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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-16913
THE SCORE BOARD, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2766077
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1951 Old Cuthbert Road, Cherry Hill, New Jersey 08034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 354-9000
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value, as of March 31, 1997, of voting stock of the
registrant held by non-affiliates was approximately $19,445,891.
The number of outstanding shares of registrant's Common Stock, $.01 par value,
on March 31, 1997 was 14,687,566.
Documents Incorporated By Reference: None
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THE SCORE BOARD, INC.
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INDEX
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Item Page
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PART I 1. Business 3
2. Properties 10
3. Legal Proceedings 10
4. Submission of Matters to Vote of
Security Holders 11
PART II 5. Market for Registrant's Common Equity
and Related Stockholder Matters 11
6. Selected Financial Data 12
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
8. Financial Statements and Supplementary
Data 16
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 16
PART III 10. Directors and Executive Officers of the
Registrant 17
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial
Owners and Management 21
13. Certain Relationships and Related
Transactions 23
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 24
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2
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PART I
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Item 1. Business
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Introduction
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The Score Board, Inc. ("Company" or "Registrant") designs, manufactures,
markets and distributes sports and entertainment related products. Its primary
activities are the marketing and sale of sports trading cards, sports and
entertainment memorabilia and prepaid telephone calling cards. The Company's
products are sold primarily through cable television shopping networks,
retailers, wholesalers and distributors, hobby stores, and premium and
promotional programs.
The Company's trading card activities focus on the sale of Company designed
sports trading cards. The Company's memorabilia operations consist of
designing, manufacturing and selling autographed and non-autographed sports and
entertainment memorabilia. The memorabilia product lines include baseballs,
baseball bats, footballs, basketballs, hockey sticks, uniform jerseys and
trading cards autographed by athletes, as well as autographed and non-
autographed plaques and limited edition lithographs. Each item of memorabilia
features the name, likeness or similar indicia of an athlete or entertainer, or
certain characters and trademarks associated with a television show or motion
picture. The Company also designs and sells prepaid telephone calling card
products in sets or packaged with its trading card products, and licenses third
parties to manufacture and sell trading cards and other non-autographed
products.
The Company produces its products based upon personal service contracts with
celebrities and other license agreements. Under the personal service contracts,
the celebrities agree to autograph memorabilia, for which they are generally
paid on a per signature basis with a specific guaranteed minimum. The
celebrities may also grant the Company a license to manufacture and sell, and to
sublicense third parties to manufacture and sell, various non-autographed
products such as prepaid telephone calling cards, watches, greeting cards, party
accessories and ornaments. They may also be paid additional fees for
performing other services, such as personal appearances, on behalf of the
Company.
The Company was incorporated in the State of New Jersey on November 25, 1986.
References to the Company include Registrant and its wholly-owned, but inactive,
subsidiaries, Americana Memorabilia, Inc., Classic Games, Inc., Classic
Marketing, Inc. and SB Acquisition Corp., as well as Score Board Holding
Corporation. The Company recently changed its fiscal year end from January 31st
to December 31st. See Item 1. "Business - Recent Developments." Accordingly,
this Form 10-K relates to the eleven month period commencing February 1, 1996
and ending December 31, 1996.
Trading Cards
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The Company produces various trading card products based upon its personal
service contracts with athletes and other license agreements. Pursuant to its
contracts with athletes, the Company produces trading card products of top
baseball, basketball, football and hockey prospects. These products have been
marketed in different configurations, including complete sets and foil packs of
six, ten or twelve cards, and are distributed through the Company's various
channels of distribution. The Company also produces a multi-sport trading card
product featuring race car drivers and prospects from each of the four major
sports, as well as various auto racing trading card products featuring drivers,
members of their crews, race cars and car owners. In addition, the Company
produces its Pro-Line and NFL Rookies trading card products under its license
agreements with the National Football League Properties, Inc. ("NFLP") and
National Football League Players, Inc. ("NFLPA").
The Company's trading card products are manufactured, printed and packaged for
the Company by unrelated third parties.
3
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Memorabilia
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The Company's memorabilia line consists of sports memorabilia and
entertainment memorabilia. Sports memorabilia products are based upon personal
service contracts with athletes, as well as non-exclusive licenses obtained from
entities such as NFLP, Major League Baseball Properties, Inc. ("MLBP") and the
Major League Baseball Players Association ("MLBPA"). The products currently
include items such as baseballs, baseball bats, footballs, basketballs, hockey
sticks, uniform jerseys, plaques, limited edition lithographs and trading cards
autographed by athletes. The sports memorabilia line also includes non-
autographed plaques, limited edition lithographs, gold trading cards and other
collectibles.
As of December 31, 1996, the Company had personal service contracts with
approximately 150 athletes, including Cal Ripken, Jr., Scottie Pippen, Hank
Aaron, Hakeem Olajuwon, Barry Bonds, Ken Griffey, Jr., Frank Thomas, Alonzo
Mourning, Troy Aikman, Emmitt Smith, Steve Young and Dale Earnhardt. The
contracts typically have a term of one to two years. The Company generally has
not experienced difficulty in renewing these contracts. Many of the contracts
prohibit the celebrity from autographing memorabilia for sale through mass
merchandising channels, such as television shopping networks and retail
catalogs, unless the sales are arranged by the Company.
The Company has license agreements with MLBP and MLBPA, pursuant to which the
Company may utilize the names and logos of MLBP (and its member teams) and MLBPA
in connection with the manufacture and distribution of autographed and non-
autographed memorabilia. During the past year, products sold by the Company
under these licenses included baseballs, baseball bats, photographs and
collector plaques autographed by athletes. In addition, the Company has
acquired a license from NFLP to utilize the names, logos and other identifying
symbols of NFLP and its member teams on a variety of autographed and non-
autographed memorabilia.
The Company's entertainment memorabilia is based upon exclusive and non-
exclusive licenses obtained, and personal service contracts entered into, by the
Company involving celebrities and certain characters and trademarks associated
with motion pictures and television shows. The products currently include
limited edition lithographs, gold record plaques, ceramic items, jewelry, stamp
plaques, photo plaques, framed and matted photographs, posters and similar
products.
As of December 31, 1996, the Company had personal service contracts with
approximately six entertainment celebrities. The contracts typically have a
term of one to three years, and the Company generally has not had difficulty in
renewing these contracts. The Company also has a non-exclusive license from
Paramount Pictures, Inc. to market certain Star Trek memorabilia through direct
---------
mail/catalog outlets, retail outlets and certain television shopping networks.
The Company provides certificates of authenticity with its autographed
memorabilia pursuant to which it unconditionally guarantees the authenticity of
the product. Sports memorabilia is marketed primarily through cable shopping
television networks, retailers, hobby stores and premium and promotional
programs. Entertainment memorabilia is marketed primarily through cable shopping
television networks.
Prepaid Telephone Calling Cards
- -------------------------------
The Company produces various prepaid telephone calling card products based
upon its personal service contracts with athletes and other license agreements.
