8% in 1996. The Company
experienced advertising expense increases due to increased paper costs during
1995, for which the full impact was experienced in 1996. Also, in January 1996,
there was a postal increase which added to the increase in advertising costs
from mailing catalogs. These increases, along with flat sales, increased selling
expenses on a percentage basis.
General and administrative expenses were $441,691, or 26.7% of net sales,
for year ended December 31, 1996, and $385,829, or 23.1% of net sales, for the
same period of 1995. This dollar increase is attributable to an increase in the
wages and rent allocation incurred from redesigning the warehouse. General and
administrative expenses for 1996 and 1995 were incurred by Duncan Hill, and
allocated to the Company consistent with past practices, under which Duncan Hill
allocated its general and administrative expenses to its operating subsidiaries
on a pro rata basis determined by the percentage of total assets of the various
operating subsidiaries, exclusive of the assets of Duncan Hill. For 1996 and
1995, the Company's allocation was 31% of Duncan Hill's total general and
administrative expenses. See "Certain Transactions" and "The Company and Its
Parent."
Pre-tax loss for 1996 was $115,523, or 7.0% of net sales, while pre-tax
loss for 1995 was $85,916, or 5.1% of net sales. This increase of 1.9% is
attributable to increased advertising costs and general and administrative
costs, which were partially offset by decreased costs of sales.
37
<PAGE>
Liquidity and Capital Resources
At September 30, 1997, the Company had retained earnings of $661,577,
compared to $684,885 at December 31, 1996. This resulted from a net loss of
$23,308 for the nine months ended September 30, 1997.
For the nine months ended September 30, 1997, the impact of the operating
loss on the Company's cash position was increased by changes in working capital
which effected operating activities. The operating activities consumed $182,325
in cash through increases in accounts receivable, inventories, deferred catalog
expenses and a decrease in accounts payable, customer advances and other accrued
expenses, but provided $1,338 in cash through a decrease in prepaid expense. The
net effect of these changes and non-cash charges of $29,029 relating to
depreciation and amortization when added to the Company's net loss, resulted
in net cash used by operating activities of $175,266. For the
year ended December 31, 1996, the impact of the operating loss on the Company's
cash position was offset by the use of cash of $5,422 through increases in
deferred catalog expense and an increase in prepaid expenses, but provided
$113,978 in cash through a decrease in accounts receivable, inventories and an
increase in accounts payable, customer advances and other accrued expenses. The
net effect of these changes and non-cash charges of $38,706 relating to
depreciation and amortization was to decrease the Company's cash position by
$147,262, so that net cash provided by operating activities was $31,739.
For the nine months ended September 30, 1997, the Company's financing
activities provided $192,566 in cash, from changes in current obligations
to/from affiliates. For 1996, the Company's financing activities used $35,165
in cash.
For the nine months ended September 30, 1997, the combined effect of net
cash used by operating activities of $175,266, net cash provided by financing
activities of $192,566, and investments in fixed assets totaling $12,808,
increased cash from $5,895 to $10,387 at September 30, 1997. For the year ended
December 31, 1996, the combined effect of net cash provided by operating
activities of $31,739, and net cash used by financing activities of $35,165
decreased cash from $9,321 to $5,895 at December 31, 1996.
The Company has no credit facility at the current time. However, the assets
of the Company are pledged as collateral along with the assets of Duncan Hill to
guarantee an $800,000 bank line of credit in the name of Kids Stuff. Kid
Stuff's bank line of credit had a balance of $671,000 at January 1, 1998. The
line of credit is for an open term, payable on demand. The repayment of the
facility is guaranteed by the Company's Chief Executive Officer, William Miller.
Interest is charged at the rate of 1% over prime. It is the policy of the bank
to review the credit facility annually, commencing June 30, 1997, and to require
that the Company maintain a zero balance on the credit line for a period of
thirty consecutive days sometime during the course of each year. The bank agreed
to waive the "zero balance" required for the 1997 loan year ended June 30, 1997,
because Kids Stuff's
38
<PAGE>
current cash flow would not allow it to comply before then. Kids Stuff is
currently negotiating the renewal of its current line of credit with the bank
for the 1998 loan year.
In December 1997, the Company's predecessor, Carey, effected a
reincorporation in Delaware and recapitalized the Company by replacing the 100
shares of no par value Carey common stock owned by the Company's parent, Duncan
Hill with 1,000,000 shares of the Company's $.001 par value Common Stock and
5,000,000 shares of Series A Preferred Stock (and 138,000 warrants which
automatically, upon the completion of the Offering, convert into Class A
Warrants identical to those sold in the Offering) through a stock split and
stock dividend. The Company also issued to Duncan Hill 1,100,000 shares of
Series B Convertible Preferred Stock in exchange for Duncan Hill's assumption of
a $300,000 liability due to Kids Stuff. The Series B Convertible Preferred
shares are convertible at the option of the holder into the Company's Common
Stock at any time after the Company's pre-tax earnings reach $500,000 in any
given calendar year. See "Certain Transactions" and "Description of
Securities."
On January 23, 1998, the Company raised $200,000 in bridge financing from
the Bridge Lender. The Company issued the Non-Convertible Note due the earlier
of the completion of the Offering or December 31, 1998 in the principal amount
of $100,000 and the Convertible Note in the principal amount of $100,000 due
December 31, 1998. Each Note bears interest at the rate of eight (8%) percent
per annum. The Convertible Note automatically converts into a total of 400,000
shares of the Company's Common Stock and 1,400,000 Class A Warrants upon the
consummation of the Offering. See "Use of Proceeds - Bridge Financing" and
"Selling Security Holders."
Effective January 1, 1998, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an annual
cost of $206,100. Kids Stuff is also providing fulfillment services to the
Company at a cost of $2.40 per order processed. The aforesaid $206,100 and
$2.40 per order processed is based upon actual costs incurred by Kid Stuff in
1997. The Company is also obligated to pay 5% of 1998 pre-tax profits to Kids
Stuff in connection with these administrative and fulfillment services. See
"The Company and its Parent" and "Certain Transactions."
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to
39
<PAGE>
employees. As a result, there will be no effect to the Company other than to
require a pro forma footnote disclosure.
As of the date of this Prospectus, the Company has granted its three
directors options to purchase an aggregate of 260,000 shares of the Company's
Common Stock at an exercise price of $6.00 per share. These options contain
provisions pursuant to which the exercise price will decrease based upon the
Company's operating performance. The Company does not anticipate that these
options will have any material impact on its future operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which is effective for periods ending after December
15, 1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Management believes earnings per share
computed in accordance with SFAS 128 will not be materially different than
earnings per share as currently reported.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information About Capital Structure," which is effective for
periods ended after December 15, 1997. SFAS No. 129 requires an entity to
explain the pertinent rights and privileges of outstanding securities. The
effect for the Company will be to require a footnote disclosure defining its
capital structure. See "Description of Securities."
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes new standards for reporting
comprehensive income and its components. The Company expects that comprehensive
income (loss) will not be materially different from net income (loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS No.
131 changes the standards for reporting financial results by operating segments,
related products and services, geographic areas and major customers. The
Company must adopt SFAS No. 131 not later than December 31, 1998.
Management believes that the effect of adoption will not be material.
THE COMPANY AND ITS PARENT
History of Duncan Hill
The Company's parent, Duncan Hill, was organized under Ohio law in 1977 for
the purpose of developing and marketing a designer line of smoking pipes,
tobacco and accessories. Duncan Hill is a publicly held corporation controlled
(approximately 64%) by William L. Miller, the Company's Chief Executive
Officer. In 1980, a Duncan Hill
40
<PAGE>
subsidiary, Highland Pipe Company, acquired the pipe manufacturing business of
the Monarch Pipe Co., of Bristow, Oklahoma. In 1984, the business of E.A. Carey
Co. of Chicago, a mail order supplier of smoking products, was purchased by
Duncan Hill through its subsidiary, E.A. Carey of Ohio, Inc. ("Carey").
Perfectly Safe, Inc. was formed by Duncan Hill in 1990 under Ohio law for
the purpose of publishing The Perfectly Safe Catalog, which was acquired from
Jeanne E. Miller in January, 1990. Mrs. Miller purchased the Perfectly Safe
Catalog in 1988 from the catalog's creator. In July, 1995, Perfectly Safe, Inc.
began to publish its second catalog, Jeannie's Kids Club. Duncan Hill combined
its children's operations into a separate subsidiary, Kids Stuff during 1996 and
acquired a third children's catalog in June 1997. Kids Stuff funded the
acquisition with a public offering and is currently traded on the OTC Bulletin
Board under the symbol "KDST."
Prior to January 1, 1997, all fulfillment and administrative services of
the Company were performed and paid for by Duncan Hill which also provided
similar services to its subsidiary, Kids Stuff. Fulfillment services included
order taking, order processing, customer service, warehouse packing and
delivery, telephone contracts and shipping contracts. Fulfillment services were
charged to the Company and Kids Stuff based on the actual cost. Administrative
services included wages and salaries of officers, accounting, purchasing,
executive and creative/marketing personnel. It also included, all leases,
contracts, equipment rentals and purchases, audit, legal, data processing,
insurance and building rent and maintenance. The administrative costs were
allocated by Duncan Hill to the Company and Kids Stuff based upon the percentage
of assets for each operating subsidiary to the total assets for all operating
subsidiaries. The percentages for 1996 were 31% to the Company and 69% to Kids
Stuff.
During 1997, all administrative and fulfillment services were performed or
paid by Kids Stuff on behalf of the Company. All fulfillment services were
contracted and paid by Kids Stuff and charged to the Company based on the
actual cost. All administrative costs were allocated between the Company and
Kids Stuff based upon the percentage of assets for each respective operating
company to the total assets for both operating companies with 33% charged to
the Company for the period January 1, 1997 through June 30, 1997 and 21% charged
to the Company for the period July 1, 1997 through December 31, 1997. Duncan
Hill incurred certain other costs which included legal and outside
accounting/auditing expenses. These costs were allocated to the Company and
Kids Stuff based on the same method and percentages as described above.
Effective January 1, 1997, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an annual
cost of $206,100 based upon the following: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management, $34,900 for
data processing, $32,200 for office equipment and facilities use, $38,100 for
merchandising and marketing services and $15,300 for purchasing services. Kids
Stuff is also providing fulfillment services to the Company at a cost of $2.40
per order processed. The Company has calculated these fees
41
<PAGE>
based on actual 1997 costs, and it is Management's belief that these fees would
represent actual costs should the Company undertake to provide these services
itself. The Company is also obligated to pay Kids Stuff an amount equal to 5%
of the Company's 1998 pre-tax profits as additional consideration for Kids Stuff
providing the Company with administrative and fulfillment services. In addition
to the above, the Company also expects to incur additional administrative costs
such as the salaries of the Company's Chief Executive Officer, legal,
accounting, depreciation and amortization and tax expenses which costs will be
incurred by and paid for directly by the Company. See "Certain Transactions."
The Reincorporation
Effective December 5, 1997, the Company succeeded to the Carey's Smokeshop
Catalog and pipe manufacturing business of Carey, a subsidiary of Duncan Hill,
as a result of a reincorporation in which Carey was merged into and with its
wholly-owned subsidiary, The Havana Group, Inc., the surviving corporation. In
connection with the reincorporation, the Company issued Duncan Hill 1,000,000
shares of Common Stock and assumed all of the liabilities of Carey.
42
<PAGE>
BUSINESS
General
The Company is a direct marketer which publishes a catalog selling pipes,
tobacco and smoking products. The Company's wholly owned subsidiary, Monarch
Pipe Company ("Monarch") also operates a pipe manufacturing company which
produces pipes exclusively for the Company. The Company also operates a new
retail store in Canton, Ohio under the name "The Havana Group" which opened in
December 1997 and sells cigars, smoking products, and fine beers and wines (the
"Smokeshop".)
The Company's predecessor, E A Carey of Ohio, Inc. ("Carey"), which has
been in business for over 40 years, was formed to sell the patented Carey
"Magic Inch" smoking pipe exclusively through mail order during the 1960's and
1970's. Duncan Hill purchased Carey in 1984 and the Company has operated as a
subsidiary under Duncan Hill's control since then.
Monarch is located in Bristow Oklahoma and produces the Carey and Duncan
Hill smoking pipes. Monarch employs three people and has the production capacity
of 20,000 smoking pipes per year. The wood used to produce the smoking pipes
(i.e. briarwood) is purchased on a semi-finished basis and Monarch completes the
assembly and finishes the final product. Products produced by Monarch are
marketed as middle market pipes, with retail prices ranging from approximately
$20 to $40 and with factory costs of $6.00 to $9.50 per unit.
Strategies
The Company believes that its expertise in the marketing and merchandising
of smoking products and the recent introduction of the Smokeshop will provide
the basis for future growth by use of the following strategies:
Development of the Havana Group Direct. The Company plans to develop the
Havana Group Direct, a direct marketing cigar club. The Company would obtain
membership inquiries through magazine and newspaper advertisements, and solicit
memberships by offering services in return for an annual membership fee.
Services would include providing individual humidor space for up to 50 boxes of
cigars, a personalized buying service for the member's cigar preference, and a
periodic newsletter of items of interest for cigar smokers. See "Marketing."
The Smokeshop. The Company had operated "Carey's Smokeshop" from 1984 to
1996 to maintain a retail presence and provide the Company with a factory outlet
for its products. In October 1996 the Company closed its retail store, leased an
off-mall retail location, and reopened as "The Havana Group" in December 1997.
The Smokeshop offers product groups proven historically in the smokeshop
industry, and also other product lines, i.e. fine wines, imported beers, and
limited clothing to reinforce The Havana Group logo. The Company may expand the
number of retail stores depending upon the success of its existing store and
available external financing, if any.
43
<PAGE>
Maintain Carey's Smokeshop Catalog. The Company believes that Carey's
Smokeshop Catalog provides a good initial revenue base. However, the Company
believes that it must maintain and expand this customer base.
Merchandising
The Company designs all of its Carey "Magic Inch" and Duncan Hill
"Aerosphere" smoking pipes and produces them at its Monarch Pipe facility in
Oklahoma. The current Carey catalog contains 20 design groups marketed as
various series, such as "The Executive Collection" or "Carey Classic Series."
Additionally, the Company offers other hand made imported smoking pipes in its
catalog, generally at retail prices from $35.00 to $85.00 each. The Company
sources these products from international suppliers and from domestic
distributors of imported pipes.
The Company merchandises tobaccos and cigars from domestic sources, which
either import their products or manufacture in this country. Carey offers 28
tobacco blends in its current catalog, along with 23 different brands and sizes
of cigars. Because of the composition of the catalog customer base, cigar sales
are generally mid-range in the cigar market, with the most popular cigar the
Carey Honduran bundle, which retails from $1.00 to $1.50 per cigar. Because of
the upscale target market of the retail store, cigar sales are in the mid-to
upper-range market, with an average price of $1.04 per cigar.
The Company intends to merchandise cigars for its Havana Group Direct
marketing cigar club by offering its own private label "Havana Group" cigar,
plus other well known and established brand names, such as "Arturo Fuente", "H.
Upmann", "Dunhill", "Montecruz", "Partagas", "Punch", "Ashton", "Macanudo", and
others. It is the Company's intent to price brand name cigars at full retail
markups and then offer the club member a discount for purchases in box
quantities for storage in their Havana Group personal humidor. Private label
"Havana Group" cigars will be value priced to attract club members.
Marketing
Currently, the Company markets its products directly to consumers through
its "Carey's Smokeshop" catalog, and through its "Carey Tobacco Club". For the
nine months ended September 30, 1997, Carey mailed 252,562 catalogs, which
generated average gross revenues of $3.01 per catalog mailed. The catalog
consists of 48 full color pages, with approximately 77% offering pipes,
tobaccos, and related accessories, approximately 17% offering cigars and cigar
related accessories and the remaining balance of the catalog offering various
men's products.
Carey Tobacco Club, in operation since 1975, is a program of automatic
periodic shipments of tobacco directly to consumers. Members are solicited in
the catalog, and in return for their membership agreement they are offered
products at a discounted price. The member selects the blend, the quantity of
tobacco per shipment and the frequency of the shipments. Billing is by credit
card or a Carey open account. Carey Tobacco Club
44
<PAGE>
relies upon brand loyalty, and the Company estimates that 80% of the Club
membership have been members in excess of five years. At October 31, 1997,
Carey Tobacco Club had 2,165 active members who received 15,262 orders during
the nine months ended September 30, 1997, and generated $283,321 in gross
sales for that same nine month period.
The Company plans to create and develop the "Havana Group Direct", a
direct marketing cigar club. The Company would develop its member base using
the same marketing methods it has historically used in the smaller pipe and
tobacco business, namely using magazine and newspaper advertising to generate
a Havana Group inquiry and then converting the inquiry to a membership using
direct marketing techniques, including direct mail, video tapes, and
telemarketing. The Company has retained Simmons Market Research Bureau to
identify advertising media containing cigar smokers of similar demographic
characteristics. The Company believes that it can successfully generate
Havana Group cigar club members on the aforementioned basis.
The Company plans to offer its Havana Group Direct cigar club membership
on an annual fee basis, and to offer certain services in return for the
membership fee. The Havana Group Direct would construct its own
climate-controlled warehouse, and each member would receive their personal
humidor capable of storing up to 50 boxes of cigars within the Havana Group
Direct humidified warehouse. The Havana Group Direct would encourage
collection of fine cigars by each member, and distribute those cigars to the
member in any requested quantity by first and second day air shipment. To
encourage collection of fine cigars, Havana Group Direct would offer a
personal buying service for any premium cigar desired by the individual
member. The product would be supplied from stock or, alternatively, would be
sourced and purchased for the member's account. Upon receipt, the cigars
would be shipped to the member or placed in the member's personal humidor for
later distribution as requested. Havana Group Direct would identify this as
"Concierge Level" services. The Company has allocated $740,000 of the
proceeds of the Offering for Humidor Construction. See "Use of Proceeds."
Havana Group Direct anticipates that all cigars cannot be supplied from
its own inventory, and that many requested brands will be subject to
deliveries from the major manufacturers. In cases where the requested cigars
are not in stock at the time of the member's request, Havana Group Direct
will place the cigars on order for the member's account. The status of the
order will be published monthly in the Havana Group Newsletter, along with
the status of all cigars on order for the Havana Group Direct. Delivery
information will be presented much in the same manner as futures are quoted
in the Wall Street Journal, with brands, sizes, shapes, on-order, and
available remaining quantities noted. In this manner, the Havana Group
Direct member can purchase cigar future deliveries for their own account.
Additionally, the Havana Group Newsletter would contain items of information
and interest regarding cigars and related products.
The Company had operated a retail outlet, "Carey's Smokeshop", since 1984.
In October 1996, the Company closed the outlet, redesigned the planning and
marketing strategies, and reopened the Smokeshop in Canton, Ohio, as the "Havana
Group" during
45
<PAGE>
December 1997. It is the Company's intent to open additional smokeshops through
Company owned and operated or franchise facilities depending upon the success of
its current store and the availability of external financing, of which no
assurances can be given in this regard. The Company believes that additional
retail smokeshops can be readily developed in off-mall locations.
Any new retail outlets would offer product groups proven historically in
the smokeshop industry, and add other product lines, such as fine wines,
imported beers, and limited clothing with the Havana Group logo. At its
current location, the Company has determined the mix of product by taking
proven product lines of smokeshops, and deleting certain product lines
inconsistent with the Havana Group image. Such product lines dropped include
domestic cigarettes, smokeless tobacco, candy, gum, snacks and greeting cards.
Customer Service and Telemarketing
The Company currently derives approximately 75% of its revenues through
orders placed over the telephone and emphasizes superior customer service.
The Company's payment terms have been major credit cards, checks or open
account. The Company's return policy is unconditional, and provides that if a
customer is not satisfied with his or her purchase for any reason, it may be
returned within 30 days for a full refund or exchange. If a shipping error
has occurred the Company will issue call tags to pick up merchandise shipped
in error and will send a corrected shipment.
The Company purchases telemarketing services from its affiliate, Kids
Stuff. See "Certain Transactions." Kids Stuff employs 35 full time and 15
part time employees at January 1, 1998. During 1996 and the nine months
ended September 30, 1997, the Kids Stuff processed over 566,385 telephonic
customer orders, catalog requests and service requirements on behalf of the
Company.
Fulfillment and Delivery
The Company's fulfillment and delivery objective is to provide excellent
customer service within a low cost structure. The Company purchases its
fulfillment operations from its affiliate, Kids Stuff. See "Certain
Transactions." Kids Stuff's facility consist of 18,000 square feet of leased
facilities in North Canton, Ohio. The facility is designed to process
incoming shipments on a palletized or boxed basis, and to process outgoing
shipments on an individualized cost effective basis. Orders shipped are
individually recorded and posted through the use of barcode scanners, so that
sales records and credit card deposits are electronically posted. Kids
Stuff's fulfillment center processed over 462,506 shipments in 1996 and the
nine months ended September 30, 1997.
46
<PAGE>
Inventory/Purchasing
The Company conducts its purchasing operations at its general offices in
Canton, Ohio. Each catalog contains approximately 326 products or stock
keeping units (SKU's). Each product is reviewed weekly through the use of
computerized reports that provide detailed information regarding inventory
value, unit sales, and purchasing delivery times. Products are ordered as
required for the Company's inventory.
Product Sourcing
The Company acquires products for resale in its catalogs from numerous
domestic and international vendors. All "Carey" and "Duncan Hill" pipes are
manufactured by the Company's wholly-owned subsidiary, Monarch. Monarch supplies
approximately 16% of the Company's catalog products. Other than Monarch, the
Company currently has three vendors that supply more than 10% of its catalog
products. These companies include Lane Limited (32.4%), Hollco-Rohr Co. (13.6%)
and Consolidated Cigar Inc. (12.7%). Any disruption of service from any of
these companies may have an adverse effect on the Company's future sales.
Although these suppliers provide a substantial portion of the Company's catalog
product, the Company believes that, with the exception of products made by
Monarch, most products can be sourced from alternative suppliers. The Company
acquires products for sale in the retail store from approximately 56 domestic
vendors.
Seasonality
The Company's revenues are not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The
Smokeshop customer is believed to be generally the end user of the product so
purchases are spread throughout the year, rather than being concentrated
between October and December, as are traditional gift purchases.
The Company's limited experience with the new Havana Group retail store
has not afforded the Company the opportunity to determine seasonality
fluctuations for that segment of its business. However, the Company estimates
a slight increase in fourth quarter sales due to traditional gift purchasing.
Otherwise, the Company estimates a steady revenue flow from month to month.
Data Processing
The Company currently does not have any data processing equipment. It
currently relies upon Kids Stuff to provide data processing services. The
Company is allocated its portion of data processing costs. See "Certain
Transactions."
47
<PAGE>
Competition
The Company believes that there are currently approximately 1,000 to
1,500 full line smoke shops in the United States. While certain retail smoke
shops have adopted catalogs and mail order techniques as a method for
creating additional revenue, the Company believes that the number of
retailers involved in this area of distribution to be relatively small in
number. The Company has identified three companies that are involved in mail
order as a primary method of sales and distribution, and believes that this
constitutes the Company's primary current mail order competition. The three
identified competitors, which include 800 JR Cigar, Thompson's Cigar and Fink
are all mail order cigar businesses that are substantially larger than the
Smokeshop. Management believes that the largest competitor in the mail order
cigar business is 800 JR Cigar. Competition in all aspects of the Company's
business is intense with many competitors having more experience and greater
financial resources than the Company. No assurances can be given that the
Company will be able to successfully compete in all aspects of its business
in the future.
Tobacco Industry - Government Regulations
The tobacco industry is subject to regulation in the United States at
the federal, state and local levels, and the recent trend is toward
increasing regulation. A variety of bills relating to tobacco issues have
been recently introduced in the United States Congress, including bills that,
if passed, would: (i) curtail the advertising and promotion of all tobacco
products and restrict or eliminate the deductibility of such advertising
expenses; (ii) increase labeling requirements on tobacco products to include,
among other things, addiction warnings and lists of additives and toxins;
(iii) modify federal preemption of state laws to allow state courts to hold
tobacco manufacturers liable under common law or state statutes; (iv) shift
regulatory control of tobacco products at the federal level from the United
States Federal Trade Commission (the "FTC") to the United States Food and
Drug Administration (the "FDA") and require the tobacco industry to fund the
FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the access
to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with
tobacco related diseases. Although hearings have been held on certain of
these proposals, to date, none of such proposals have been passed by
Congress. Future enactment of such proposals or similar bills may have a
material adverse effect on the Company's business, results of operations and
financial condition.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and
smokeless tobacco products are drug delivery devices used for the delivery of
nicotine. Although certain legal challenges to the FDA's determination are
pending, there can be no assurance that such determination will not be
upheld, nor that in the future, the FDA will not prevail in an attempt to
extend such
48
<PAGE>
jurisdiction to cigars. In addition, a majority of states restrict or
prohibit smoking in certain public places and restrict sale of tobacco
products (including cigars) to minors. Local legislative and regulatory
bodies have increasingly moved to curtail smoking by prohibiting smoking in
certain buildings or areas or by requiring designated "smoking" areas.
Individual establishments such as bars and restaurants have further
prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Further restrictions of a similar nature
could have a material adverse effect on the business, results of operations
and financial condition of the Company. Numerous proposals have also been
considered at the state and local level restricting smoking in certain public
areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation
has been introduced in other states. In addition, effective January 1, 1998,
smoking, including cigar smoking, has been banned by the State of California
in all bars, taverns and clubs where food and alcohol is served. Other
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. The states of Minnesota and Texas have enacted
legislation which require cigar manufacturers to provide information on the
levels of certain substances in their cigars to these states on an annual
basis. There can be no assurance that such legislation introduced in other
states will not be passed in the future or that other states will not enact
similar or more restrictive legislation. Consideration at both the federal
and state level also has been given to consequences of second hand smoke.
There can be no assurance that regulations relating to second hand smoke will
not be adopted or that such regulations or related litigation would not have
a material adverse effect on the Company's business, results of operations
and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. Increased
publicity may prompt research studies by various agencies such as the
National Cancer Institute, the American Cancer Society, and others. Such
research can, by its ultimate content, influence additional regulation of
cigars by federal, state, and local regulatory bodies. There can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business, results of operations and financial
condition.
Tobacco Industry Litigation
The tobacco industry has experienced and is experiencing significant
health-related litigation. Private plaintiffs in such litigation are seeking
compensatory and, in some cases, punitive damages, for various injuries
claimed to result from the use of tobacco products or exposure to tobacco
smoke, and some of these actions have named cigarette distributors as well as
manufacturers as defendants. Over 40 states have filed lawsuits against the
major United States cigarette manufacturers to recover billions of dollars in
49
<PAGE>
damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorneys General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things,
the tobacco companies would pay hundreds of billions of dollars to the
various states; the FDA could regulate nicotine as a "drug" and tobacco
products as "drug delivery devices;" all outdoor advertising, sports event
advertising and advertising on non-tobacco products would be banned and
certain class action lawsuits and punitive damage claims against tobacco
companies would be prohibited. President Clinton recently announced that he
would not support the Proposed Settlement unless significant changes were
incorporated. Therefore, the potential impact of the Proposed Settlement on
the cigar industry in general and the Company in particular is uncertain.
There can be no assurance that similar litigation will not be brought against
cigar manufacturers and distributors. The potential costs to the Company of
defending prolonged litigation and any settlement or successful prosecution
of any health-related litigation could have a material adverse effect on the
Company's business, results of operations and financial condition. The State
of Florida has entered into a separate settlement agreement with major United
States cigarette manufacturers with respect to tobacco products, including
roll-your-own and little cigars. This settlement agreement provides, in part,
for a ban on billboard and transit advertising, significant document
disclosure by the settling cigarette companies, billions of dollars in
settlement payments and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved the
Proposed Settlement will supersede the Mississippi settlement. The recent
increase in the sales of cigars and the publicity of such increases may
increase the probability of legal claims.
Product Liability Insurance
There is a possibility that someone could claim personal injury or
property damage resulting from the use of products purchased from the
Company. As a seller of tobacco products, the Company is exposed to potential
liability. Since 1990, the Company's parent, Duncan Hill, has maintained, for
itself and its subsidiaries, product liability insurance. Currently, the
amount of coverage is $1 million per occurrence and $2 million in the
aggregate. The policies are for a period of one year and are currently in
effect through September 17, 1998. Although the Company believes that its
present insurance coverage is sufficient for its current level of business
operations, there is no assurance that such insurance will be sufficient to
cover potential claims, or that adequate, affordable insurance coverage will
be available to the Company in the future. A partially or completely
uninsured successful claim against the Company or a successful claim in
excess of the liability limits or relating to an injury excluded under the
policy could have a material adverse effect on the Company.
50
<PAGE>
Other Regulatory Matters
The Company's business, and the catalog industry in general, is subject
to regulation by a variety of state and federal laws relating to, among other
things, advertising and sales taxes. The Federal Trade Commission regulates
the Company's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which
the Company sells in its catalogs. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
without collecting sales tax. The Company believes that it collects sales in
states where it is required to do so. The Company has no claims or
regulatory matters in process or pending as of the date of this Prospectus.
See "Risk Factors - State Sales Tax."
Patents, Trademarks and Trade Names
The Company owns two patents: one for the Aerosphere Smoking system; and
one for the Carey Magic Inch Smoking System. The Company also owns the
registered trademarks of the Duncan Hill smoking pipe, "Carey" the registered
trade name for the Carey smoking pipe, and "Magic Inch", the registered trade
name of the Carey smoking system. All trademarks and patents are currently
maintained in effect, with the exception of the U.S. patent for the Carey
Magic Inch Smoking System which has expired. See "Risk Factors."
Employees
As of January 1, 1998, the Company has one full-time employee who is the
manager of its retail store, and five additional part-time employees including
Miller.
Properties
The Company's principal offices are located in Canton, Ohio, and are shared
with the Company's parent and Kids Stuff. The facility consists of 5,600 square
feet and is leased by Duncan Hill through September 30, 1998 with options to
renew for a period of two years. The Company's warehouse and distribution center
is currently operated by Kids Stuff. It is located in North Canton, Ohio and
consists of approximately 18,000 square feet, which is leased for a one year
term expiring September 30, 1998. The Company utilizes approximately 5,000
square feet of this building. Currently, all leases are in the name of Duncan
Hill, and the rent is paid by Kids Stuff. The Company currently pays $32,200
per annum to Kids Stuff for the use of the aforementioned facilities and for use
of certain equipment. See "Certain Transactions."
51
<PAGE>
Legal Proceedings
While the Company may become involved in suits, proceedings, or claims in
the ordinary course of business, the Company is not currently a party to any
legal proceedings that the Company believes would have a material adverse effect
on the Company's business, financial condition or results of operations.
MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company
are set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ------------------
<S> <C> <C>
William L. Miller........... 61 Chairman of the Board of
Directors, Chief Executive Officer,
Principal Financial Officer and
Treasurer
John W. Cobb, Jr............. 58 Director
Peter Stokkeybe VI........... 67 Director
</TABLE>
The term of office for each of the Company's directors is one year until
their respective successors are elected and shall qualify. Executive officers
serve at the pleasure of the Board of Directors.
William L. Miller, age 61, has been Chairman of the Board of directors of
the Company and its President and Chief Executive Officer since December 1997.
Previously, he was the sole director and executive officer of Carey from 1984 to
December 1997. Mr. Miller has held identical positions at Kids Stuff, Inc. from
its formation in July 1996 to the present time. Mr. Miller had been a director
of Perfectly Safe, Inc. and its vice President since it was formed by Duncan
Hill in 1990 until July 1996. Mr. Miller is President, Founder and a director
of Duncan Hill. Prior to founding Duncan Hill in 1977, Mr. Miller founded the
MBI Corporation, which designed and developed packaging machinery (1975-78).
Mr. Miller served in executive capacities in the direct marketing industry from
1971 to 1975. He holds a Bachelors Degree. in Mechanical Engineering from
Purdue University and a Masters Degree in Business Administration from Indiana
University.
52
<PAGE>
John W. Cobb, Jr., age 58, has been a director of the Company since
December 1997. Mr. Cobb is a Senior Vice President of Marketing at
McGraw-Hill Continuing Education center in Washington, DC. He has been with
McGraw-Hill since 1981. Previously, he was the Vice President of Marketing
and Syndication Sales for C.B.S., Inc., Columbia House Division in New York
(1979-1981) and Vice President, Direct Mail Marketing/Special Markets for
Bell & Howell Consumer Products Group in Chicago (1969-1979). As a result of
his experience, he has a comprehensive understanding of the direct mail
business. Mr. Cobb has serves as a director of Duncan Hill from 1993 to the
present time. Mr. Cobb holds a Bachelors Degree in Economics, with a Minor
in Marketing from Central College of Iowa and a Masters Degree in Marketing
with a Minor in Management from the University of Iowa Graduate School of
Business.
Peter Stokkeybe VI, age 67, has been a director of the Company since
December 1997. From 1962 to 1992, he served as the Managing Director
(retired) of Peter Stokkeybe International a/s, Denmark. He currently holds
the position of Honorary Chairman. Established in Odense, Denmark, in 1882,
Peter Stokkeybe International a/s manufactures of fine quality smoking
tobaccos and sells premium cigars. This company developed and supplied the
British Prime Minister, Sir Winston Churchill, with his preferred cigar
brand, Santa Maria. Mr. Stokkeybe began his career by serving in the Royal
Guard of the late King Fredrick the Ninth of Denmark, and with employment by
various tobacco manufacturers in Denmark, Switzerland and the U.S.A. In
1962, Mr. Stokkeybe became Managing Director of Peter Stokkeybe International
a/s.
Peter Stokkeybe VI is considered by Management to be the only current
outside (independent) director of the Company. Following the completion of
the Offering, the Company will attempt to identify and appoint one other
individual who is not affiliated with the Company or its affiliates as a
director. Since this person has not yet been identified, there can be no
assurance given that the Company will be able to attract a suitable candidate
to serve as a director. If successful, this presently unidentified person
combined with Peter Stokkeybe VI, would provide the Company with two
independent directors.
The Underwriter has been granted by the Company the right to designate
one director to serve on the Company's Board of Directors for a period of
three years from the date of this Prospectus. As of the date hereof, no such
person has been designated.
Upon the appointment of one additional unaffiliated and outside
director, the Board of Directors intends to establish a Compensation
Committee and an Audit Committee. The Audit Committee, which will consist of
at least a majority of outside directors who are not affiliated with the
Company, will among other things, make recommendations to the Board of
Directors regarding the independent auditors for the Company, approve the
scope of the annual audit activities of the independent auditors and review
audit results and have general responsibility for all auditing related
matters. The Compensation Committee will consist entirely of outside
directors who are not affiliated with the Company, Kids Stuff or Duncan Hill.
The Compensation Committee will review and recommend to the Board of
Directors the compensation structure for the Company's officers and other
management
53
<PAGE>
personnel, including salary rates, participation in incentive compensation and
benefit plans, fringe benefits, non-cash perquisites and other forms of
compensation.
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to the named
Chief Executive Officer for the fiscal years ended December 31, 1997, 1996 and
1995. During 1997, the Company did not have any other executive officers.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------- ----------------------------- ---------
(A) (B) (C) (D) (E) (G)
NAME OTHER (F) NUMBER (H)
AND ANNUAL RESTRICTED OF LTIP
PRINCIPAL COMPENSATION STOCK AWARD(S) OPTIONS / PAYOUTS
POSITION YEAR SALARY($) BONUS ($) ($) ($) WARRANTS ($)
- ----------------------- --------- ---------- ------------- ----------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William Miller,........ 1997 28.167 -0- -0- -0- (3) 400,000(4) -0-
Chief Executive........ 1996 31,000(1) -0- -0- -0- -0- -0-
Officer (2)............ 1995 31,000(1) -0- -0- -0- -0- -0-
<CAPTION>
AN
- -----------------------
(A) (I)
NAME ALL
AND OTHER
PRINCIPAL COMPENSATION
POSITION ($)
- ----------------------- -----------------
<S> <C>
William Miller,........ -0-
Chief Executive........ -0-
Officer (2)............ -0-
</TABLE>
- ------------------------
(See footnotes on following page.)