These cards may be either "collectible" or "utility-based" (i.e., designed for
use of the telecommunication services). These products have been marketed in
different configurations, including individually, in sets and as inserts in
trading card products. The Company has license agreements with NFLPA, MLBPA and
MLBP, pursuant to which it may picture the athletes represented by these
entities, and the names and logos of NFLPA, MLBPA and MLBP on calling cards. The
Company recently entered into a strategic distribution agreement with Frontier
Communications International, Inc. relating to the development and marketing of
calling cards. See Item 1. "Business - Recent Developments."
4
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Sublicensing
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The Company's sublicensing business is based upon its personal service
contracts with certain well-known athletes. Under these contracts, the Company
acquires the right to sublicense third parties to manufacture and sell various
non-autographed products. The Company receives royalties from the sale of
products by the third parties with which it enters into sublicensing agreements.
The Company has sublicensed to Hallmark Cards, Inc. the right to manufacture and
sell a line of personal communication and celebration specialty products (e.g.,
greeting cards and party accessories) and holiday ornaments featuring various
athletes. The Company has also sublicensed numerous other companies to produce
items such as trading cards, gold trading cards, collector plates and watches.
Recent Developments
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In December 1996, the Company changed its fiscal year-end from January 31st to
December 31st. Accordingly, this Form 10-K relates to an eleven month period
commencing February 1, 1996 and ending December 31, 1996.
In December 1996, the Company and Frontier Communications International, Inc.
("Frontier"), a subsidiary of Frontier Corporation, entered into a five-year
strategic distribution agreement relating to the development and marketing of
prepaid telephone calling cards for the domestic and international markets.
Under this agreement, Frontier has guaranteed certain minimum payments to the
Company which total $10 million over the first three years of the agreement and
would reach a minimum of $20 million over the full five-year term. Either party
may terminate the relationship after the completion of years three or four,
subject to payment of a $2.5 million early termination fee. The Company has
granted Frontier a license to use the names and images of various athletes under
contract with the Company in Frontier's calling card programs. Frontier will
distribute the Company's calling card products into retail outlets and other
avenues of distribution and provide telecommunications services in support of
the Company's calling card programs. The Company issued Frontier warrants to
acquire 125,000 shares of its Common Stock (25,000 at $3.00 per share, 50,000 at
$5.00 per share and 50,000 at $10.00 per share). The Company also agreed to
nominate a representative of Frontier to its Board of Directors. James G. Dole
was selected by Frontier for this position. See Item 13. "Certain Relationships
and Related Transactions."
In November 1996, Technology Leaders II, L.P., Technology Leaders II Offshore,
C.V. and others led a $4 million private equity placement in the Company.
Pursuant to the private placement agreement, the Company issued 1,600,000 shares
of Common Stock to the investors at $2.49 per share and warrants to acquire
2,720,000 shares of Common Stock at $3.07 per share. Proceeds of the private
placement were used for working capital purposes. The Company also agreed to
nominate a representative of the investors to its Board of Directors. Ira M.
Lubert was selected by the investors for this position. See Item 13. "Certain
Relationships and Related Transactions."
The Company also completed the exchange of $3.5 million and $3.0 million in
principal amount of its 9% subordinated debentures, due September 1, 2002 and
February 1, 2003, respectively, for 912,000 shares of Common Stock in May 1996.
The early retirement of the debentures resulted in a one-time extraordinary pre-
tax gain of $954,000, a $6.1 million increase in shareholder equity and a $6.5
million reduction in long-term debt.
The Company has recently experienced changes in senior management, including
its Chief Operating Officer, Vice President of Licensing and Vice President of
Marketing. The Company has hired a new President and Chief Operating Officer,
and is in the process of replacing the other individuals. The Company does not
anticipate any adverse impact to its operations as the result of these changes.
Marketing and Distribution
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The Company markets its products primarily through in-house sales employees
and independent sales representatives. Channels of distribution include cable
television shopping networks such as QVC and Shop At Home, Inc., retailers
(including toy stores, convenience stores, mass market retailers, warehouse
clubs and distributors of periodical publications), wholesalers and
distributors, hobby stores, and premium and promotional programs.
5
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The Company has utilized various sales representatives and distributors who
are generally paid commissions of varying rates based on net sales with respect
to certain specified accounts. Commissions are customarily paid pursuant to oral
agreements, although the Company has written agreements with certain sales
representatives. The Company primarily ships its memorabilia products from its
warehouse in Cherry Hill, New Jersey, and has its trading card products shipped
to customers by unrelated manufacturers.
License Agreements, Personal Service Contracts and Trademarks
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In general, the production or distribution of products depicting the image of
any celebrity, athlete, team, league, organization logo or trademark requires a
license from such celebrity, athlete, team, league, organization or owner of the
trademark. The Company is constantly seeking to sign athletes to personal
services contracts and to acquire licenses from other licensing entities in
connection with the production of its product lines.
The Company acquires the components it utilizes to produce its sports and
entertainment memorabilia pursuant to license agreements it has obtained or from
manufacturers the Company believes to be duly licensed. The Company obtains the
autographs for its memorabilia products pursuant to personal service contracts.
The Company's business is largely dependent upon its ability to maintain
existing licenses and personal service contracts and to obtain additional
licenses and personal service contracts necessary to offer new products.
To enable the Company to produce its trading cards of prospective professional
athletes (draft picks), the Company enters into personal services contracts with
these players. Because the players are shown in their high school or college
uniforms, rather than in the uniforms of their future professional teams, and
are not yet members of the players' associations, the Company believes that no
licenses are needed from either the leagues or the players' associations to
produce these trading cards. The Company has, however, obtained licenses from
the NFLP and NFLPA to use certain identifying marks of these entities on the
Company's NFL Rookies trading card product.
The Company has also acquired licenses from the NFLP, MLBP and MLBPA in
connection with the manufacture and distribution of telephone calling cards and
football, basketball and baseball memorabilia. The Company has several other
exclusive and non-exclusive licenses which grant the Company the right to
produce and distribute trading cards and sports and entertainment-related
memorabilia.
The Company considers its trademarks to be of material importance to its
business. The principal trademarks, including Score Board(R) and Classic(R),
have been registered in the United States and Canada.
Employees
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As of December 31, 1996, the Company employed approximately 150 full-time
employees and 3 part-time employees. No employees of the Company are subject to
collective bargaining agreements. The Company considers its relations with its
employees to be satisfactory.
Risk Factors
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In addition to the other information contained in this Form 10-K, the
following risk factors should be considered carefully in evaluating the Company
and its business. This Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Form 10-K.
6
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Dependence Upon License Agreements
----------------------------------
In general, the production or distribution of products depicting the image of
any athlete, entertainer, team, league, organization, logo or trademark requires
a personal service contract or license from such athlete, entertainer, team,
league, organization or owner of the trademark. The Company's business is
highly dependent upon its ability to obtain and maintain existing licenses and
personal service contracts and to obtain additional licenses and personal
service contracts necessary to offer new products. Although the Company
believes it will be able to renew its licenses and personal service contracts
upon their expiration, there can be no assurance that such renewals can be
obtained on terms acceptable to the Company. The inability of the Company to
renew existing licenses and personal services contracts and/or to acquire
additional licenses and personal service contracts with sports and entertainment
celebrities could have a material adverse impact on the Company's sales and
earnings.