55
<PAGE>
(1) Compensation was paid by Kids Stuff or Duncan Hill, which provided
management and general and administrative services to the Company (and its
predecessor, Carey), and which after Carey's reincorporation in Delaware,
continued to maintain the named Executive Officer on its payroll.
Approximately 20%, 31% and 31% of Miller's compensation paid by Duncan Hill
or Kids Stuff to Miller were expensed to the Company in 1997, 1996 and 1995,
respectively. The table reflects the amount of Mr. Miller's compensation
allocated to the Company. See "The Company and its Parent."
(2) Mr. Miller served as the President of Carey Inc. until its reincorporation
in Delaware after which time he became Chief Executive Officer of the
Company. Since December 1, 1997, Mr. Miller is being paid by the Company for
services rendered to it under his employment contract with the Company. Mr.
Miller also has an employment contract with Duncan Hill and an employment
contract with Kids Stuff for services rendered by him to those companies.
See "Risk Factors-Chief Executive Officer Not Required to Work Full-Time;
Potential Conflict of Interest."
(3) Does not include securities issued to Duncan Hill, a public company
controlled by Mr. Miller. See "Certain Transactions" for a description of
these transactions, which transactions include 1,000,000 shares of the
Company's Common Stock in connection with the reincorporation of the Company
in Delaware, 5,000,000 shares of Series A Preferred Stock issued as a
dividend to Duncan Hill, 1,100,000 shares of Series B Preferred Stock issued
to Duncan Hill in connection with Duncan Hill's assumption of $300,000 of
the Company's indebtedness to Kids Stuff and a dividend to Duncan Hill of
Warrants to purchase 138,000 shares of the Company's Common Stock, which
Warrants upon the completion of the Offering automatically convert into
138,000 Class A Warrants identical to those sold in the Offering.
(4) Includes warrants to purchase 200,000 shares of the Company's Common Stock,
which warrants upon the completion of the Offering automatically convert
into 200,000 Class A warrants identical to those sold in the Offering and
options to purchase 200,000 shares of the Company's Common Stock as
described herein.
56
<PAGE>
Options/Warrants Grants Table--The following table provides information with
respect to individual grants of stock options and warrants by the Company during
fiscal 1997 to the Chief Executive Officer named in the preceding summary
compensation table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION> POTENTIAL
REALIZED VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
FOR OPTION/WARRANT
INDIVIDUAL GRANTS TERM(2)
- --------------------------------------------------------------------------------------------------------- --------------------
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS
OPTIONS/ GRANTED TO
WARRANTS EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR (1) ($/SH) DATE 5% ($) 10% ($)
- ----------------------------------------------------- ----------- ------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
William Miller(3).................................... 200,000 100% 6.00 12/01/07 754,600 1,912,400
William Miller(4).................................... 200,000 100% 5.25 (4) 290,000 634,000
</TABLE>
- ------------------------
N/A--not applicable
(1) The % of Total Options/Warrants Granted to Employees in Fiscal Year' is
based upon options/ warrants granted to the Company's employees only and
excludes options/warrants granted to non-employees.
(2) The potential realizable value of each grant of options/warrants assumes
that the market price of the Company's Common Stock appreciates in value
from the date of grant to the end of the option term at annualized rates of
5% and 10%, respectively, after subtracting out the applicable exercise
price.
(3) The exercise price of $6.00 per share may be lowered based upon certain
performance criteria. These possible adjustment provisions have been ignored
for purposes of the table above.
(4) As of December 1, 1997, the Company granted warrants to purchase 200,000
shares of Common Stock to Miller. While these warrants have a term of five
years and are exercisable at $6.00 per share, these warrants, upon the
completion of the Offering, automatically convert into 138,000 Class A
Warrants. The expiration date of the Class A Warrants is disclosed in
"Description of Securities--Warrants." The information in the table reflects
the conversion of these warrants into Class A Warrants.
57
<PAGE>
Aggregated Option/Warrant Exercises and Fiscal Year-End Option/Warrant
Table-The following table provides information with respect to each exercise
of stock options/warrants during fiscal 1997 by the Chief Executive Officer
named in the preceding summary compensation table and the fiscal year-end
value of unexercised options and warrants. Since there is no public market
for the Company's Common Stock at December 31, 1997, the following table
assumes a fiscal year end value of $6.00 per share based upon the initial
public offering price of the Company's Common Stock included in the Units
without any value attributed to the Class A Warrants included in the Units.
AGGREGATED OPTION/WARRANT/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/WARRANTS IN-THE- MONEY
SHARES AT FY-END (#) OPTIONS/WARRANTS AT
ACQUIRED ON VALUE EXERCISABLE FY-END ($)
EXERCISE REALIZED (1) /UNEXERCISABLE EXERCISABLE/
NAME (#) ($) (1) UNEXERCISABLE (1)
- ------------------------------------------------ --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
William Miller.................................. -0- -0- 80,000/200,000 0/210,000
</TABLE>
- ------------------------
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common Stock
underlying the options/warrants and the exercise price of the
options/warrants at exercise or fiscal year end, respectively, assuming the
conversion of outstanding warrants into Class A Warrants.
58
<PAGE>
INCENTIVE COMPENSATION PLAN
1997 Long-Term Stock Incentive Plan. In November, 1997, the Company's
majority stockholder approved the adoption of the Company's 1997 Long-term
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, the Board of
Directors or a Compensation Committee of the Board of Directors consisting of
not less than three members may grant stock incentives to employees of the
Company pursuant to which a total of 400,000 shares of common stock may be
issued: provided, however, that the maximum amount of Common Stock with respect
to which stock incentives may be granted to any person during any calendar year
shall be 20,000 shares, except for a grant made to a recipient upon the
recipients initial hiring by the Company, in which case the number shall be a
maximum of 40,000 shares. These numbers are subject to adjustment in the event
of a stock split and similar events. Stock incentive grants may be in the form
of options, stock appreciation rights, stock awards or a combination thereof.
Options granted under the Incentive Plan may be either "Incentive stock
options," which qualify for special tax treatment under Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options, which do not
qualify. Incentive stock options may only be granted to persons who are
employees of the Company. Options will expire at such time as the compensation
Committee determines, provided that no stock option may be exercisable later
than ten years from its grant, except that the maximum term of any incentive
stock option granted to a person who owns, directly or indirectly, 10% or more
of the combined voting power of the Company's capital stock (a " 10%
Shareholder") shall be five years. If an optionee ceases to be an employee by
reason of death, incapacity of retirement, the option shall terminate fifteen
months after the optionee ceases to be an employee. If an optionee ceases to be
an employee because of resignation with the consent of the compensation
committee, the option will terminate three months after the optionee ceases to
be an employee. If an optionee ceases to be an employee or director for any
other reason, the option will expire thirty days after the optionee ceases to be
an employee.
The option price per share is determined by the Compensation Committee,
except for incentive stock options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less
than 110% of such fair market value if the optionee is a 10% shareholder.
Payment of the exercise price may be made in cash, or unless otherwise
provided by the Compensation Committee in shares of Common Stock delivered to
the Company by the optionee or by withholding of shares issuable upon
exercise of the option or in a combination thereof. Each Option shall be
exercisable in full or in part not less than six months after the date the
Option is granted, or may become exercisable in one or more installments at
such later time or times as the Committee shall determine. In the event of a
"change in control" as defined under the Incentive Plan, generally any stock
incentives which have been outstanding for at least six months shall be
immediately exercisable. Each option shall be exercised in full or in part.
Options are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the life of the employee or
director only by him or her. No Incentive Stock Options may be granted under
the Incentive Plan after November 8, 2007.
59
<PAGE>
However, any options outstanding on November 8, 2007 will remain in effect
'in accordance with their terms.
The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation committee, provided, however, that such expiration date shall not
be later than ten years from the date of the grant. SARS are not transferable
other than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee" cessation of employment or
directorship, as pertains to options, discussed above.
The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the committee may determine. All shares of Common
Stock subject to a stock award will be valued at not less than 100% of the fair
market value of such shares on the date the stock award is granted. The number
of shares of Common stock which may be granted as a stock award in any calendar
year may not exceed 80,000.
The Incentive Plan will be administered by the compensation Committee, which
has the authority to prescribe, amend and rescind rules and regulations relating
to the Plan, to accelerate the exercise date of any option, to interpret the
Plan and to make all necessary determinations in administering the Plan.
The Incentive Plan will remain in effect until such time as it is terminated
by the Board of Directors. The Incentive Plan may be amended by the Board of
Directors upon the recommendation of the Compensation Committee, except that,
without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to issuance under the Plan: change the class of persons
eligible to participate under the Plan: withdraw the administration of the Plan
from the Compensation Committee, or, to permit any option to be exercised more
than ten years after the date it was granted. As of the date of the Prospectus,
the Compensation Committee has yet to be formed, and accordingly, no stock
incentives have been granted under the Incentive Plan.
EMPLOYMENT AGREEMENT
Pursuant to an employment agreement dated as of December 1, 1997, the
Company employed William Miller ("Miller") as its Chairman of the Board and
Chief Executive Officer over a term commencing on December 1, 1997 and expiring
on December 31, 2002. The agreement provides for the following compensation: (i)
a base annual salary of $50,000 subject to increase to at least $100,000 for the
beginning of the following fiscal year and the remainder of the term should the
Company's gross revenues exceed $5,000,000 for the prior year; (ii) a cash bonus
pool for key management personnel
60
<PAGE>
administered by the Board of Directors or a Compensation Committee under
which a cash bonus will be paid to Miller in an amount ranging from 0% to 50%
of Miller's prior year's base salary; (iii) five-year warrants to purchase
200,000 shares of the Company's Common Stock at an exercise price of $6.00
per share, provided, however, that such warrants upon the completion of the
Offering automatically convert into 200,000 Class A Warrants identical to
those sold to the public ; (iv) in the event the Company engages in any
interim financing in order to raise capital for any venture, subsidiary
acquisition or similar transaction, Miller shall have the option to
participate in, or match the terms of, any such interim financing such that
the terms offered to Miller are the same or similar to those terms offered to
such non-affiliated third party, and Miller is given the opportunity to
participate up to an amount equal to the amount of financing provided by any
third party (it being noted that Miller elected not to participate in the
$200,000 bridge financing); and (v) ten-year options to purchase 200,000
shares of the Company's Common Stock. Options to purchase 80,000 shares are
vested and are currently exercisable. The remaining options become
exercisable as to an additional 40,000 shares on each of January 1, 1999,
January 1, 2000 and January 1, 2001. The initial exercise price of the
options shall be $6.00 per share subject to adjustment as set forth below.
The exercise price for vested options may be decreased if (a) the Company
meets certain performance goals, and (b) Miller timely elects to "lock-in" a
lower exercise price with respect to his vested options. The exercise price
for vested options may be reduced by $1.00 per share for each $200,000 of
pre-tax net income of the Company for the prior fiscal year. The Company
shall report to Miller, promptly upon audited financial statements for the
prior fiscal year becoming available, for pre-tax net income of the Company
for that year. Miller shall have thirty (30) days in which to decide, with
respect to his vested options for which an alternative exercise price has not
previously been locked-in, whether to adjust the exercise price of such
vested options based upon the pre-tax income of the Company for the prior
year.
Miller's employment agreement provides for indemnification to the full
extent permitted by law. Miller is entitled to terminate the agreement on 30
days' prior written notice upon the incurrence of one of the following
events: (a) the failure of the Company to re-relect him as Chief Executive
Officer; (b) a material change in his responsibilities, functions or duties
at a time when Miller owns less than 50% of the Company's outstanding Common
Stock; (c) a material breach of the agreement by the Company; or (d) the
liquidation or dissolution, or consolidation, merger or other business
combination of the Company, or transfer of all or substantially all of the
Company' assets unless such consolidation, merger, or business combination
does not adversely affect Miller's position or the dignity or
responsibilities of Miller. The employment agreement can be terminated by the
Company at any time for cause (as defined in the agreement) on 30 days' prior
written notice. In the event that the agreement is terminated by the Company
without cause or by Miller due to a material change in his responsibilities,
functions or duties, the Company shall pay Miller a lump sum on the date of
termination as severance pay an amount derived by multiplying the factor 2.99
by the sum of Miller's salary and bonus paid in the year prior to the year of
termination. In the event the agreement expires and Miller is not re-hired as
Chairman of the Board and Chief Executive Officer of the Company on terms
mutually acceptable to the parties, the Company shall pay in a lump sum on
the date
61
<PAGE>
of termination severance compensation to Miller in an amount equal to
Miller's salary and bonus paid in the year ending December 31, 2002.
In the event that (i) any person other than Miller, Jeanne E. Miller
(Miller's wife), Duncan Hill or their affiliates by any means of purchase or
acquisition becomes the beneficial owner of more than 50% of the Company's
outstanding Common Stock or (ii) the Company enters into an agreement of
reorganization, consolidation or merger of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation or an agreement to sell all or substantially all of the assets of
the Company, then all of Miller options to purchase Common Stock of the
Company outstanding at the time of the event and which were granted six
months or more prior to the event, shall immediately become exercisable in
full. Thereafter, upon the written election of Miller given within 180 days
of the event, the Company shall repurchase for cash all or any part of the
options as specified in the written election at a price per share equal to
the difference in the fair market value of the Company's Common Stock on the
date of the event and the option exercise price per share.
62
<PAGE>
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains a provision
eliminating the personal monetary liability of directors to the extent
allowed under the General Corporation Law of the State of Delaware. Under the
provision, a stockholder is able to prosecute an action against a director
for monetary damages only if he can show a breach of the duty of loyalty, a
failure to act in good faith, intentional misconduct, a knowing violation of
law, an improper personal benefit or an illegal dividend or stock repurchase,
as referred to in the provision, and not "negligence" or "gross negligence"
in satisfying his duty of care. In addition, the provision applies only to
claims against a director arising out of his role as a director or not, if
he is also an officer, his role as an officer or in any other capacity or to his
responsibilities under any other law, such as the federal securities laws. In
addition, the Company's Bylaws provide that the Company will indemnify its
directors, officers, employees and other agents to the fullest extent permitted
by Delaware law. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
DIRECTORS COMPENSATION
The Company intends to pay its directors who are not also employees of the
Company $500 for each meeting attended and will reimburse such directors for
travel and other expenses incurred by them in connection with attending Board of
Directors meetings.
Miller received options and other compensation pursuant to his employment
contract as discussed under "Employment Contract." In December 1997, the
Company granted options to purchase 30,000 shares to each of Messrs. Cobb and
Stokkeybe. These options are almost identical to the options given to Miller
and described under "Employment Contract" except for the date of grant and
number of options granted.
POTENTIAL CONFLICTS OF INTEREST
Miller is a co-founder of the Company's parent, Duncan Hill. See "The
Company and its Parent." Miller is currently the President of Duncan Hill, as
well as Chairman of the Board of Directors and Chief Executive Officer of Kids
Stuff and the Company. Miller's employment agreement with the Company provides
that he shall be permitted to devote such time to managing Duncan Hill and Kids
Stuff as he deems appropriate. Accordingly, Miller will not be devoting his
full-time attention to managing the operations of the Company. Thus, conflicts
of interest could potentially develop (i) to the extent that Miller is not able
to devote his full-time and attention to a matter that would otherwise require
the full-time and attention of a business' chief executive officer, (ii)
involving competition for business opportunities, and (iii) involving
transactions between the Company and its affiliated companies. The Company has
not adopted any procedure for dealing with such conflicts of interest, except
that the Company's Board of Directors has adopted a policy
63
<PAGE>
that all new transactions between the Company and Duncan Hill, Kids Stuff or
any other affiliated company must be approved by at least a majority of the
Company's disinterested directors. Currently the Company has only one outside
director.
64
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of the date of this Prospectus certain
information with respect to the beneficial ownership of Common Stock by each
person or entity known by the Company to be the beneficial owner of 5% or
more of such shares, each officer and director of the Company, and all
officers and directors of the Company as a group. Beneficial ownership as
reported in the table above has been determined in accordance with Rule 13d-3
of the Exchange Act. Accordingly, except as noted, all of the Company's
securities over which the officers and directors and nominees named, or as a
group, directly or indirectly have, or share voting or investment power, have
been deemed beneficially owned. The table does not reflect beneficial
ownership of Class A Warrants and shares of Preferred Stock held by Duncan
Hill and/or Miller which ownership is described below the table and
accompanying footnotes thereto.
<TABLE>
<CAPTION>
PERCENTAGE
------------------------
<S> <C> <C> <C> <C> <C>
SHARES OF SHARES OF
COMMON COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED NUMBER OF OWNED BEFORE AFTER
BEFORE SHARES AFTER OFFERING OFFERING
NAME AND ADDRESS (1) OFFERING OFFERED OFFERING (2) (2)
- ------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Duncan Hill Co., Ltd (3)(6)............................ 1,000,000 69,000(4) 931,000 100.0 50.1
William L. Miller (5)(6)............................... 80,000 -0- 80,000 6.25 4.1
John W. Cobb (7)....................................... 7,500 -0- 7,500 * *
Peter Stokkebye VI (7)................................. 7,500 -0- 7,500 * *
All three officers and directors and Duncan Hill as a
group)............................................... 1,095,000 69,000 1,026,000 100.0 52.5
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares.
(1) All addresses for Duncan Hill Co., Ltd., Miller, John Cobb and Peter
Stokkebye are c/o The Havana Group, Inc. 4450 Belden Village Street, N.W.,
Suite 406, Canton, Ohio 44718. The address for Linda Gallenberger is 120
South Riverside Plaza, Suite 1620, Chicago, IL 60606.
(2) Calculated based upon 1,000,000 shares of Common Stock outstanding before
the Offering and 1,860,000 shares outstanding after the Offering and without
giving effect to the possible exercise of the Over-Allotment Option.
65
<PAGE>
(3) Miller may be deemed to beneficially own all Duncan Hill's shares based upon
his 64% controlling interest in Duncan Hill's shares of Common Stock. Duncan
Hill also owns 5,000,000 shares of Series A Preferred Stock and 1,100,000
shares of Series B Preferred Stock which have the same voting rights as the
Common Stock. This would bring the number of shares of Common Stock
beneficially owned for voting purposes by Duncan Hill before the Offering to
7,100,000 representing, 100% of the voting capital stock and after the
Offering up to 7,031,000, representing 88.3% of the voting capital stock
assuming the Underwriter's Over-Allotment Option is exercised in full.
(4) Represents minimum number of shares to be offered pursuant to the
Underwriters' Over-Allotment Option by Duncan Hill as a Selling Unit Holder.
(5) Miller has a ten-year option to purchase 200,000 shares of Common Stock as
described under "Executive Compensation--Employment Contracts. The table
includes only 80,000 of the 200,000 shares represented by the options and
beneficially owned by him as of the date of this Prospectus.
(6) The shares of Common Stock owned by Miller and Duncan Hill are shown
separately even though Miller controls Duncan Hill. If shown together,
Duncan Hill and Miller beneficially own 1,080,000 shares (100%) of the
outstanding Common Stock before the Offering and 1,011,000 shares (54.4%)
after the Offering assuming the Over-Allotment Option is exercised in full
by the Underwriters.
The foregoing table does not reflect any ownership by the Bridge Lender
since shares of Common Stock issuable upon exercise of the Class A Warrants are
not deemed to be beneficially owned by it as of the date of this Prospectus. The
Bridge Lender shall receive 400,000 shares of Common Stock and 1,400,000 Class A
Warrants upon the completion of the Offering by virtue of the automatic
conversion of a Convertible Note into those securities. The 400,000 shares of
Common Stock and 1,400,000 Class A Warrants held by the Bridge Lender have been
registered for resale in the Concurrent Offering. See "Selling Security
Holders."
Duncan Hill owns 5,000,000 shares of Series A Preferred Stock representing
100% of the outstanding Series A Preferred Stock. The Series A Preferred Stock
has the same voting privileges as the Common Stock. Duncan Hill owns 1,100,000
shares of Series B Preferred Stock representing 100% of the outstanding Series B
Preferred Stock. The Series B Preferred Stock has the same voting privileges as
the Common Stock and may in the future become convertible into Common Stock if
certain criteria is met by the Company. See "Description of Securities."
66
<PAGE>
The following table sets forth the number of Class A Warrants to be owned
by the Company's officers, directors and the Bridge Lender after the Offering
and the percentages of ownership of outstanding Class A Warrants assuming the
Over-Allotment Option is exercised in full.
<TABLE>
<CAPTION>
NAME AMOUNT PERCENTAGE AFTER THE OFFERING
- ------------------------------------------------------------------------- ---------- -----------------------------
<S> <C> <C>
Duncan Hill (1).......................................................... -0- -0-
William Miller (2)....................................................... 200,000 6.4
John Cobb................................................................ -0- -0-
Peter Stokkebye VI....................................................... -0- -0-
Linda Gallenberger, Trustee ARO Trust #1, 1970 Trust..................... 1,400,000 44.9
</TABLE>
- ------------------------
(1) If the Over-Allotment Option is not exercised, Duncan Hill would own 138,000
Class A Warrants after the Offering representing 4.4% of the outstanding
Class A Warrants. Duncan Hill's 138,000 Class A Warrants and the underlying
shares of Common Stock are registered for sale in the Concurrent Offering.
See "Selling Security Holders."
(2) Miller's 200,000 Class A Warrants are registered for sale in the Concurrent
Offering. See "Selling Security Holders."
67
<PAGE>
CERTAIN TRANSACTIONS
(i) Over the last five years the Company's operations have been
financed by Duncan Hill (and by Kids Stuff in 1997) providing certain
administrative and other services for the benefit of the Company and charging
the Company for these services as described below. On December 31, 1996,
Carey entered into an agreement with United Bank to pledge all of its assets
as collateral along with the assets of Duncan Hill to guarantee an $800,000
revolving bank line of credit in the name of Kids Stuff. The bank line of
credit is for an open term, payable on demand. The repayment of this credit
facility is also guaranteed by Miller. This transaction occurred at a time
when the Company was a wholly-owned subsidiary of Duncan Hill and the Company
did not intend to undertake a public offering of its securities.
Prior to January 1, 1997, all fulfillment and administrative services of
the Company were performed for by Duncan Hill which also provided similar
services to its subsidiary, Kids Stuff. Fulfillment services included order
taking, order processing, customer service, warehouse packing and delivery,
telephone contracts and shipping contracts. Fulfillment services were
charged to the Company and Kids Stuff based on the actual cost.
Administrative services included wages and salaries of officers, accounting,
purchasing, executive and creative/marketing personnel. It also included,
all leases, contracts, equipment rentals and purchases, audit, legal, data
processing, insurance and building rent and maintenance. The administrative
costs were allocated by Duncan Hill to the Company and Kids Stuff based upon
the percentage of assets for each operating subsidiary to the total assets
for all operating subsidiaries. The percentages for 1996 were 31% to the
Company and 69% to Kids Stuff.
During 1997, all administrative and fulfillment services were performed
or paid by Kids Stuff on behalf of the Company. All fulfillment services
were contracted and paid by Kids Stuff and charged to the Company based on
the actual cost. All administrative costs were allocated between the Company
and Kids Stuff based upon the percentage of assets for each respective
operating company to the total assets for both operating companies with 33%
charged to the Company for the period January 1, 1997 through June 30, 1997
and 21% charged to the Company for the period July 1, 1997 through December
31, 1997. Duncan Hill incurred certain other costs which included legal and
outside accounting/auditing expenses. These costs were allocated to the
Company and Kids Stuff based on the same method and percentages as described
above.
68
<PAGE>
Effective January 1, 1998, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an
annual cost of $206,100 based upon the following: $34,000 for accounting and
payroll services, $51,600 for administration and human resource management,
$34,900 for data processing, $32,200 for office equipment and facilities use,
$38,100 for merchandising and marketing services and $15,300 for purchasing
services. Kids Stuff is also providing fulfillment services to the Company
at a cost of $2.40 per order processed. The Company has calculated these fees
based on actual 1997 costs, and it is Management's belief that these fees
would represent actual costs should the Company undertake to provide these
services itself. The Company is also obligated to pay Kids Stuff an amount
equal to 5% of the Company's 1998 pre-tax profits as additional consideration
for Kids Stuff providing the Company with administrative and fulfillment
services. In addition to the above, the Company also expects to incur
additional administrative costs such as legal, accounting, depreciation and
amortization and tax expenses which costs will be incurred by and paid for
directly by the Company.
Until August, 1997, Duncan Hill received all revenues and deposited
these funds in its own account for the benefit of the Company and made
payments against Company charged expenses including, without limitation, any
funds due Duncan Hill and Kids Stuff. At January 1, 1998, the Company owed a
net of $185,491 to Kids Stuff and is owed a net of $43,859 from Duncan Hill.
(ii) Pursuant to an employment agreement, the Company granted Miller
five year Warrants to purchase 200,000 shares of the Company's Common Stock
in December 1997. Upon the completion of the Offering, the aforesaid
Warrants which are currently exercisable at $6.00 per share automatically
convert into Class A Warrants identical to those sold in the Offering. See
"Selling Security Holders."
(iii) On December 8 , 1997, the Company declared a stock dividend of
5,000,000 shares of its Series A Preferred Stock and five year warrants to
purchase 138,000 shares of the Company's Common Stock to Duncan Hill, the
Company's sole common stockholder prior to the Offering. Upon the completion
of the Offering, the aforesaid warrants which are currently exercisable at
$6.00 per share automatically convert into Class A Warrants identical to
those sold in the Offering. See "Selling Security Holders."
(iv) On December 8, 1997, the Company sold 1,100,000 shares of its
Series B Preferred Stock to Duncan Hill in exchange for Duncan Hill's
assumption of $300,000 of indebtedness owing to an affiliate.
All the aforesaid transactions occurred at a time when the Company was a
sole shareholder of Duncan Hill. All future transactions between the
Company, Duncan Hill and Kids Stuff must be approved by a majority of the
Company's disinterested directors. See "Possible Conflicts of Interest."
69
<PAGE>
DESCRIPTION OF SECURITIES
Units
The securities that are offered hereby are being offered and will be
sold only in units ("Units"). Each Unit consists of one share of Common
Stock, $.001 par value (the "Common Stock") and two Class A Warrants. The
Common Stock and the Class A Warrants are not detachable or separately
transferable until the earlier of (i) ________, 1998 (six months from the
date of this Prospectus) or (ii) the date selected by the Representative in
writing for separation (the "Separation Date"). After the Separation Date,
the Common Stock and Class A Warrants will be detachable and may trade
separately.
Common Stock
The Company has 25,000,000 shares of authorized Common Stock, $.001 par
value. Immediately prior to the Offering, 1,000,000 shares of Common Stock
were issued and outstanding, all of which are owned by Duncan Hill.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do
not have cumulative voting rights. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared from time
to time by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of a dissolution, liquidation or
winding-up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no right to convert their Common Stock into any other
securities. The Common Stock has no preemptive or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are, and the Common Stock to
be outstanding upon completion of the Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
Preferred Stock
The Certificate of Incorporation provides the Company's Board of
Directors with the authority, without further action by the stockholders, to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or
the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock beyond the presently outstanding Series A Preferred Stock and Series B
Preferred Stock discussed below.
70
<PAGE>
Series A Preferred Stock
The Company has issued and outstanding 5,000,000 shares of Series A
Preferred Stock, $.001 par value. The holders of the Series A Preferred
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the common stockholders with the Series A Preferred
Stock voting as a class with the Common Stock and Series B Preferred Stock
and the right to vote as a separate class only where required by Delaware
law. As of the date of this Prospectus, all of the issued and outstanding
shares of the Series A Preferred Stock are held by Duncan Hill. The Series A
Preferred Stock, Series B Preferred Stock (described below) and the Common
Stock owned by Duncan Hill will enable it and William Miller to maintain
control of the Company subsequent to the completion of the Offering. See
"Risk Factors - Control by Parent and Parent's Controlling Stockholders."
The Series A Preferred Stock is not subject to redemption and has no
conversion rights or rights to participate in dividend payments. In the
event of any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, each share of Series A Preferred Stock has a
liquidation preference of $.001 per share.
Series B Convertible Preferred Shares
The Company has 1,100,000 shares of Series B Preferred Stock, $.001 par
value. The holders of Series B Preferred Stock are entitled to one vote on
all matters submitted to a vote of common stockholders with the Series B
Preferred Stock voting as a class with the Common Stock and Series A
Preferred Stock and the right to vote as a separate class only where required
by Delaware law. The holder of each share of Series B Preferred Stock will
be entitled to receive, when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, cumulative quarterly
cash dividends at the rate of $.025 per share, quarterly on March 31, June
30, September 30 and December 31 commencing with March 31, 1998. As of the
date of this Prospectus, all issued and outstanding shares of Series B
Preferred Stock are owned by Duncan Hill. Each share of Series B Preferred
Stock is convertible at the option of the holder of the Series B Preferred
Stock into one share of Common Stock at any time after the Company has
pre-tax earnings of at least $500,000 in any calendar year. The Series B
Preferred Stock is not subject to redemption rights. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company, each share of Series B Preferred Stock has a
liquidation preference of $.001 per share plus all accumulated and unpaid
dividends.
Outstanding Warrants
The Company currently has outstanding Warrants to purchase 338,000
shares of its Common Stock at an exercise price of $6.00 per share over a
term of five years expiring in December 2002. These Warrants which are owned
by Duncan Hill/Miller upon completion of the Offering automatically convert
into 338,000 Class A Warrants identical to those sold in the Offering. See
"Certain Transactions."
71
<PAGE>
Class A Warrants
The Class A Warrants will be issued pursuant to the terms of a Warrant
Agreement dated as of the date of this Prospectus between the Company and
Harris Trust Company of New York (the "Warrant Agent") named below, a copy of
which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. During the exercise period commencing on the
Separation Date and expiring _______, 2003 (the "Expiration Date"), each
Class A Warrant will entitle the registered holder to purchase one share of
Common Stock at an exercise price of $5.25 per share.
The Company may redeem the Class A Warrants at a price of $.01 per
Warrant at any time after they become exercisable and prior to their
expiration by giving not less than 30 days' written notice mailed to the
record holders if the closing bid price of the Common Stock has been at least
$10.50 on each of the 20 consecutive trading days ending on the 15th day
prior to the date on which the notice of redemption is given.
The Class A Warrants will expire at 5:00 p.m., New York time, on the
Expiration Date. In the event a holder of Class A Warrants fails to exercise
the Class A Warrants prior to their expiration, the Class A Warrants will
expire and the holder thereof will have no further rights with respect to the
Class A Warrants. A holder of Class A Warrants will not have any rights,
privileges or liabilities as a stockholder of the Company. In the event of
the liquidation, dissolution or winding up of the Company, holders of the
Class A Warrants are not entitled to participate in the distribution of the
Company's assets.
The exercise price of the Class A Warrants and the number of shares
issuable upon exercise of the Class A Warrants will be subject to adjustment
to protect against dilution in the event of stock dividends, stock splits,
combinations, subdivisions and reclassifications. No assurance can be given
that the market price of the Company's Common Stock will exceed the exercise
price of the Class A Warrants at any time during the exercise period. Class
A Warrants may be exercised by surrendering to the Warrant Agent the Class A
Warrants and the payment of the exercise price in United States funds by cash
or certified or bank check. No fractional shares of Common Stock will be
issued in connection with the exercise of Class A Warrants. Upon exercise,
the Company will pay to the holder the value of any such fractional shares
based upon the market value of the Common Stock at such time. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock for issuance to permit exercise of the Class A Warrants.
Purchasers of the Class A Warrants will have the right to exercise the
Class A Warrants to purchase shares of Common Stock only if a current
prospectus relating to such shares is then in effect and only if the shares
are qualified for sale under the securities laws of the jurisdictions in
which the various holders of the Class A Warrants reside. The Company has
undertaken to maintain the effectiveness of the Registration Statement of
which this Prospectus is a part or to file and maintain the effectiveness of
another registration statement so as to permit the purchase of the Common
Stock underlying the Class A Warrants, but there can be no assurance that the
Company will be
72
<PAGE>
able to do so. The Class A Warrants may be deprived of any value if this
Prospectus or another prospectus covering the shares issuable upon the
exercise thereof is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the
holders of the Class A Warrants reside.
The Company may find it more difficult to raise capital if it should be
needed for the business of the Company while the Class A Warrants are
outstanding. At any time when the holders of Class A Warrants might be
expected to exercise them, the Company would, in all likelihood, be able to
obtain additional capital on terms more favorable than those provided in the
Class A Warrants. See "Risk Factors - Current Prospectus and State Blue Sky
Registration Required to Exercise Class A Warrants."
See "Underwriting" regarding an agreement to pay a solicitation fee to
the Representative if certain conditions are met.
Underwriters' Unit Purchase Option
In connection with the Offering, the Company has agreed to sell to the
Underwriters, for an aggregate purchase price of $46, the Underwriters' Unit
Purchase Option which entitles the holders to purchase 46,000 Units. For a
description of the terms of the Underwriters' Unit Purchase Option, see
"Underwriting."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Units, Common Stock
and Class A Warrants is Harris Trust Company of New York, 430 Park Avenue,
New York, NY 10022.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
1,860,000 shares of Common Stock. Of such shares, 460,000 shares of Common
Stock will be freely transferable without restriction or further
registration under the Securities Act (the "Unrestricted Shares"), other than
any of such shares acquired by persons who are currently "affiliates" of the
Company as defined by Rule 144 under the Act, which will be subject to
limitations under Rule 144 for so long as such persons are affiliates. An
additional 400,000 shares have been registered for resale in the Concurrent
Offering and are freely transferable subject to the holder being able to
deliver a current Prospectus. See "Selling Security Holders."
Duncan Hill beneficially owns 1,000,000 shares of the Company's Common
Stock, 5,000,000 shares of the Company's Series A Preferred Stock, and
1,100,000 shares of the Company's Series B Convertible Preferred Stock. Of
the 1,000,000 shares of Common Stock, 69,000 shares have been registered for
sale pursuant to the Over-Allotment option and to the extent not exercised,
if any, pursuant to the Concurrent Offering. The remaining 931,000 shares of
Common Stock and the aforementioned Preferred Stock held by
73
<PAGE>
Duncan Hill (and options to purchase 260,000 shares held by the three
directors of the Company) are "restricted securities" within the meaning of
Rule 144, and may not be sold in the absence of registration other than in
accordance with Rule 144 described below or another exemption from regulation
under the Securities Act. These restricted shares and Duncan Hill's 69,000
shares registered for sale pursuant to the Concurrent Offering (to the extent
not sold pursuant to the Underwriters' Over-Allotment Option) are also
subject to a 24-month "lock-up" by the Underwriter. See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act,
is entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of
(i) one percent of the then-outstanding shares of Common Stock or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume, manner of sale or
notice requirements.
No predictions can be made as to the effect, if any, that future sales
of shares under Rule 144 or the availability of shares for sale will have on
the then-prevailing market, if any. Sales of substantial amounts of Common
Stock pursuant to Rule 144 or otherwise may adversely affect the
then-prevailing market price of the Units, Common Stock and the Class A
Warrants, should a public trading market for such securities develop.
74
<PAGE>
UNDERWRITING
The Underwriters, as set forth below and for whom VTR Capital, Inc. is
the Representative, have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company a total of 460,000 Units
on a "firm commitment" basis. The Underwriting Agreement provides that the
obligations of the Underwriters to purchase the Units are subject to certain
conditions and that the Underwriters are obligated to purchase all of the
460,000 Units, if any are purchased.
Underwriters Number of Units
------------ ---------------
VTR Capital, Inc.
Total 460,000
-------
-------
The Underwriters have advised the Company that they propose to offer the
Units to the public at the offering price set forth on the cover page of this
Prospectus and that they may allow to certain dealers concessions not in
excess of $.60 per Unit. After the initial public offering, the offering
price and discount may be changed. The Underwriters do not intend to sell
any of the Units offered hereby to accounts for which they have discretionary
authority.
Duncan Hill has granted to the Underwriters an option, exercisable
during the 30-day period from the date of this Prospectus, to purchase from
Duncan Hill at the offering price, less the underwriting discount, up to a
maximum of 69,000 additional Units for the sole purpose of covering
over-allotments, if any.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific maximum.
Syndicate covering transactions involve purchases of the Company's securities
in the open market after the distribution has been completed in order to
cover syndicate short positions. Penalty bids permit the Underwriters to
reclaim a selling concession from a syndicate member when the securities
originally sold by such syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the securities to be higher than they would otherwise be in the
absence of such transactions. These transactions may be effected on the OTC
Electronic Bulletin Board assuming the Company is successful in listing its
securities on such system. See "Risk Factors -Certain Implications of
Trading Over-the-Counter; Penny Stock Regulations."
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as
75
<PAGE>
indemnification for liabilities arising under the Securities Act may be
provided to officers, directors or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
The Company has agreed to pay the Underwriters an expense allowance on a
non-accountable basis equal to 3% of the gross proceeds from the sale of the
Units offered hereby (including the sale of any Units pursuant to the
Underwriters' Over-Allotment Option). The Company also has agreed to pay all
expenses in connection with qualifying the Units offered hereby for sale
under the laws of such states as the Representative may designate, and the
fees, costs and disbursements in connection with registering the Offering
with the NASD, including fees and expenses of counsel retained for such
purposes by the Representative.
The Company has also agreed to sell to the Underwriters, for an
aggregate purchase price of $46, the Underwriters' Unit Purchase Option,
which entitles the holder(s) to purchase up to 46,000 Units at an exercise
price of $9.00 per Unit. The Units are identical to the Units sold to the
public except that the exercise price of Class A Warrants included in the
Units is 150% of the then effective exercise price of the publicly held Class
A Warrants. The Underwriters' Unit Purchase Option is exercisable for four
years commencing one year from the date of the Prospectus. The Underwriters'
Unit Purchase Option may not be assigned, transferred, sold or hypothecated
by the Underwriters until 12 months after the date of this Prospectus, except
to officers or partners of the Underwriters, selling group members and their
officers and partners. Any profits realized by the holders upon the sale of
the Units issuable upon exercise of the Underwriters' Unit Purchase Option
may be deemed to be additional underwriting compensation. The exercise price
and the number of Units underlying the Underwriters' Unit Purchase Option are
subject to adjustment in certain events to prevent dilution. For the life of
the Underwriters' Unit Purchase Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of
the Units with a resulting dilution in the interest of other stockholders.
The Company may find it more difficult to raise capital for its business if
the need should arise while the Underwriters' Unit Purchase Option is
outstanding. At any time when the holders of the Underwriters' Unit Purchase
Option might be expected to exercise it, the Company would probably be able
to obtain additional capital on more favorable terms.
The Company has agreed to register, at its expense, under the Securities
Act, on one occasion, the Underwriters' Unit Purchase Option or the
underlying securities covered by the Underwriters' Unit Purchase Option at
the request of the holders of 50% of the Underwriters' Unit Purchase Option.
Such request may be made at any time during a period of four years beginning
one year from the date of this Prospectus. The Company has also agreed to
certain "piggyback" registration rights for the holders of the Underwriters'
Unit Purchase Option or securities issuable upon the exercise of the
Underwriters' Unit Purchase Option. Any exercise of such registration rights
by the Underwriter or the sale of any Units by the holders thereof may be
dilutive to the then present shareholders and may also have an adverse effect
upon either the Company's
76
<PAGE>
ability to obtain additional capital, or the market price of the Company's
securities should a public trading market develop.
To the extent not inconsistent with the guidelines of the NASD and the
rules and regulations of the Commission, the Company has agreed to pay the
Representative a warrant solicitation fee of 5% of the exercise price for
each Warrant exercised (excluding Class A Warrants exercised by the
Representative) payable upon the exercise of such Class A Warrant. However,
no compensation will be paid to the Representative in connection with the
exercise of such Class A Warrants if (a) the market price of the underlying
shares of Common Stock is lower than the exercise price, (b) the Class A
Warrants are held in a discretionary account, (c) the Class A Warrants are
exercised in an unsolicited transaction or (d) the disclosure of such
compensation arrangements has not been made in the documents provided to the
customers both as part of the original offering and at the time of exercise.
In addition, unless granted an exemption by the Commission from Regulation M
under the Exchange Act, the Representative will be prohibited from engaging
in any market making activities or solicited brokerage activities with regard
to the Company's securities until the later of the termination of such
solicitation activity or the termination by waiver or otherwise of any right
the Representative may have to receive a fee for the exercise of the Class A
Warrants following such solicitations.
The Company has agreed for a period of two years after the date of this
Prospectus not to issue any securities not contemplated by or disclosed in
this Prospectus without the prior written consent of the Representative.
Duncan Hill and each officer and director of the Company have agreed
not to sell or otherwise transfer any securities of the Company beneficially
owned by them on the date of this Prospectus for a period of 24 months from
the date of this Prospectus, without the prior written consent of the
Representative, except for the 69,000 Units that may be sold by Duncan Hill
pursuant to the Over-Allotment Option.
The Company has agreed to enter into a two-year consulting agreement
(the "Consulting Agreement") with the Representative. Such agreement
provides that the Representative will render consulting services on
investment banking and other financial matters to be determined by the
Company. Such services will be provided upon dates requested by the Company
and reasonably acceptable to the Representative not to exceed two business
days per month. The services to be provided by the Representative shall
include: assistance in formulating plans and presenting financial reports;
analyzing third party proposals for the provision of additional financing to
the Company; assistance in dealing with brokers and institutions; assistance
in obtaining financial management, technical and advisory services; and,
assistance in obtaining financial and corporate public relations. The
aggregate fee due to the Representative for such consulting services will be
$100,000 and shall be paid in full upon the closing date of the Offering.
The Representative has been granted by the Company the option to
designate one individual to serve on the Company's Board of Directors for a
period of three years from the date of this Prospectus. That individual must
be reasonably satisfactory to the
77
<PAGE>
Company's Board of Directors. As of the date hereof, no such person has been
designated. The Company has been advised by the Representative that any
individual appointed by the Representative will not likely be an officer,
director or affiliate of the Representative or any member of the NASD. In
lieu of nominating a director, the Representative may designate a
non-director observer to attend meetings of the Company's Board of Directors
for a period of three years from the date of the Prospectus. Such appointee
or designee shall receive the same compensation as any other non-executive.
Prior to the Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units offered
hereby and the terms of the Class A Warrants, including the exercise price of
the Class A Warrants, were determined by negotiations between the Company and
the Representative and do not necessarily bear any relationship to the
Company's assets, results of operations or other generally accepted criteria
of value. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, include the history of and the
prospects of the industry in which the Company competes, an assessment of the
Company's management, the results of operations of the Company in recent
periods, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
The offering price set forth on the cover page of this Prospectus should
not be considered an indication of the actual value of the Units. Such price
is subject to change as a result of market conditions and other factors and
no assurance can be given that the Units can be resold at the offering price.
The foregoing is a summary of all of the material provisions of the
Underwriting Agreement, Consulting Agreement and Underwriters' Unit Purchase
Option which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
Investigations Involving VTR Capital, Inc.
Possible Adverse Effect on Liquidity and Price of the Company's Securities due
to an Investigation by the SEC Involving VTR Capital, Inc.
The Company has been advised by VTR Capital, Inc., ("VTR"), the
Representative of the Offering, that the Securities and Exchange Commission
("SEC") has issued an order directing a private investigation by the staff of
the SEC. Such order empowers the SEC staff to investigate whether, from
June 1995 to the present, VTR and certain other persons and/or entities may
have engaged in fraudulent acts or practices in connection with the purchase
or sale of securities of certain other companies in violation of Sections
10(b) and 15(c)(1) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act") and Section 17(a) of the Securities of 1933, as amended.
These acts or practices include whether VTR and certain other brokers or
dealers effected transactions or induced transactions by making untrue
statements of material fact and whether VTR and certain others have engaged
in manipulative, deceptive or other fraudulent devices. The formal order
also concerns whether VTR and certain others who have agreed to participate
in a
78
<PAGE>
distribution have violated Rule 10b-6 of the Exchange Act by having bid for
or purchased securities for accounts in which it had a beneficial interest or
which is the subject of such distribution. As of February 1, 1998, VTR
understands that the SEC investigation is ongoing. VTR cannot predict
whether this investigation will result in any type of enforcement action
against VTR. The Company has been advised that VTR intends to make a market
in the Company's Units and components thereof following the Offering in the
over-the-counter market, subject to compliance with Regulation M of the
Exchange Act. An unfavorable resolution of the SEC investigation concerning
the sales and trading activities and practices of VTR could have the effect
of limiting VTR's ability to make a market in the Company's securities in
which case the market for and liquidity of the Company's securities may be
adversely affected. See "Underwriting."
NASD Investigation
The Company has also been advised by VTR that during 1996 and 1997, the
staff of the NASD conducted an inquiry into the trading and sales practices
of securities of another company in and around April 1995. In connection with
the inquiry, the NASD staff obtained documents from VTR and conducted
on-the-record interviews of, among others, VTR's Chief Executive Officer,
Head Trader and Chief Financial Officer. In late 1997, the NASD staff
advised VTR's counsel that it had completed its investigation and that it
intended to recommend that a formal disciplinary proceeding be instituted
against VTR, its Chief Executive Officer and Head Trader, as well as certain
other individuals not affiliated with VTR for fraudulent market manipulation
in connection with a purported unregistered distribution as well as for
violation of VTR's restriction agreement. As of February 1, 1998, to VTR's
knowledge, no complaint has been issued in this matter. VTR has cooperated
fully with this investigation and intends to vigorously defend itself and its
employees if any formal action is taken. An unfavorable resolution of the
NASD investigation could have the effect of limiting VTR's ability to make a
market in the Company's securities in which case the market for and liquidity
of the Company's securities may be adversely affected. See "Underwriting."
SELLING SECURITY HOLDERS
The Registration Statement of which this Prospectus forms a part also
includes an Alternate Prospectus that covers a "Concurrent Offering" by
certain Selling Security Holders (as defined below). The Concurrent Offering
includes an offering of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants owned by the Bridge Lender and the exercise of the Common Stock
underlying the 1,400,000 Class A Warrants by the transferees of the Bridge
Lender. The Alternate Prospectus also covers the resale of 200,000 Class A
Warrants owned by Miller and the exercise of such 200,000 Class A Warrants
by the transferees of Mr. Miller. In addition to the foregoing, the
Alternate Prospectus includes up to 69,000 Units (identical to those sold in
the Offering) to be offered by Duncan Hill including the exercise of 138,000
Class A Warrants by the transferees of Duncan Hill. To the extent that the
Underwriters exercise the Over-Allotment Option as described herein, then the
number of Units to be offered by Duncan Hill in the Concurrent Offering will
be proportionately reduced. (The Bridge Lender, Miller,
79
<PAGE>
and Duncan Hill are hereinafter collectively referred to as the "Selling
Security Holders.") The securities offered as part of the Concurrent
Offering may be sold concurrently with or after the Offering. The Class A
Warrants held by the Selling Security Holders are identical to the Class A
Warrants being offered by the Company. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby.
Except for Miller's Common Stock ownership, which is not being offered
for sale, the following tables set forth the beneficial ownership of the
Common Stock and Class A Warrants of the Company held by each Selling
Security Holders prior to the Offering and after the Offering, assuming all
of the Common Stock and Class A Warrants owned and to be offered for sale by
the Selling Security Holders are sold. The number of shares of Common Stock
owned by a Selling Security Holders do not include beneficial ownership of
options and Class A Warrants. It should be noted that securities offered by
Miller and Duncan Hill pursuant to the Concurrent Offering may not be sold
for a period of two years after the date of this Prospectus without the prior
written consent of the Representative. No such restriction applies to those
securities owned by the Bridge Lender and offered pursuant to the Concurrent
Offering.
80
<PAGE>
TABLE I (Common Stock)
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
COMMON STOCK OWNED OWNED%
--------------------- ------------------------
PRIOR TO AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING
- ---------------------------------------------------------------------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee (1)(2)........................................................ 400,000 -0- 28.5 0
Duncan Hill Co., Ltd.................................................. 1,000,000 931,000 100.0 50.1
</TABLE>
TABLE II (Class A Warrants)
<TABLE>
<CAPTION>
CLASS A WARRANTS PERCENT OF CLASS A
OWNED WARRANTS OWNED%
------------------------- --------------------------
PRIOR TO AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING
- ----------------------------------------------------------------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee (1)(2)......................................................... 1,400,000 -0- 80.6 -0-
Duncan Hill Co., Ltd................................................... 138,000 -0- 7.9 -0-
William L. Miller...................................................... 200,000 -0- 11.5 -0-
</TABLE>
- ------------------------
(1) Assumes Common Stock and Class A Warrants are outstanding prior to the
Offering notwithstanding that such securities are not issuable upon
conversion of a Convertible Note until the Closing Date of the Offering.
(2) The sole beneficiary of the trust is Pamela Osowski.
William Miller is the Company's Chief Executive Officer and Duncan Hill
is the Company's sole stockholder prior to the Offering. See "Certain
Transactions" and "Principal and Selling Stockholders." The Bridge Lender is
not affiliated with the Company in any capacity, has had no business
relationship with the Company at any time and has not owned any of the
Company's Securities beneficially or of record prior to the Offering other
than the Convertible Note and Non-Convertible Note issued to the Bridge
Lender on January 23, 1998. See "Use of Proceeds--Bridge Lenders."
Other than agreements between the Representative and Miller and Duncan Hill
to refrain from selling any securities of the Company for a period of two years
without the
81
<PAGE>
Representative's prior written consent, the securities offered hereby may be
sold from time to time directly by the Selling Security Holders.
Alternatively, the Selling Security Holders may from time to time offer such
securities through underwriters, dealers or agents. The distribution of
securities by the Selling Security Holders may be effected in one or more
transactions that may take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated transactions or through
sales to one or more broker-dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Usual and
customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Security Holders in connection with such sales of
securities. The Selling Security Holders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act with respect to the Securities offered, and any profits
realized or commissions received may be deemed underwriting compensation.
At the time a particular offer of the shares of Common Stock and/or Class
A Warrants is made by or on behalf of the Selling Security Holders, to the
extent required, a prospectus will be distributed which will set forth the
number of the shares of Common Stock and/or Class A Warrants being offered
and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the shares of Common Stock and/or Class A Warrants purchased
from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged
in a distribution of the shares of Common Stock and/or Class A Warrants of
the Company offered by the Selling Security Holders may not simultaneously
engage in market-making activities with respect to such securities of the
Company during the applicable "cooling off" period (up to 5 days) prior to
the commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Security Holders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Regulation M, in connection with transactions
in such securities, which provisions may limit the timing of purchase and
sales of the Securities by the Selling Securities Holders.
82
<PAGE>
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon
for the Company by Lester Morse P.C., Suite 420, 111 Great Neck Road, Great
Neck, NY 11021. Certain legal matters will be passed upon for the
Underwriters by Mintz & Gold, LLP, 444 Park Avenue South, New York, NY 10016.
EXPERTS
The financial statements of The Havana Group, Inc. as of December 31,
1996 and for the years ended December 31, 1996 and 1995, as of December 31,
1996 and for the years ended December 31, 1996 and 1995 appearing in this
Prospectus, have been audited by Hausser + Taylor LLP, independent auditors,
and are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE HAVANA GROUP, INC.
Report of Independent Auditors............................................................................. F-1
Balance Sheets as of December 31, 1996 and as of September 30, 1997 (Unaudited)............................ F-2
Statements of Operations
for the Years ended December 31, 1995 and 1996 and for the Nine Months ended September 30, 1997 and
1996 (Unaudited)....................................................................................... F-3
Statements of Cash Flows
for the Years ended December 31, 1995 and 1996 and for the Nine Months ended September 30, 1997 and
1996 (Unaudited)....................................................................................... F-4
Statements of Stockholders' Equity
for the Year ended December 31, 1996 and for the Nine Months ended September 30, 1997 (Unaudited)...... F-5
Notes to Financial Statements.............................................................................. F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Duncan Hill Company, Ltd.
North Canton, Ohio
We have audited the accompanying combined balance sheet of E. A. Carey of
Ohio, Inc. and Monarch Pipe Company as of December 31, 1996, and the related
combined statements of operations, retained earnings, and cash flows for the
years ended December 31, 1996 and 1995. These combined financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of E. A. Carey of
Ohio, Inc. and Monarch Pipe Company as of December 31, 1996 and the
combined results of their operations and cash flows for the years ended December
31, 1996 and 1995 in conformity with generally accepted accounting principles.
HAUSSER + TAYLOR
Canton, Ohio
April 11, 1997
F-1
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash.............................................................................. $ 10,387 $ 5,895
Accounts receivable--trade (less allowance for doubtful accounts of $5,500 for
1997 and 1996).................................................................. 42,184 34,280
Due from affiliates............................................................... 74,152 663,680
Inventories....................................................................... 397,511 271,338
Deferred catalogue expense........................................................ 66,416 41,968
Prepaid expenses.................................................................. -- 1,338
------------- ------------
Total current assets.......................................................... 590,650 1,018,499
DEFERRED FEDERAL INCOME TAX......................................................... 29,070 29,070
PROPERTY AND EQUIPMENT
Machinery and equipment........................................................... 83,575 83,575
Leasehold improvements............................................................ 12,808 --
------------- ------------
96,383 83,575
Less accumulated depreciation..................................................... 83,575 83,575
------------- ------------
12,808 --
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION
Customer lists.................................................................... 474,156 503,185
------------- ------------
$ 1,106,684 $1,550,754
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................. $ 103,189 $ 147,541
Due to affiliates................................................................. 19,288 715,750
Customer advances and other....................................................... 22,630 2,078
------------- ------------
Total current liabilities..................................................... 145,107 865,369
STOCKHOLDER'S EQUITY
E. A. Carey of Ohio, Inc. common stock, no par value, 750 shares authorized,
100 shares issued and outstanding............................................... -- --
Monarch Pipe Company common stock, $1 par value, 1,200 shares authorized,
500 shares issued and outstanding............................................... -- 500
E. A. Carey of Ohio, Inc. common stock, $.001 par value, 25,000,000 shares
authorized, 1,000,000 shares issued and outstanding............................. 1,000 --
Series A preferred stock, $.001 par value, 10,000,000 authorized,
5,000,000 issued and outstanding................................................ 5,000 --
Series B preferred stock, $.001 par value, 1,100,000 authorized,
1,100,000 issued and outstanding................................................ 1,100 --
Additional Paid In Capital........................................................ 292,900 --
Retained earnings................................................................. 661,577 684,885
------------- ------------
Total Stockholder's Equity.................................................... 961,577 685,385
------------- ------------
$ 1,106,684 $1,550,754
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ------------ ------------ ------------
UNAUDITED
NET SALES................................................ $ 1,015,416 $ 1,217,523 $ 1,656,316 $ 1,668,927
COST OF SALES............................................ 528,808 716,146 946,660 1,074,122
------------ ------------ ------------ ------------
GROSS PROFIT............................................. 485,608 501,377 709,656 594,805
SELLING EXPENSES......................................... 212,991 277,071 374,303 300,327
GENERAL AND ADMINISTRATIVE EXPENSES...................... 276,971 321,847 441,691 385,829
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS..................................... (3,354) (97,541) (106,338) (91,351)
OTHER INCOME (EXPENSE)
Interest............................................... -- -- -- 831
Miscellaneous, net..................................... (19,954) (19,304) (9,185) 4,604
------------ ------------ ------------ ------------
(19,954) (19,304) (9,185) 5,435
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES................................. (23,308) (116,845) (115,523) (85,916)
CREDIT FOR FEDERAL INCOME TAXES.......................... -- -- -- (21,290)
------------ ------------ ------------ ------------
NET LOSS................................................. $ (23,308) $ (116,845) $ (115,523) $ (64,626)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma loss per Share (unaudited)..................... $ (0.02) $ (0.12) $ (0.12) $ (0.06)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
COMBINED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------
1997 1996 1995
------------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
BALANCE--BEGINNING................................................... $ 684,885 $ 800,408 $ 900,916
PRIOR PERIOD ADJUSTMENT.............................................. -- -- (35,882)
-------- ---------- ----------
BALANCE--BEGINNING, AS RESTATED...................................... 684,885 800,408 865,034
DEDUCTION
Net loss........................................................... 23,308 115,523 64,626
-------- ---------- ----------
BALANCE--ENDING...................................................... $ 661,577 $ 684,885 $ 800,408
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------- -----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ----------- ----------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................... $ (23,308) $ (116,845) $ (115,523) $ (64,626)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization............................. 29,029 29,029 38,706 42,112
(Increase) decrease in accounts
receivables--trade...................................... (7,904) 14,936 44,829 16,558
(Increase) decrease in inventories........................ (126,173) 1,374 35,070 35,665
(Increase) in deferred catalogue expense.................. (24,448) (9,959) (4,084) (9,953)
Decrease (increase) in prepaid expenses................... 1,338 (24,521) (1,338) 672
(Decrease) in deferred Federal income tax................. -- -- -- (21,290)
(Decrease) increase in accounts payable, customer advances
and other............................................... (23,800) 35,217 34,079 (52,947)
---------- ----------- ----------- ----------
Net cash (used) provided by operating activities................ (175,266) (70,769) 31,739 (53,809)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in fixed assets.................................... (12,808) -- -- --
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in due from affiliates.................... 589,028 (534,404) (109,816) 140,034
(Decrease) increase in due to affiliates...................... (396,462) 597,775 74,651 (87,975)
---------- ----------- ----------- ----------
Net cash provided (used) by financing activities................ 192,566 63,371 (35,165) 52,059
NET INCREASE (DECREASE) IN CASH................................. 4,492 (7,398) (3,426) (1,750)
CASH--BEGINNING................................................. 5,895 9,321 9,321 11,071
---------- ----------- ----------- ----------
CASH--ENDING.................................................... $ 10,387 $ 1,923 $ 5,895 $ 9,321
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for interest........................ $ -- $ -- $ -- $ --
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. E. A. Carey of Ohio, Inc. (Carey) and Monarch Pipe Company (Monarch) are
wholly-owned subsidiaries of Duncan Hill Company, Ltd. These two companies
represent the tobacco product segment of the Duncan Hill Group. The accounts of
Carey and Monarch are combined for the purposes of these financial statements.
All significant inter-company transactions have been eliminated.
B. Business Description--Carey is primarily in the mail order business and
sells to customers throughout the United States. Carey sells tobacco and smoking
pipes and accessories. Products are purchased from a variety of manufacturers.
Monarch manufactures smoking pipes and sells them exclusively to Carey. Carey
grants credit to E. A. Carey Tobacco Club members.
C. 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.
D. Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out (FIFO) method.
E. Deferred catalogue expenses are costs of catalogues mailed to customers
which are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers utilize catalogues and other mail
order mailings from Carey.
F. Property and equipment are carried at cost and depreciated using the
straight-line and accelerated methods over their estimated useful lives. There
was no depreciation expense for the year ended December 31, 1996, or the nine
months ended September 30, 1997 and 1996. Depreciation expense amounted to
$3,407 for the year ended December 31, 1995.
Maintenance, repairs, and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.
G. Carey's customer list was obtained in the acquisition of Carey in 1984
for $889,000. The acquisition was consummated primarily to obtain Carey's
mailing list. The list is being amortized on a straight-line basis over a period
of 20 years. At December 31, 1996, accumulated amortization was $385,815. At
September 30, 1997 and 1996, accumulated amortization was $414,844 and $376,138,
respectively.
H. Deferred taxes have been recognized to reflect temporary differences
between financial reporting and income tax purposes. The principal differences
are due to net operating losses and the treatment of deferred catalogue expense.
I. New Authoritative Pronouncements--In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121). SFAS 121 requires the Company to review long-lived
assets and certain identifiable intangibles, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
The assessment of impairment is based on the estimated undiscounted future
cash flows from operating activities compared with the carrying value of the
asset. If the undiscounted future cash flows of an asset are less than the
carrying value, a write-down would be recorded measured by the amount of the
F-6
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
difference between the carrying value of the asset and the fair value of the
asset. The adoption of SFAS 121 did not have a material effect on the financial
statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not have any effect
to the Company's financial statements other than to require disclosure of the
pro forma effect on net income of using the fair value-based method of
accounting. As a result, there will be no effect to the Company other than to
require a pro forma footnote disclosure.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share", which is effective for periods ending after December
15, 1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Management believes earnings per share
computed in accordance with SFAS 128 will not be materially different than
earnings per share as currently reported.
In February, 1997, the Financial Accounting Standards Board issued SFAS 129,
"Disclosure of Information About Capital Structure," which is effective for
periods ending after December 15, 1997. SFAS No. 129 requires an entity to
explain the pertinent rights and privileges of outstanding securities. The
effect to the Company will be to require a footnote disclosure defining its
capital structure.
In June, 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for periods beginning after
December 15, 1997. SFAS No. 130 established new standards for reporting
comprehensive income and its components. The Company expects that comprehensive
income (loss) will not be materially different from net income (loss).
In June, 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS No.
131 changes the standards for reporting financial results by operating segments,
related products and services, geographical areas and major customers. The
Company must adopt SFAS No. 131 no later than December 31, 1998. The
Company believes that the effect of adoption will not be material.
J. Reclassifications--Certain amounts in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation.
F-7
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
Raw materials................................................... $ 103,648 $ 104,428
Pipes........................................................... 75,157 58,278
Tobacco and cigars.............................................. 144,251 43,589
Accessories..................................................... 26,377 24,965
Supplies and catalogs........................................... 48,078 40,078
------------- ------------
$ 397,511 $ 271,338
------------- ------------
------------- ------------
</TABLE>
NOTE 2. INCOME TAXES
Income tax expense includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ------------ ----------
<S> <C> <C> <C>
(UNAUDITED)
Current............................................. $ -- $ -- $ --
Deferred............................................ -- (26,390) (21,290)
Change in valuation allowance....................... -- 26,390 --
------------- ------------ ----------
$ -- $ -- $ (21,290)
------------- ------------ ----------
------------- ------------ ----------
</TABLE>
The net deferred tax amounts shown on the balance sheets are comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
Deferred tax asset.............................................. $ 68,396 $ 64,900
Deferred tax liabilities........................................ (15,276) (9,440)
Valuation allowance............................................. (24,050) (26,390)
------------- ------------
Net tax asset................................................... $ 29,070 $ 29,070
------------- ------------
------------- ------------
</TABLE>
The deferred tax asset relates to net operating loss carryforwards. The
deferred tax liabilities relate principally to the treatment of deferred
catalogue expenses.
A valuation allowance to reflect the estimated amount of deferred tax assets
which may not be realized due to the expiration of net operating losses has been
recorded.
F-8
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards which will expire as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ------------------------------------------------------------------------ ----------
<S> <C>
2008.................................................................... $ 5,600
2009.................................................................... 57,600
2010.................................................................... 105,900
2011.................................................................... 119,600
2012 (unaudited)........................................................ 47,800
</TABLE>
NOTE 3. PARENT CORPORATION
Duncan Hill Company, Ltd. (Duncan), the Companies' sole stockholder,
provided management, general, and administrative services to Carey and Monarch,
which are charged for their portion of these expenses. The Companies' portion of
these expenses totaled $392,958 and $337,353 for the years ended December 31,
1996 and 1995, respectively. Amounts due to affiliate are a result of the unpaid
portion of these charges.
The accounts receivable and inventory of the Companies' and Duncan's other
subsidiaries are pledged as collateral against an $800,000 line of credit
reflected on the financial statements of Kids Stuff, Inc., a wholly-owned
subsidiary of Duncan. The balance on the line of credit was $650,000 and
$430,000 at December 31, 1996 and 1995, respectively.
(Unaudited) Effective January 1, 1997, the Company contracted with Kids
Stuff, Inc. ("Kids"), a subsidiary of Duncan, to provide telemarketing, order
fulfillment, data processing and certain administrative functions. The Company
is charged for its portion of the expenses on a direct cost basis, as
applicable, or on a pro rata basis. Actual costs are those direct costs that can
be charged on a per order or per hour basis, fixed costs are allocated on a pro
rata basis by dividing the total assets of the Company by the sum of the total
assets of the Company and Kids. Effective January 1, 1998, the Company renewed
this contract with Kids at an annual cost of approximately $206,100 for the
administrative, executive and accounting services, as outlined below, and $2.40
per order processed, with an additional annual payment of 5% of the Company's
1998 pre-tax profits. Management believes that this is substantially the same
cost that it would incur should it procure these services itself.
<TABLE>
<CAPTION>
<S> <C>
Accounting and payroll services................................... $ 34,000
Administration and Human Resource Management...................... 51,600
Data Processing................................................... 34,900
Office Equipment and facilities use............................... 32,200
Merchandising and Marketing services.............................. 38,100
Purchasing services............................................... 15,300
---------
Total......................................................... $ 206,100
---------
---------
</TABLE>
NOTE 4. PRIOR PERIOD ADJUSTMENT
During 1996, Carey changed its accounting principle utilized regarding
internally-generated customer lists. Prior to the change, the Company
capitalized and amortized these costs over their estimated useful lives. The
Company now expenses these costs as incurred. The change is being made in
conjunction with an
F-9
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PRIOR PERIOD ADJUSTMENT (CONTINUED)
initial public offering, and the Company expects to use the newly adopted policy
in future periods. The January 1, 1995 retained earnings has been restated for
the effect of the following adjustments:
<TABLE>
<CAPTION>
RETAINED
EARNINGS
----------
<S> <C>
As previously reported............................................................ $ 900,916
Elimination of internally-generated customer lists................................ (46,302)
Elimination of related deferred tax liability..................................... 10,420
----------
As adjusted....................................................................... $ 865,034
----------
----------
</TABLE>
NOTE 5. SUBSEQUENT EVENTS (UNAUDITED)
A. REINCORPORATION OF THE COMPANY
In December, 1997, The Havana Group, Inc. succeeded to the Carey's Smokeshop
catalog and pipe manufacturing business of Carey, a subsidiary of Duncan Hill,
as a result of a reincorporation in which Carey was merged into and with its
wholly-owned subsidiary, The Havana Group, Inc., the surviving corporation, and
assuming all liabilities of Carey.
The Havana Group, Inc. has 25,000,000 shares of $.001 par value Common Stock
authorized, and 10,000,000 shares of $.001 par value Preferred Stock authorized.
The Common shares are entitled to one vote on all stockholder matters. The Board
of Directors has the authority, without further action by the stockholders, to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges, and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidating preferences, and the number of shares constituting any series or the
designation of such series.
Subsequent to the merger, The Havana Group, Inc. issued a 10,000 for one
stock split and a preferred stock dividend of 5,000,000 shares of Series A
Preferred and 138,000 Warrants. The preferred stock has the same voting
privileges as the common. Upon the completion of the Initial Public Offering,
these Warrants automatically convert into Class A Warrants identical those to be
sold to the public. The financial statements give retroactive effect to January
1, 1997, to the aforesaid stock split. Pro Forma Earnings per share for all
periods presented are calculated based on 1,000,000 shares of common stock
outstanding.
B. ISSUANCE OF SERIES B CONVERTIBLE STOCK
In December 1997, the Company issued 1,100,000 shares of its Series B
Convertible Preferred Stock ("Series B") $.001 par value to Duncan Hill at a
value of $.27 per share. In return, Duncan Hill assumed a $300,000 liability due
to an affiliate. The Series B stock has the same voting privileges as the Common
Stock, and is convertible into the Company's Common stock upon the Company's net
pre-tax profit reaching $500,000 in any given calendar year. The holder of each
share of Series B Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, out of funds legally
available therefor, cumulative quarterly cash dividends at the rate of $0.25 per
share, and, no more, quarterly on March 31, June 30, September 30 and December
31 commencing with March 31, 1998. The financial statements give retroactive
effect to January 1, 1997, to the aforesaid stock split.
F-10
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
C. RECENT SALE OF UNREGISTERED SECURITIES.
In January, 1998, the Company borrowed $100,000 from one private investor,
in exchange for a convertible promissory note ("Convertible Note"). The
Convertible Note bears interest at 8% per annum and is payable on December 31,
1998. However, if the Company completes an IPO, the note is automatically
converted into an aggregate of 400,000 shares of Common Stock and 1,400,000
warrants. Each warrant allows the holder to purchase a share of the Company's
Common Stock at an exercise price of $5.25 per share. The warrants are
exercisable upon the separation date and expire five years from the effective
date of the Company's Initial Public Offering. The warrants may be redeemed by
the Company at a price of $.01 per warrant, at any time after they become
exercisable, upon not less than 30 days' prior notice, if the closing bid price
of the Common Stock has been at least $10.50 per share for 20 consecutive
trading days ending on the fifteenth day prior to the date on which the notice
of redemption is given.
D. BRIDGE LOAN
In January 1998, the Company borrowed $100,000 from one private investor
evidenced by a promissory notes of $100,000. This is the same private investor
mentioned in Note 5-C "Recent Sale of Unregistered Securities". The note bears
interest at 8% per annum and is due at the earlier of December 31, 1998 or the
successful completion of the Company's IPO.
E. ADOPTION OF 1997 STOCK INCENTIVE PLAN.
In November 1997, E. A. Carey's Board of Directors and majority stockholder
adopted the 1997 Stock Incentive Plan. Under the Incentive Plan, the
Compensation Committee of the Board of Directors may grant stock incentives to
key employees and the directors of the Company pursuant to which a total of
300,000 shares of Common Stock may be issued; provided, however, that the
maximum amount of Common Stock with respect to which stock incentives may be
granted to any person during any calendar year shall be 20,000 shares, except
for a grant made to a recipient upon the recipients initial hiring by the
Company, in which case the number shall be a maximum of 40,000 shares. These
numbers are subject to adjustment in the event of a stock split and similar
events. Stock incentive grants may be in the form of option, stock appreciation
rights, stock awards or a combination thereof.
F. INCENTIVE COMPENSATION PLAN.
The Company's Incentive Compensation Plan (the "Plan") is designed to
motivate employee participants to achieve the Company's annual strategic goals.
Eligibility for participation in the plan is limited to the Chief Executive
Officer and the Executive Vice President of the Company, and such other
employees of the Company as may be designated by the Board of Directors from
time to time. For each fiscal year of the Company, the Board will establish a
bonus pool not to exceed 10% of the Company's operating income. The amount of
such pool with respect to any year shall be determined subsequent to the end of
the year upon the determination of the Company's operating income for that year.
Each participant in the Plan is eligible to receive from the bonus pool an
annual award up to 50% of the participant's base salary.
G. EMPLOYMENT AGREEMENT.
The Company has entered into a five-year employment agreement with William
L. Miller, effective December 1, 1997, pursuant to which Mr. Miller is to serve
as Chief Executive Officer and President of the
F-11
<PAGE>
E. A. CAREY OF OHIO, INC. AND MONARCH PIPE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Company. The employment agreement provides for an annual salary of $50,000
increasing to at least $100,000 for the remainder of the contract if the
Company's revenues for any fiscal year exceed $5,000,000. The employment
agreement also provides for the eligibility of Mr. Miller to receive annual cash
bonuses under the Company's Incentive Compensation Plan, ranging from 0% to 50%
of Mr. Miller's prior year base salary.
Mr. Miller was granted under his employment agreement 200,000 Common Stock
Purchase warrants at $6.00 per share. The warrants are convertible into Class A
warrants upon the effectiveness of the Company's planned registration statement,
bearing the same terms and conditions as those Class A warrants issued by the
Company being registered.
Mr. Miller was granted under his employment agreement an option to purchase
200,000 shares of the Company's Common Stock, which will vest 20% on each of the
following dates: December 1, 1997, January 1, 1998, January 1, 1999, January 1,
2000 and January 1, 2001, regardless of whether the executive is employed on
such dates by the Company. The vested options will be immediately exercisable
and will expire ten years from the date of the agreement. The exercise price of
the options will be $6.00 per share, subject to downward adjustments in the
exercise price if the Company meets certain performance goals.
Mr. Miller's contract allows for termination by the Company for cause. If
the agreement is terminated by the Company without cause, or by Mr. Miller due
to a material change in his responsibilities, functions, or duties, the Company
shall pay Mr. Miller a lump sum on the date of termination as severance pay an
amount equal to 2.99 times the sum of Mr. Miller's salary and bonus paid in the
year prior to the year of termination.