Competition
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The Company believes that no single entity competes against the Company in all
of its product offerings. In each of its product lines, however, the Company has
significant existing and potential competition.
With respect to the manufacture and sale of draft pick/prospects trading
cards, the Company believes that it is the dominant source of these cards. The
competitive factors in this market are principally based upon quality, ability
to make prompt delivery and ability to obtain premier players. With respect to
the manufacture and sale of other trading cards, the Company competes directly
with other manufacturers, some of whom have far greater experience and finances
devoted to these products. The Company encounters competition principally based
upon product pricing, creativity, quality and ability to make delivery.
With respect to memorabilia, the Company's sports products compete with
several other sports memorabilia companies, including a company which is an
affiliate of a major trading card manufacturer, as well as individual dealers.
The Company believes that its sports memorabilia competitors generally sell
their products primarily through television shopping networks, retail stores,
card shows and catalogs, and that the dealers generally sell their products only
through hobby magazines and sports card shows. The Company's entertainment
memorabilia product line competes with certain licensors who have developed
their own entertainment memorabilia product lines which are sold in stores and
in catalogs, as well as with dealers, fan clubs, entertainment memorabilia
conventions and concert hall concessions. The Company faces competition for the
sale of sports and entertainment memorabilia based upon reputation for
authenticity of product, product quality and pricing, athlete/celebrity
selection and ability to deliver product in volume. The Company also competes
with other sports and entertainment memorabilia companies for the engagement of
sports and entertainment celebrities under personal services contracts.
With respect to prepaid telephone calling cards, the Company competes with
various telecommunication companies and other entities that have developed
calling card product lines. The competitive factors in this market are
principally card design and the quality and price of telecommunication services.
The inability of the Company to adequately address any of these competitive
factors in its product offerings could have a material adverse impact on its
sales and earnings.
Reliance on Television Shopping Networks
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For the Company's period ended December 31, 1996 and fiscal year ended January
31, 1996, sales to national and regional cable television networks accounted for
approximately 31% and 22%, respectively, of net sales. Sales to one of these
television shopping networks, QVC Network, Inc. ("QVC"), accounted for
approximately 19% and 17%, respectively, of net sales for these periods. The
Company has no written agreement with QVC or any other cable television network,
and cannot give any assurance that it will attain its current level of sales to
QVC or to cable television networks. The loss of QVC as a customer, or cable
television as a sales outlet for the Company's products, could have a material
adverse impact on the Company.
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Factors Affecting Sales and Earnings
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The market for sports trading cards, prepaid telephone calling cards and
sports and entertainment memorabilia is affected by many factors, including
seasonality, consumer interest and general economic conditions. In recent
years, the market for sports trading cards has experienced a contraction, which
has resulted in diminished sales of trading cards by the Company and certain of
its competitors.
As part of its marketing efforts, the Company has sports and entertainment
celebrities under contract to sign autographs and make appearances. If the
Company were not able to respond to changes in consumer demand and tastes
quickly enough, or if the celebrities under contract with the Company were to
become ill or injured, or to fall into public disfavor, the Company's sales and
earnings could be materially adversely effected. The Company's sales and
earnings could also be materially adversely effected if the Company were unable
to retain the services of the celebrities or if an overabundance of the
celebrities' autographs were to become available for sale.
During 1996, the Company distributed trading card products that were
advertised to contain so-called "vintage" cards, thereby creating the impression
that these cards were in actuality printed in prior years. A small percentage
of these products contained reprints of cards previously published by the
Company rather than originals of these "vintage" cards. The sale of the
products, which had been approved by the Company's Chief Executive Officer,
ceased in February 1997, and internal procedures were reinforced to ensure that
such activity does not recur. Although the Company believes the incident has
been handled in a professional and thorough manner, the inclusion of the
reprinted cards could be deemed to be in violation of certain laws or to be in
breach of certain contractual obligations and, accordingly, there is no
assurance that it will not result in a material adverse effect on the Company.
The Company incurred approximately $300,000 of charges related to this incident
in the quarter ended December 31, 1996.
Source of Materials
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The Company obtains the standard items to be autographed, such as baseballs,
footballs, basketballs and uniform jerseys, and components for its memorabilia
products from licensed dealers and unrelated third party manufacturers. The
sources for many of these items are limited to several or, in certain cases, one
manufacturer or supplier. Although the Company does not have formal written
agreements with any such supplier, it generally has not experienced difficulty
in obtaining these items. The majority of the Company's trading card products
are manufactured by a single manufacturer pursuant to a manufacturing services
agreement expiring in June 1999. No assurance can be given, however, that the
Company will not experience any significant difficulty in obtaining these items
in the future.
Dependence on Key Personnel
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The Company's future success depends upon its ability to attract and retain
its key managerial personnel. The loss of services of certain of the Company's
executive officers or the inability of the Company to attract additional
management personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.
Potential for Significant Fluctuations in Quarterly Operating Results
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The Company has experienced, and may in the future experience, significant
quarter to quarter fluctuations in its results of operations. Such fluctuations
may result in volatility in the price of its Common Stock. Quarterly results of
operations may fluctuate as a result of a variety of factors, including demand
for products, the timing of the introduction of new trading card products or
other products by the Company or its competitors, market acceptance of new
products, competitive conditions in the industry and general economic
conditions. As a result, revenues are difficult to forecast, and the Company
believes that period to period comparisons of results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
results of operations. Due to the
8
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foregoing factors, it is possible that in future quarters operating results will
be below the expectations of public market analysts and investors. Such an
event could have a material adverse effect on the price of the Common Stock.
Potential Volatility of Stock Price
-----------------------------------
The market price of the Company's Common Stock has been, and may in the future
be, highly volatile. Factors such as announcements with respect to new products
or licenses by the Company or its competitors, fluctuations in the Company's
operating results and general market and economic conditions could cause the
market price of the Common Stock to fluctuate substantially. These or other
factors may adversely effect the market price of the Common Stock. See Item 5.
"Market for the Registrant's Common Equity and Stockholder Matters."
Distribution
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The Company's channels of distribution include cable television shopping
networks, retailers, wholesalers and distributors, hobby stores, and premium and
promotional programs. The loss of one or more of these channels of distribution
could have a material adverse impact on the Company.
The Company has limited written agreements with its customers and
distributors. In light of this, no assurance can be given that the Company will
not experience a diminution or cessation of sales to any of its customers or
distributors.
Pledge of Company's Assets
--------------------------
The Company has a revolving credit facility from Congress Financial
Corporation whereby borrowings are available up to $12,000,000. This facility
is secured by a pledge of essentially all of the Company's assets. The credit
facility restricts, among other things, the ability of the Company to obtain
additional borrowings. In the event of default, the lender would be entitled to
foreclose and take title to these assets.
Lack of Dividends
-----------------
The Company has not paid any dividends on its Common Stock since inception and
does not intend to pay any dividends to its shareholders in the foreseeable
future. The Company currently intends to reinvest its earnings, if any, in the
development and expansion of its business.