H. PUBLIC OFFERING
The Company plans to file a registration statement relating to an offering
by the Company of 529,000 units at an offering price of $6 per unit, including
69,000 units to cover over-allotments, if any, each unit consisting of one share
of common stock, $.001 par value, and two Class A Warrant. The over-allotment,
if exercised, will be sold on behalf of Duncan Hill, out of the 1,000,000 shares
of Common stock and 138,000 Class A Warrants owned by Duncan Hill, with net
proceeds to be received by Duncan Hill.
The common stock and warrant are not detachable or separately transferable
until the separation date. Each warrant entitles the holder to purchase one
share of common stock at a price of $5.25 commencing from the separation date
until five years from the date of this prospectus. The Company may redeem the
Warrants at a price of $.01 per Warrant, at any time after they become
exercisable, upon not less than 30 days' prior written notice, if the closing
bid price of the Common Stock has been at least $10.50 per share for 20
consecutive trading days ending on the 15th day prior to the date on which the
notice of redemption is given. rading days ending on the 15th day prior to the
date on which the notice of redemption is given.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
OF COMMON STOCK AND WARRANTS OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
Prospectus Summary...................................................
Risk Factors.........................................................
Use of Proceeds......................................................
Dividend Policy......................................................
Dilution.............................................................
Capitalization.......................................................
Selected Financial Data..............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................
The Company and Its Parent...........................................
Business.............................................................
Management...........................................................
Principal and Selling Stockholders...................................
Certain Transactions.................................................
Description of Securities............................................
Unregistered Shares Eligible for Immediate and Future Sale...........
Underwriting.........................................................
Selling Security Holders.............................................
Legal Matters........................................................
Experts..............................................................
Index to Financial Statements........................................
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF UNITS, COMMON STOCK AND
WARRANTS OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THE 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.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
460,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON
STOCK AND TWO CLASS A COMMON STOCK
PURCHASE WARRANTS
THE HAVANA GROUP, INC.
PROSPECTUS
VTR CAPITAL, INC.
, 1998
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
Alternate
Subject to completion February 9, 1998
PROSPECTUS
THE HAVANA GROUP, INC.
469,000 Shares of Common Stock
1,738,000 Class A Common Stock Purchase Warrants
This Prospectus includes the registration on behalf of a bridge lender
(the "Bridge Lender") as a Selling Security Holder of the (i) resale of
400,000 shares of Common Stock and 1,400,000 Class A Warrants issuable to the
Bridge Lender by The Havana Group, Inc. (the "Company ") upon the completion
of the Offering pursuant to the automatic conversion of a convertible note
and (ii) the exercise of such 1,400,000 Class A Warrants by the transferees
of the Bridge Lender. This Prospectus also includes the resale of 200,000
Class A Warrants owned by William Miller, the Company's Chief Executive
Officer ("Miller"), and the 200,000 shares issuable upon exercise thereof by
the transferees of Miller. The 200,000 Class A Warrants are issuable by the
Company pursuant to Warrants which provide for the automatic conversion of
the Warrants into Class A Warrants upon the completion of the Offering. In
the event that the Underwriters' Over-Allotment Option as discussed under
"Concurrent Sales" is not exercised in its entirety, then this Prospectus
includes the resale of up to 69,000 Units (identical to those sold in the
Offering) to be offered by Duncan Hill Co., Ltd. the Company's sole
stockholder prior to the Offering ("Duncan Hill" or the "Selling Unit
Holder"), including the exercise of 138,000 Class A Warrants by the
transferees of Duncan Hill. The securities offered herein may be sold
concurrently with or after the Offering. (The Bridge Lender, Miller and
Selling Unit Holder are hereinafter collectively referred to as the "Selling
Security Holders.") The aforementioned securities in the aggregate are
collectively referred to as the "Securities." For a description of the
Offering, see "Concurrent Sales."
Each Class A Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.25 and are exercisable from the earlier of (i)
_________, 1998 (six months from the date of this Prospectus) or (ii) a date
selected by VTR Capital, Inc., the Representative of the Underwriters in the
Offering (the "Representative"), in writing for separation (the "Separation
Date") until five years after the date of this Prospectus. The Company may
redeem the Class A Warrants at a price of $.10 per Warrant, at any time after
one year from the date of this Prospectus, upon not less than 30 days' prior
written notice, if the closing bid price of the Common Stock has been at
least $10.50 per share for 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given. See
"Description of Securities."
Other than agreements between the Representative and Miller and Duncan
Hill to refrain from selling the Securities of the Company for a period of
two years without the Representative's prior written consent, the Securities
offered hereby may be sold from time to time directly by the Selling Security
Holders. Alternatively, the Selling Security Holders
ALT-1
<PAGE>
Alternate
may from time to time offer the Securities through underwriters, dealers or
agents. The distribution of the Securities by the Selling Security Holders
may be effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of the Securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of securities. The Selling Security
Holders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect
to the Securities offered, and any profits realized or commissions received
may be deemed underwriting compensation. Usual and customary or specially
negotiated brokerage fees may be paid by the Selling Security Holders in
connection with sales of the Securities.
--------------------
On the date hereof, the Company commenced an initial public offering of
460,000 Units, each Unit consisting of one share of common stock, $.001 par
value and two redeemable Class A Common Stock Purchase Warrants. The
Offering also included an Over-Allotment Option pursuant to which the
Underwriters may purchase up to 69,000 Units from Duncan Hill. See
"Concurrent Sales."
The Company will not receive any of the proceeds for the sale of the
Securities by the Selling Security Holders. All costs incurred in the
registration of the Securities of the Selling Security Holders are being
borne by the Company. See "Selling Security Holders."
Prior to the Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units in the
Offering and the terms of the Class A Warrants, including the exercise price
of the Class A Warrants, were determined by negotiations between the Company
and the Representative and do not necessarily bear any relationship to the
Company's assets, results of operations or other generally accepted criteria
of value. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, include the history of and the
prospects of the industry in which the Company competes, an assessment of the
Company's management, the results of operations of the Company in recent
periods, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
The Units, Common Stock and Warrants are expected to be approved for
quotation on the Over-the-Counter ("OTC") Electronic Board under the symbols
"____," "____," and "____," respectively. See "Risk Factors - Certain
Implications of Trading Over-The-Counter; "Penny Stock Regulations." There is
no assurance, however, that the Company's securities will be approved for
listing on the OTC Electronic Bulletin Board or elsewhere. The Company
anticipates that the Units offered hereby will be qualified for sale by the
Company in a limited number of states. See "Risk Factors - Limits on
Secondary Trading; Current Prospectus and State Sky Registration Required to
Exercise Warrants."
ALT-2
<PAGE>
Upon completion of the Offering, the Selling Unit Holder and Miller
will beneficially own approximately 89% of the Company's outstanding voting
capital stock (not including Class A Warrants and options to be owned by
them). See "Risk Factors - Control by Parent and Parent's Controlling
Stockholders."
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE __
AND "DILUTION" BEGINNING ON PAGE __.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1998
ALT-3
<PAGE>
Alternate
USE OF PROCEEDS OF COMPANY OFFERING
The net proceeds to be received from the sale of the 460,000 Units
offered by the Company (after deducting underwriting discounts, a 3%
non-accountable expense allowance and other estimated offering expenses) will
be approximately $2,050,000 ($2,037,500 if the Underwriters' Over-Allotment
option is exercised in full). The Company intends to use the net proceeds of
the Offering over at least the next twelve months approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount of Percentage of
Net Proceeds Net Proceeds
------------ -------------
<S> <C> <C>
Inventory $ 600,000 30%
Preferred Stock Dividend
to Duncan Hill (1) 110,000 5%
Payment of Bridge Lender 102,000 5%
Indebtedness (2)
Humidor Construction (3) 740,000 36%
Working Capital (4).......... 498,000 24%
------------ -------------
TOTAL.................... $2,050,000 100%
------------ -------------
------------ -------------
</TABLE>
- -------------------
(1) The Company has allocated approximately $110,000 to be paid to Duncan
Hill. The $110,000 represents the first year's cash dividend on the
Series B Preferred Stock. See "Description of Securities."
(2) The Company has also allocated $102,000 to be paid to the Bridge Lender,
who is also a Selling Security Holder, in satisfaction of a
non-convertible note (including accrued interest at the rate of 8% per
annum) which becomes due and payable upon the completion of the
Offering. See "Bridge Financing."
(3) The Company intends to construct its own climate controlled warehouse in
which each Havana Group member would receive an allocated portion
serving as such members personal humidor, capable of storing up to 50
boxes of cigars. See "Business -- Marketing."
(4) The Company intends to use such funds for general working capital
purposes. In the event that the Over-Allotment Option is exercised in
full by the Underwriters, working capital and the estimated net proceeds
of the Offering will be reduced by $12,420 which represents the amount
of the expense allowance which the Company has agreed to pay for the
benefit of the Selling Unit Holder. See "Underwriting."
ALT-4
<PAGE>
Alternate
Bridge Financing
On January 23, 1998, the Company raised $200,000 in bridge financing
from ARO Trust #1, 1970 Trust (Linda Gallenberger, Trustee), a
non-affiliated investor, (the "Bridge Lender"). In exchange for the Bridge
Lender making such loan, the Company issued to the Bridge Lender a
non-convertible note due the earlier of the completion of the Offering or
December 31, 1998 in the principal amount of $100,000 (the "Non-Convertible
Note") and a convertible note in the principal amount of $100,000 due
December 31, 1998 (the "Convertible Note"). The Convertible Note and
Non-Convertible Note are collectively referred to as the "Notes." Each Note
bears interest at the rate of eight (8%) percent per annum. The Convertible
Note automatically converts into 400,000 shares of the Company's Common Stock
and 1,400,000 Class A Warrants upon the consummation of the Offering. Each
such Class A Warrant is identical to the Class A Warrants offered hereby.
The proceeds of the bridge offering were used by the Company to pay certain
expenses in connection with the Offering and to increase working capital.
The Registration Statement, of which this Prospectus is a part, covers
the sale of the 400,000 shares of the Company's Common Stock and 1,400,000
Class A Warrants (and the exercise thereof by Class A Warrant transferees of
the Bridge Lenders) that will be acquired by the Bridge Lender (herein also
referred to as a "Selling Security Holder") pursuant to the conversion of the
Convertible Note. See "Selling Security Holders."
ALT-5
<PAGE>
Alternate
CONCURRENT SALES
On the date of this Prospectus, a Registration Statement under the
Securities Act with respect to an underwritten initial public offering (the
"Offering") of securities by the Company was declared effective by the
Securities and Exchange Commission ("SEC"), and the Company commenced the
sale of the securities offered thereby. The securities consist of 460,000
Units, each Unit consisting of one share of common stock, $.001 par value and
two redeemable Class A Common Stock Purchase Warrants (without giving effect
to the Over-Allotment Option granted to the Representative of the Offering).
The Offering also includes an Over-Allotment Option of up to 69,000 Units
which the Underwriters may purchase from Duncan Hill. To the extent that the
Over-Allotment Option is not exercised in full by the Underwriters in the
Offering, Duncan Hill will be a Selling Security Holder in this Prospectus.
Sales of securities under this Prospectus by the Selling Security Holders or
event the potential of such sales may have an adverse effect on the market
price of the Company's securities.
SELLING SECURITY HOLDERS
This Prospectus includes the registration on behalf of the Bridge Lender
as a Selling Security Holder of the (i) resale of 400,000 shares of Common
Stock and 1,400,000 Class A Warrants issuable to the Bridge Lender by The
Havana Group, Inc. (the "Company ") upon the completion of the Offering
pursuant to the automatic conversion of a convertible note and (ii) the
exercise of such 1,400,000 Class A Warrants by the transferees of the Bridge
Lender. This Prospectus also includes the resale of 200,000 Class A Warrants
owned by Miller, and the 200,000 shares issuable upon exercise thereof by the
transferees of Miller. The 200,000 Class A Warrants are issuable by the
Company pursuant to Warrants which provide for the automatic conversion of
the Warrants into Class A Warrants upon the completion of the Offering. In
the event that the Underwriters of the Offering do not exercise the
Over-Allotment Option in its entirety, then this Prospectus includes the
resale of up to 69,000 Units (identical to those sold in the Offering) to be
offered by Duncan Hill, including the exercise of 138,000 Class A Warrants by
the transferees of Duncan Hill. The above referenced registered securities
are collectively referred to the "Securities." The Securities offered herein
may be sold concurrently with or after the Offering.
Except for Miller's Common Stock ownership, which is not being offered
for sale, the following tables set forth the beneficial ownership of the
Common Stock and warrants of the Company held by each Selling Security
Holders prior to the Offering and after the Offering, assuming all of the
Common Stock and Class A Warrants owned and to be offered for sale by the
Selling Security Holders are sold. The number of shares of Common Stock
owned by the Selling Security Holders do not include beneficial ownership of
options and Class A Warrants. It should be noted that securities offered by
Miller and Duncan Hill pursuant to the Concurrent
ALT-6
<PAGE>
Offering may not be sold for a period of two years after the date of this
Prospectus without the prior written consent of the Representative. No such
restriction applies to the Securities owned by the Bridge Lender and offered
pursuant to the Concurrent Offering.
TABLE I (Common Stock)
<TABLE>
<CAPTION>
Percent of Common Stock
Name of Beneficial Owner Common Stock Owned Owned%
- ------------------------ ------------------ -----------------------
Prior to After Prior to After
Offering(1) Offering Offering Offering
---------- -------- -------- --------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee(1)(2) 400,000 -0- 28.5 0
Duncan Hill Co., Ltd. 1,000,000 931,000 100.0 50.1
</TABLE>
TABLE II (Class A Warrants)
<TABLE>
<CAPTION>
Class A Warrants Percent of Class A
Name of Beneficial Owner Owned Warrants Owned%
- ------------------------ ------------------ --------------------
Prior to After Prior to After
Offering Offering Offering Offering
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee(1)(2) 1,400,000 -0- 80.6 -0-
Duncan Hill Co., Ltd. 138,000 -0- 7.9 -0-
William L. Miller 200,000 -0- 11.5 -0-
</TABLE>
- -------------------
(1) Assumes Common Stock and Class A Warrants are outstanding prior to the
Offering notwithstanding that such securities are not issuable upon
conversion of a Convertible Note until the Closing Date of the Offering.
(2) The sole beneficiary of the trust is Pamela Osowski.
Miller is the Company's Chief Executive Officer and Duncan Hill is the
Company's sole stockholder prior to the Offering. See "Certain Transactions"
and "Principal and Selling Stockholders." The Bridge Lender is not
affiliated with the Company in any capacity, has had no business relationship
with the Company at any time and has not owned any of the Company's
Securities beneficially or of
ALT-7
<PAGE>
Alternate
record prior to the Offering other than the Convertible Note and
Non-Convertible Note issued to the Bridge Lender on January 23, 1998.
Other than agreements between the Representative and Miller and Duncan
Hill to refrain from selling any Securities of the Company for a period of
two years without the Representative's prior written consent, the Securities
offered hereby may be sold from time to time directly by the Selling Security
Holders. Alternatively, the Selling Security Holders may from time to time
offer the Securities through underwriters, dealers or agents. The
distribution of the Securities by the Selling Security Holders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of the Securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of the Securities. The Selling
Security Holders and intermediaries through whom the Securities are sold may
be deemed "underwriters" within the meaning of the Securities Act with
respect to the Securities offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time a particular offer of the Securities is made by or on behalf
of the Selling Security Holders, to the extent required, a prospectus will be
distributed which will set forth the number of the Securities being offered
and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the Securities purchased from the Selling Security Holders
and any discounts, commissions or concessions allowed or reallowed or paid to
dealers, and the proposed selling price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged
in a distribution of the shares of Common Stock and/or Class A Warrants of
the Company offered by the Selling Security Holders may not simultaneously
engage in market-making activities with respect to securities of the Company
during the applicable "cooling off" period (up to 5 days) prior to the
commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Security Holders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Regulation M, in connection with transactions
in the Securities, which provisions may limit the timing of purchase and
sales of the Securities by the Selling Security Holders.
PLAN OF DISTRIBUTION
Other than agreements between the Representative and Miller and Duncan
Hill to refrain from selling any Securities of the Company for a period of
two years without the Representative's prior written consent, the Securities
offered hereby may be sold from time to time directly by the Selling Security
Holders. Alternatively, the
ALT-8
<PAGE>
Alternate
Selling Security Holders may from time to time offer the Securities through
underwriters, dealers or agents. The distribution of Securities by the
Selling Security Holders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or
more broker-dealers for resale of the Securities as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of the Securities. The Selling
Security Holders and intermediaries through whom the Securities are sold may
be deemed "underwriters" within the meaning of the Securities Act with
respect to the Securities offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time a particular offer of the Securities is made by or on behalf
of the Selling Security Holders, to the extent required, a prospectus will be
distributed which will set forth the number of the Securities being offered
and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the Securities purchased from the Selling Security Holders
and any discounts, commissions or concessions allowed or reallowed or paid to
dealers, and the proposed selling price to the public.
ALT-9
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK AND WARRANTS OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary..............................
Risk Factors....................................
Use of Proceeds.................................
Dividend Policy.................................
Dilution........................................
Capitalization..................................
Selected Financial Data.........................
Management's Discussion and
Analysis of Financial Condition and Results of
Operations....................................
The Company and Its Parent......................
Business........................................
Management......................................
Principal and Selling
Stockholders....................................
Certain Transactions............................
Description of Securities.......................
Unregistered Shares
Eligible for Immediate and Future Sale..........
</TABLE>
--------------------
Until ____________, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Units, Common Stock and
Warrants offered hereby, whether or not participating in the 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.
469,000 SHARES OF COMMON STOCK
1,738,000 CLASS A COMMON STOCK
PURCHASE WARRANTS
THE HAVANA GROUP, INC.
PROSPECTUS
, 1998
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such capacity
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of Chancery or such
other court shall deem proper.
Article VII, Section 7, of the By-Laws of the Company provides for
indemnification of officers, directors, employees and agents to the extent
permitted under the Delaware General Corporation Law. The employment agreement
with William L. Miller provide for his indemnification to the full extent
permitted by law.
The Company's Certificate of Incorporation contains a provision eliminating
the personal monetary liability of directors to the extent allowed under the
General Corporation Law of the State of Delaware. Under the provision, a
stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as
II-1
<PAGE>
a director and not, if he is also an officer, his role, as an officer or in any
other capacity or to his responsibilities under any other law, such as federal
securities laws.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering, other than
underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC filing fees $6,262.83
NASD fees 2,566.70
Accounting fees and
expenses 20,000.00
Legal fees 60,000.00
Blue Sky fees and expenses 60,000.00
Printing and engraving 70,000.00
Miscellaneous expenses 28,917.47
Transfer Agent 3,500.00
Underwriters' 3%
Non-Accountable Expense
Allowance on 460,000 Units 82,800.00
Underwriters' Financial
Consulting Fee 100,000.00
-----------
TOTAL $434,047.00
-----------
-----------
</TABLE>
The Company will bear all expenses shown above.
II-2
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following shares of unregistered securities have been issued by the
Registrant since its incorporation in Delaware. There were no underwriting
discounts and commissions paid in connection with the issuance of any of said
securities.
(i) Effective December 5, 1997, E. A. Carey of Ohio, Inc. ("Carey") was
merged into the Company, then a wholly owned subsidiary of Carey, for the
purpose of reincorporating Carey in Delaware. In connection with the
reincorporation, the Company issued to its parent, Duncan Hill Co., Ltd.,
("Duncan Hill") 100 shares of its Common Stock. This transaction is not
considered a sale within the meaning of Rule 145(a)(2) of the Securities Act of
1933 as amended (the "Securities Act").
(ii) Effective December 8, 1997, the Company's Board of Directors declared
a 10,000 for 1 forward stock split resulting in Duncan Hill receiving 1,000,000
shares of the Company's Common Stock in place of the above referenced 100
shares. This transaction is not considered a sale within the meaning of Rule
145(a)(1) of the Securities Act.
(iii) On December 8, 1997, the Company declared a dividend on its Common
Stock of 5,000,000 shares of its Series A Preferred Stock and 138,000 Warrants
to purchase a like number of shares of Common Stock to Duncan Hill, then the
Company's sole common stockholder. This transaction is not considered a sale
within the meaning of Section 2(a)(3) of the Securities Act.
(iv) On December 8, 1997, the Company sold 1,100,000 shares of its Series B
Preferred Stock to Duncan Hill in exchange for Duncan Hill's assumption of
$300,000 of indebtedness owing to an affiliate. Exemption is claimed on the
issuance of such securities since the transactions did not involve a public
offering within the meaning of Section 4(2) of the Securities Act.
(v) On December 24, 1997, pursuant to an employment contract with
William Miller, the Company's Chief Executive Officer, the Company granted him
options to purchase an additional 200,000 shares of the Company's Common Stock
and Warrants to purchase 200,000 shares of Common Stock. Exemption is claimed
on such securities since the transactions did not involve a public offering
within the meaning of Section 4(2) of the Securities Act.
(vi) On January 23, 1998, the Company received $200,000 from a bridge
lender, Aro #1, 1970 Trust, Linda Gallenberger Trustee (the "Bridge Lender"), in
exchange for a $100,000 non-convertible note (the "Non-Convertible Note") due
the earlier of December 31, 1998 or the completion of the Company's initial
public offering and a $100,000 convertible note due December 31, 1998 (the
"Convertible Note" and together with the Non-Convertible Note, the "Notes").
The Notes bear interest at the rate of 8% per annum. Upon the completion of the
Company's initial public offering, the Convertible Note automatically converts
into 400,000 shares of the Company's Common Stock and 1,400,000 Class A
Warrants. Exemption is claimed under Section 4(6) and Rule 505
II-3
<PAGE>
and/or 506 of Regulation D of the Securities Act since the sale was made to an
accredited investor and there was no general advertising or public solicitation
in connection with the transaction. The Company filed a Form D in February,
1998. The Bridge Lender agreed to take the Notes for investment and without a
view to the distribution or resale thereof and to have an appropriate
restrictive legend placed on its securities. Also, the Bridge Lender which
acquired the notes was provided with all information requested by it and was
afforded access to information and such investor had such knowledge and
experience in financial and business matters that they were capable of
evaluation of the merits and risks of such investment and were able to bear the
economic risk thereof. Accordingly, exemption is also claimed on the sale of
the notes since the transaction did not involve a public offering within the
meaning of Section 4(2) of the Securities Act.
Item 27. Exhibits.
All Exhibits are filed herewith unless otherwise noted.
<TABLE>
<S> <C>
Exhibit 1.0 Underwriting Agreement
1.1 Agreement Among Underwriters*
1.2 Selected Dealer Agreement*
1.3 Financial Consulting Agreement*
2.0 Certificate of Merger (Ohio)
2.1 Certificate of Merger (Delaware)
2.2 Agreement and Plan of Merger
3.0 Certificate of Incorporation
3.1 Designation of Rights of Series A and Series B
Preferred Stock
3.2 By-Laws
4.0 Specimen of Common Stock*
4.1 Specimen of Class A Warrant*
4.2 Specimen of Unit*
4.3 Form of Underwriter's Unit Purchase Option*
4.4 Form of Warrant Agreement*
5.0 Opinion of Lester Morse P.C.*
10.0 Employment Agreement with William L. Miller
10.1 Agreement with Kids Stuff, Inc. as of January 1,
1998
10.2 1997 Long-Term Incentive Plan
10.3 Retail store lease*
11.0 Earnings per Share (see notes to financial statements)
23.0 Consent of Hausser + Taylor LLP
23.1 Consent of Lester Morse P.C.*
</TABLE>
----------------------------------
* To be supplied by Amendment.
II-4
<PAGE>
Item 28. Undertakings.
(a) Rule 415 Offering
The Company will:
1. File, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) Include any additional or changed material information
on the plan of distribution;
2. For determining liability under the Securities Act, treat each
such post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers
The Company will provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(c) Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling persons of
the Company pursuant to the provisions referred to in Item 14 of this
Registration Statement or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suite or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as
II-5
<PAGE>
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(d) Rule 430A
The undersigned Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For purposes 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 for the securities offered in the
Registration Statement, and that the offering of the securities at that time as
the initial bona fide offering of those securities.
The Company will:
1. For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of a
prospectus filed by the Company issuer under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
2. For any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and the offering of the securities at that time as the initial bona fide
offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Canton, State of Ohio, on this 9th day of February, 1998.
THE HAVANA GROUP, INC.
By: /s/ William L. Miller
------------------------------
Chairman of the Board
Chief Executive Officer,
Treasurer, and Principal
Financial Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William L. Miller Chairman of the Board, Chief February 9, 1998
-------------------------- Executive Officer, Treasurer
William L. Miller and Principal Financial and
Accounting Officer
/s/ John W. Cobb Director February 9, 1998
--------------------------
John W. Cobb
/s/ Peter Stokkeybe VI Director February 9, 1998
--------------------------
Peter Stokkeybe VI
</TABLE>
II-7
<PAGE>
Exhibit 1.0 THE HAVANA GROUP, INC.
460,000 UNITS
UNDERWRITING AGREEMENT
New York, New York
_____, 1998
VTR Capital, Inc.
Ladies and Gentlemen:
The undersigned, The Havana Group, Ltd., a Delaware corporation (the
"Company"), hereby confirms its agreement with VTR Capital, Inc. ("VTR",
being referred to herein variously as "you" or the "Underwriters"), as
follows:
1. Purchase and Sale of Securities.
1.1 Firm Units.
1.1.1 Purchase of Firm Units. On the basis of the representations
and warranties herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to issue and sell, and the Underwriters
agree to purchase, 460,000 units ("Firm Units;") for a gross purchase price
of $6.00 per Firm Unit less a 10% discount ($.60) per Firm Unit. Each Firm
Unit consists of one share of the Company's Common Stock, par value $.01
("Common Stock"), and two Redeemable Common Stock Purchase Warrants
("Warrant(s)"). The shares of Common Stock and the Warrants included in the
Firm Units will be detachable and separately transferable on the earlier of
(i) six months from the date hereof or (ii) the date on which VTR grants its
written consent thereto (the "Separation Date"). Each Warrant entitles its
holder to purchase one share of Common Stock at an initial exercise price of
$5.25 per share commencing on the first anniversary of the Effective Date (as
defined in Section 1.1.2 below) and ending on the fifth anniversary of the
Effective Date.
1.1.2 Payment and Delivery. Delivery and payment for the Firm Units
shall be made at 10:00 A.M., New York time, on or before the fifth business
day following the effective date ("Effective Date") of the Registration
Statement (as hereinafter defined) or at such earlier time as the
Underwriters shall determine, or at such other time as shall be agreed upon
by the Underwriters and the Company, at the offices of VTR or at such other
place as shall be agreed upon by the Underwriters and the Company. The hour
and date of delivery and payment for the Firm Units are called the "Closing
Date." Payment for the Firm Units shall be made on the Closing Date at the
Underwriters' election by certified or bank cashier's check(s) in New York
Clearing House funds, payable to the order of the Company upon delivery to
you of certificates (in form and substance satisfactory to the Underwriters)
representing the Firm Units for the accounts of the Underwriters. The Firm
Units shall be registered in such name or names and in such authorized
denominations as the Underwriters may request in writing at least two full
business days prior to the Closing Date.
<PAGE>
The Company will permit the Underwriters to examine and package the Firm
Units for delivery at least one full business day prior to the Closing Date.
The Company shall not be obligated to sell or deliver the Firm Units except
upon tender of payment by the Underwriters for all the Firm Units.
1.2 Over-Allotment Option.
1.2.1 Option Units. For the purposes of covering any
over-Allotments in connection with the distribution and sale of the Firm
Units, the Underwriters are hereby granted an option to purchase up to an
additional 46,000 Units from Duncan Hill Co. Ltd. ("Over-Allotment Option").
Such additional Units are hereinafter referred to as the "Option Units."
The Firm Units and the Option Units are, together with the shares of Common
Stock issuable upon exercise of the Warrants, hereinafter referred to
collectively as the "Public Securities." The purchase price to be paid for
the Option Units will be the same price per Option Unit as the price per Firm
Unit set forth in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-Allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriters as to
all or any part of the Option Units at any time, from time to time, within
forty-five days after the Effective Date. The Underwriters will not be under
any obligation to purchase any Option Units prior to the exercise of the
Over-Allotment Option. The Over-Allotment Option granted hereby may be
exercised by the giving of oral notice to the Company from the Underwriters,
which must be confirmed by a letter or telecopy setting forth the number of
Option Units to be purchased, the date and time for delivery of and payment
for the Option Units and stating that the Option Units referred to therein
are to be used for the purpose of covering over-Allotments in connection with
the distribution and sale of the Firm Units. If such notice is given at
least two full business days prior to the Closing Date, the date set forth
therein for such delivery and payment will be the Closing Date. If such
notice is given thereafter, the date set forth therein for such delivery and
payment will not be earlier than five full business days after the date of
the notice. If such delivery and payment for the Option Units does not occur
on the Closing Date, the date and time of the closing for such Option Units
will be as set forth in the notice (hereinafter the "Option Closing Date").
Upon exercise of the Over-Allotment Option, Duncan Hill Co. Ltd. will become
obligated to convey to the Underwriters, and, subject to the terms and
conditions set forth herein, the Underwriters will become obligated to
purchase, the number of Option Units specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Units will be
at the Underwriters' election by certified or bank cashier's check(s) in New
York Clearing House funds, payable to the order of the Company at the offices of
VTR or at such other place as shall be agreed upon by the Underwriters and the
Company upon delivery to you of certificates representing such securities for
the account of the Underwriters. The certificates representing the Option Units
to be delivered will be in such denominations and registered in such names as
the Underwriters request not less than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be, and will be made
available to the Underwriters for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to such Closing Date or Option Closing Date.
1.3 Underwriters' Purchase Option.
1.3.1 Purchase Option. The Company hereby agrees to issue and
sell to the Underwriters (and/or their designees) on the Closing Date an option
for an aggregate purchase price
2
<PAGE>
of $46.00 ("Underwriters' Purchase Option") for the purchase of an aggregate of
46,000 Units ("Underwriters' Units"). The Underwriters' Units are initially
exercisable at $9.00 per Unit. The Underwriters' Units are identical to the
Firm Units. The Underwriters' Purchase Option, the Underwriters' Units, the
warrants included in the Underwriters' Units ("Underwriters' Warrants"), the
shares of Common Stock issuable upon exercise of the Underwriters' Purchase
Option and the shares of Common Stock issuable upon exercise of the
Underwriters' Warrants are hereinafter referred to collectively as the
"Underwriters' Securities." The Public Securities and the Underwriters'
Securities are hereinafter referred to collectively as the "Securities".
1.3.2 Payment and Delivery. Delivery and payment for the
Underwriters' Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriters, upon payment therefor, certificates for
the Underwriters' Purchase Option in the name or names and in such authorized
denominations as the Underwriters may request. The Underwriters' Purchase
Option shall be exercisable for a period of four years commencing one year
from the Effective Date.
2. Representations and Warranties of the Company. The Company represents and
warrants to the Underwriters as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Act. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement
and an amendment or amendments thereto, on Form SB-2 (Registration File No.
333-_______), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Public Securities under the
Securities Act of 1933, as amended ("Act"), which registration statement and
amendment or amendments have been prepared by the Company in conformity with
the requirements of the Act, and the rules and regulations ("Regulations") of
the Commission under the Act. Except as the context may otherwise require,
such registration statement, as amended, on file with the Commission at the
time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein and all information deemed to be a part
thereof as of such time pursuant to paragraph (b) of Rule 430A of the
Regulations), is hereinafter called the "Registration Statement," and the
form of the final prospectus dated the Effective Date (or, if applicable, the
form of final prospectus filed with the Commission pursuant to Rule 424 of
the Regulations), is hereinafter called the "Prospectus." The Registration
Statement has been declared effective by the Commission on the date hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed with the
Commission a Registration Statement on Form 8-A providing for the
registration under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), of the Securities. Such registration of the Securities has been
declared effective by the Commission on the date hereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has
instituted or, to the best of the Company's knowledge, threatened to
institute any proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 10b-5 Representation. At the time the Registration Statement
became
3
<PAGE>
effective and at all times subsequent thereto up to the Closing Date and the
Option Closing Date, if any, the Registration Statement and the Prospectus
will contain all material statements which are required to be stated therein
in accordance with the Act and the Regulations, and will in all material
respects conform to the requirements of the Act and the Regulations; neither
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, on such dates, will contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. When any
Preliminary Prospectus was first filed with the Commission (whether filed as
part of the Registration Statement for the registration of the Securities or
any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the
Commission, such Preliminary Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and did not and will not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and
in conformity with written information furnished to the Company with respect
to the Underwriters expressly for use in the Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the Registration
Statement and the Prospectus of contracts and other documents is accurate and
presents fairly the information required to be disclosed and there are no
contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which
the Company is a party or by which its property or business is or may be
bound or affected and (i) which is referred to in the Prospectus, or (ii) is
material to the Company's business, has been duly and validly executed, is in
full force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company, and neither the Company nor, to
the best of the Company's knowledge, any other party is in default thereunder
and, to the best of the Company's knowledge, no event has occurred which,
with the lapse of time or the giving of notice, or both, would constitute a
default thereunder. None of the material provisions of such contracts or
instruments violates or will result in a violation of any existing applicable
law, rule, regulation, judgment, order or decree of any governmental agency
or court having jurisdiction over the Company or any of its respective assets
or businesses, including, without limitation, those relating to environmental
laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the Company
have been sold by the Company or by or on behalf of, or for the benefit of,
any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no
material adverse change in the condition, financial or otherwise, or in the
results of operations, business or business prospects of the Company,
4
<PAGE>
including, but not limited to, a material loss or interference with its
business from fire, storm, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, whether or not arising in the ordinary course of
business, and (ii) there have been no transactions entered into by the
Company, other than those in the ordinary course of business, which are
material with respect to the condition, financial or otherwise, or to the
results of operations, business or business prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus, and except as may otherwise be indicated or
contemplated herein or therein, the Company has not (i) issued any securities
or incurred any liability or obligation, direct or contingent, for borrowed
money; or (ii) declared or paid any dividend or made any other distribution
on or in respect to its capital stock.
2.5 Independent Accountants. Hausser + Taylor, whose report is filed
with the Commission as part of the Registration Statement, are independent
accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the notes
thereto included in the Registration Statement and Prospectus, fairly present
the financial position and the results of operations of the Company at the
dates and for the periods to which they apply; and such financial statements
have been prepared in conformity with generally accepted accounting
principles, consistently applied throughout the periods involved; included in
the Registration Statement present fairly the information required to be
stated therein.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company, or
any security convertible into shares of Common Stock of the Company, or any
contracts or commitments to issue or sell shares of Common Stock or any such
options, warrants, rights or convertible securities.
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding securities
of the Company have been duly authorized and validly issued and are fully
paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of
the preemptive rights of any holders of any security of the Company or
similar contractual rights granted by the Company. The outstanding options
and warrants to purchase shares of Common Stock constitute the valid and
binding obligations of the Company, enforceable in accordance with their
terms. The authorized Common Stock and outstanding options and warrants to
purchase shares of Common Stock conform to all statements relating thereto
contained in the Registration Statement and the Prospectus. The offers and
sales of the outstanding Common Stock, options and warrants to purchase
shares of Common Stock were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky Laws or exempt from such
registration requirements.
5
<PAGE>
2.8.2 Securities Sold Pursuant to this Agreement. The Securities
have been duly authorized and, when issued and paid for, will be validly
issued, fully paid and non-assessable; the holders thereof are not and will
not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted
by the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Underwriters' Purchase Option, the Underwriters'
Warrants and the Warrants will constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment therefor,
the number and type of securities of the Company called for thereby and the
Underwriters' Purchase Option, the Underwriters' Warrants and the Warrants
are enforceable against the Company in accordance with their respective
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to the equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
2.10 Validity and Binding Effect of Agreements. This Agreement, the
Warrant Agreement (as hereinafter defined) and the Consulting Agreement (as
hereinafter defined), have been duly and validly authorized by the Company
and constitute, or when executed and delivered will constitute, the valid and
binding agreements of the Company, enforceable against the Company in
accordance with their respective terms, except (i) as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, (ii) as enforceability of any
indemnification provision may be limited under the federal and state
securities laws, and (iii) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
Company of this Agreement, the Warrant Agreement and the Consulting
Agreement, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof
and thereof do not and will not, with or without the giving of notice or the
lapse of time or both, (i) result in a breach of, or conflict with any of the
terms and provisions of, or constitute a default under, or result in the
creation, modification, termination or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to the terms
of any indenture, mortgage, deed of trust, note, loan or credit agreement or
any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which any of the property or
assets of the Company is subject; (ii) result in any violation of the
provisions of the Certificate of Incorporation or the By-Laws of the Company;
(iii) violate any existing applicable law, rule, regulation, judgment, order
or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of its properties or business; or (iv)
have a material adverse effect on any permit, license, certificate,
registration, approval, consent, license or franchise
6
<PAGE>
concerning the Company.
2.12 No Defaults; Violations. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of
trust, note, loan or credit agreement, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement
or instrument to which the Company is a party or by which the Company may be
bound or to which any of the properties or assets of the Company is subject.
The Company is not in violation of any term or provision of its Certificate
of Incorporation or By-Laws or in violation of any franchise, license,
permit, applicable law, rule, regulation, judgment or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
the Company or any of its properties or business, except as described in the
Prospectus.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite corporate
power and authority, and has all necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease its properties and conduct its business
as described in the Prospectus, and the Company is and has been doing
business in compliance with all such material authorizations, approvals,
orders, licenses, certificates and permits and all federal, state and local
laws, rules and regulations. The disclosures in the Registration Statement
concerning the effects of federal, state and local regulation on the
Company's business as currently contemplated are correct in all material
respects and do not omit to state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to carry out
the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained. No
consent, authorization or order of, and no filing with, any court, government
agency or other body is required for the valid issuance, sale and delivery,
of the Securities pursuant to this Agreement, the Warrant Agreement and the
Underwriters' Purchase Option, and as contemplated by the Prospectus, except
with respect to applicable federal and state securities laws.
2.14 Title to Property; Insurance. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real
and personal property (tangible and intangible) owned or leased by it, free
and clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable. The Company
has adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is
usually maintained by companies engaged in the same or similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or
the operation or the properties or the business of the Company, or which
question the validity of the capital stock of the Company or this Agreement
or of any action taken or to be taken by the Company pursuant to, or in
connection with, this Agreement. There are no outstanding orders, judgments
or decrees of any court, governmental agency or other tribunal naming the
Company and enjoining the Company from
7
<PAGE>
taking, or requiring the Company to take, any action, or to which the
Company, its properties or business is bound or subject.
2.16 Good Standing. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which ownership or leasing of
any properties or the character of its operations requires such qualification or
licensing, except where the failure to qualify would not have a material adverse
effect on the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has
paid all taxes (as hereinafter defined) shown as due on such returns that
were filed and has paid all taxes imposed on or assessed against the Company.
The provisions for taxes payable, if any, shown on the financial statements
filed with or as part of the Registration Statement are sufficient for all
accrued and unpaid taxes, whether or not disputed, and for all periods to and
including the dates of such consolidated financial statements. Except as
disclosed in writing to the Underwriters, (i) no issues have been raised (and
are currently pending) by any taxing authority in connection with any of the
returns or taxes asserted as due from the Company, and (ii) no waivers of
statutes of limitation with respect to the returns or collection of taxes
have been given by or requested from the Company. The term "taxes" mean all
federal, state, local, foreign, and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
lease, service, service use, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, windfall profits, customs,
duties or other taxes, fees, assessments, or charges of any kind whatever,
together with any interest and any penalties, additions to tax, or additional
amounts with respect thereto. The term "returns" means all returns,
declarations, reports, statements, and other documents required to be filed
in respect to taxes.
2.18 [Intentionally Omitted].
2.19 Transactions Affecting Disclosure to NASD.
2.19.1 Finder's Fees. Except as described in the Prospectus, 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, payments or issuance with respect to the Company that may
affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD").
2.19.2 Payments Within Twelve Months. The Company has not made any
direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in consideration of
such person raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) to any NASD member, or
(iii) to any person or entity that has any direct or indirect affiliation or
association with any NASD member within the twelve month period prior to the
date on which the Registration Statement was filed with the Commission
("Filing Date") or thereafter, other than payments to the Underwriters.
2.19.3 Use of Proceeds. None of the net proceeds of the offering
will be paid by the Company to any NASD member or any affiliate or associate
of any NASD member, except as
8
<PAGE>
specifically authorized herein.
2.19.4 Insiders' NASD Affiliation. No officer or director of the
Company or owner of any of the Company's securities has any direct or
indirect affiliation or association with any NASD member, except as provided
on Schedule 2.19.4 attached hereto. The Company covenants that it will
advise the Corporate Financing Department of the NASD if any 5% or greater
stockholder of the Company becomes an affiliate or associated person of an
NASD member participating in the distribution of the securities which are the
subject of the Registration Statement.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
officers, directors, employees, agents or any other person acting on behalf
of the Company has, directly or indirectly, given or agreed to give any
money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency or instrumentality of any government (domestic or
foreign) or any political party or candidate for office (domestic or foreign)
or any political party or candidate for office (domestic or foreign) or other
person who was, is, or may be in a position to help or hinder the business of
the Company (or assist it in connection with any actual or proposed
transaction) which (i) might subject the Company to any damage or penalty in
any civil, criminal or governmental litigation or proceeding, (ii) if not
given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company as reflected in any of the financial
statements contained in the Prospectus or (iii) if not continued in the
future, might adversely affect the assets, business, operations or prospects
of the Company. The Company's internal accounting controls and procedures
are sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
2.21 Nasdaq and The Boston Stock Exchange Eligibility. As of the
Effective Date, the Public Securities have been approved for quotation on the
Nasdaq SmallCap Market and for listing on The Boston Stock Exchange ("BSE").
2.22 Intangibles. The Company owns or possesses the requisite licenses
or rights to use all trademarks, service marks, service names, trade names,
patents and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the
Registration Statement. The Company's Intangibles which have been registered
in the United States Patent and Trademark Office have been fully maintained
and are in full force and effect. There is no claim or action by any person
pertaining to, or proceeding pending or threatened and the Company has not
received any notice of conflict with the asserted rights of others which
challenges the exclusive right of the Company with respect to any Intangibles
used in the conduct of the Company's business except as described in the
Prospectus. The Intangibles and the Company's current products, services and
processes do not infringe on any intangibles held by any third party. To the
best of the Company's knowledge, no others have infringed upon the
Intangibles of the Company.
2.23 Relations With Employees.
2.23.1 Employee Matters. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws
and regulations respecting the employment of its employees and employment
practices, terms and conditions of employment and wages and hours relating
thereto. There are no pending investigations involving the Company by the
U.S. Department of Labor or any
9
<PAGE>
other governmental agency responsible for the enforcement of such federal,
state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or
stoppage pending or threatened against or involving the Company or any
predecessor entity, and none has ever occurred. No question concerning
representation exists respecting the employees of the Company and no
collective bargaining agreement or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the
Company, if any.
2.23.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement's financial statement footnotes, the Company neither
maintains, sponsors nor contributes to, nor is it required to contribute 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") ("ERISA Plans").
The Company does not, and has at no time, maintained or contributed to a
defined benefit plan, as defined in Section 3(35) of ERISA. If the Company
does maintain or contribute to a defined benefit plan, any termination of the
plan on the date hereof would not give rise to liability under Title IV of
ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), which
could subject the Company to any tax penalty for prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance
with all material reporting, disclosure and other requirements of the Code
and ERISA as they relate to any such ERISA Plan. Determination letters have
been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. The Company has
never completely or partially withdrawn from a "multi-employer plan".
2.24 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel
shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
2.25 Warrant Agreement. The Company has entered into a warrant agreement
with respect to the Warrants and the Underwriters' Warrants substantially in
the form filed as an exhibit to the Registration Statement ("Warrant
Agreement") with Continental Stock Transfer & Trust Company, in form and
substance satisfactory to the Underwriters, providing for, among other
things, no redemption of the Warrants without the consent of the Underwriters.
2.26 Agreements With Insiders.
2.26.1 Insiders' Lock-Up Agreements. The Company has caused to be
duly executed legally binding and enforceable agreements pursuant to which
all of the officers and directors of the Company as of the date hereof
(including their family members and affiliates) and persons (including their
family members and affiliates) who beneficially own or hold five percent or
more of the outstanding Common Stock of the Company (collectively,
"Insiders") agree not to sell any shares of Common Stock owned by them
(either pursuant to Rule 144 of the Regulations or otherwise) for a period of
36 months following the Effective Date except with the prior written consent
of the Underwriters and, if applicable, the Pennsylvania Securities
Commission.
10
<PAGE>
2.26.2 Other Lock-Up Agreements. The Company has caused to be duly
executed legally binding and enforceable agreements pursuant to which all
persons (including their family members and affiliates) who beneficially own
or hold at least two percent but less than five percent of the outstanding
Common Stock of the Company as of the date hereof agree not to sell any
shares of Common Stock owned by them (either pursuant to Rule 144 of the
Regulations or otherwise) for a period of 12 months following the Effective
Date except with the prior written consent of VTR. The Company has caused to
be duly executed legally binding and enforceable agreements pursuant to which
all stockholders of the Company whose shares of Common Stock are being
registered by the Registration Statement agree not to sell until ____ any
shares of Common Stock so registered except with the prior written consent of
both VTR. The persons described in this Section 2.26.2 are hereinafter
referred to as the "Other Insiders."
2.27 Subsidiaries. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or
more subsidiaries (a "subsidiary(ies)"), also apply and be true with respect
to each subsidiary, individually and taken as a whole with the Company and
all other subsidiaries, as if each representation and warranty contained
herein made specific reference to the subsidiary each time the term "Company"
was used.
2.28 Losses. [reserved]
2.29 Net Sales. [reserved]
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver to
the Underwriters, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Underwriters
shall reasonably object. The Company will submit to the NASD at the same
time (or as soon as practical thereafter) they are filed with the Commission
all post-effective amendments or prospectus supplements, if any, disclosing
actual price and selling terms by the stockholders of the Company whose
shares of Common Stock have been registered for resale.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is required to
be delivered under the Act and for at least 45 days from the Effective Date
the Company will use all reasonable efforts to comply with all requirements
imposed upon it by the Act, the Regulations and the Exchange Act and by the
regulations under the Exchange Act, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Public
Securities in accordance with the provisions hereof, the Prospectus. If at
any time when a Prospectus relating to the Public Securities is required to
be delivered under the Act and, in any event, for a period of 45 days from
the Effective Date, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or counsel for the Underwriters, the
Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Underwriters promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance
11
<PAGE>
with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriters) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years from
the Effective Date, the Company will use its best efforts to maintain the
registration of the Units, Common Stock and Warrants under the provisions of
the Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Underwriters, at or prior to the time the Registration
Statement becomes effective to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriters may
reasonably designate, provided that no such qualification shall be required
in any jurisdiction where, as a result thereof, the Company would be subject
to service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Underwriters agree that such
action is not at the time necessary or advisable, use all reasonable efforts
to file and make such statements or reports at such times as are or may be
required by the laws of such jurisdiction.
3.4 Delivery to Underwriters of Prospectuses. The Company will deliver
to the Underwriters, without charge, from time to time during the period when
the Prospectus is required to be delivered under the Act and, in any event,
for at least 90 days from the Effective Date, or the Exchange Act such number
of copies of each Preliminary Prospectus and the Prospectus as the
Underwriters may reasonably request and, as soon as the Registration
Statement or any amendment or supplement thereto becomes effective, deliver
to you two original executed Registration Statements, including exhibits, and
all post-effective amendments thereto and copies of all exhibits filed
therewith or incorporated therein by reference and all original executed
consents of certified experts.
3.5 Events Requiring Notice to the Underwriters. The Company will
notify the Underwriters immediately and confirm the notice in writing (i) of
the effectiveness of the Registration Statement and any amendment thereto,
(ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding for that purpose, (iii) of
the issuance by any state securities commission of any proceedings for the
suspension of the qualification of the Public Securities for offering or sale
in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) of the mailing and delivery to the
Commission for filing of any amendment or supplement to the Registration
Statement or Prospectus, (v) of the receipt of any comments or request for
any additional information from the Commission, and (vi) of the happening of
any event during the period described in Section 3.4 hereof which, in the
judgment of the Company, makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or which requires the making
of any changes in the Registration Statement or the Prospectus in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. If the Commission or any state securities
commission shall enter a stop order or suspend such qualification at any
time, the Company will make every reasonable effort to obtain promptly the
lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly
engaged independent certified public
12
<PAGE>
accountants to consult with the Company concerning the Company's financial
statements for each of the first three fiscal quarters in such years prior to
the announcement of quarterly financial information, the filing of the
Company's Form 10-Q quarterly report and the mailing of quarterly financial
information to stockholders. The purpose of such consultation is to obtain
the assistance and input of such accountants so that each of such financial
statements will comply in all material respects with the applicable
accounting requirements of the Act and the regulations promulgated thereunder
and will be fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the then
most recently audited financial statements of the Company. It is not the
intended purpose of this provision that such accountants audit or review such
financial statements within the meaning of the AICPA's Statement on Auditing
Standards or that such accountants issue any report to the Company or the
Underwriter.
3.7 [Intentionally Omitted].
3.8 Secondary Market Trading and Standard & Poor's. The Company will take
all necessary and appropriate actions to be included in Standard and Poor's
Daily News and Corporation Records Corporate Descriptions for a period of five
years from the Effective Date, including the payment of any necessary fees and
expenses. The Company shall take such action as may be reasonably requested by
the Underwriters to obtain a secondary market trading exemption in such States
as may be requested by the Underwriters, including the payment of any necessary
fees and expenses and the filing of a Form (e.g. 25101(b)) for secondary market
trading in the State of California 90 days following the Effective Date.
3.9 Nasdaq and BSE Maintenance and De-listing of Units. [reserved]
3.10 Warrant Solicitation and Registration of Common Stock underlying the
Warrants.
3.10.1 Warrant Solicitation. [Intentionally omitted]
3.10.2 Registration of Common Stock. The Company agrees that prior
to the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if
possible or a new registration statement, for the registration, under the
Act, of the Common Stock issuable upon exercise of the Warrants. In either
case, the Company shall cause the same to become effective at or prior to the
date that the Warrants become exercisable, and to maintain the effectiveness
of such registration statement and keep current a prospectus thereunder until
the expiration of the Warrants in accordance with the provisions of the
Warrant Agreement.
3.11 Reports to the Underwriters.
3.11.1 Periodic Reports, Etc. For a period of five years from the
Effective Date, the Company will furnish to the Underwriters copies of such
financial statements and other periodic and special reports as the Company
from time to time furnishes generally to holders of any class of its
securities, and promptly furnish to the Underwriters (i) a copy of each
periodic report the Company shall be required to file with the Commission,
(ii) a copy of every press release and every news item and article with
respect to the Company or its affairs which was released by the Company,
(iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules 13D,
13G, 14D-1 or 13E-4 received or prepared by the Company, (v) a copy of
monthly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
13
<PAGE>
and loss statements and data regarding outstanding purchase orders) as is
regularly prepared by management of the Company, and (vi) such additional
documents and information with respect to the Company and the affairs of any
future subsidiaries of the Company as the Underwriters may from time to time
reasonably request.
3.11.2 Transfer Sheets and Weekly Position Listings. For a period
of five years from the Closing Date, the Company will furnish to the
Underwriters at the Company's sole expense such transfer sheets and position
listings of the Company's securities as the Underwriters may request,
including the daily, weekly and monthly consolidated transfer sheets of the
transfer agent of the Company and the weekly security position listings of
the Depository Trust Co.
3.11.3 Secondary Market Trading Memorandum. Until such time as the
Public Securities are listed or quoted, as the case may be, on the New York
Stock Exchange, the American Stock Exchange or Nasdaq National Market, the
Company shall engage the Underwriters' legal counsel to deliver to the
Underwriters and to the Company at the times set forth below a written
opinion detailing those states in which Public Securities may be traded in
non-issuer transactions under the Blue Sky laws of the fifty states
("Secondary Market Trading Memorandum"). The Secondary Market Trading
Memorandum shall be delivered to the Underwriters and to the Company on the
Effective Date and on the first day of every calendar quarter thereafter.
The Company shall pay to Underwriters' legal counsel a one-time fee of $5,000
for such services at the Closing.
3.12 Agreements between the Underwriters and the Company.
3.12.1 [Intentionally Omitted].
3.12.2 Underwriters' Purchase Option. On the Closing Date, the
Company will execute and deliver the Underwriters' Purchase Option to the
Underwriters substantially in the form filed as an exhibit to the
Registration Statement.
3.13 Disqualification of Form S-1 (or other appropriate form). For a
period equal to seven years from the date hereof, the Company will not take
any action or actions which may prevent or disqualify the Company's use of
Form S-1 (or other appropriate form) for the registration of the Warrants and
the Underwriters' Warrants under the Act.
3.14 Payment of Expenses.
3.14.1 General Expenses. The Company hereby agrees to pay on each
of the Closing Date and the Option Closing Date, if any, to the extent not
paid at Closing Date, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
(i) the preparation, printing, filing, delivery and mailing (including the
payment of postage with respect to such mailing) of the Registration
Statement, the Prospectus and the Preliminary Prospectuses and the printing
and mailing of this Agreement and related documents, including the cost of
all copies thereof and any amendments thereof or supplements thereto supplied
to the Underwriters in quantities as may be required by the Underwriters,
(ii) the printing, engraving, issuance and delivery of the Units, the shares
of Common Stock and the Warrants included in the Units and the Underwriters'
Purchase Option, including any transfer or other taxes payable thereon, (iii)
the qualification of the Public Securities under state or foreign securities
or Blue Sky laws, including the filing fees under such Blue Sky laws, the
costs of printing and mailing the "Preliminary Blue Sky Memorandum," and all
amendments and supplements thereto, fees up to an aggregate of
14
<PAGE>
$60,000 and disbursements of Underwriters' counsel, iv) filing fees incurred
in registering the offering with the NASD, (v) costs of placing "tombstone"
advertisements in The Wall Street Journal and an industry publication
mutually selected by the Company and the Underwriters; (vi) fees and
disbursements of the transfer and warrant agent, (viii) the preparation,
binding and delivery of five sets of transaction "bibles," in form and style
satisfactory to the Underwriters and transaction lucite cubes or similar
commemorative items in a style and quantity as requested by the Underwriters,
(ix) any listing of the Public Securities on the OTC Bulletin Board and (x)
all other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section
3.14.1. Since an important part of the public offering process is for the
Company to appropriately and accurately describe both the background of the
principals of the Company and the Company's competitive position in its
industry, the Company has engaged and will pay for an investigative search
firm of the Underwriters' choice to conduct an investigation of principals of
the Company mutually selected by the Underwriters and the Company (the fees
of which will be credited against the Underwriters' non-accountable expense
allowance if the offering is consummated as provided herein). The
Underwriters may deduct from the net proceeds of the offering payable to the
Company on the Closing Date, or the Option Closing Date, if any, the expenses
set forth herein to be paid by the Company to the Underwriters and/or to
third parties.
3.14.2 Non-Accountable Expenses. The Company further agrees that,
in addition to the expenses payable pursuant to Section 3.14.1, it will pay
to the Underwriters a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of
the Public Securities, of which $____ has been paid to date, and the Company
will pay the balance on the Closing Date and any additional monies owed
attributable to the Option Units or otherwise on the Option Closing Date by
certified or bank cashier's check or, at the election of the Underwriters, by
deduction from the proceeds of the offering contemplated herein. If the
offering contemplated by this Agreement is not consummated for any reason
whatsoever then the following provisions shall apply: The Company's
liability for payment to the Underwriters of the non-accountable expense
allowance shall be equal to the sum of the Underwriters' actual out-of-pocket
expenses (including, but not limited to, counsel fees, "road-show" and due
diligence expenses). The Underwriters shall retain such part of the
non-accountable expense allowance previously paid as shall equal such actual
out-of-pocket expenses. If the amount previously paid is insufficient to
cover such actual out-of-pocket expenses, the Company shall remain liable for
and promptly pay any other actual out-of-pocket expenses. If the amount
previously paid exceeds the amount of the actual out-of-pocket expenses, the
Underwriters shall promptly remit to the Company any such excess.
3.15 Application of Net Proceeds. The Company will apply the net
proceeds from the offering received by it in a manner consistent with the
application described under the caption "USE OF PROCEEDS" in the Prospectus.
The Company hereby agrees that, without the express prior written consent of
the Underwriters, the Company will not apply any net proceeds from the
offering to pay any debt for borrowed funds or any debt or obligation owed to
any Insider.
3.16 Delivery of Earnings Statements to Security Holders. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month
following the Effective Date, an earnings statement (which need not be
certified by independent public or independent certified public accountants
unless required by the Act or the Regulations, but which shall satisfy the
provisions of Rule 158(a) under Section 11(a) of the Act) covering a period
of at least twelve consecutive months beginning after the Effective Date.
3.17 Key Person Life Insurance. The Company will maintain key person
life insurance in
15
<PAGE>
an amount no less than _______ naming the Company as the sole beneficiary
thereof, for at least three years following the Effective Date, or such
shorter respective period that he performs management duties for the Company.
3.18 Stabilization. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.19 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are
recorded as necessary in order to permit preparation of financial statements
in accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.20 Transfer Agent. For a period of five years from the Effective
Date, the Company shall retain Continental Stock Transfer & Trust Company as
transfer agent for the Units, Common Stock and Warrants or such other
transfer agent acceptable to the Underwriters.
3.21 Sale of Securities.
3.21.1 Insiders. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally
or beneficially (i) by the Insiders for a period of 36 months following the
Effective Date without obtaining the prior written consent of the
Underwriter, (ii) by the Other Insiders, for a period of 12 months following
the Effective Date without obtaining the prior written consent of VTR or of
the Other Insiders until August 1, 1995 without obtaining the prior written
consent of VTR, each as the case may be.
3.21.2 Others. The Company has caused to be duly executed a
legally binding and enforceable agreements pursuant to which all of the
officers and directors of the Company (including their family members and
affiliates) and persons (including their family members and affiliates) who
beneficially own or hold at least two percent but less than five percent of
the outstanding Common Stock on _____ agree not to sell any shares of Common
Stock owned by them (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of 12 months following the Effective Date except with
the consent of VTR and, if applicable, the Pennsylvania Securities Commission.
3.22 Exercise Price of Options/Warrants. After the execution hereof,
the Company will not grant any option pursuant to the Company's 199_ Stock
Option Plan at an exercise price less than the greater of $___ per share or
the fair market value of the Common Stock on the date of the grant.
3.23 Chief Financial Officer. [reserved]
3.24 Independent Directors. [reserved]
16
<PAGE>
3.25 Backlog Schedule. At or prior to the Closing, the Company shall
deliver a schedule setting forth the calculations necessary to derive the
numbers included in the section entitled "Backlog" in the Prospectus.
4. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Securities, as provided herein,
shall be subject to the continuing accuracy of the representations and
warranties of the Company as of the date hereof and as of each of the Closing
Date and the Option Closing Date, if any, to the accuracy of the statements
of officers of the Company made pursuant to the provisions hereof and to the
performance by the Company of its obligations hereunder and to the following
conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement. The Registration
Statement shall have become effective not later than 5:00 P.M., New York
time, on the date of this Agreement or such later date and time as shall be
consented to in writing by you, and, at each of the Closing Date and the
Option Closing Date, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for the
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Graubard Mollen Horowitz Pomeranz & Shapiro, counsel to the Underwriters.
4.1.2 NASD Clearance. By the Closing Date, the Underwriters shall
have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriters as described in the Registration
Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the
Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted
or shall be contemplated.
4.2 Company Counsel Matters.
4.2.1 Effective Date Opinion of Counsel. On the Effective Date, the
Underwriters shall have received the favorable opinion of Lester Morse, P.C.,
counsel to the Company, dated the Effective Date, addressed to the
Underwriters and in form and substance satisfactory to Mintz & Gold, LLP,
counsel to the Underwriters, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state
of incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not
have a material adverse effect on the Company.
(ii) The Company has all requisite corporate power and
authority, and has all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental or regulatory officials
and bodies to own or lease its properties and conduct its business as
described in the Prospectus, and the Company is and has been doing business
in
17
<PAGE>
compliance with all such authorizations, approvals, orders, licenses,
certificates and permits and all federal, state and local laws, rules and
regulations. The Company has all corporate power and authority to enter into
this Agreement and to carry out the provisions and conditions hereof, and all
consents, authorizations, approvals and orders required in connection
therewith have been obtained. No consents, approvals, authorizations or
orders of, and no filing with any court or governmental agency or body (other
than such as may be required under the Act and applicable Blue Sky laws), is
required for the valid authorization, issuance, sale and delivery of the
Securities, and the consummation of the transactions and agreements
contemplated by this Agreement, the Warrant Agreement and the Underwriters'
Purchase Option, and as contemplated by the Prospectus or if so required, all
such authorizations, approvals, consents, orders, registrations, licenses and
permits have been duly obtained and are in full force and effect and have
been disclosed to the Underwriters.
(iii) All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and
warrants to purchase shares of Common Stock constitute the valid and binding
obligations of the Company, enforceable in accordance with their terms. The
offers and sales of the outstanding Common Stock and options and warrants to
purchase shares of Common Stock were at all relevant times either registered
under the Act and the applicable state securities or Blue Sky Laws or exempt
from such registration requirements. The authorized and outstanding capital
stock of the Company is as set forth under the caption "Capitalization" in
the Prospectus.
(iv) The Securities have been duly authorized and, when issued
and paid for, will be validly issued, fully paid and non-assessable; the
holders thereof are not and will not be subject to personal liability by
reason of being such holders. The Securities are not and will not be subject
to the preemptive rights of any holders of any security of the Company or, to
the best of such counsel's knowledge after due inquiry, similar contractual
rights granted by the Company. All corporate action required to be taken for
the authorization, issuance and sale of the Securities has been duly and
validly taken. When issued, the Underwriters' Purchase Option, the
Underwriters' Warrants and the Warrants will constitute valid and binding
obligations of the Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the Company called for
thereby and such Warrants, the Underwriters' Purchase Option, and the
Underwriters' Warrants, when issued, in each case, will be enforceable
against the Company in accordance with their respective terms, except (a) as
such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally, (b) as enforceability
of any indemnification provision may be limited under the federal and state
securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to the
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
(v) To the best of such counsel's knowledge, after due
inquiry, except as set forth in the Prospectus, no holders of any securities
of the Company or of any options, warrants or securities of the Company
exercisable for or convertible or exchangeable into securities of the Company
have the right to require the Company to register any such securities of the
Company under the Act or to include any such securities in a registration
statement to be filed by the Company.
(vi) To the best of such counsel's knowledge, after due
inquiry, the Units,
18
<PAGE>
the shares of Common Stock and the Warrants are eligible for quotation on the
OTC Bulletin Board.
(vii) This Agreement, the Warrant Agreement and the
Underwriters' Purchase Option have each been duly and validly authorized and,
when executed and delivered by the Company, will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance
with their respective terms, except (a) as such enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (b) as enforceability of any indemnification
provisions may be limited under the federal and state securities laws, and
(c) that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the
Company of this Agreement, the Underwriters' Purchase Option, the Warrant
Agreement, the issuance and sale of the Securities, the consummation of the
transactions contemplated hereby and thereby and the compliance by the
Company with the terms and provisions hereof and thereof, do not and will
not, with or without the giving of notice or the lapse of time, or both, (a)
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 modification of
any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company pursuant to the terms of, any material mortgage,
deed of trust, note, indenture, loan, contract, commitment or other material
agreement or instrument, to which the Company is a party or by which the
Company or any of its properties or assets may be bound, (b) result in any
violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company, (c) violate any statute or any judgment, order or
decree, rule or regulation applicable to the Company of any court, domestic
or foreign, or of any federal, state or other regulatory authority or other
governmental body having jurisdiction over the Company, its properties or
assets, or (d) have a material effect on any permit, certification,
registration, approval, consent, license or franchise of the Company.
(ix) The Registration Statement, each Preliminary Prospectus
and the Prospectus and any post-effective amendments or supplements thereto
(other than the financial statements included therein, as to which no opinion
need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other
securities issued or issuable by the Company conform in all respects to the
description thereof contained in the Registration Statement and the
Prospectus. The statements in the Prospectus under "Business," "Management,"
"Certain Transactions," "Risk Factors," and "Description of Securities" have
been reviewed by such counsel, and insofar as they refer to statements of
law, descriptions of statutes, licenses, rules or regulations or legal
conclusions are correct in all material respects. No statute or regulation
or legal or governmental proceeding required to be described in the
Prospectus is not described as required, nor are any contracts or documents
of a character required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement not so
described or filed as required.
(x) Counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent
public accountants for the Company and representatives of the Underwriters at
which the contents of the Registration Statement, the Prospectus and related
matters were discussed and although such counsel is not passing upon and does
not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and Prospectus (except
as otherwise set forth in this opinion), no facts have come to the attention
of such counsel which lead them to believe
19
<PAGE>
that either the Registration Statement or the Prospectus nor any amendment or
supplement thereto, as of the date of such opinion, contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act,
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act or applicable state securities laws.
(xii) The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property (tangible and intangible) stated in the Prospectus to be owned or
leased by it, free and clear of all liens, encumbrances, claims, security
interests, defects and restrictions of any material nature whatsoever, other
than those referred to in the Prospectus and liens for taxes not yet due and
payable.
(xiii) Except as described in the Prospectus, no default
exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of
trust, note, loan or credit agreement, or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the properties or assets of the
Company is subject. The Company is not in violation of any term or provision
of its Certificate of Incorporation or By-Laws or of any franchise, license,
permit, applicable law, rule, regulation, judgment or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over
the Company or any of its properties or business, except as described in the
Prospectus.
(xiv) To the best of such counsel's knowledge, after due
inquiry, the Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, other than as
described in the Prospectus, the requisite licenses or other rights to use
all Intangibles and other rights necessary to conduct its business
(including, without limitation, any such licenses or rights described in the
Prospectus as being licensed to or owned or possessed by the Company), and
there is no claim or action by any person pertaining to, or proceeding,
pending or to the best of such counsel's knowledge after due inquiry
threatened, which challenges the exclusive rights of the Company with respect
to any Intangibles used in the conduct of the its business (including without
limitation any such licenses or rights described in the Prospectus as being
owned or possessed by the Company); to the best of such counsel's knowledge
after due inquiry, the Company's current products, services and processes do
not infringe on any Intangibles held by third parties except as discussed in
the Prospectus; and the Company's Intangibles which have been registered in
the United States Patent and Trademark Office have been fully maintained and
are in full force and effect.
(xv) To the best of such counsel's knowledge, after due
inquiry, except as described in the Prospectus, the Company does not own an
interest in any corporation, partnership, joint venture, trust or other
business entity.
(xvi) To the best of such counsel's knowledge, after due
inquiry, except as
20
<PAGE>
set forth in the Prospectus, there is no action, suit or proceeding before or
by any court of governmental agency or body, domestic or foreign, now
pending, or threatened against the Company, which might result in any
material and adverse change in the condition (financial or otherwise),
business or prospects of the Company, or might materially and adversely
affect the properties or assets thereof.
(xvii) To the best of such counsel's knowledge, after due
inquiry, neither the Company nor its officers, employees, agents or other
persons acting on their behalf has, directly or indirectly, given or agreed
to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer
or supplier, any employee or agent of a customer or supplier, any official or
employee of any governmental agency or body (domestic or foreign), any
political party or candidate for office (domestic or foreign) or any other
person who was, is or may be in a position to help or hinder the business of
the Company (or assist it in connection with any actual or proposed
transaction) which (a) might subject the Company to any damage or penalty in
any civil, criminal or governmental litigation or proceeding, (b) if not
given in the past, might have had a materially adverse effect on the assets,
business or operations of the Company as reflected in the financial
statements contained in the Registration Statement or (c) if not continued in
the future, might adversely affect the assets, business, operations or
prospects of the Company.
(xviii) To the best of such counsel's knowledge, after due
inquiry, except as described in the Prospectus, 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 financial consulting arrangements or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD.
(xix) Based solely upon a reading of the minutes of the
Board of Directors of the Company, the outstanding options to purchase Common
Stock are as set forth on Schedule A annexed hereto.
Unless the context clearly indicates otherwise, the term "Company"
as used in this Section 4.2.1 shall include each subsidiary of the Company.
The opinion of counsel for the Company and any opinion relied upon by such
counsel for the Company shall include a statement to the effect that it may
be relied upon by counsel for the Underwriters in its opinion delivered to
the Underwriters.
4.2.2 Closing Date and Option Closing Date Opinion of Counsel.
On each of the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received the favorable opinion of Berger & Paul,
counsel to the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters and in form and substance
satisfactory to Mintz & Gold, LLP, counsel to the Underwriters, confirming as
of the Closing Date and, if applicable, the Option Closing Date, the
statements made by Lester Morse, P.C. in their opinion delivered on the
Effective Date.
4.2.3 Reliance. In rendering such opinion, such counsel may rely
(i) as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the extent
such counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably
satisfactory to the Underwriters' counsel) of other counsel reasonably
acceptable to the Underwriters' counsel, familiar
21
<PAGE>
with the applicable laws, and (ii) as to matters of fact, to the extent they
deem proper, on certificates or other written statements of officers of
departments of various jurisdiction having custody of documents respecting
the corporate existence or good standing of the Company, provided that copies
of any such statements or certificates shall be delivered to the
Underwriters' counsel if requested. The opinion of counsel for the Company
shall include a statement to the effect that it may be relied upon by counsel
for the Underwriters in its opinion delivered to the Underwriters.
4.2.4 Secondary Market Trading Memorandum. On the Effective Date
the Underwriter and the Company shall have received the Secondary Market
Trading Memorandum.
4.3 Cold Comfort Letter. At the time this Agreement is executed
and at each of the Closing Date and the Option Closing Date, if any, you
shall have received a letter, addressed to the Underwriters and in form and
substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to you
and to Graubard Mollen Horowitz Pomeranz & Shapiro, counsel for the
Underwriters, from Hauser + Taylor dated, respectively, as of the date of
this Agreement and as of the Closing Date and the Option Closing Date, if any:
(i) Confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) Stating that in their opinion the financial statements of
the Company included in the Registration Statement and Prospectus comply as
to form in all material respects with the applicable accounting requirements
of the Act and the published Regulations thereunder;
(iii) Stating that, on the basis of a limited review which
included a reading of the latest available minutes of the stockholders and
board of directors and the various committees of the board of directors,
consultations with officers and other employees of the Company responsible
for financial and accounting matters and other specified procedures and
inquiries, nothing has come to their attention which would lead them to
believe that at a date not later than five days prior to the Effective Date,
Closing Date or Option Closing Date, as the case may be, there was any change
in the capital stock or long-term debt of the Company, as compared with
amounts shown in the September 30, 1994 balance sheet included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there were any change setting forth the amount
of such change;
(iv) [Intentionally Omitted].
(v) Stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus
in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records
and work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and found them
to be in agreement; and
(vi) [Intentionally Omitted].
22
<PAGE>
(vii) Statements as to such other matters incident to the
transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and the
Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the Chairman of the Board or the
President and the Secretary of the Company, dated the Closing Date or the
Option Closing Date, as the case may be, respectively, to the effect that the
Company has performed all covenants and complied with all conditions required
by this Agreement to be performed or complied with by the Company prior to
and as of the Closing Date, or the Option Closing Date, as the case may be,
and that the conditions set forth in Section 4.5 hereof have been satisfied
as of such date and that, as of Closing Date and the Option Closing Date, as
the case may be, the representations and warranties of the Company set forth
in Section 2 hereof are true and correct. In addition, the Underwriters will
have received such other and further certificates of officers of the Company
as the Underwriters may reasonably request.