Litigation
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On February 14, 1995, Upper Deck Authenticated, Ltd. filed suit against the
Company and three unaffiliated entities in the United States District Court for
the Southern District of California alleging, among other things, that the
Company had engaged in unfair competition and violated its right to use the
indicia of certain athletes on sports memorabilia and collectibles. The Company
plans to vigorously defend these actions. See Item 3. "Legal Proceedings."
In August 1996, a purported class action was filed against the Company
alleging, among other things, that the practice of randomly inserting chase
cards in packages of trading cards constitutes illegal gambling activity in
violation of state and federal law, including the Racketeer Influenced and
Corrupt Organization Act. See Item 3. "Legal Proceedings."
Shares Eligible for Future Sale
-------------------------------
Sales of the Company's Common Stock in the public market could adversely
effect the market price of the Common Stock and could impair the Company's
future ability to raise capital through the sale of equity securities.
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Personal Service Contracts
--------------------------
The Company routinely enters into personal service contracts with celebrities.
These contracts provide primarily for the celebrities to autograph various items
of memorabilia and may include personal appearances. These contracts typically
have a term of one to two years, but some may extend for much greater periods.
As of December 31, 1996, the Company had approximately $10,000,000 of
commitments under these contracts. There is no assurance that the Company will
fully utilize the services for which it is committed to pay under these personal
service contracts.
Recent Financial Developments
-----------------------------
The Company has incurred significant losses (a net loss of $17,436,000 for the
eleven months ended December 31, 1996) during the past three years. During the
eleven months ended December 31, 1996, total stockholders' equity decreased from
$6,193,000 to a deficit of $1,292,000, and working capital decreased from
$13,033,000 to $315,000.
Item 2. Properties
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The Company leases office and warehouse space at the locations set forth in
the following table:
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<CAPTION>
Approx. Lease
Square Expiration Type of
Location Footage (mos./yr.) Space
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<S> <C> <C> <C>
Cherry Hill, NJ 56,000 12/01 Office and warehouse
Cherry Hill, NJ 13,150 10/97 Office and assembly
Cherry Hill, NJ 8,925 12/96 Office and assembly
Cherry Hill, NJ 22,500 10/98 Warehouse
Austell, GA 37,340 03/99 Office and warehouse
Austell, GA 50,636 03/99 Warehouse
</TABLE>
All of the Company's properties are suitable for the intended activities. In
July 1996, the Company extended the lease term on its Cherry Hill, New Jersey
corporate headquarters (56,000 square feet) for a sixty-five month term ending
December 31, 2001.
All operations of Classic Games, Inc. were relocated from Austell, Georgia to
New Jersey during 1994. The Company has sublet all of its space in Austell,
Georgia for the remainder of the lease terms. The Company has also sublet two
Cherry Hill spaces (13,150 square feet and 8,925 square feet) for the remainder
of the lease terms.
Item 3. Legal Proceedings
- -------------------------
On February 14, 1995, Upper Deck Authenticated, Ltd. (`UDA") filed suit
against the Company and three unaffiliated entities in the United States
District Court for the Southern District of California alleging, among other
things, that the Company had engaged in unfair competition and violated UDA's
right to use the indicia of certain athletes on sports memorabilia and
collectibles. The Company responded to UDA's suit by denying all wrongdoing and
filing its own claims against UDA, Upper Deck Company and their president,
charging them with unfair competition, defamation and tortious interference with
current and prospective contractual relations. Substantial discovery has been
taken in the case, and trial is scheduled for June 1997. The court has granted
the Company partial summary judgment with respect to several of UDA's claims.
In August 1996, a purported class action was filed against the Company in the
United States District Court for the District of New Jersey. The suit alleges,
among other things, that the practice of randomly inserting chase cards in
packages of trading cards constitutes illegal gambling activity in violation of
state and federal law, including the Racketeer Influenced and Corrupt
Organization Act. Plaintiffs seek certification of a class of persons who,
within the applicable statute of limitations, purchased packages of the
Company's trading cards that might contain randomly
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inserted chase cards. The Company has filed a motion to dismiss the suit that is
currently pending before the court. No discovery has commenced.
The Company is involved in various other legal proceedings and claims incident
to the conduct of its business.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Company's 1996 Annual Meeting of Shareholders was held on January 28, 1997
for the purposes of electing five members of the Board of Directors for a one-
year term, acting on an amendment to the Company's 1992 Stock Incentive Plan to
increase the number of shares issuable under the plan from 1,200,000 to
1,850,000, and acting on an amendment to the Company's 1992 Directors Stock
Option Plan to increase the number of shares issuable under the plan from
400,000 to 800,000. The Board of Directors nominated Kenneth Goldin, Ira M.
Lubert, Allan R. Lyons, Gerald B. Shreiber and Richard C. Yancey for election as
directors. The results of the votes taken at the Annual Meeting were as
follows:
<TABLE>
<CAPTION>
Number of Votes:
Matter For Withheld
------ -- --------
<S> <C> <C>
Directors:
Kenneth Goldin...... 7,842,279 142,041
Ira M. Lubert....... 7,858,577 125,743
Allan R. Lyons...... 7,859,077 125,243
Gerald B. Shreiber.. 7,859,077 125,243
Richard C. Yancey... 7,859,077 125,243
Amendment to Stock
Incentive Plan...... 6,211,034 1,042,486
Amendment to
Directors Plan...... 6,852,917 402,306
</TABLE>
PART II
-------
Item 5. Market for the Registrant's Common Equity and Stockholder Matters
- -------------------------------------------------------------------------
The Company's Common Stock is traded on the NASDAQ-NMS under the symbol
"BSBL." The following table sets forth the range of high and low sale prices for
the Company's Common Stock for each of the periods indicated.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
February 1, 1995 - January 31, 1996
- -----------------------------------
2/1/95 - 4/30/95...................... $ 6.25 $ 3.50
5/1/95 - 7/31/95...................... $ 6.63 $ 3.50
8/1/95 - 10/31/95..................... $ 6.75 $ 4.50
11/1/95 - 1/31/96..................... $ 6.25 $ 4.13
February 1, 1996 - December 31, 1996
- ------------------------------------
2/1/96 - 4/30/96...................... $ 6.13 $ 3.13
5/1/96 - 7/31/96...................... $ 6.25 $ 2.63
8/1/96 - 10/31/96..................... $ 3.81 $ 1.38
11/1/96 - 12/31/96.................... $ 3.44 $ 1.81
</TABLE>
On March 31, 1997, the last sale price for the shares of Common Stock as
reported by NASDAQ was $1.44. There were approximately 3,957 record-holders of
the Company's Common Stock as of March 31, 1997.
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. In addition, the Company's current
credit facility with Congress Financial Corporation prohibits the payment of
11
<PAGE>
dividends. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 6. Selected Financial Data
-------------------------------
This information should be read in conjunction with the consolidated
financial statements and the related notes appearing elsewhere herein.