4.4.2 Secretary's Certificate. At each of the Closing Date and the
Option Closing Date, if any, the Underwriters shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force
and effect, (ii) that the resolutions relating to the public offering
contemplated by this Agreement are in full force and effect and have not been
modified, (iii) all correspondence between the Company or its counsel and the
Commission, (iv) all correspondence between the Company or its counsel and
the NASD concerning inclusion on Nasdaq, (v) all correspondence between the
Company or its counsel and the BSE concerning listing on the BSE, and (vi) as
to the incumbency of the officers of the Company. The documents referred to
in such certificate shall be attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date
and the Option Closing Date, if any, (i) there shall have been no material
adverse change or development involving a prospective material change in the
condition or prospects or the business activities, financial or otherwise, of
the Company from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company from the latest date as of which the financial condition of the
Company is set forth in the Registration Statement and Prospectus which is
materially adverse to the Company, taken as a whole, (iii) the Company shall
not be in default under any provision of any instrument relating to any
outstanding indebtedness which default would have a material adverse effect
on the Company, (iv) no material amount of the assets of the Company shall
have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus, (v) no action suit or proceeding, at law or in
equity, shall have been pending or threatened against the Company or
affecting any of its property or business before or by any court or federal
or state commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may materially adversely affect the
business, operations, prospects or financial condition or income of the
Company, except as set forth in the Registration Statement and Prospectus,
(vi) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated or threatened by the Commission, and (vii)
the Registration Statement and the Prospectus and any amendments or
supplements thereto contain all material statements which are required to be
stated therein in accordance with the Act and the Regulations and conform in
all
23
<PAGE>
material respects to the requirements of the Act and the Regulations, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
4.6 Delivery of Agreements. The Company has delivered to the
Underwriters executed copies of the Underwriters' Purchase Option and the
Financial Consulting Agreement.
4.7 Opinion of Counsel for the Underwriters. 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
you and to Mintz & Gold, LLP, counsel to the Underwriters, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and
the Option Closing Date, if any, with respect to such of these proceedings as
you may reasonably require. On or prior to the Effective Date, the Closing
Date and the Option Closing Date, as the case may be, counsel for the
Underwriters shall have been furnished such documents, certificates and
opinions as they may reasonably require for the purpose of enabling them to
review or pass upon the matters referred to in this Section 4.7, or in order
to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
5. Indemnification.
5.1 Indemnification of the Underwriters.
5.1.1 General. Subject to the conditions set forth below, the
Company (for purposes of this Section 5, references to the "Company" shall
include Duncan Hill) agree to indemnify and hold harmless each of the
Underwriters, their directors, officers, agents and employees and each
person, if any, who controls the Underwriters ("controlling person") within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all loss, liability, claim, damage and expense whatsoever
(including but not limited to any and all legal or other expenses reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever) to which they or any of
them may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in (i) any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time each may be amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Underwriters' Purchase
Option; or (iii) any application or other document or written communication
(in this Section 5 collectively called "application") executed by the Company
or based upon written information furnished by the Company in any
jurisdiction in order to qualify any of the Securities under the securities
laws thereof or filed with the Commission, any state securities commission or
agency, Nasdaq or any securities exchange; or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, unless such statement or omission
was made in reliance upon, and in strict conformity with, written information
furnished to the Company with respect to the Underwriters by or on behalf of
the Underwriters expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof,
or in any application, as the case may be. The Company agrees promptly to
notify the Underwriters of the
24
<PAGE>
commencement of any litigation or proceedings against the Company or any of
its officers, directors or controlling persons in connection with the issue
and sale of the Securities or in connection with the Registration Statement
or Prospectus.
5.1.2 Procedure. If any action is brought against the Underwriters
or controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, the Underwriters shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of
counsel (subject to the approval of the Underwriters) and payment of actual
expenses. The Underwriters or controlling person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of the Underwriters or such
controlling person unless (i) the employment of such counsel shall have been
authorized in writing by the Company in connection with the defense of such
action, or (ii) the Company shall not have employed counsel to have charge of
the defense of such action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to the Company (in
which case the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
the fees and expenses of not more than one additional firm of attorneys
selected by the Underwriters and/or controlling person shall be borne by the
Company. Notwithstanding anything to the contrary contained herein, if the
Underwriters or controlling person shall assume the defense of such action as
provided above, the Company shall have the right to approve the terms of any
settlement of such action which approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. The Underwriters, severally and not
jointly, agree to indemnify and hold harmless the Company against any and all
loss, liability, claim, damage and expense described in the foregoing
indemnity from the Company to the Underwriters, as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions directly relating to the transactions effected by the Underwriters
in connection with this offering made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto
or in any application in reliance upon, and in strict conformity with,
written information furnished to the Company with respect to the Underwriters
by or on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any such application. In case any action shall be
brought against the Company or any other person so indemnified based on any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Underwriter, such Underwriter shall have
the rights and duties given to the Company, and the Company and each other
person so indemnified shall have the rights and duties given to the
Underwriters by the provisions of Section 5.1.2.
25
<PAGE>
5.3 Contribution.
5.3.1 Contribution Rights. 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 5 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 5 provides for indemnification in such case, or (ii)
contribution under the Act, the Exchange Act or otherwise may be required on
the part of any such person in circumstances for which indemnification is
provided under this Section 5, then, and in each such case, the Company and
the Underwriters shall contribute to the aggregate losses, liabilities,
claims, damages and expenses of the nature contemplated by said indemnity
agreement incurred by the Company and the Underwriters, as incurred, in such
proportions that the Underwriters are responsible for that portion
represented by the percentage that the underwriting discount appearing on the
cover page of the Prospectus bears to the initial offering price appearing
thereon and the Company is responsible for the balance; provided, that, 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. Notwithstanding the
provisions of this Section 5.3, the Underwriters shall not be required to
contribute any amount in excess of the amount by which the total price at
which the Public Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which the
Underwriters have otherwise been required to pay in respect of such losses,
liabilities, claims, damages and expenses. For purposes of this Section,
each director, officer and employee of any Underwriter, and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
shall have the same rights to contribution as the Underwriters.
5.3.2 Contribution Procedure. Within fifteen 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
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so 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
its representative of the commencement thereof within the aforesaid fifteen
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any
such contributing party shall not be liable to any party seeking contribution
on account of any settlement of any claim, action or proceeding which was
effected by such 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 such contributing party. The contribution
provisions contained in this Section are intended to supersede, to the extent
permitted by law, any right to contribution under the Act, the Exchange Act
or otherwise available.
6. [Intentionally Omitted].
7. Additional Covenants.
7.1 Attendance at Board Meetings. For a period of five years from the
Effective Date, the Underwriters shall be permitted to select a designee to
attend all meetings of the Board of Directors, but who will not be entitled
to vote at such meetings. The Company agrees to give the Underwriters
26
<PAGE>
written notice of each such meeting and to provide to the Underwriters with
an agenda and minutes of the meeting no later than it gives such notice and
provides such items to the other directors. The Company shall reimburse the
designee of the Underwriters for their out-of-pocket expenses incurred in
connection with its attendance at the Company's Board meetings, including,
but not limited to, food, lodging, transportation.
7.2 [Intentionally Omitted].
7.3 [Intentionally Omitted].
7.4 Press Releases. The Company will not issue a press release or engage
in any other publicity until 25 days after the Effective Date without the
Underwriters' prior written consent.
7.5 Form S-8 or any Similar Form. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period
of three years from the Effective Date without the Underwriters' written
consent.
7.6 Transactional Bibles. The Company agrees that if its representatives
have not submitted to a bindery acceptable to the Underwriters all of the
closing and other documents material to the offering within 30 days of the
Effective Date, then the Company shall pay the fees and costs of the
Underwriters' agents to prepare the transactional bibles and have them bound.
7.7 Related Party Transactions. All future transactions between the
Company and its officers, directors or 5% stockholders will be on terms no
less favorable than could be obtained from unaffiliated third parties and
will be approved by a majority of the directors of the Company disinterested
in the transaction.
8. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates and such representations, warranties and
agreements of the Underwriters and Company, including the indemnity
agreements contained in Section 5 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Underwriters, the Company or any controlling person, and shall survive
termination of this Agreement or the issuance and delivery of the Securities
to the Underwriters until the earlier of the expiration of any applicable
statute of limitations and the seventh anniversary of the later of the
Closing Date or the Option Closing Date, if any, at which time the
representations, warranties and agreements shall terminate and be of no
further force and effect.
9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective or at the time of the initial public offering by the Underwriters
of the Public Securities, whichever is earlier. The time of the initial
public offering, for the purpose of this Section 9 shall mean the time, after
the Registration Statement becomes effective, of the release by you for
publication of the first newspaper advertisement which is subsequently
published relating to the Public Securities or the time, after the
Registration Statement becomes effective, when the Public Securities are
first released by you for offering by the
27
<PAGE>
Underwriters or dealers by letter or telegram, whichever shall first occur.
You may prevent this Agreement from becoming effective without liability to
any other party, except as noted below, by giving the notice indicated below
in this Section 9 before the time this Agreement becomes effective. You
agree to give the undersigned notice of the commencement of the offering
described herein.
9.2 Termination. You shall have the right to terminate this Agreement at
any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will
in the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the
American Stock Exchange, The Boston Stock Exchange or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall have
been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction, or (iii) if
the United States shall have become involved in a war or major hostilities,
or (iv) if a banking moratorium has been declared by a New York State or
federal authority, or (v) if a moratorium on foreign exchange trading has
been declared which materially adversely impacts the United States securities
market, or (vi) if the Company shall have sustained a material loss by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not such loss shall have been insured, will,
in your opinion, make it inadvisable to proceed with the delivery of the
Securities, or (vii) if William Miller shall no longer serve the Company in
their present capacities, or (viii) if the Company has breached any of its
representations, warranties or obligations hereunder, or (ix) if the
Underwriters shall have become aware after the date hereof of such a material
adverse change in the condition (financial or otherwise), business, or
prospects of the Company, or such adverse material change in general market
conditions as in the Underwriters' judgment would make it impracticable to
proceed with the offering, sale and/or delivery of the Securities or to
enforce contracts made by the Underwriters for the sale of the Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay
the expenses related to the transactions contemplated herein shall be
governed by Section 3.14 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way effected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
28
<PAGE>
If to the Underwriters:
VTR Securities Corp.
Copy to:
Mintz & Gold, LLP
444 Park Avenue South, 10th Floor
New York, NY 10016
Attention: Steven W. Gold, Esq.
If to the Company:
The Havana Group, Inc.
4450 Belden Village Street, N.W. Suite 406
Canton, OH 44718
Attention: William Miller
Copy to:
Lester Morse, P.C.
111 Great Neck Road, Suite 420
Great Neck, NY 11021
Attention: Steven Morse, Esq.
10.2 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with
this Agreement) constitute the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersede all prior agreements and
understandings of the parties, oral and written, with respect to the subject
matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained.
10.6 Governing Law; Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the law of the State of New
York, without giving effect to conflicts of law. The Company hereby agrees
that any action, proceeding or claim against it arising out of,
29
<PAGE>
relating in any way to this Agreement shall be brought and enforced in the
courts of the State of New York of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any
objection to such exclusive jurisdiction and that such courts represent an
inconvenient forum. Any such process or summons to be served upon the
Company may be served by transmitting a copy thereof by registered or
certified mail, return receipt requested, postage prepaid, addressed to it at
the address set forth in Section 10 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the Company in any
action, proceeding or claim. The Company agrees that the prevailing
party(ies) in any such action shall be entitled to recover from the other
party(ies) all of its reasonable attorneys' fees and expenses relating to
such action or proceeding and/or incurred in connection with the preparation
therefor.
10.7 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of the
parties hereto and delivered to each of the other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto to at any
time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way effect the
validity of this Agreement or any provision hereof or the right of any of the
parties hereto to thereafter enforce each and every provision of this
Agreement. No waiver of any breach, non-compliance or non-fulfillment of any
of the provisions of this Agreement shall be effective unless set forth in a
written instrument executed by the party or parties against whom or which
enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver
of any other or subsequent breach, non-compliance or non-fulfillment.
30
<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
THE HAVANA GROUP, INC.
By:
------------------------------------
Name:
Title:
DUNCAN HILL CO., LTD.
By:
------------------------------------
Name:
Title:
Accepted as of the date first
above written.
New York, New York
VTR CAPITAL, INC.
By:
------------------------------
Name:
Title:
31
<PAGE>
Exhibit 2.0 CERTIFICATE OF MERGER
OF
E.A. CAREY OF OHIO, INC.
INTO
THE HAVANA GROUP, INC.
In accordance with the requirements of Ohio law, the undersigned
corporations, desiring to effect a merger, set forth the following facts:
I. SURVIVING ENTITY.
A. The name of the entity surviving the merger is The Havana Group,
Inc.
B. The surviving entity is a foreign (non-Ohio) corporation
incorporated under the laws of the state of Delaware and which shall be
licensed to transact business in the state of Ohio.
II. MERGING ENTITIES.
The name, type of entity, and state of incorporation or organization,
respectively, of each entity, other than the survivor, which is a party to
the merger are as follows:
NAME STATE OF ORGANIZATION TYPE OF ENTITY
---------- ------------------------ -------------------
E.A. CAREY OF OHIO, INC. OHIO CORPORATION
III. MERGER AGREEMENT ON FILE.
The name and mailing address of the person or entity from whom eligible
persons may obtain a copy of the agreement of merger upon written request:
NAME ADDRESS
----------- ------------------------------
William L. Miller 4450 Belden Village St., N.W.
Canton, Ohio 44718
IV. EFFECTIVE DATE OF MERGER.
This merger is to be effective on the date of filing.
V. MERGER AUTHORIZED.
<PAGE>
The laws of the state under which each constituent entity exists,
permits this merger.
This merger was adopted, approved and authorized by each of the
constituent entities in compliance with the laws of the state under which it
is organized, and the persons signing this certificate on behalf of each of
the constituent entities are duly authorized to do so.
VI. STATEMENT OF MERGER
Upon filing, or upon such later date as specified herein, the merging
entity listed herein shall merge into the listed surviving entity.
VII. QUALIFICATION OR LICENSURE OF FOREIGN SURVIVING ENTITY.
A. The listed surviving foreign corporation, limited liability
company, or limited partnership desires to transact business in Ohio as a
foreign corporation and hereby appoints the following as its statutory agent
upon whom process, notice or demand against the entity may be served in the
State of Ohio. The name and complete address of the statutory agent is:
NAME ADDRESS
--------- -----------------------
David G. LeGrand 175 South Third Street
Columbus, Ohio 43215
The subject surviving foreign corporation irrevocably consents to
service of process on the statutory agent listed above as long as the
authority of the agent continues, and to service of process upon the
Secretary of State if the agent cannot be found, if the corporation fails to
designate another agent when required to do so, of if the corporation's
license or registration to do business in Ohio expires or is canceled.
<PAGE>
The undersigned constituent entities have caused this certificate of merger
to be signed by its duly authorized officers, partners and representatives on
the date(s) stated below:
THE HAVANA GROUP, INC. E.A. CAREY OF OHIO, INC.
a Delaware corporation an Ohio corporation
By:/s/William L. Miller By:/s/ William L. Miller
--------------------------- -------------------------
William L. Miller William L. Miller
President President
Date: 12/1/97 Date: 12/1/97
------------------------ -------------------------
By:/s/ Chris Weber By: /s/ Chris Weber
--------------------------- -------------------------
Chris Weber Chris Weber
Secretary Secretary
Date: 12/1/97 Date: 12/1/97
------------------------- ------------------------
<PAGE>
Exhibit 2.1 CERTIFICATE OF MERGER
OF
E.A.CAREY OF OHIO, INC.
INTO
THE HAVANA GROUP, INC.
The undersigned corporations do hereby certify as follows:
FIRST: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
E.A. Carey of Ohio, Inc. Ohio
The Havana Group, Inc. Delaware
SECOND: That an Agreement of Merger between the parties to the merger
has been approved, adopted, certified, executed and acknowledged by each of
the constituent corporations in accordance with the requirements of section
252 of the General Corporation Law of Delaware.
THIRD: That the name of the surviving corporation of the merger is THE
HAVANA GROUP, INC., a Delaware corporation.
FOURTH: That the Certificate of Incorporation of THE HAVANA GROUP, INC.,
a Delaware corporation, which is surviving the merger, shall be the
Certificate of Incorporation of the surviving corporation.
FIFTH: That the executed Agreement of Merger is on file at the principal
place of business of the surviving corporation, the address of which is 4450
Belden Village Street, N.W., Canton, Ohio 44718.
SIXTH: That a copy of the Agreement of Merger will be furnished by the
surviving corporation, on request and without cost, to any stockholder of any
constituent corporation.
SEVENTH: The authorized capital stock of each foreign corporation which
is a party to the merger is as follows:
<TABLE>
<CAPTION>
PAR VALUE PER SHARE OR
NO. OF STATEMENT THAT SHARES
CORPORATION CLASS SHARES ARE W/O PAR VALUE
- ------------------------ ------- ------ -----------------------
<S> <C> <C> <C>
E.A. Carey of Ohio, Inc. Common 100 No Par Value
</TABLE>
<PAGE>
Dated: November 8, 1997 E.A. Carey of Ohio, Inc.
---------------------- an Ohio corporation
By: /s/ William L. Miller
-----------------------------
William L. Miller, President
Dated: November 8, 1997 The Havana Group, Inc.,
---------------------- a Delaware corporation
By: /s/ William L. Miller
-----------------------------
William L. Miller, President
<PAGE>
Exhibit 2.2 AGREEMENT OF MERGER
This Agreement of Merger made this 8th day of November, 1997, by and
between:
E.A. Carey of Ohio, Inc., an Ohio corporation, the principal office of
which is located at 4450 Belden Village Street, N.W., Canton, Ohio
43223; and
The Havana Group, Inc., an Delaware corporation, the principal office of
which is located at 4450 Belden Village Street, N.W., Canton, Ohio
43223, said corporations being together hereinafter sometimes called the
"Constituent Corporations."
RECITALS
WHEREAS, E.A. Carey of Ohio, Inc. is a duly organized and validly
existing corporation under the laws of the State of Ohio, and The Havana
Group, Inc. is a corporation duly organized under the laws of the State of
Delaware; and
WHEREAS, the Boards of Directors of both of said corporations have
unanimously determined that for the purpose of greater efficiency and economy
in the management of the business carried on by each corporation, and in
consideration of the mutual agreements of each corporation as set forth
herein, they deem it advisable and generally to the advantage and welfare of
both of said corporations that E.A. Carey of Ohio, Inc. be merged into The
Havana Group, Inc.
WHEREAS, the provisions of Title 17, Chapter 1701, of the Ohio Revised
Code authorize the merger of Ohio corporations into corporations organized
under the laws of other states, and the corporation law of the State of
Delaware authorize the merger of a corporation organized under the laws of
another state into a Delaware corporation;
NOW THEREFORE, the corporations, parties to this Agreement, have agreed
and do hereby agree as follows:
FIRST: E.A. Carey of Ohio, Inc., organized and existing under the laws
of the State of Ohio, shall be and hereby is merged into The Havana Group,
Inc., organized and existing under the laws of the State of Delaware and The
Havana Group, Inc. shall be the continuing and surviving corporation
(hereinafter referred to as the "Surviving Corporation") and shall be
governed by the Corporation law of the State of Delaware.
SECOND: The place where the principal office of the Surviving
Corporation is to be located is 4450 Belden Village St. N.W., Canton, OH
43223.
THIRD: The Certificate of Incorporation of The Havana Group, Inc. is
set forth in its entirety and attached hereto as Exhibit A, and all the terms
and provisions thereof are hereby incorporated into this Agreement and made a
part hereof with the same force and effect as if set forth herein in full;
and from and after the effective date of the merger and until further amended
as
<PAGE>
provided by law said Exhibit A, separate and apart from this Agreement of
Merger shall be, and may be separately certified as, the Certificate of
Incorporation, as amended, of the Surviving Corporation.
FOURTH: This Agreement shall be submitted to the shareholders of E. A.
Carey of Ohio, Inc. and to the Board of Directors of The Havana Group as
provided by law, and shall become binding upon the Constituent Corporations
upon the adoption by a vote of a majority of the shareholders of E.A. Carey
of Ohio, Inc. and adoption by the vote of the Board of Directors of The
Havana Group, Inc., and upon the doing of such other acts as are required by
the statutes of the States of Ohio and Delaware.
Upon the merger becoming effective, the shareholders of E.A. Carey of
Ohio, Inc. shall be issued one (1) share of the common stock of The Havana
Group, Inc. for each share of common stock of E.A. Carey of Ohio, Inc., and
the shares of E.A. Carey of Ohio, Inc. shall be retired. On the effective
date of the merger, the shares of E.A. Carey of Ohio, Inc. shall be
automatically changed and converted, in the proportions set forth above, into
shares of the Surviving Corporation and at that time the holder of shares of
E.A. Carey of Ohio, Inc. shall cease to be a holder thereof and shall cease
to have any rights thereunder.
FIFTH: The Surviving Corporation shall transact business in the State
of Ohio as a foreign corporation. The name and address of the statutory agent
is: David G. LeGrand, 175 South Third Street, Columbus, Ohio 43215.
SIXTH: The merger herein provided shall be and become effective at the
beginning of business the date of filing of a Certificate of Merger at the
Office of the Secretary of State of the State of Delaware or upon the
issuance by the Secretary of State of the State of Ohio of the Certificate of
Merger, whichever occurs later. Thereupon, the separate existence of E.A.
Carey of Ohio, Inc., except insofar as it may continue by statute, shall
thereupon cease.
On the effective date of the merger, The Havana Group, Inc. shall
thereupon and thereafter possess all the rights, privileges, immunities,
powers, franchises and authorities of E.A. Carey of Ohio, Inc. and all
property, real, personal and mixed, and all debts or obligations due E.A.
Carey of Ohio, Inc., on whatever account, including choses in action, and all
and every other interest of or belonging to or due E.A. Carey of Ohio, Inc.
shall thereafter be fully and effectually the property of The Havana Group,
Inc. as they were of E.A. Carey of Ohio, Inc. Title to any real estate
vested by deed or otherwise in E.A. Carey of Ohio, Inc. shall not revert or
be impaired by reason of this merger, but shall be vested in The Havana
Group, Inc. All rights of the creditors of E.A. Carey of Ohio, Inc. shall be
preserved unimpaired, limited to the property affected by such liens
immediately prior to the effective date of the merger, and all debts,
liabilities and duties of E.A. Carey of Ohio, Inc. shall thenceforth attach
to The Havana Group, Inc. and be enforced against it.
Whenever The Havana Group, Inc. shall consider or be advised that any
conveyances, deeds, transfers, assignments, assurances, or other instruments
are necessary or desirable to vest or confirm in The Havana Group, Inc. title
to any property or rights of E.A. Carey of Ohio, Inc., the proper officers
and/or directors of E.A. Carey of Ohio, Inc. shall execute and deliver any
and all such instruments and do such other acts or things as The Havana
Group, Inc. may deem necessary or
<PAGE>
proper to vest or confirm title to such property and rights in it and
otherwise carry out the purpose and intent of this Agreement.
Upon the merger becoming effective, all costs, charges and expenses of
or in connection with the merger shall be borne and paid by The Havana Group,
Inc.
SEVENTH: This Agreement may be simultaneously executed in any number of
counterparts, each of which when so executed shall be an original, and such
counterparts shall together constitute but one and the same instrument.
EIGHTH: This Agreement may be terminated at any time prior to the
merger's becoming effective:
(a) by the mutual agreement of the Boards of Directors of the
Constituent Corporations;
(b) by the Board of Directors of either E.A. Carey of Ohio, Inc.
or The Havana Group, Inc. if any legal or administrative
action or proceedings relating to the merger have been
instituted or threatened in any court or by or before any
governmental agency.
IN WITNESS WHEREOF, the Constituent Corporations have caused this
Agreement to be signed in their respective corporate names by their
respective Presidents and Secretaries.
E.A. Carey of Ohio, Inc.,
an Ohio corporation
By:/s/ William L. Miller
---------------------------------
William L. Miller, President
By:/s/ Chris Weber
---------------------------------
Chris Weber, Secretary
The Havana Group, Inc.,
a Delaware corporation
By:/s/ William L. Miller
---------------------------------
William L. Miller, President
By:/s/ Chris Weber
---------------------------------
Chris Weber, Secretary
<PAGE>
Exhibit 3.0
CERTIFICATE OF INCORPORATION
OF THE HAVANA GROUP, INC.
1. The name of the Corporation shall be The Havana Group, Inc.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is
The Corporation Trust Company.
3. The nature of the business to be conducted or promoted and the
purposes of the Corporation are:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
To manufacture, purchase or otherwise acquire, invest in, own, mortgage,
pledge, sell, assign and transfer or otherwise dispose of, trade, deal in and
deal with goods, wares and merchandise and personal property of every class
and description.
To acquire, and pay for in cash, stock or bonds of this corporation or
otherwise, the good will, rights, assets and property, and to undertake or
assume the whole or any part of the obligations or liabilities of any person,
firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in respect
of, mortgage or otherwise dispose of letters patent of the United States or
any foreign country, patent rights, licenses and privileges, inventions,
improvements and processes, copyrights, trademarks and trade names, relating
to or useful in connection with any business of this corporation.
To acquire by purchase, subscription or otherwise, and to receive, hold,
own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or
otherwise dispose of or deal in and with any of the shares of the capital
stock, or any voting stock certificates in respect of the shares of capital
stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and
other securities, obligations, chooses in action and evidences of
indebtedness or interest issued or created by any corporations, joint stock
companies, syndicates, associations, firms, trusts or persons, public or
private, or by the government of the United States of America, or by any
foreign government, or by any state, territory, province, municipality or
other political subdivision or by any governmental agency, and as owner
thereof to possess and exercise all the rights, powers and privileges of
ownership, including the right to execute consents and vote thereon, and to
do any and all acts and things necessary or advisable for the preservation,
protection, improvement and enhancement in value thereof.
To borrow or raise money for any of the purposes of the corporation and,
from time to time without limit as to amount, to draw, make, accept, endorse,
execute and issue promissory notes, drafts, bills of exchange, warrants,
bonds, debentures and other negotiable or non-negotiable instruments and
evidences of indebtedness, and to secure the payment of any thereof and of
the
<PAGE>
interest thereon by mortgage upon or pledge, conveyance or assignment in
trust of the whole or any part of the property of the corporation, whether at
the time owned or thereafter acquired, and to sell, pledge or otherwise
dispose of such bonds or other obligations of the corporation for its
corporate purposes.
To purchase, receive, take by grant, gift, devise, bequest or otherwise,
lease, or otherwise acquire, own, hold, improve, employ, use and otherwise
deal in and with real or personal property, or any interest therein, wherever
situated, and to sell, convey, lease, exchange, transfer or otherwise dispose
of, or mortgage or pledge, all or any of the corporation's property and
assets, or any interest therein, wherever situated.
In general, to possess and exercise all the powers and privileges
granted by the General Corporation Law of Delaware or by any other law of
Delaware or by this Certificate of Incorporation together with any powers
incidental thereto, so far as such powers and privileges are necessary or
convenient to the conduct, promotion or attainment of the business or
purposes of the corporation.
The business and purposes specified in the foregoing clauses shall,
except where otherwise expressed, be in nowise limited or restricted by
reference to, or inference from, the terms of any other clause in this
Certificate of Incorporation, but the business and purposes specified in each
of the foregoing clauses of this article shall be regarded as independent
business and purposes.
4. The total number of shares of all classes of capital stock which the
Corporation has the authority to issue is Thirty Five Million (35,000,000)
shares consisting of the following classes:
(a) Twenty Five Million (25,000,000) common shares, $.001 par value,
hereinafter called the Common Stock; and
(b) Ten Million (10,000,000) shares of serial Preference Stock, $.001 par
value, issuable in series, hereinafter called "Series Preference Stock".
The designations, voting powers, preferences and relative priority,
participating, option or other special rights, and qualifications,
limitations or restrictions of the above classes of stock are as follows:
DIVISION A
EXPRESS TERMS OF THE
SERIAL PREFERENCE STOCK
Section 1. The Serial Preference Stock may be issued from time to time
in one or more series. All shares of Serial Preference Stock shall be of
equal rank and shall be identical, except in respect of the matters that may
be fixed by the Board of Directors as hereinafter provided, and each share of
each series shall be identical with all other shares of such series, except
as to the date from which dividends are cumulative. Subject to the
provisions of Sections 2 to 8, both inclusive, of this Division, which
provisions shall apply to all Serial Preference Stock, the Board of Directors
hereby is authorized to cause such shares to be issued in one or more series
and with respect to each such
<PAGE>
series prior to the issuance thereof to fix:
(a) The designation of the series, which may be by distinguishing
number, letter or title;
(b) The number of shares of the series, which number the Board of
Directors may (except where otherwise provided in the creation of the series)
increase and decrease (but not below the number of shares thereof then
outstanding);
(c) The annual dividend rate of the series and the date from which
dividends shall be cumulative;
(d) The dates which dividends, if declared, shall be payable;
(e) The redemption rights and price or prices, if any, for shares of the
series;
(f) The terms and amount of any sinking fund provided for the purchase
or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event of any
voluntary or involuntary dissolution, liquidation or winding up of the
business and affairs of the corporation;
(h) Whether the shares of a series are convertible into the shares of
any other series or other class of shares, and, if so, the conversion price
or prices, any adjustments thereof, and all other terms and conditions upon
which such conversion may be made;
(i) Restrictions on the issuance of shares of the same series or any
other class or series;
(j) The voting rights of any shares in any series.
The Board of Directors is authorized to adopt, from time to time,
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) through (j), inclusive of this
Section 1.
Section 2. Nothing in clause (a) through (i), inclusive, of Section 1
above, shall be construed to require the Board of Directors to fix any
particular terms with respect to a series of shares.
Section 3. The Holders of Serial Preference Stock of each series, in
preference to the holders of Common Stock, shall be entitled to receive out
of any funds legally available, and when and as declared by the Board of
Directors, dividends in cash or property at the rate for such series fixed in
accordance with the provisions of Section 1 of this Division and no more,
payable on the dates fixed
<PAGE>
for such series. No dividends may be paid upon or declared or set apart for
any of the Serial Preference Stock for any dividend period, unless at the
same time a like proportionate dividend for the same dividend period, in
proportion to the respective dividend rates fixed therefor, shall be paid
upon or declared or set apart for all Serial Preference Stock of all series
then issued and outstanding and entitled to receive such dividends.
Section 4. In no event so long as any Serial Preference stock shall be
outstanding shall any dividends in excess of $.05 per share per year, except
payable in Common Stock or other shares ranking junior to the Serial
Preference Stock, be paid or declared or any distribution be made except as
aforesaid on the Common Stock or any other shares ranking junior to the
Serial Preference Stock, nor shall any Common Stock or any other shares
ranking junior to the Serial Preference Stock be purchased, retired or
otherwise required by the corporation (except out of the proceeds of the sale
of Common stock or other shares ranking junior to the Serial Preference Stock
received by the Corporation):
(a) Unless all accrued and unpaid dividends on Serial Preference
stock, including the full dividends for the current quarterly dividend
period, shall have been declared and paid or a sum sufficient for
payment thereof set apart; and
(b) Unless there shall be no arrearages with respect to the
redemption of Serial Preference stock of any series or any sinking fund
provided for shares of such series in accordance with the provisions of
Section 1 of this Division.
Section 5. (a) Subject to the express terms of each series and to
the provisions of Section 7(b)(iv) of this Division, the corporation may
from time to time redeem all or any part of the Serial Preference Stock
of any series at the time outstanding (i) at the option of the Board of
Directors at the applicable redemption price for such series fixed in
accordance with the provisions of Section 1 of this Division, or (ii) in
fulfillment of the requirements of any sinking fund provided for shares
of such series at the applicable sinking fund redemption price fixed in
accordance with the provisions of Section 1 of this Division; together
in each case with an amount equal to all dividends accrued and unpaid
thereon (whether or not such dividends shall have been earned or
declared) to the redemption date.
(b) Notice of every such redemption shall be mailed, postage
prepaid to the holders of record of the Serial Preference Stock to be
redeemed at their respective addresses then appearing on the books of
the corporation, not less than thirty (30) days nor more than sixty (60)
days prior to the date fixed for such redemption. At any time before or
after notice has been given as above provided the corporation may
segregate on its books an amount equal to the aggregate redemption price
of the shares of Serial Preference Stock to be redeemed for the purpose
of such redemption. Upon the making of such segregation such holders
shall cease to be shareholders with respect to such shares, and after
such notice shall have been given and such deposit shall have been made,
such holders shall have no interest in or claim against the corporation
with respect to such shares except only to receive such money without
<PAGE>
interest or the right to exercise, before the redemption date, any
unexpired privileges of conversion. In case less than all of the
outstanding shares of Serial Preference Stock are to be redeemed, the
corporation shall select pro rata or by lot the shares so to be redeemed
in such manner as shall be prescribed by its Board of Directors.
If the holders of shares of Serial Preference Stock which shall
have been called for redemption shall not, within six years after such
segregation, claim the amount due for the redemption thereof, the
corporation shall be relieved of all responsibility in respect thereof
and to such holders.
(c) Any shares of Serial Preference Stock which are redeemed by
the corporation pursuant to the provisions of this Section 5 and any
shares of Serial Preference Stock which are purchased and delivered in
satisfaction of any sinking fund requirements provided for shares of
such series and any shares of Serial Preference Stock which are
converted in accordance with the express terms thereof shall be deemed
retired.
Section 6. (a) The holders of Serial Preference Stock of all
outstanding series shall, in case of voluntary liquidation, dissolution
or winding up of the business and affairs of the corporation, be
entitled to receive in full, out of the assets of the corporation,
including capital, before any amount shall be paid or distributed among
the holders of any other shares ranking junior to the Serial Preference
Stock, the amounts fixed with respect to the shares in accordance with
Section 1 of this Division. In case the net assets of the corporation
legally available therefor are insufficient to permit the payment upon
all outstanding shares of Serial Preference Stock of the full
preferential amount to which they are respectively entitled, then such
net assets shall be distributed ratably upon outstanding shares of
Serial Preference Stock in proportion to the full preferential amount to
which each such share is entitled.
After payment to holders of Serial Preference Stock of the full
preferential amounts as aforesaid, holders of Serial Preference Stock as
such shall have no right or claim to any of the remaining assets of the
corporation.
In case of involuntary liquidation, involuntary dissolution or
involuntary winding up of the affairs of the corporation, the holders of
Serial Preference Stock shall, as such holders, (except with respect to
any series as to which the Board of Directors shall have otherwise
provided pursuant to Section 1(g) of this Division, and solely to the
extent of such provisions) receive distribution of the assets of the
corporation ratably with the holders of shares of all other classes
share for share, without distinction by reason of class.
(b) The merger or consolidation of the corporation into or with any
other corporation, or the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all of the property or
business of the corporation, shall not be deemed to be a dissolution,
liquidation or winding up, voluntary or
<PAGE>
involuntary, for the purposes of this Section 6.
Section 7. The holders of Serial Preference Stock shall be
entitled to one vote for each share of such stock on all matters
presented to the shareholders, except as otherwise provided herein or
required by law.
Section 8. For the purpose of this Division A:
Whenever reference is made to shares "ranking prior to the Serial
Preference Stock" or "on a parity with the Serial Preference Stock," such
reference shall mean and include all shares of the corporation in respect of
which the rights of the holders thereof as to the payment of dividends or as
to distributions in the event of a voluntary liquidation, dissolution, or
winding up of the affairs of the corporation are given preference over or
rank equally with (as the case may be) the rights of the holders of Serial
Preference Stock; and whenever reference is made to shares "ranking junior to
the Serial Preference Stock," such reference shall mean and include all
shares of the corporation in respect of which the rights of the holders
hereof as to the payment of dividends and as to distributions in the event of
a voluntary liquidation, dissolution, or winding up of the affairs of the
corporation are junior and subordinate to the rights of the holders of Serial
Preference Stock.
DIVISION B
EXPRESS TERMS OF THE COMMON STOCK
The Common Stock shall be subject to the express terms of the Serial
Preference Stock, and each series thereof. Each share of Common Stock shall
be equal to every other share of Common Stock. The holders of shares of
Common Stock shall be entitled to one vote for each share of such stock upon
all matters presented to the shareholders.
5. The name and mailing address of each incorporator is as follows:
NAME MAILING ADDRESS
----------- ------------------
David G. LeGrand 175 South Third Street
Columbus, Ohio 43215
The name and mailing address of each person who is to serve as a
director until the first annual meeting of the stockholders or until a
successor is elected and qualified, is as follows:
NAME MAILING ADDRESS
----------- ------------------
William L. Miller 4450 Belden Village Street., N.W.