Consolidated Statement of Operations Data (thousands of dollars, except share
- -----------------------------------------------------------------------------
data):
- ------
<TABLE>
<CAPTION>
Years Ended January 31,:
-----------------------------------------------------
11 Months Ended
12/31/96 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales........................................... $ 42,593 $ 74,953 $ 72,799 $ 108,595 $ 75,362
Cost of Goods Sold.................................. 39,201 45,211 57,885 59,193 41,503
Gross Profit........................................ 3,392 29,742 14,914 49,402 33,859
Selling, General and
Administrative Expenses.......................... 20,444 28,126 30,082 32,380 20,525
Realignment, restructuring
and product line costs.............................. -- 5,675 22,700** -- --
Securities Litigation Settlement.................... -- 2,175 -- -- --
Income (loss) from
Operations....................................... (17,052) (6,234) (37,868) 17,022 13,334
Interest Expense, Net............................... ( 1,338) (1,970) (2,388) (1,346) (788)
Net Income (loss)
before extraordinary item........................ (18,390) (8,204) (33,816) 10,514 8,051
Extraordinary Gain.................................. 954 -- -- -- --
Net Income (loss)................................... (17,436) (8,204) (33,816) 10,514 8,051
Net Income (loss) per share......................... ( 1.35) (0.71) (3.01) 0.95 0.76
Weighted Average Shares
Outstanding..................................... 12,919,000 11,558,000 11,243,258 11,094,219 10,624,562
Fully-Diluted Net Income
per share........................................... * * * 0.92 0.75
Weighted Number of Shares
Outstanding..................................... * * * 12,180,096 10,994,346
</TABLE>
- -------------------------
* Earnings per share information on a fully diluted basis would reflect a
smaller loss per share.
** Net of insurance proceeds of $1,100,000 on death of former Chairman, CEO and
President.
Consolidated Balance Sheet Data (thousands of dollars):
- -------------------------------------------------------------
<TABLE>
<CAPTION>
As of:
------
12/31/96 1/31/96 1/31/95 1/31/94 1/31/93
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working Capital................................... $ 315 $ 13,033 $ 17,246 $ 48,923 $ 33,780
Total Assets...................................... 20,280 40,118 53,687 86,750 62,603
Bank Indebtedness................................. 6,743 9,884 14,096 16,030 4,000
Long-Term
Obligations.................................... 4,000 10,500 10,737 10,980 11,250
Total Liabilities................................. 21,572 33,925 41,782 41,197 33,979
Stockholders' Equity (Deficit).................... (1,292) 6,193 11,905 45,553 28,624
</TABLE>
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Eleven Months Ended December 31, 1996 and Twelve Months Ended January 31, 1996
- ------------------------------------------------------------------------------
The Company reported net sales of $42,593,000 for the eleven months ended
December 31, 1996, compared to $74,953,000 for the twelve months ended January
31, 1996. Following is a comparison of sales by major product category:
<TABLE>
<CAPTION>
Eleven Months Ended Year Ended
December 31, 1996 January 31, 1996
------------------- ----------------
<S> <C> <C>
Trading Cards $13,374,000 $32,887,000
Memorabilia 18,710,000 28,037,000
Prepaid Calling Cards 8,190,000 9,906,000
Other 2,319,000 4,123,000
----------- -----------
$42,593,000 $74,953,000
=========== ===========
</TABLE>
Net sales decreased in each of the Company's major product categories.
Memorabilia sales were lower primarily due to the loss of a significant retail
account and a decline in sales of entertainment memorabilia. Trading card sales
decreased due to the Company's strategy of decreasing production quantities and
product offerings in response to the overall weakness in the trading card
industry and higher than anticipated returns. Sales of prepaid telephone calling
cards were down due to a decrease in demand for collectible calling cards,
which was partially offset by an increase in sales of utility-based calling
cards. Other sales were down due to reduced sales of non-autographed products,
such as pogs, which the Company no longer produces.
The decrease in gross margins were due to several factors, including an
increase in reserves for obsolescence and player contracts in response to
reduced sales volume, an increase in the reserve for returns (primarily for
trading card products) and a decrease in sales of trading card products, which
traditionally sell at higher margins. In addition, margins were impacted by a
decrease in sales of collectible calling cards, which sell at higher margins,
and an increase in sales of utility-based calling cards, which sell at lower
margins.
The Company experienced decreases in selling expenses primarily due to
decreases in variable selling expenses, such as commissions and royalties,
resulting from the reduced sales volumes. General and administrative expenses
decreased primarily due to cost control efforts by the Company.
No income tax benefit was recorded by the Company.
Fiscal Years Ended January 31, 1996 and 1995
- --------------------------------------------
Fiscal 1996 was a year of transition, following a major restructuring in
fiscal 1995. Excluding realignment, restructuring and discontinuance of product
line costs and the securities litigation settlement, the Company reported sales
of $74,953,000 in fiscal 1996, compared to $72,799,000 in fiscal 1995, and a
pre-tax loss of $354,000 in fiscal 1996, compared to $17,556,000 in fiscal 1995.
Following is a comparison of sales by major product category and distribution
channels:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Classic(R) Draft Pick Cards $19,183,000 $22,618,000
NFL Pro-Line Trading Cards 9,592,000 7,731,000
Other Trading Cards 14,018,000 8,493,000
Memorabilia 28,037,000 29,944,000
Other 4,123,000 4,013,000
----------- -----------
$74,953,000 $72,799,000
=========== ===========
</TABLE>
[chart continued on next page]
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Cable Television $16,235,000 $13,465,000
Retail 26,956,000 30,375,000
Hobby 25,611,000 21,748,000
Other 6,151,000 7,211,000
----------- -----------
$74,953,000 $72,799,000
=========== ===========
</TABLE>
The increase in net sales was primarily due to increases in the sale of NFL
Pro-Line trading cards and other trading cards. The increase in sales of NFL
Pro-Line trading cards was primarily due to new product releases as well as
increased marketing efforts by the Company. The increase in sales of other
trading cards was primarily due to increased sales of trading card sets which
included prepaid telephone calling cards. Such increases were offset by
decreased sales of Classic Draft Pick trading cards, which declined due to a
reduction in production quantities in response to market conditions, and
decreased sales of memorabilia products, which declined due to the
discontinuation of several entertainment related product categories.
The increase in gross profit margins, which has been a major focus of
management, is a result of the Company's development of new trading card
products and marketing strategies which have enabled the Company to increase its
selling prices. In addition, prior year's results reflect the disposition of
slow moving items at low margins, as well as additional reserves for product
returns and inventories.
The Company experienced decreases in both selling and general
administrative expenses. Variable selling expenses such as royalties and
commissions were down substantially due to significantly lower sales volumes.
General and administrative expenses were lower primarily due to reductions in
payroll and related expenses. These items decreased due to the restructuring of
the Company which significantly reduced the number of employees required to
operate the business.
On June 27, 1995, the Company reached an agreement for the full settlement
and dismissal of its shareholder litigation, and on November 6, 1995, the
settlement received final court approval. The settlement required the Company to
pay $3,000,000 in cash (paid by insurance) and $2,000,000 in the Company's
Common Stock (430,394 shares). Accordingly, in the quarter ended July 31, 1995,
the Company recorded a one-time, $2,000,000 pre-tax, noncash charge of
$2,000,000 to reflect the fair value of Common Stock on the settlement date. In
addition, the Company incurred legal and other fees of approximately $175,000
associated with the shareholder litigation.
In fiscal 1996, the Company recorded pre-tax charges of $5,675,000 for the
costs associated with a strategic realignment program designed to reduce costs,
improve operating efficiencies and to concentrate the Company's efforts on its
core product lines. This realignment included the discontinuance of the hockey
draft pick trading card products, the write-down of certain license agreements,
elimination of small lot inventories and employee termination costs. In
addition, the charge also includes a $500,000 litigation reserve.
No income tax benefit was recorded by the Company.
14
<PAGE>
Seasonality
- -----------
Sales of the Company's trading card products are somewhat seasonal, with
sales peaks typically following the draft for the sport to which the product
relates. The Company has been working to reduce seasonality, to the extent
possible, by having more trading card issues in more limited quantities
throughout the year. Sales of sports-related memorabilia products tend to be
more constant, with sales peaks during holiday seasons and the then current
sport season. Sales of entertainment-related products tend to be less seasonal
and are planned, where possible, to counterbalance the seasonality of sport
trading card products.
Liquidity and Capital Resources
- -------------------------------
The Company generated $934,000 in cash flow from operations primarily due
to decreases in accounts receivable, inventories and prepaid expenses, partially
offset by a decrease in accounts payable. Accounts receivable decreased
primarily due to lower sales. Inventories decreased due to management's
concentrated effort to generate cash. Prepaid expenses and prepaid contracts
decreased due to a reduction in contract obligations. Accounts payable decreased
due to reduction in purchasing.
On July 31, 1995, the Company obtained a three year revolving credit
facility from Congress Financial Corporation (the "Bank"). Borrowings under the
facility are available up to $12,000,000, subject to availability, based on
eligible inventory and accounts receivable, as defined. Interest is charged at
prime rate plus 2%. The facility is secured by essentially all of the Company's
assets. At April 14, 1997, the outstanding balance was $6,855,000, which was the
maximum credit available. At December 31, 1996, the Company was in violation of
certain loan covenants under the loan agreement with its bank. Effective March
31, 1997, the violations were waived and the covenants modified. The Company
expects to be in compliance with the revised covenants during 1997; however,
such compliance cannot be assured.
On May 28, 1996, one of the holders of the Company's convertible
subordinated debentures exchanged $3,500,000 and $3,000,000 in principal amount
of the subordinated debentures, due September 1, 2002 and February 1, 2003,
respectively, for 912,000 shares of Common Stock. The early retirement of the
debentures resulted in a one-time extraordinary pre-tax gain of approximately
$954,000, or $0.07 per share.
On November 4, 1996, Technology Leaders II L.P., Technology Leaders
Offshore II C.V. and others (collectively, the "Investors") led a $4 million
private equity placement in the Company. Pursuant to the private placement
agreement, the Company issued 1,600,000 shares of its Common Stock at $2.49 per
share and warrants to acquire 2,720,000 shares of Common Stock at $3.07 per
share to the Investors. Proceeds of the private placement were used for working
capital purposes.
In December 1996, the Company and Frontier entered a five-year strategic
distribution agreement relating to the development and marketing of prepaid
calling cards for the domestic and international markets. Under the agreement,
Frontier has guaranteed certain monthly minimum payments to the Company which
total $10 million over the first three years of the agreement and would reach a
minimum of $20 million over the full five-year term. Either party may terminate
the relationship after the completion of years three or four, subject to payment
of a $2.5 million early termination fee. The Company issued Frontier warrants to
acquire 125,000 shares of its Common Stock (25,000
15
<PAGE>
at $3.00 per share, 50,000 at $5.00 per share and 50,000 at $10.00 per share).
The Company has incurred significant losses during each of the past three
fiscal years. During the eleven months ended December 31, 1996, total
stockholders equity decreased from $6,193,000 to a deficit of $1,292,000 and
working capital decreased from $13,033,000 to $315,000. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to attain
satisfactory levels of future cash flows from profitable operations, to obtain
concessions from its debt holders and the ability to meet the new covenant
requirements of the Bank.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $35,000,000 for which no benefit has been
reflected in the consolidated financial statements. These carryforwards, in
addition to other fully reserved deferred tax assets, may offset future taxable
income.
Recent FASB Pronouncements
- --------------------------
The Financial Accounting Standards Board issued two Standards in fiscal
1996 which would apply to the Company. SFAS No. 121 is effective for the current
year and requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Implementation of
this Standard did not have a material impact on the Company's financial position
or results of operations. SFAS No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. In the current
year the Company adopted the disclosure requirements of this statement.
Inflation
- ---------
In recent years, the Company has not experienced any material adverse
effects due to inflation.
Item 8. Financial Statements and Supplemental Data
- --------------------------------------------------
All financial information required by this Item is attached to this Report
beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
On November 8, 1995, the Company dismissed BDO Seidman, LLP ("BDO") as the
Company's independent public accountants and auditors, a capacity in which that
firm had served for several years, and selected Arthur Andersen LLP ("Arthur
Andersen") to replace BDO in this role. The decision to change the Company's
accountants and auditors was approved by the Company's full Board of Directors.
During the fiscal years 1994 and 1995 and the subsequent period through
November 8, 1995, the date on which BDO was dismissed as the Company's
independent public accountants and auditors, there were no disagreements between
the Company and BDO on any matter relating to accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to BDO's satisfaction, would have caused
them to make reference in connection with their reports to the subject matter of
the disagreement. In addition, BDO's reports on the Company's financial
statements for fiscal years 1994 and 1995 contained no adverse opinions or
disclaimers of opinion, nor were such reports qualified as to uncertainty, audit
scope or accounting principles.
The Company authorized BDO to respond fully to the inquiries of Arthur
Andersen. The Company also provided BDO with a copy of the disclosures contained
in the Form 8-K filed with the Securities and Exchange Commission on November
15, 1995 in connection with BDO's dismissal, and BDO furnished the Company with
a letter addressed to the Securities and Exchange Commission stating that it
agreed with the statements made by the Company therein.
On November 10, 1995, the Company appointed the accounting firm of Arthur
Andersen as the Company's independent public accounts and auditors.
16
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Company
- --------------------------------------------------------
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------- --- ----------------
<S> <C> <C>
Kenneth Goldin 31 Chairman of the Board and
Chief Executive Officer
John F. White 50 President and Chief
Operating Officer
Michael D. Hoppman 35 Chief Financial Officer,
Vice President - Finance and
Treasurer
Patrick J. Wujcik 34 Vice President - Administration,
Secretary and General Counsel
James G. Dole 38 Director
Ira M. Lubert 46 Director
Allan R. Lyons 56 Director
Gerald B. Shreiber 55 Director
Richard C. Yancey 70 Director
</TABLE>
Kenneth Goldin has been employed by the Company in various capacities since
1987 and has been a Director since July 1989. Mr. Goldin has served as Chairman
of the Board and Chief Executive officer since May 1994. He served as President
from May 1994 to January 1997 and as Executive Vice President from July 1989 to
May 1994.