Canton, Ohio 43223
<PAGE>
6. The corporation is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
To set apart out of any of the funds in the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
By a majority of the whole board, to designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. The by-laws may provide that in the absence
or disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board
of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the board of directors, or in the by-laws of the corporation,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation,
and may authorize the seal of the corporation to be affixed to all papers
which may require it; but no such committee shall have the power or authority
in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the
sale, lease or exchange of all or substantially all of the corporation's
property and assets, recommending to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or amending the by-laws of the
corporation; and, unless the resolution or by-laws expressly so provide, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
When and as authorized by the stockholders in accordance with law,
to sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its good will and its corporate
franchises, upon such terms and conditions and for such consideration, which
may consist in whole or in part of money or property including shares of
stock in, and/or other securities of, any other corporation or corporations,
as its board of directors shall deem expedient and for the best interests of
the corporation.
8. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
<PAGE>
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provisions contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the board of directors or in the by-laws of the corporation.
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware
Code or on the application of trustees in dissolution or of any receiver or
receivers appointed for this corporation under the provisions of Section 279
of Title 8 of the Delaware Code order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths in value
of the creditors or class of creditors, and/or of the stockholders or class
of stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as a
consequence of such compromise or arrangement, the said compromise or
arrangement and said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders,
of this corporation, as the case may be, and also on this corporation.
9. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
10. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit.
WE, THE UNDERSIGNED, being the incorporators hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this Certificate, hereby declaring and
certifying that this is our act and deed and the facts herein stated are
true, and accordingly have hereunto set our hands this __ day of November,
1997.
/s/ David G. LeGrand
------------------------------------
David G. LeGrand, Incorporator
<PAGE>
Exhibit 3.1 ACTION IN WRITING WITHOUT MEETING
BY THE DIRECTORS OF THE HAVANA GROUP, INC.
Canton, Ohio
Pursuant to the authority contained in Section 8-141 of the Delaware
Corporation Law, the undersigned, being the directors of THE HAVANA GROUP,
INC., a Delaware corporation, (the "Corporation") and being all of the
directors necessary to take the actions set forth herein, do hereby take and
adopt the following actions, in writing, without meeting:
WHEREAS, pursuant to the terms of the Certificate of Incorporation, the
Board of Directors is authorized to fix the terms and conditions of its
Serial Preference Stock.:
NOW THEREFORE BE IT:
RESOLVED, that the Corporation's Series A Preferred Stock be subject to
the following terms and conditions:
(a) the Stock shall be designated as Series A Preferred Stock;
(b) the Corporation shall issue and have outstanding 5,000,000
shares of Series A Preferred Stock;
(c) the Series A Preferred Stock has no preferential dividend
payment rights and is not participating;
(d) the Series A Preferred Stock is not subject to redemption;
(e) in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation,
each share of Series A Preferred Stock has a liquidation
preference of $.001;
(f) the Series A Preferred Stock is not convertible into shares of
Common Stock;
(g) the holders of the Series A Preferred Stock are entitled to
one vote for each share held of record on all matters
submitted to a vote of the shareholders.
RESOLVED FURTHER, that the Corporation's Series B Preferred Stock be
subject to the following terms and conditions:
(a) the Stock shall be designated as Series B Preferred Stock;
(b) the Corporation shall issue and have outstanding 1,100,000
shares of Series B Preferred Stock;
(c) the holders of Series B Preferred Stock shall be entitled to
receive annual dividends thereon at the rate of ten cents
($0.10) per share and no more, payable out of surplus or net
profits of the Corporation on a quarterly basis,
<PAGE>
as and when declared by the Board of Directors, before any
dividend shall be declared, set apart for, or paid upon the
Common Stock for such year, and the remainder of the surplus
or net earnings applicable to the payment of dividends shall
be distributed as dividends among the holders of Common Stock
as and when the Board of Directors determines;
(d) the Series B Preferred Stock is not subject to redemption;
(e) in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation,
each share of Series B Preferred Stock has a liquidation
preference of $.001, which is subordinated to the liquidation
preference of the Series A Preferred Stock;
(f) each share of Series B Preferred Stock is convertible into one
share of the Corporation's Common Stock, at the option of
either the holder or the Corporation, upon the Corporation
earning $500,000 in annual pre-tax profits. Upon satisfaction
of the conditions for conversion, the holders of each share of
Series B Preferred Stock may convert such shares into Common
Stock upon delivery of written notice of conversion to the
Corporation at least thirty (30) days prior to the date of
conversion and the surrender by the shareholder of his
certificate(s) for each share of Series B Preferred Stock
which is to be so converted. The option to convert hereunder
is subject to the Corporation filing an effective registration
statement under the Securities Act of 1933 and any other state
securities laws, or pursuant to an exemption from registration
under the Securities Act of 1933 and any applicable state
securities laws. The Corporation shall bear all expenses
associated with the registration or procurring an exemption
from registration for the shares to be issued upon conversion.
(g) the holders of the Series B Preferred Stock are entitled to
one vote for each share held of record on all matters
submitted to a vote of the shareholders.
RESOLVED FURTHER, that the officers of the Corporation be and hereby are
authorized to execute and record such documents as may be required to
effectuate the foregoing Resolutions.
IN WITNESS WHEREOF, the undersigned directors have executed this written
consent dated as of December 24, 1997.
/s/ William L. Miller
--------------------------------------
Wlliam L. Miller
/s/ John W. Cobb, Jr.
--------------------------------------
John W. Cobb, Jr.
/s/ Peter Stokkeybe
--------------------------------------
Peter Stokkeybe
<PAGE>
Exhibit 3.2
THE HAVANA GROUP, INC.
BY-LAWS
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places
both within and without the State of Delaware as the board of directors may
from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Canton, State of Ohio, at such place
as may be fixed from time to time by the board of directors, or at such other
place whether within or without the State of Delaware as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting. Meetings of stockholders for any other purpose may be held at such
time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year
1997, shall be held on the 20th day of June, if not a legal holiday, and if a
legal holiday, then on the next secular
<PAGE>
day following, at 10:00 a.m., or at such other date and time as shall be
designated from time to time by the board of directors and stated in the
notice of the meeting, at which they shall elect by a plurality vote a board
of directors, and transact such other business as may properly be brought
before the meeting.
Section 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not less than ten nor more than sixty days before the date of
the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in
the notice of the meeting or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected
by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board
of directors, or at the request in writing of stockholders owning a majority
in amount of the entire capital stock of the corporation issued and
outstanding and entitled to vote. Such
2
<PAGE>
request shall state the purpose or purposes of the proposed meeting.
Section 6. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 7. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled
to vote thereat, present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum shall be present or represented
any business may be transacted which might have been transacted at the
meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or
of the certificate of incorporation, a different vote is required in which
case such express provision shall govern and control the decision of such
question.
Section 9. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each
3
<PAGE>
share of the capital stock having voting power held by such stockholder, but
no proxy shall be voted on after three years from the date, unless the proxy
provides for a longer period.
Section 10. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special
meeting of stockholders of the corporation, or any action which may be taken
at any annual or special meeting of such stockholders, may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented
in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
board shall be not less than three nor more than seven. The first board
shall consist of three directors. Thereafter, within the limits above
specified, the number of directors shall be determined by resolution of the
board of directors or by the stockholders at the annual meeting. The
directors shall be elected at the annual meeting of the stockholders, except
as provided in Section 2 of this Article, and each director elected shall
hold office until his successor is elected and qualified. Directors need not
be stockholders.
4
<PAGE>
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then
an election of directors may be held in the manner provided by statute. If,
at the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to
be held to fill any such vacancies or newly created directorships, or to
replace the directors chosen by the directors then in office.
Section 3. The business of the corporation shall be managed by or under
the direction of its board of directors which 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 or by these by-laws directed or
required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to
5
<PAGE>
constitute the meeting, provided a quorum shall be present. In the event of
the failure of the stockholders to fix the time or place of such first
meeting of the newly elected board of directors, or in the event such meeting
is not held at the time and place so fixed by the stockholders, the meeting
may be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors, or as
shall be specified in a written waiver signed by all of the directors.
Section 6. Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the president
on one-day's notice to each director, either personally or by mail or by
facsimile communication, special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of two
directors unless the board consists of only one director, in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
Section 8. At all meetings of the board, a majority of directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be
the act of the board of directors, except as may be otherwise specifically
provided by statute or by the certificate of incorporation. If a quorum
shall not be present at any meeting of the board of directors the directors
present thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present.
6
<PAGE>
Section 9. Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken
at any meeting of the board of directors or of any committee thereof may be
taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting
of the board of directors, or any committee, by means of conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the board of directors to act at the meeting in the
place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
board of directors,
7
<PAGE>
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation,
and may authorize the seal of the corporation to be affixed to all papers
which may require it; but no such committee shall have the power or authority
in reference to amending the certificate of incorporation, (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of
directors as provided in Section 151(a) of the General corporation Law of
Delaware fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation) adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or
a revocation of a dissolution, or amending the by-laws of the corporation;
and, unless the resolution or the certificate of incorporation expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock or to adopt a certificate or
ownership and merger. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the
board of directors.
Section 12. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required.
8
<PAGE>
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the
authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of shares
entitled to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be
given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed
to such director or stockholder, at his address as it appears on the records
of the corporation, with postage thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to directors may also be given by facsimile
telecommunication.
9
<PAGE>
Section 2. Whenever any notice is required to be given under the
provisions of the statutes, or of the certificate of incorporation or of
these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board
of directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional
vice-presidents, and one or more assistant vice-presidents, assistant
secretaries, and assistant treasurers. Any number of offices may be held by
the same person, unless the certificate of incorporation or these by-laws
otherwise provide.
Section 2. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a president, one or more
vice-presidents, a secretary and a treasurer.
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board..
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the board of directors may be removed at any time by the affirmative vote of
a majority of the board of directors. Any vacancy occurring on
10
<PAGE>
any office of the corporation shall be filled by the board of directors.
THE PRESIDENT
Section 6. The president shall be the chief executive officer of the
corporation, and preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 7. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 8. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be
more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of
their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the president. The vice-presidents shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 9. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the board of directors in a book to
be kept for that purpose and shall perform like duties
11
<PAGE>
for the standing committees when required. He shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed
by the board of directors or president, under whose supervision he shall be.
He shall have custody of the corporate seal of the corporation and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by
the signature of such assistant secretary. The board of directors may give
general authority to any other officer to affix the seal of the corporation
and to attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or
if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or on the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board
of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys and other valuable facts in the name and to the credit of the
corporation in such depositories as may be designated by the board of
directors.
Section 12. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors,
at its regular meetings, or when the board of directors so requires, an
12
<PAGE>
account of all his transactions as treasurer and of the financial condition
of the corporation.
Section 13. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of his office and for
the restoration of the corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the corporation.
Section 14. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of
directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of
the treasurer and shall perform such other duties and have such other powers
as the board of directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The shares of the corporation shall be represented by a
certificate or shall be uncertificated. Certificates shall be signed by, or
in the name of the corporation by, the chairman or vice-chairman of the board
of directors, or the president or a vice-president, and by the treasurer or
an assistant treasurer, or the secretary or an assistant secretary of the
corporation.
Section 2. Any of or all the signatures on a certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed
13
<PAGE>
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent
or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The board of directors may direct a new certificate or
certificates or uncertificated shares to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates
or uncertificated shares, the board of directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent to
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall
be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon
its books. Upon receipt of proper transfer instructions from the registered
owner of uncertificated shares such uncertificated shares shall be cancelled
and issuance of new equivalent uncertificated shares or certificated shares
shall be made to the person entitled thereto and the transaction shall be
14
<PAGE>
recorded upon the books of the corporation.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the board of directors may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for
the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
15
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the certificate of
incorporation.
Section 2. Before payment of any dividend there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the corporation, or for such
other purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. The board of directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons
as the board of directors may from time to time designate.
16
<PAGE>
FISCAL YEAR
Section 5. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
SEAL
Section 6. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 7. The corporation shall indemnify its officers, directors,
employees and agents to the extent permitted by the General Corporation Law
of Delaware.
ARTICLE VIII
AMENDMENTS
Section 1. These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the board of directors by
the certificate of incorporation it shall not divest or limit the power of
the stockholders to adopt, amend or repeal by-laws.
17
<PAGE>
Exhibit 10.0
EXECUTIVE EMPLOYMENT AGREEMENT
This Agreement is made as of the 1st day of December, 1997, between THE
HAVANA GROUP, INC., a Delaware Corporation with its principal offices at 4450
Belden Village Street, N.W., Suite 406, Canton, Ohio 44718 (the "Company") and
William L. Miller residing at P.O. Box 500, 72 East Drive, Hartville, Ohio 44632
(the "Executive").
AGREEMENT
In consideration of the mutual agreements set forth herein, the parties,
intending to be legally bound, agree as follows:
1. Employment.
a) Position. The Company hereby agrees to employ Executive, and
Executive hereby accepts employment by the Company as Chairman of the Board and
Chief Executive Officer of the Company.
b) Performance. Except as set forth below, Executive agrees to
devote his full time, energies and attention to the performance of his duties
and functions hereunder, to exercise his best efforts, judgment, skills, and
talents exclusively in the business and affairs of the Company and, in the
performance thereof, to comply with the policies of and be subject to the
direction of the Board of Directors of the Company. Notwithstanding the above,
the Company recognizes and acknowledges that Executive will continue to serve as
the Chief Executive Officer of Duncan Hill, Inc. and as the Chief Executive
Officer and Chairman of the Board of Kids Stuff, Inc. during the term of this
Agreement. Additionally, Executive may serve as an employee or officer of other
subsidiaries or affiliates of Duncan Hill, Inc. Executive shall devote such
time to Duncan Hill, Inc., subsidiaries or affiliates of Duncan Hill, Inc.,
including Kids Stuff, Inc., as he deems appropriate. Executive shall be entitled
to the compensation set forth below regardless of the percentage of working
hours that Executive devotes to the affairs of the Company.
c) Responsibilities. Executive shall be responsible for the duties
assigned to him by the Board of Directors or by an executive officer of the
Company with authority to assign duties and shall be subject and report to the
Board of Directors and/or any such other executive officer. Executive is
engaged to act as the Company's Chairman of the Board and Chief Executive
Officer and shall perform all of the usual duties inherent in such position(s)
as well as such other duties as may from time to time be delegated to him by the
Board of Directors.
<PAGE>
2. Compensation.
a) Base Salary. The Company agrees to pay Executive and Executive
agrees to accept as compensation for all of his services, a base salary payable
in accordance with the Company's standard payroll policy at the annual rate of
$50,000. The Board of Directors or the Compensation Committee of the Board of
Directors shall review the Executive's performance on an annual basis and shall
determine, in its discretion, whether to increase the base salary.
Notwithstanding the previous two sentences, in the event the Company's gross
revenues exceed $5M for a fiscal year during the term hereof, the Company shall
increase Executive's annual base salary at least to $100,000 from the beginning
of the following fiscal year and for the remainder of the term.
b) Bonuses. Executive shall be eligible to receive, in addition to
his base salary, an annual cash bonus under the Company's bonus program for key
management personnel administered by the Board of Directors or the Compensation
Committee of the Board of Directors under which a cash bonus will be payable
based upon the Company's performance and Executive's personal performance, with
a range of bonus from 0 to 50% of Executive's prior year's base salary.
c) Option Grant. The Company hereby grants options to purchase
200,000 shares of the Company's Common Stock (the "Options"). Options to
purchase 40,000 shares of Common Stock vest and are exercisable on the date
hereof. The remainder of the Options shall vest and become exercisable with
respect to options to purchase 40,000 shares of Common Stock on each of the
first four anniversary dates January 1, 1998. The Options will vest and become
exercisable on such dates regardless of whether Executive is employed on such
dates by the Company. The Options will expire and be nonexercisable ten years
from the date hereof.
The exercise price of the Option shall be $6.00 per share of Common Stock,
subject to adjustment as set forth below. The exercise price for vested options
may be decreased if (i) the Company meets certain performance goals, and (ii)
Executive timely elects to "lock-in" a lower exercise price with respect to his
vested options.
The exercise price for vested options may be reduced by $1.00 per share for
each $200,000 of pretax net income of the Company for the prior fiscal year.
The Company shall report to Executive, promptly upon audited financial
statements for the prior fiscal year becoming available, the pretax net income
of the Company for that year. Executive shall have thirty (30) days in which to
decide, with respect to his vested options for which an alternative exercise
price has not previously been locked-in, whether to adjust the exercise price of
such vested options based upon the pretax income of the Company for the prior
year. For example, if the Company has $500,000 of pretax net income for the
year ended December 31, 1998, the Company shall report such net income to
Executive in 1999. Executive will have to decide, within thirty (30) days of
receipt of the financial
2
<PAGE>
information, whether to modify or "lock-in" an amended exercise price for the
vested options (with the original grant date of December 1, 1997, options to
purchase 80,000 shares of Common Stock would be vested at that time). The
exercise price for the 80,000 of such vested Options could be lowered to $3.00
per share and locked-in with respect to the underlying shares (two $200,000
increments of pretax net profit (no additional adjustment for the $100,000
partial increment)).
If Executive locks-in the new exercise price, that price will be the
exercise price for those shares for the entire term of the option. However,
Executive may determine not to so lock-in the exercise price. In that event,
Executive may, in the subsequent year(s), elect to lock-in a lowered exercise
price for all then vested Options with respect to which a lowered exercise price
had not previously been locked-in.
(d) The Company hereby grants to Executive Common Stock Purchase
Warrants to purchase 200,000 shares of common stock at $6.00 per share. The
Warrants, which expire December 1,12007, upon the completion of an initial
public offering of the Company's securities, automatically convert into Class A
Warrants identical to those sold to the public. The 200,000 Class A Warrants
and the shares issuable upon exercise thereof will be registered with the
Securities and Exchange Commission at the time the Company files its
Registration Statement for an Initial Public Offering at the sole cost of the
Company.
3. Expenses. The Company shall pay or reimburse Executive during his
employment hereunder for all reasonable travel and other expenses incurred by
Executive in the performance of his duties and obligations hereunder upon
submission of appropriate supporting documentation. In addition, the Company
shall pay or reimburse Executive during his employment for expenses incurred by
Executive in personal financial and legal counseling (including income tax
preparation and counseling, financial planning, financial counseling and
financial management and legal services on personal matters) in amounts not to
exceed in the aggregate $5,000 annually, and supplemental medical/dental
expenses up to the maximum of $1,500 annually. To the extent reimbursement by
the Company of any of Executive's expenses set forth in the preceding sentence
results in taxable income to Executive, the Company shall pay Executive, in
addition, an amount sufficient to gross-up such expenses so that Executive shall
not bear any personal out-of-pocket expenses with respect thereto. The Company
shall also, during the term hereof, provide Executive with a Company automobile
for his exclusive use, of a make and model mutually agreed upon by Executive and
the Company from time to time, at the Company's expense.
4. Benefit Plans. Executive shall be entitled to participate in all of
the Company sponsored employee benefit plans.
3
<PAGE>
5. Vacation. Executive shall be entitled to at least one month of
vacation during each twelve-month period of his employment hereunder.
6. Indemnification. The Company shall to the full extent permitted by
law and not inconsistent with the provisions of the Certificate of Incorporation
and By-laws of the Company indemnify Executive if Executive shall become, or
shall be threatened with becoming, a party to any action, suit, or proceeding by
reason of his acting as an officer, agent, or employee of the Company, and such
indemnification shall not be deemed exclusive of any other rights to which
Executive may be entitled as a matter of law or in accordance with any
agreement, document, instrument, or under any policy of insurance carried by the
Company and such indemnification shall survive termination of this Agreement.
7. Confidential Information.
a) Executive acknowledges that the information, observations and
data regarding the Company and its subsidiaries obtained by him during the
course of his employment, either before or after the effective date of the
Agreement, are the property of the Company. Therefore, Executive agrees that he
will not disclose to any unauthorized person or use for his own account or for
the benefit of any third party (other than the Company and its subsidiaries) any
of such information, observations or data without the prior express written
approval of the Board of Directors of the Company. Notwithstanding the
foregoing, Executive may disclose information, observations or data to the
extent that (i) the same become generally known to and available for use by the
public other than as a result of acts or omissions to act by Executive in
violation of this paragraph 7 or (ii) such disclosure is required by law or
legal process. Executive agrees to deliver to the Company, at the termination
of his employment, all memoranda, notes, plans, records, reports and other
documents (and copies thereof) relating to the Company and its subsidiaries,
which he may then possess or have under his control, provided, however, that
Executive may retain copies of his director files, initial public offering files
and Company presentation files.
b) Except as may be otherwise provided in Paragraph 1, Executive
shall not during the term of this Agreement work for or otherwise assist a
business or organization, or invest in the securities (other than a portfolio
investment, including without limitation investment in mutual funds, not
exceeding 2% of outstanding securities of a firm listed on a national stock
exchange or traded in the Nasdaq Stock Market) of any other business or
organization, if such business or organization now is or shall then be competing
with the Company; provided, however, that Executive may serve on the board of
directors or the board of trustees of other businesses or organizations with the
approval of the Board of Directors of the Company.
4
<PAGE>
c) For a period of one year subsequent to the later to occur of (i)
the termination of Executive's employment with the Company, or (ii) the
termination of any consulting arrangement between the Company and Executive,
Executive shall not compete directly or indirectly be associated with, or act as
an independent contractor or consultant to, or be a director, officer, employee,
owner, or partner of, any other business or organization that competes with the
business of the Company as then conducted. Nothing contained herein will be
deemed to require the Company to enter into a consulting agreement with the
Executive upon termination of Executive's employment with the Company.
8. Term and Termination.
a) Term. The term of this Agreement shall commence on December 1,
1997 and shall terminate on December 31, 2002 unless earlier terminated as
provided in Section 8(b) below.
b) Termination.
(i) This Agreement and Executive's employment hereunder may be
terminated by the Company at any time with Cause (as hereinafter defined) on 30
days' prior written notice.
(ii) This Agreement and Executive's employment hereunder may be
terminated by Executive on 30 days' prior written notice upon the occurrence of
any one of the following events: (A) The failure of the Company to elect or
reelect or to appoint or reappoint Executive to the office of Chief Executive
Officer; (B) A material change by the Company in Executive's functions, duties,
or responsibilities which change would cause Executive's position with the
Company to become of less dignity, responsibility or scope from the position and
responsibilities described in Section 1 hereof; (C) The liquidation or
dissolution, or consolidation, merger or other business combination (including
assumption of control by a shareholder or consortium of shareholders) of the
Company, or transfer of all or substantially all of its assets, unless any such
consolidation, merger or other business combination does not adversely affect
Executive's position or the dignity or responsibilities of Executive, in
Executive's judgment; and (D) Any material breach of this Agreement by the
Company. Provided, however, that this Section 8(b)(ii) shall not be effective
unless Executive's beneficial ownership of the Company's outstanding voting
capital stock (within the meaning of Section 13(d) of the Securities Exchange
Act of 1934) is less than 50% of the Company's total outstanding voting capital
stock.
c) Effect of Termination. Upon termination of this Agreement
neither party shall have any further obligation to the other party, except as
provided in Section 8(d) below and under the provisions of any outstanding stock
options held by Executive at the time of termination, and except that the
provisions of Sections 6 and 7(a) if applicable, shall survive termination of
the Agreement.
5
<PAGE>
d) Payments to Executive on Termination.
(i) In the event that this Agreement is terminated by the
Company without Cause or Executive terminates this Agreement pursuant to Section
8(b)(ii), the Company shall pay in a lump sum on the date of termination
severance compensation to Executive in the amount derived by multiplying the
factor 2.99 by the sum of Executive's salary and bonus paid in the year prior to
the year of termination.
(ii) In the event this Agreement expires and Executive is not
rehired in the same position under the terms and conditions of a new executive
employment agreement acceptable to Executive and the Company, the Company shall
pay in a lump sum on the date of termination severance compensation to Executive
in an amount equal to the sum of Executive's salary and bonus paid in the year
ending December 31, 2002.
(iii) In the event Executive dies or becomes disabled (as
hereinafter defined) during the term hereof, the Company shall pay severance
compensation to Executive, or his estate, as the case may be, in the amount
derived by multiplying the factor 2.99 by the sum of Executive's salary and
bonus paid in the year prior to the year in which the death or disability
occurs, reduced to a lesser amount determined by multiplying said amount by a
fraction, the numerator of which is the number of whole or partial months
remaining from the date of death or disability, as the case may be, to December
31, 2002 and the denominator is 60; provided, however, that such severance
compensation shall in no event be less than Executive's salary and bonus paid in
the year prior to the year in which Executive dies or becomes disabled. Such
severance compensation shall be paid in a lump sum as soon as practicable
following the date of death or disability. The Company also agrees to maintain
in force during the term of this Agreement a policy on the life of Executive in
face amount equal to two times base salary as of the date hereof, the proceeds
of which will be paid to Executive's estate.
(iv) In addition to the severance payment provided in
subparagraphs (i), (ii) or (iii) above, Executive's participation in the
Company-sponsored employee health benefit plan shall be continued at Company
expense for a maximum period of eighteen months so long as Executive is alive
and is not elsewhere earlier employed on a full-time basis.
e) Definitions. For the purposes of this Agreement:
(i) Cause shall mean acts of moral turpitude, and the willful
repeated or habitual neglect of Executive's obligations under this Agreement,
the misuse of corporate funds, the gross failure to manage the business of the
Company in accordance with normal business practices, or the material breach of
this Agreement.
6
<PAGE>
(ii) Disabled shall mean the physical or mental inability of
Executive to perform his duties hereunder for a period of three consecutive
months as determined by an independent physician chosen by the Company and
approved by Executive.
(iii) Fair Market Value of the Company's stock on the applicable
date shall mean the mean of the highest and lowest quoted selling prices
of such stock on the composite tape of the NASD Bulletin Board (or such
other market or exchange on which the Company's common stock is then traded) on
the applicable date, or if the Company's common stock was not traded on such
exchange on such date, on the next preceding date on which the common stock was
traded.
f) Replacement. Notwithstanding the above, the Board of Directors,
with the consent of Executive, may hire a replacement to serve as the Chairman
of the Board and Chief Executive Officer of the Company. Executive shall assist
in the orderly transition of duties and responsibilities for such period as is
mutually agreed upon by the Company and Executive. During such transition
period, Executive shall be entitled to all benefits and compensation provided
for herein. At the conclusion of the transition period, Executive's employment
with the Company shall cease. Executive shall receive the severance
compensation set forth in Section 8(d)(ii) upon termination of his employment
and shall be entitled to received the health plan benefits set forth in Section
8(d)(iv) thereafter.
9. Change of Control; Executive's Stock Options. In the event any person
other than Executive, Duncan Hill, Inc., Jeanne E. Miller or their affiliates,
by any means of purchase or acquisition, becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, or any successor provision thereto)
of more than 50% of the outstanding shares of the Company's common stock, or
commences a tender offer pursuant to Regulation 14-C promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, or
any successor provision thereto, which, if successful, would result in such
person becoming the beneficial owner of more than 50% of such shares, then all
of Executive's options to purchase common stock of the Company outstanding at
the time of the event and which were granted six months or more prior to the
event shall immediately become exercisable in full and upon the written election
of Executive, given to the Company within 180 days of the event, and the Company
shall repurchase for cash all or any part of the options as specified in the
written election, at a price per share equal to the difference between the Fair
Market Value of the Company's stock on the date of the event and the option
exercise price per share.
In the event of the execution of an agreement of reorganization, merger or
consolidation of the Company with one or more corporations as a result of which
the Company is not to be the surviving corporation or the execution of an
agreement of sale or transfer of all or substantially all of the assets of the
Company, then all of Executive's
7
<PAGE>
options to purchase common stock of the Company outstanding at the time of the
event and which were granted six months or more prior to the event shall
immediately become exercisable in full and upon the written election of
Executive given to the Company within 180 days of the event, and the Company
shall repurchase for cash all or any part of the options as specified in the
written election, at a price per share equal to the difference between the Fair
Market Value of the Company's stock on the execution date and the option
exercise price per share.
10. Miscellaneous.
a) Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision.
b) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, the heirs and legal representatives
of Executive, and the successors and assigns of the Company, except that
Executive may not assign this Agreement or any of Executive's duties or services
hereunder.
c) No Waivers. The failure of either party to insist upon the
strict performance of any of the terms, conditions, and provisions of this
Agreement shall not be construed as a waiver or relinquishment of future
compliance therewith, and said terms, conditions, and provisions shall remain in
full force and effect. No waiver of any term or condition of this Agreement on
the part of either party shall be effective for any purpose whatsoever unless
such waiver is in writing and signed by such party.
d) Modification. This Agreement may not be changed, amended, or
modified except by a writing signed by both parties.
e) Notices. Any notice, request, demand, waiver, consent, approval,
or other communication which is required to be or may be given under this
Agreement shall be in writing and shall be deemed given only if delivered to the
party personally or sent to the party by registered or certified mail, return
receipt requested, postage prepaid, to the parties at the addresses set forth
herein or to such other address as either party may designate from time to time
by notice to the other party sent in like manner.
f) Governing Law. This Agreement constitutes the entire agreement
between the parties and shall be governed by and construed in accordance with
the laws of the State of Ohio applicable to agreements made and to be performed
solely within such state.
g) Headings. The section headings contained in this Agreement are
for reference purposes only and shall not be deemed to be a part of this
Agreement or to affect the construction or interpretation of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the day and year first above written.
THE HAVANA GROUP, INC. EXECUTIVE
By: By:
--------------------------- -----------------------------
Name: William L. Miller
------------------------------
Printed
Title:
-----------------------------
9
<PAGE>
EXHIBIT 10.1
ADMINISTRATIVE AND OPERATIONAL SERVICES AGREEMENT
THIS AGREEMENT (the "Agreement") made effective the 1st day of January,
1998 by and between KIDS' STUFF, INC., a Delaware corporation ("Manager"), and
THE HAVANA GROUP, INC., a Delaware corporation ("Company").
W I T N E S S E T H:
WHEREAS, Company functions as a catalog sales organization with few direct
operations of its own and has fewer than 10 employees or management staff;
WHEREAS, Manager is owned by an affiliate of Company and has previously
provided on an informal basis certain necessary management services and
Operational services for the Company; and
WHEREAS, Company desires to have Manager continue to provide all such
services pursuant to this Administrative and Operational Services Agreement,
NOW, THEREFORE, and in consideration of the mutual promises and covenants
hereinafter set forth, Manager and Company hereby agree as follows:
1. ADMINISTRATIVE SERVICES. During the term hereof, Manager shall
provide all administrative services (the "Fulfillment Services") reasonably
necessary or appropriate to facilitate the ordinary operations of the Company,
including the following:
1.1 ACCOUNTING AND PAYROLL SERVICES including payroll production
and payroll reporting to all tax authorities, and all basic
internal accounting services. Such services shall include
administering the Company's finances and bank accounts,
maintaining accurate records of and collecting payment on
accounts receivable, assisting in the preparation of the
Company's budgets, and maintaining financial and accounting
records subject to periodic review and audit by the Chief
Financial Officer and such other public accountant(s) as the
Company in its sole discretion, may authorize. Manager shall
also provide the services of such accounting, bookkeeping and
clerical personnel as may be required to assist the Chief
Financial Officer in his or her duties.
Manager shall also provide accounts payable administration,
accounting consultation regarding interpretation of accounting
policies and facilitation of the implementation of accounting
policies and all necessary processing of payroll and employee
benefits. Such services shall include but shall not be limited
to acting as paymaster for Company and collecting, paying or
causing to be paid, reporting, and maintaining records of any
and all required federal, state, and local payroll taxes.
1.2 ADMINISTRATION AND HUMAN RESOURCE MANAGEMENT including testing,
evaluation, and benefits administration, employment training
and
<PAGE>
management of both managers and employees and all necessary
time and attention of accounting and payroll personnel,
purchasing and receivables staff, sales managers, sales staff,
customer service staff, and such other administrative and
clerical personnel (the "Manager's Employees") as may be
required to assure delivery of the services required hereunder.
Manager shall employ, train, and manage all Manager's Employees
and shall be responsible for the hiring, supervision, and
firing of said Manager's Employees. All Manager's Employees
shall be strictly and solely the employees of Manager. Manager
reserves the exclusive right to determine the manner in which
Manager's Employees will carry out their duties hereunder, to
hire and fire same at its own discretion, to maintain the
Manager's Employees on the Manager's books as its employees,
and to pay and make all deductions from Manager's Employees'
wages or salaries and benefits. Company shall not attempt to
exercise authority over the Manager's Employees in any way
inconsistent with the aforesaid.
The Company shall employ a President and a Chief Financial
Officer (the "Company Employees") separate and apart from this
Agreement, and the Manager shall exercise no authority over
said Company Employees.
All clerical, secretarial services and other customary and
usual general and administrative services reasonably necessary
to the daily operations of Company's business.
1.3 DATA PROCESSING SERVICES including use of Manager's computers,
copiers, software telephones, facsimile machines, and other
office equipment, and printing and postage services as
necessary.
1.4 OFFICE EQUIPMENT AND FACILITIES USE including use of as much of
Manager's administrative office(s) and warehouse space as is
reasonably necessary to Company for the purpose of managing and
operating Company's business.
Manager shall be solely responsible for compensating all personnel who
provide the services specified above and shall be deemed to be the employer for
all such personnel, except that Manager shall not be responsible for
compensating and shall not be deemed to be the employer for the Company
Employees.
2. MERCHANDISING AND MARKETING SERVICES. During the term hereof, Manager
shall provide all services reasonably necessary or appropriate to select
merchandise and market the Company's products and services including the
following:
2
<PAGE>
2.1 Marketing including mailing, advertising, maintenance and
procurement of mailing lists, compliance with postal
regulations, advertising selection and creation not including
the direct cost of media buys.
2.2 Merchandising including catalog production, inventory/product
selection, catalog design and production.
3. FULFILLMENT AND PURCHASING SERVICES. During the term hereof, Manager
shall provide all Fulfillment and Purchasing Services reasonably necessary
or appropriate to timely and accurately fulfill all Customer Orders
received by telephone or by mail from Company's customers, including the
following:
3.1 All functions reasonably necessary to fulfill Customer Orders.
Manager shall be responsible for receiving and fulfilling all
Customer Orders received in the normal course of Company's
business Such services shall include receiving and maintaining
accurate records of Customer Orders, matching Customer Orders
with inventory, handling shipping and delivery, and handling
receipt and replacement/reimbursement for returns pursuant to
customer satisfaction guarantees established by the Company.
Manager shall also be responsible for initially fielding all
questions and/or complaints raised by customers of the company,
including questions about specific items advertised in the
Company's catalog and returns.
3.2 All purchasing functions including initiating and maintaining
contact with Company's suppliers when necessary to ensure
favorable and continued business relations with same. Such
services will also include ordering all inventory and equipment
necessary to the customary operation of Company's business,
managing shipping, receipt, and payment of same by or on behalf
of company, all functions to purchase goods, process deliver of
goods including inventory maintenance, warehousing, and
inventory reporting.
4. TERM. The term of this Agreement shall be deemed to commence as of
December 15, 1997 and shall continue for until December 31, 1998, renewable upon
renegotiation of fees for services. However, this Agreement may be terminated
by either party upon not less than ninety (90) days written notice.
5. FEES. In exchange for the Management Services and Operational
Services specified above, Company shall, on a monthly basis in arrears, pay
Manager an amount equal to the reasonable value of the services received
hereunder based upon the quantity thereof and the cost incurred by Manager in
producing such services. Such fees shall be determined as follows:
5.1 (a) For Accounting and Payroll services, $34,000.00 per
year;
3
<PAGE>
(b) For Administration and Human Resource Management,
$51,600.00 per year;
(c) For Data Processing, $34,900.00 per year;
(d) For Office Equipment and Facilities Use, $32,200.00 per
year;
(e) For Merchandising and Marketing Services, $38,100.00
per year;
(f) For Fulfillment, $2.40 per order.
(g) For Purchasing Services, $15,300.00 per year;
6. MEDIATION AND ARBITRATION.
6.1 The Manager and Company shall make a good faith attempt to
settle the any dispute by mediation pursuant to the provisions
of this Section 6.3 before resorting to arbitration, litigation
or any other dispute resolution procedure.
6.2 Unless the Manager and Company agree otherwise, the mediation
shall be conducted in accordance with the Commercial Mediation
Rules of the American Arbitration Association (the "AAA") then
in effect by a mediator who (I) has the qualifications and
experience set forth in 6.3 below of this Section and, (ii) is
selected as provided in Section 6.4.
6.3 Unless the Manager and Company agree otherwise, the mediator
shall be a person with excellent academic and professional
credentials who has had both training and experience as a
mediator as a member of the AAA Mediation Panel or who is a
lawyer or retired judge who has mediated cases for the federal
or state courts or a reputable commercial ADR firm or
not-for-profit ADR organization.
6.4 Either party (the "Initiating Party") may initiate mediation of
a dispute by giving the other party (the "Recipient Party")
written notice (a "Mediation Notice") setting forth a list of
the names and resumes of qualifications and experience of three
impartial persons who the Initiating Party believes would be
qualified as a mediator pursuant to the provisions of Section
6.3 hereof. Within 15 days after the delivery of the Mediation
Notice, the Recipient Party may designate a person to serve as
the mediator from among the three persons listed by the
Initiating Party in the Mediation Notice (in which event such
designated person shall be the mediator). If none of the
persons listed in the Mediation Notice is designated by the
Recipient Party to serve as the mediator, the Counter-Notice
should set forth a list of the names and resumes
4
<PAGE>
of three impartial persons who the Recipient Party believes
would be qualified as a mediator pursuant to the provisions
hereof. Within 10 days after the delivery of the
Counter-Notice, the Initiating Party may designate a person to
serve as the Mediator from among the three persons listed by
the Recipient Party in the Counter-Notice (in which event such
designated person shall be the mediator). If the parties
cannot agree on a mediator from the three impartial nominees
submitted by each party, each party shall strike two names from
the other party's list, and the two remaining persons on both
lists will jointly select as the mediator any person who has
the qualifications and experience set forth in Section 6.3
hereof. If they are unable to agree, then the mediator will be
selected by the President of the AAA or his regional designee.
6.5 Within 30 days after the mediator has been selected as provided
above, both parties and their respective attorneys shall meet
with the mediator for one mediation session of at least four
hours, it being agreed that each party representative attending
such mediation session shall be a Senior Party Representative
with authority to settle the dispute. If the dispute cannot be
settled at such mediation session or at any mutually agreed
continuation thereof, either party may give the other and the
mediator a written notice declaring the mediation process at an
end, in which event either party shall be free to pursue such
remedies as it may elect.
6.6 All conferences and discussions which occur in connection with
mediation conducted pursuant to this Agreement shall be deemed
settlement discussions, and nothing said or disclosed, nor any
document produced, which is not otherwise independently
discoverable shall be offered or for any other purpose in any
current or future arbitration or litigation.
6.7 The costs of the mediation shall be shared equally between the
Manager and Company.
6.8 The Manager and Company will endeavor to amicably resolve any
dispute controversy or claim arising out of or related to this
Agreement, or breach thereof. In the event, however, that any
dispute, controversy or claim cannot be amicably resolved, it
shall be finally settled by binding arbitration. Such
arbitration shall be conducted by the American Arbitration
Association in Canton, Ohio, under that organization's
commercial arbitration rules. The expense of arbitration will
be borne by the losing party. The parties further agree that
the award of the arbitrator shall be the final, sole, and
exclusive remedy between them regarding any claims,
counterclaims, issues, or accounting presented or pled to the
arbitrator; that is shall be nonappealable; that any monetary
award shall be promptly paid, free of any tax, deduction
5
<PAGE>
or offsets; and that any costs, fees, or taxes incident to
enforcing the award shall be charged against the party
resisting such enforcement. Judgment upon the award of the
arbitrator may be entered and enforced in any court having
jurisdiction thereof.
7. MISCELLANEOUS.
7.1 RELATIONSHIP OF THE PARTIES. The relationship between Manager
and Company under this Agreement is that of independent
contractors. Nothing contained in this Agreement or otherwise
shall be construed to constitute or create a partnership,
agency relationship, joint venture, equity interest or lease
between Manager and Company. Neither party has the power or
authority to act on behalf of the other party, except as
expressly set forth in this Agreement, as reasonably implied
hereunder or as authorized in writing by the other party.
7.2 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes and cancels any
other agreement, representation, or communication, whether oral
or written, between the parties hereto relating to the
transactions contemplated herein or the subject matter hereof.
7.3 GOVERNING LAW. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State
of Ohio.
7.4 ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to
execute any document or documents that may be requested from
time to time by the other party in order to implement or
complete any obligations pursuant to this Agreement.
7.5 PARTIES INTEREST. This Agreement shall insure to the benefit
of, and be binding upon, the parties hereto and their
successors and assigns; provided, however, that any assignment
by either party of its rights under this Agreement without the
written consent of the other party shall be void.
7.6 COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and
the same instrument.
7.7 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws
effective during the term hereof, such provision shall be fully
severable and this Agreement shall be construed and enforced as
if such illegal, invalid, or unenforceable provision never
comprised a part hereof; and the remaining provisions hereof
shall
6
<PAGE>
remain in full force and effect and shall not be affected by
the illegal, invalid or unenforceable provision or by its
severance here from. Furthermore, in lieu of such illegal,
invalid or unenforceable provision, there shall be added
automatically as part of this Agreement a provision as similar
in its terms to such illegal, invalid or unenforceable as may
be possible and legal, valid, and enforceable.
7.8 COMMUNICATION. The parties agree that good communication
between the parties is essential to the successful performance
of this Agreement, and each pledges to communicate fully and
clearly with the other on matters relating to the successful
management and operation of the Company.
7.9 NOTICES. Any notices required to be in writing under this
Agreement shall be sent to the parties as follows:
To MANAGER: KIDS' STUFF, INC.
4450 Belden Village St. N.W.
Canton, Ohio 44718
Tel: (330) 492-8090
Fax: (330) 492-8290
Attn:___________________________
To COMPANY: THE HAVANA GROUP
[ADDRESS]
6.10 AMENDMENT. This Agreement may only be amended by a written
instrument signed by both parties hereto.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first set forth
above.
KIDS' STUFF, INC.
By: /s/ William Evans
---------------------------------------
William Evans, Director of Finance
THE HAVANA GROUP
By: /s/ William Evans
---------------------------------------
William Miller, Chief Executive Officer
8
<PAGE>
Exhibit 10.2
THE HAVANA GROUP, INC.
1997 LONG-TERM STOCK INCENTIVE PLAN
1. Purposes: The purposes of this Plan are (a) to secure for the Company
the benefits of incentives inherent in ownership of Common Stock by Eligible
Employees, (b) to encourage Eligible Employees to increase their interest in
the future growth and prosperity of the Company and to stimulate and sustain
constructive and imaginative thinking by Eligible Employees, (c) to further
the identity of interest of those who hold positions of major responsibility
in the Company and its Subsidiaries with the interests of the Company's
shareholders, (d) to induce the employment or continued employment of
Eligible Employees and (e) to enable the Company to compete with other
organizations offering similar or other incentives in obtaining and retaining
the services of competent employees.
2. Definitions: Unless otherwise required by the context, the following
terms when used in this Plan shall have the meanings set forth in this
section 2.
Board of Directors: The Board of Directors of the Company.
Change of Control: The event which shall be deemed to have occurred if
either (I) after the date this Plan is adopted by the Company's shareholders,
without prior approval of the Board, any "person" becomes a beneficial owner,
directly or indirectly, of securities of the Company representing 20% or more
of the combined voting power of the Company's then outstanding securities; or
(ii) without prior approval of the Board, as a result of, or in connection
with, or within two years following, a tender or exchange offer for the
voting stock of the Company, a merger or other business combination to which
the Company is a party, the sale or other disposition of all or substantially
all of the assets of the Company, a reorganization of the Company, or a proxy
contest in connection with the election of members of the Board of Directors,
the persons who were directors of the Company immediately prior to any of
such transactions cease to constitute a majority of the Board of Directors or
of the board of directors of any successor to the Company (except for
resignations due to death, disability or normal retirement). For purposes of
this definition, a person shall be deemed the "beneficial owner" of any
securities (I) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or (ii) which such person or any
of its Affiliates or Associates, has directly or indirectly, (1) the right to
acquire (whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or options,
or otherwise, or (2) the right to vote pursuant to any agreement, arrangement
or understanding; or (iii) which are beneficially owned, directly or
indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any securities. For
purposes of this definition, a "person" shall mean any individual, firm,
company, partnership, other entity or group, and the terms "Affiliate" or
"Associate" shall have the respective meanings ascribed to such terms in Rule
12b-2 of the General Rules and Regulations promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as in effect
on the date the Plan is approved by the shareholders of the Company and
becomes effective.
<PAGE>
Committee: The Committee of the Board of Directors, if any, designated
to administer this Plan pursuant to the provisions of section 12.
Common Stock: The Common Stock of the Company, .001 par value per share
Company: The Havana Group, Inc., a Delaware corporation.
Eligible Employee: An employee of the Company or of a Subsidiary who in
the opinion of the Committee can contribute significantly to the growth and
successful operations of the Company or a Subsidiary. The recommendation of
the grant of a Stock Incentive to an employee by the Committee shall be
deemed a determination by the Committee that such employee is an Eligible
Employee.
Fair Market Value: As applied to any date, the mean of the highest bid
and the lowest asked prices of a share of Common Stock on the Nasdaq SmallCap
Market (or any stock market or exchange on which the Company's Common Stock
may be listed in the future) for the trading date immediately prior to the
date for which the valuation is to be effective; provided, however, that, if
the Common Stock is not so quoted, Fair Market Value shall be determined in
accordance with the method approved by the Board of Directors, and, provided
further, if any of the foregoing methods of determining Fair Market Value
shall not be consistent with the regulations of the Secretary of the Treasury
or his delegate at the time applicable to a Stock Incentive of the type
involved, Fair Market Value in the case of such Stock Incentive shall be
determined in accordance with such regulations and shall mean the value as so
determined.
Incentive Compensation: Bonuses, extra and other compensation payable in
addition to a salary or other base amount, whether contingent or
discretionary or required to be paid pursuant to an agreement, resolution or
arrangement, and whether payable currently, or on a deferred basis, in cash,
Common Stock or other property, awarded by the Company or a Subsidiary prior
or subsequent to the date of the approval and adoption of this Plan by the
shareholders of the Company.
Incentive Option: An option granted under this Plan which is designated
to be an incentive stock option under the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended; and any provisions elsewhere in
this Plan or in any such Incentive Option which would prevent such option
from being an incentive stock option may be deleted and/or voided
retroactively to the date of the granting of such option, by action of the
Committee.
Nonqualified Option: An option granted under this Plan which is not an
incentive stock option under the provisions of Section 422 of the Internal
Revenue Code of 1986, as amended; and which is exercisable even though there
is outstanding an Incentive Option which was granted before the granting of
the Nonqualified Option to the same participant. Such Nonqualified Option
shall not be affected by any actions taken retroactively as provided above
with respect to Incentive Options.
Option: An option to purchase shares of Common Stock.
2
<PAGE>
Performance Objectives: Stated criteria which may, but need not be set
forth in a Stock Incentive at the discretion of the Committee, the successful
attainment of which is specified in the Stock Incentive as a condition
precedent to the issuance, transfer or retention of some or all of the shares
of Common Stock covered by the Stock Incentive. Performance Objectives may
be personal and/or corporate in nature and shall include, but shall not be
limited to, objectives determined by reference to or changes in (a) the Fair
Market Value, book value or earnings per share of Common Stock, or (b) sales
and revenues, income, profits and losses, return on capital employed, or net
worth of the Company (on a consolidated or unconsolidated basis) or of any or
more of its groups, divisions, Subsidiaries or departments, or (c) a
combination of two or more of the foregoing or other factors.
Plan: The 1997 Long-Term Stock Incentive Plan herein set forth as the
same may from time to time be amended.
Stock Appreciation Right (SAR): A right to receive cash, shares of
Common Stock, or a combination thereof, as the case may be, having an
aggregate value equal to the excess of the Fair Market Value of one share of
Common Stock on the date of exercise of such right over the Fair Market Value
of one such share on the date of grant of such right.
Stock Award: An issuance or transfer of shares of Common Stock at the
time the Stock Incentive is granted or as soon thereafter as practicable, or
an undertaking to issue or transfer such shares in the future.
Stock Incentive: A stock incentive granted under this Plan in one of the
forms provided for in section 3.
Subsidiary: A company or other entity designated by the Committee in
which the Company has a significant equity interest, except that, with
respect to grants of Incentive Options, the term "Subsidiary" shall be deemed
to mean a company or other form of business association of which shares (or
other ownership interests) having 50% or more of the voting power are owned
or controlled, directly or indirectly, by the Company.
3. Grants of Stock Incentives:
(a) Subject to the provisions of this Plan, the Committee may at any
time, or from time to time, grant Stock Incentives under this Plan to, and
only to, Eligible Employees.
(b) Stock Incentives may be granted in the following forms:
(i) an Option, or
(ii) a SAR, or
3
<PAGE>
(iii) a Stock Award, or
(iv) a combination of an Option, a SAR, and/or a Stock Award.
(c) Stock Incentives contingently granted prior to the approval of this
Plan by the Company's shareholders but subject to such approval shall be
deemed to be granted hereunder as of the date of such shareholder approval.
4. Stock Subject to this Plan:
(a) The maximum aggregate number of shares of Common Stock subject to
Stock Incentives that may be granted to participants in the Plan shall be
400,000. Shares of Common Stock subject to Stock Incentives granted under
this Plan may be either authorized but unissued shares or shares held in the
Company's treasury, or any combination thereof, in the discretion of the
Committee.
(b) The maximum amount of Common Stock with respect to which Stock
Incentives may be granted to any person during any calendar year shall be
20,000 shares; provided, however, that in the event of a grant made to a
recipient upon the recipient's initial hiring by the Company, such limitation
shall be increased to 40,000 shares.
(c) The number of shares of Common Stock which may be granted under the
Plan as Stock Awards in any calendar year shall not exceed 80,000.
5. Options: Stock Incentives in the form of Options shall be subject
to the following provisions:
(a) Upon the exercise of an Option, the purchase price shall be paid in
cash or, unless otherwise provided by the Committee (and subject to such
terms and conditions as are specified in the Option or by the Committee), in
shares of Common Stock delivered to the Company by the optionee or by the
withholding of shares issuable upon exercise of the Option or in a
combination of such payment methods. Shares of Common Stock thus delivered
or withheld shall be valued at their Fair Market Value on the date of the
exercise. The purchase price per share shall be not less than 100% of the
Fair Market Value of a share of Common Stock on the date the Option is
granted.
(b) Each Option shall be exercisable in full or in part not less than
six months after the date the Option is granted, or may become exercisable in
one or more installments at such later time or times as the Committee shall
determine. Unless otherwise provided in the Option, an Option, to the extent
it is or becomes exercisable, may be exercised at any time in whole or in
part until the expiration or termination of the Option. Any term or
provision in any outstanding Option specifying that the Option not be
immediately exercisable or that it be exercisable in installments may be
modified at any time during the life of the Option by the Committee,
provided, however, no such modifications of an outstanding Option shall,
without the consent of the optionee, adversely affect any Option theretofore
granted to the optionee.
4
<PAGE>
(c) Each Option shall be exercisable during the life of the optionee
only by the optionee and, after the optionee's death, only by the optionee's
estate or by a person who acquired the right to exercise the Option by will
or the laws of descent and distribution. An Option, to the extent that it
shall not have been exercised, shall terminate at the close of business on
the thirtieth day following the date the optionee ceases to be an employee of
the Company or a Subsidiary, unless the optionee ceases to be an employee
because of resignation with the consent of the Committee (which consent may
be given before or after resignation), or by reason of death, incapacity or
retirement under a retirement plan of the Company or a Subsidiary. Except as
provided in the next sentence, if the optionee ceases to be an employee by
reason of such resignation, the Option shall terminate three months after the
optionee ceases to be an employee. If the optionee ceases to be an employee
by reason of such death, incapacity or retirement, or if the optionee should
die during the three-month period referred to in the preceding sentence, the
Option shall terminate fifteen months after the optionee ceases to be an
employee. Where an Option is exercised more than three months after the
optionee ceased to be an employee, the Option may be exercised only to the
extent it could have been exercised on the date three months after the
optionee ceased to be an employee. A leave of absence for military or
governmental service or for other purposes shall not, if approved by the
Committee, be deemed a termination of employment within the meaning of this
paragraph (c). Notwithstanding the foregoing provisions of this paragraph
(c) or any other provisions of this Plan, no Option shall be exercisable
after expiration of the term for which the Option was granted, which shall in
no event exceed ten years.
(d) Options shall be granted for such lawful consideration as the
Committee shall determine.
(e) No Option nor any right thereunder may be assigned or transferred by
the optionee except by will or the laws of descent and distribution. If so
provided in the Option or if so authorized by the Committee and subject to
such terms and conditions as are specified in the Option or by the Committee,
the Company shall have the right, upon or without the request of the holder
of the Option and at any time or from time to time, to cancel all or a
portion of the Option then subject to exercise and either (i) pay the holder
an amount of money equal to the excess, if any, of the Fair Market Value, at
such time or times, of the shares subject to the portion of the Option so
cancelled over the aggregate purchase price of such shares, or (ii) issue or
transfer shares of Common Stock to the holder with a Fair Market Value, at
such time or times, equal to such excess.
(f) Each Option shall be evidenced by a written instrument, which shall
contain such terms and conditions (including, without limitation, Performance
Objectives), and shall be in such form, as the Committee may determine,
provided the Option is consistent with this Plan and incorporates it by
reference. Notwithstanding the preceding sentence, an Option if so
recommended by the Committee, may include restrictions and limitations in
addition to those provided for in this Plan.
5
<PAGE>
(g) Any federal, state or local withholding taxes payable by an optionee
upon the exercise of an Option shall be paid in cash or, unless otherwise
provided by the Committee, by the surrender of shares of Common Stock or the
withholding of shares of Common Stock to be issued to the optionee, or in any
combination thereof, or in such other form as the Committee may authorize
from time to time. All such shares so surrendered or withheld shall be
valued at Fair Market Value on the date they are surrendered to the Company
or authorized to be withheld.
(h) Options may be either Incentive Options or Nonqualified Options at
the discretion of the Committee. Options not otherwise designated shall be
Nonqualified Options. Notwithstanding any other provisions herein, the
following provisions shall apply to Incentive Options: (i) the exercise
price of any Incentive Option granted to any person who on the date of grant
owns (within the meaning of Section 425(d) of the Internal Revenue Code)
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary shall not be less than 110%
of the Fair Market Value of the stock on the date of grant; (ii) the maximum
term of any Incentive Option granted hereunder shall be ten years, except
that the maximum term of any Incentive Option granted to a person described
in section 5(h)(i) above shall be five years; (iii) no Incentive Option may
be granted subsequent to the tenth anniversary of the date of shareholder
approval of this Plan; (iv) Incentive Options may only be granted to persons
who are employees of the Company or any Subsidiary within the meaning of the
Internal Revenue Code; and (v) Incentive Options may not be granted with
respect to more than an aggregate of 400,000 shares of Common Stock under
this Plan.
6. Stock Appreciation Rights: Stock Incentives in the form of Stock
Appreciation Rights (SAR's) shall be subject to the following provisions:
(a) Each SAR shall be evidenced by a written instrument (the "SAR
Agreement") specifying the number of shares of Common Stock to which it
relates and containing such other terms and conditions (which may, but need
not, include Performance Objectives), and shall be in such form as the
Committee may determine, provided the SAR is consistent with this Plan and
incorporates it by reference.
(b) Each SAR Agreement shall specify the period during which the
pertinent SAR(s) may be exercised and shall provide that the SAR(s) shall
expire at the end of such period (or periods); provided that such expiration
date shall not be later than ten years from the date of grant thereof.
Except as otherwise provided herein, any SAR must be exercised during the
period of the holder's employment with the Company. Each SAR may be
exercisable in full or in part in one or more installments at such time or
times as the Committee shall determine. Unless otherwise provided in the SAR
Agreement, a SAR, to the extent it is or becomes exercisable, may be
exercised at any time in whole or in part until the expiration or termination
of the SAR. Any term or provisions in any outstanding SAR specifying that
the SAR not be immediately exercisable or that it is to be exercisable in
installments may be modified at any time during the life of the SAR by the
Committee, provided, however, no such modifications of any outstanding SAR
shall, without the consent of the grantee adversely affect any SAR
theretofore granted the grantee.
6
<PAGE>
(c) Each SAR shall be exercisable during the life of the grantee only by
the grantee and, after the grantee's death, only by the grantee's estate or
by a person who acquired the right to exercise the SAR by will or the laws of
descent and distribution. A SAR, to the extent that it shall not have been
exercised, shall terminate at the close of business on the thirtieth day
following the date the grantee ceases to be an employee of the Company or a
Subsidiary, unless the grantee ceases to be an employee because of
resignation with the consent of the Committee (which consent may be given
before or after resignation), or by reason of death, incapacity or retirement
under a retirement plan of the Company or a Subsidiary. Except as provided
in the next sentence, if the grantee ceases to be an employee by reason of
such resignation, the SAR shall terminate three months after the grantee
ceases to be an employee. If the grantee ceases to be an employee by reason
of such death, incapacity or retirement, or if the grantee should die during
the three-month period referred to in the preceding sentence, the SAR shall
terminate fifteen months after the grantee ceases to be an employee. Where a
SAR is exercised more than three months after the grantee ceased to be an
employee the SAR may be exercised only to the extent it could have been
exercised on the date three months after the grantee ceased to be an
employee. A leave of absence for military or governmental service or for
other purposes shall not, if approved by the Committee, be deemed a
termination of employment within the meaning of this paragraph (c).
(d) No SAR may be assigned or transferred by the grantee except by will
or the laws of descent and distribution.
(e) If the form of consideration to be received upon exercise of the SAR
is not specified in the agreement governing the SAR, upon the exercise
thereof, the holder may request the form of consideration to be received in
satisfaction of such SAR, which may be in shares of Common Stock (valued at
Fair Market Value on the date of exercise of the SAR), or in cash, or partly
in cash and partly in shares of Common Stock, as the holder shall request;
provided, however, that the Committee, in its sole discretion, may consent to
or disapprove any request of the grantee to receive cash in full or partial
settlement of such SAR.
(f) Any federal, state or local withholding taxes payable by the grantee
upon the exercise of a SAR shall be paid in cash or, unless otherwise
provided by the Committee, by the surrender of shares of Common Stock in the
case of a SAR to be paid in the form of Common Stock, or by the withholding
of shares of Common Stock to be issued to the grantee, or in any combination
thereof, or in such other form as the Committee may authorize from time to
time. All such shares so surrendered or withheld shall be valued at Fair
Market Value on the date they are surrendered to the Company or authorized to
be withheld.
7. Stock Awards: Stock Incentives in the form of Stock Awards shall be
subject to the following provisions:
(a) A Stock Award shall be granted only in payment of Incentive
Compensation that has been earned or as Incentive Compensation to be earned,
including, without limitation, Incentive Compensation awarded concurrently
with or prior to the grant of the Stock Award.
7
<PAGE>
(b) For the purposes of this Plan, in determining the value of a Stock
Award, all shares of Common Stock subject to such Stock Award shall be valued
at not less than 100% of the Fair Market Value of such shares on the date
such Stock Award is granted, regardless of whether or when such shares are
issued or transferred to the Eligible Employee and whether or not such shares
are subject to restrictions which affect their value.
(c) Shares of Common Stock subject to a Stock Award may be issued or
transferred to the Eligible Employee at the time the Stock Award is granted,
or at any time subsequent thereto, or in installments from time to time, as
the Committee shall determine. In the event that any such issuance or
transfer shall not be made to the Eligible Employee at the time the Stock
Award is granted, the Committee may provide for payment to such Eligible
Employee, either in cash or in shares of Common Stock from time to time or at
the time or times such shares shall be issued or transferred to such Eligible
Employee, of amounts not exceeding the dividends which would have been
payable to such Eligible Employee in respect of such shares (as adjusted
under section 9) if they had been issued or transferred to such Eligible
Employee at the time such Stock Award was granted. Any amount payable in
shares of Common Stock under the terms of a Stock Award may, at the
discretion of the Company, be paid in cash, on each date on which delivery of
shares would otherwise have been made, in an amount equal to the Fair Market
Value on such date of the shares which would otherwise have been delivered.
(d) A Stock Award shall be subject to such terms and conditions,
including, without limitation, restrictions on sale or other disposition of
the Stock Award or of the shares issued or transferred pursuant to such Stock
Award, as the Committee shall determine; provided, however, that upon the
issuance or transfer of shares pursuant to a Stock Award, the recipient
shall, with respect to such shares, be and become a shareholder of the
Company fully entitled to receive dividends, to vote and to exercise all
other rights of a shareholder except to the extent otherwise provided in the
Stock Award. The Committee may, in its sole discretion, but shall not be
required to, specify in any Stock Award that the issuance, transfer and/or
retention of some or all of the shares of Common Stock covered by the Stock
Award shall be subject to the attainment of Performance Objectives. Each
Stock Award shall be evidenced by a written instrument in such form as the
Committee shall determine, provided such written instrument is consistent
with this Plan and incorporates it by reference.
(e) In the event the holder of shares of Common Stock subject to a Stock
Award dies prior to the time such shares are no longer subject to forfeiture
pursuant to the terms of the Stock Award, the estate of such holder may
retain such shares subject to the restrictions set forth in the Stock Award.
8. Combinations of Stock Awards and Options: Stock Incentives
authorized by paragraph (b)(iv) of section 3 in the form of combinations of
Options, SAR's and/or Stock Awards, shall be subject to the following
provisions:
8
<PAGE>
(a) A Stock Incentive may be a combination of any form of Option with
any form of SAR and/or with any form of Stock Award; provided, however, that
the terms and conditions of such Stock Incentive pertaining to an Option are
consistent with section 5, the terms and conditions of such Stock Incentive
pertaining to a SAR are consistent with section 6, and the terms and
conditions of such Stock Incentive pertaining to a Stock Award are consistent
with section 7.
(b) Such combination Stock Incentive shall be subject to such other
terms and conditions as the Committee may determine, including, without
limitation, a provision terminating in whole or in part a portion thereof
upon the exercise in whole or in part of another portion thereof. Such
combination Stock Incentive shall be evidenced by a written instrument in
such form as the Committee shall determine, provided it is consistent with
this Plan and incorporates it by reference.
9. Adjustment Provisions: In the event that any recapitalization,
reclassification, forward or reverse split of shares of Common Stock, or any
similar transaction shall be effected, or the outstanding shares of Common
Stock are, in connection with a merger or consolidation of the Company or a
sale by the Company of all or a part of its assets, exchanged for a different
number of class of shares of stock or other securities of the Company or for
shares of the stock or other securities of any other company, or a record
date for determination of holders of Common Stock entitled to receive a
dividend payable in Common Stock shall occur, (a) the number and class of
shares or other securities that may be issued or transferred pursuant to
Stock Incentives or with respect to which a cash payment pursuant to the
Stock Incentive is determinable, (b) the number and class of shares or other
securities which have not been issued or transferred under outstanding Stock
Incentives, (c) the purchase price to be paid per share or other security
under outstanding Options, and (d) the price to be paid by the Company or a
Subsidiary for shares or other securities issued or transferred pursuant to
Stock Incentives which are subject to a right of the Company or a Subsidiary
to reacquire such shares or other securities, shall in each case be equitably
adjusted.
10. Acceleration: In the event of a Change of Control, any Stock
Incentives which have then been outstanding hereunder for at least six months
shall be immediately exercisable (without regard to any limitation imposed by
the Plan or the Committee at the time the Stock Incentive was granted, which
permits all or any part of the Stock Incentive to be exercised only after the
lapse of time or the attainment of Performance Objectives or other conditions
to exercise), and will remain exercisable until the expiration of the Stock
Incentive.
11. Term: This Plan shall be deemed adopted and shall become effective
on the date it is approved and adopted by the shareholders of the Company.
This Plan shall remain in effect until such time as it is terminated by the
Board of Directors; provided, however, that no Incentive Options may be
granted after the tenth anniversary of the effective date of the Plan.
12. Administration:
(a) The Plan shall be administered by the Board of Directors or by
aCommittee, which shall consist of not less than three directors of the
Company designated by the Board of Directors in
9
<PAGE>
accordance with the Code of Regulations of the Company; provided, however,
that no director shall be designated as or continue to be a member of the
Committee unless such director shall at the time of designation and service
be a "disinterested person" within the meaning of Rule 16b-3 of the
Securities and Exchange Commission (or any successor provision at the time in
effect). Grants of Stock Incentives may be recommended by the Committee
either with or without consultation with employees, but, anything in this
Plan to the contrary notwithstanding, the Committee shall have full authority
to act in the matter of selection of all Eligible Employees and in
recommending Stock Incentives to be granted to them. In the absence of a
Committee appointed by the Board of Directors, the Board of Directors shall
have the powers, rights and duties of the Committee as set forth herein.
(b) The Committee may establish such rules and regulations, not
inconsistent with the provisions of this Plan, as it deems necessary to
determine eligibility to participate in this Plan and for the proper
administration of this Plan, and may amend or revoke any rule or regulation
so established. The Committee may make such determinations and
interpretations under or in connection with this Plan as it deems necessary
or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
Subsidiaries, its shareholders and all employees, and upon their respective
legal representatives, beneficiaries, successors and assigns and upon all
other persons claiming under or through any of them.
(c) Members of the Board of Directors and members of the Committee
acting under this Plan shall be fully protected in relying in good faith upon
the advice of counsel and shall incur no liability except for gross
negligence or willful misconduct in the performance of their duties.
13. Acquisitions: If the Company or any Subsidiary should merge or
consolidate with, or purchase stock or assets or otherwise acquire the whole
or part of the business of, another company, the Company in connection
therewith, upon the recommendation of the Committee and the approval of the
Board of Directors, (a) may assume, in whole or in part and with or without
modifications or conditions, any stock options granted by the acquired
company to its employees, in their capacity as such, or (b) may grant new
Options in substitution therefore; provided that the granting of an Option
with the terms and conditions of the assumed or substitute options is
permissible under either this Plan or a plan approved by the shareholders of
the acquired company. For the purposes of the preceding sentence, the
permissibility of the granting of an option under a plan shall be determined
as of the date of grant of the original option by the acquired company and
not as of the date of assumption or substitution by the Company.
10
<PAGE>
14. General Provisions:
(a) Nothing in this Plan nor in any instrument executed pursuant hereto
shall confer upon any employee any right to continue in the employ of the
Company or a Subsidiary, or shall affect the right of the Company or of a
Subsidiary to terminate the employment of any employee with or without cause.
(b) No shares of Common Stock shall be issued or transferred pursuant to
a Stock Incentive unless and until all legal requirements applicable to the
issuance or transfer of such shares, in the opinion of counsel to the
Company, have been complied with. In connection with any such issuance or
transfer the person acquiring the shares shall, if requested by the Company,
give assurances, satisfactory to counsel to the Company, that the shares are
being acquired for investment and not with a view to resale or distribution
thereof and assurances in respect of such other matters as the Company or a
Subsidiary may deem desirable to assure compliance with all applicable legal
requirements. No employee (individually or as a member of a group), and no
beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any shares of Common Stock allocated or
reserved for the purposes of this Plan or subject to any Stock Incentive
except as to shares of Common Stock, if any, as shall have been issued or
transferred to him.
(d) The Company or a Subsidiary may, with the approval of the Committee,
enter into an agreement or other commitment to grant a Stock Incentive in the
future to a person who is or will be an Eligible Employee at the time of
grant, and, notwithstanding any other provision of this Plan, any such
agreement or commitment shall not be deemed the grant of a Stock Incentive
until the date on which the Company takes action to implement such agreement
or commitment.
(e) In the case of a grant of a Stock Incentive to an employee of a
Subsidiary, such grant may, if the Committee so directs, be implemented by
the Company issuing or transferring the shares, if any, covered by the Stock
Incentive to the Subsidiary, for such lawful consideration as the Committee
may specify, upon the condition or understanding that the Subsidiary will
transfer the shares to the employee in accordance with the terms of the Stock
Incentive specified by the Committee pursuant to the provisions of this Plan.
Notwithstanding any other provision hereof, such Stock Incentive may be
issued by and in the name of the Subsidiary and shall be deemed granted on
the date it is approved by the Committee on the date it is delivered by the
Subsidiary or on such other date between said two dates, as the Committee
shall specify.
(f) The Company or a Subsidiary may make such provisions as it may deem
appropriate for the withholding of any taxes which the Company or a
Subsidiary determines it is required to withhold in connection with any Stock
Incentive.
(g) Nothing in this Plan is intended to be a substitute for, or shall
preclude or limit the establishment or continuation of, any other plan,
practice or arrangement for the payment of compensation or fringe benefits to
employees generally, or to any class or group of employees, which the Company
or any Subsidiary or other affiliate now has or may hereafter lawfully put
into effect,
11
<PAGE>
including, without limitation, any retirement, pension, group insurance,
stock purchase, stock bonus or stock option plan.
15. Amendments and Discontinuance:
(a) This Plan may be amended by the Board of Directors upon the
recommendation of the Committee, provided that, without the approval of the
shareholders of the Company, no amendment shall be made which (i) increases
the maximum aggregate number of shares of Common Stock that may be issued or
transferred pursuant to Stock Incentives as provided in section 4, (ii)
withdraws the administration of this Plan from the Committee or amends the
provisions of paragraph (a) of section 12 with respect to eligibility and
disinterest of members of the Committee, (iii) permits any person who is not
at the time an Eligible Employee of the Company or of a Subsidiary to be
granted a Stock Incentive, (iv) permits any Option to be exercised more than
ten years after the date it is granted, (v) amends section 11 to extend the
date set forth therein or (vi) amends this section 15.
(b) The Board of Directors may by resolution adopted by a majority of
the entire Board of Directors discontinue this Plan.
(c) No amendment or discontinuance of this Plan by the Board of
Directors or the shareholders of the Company shall, without the consent of
the employee, adversely affect any Stock Incentive theretofore granted to him.
12
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Havana Group, Inc.
Canton, Ohio 44718
As independent certified public accountants for The Havana Group,
Inc., we hereby consent to the use in this Form SB-2 Registration Statement
for The Havana Group, Inc. of our report included herein, which has a date of
April 11, 1997, relating to the combined balance sheet of E. A. Carey of
Ohio, Inc. and Monarch Pipe Company as of December 31, 1996, and the related
combined statements of income, cash flows, and stockholders' equity for the
years ended December 31, 1996 and 1995, and to the reference to our firm
under the caption "Experts" in the Prospectus.
Hauser & Taylor LLP
Canton, Ohio
February 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001053648
<NAME> THE HAVANA GROUP, INC.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 10,387 5,895
<SECURITIES> 0 0
<RECEIVABLES> 47,684 39,780
<ALLOWANCES> 5,500 5,500
<INVENTORY> 397,511 271,338
<CURRENT-ASSETS> 590,650 1,018,499
<PP&E> 96,383 83,575
<DEPRECIATION> 83,575 83,575
<TOTAL-ASSETS> 1,106,684 1,550,754
<CURRENT-LIABILITIES> 145,107 865,369
<BONDS> 0 0
0 0
6,100 0
<COMMON> 1,000 0
<OTHER-SE> 954,477 685,385
<TOTAL-LIABILITY-AND-EQUITY> 1,106,684 1,550,754
<SALES> 876,765 1,425,582
<TOTAL-REVENUES> 1,015,416 1,656,316
<CGS> 528,808 716,146
<TOTAL-COSTS> 741,799 1,320,963
<OTHER-EXPENSES> 296,925 450,876
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (23,308) (115,523)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (23,308) (115,523)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,308) (115,523)
<EPS-PRIMARY> (.02) (.12)
<EPS-DILUTED> (.02) (.12)
</TABLE>