John F. White has served as the Company's President and Chief Operating
Officer since February 1997. From 1994 to January 1997, Mr. White served as
Chairman, President and Chief Executive Officer at The Outsourcing Partnership,
L.L.C., a firm specializing in the outsourcing of internal auditing, due
diligence, information technology and human resources. Prior to 1994, Mr. White
was a partner at Coopers & Lybrand LLP, where he was responsible for the firm's
financial services division and served clients in the wholesale, retail and
distribution industries.
Michael D. Hoppman has been employed by the Company in various capacities
since March 1990. Mr. Hoppman has served as Chief Financial Officer since March
1996 and Vice President of Finance since April 1994. Prior to joining the
Company, Mr. Hoppman was an accountant with Ernst and Young from 1984 to 1990,
holding various positions, including audit manager from 1988 to 1990.
Patrick J. Wujcik has been employed in the Company's legal department since
February 1994. Mr. Wujcik has served as General Counsel since June 1995, as
corporate secretary since March 1995, and as Vice President of Administration
since March 1996. From May 1992 through February 1994, Mr. Wujcik was an
associate in the corporate department of Pepper, Hamilton & Scheetz, a law firm
based in Philadelphia, PA. He was an associate at the law firm of Braemer
Abelson & Hitchner prior thereto.
James G. Dole was first elected as director in February 1997. He is Vice
President for long distance business development for Frontier Corporation, a
telecommunications services provider. He has been employed in various capacities
by Frontier Corporation since 1986. His nomination to the Board of Directors is
pursuant to an agreement between the Company and Frontier Communications
International, Inc. See Item 1. "Business - Recent Developments" and Item 13.
"Certain Relationships and Related Transactions."
Ira M. Lubert was first elected a director in November, 1996. See Item 1.
"Business - Recent Developments"
17
<PAGE>
and Item 13. "Certain Relationships and Related Transactions." Since 1991, he
has been a managing director of Technology Leaders Management L.P., a venture
capital management company which is affiliated with Safeguard Scientifics, Inc.
This Company manages Technology Leaders II L.P. and Technology Leaders II
Offshore C.V. See Item 12. "Security Ownership of Certain Beneficial Owners and
Management." Mr. Lubert also serves as a director of National Media Corporation,
CompuCom Systems, Inc., and Sanchez Computer Associates, Inc.
Allan R. Lyons has served as a director since June 1990. Since November 1993,
Mr. Lyons has been the Chairman of the Board and Chief Executive Officer of
Piaker & Lyons, P.C., Certified Public Accountants, and he served as Executive
Vice President prior thereto. Mr. Lyons also serves as a director of Franklin
Credit Management Corporation.
Gerald B. Shreiber has served as a director since December 1994. Mr. Shreiber
is the founder of J & J Snack Foods Corp. and has served as its Chairman of the
Board, President and Chief Executive Officer since its inception in 1971.
Richard C. Yancey has served as a director since November 1992. Mr. Yancey
had been an investment banker with Dillon, Read & Co. Inc. from 1952 through
1992, holding various positions, including managing director from 1975 to 1990,
director from 1990 to 1991, and senior advisor from 1991 through 1992. In
addition, Mr. Yancey currently serves as a director of CapMac Holdings, Inc. and
eight mutual fund companies of The Composite Group.
Item 11. Executive Compensation
- --------------------------------
The following table sets forth certain summary information concerning the
compensation paid to the Company's Chief Executive Officer and other highly
compensated executive officers whose total annual salary and bonus were in
excess of $100,000 (collectively, the "Named Executive Officers") for services
rendered in all capacities to the Company and its subsidiaries for the period
ended December 31, 1996 and years ended January 31, 1996 and January 31, 1995:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term
Compensation
Annual Compensation Awards
- --------------------------------------------------------------------------------
Name & Securities All Other
Principal Period Salary Bonus Underlying Compensation
Position Ended (1) ($) ($) Options (#) ($) (2)
- --------- -------- ------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Kenneth Goldin 12/31/96 324,857 0 176,000 33,450
C.E.O. 01/31/96 362,407 0 70,000 67,003
01/31/95 375,822 0 150,000 39,499
Barry Bookman 12/31/96 122,917 0 75,000 0
C.O.O.(3)
Michael D. Hoppman 12/31/96 103,347 0 15,000 8,861
V.P. - Finance 01/31/96 104,429 0 10,000 10,314
01/31/95 103,608 0 10,000 8,983
- -------------
</TABLE>
[see footnotes on following page]
18
<PAGE>
(1) Compensation and awards for the period ended December 31, 1996 reflect an
eleven month period commencing February 1, 1996 and ending December 31,
1996. Compensation and awards for the prior years reflect a twelve month
fiscal year commencing February 1st and ending January 31st.
(2) Includes: (a) Company contributions under its profit sharing plan for
certain of the Named Executive Officers (Messrs. Goldin $8,346 and Hoppman
$4,461); (b) Company payments of certain life insurance premiums (Mr.
Goldin $10,884); and (c) car allowances for certain of the Named Executive
Officers (Messrs. Goldin $14,220 and Hoppman $4,400).
(3) As of January 1997, Mr. Bookman was no longer an officer or employee of the
Company. See Item 11. "Executive Compensation - Employment Agreements,
Compensatory Arrangements."
No individual named above received perquisites or non-cash compensation
exceeding the lesser of $50,000 or an amount equal to 10% of such person's
salary and bonus during the period ended December 31, 1996 or years ended
January 31, 1996 or January 31, 1995.
The following table sets forth information concerning individual grants of
stock options made during the period ended December 31, 1996 to each of the
Named Executive Officers:
<TABLE>
<CAPTION>
Option Grants in Period Ended December 31, 1996
-----------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
- ------------------------------------------------- ------------------------
Number of
Securities % of
Underlying Total Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#)(1) Fiscal Year ($/Sh) Date 5%($)(2) 10%($)(2)
---- ---------- ----------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Goldin 26,000(3) 7.0% $3.63 3/11/01 $120,455 $152,000
Kenneth Goldin 100,000(3) 26.0% $1.82 8/29/01 $232,283 $293,113
Kenneth Goldin 50,000(3) 13.0% $3.00 10/2/01 $191,442 $241,577
Barry Bookman 45,000(4) 12.0% $4.88 5/1/97 $230,868 $242,164
Barry Bookman 30,000(4) 8.0% $1.82 5/1/97 $ 56,429 $58,258
Michael Hoppman 15,000(5) 4.0% $2.50 8/21/01 $ 47,861 $60,394
- ----------------
</TABLE>
(1) The options granted to Messrs. Goldin, Bookman and Hoppman were granted
under the Company's 1992 Stock Incentive Plan, with exercise prices equal
to the fair market value on the date of grant and a term of five years.
(2) The five percent and ten percent assumed rates of appreciation are mandated
by the rules of the Securities and Exchange Commission and do not represent
the Company's estimate or projection of future stock price or performance.
(3) The option to purchase 26,000 shares is currently exercisable. One-third
of the option to purchase 100,000 shares will become exercisable on August
30, 1997, 1998 and 1999, respectively. One-third of the option to
purchase 50,000 will become exercisable on October 3, 1997, 1998 and 1999,
respectively, if certain conditions are met. Effective November 5, 1996,
the following options previously granted to Mr. Goldin were cancelled: (i)
option to purchase 20,000 shares of Common Stock at an exercise price of
$9.13 per share; (ii) option to purchase 41,250 shares of Common Stock at
an exercise price of $8.38 per share; and (iii) option to purchase 25,000
shares of Common Stock at an exercise price of $5.00 per share.
19
<PAGE>
(4) Mr. Bookman's employment was terminated in January 1997. The option to
purchase 45,000 shares became exercisable with respect to 10,000 shares
upon Mr. Bookman's termination; the remainder was cancelled. The option to
purchase 30,000 shares will not become exercisable before its expiration
date.
(5) One-third of the option will become exercisable on April 22, 1997, 1998 and
1999, respectively.
The following table sets forth information concerning exercise of stock
options during the period ended December 31, 1996 by each of the Named Executive
Officers and the value of unexercised options held by each of them as of
December 31, 1996:
Aggregated Option Exercises in Period Ended December 31, 1996
-------------------------------------------------------------
and Period End Option Values
----------------------------
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
12/31/96 (#) 12/31/96($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable (1)
- ---- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Kenneth Goldin 0 0 249,750/185,000 $0/$12,000
Barry Bookman 0 0 0/75,000 $0/$3,600
Michael D. Hoppman 0 0 31,333/21,667 $0/$0
</TABLE>
- --------------
(1) This amount represents the market value of the underlying securities
relating to "in-the-money" options at January 31, 1996 minus the exercise
price of such options.
Employment Agreements, Compensatory Arrangements
------------------------------------------------
Effective November 1, 1996, the Company entered into a new employment
agreement with Kenneth Goldin which provides for his employment until
October 31, 1998. Under this agreement, Mr. Goldin was to receive an annual
base salary of $375,000 and various benefits, including life and health
insurance. However, Mr. Goldin has agreed to amend the agreement to provide
for a reduced base salary of $250,000. In addition, the agreement provides
for an annual bonus commencing with the end of 1998 based upon the
achievement of certain milestones as determined by the officers of the
Company and approved by the Board of Directors. The Board of Directors will
also determine Mr. Goldin's eligibility for special bonuses based on share
price targets set prior to December 31, 1996 and December 31, 1997.
On April 22, 1996, the Company entered into a two-year employment
agreement with Barry Bookman, pursuant to which Mr. Bookman was to receive
an annual salary of $200,000. As of January 1997, the employment agreement
was terminated and Mr. Bookman is no longer an officer or employee of the
Company. The option to purchase 45,000 shares was cancelled with respect to
35,000 shares and will expire on May 1, 1997 with respect to the remaining
10,000 shares.
Director Compensation
---------------------
The members of the Company's Compensation Committee for the year ended
December 31, 1996 were Allan R. Lyons, Fred A. Shabel, Gerald B. Shreiber
and Richard C. Yancey. Messrs. Lyons, Shreiber and Yancey, each an outside
director, were paid $2,000 for attending audit committee meetings during
1996.
Under the Company's 1992 Directors Stock Option Plan (the "Directors
Plan"), each outside director receives an option to purchase 30,000 shares
of Common Stock when he first becomes a director. Each September 1st
thereafter, each outside director receives an option to purchase 15,000
shares of Common Stock at fair market
20
<PAGE>
value and an option to purchase 15,000 shares of Common Stock at 120% of fair
market value. The options all expire upon the earlier of ten years from the date
of grant or three months from the date the recipient ceases to be a director. At
September 1, 1996, no shares were available for grant under the Directors Plan.
On January 28, 1997, the shareholders approved an amendment to the Directors
Plan increasing the number of shares issuable from 400,000 to 800,000. The
options that would have been issued to Messrs. Dole and Lubert upon their
election to the Board, and to Messrs. Lyons, Shabel, Shreiber and Yancey on
September 1, 1996, were issued after the amendment to the plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth, as of March 31, 1997, information
concerning beneficial ownership of shares of the Company's Common Stock with
respect to (i) each person known to the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1) Class
- ------------------------ ------------- ----------
<S> <C> <C>
Directors and Named Executive Officers*
Kenneth Goldin...................................... 1,076,650(2) 7.3%
Barry Bookman....................................... 15,000(3)
Michael D. Hoppman.................................. 40,196(4) **
James G. Dole....................................... 30,000(5) **
Ira M. Lubert....................................... 257,500(6) 1.8%
Allan R. Lyons...................................... 231,500(7) 1.6%
Gerald B. Shreiber.................................. 90,000(8) **
Richard C. Yancey................................... 190,000(9) 1.3%
Five Percent Shareholders
Carole Goldin*...................................... 1,274,500(10) 8.7%
McCullough Andrews & Cappeillo, Inc.***
101 California Street, Suite 4250
San Francisco, CA 94111.......................... 1,259,150 8.6%
T. Rowe Price Associates, Inc.***
100 East Pratt Street
Baltimore, Maryland 21202........................ 700,000 5.0%
Technology Leaders II Offshore C.V. ("TLO II")
8000 The Safeguard Building
435 Dover Park Drive
Wayne, PA. 19087................................. 1,487,472(11) 10.1%
Technology Leaders II L.P. ("TL II")
8000 The Safeguard Building
435 Dover Park Drive
Wayne, PA 19087.................................. 1,872,528(12) 12.7%
Technology Leaders II Management L.P.
8000 The Safeguard Building
435 Dover Park Drive
Wayne, PA 19087................................. 3,360,000(13) 22.9%
All Directors and Officers as a Group (12 persons).. 1,946,641(14) 13.2%
- ---------------
</TABLE>
[see footnotes on following page]
21
<PAGE>
* The address for each such person is c/o The Score Board, Inc., 1951 Old
Cuthbert Road, Cherry Hill, New Jersey 08034.
** Less than one percent.
*** Reflects information set forth on Forms 13F and 13G filed by the holder with
the Securities and Exchange Commission.
(1) The securities "beneficially owned" by a person are determined in accordance
with the definition of "beneficial ownership" set forth in the regulations
of the Securities and Exchange Commission and, accordingly, may include
securities owned by or for, among others, the spouse, children or certain
other relatives of such person as well as other securities as to which the
person has or shares voting or investment power or has the right to acquire
within sixty days after March 31, 1997. The same shares may be beneficially
owned by more than one person. Beneficial ownership may be disclaimed as to
certain of the securities. Shares beneficially owned by Messrs. Dole,
Lubert, Lyons, Shreiber and Yancey include 30,000 shares of Common Stock
issuable upon exercise of stock options issued subsequent to the amendment
of the Directors Plan. See Item 11. "Executive Compensation- Director
Compensation."
(2) Includes 249,750 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(3) Includes 10,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(4) Includes 34,666 shares of Common Stock issuable upon exercise of currently
exercisable stock options and 5,000 shares of Common Stock under an option
exercisable within sixty days from the date of this Form 10-K.
(5) Includes 30,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(6) Includes 30,000 shares of common stock issuable upon exercise of currently
exercisable stock options. Mr. Lubert is one of the general partners of
Technology Leaders II Management L.P. (see note 13).
(7) Includes 150,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(8) Includes 90,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(9) Includes 150,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(10)Includes 96,000 shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(11)Includes 956,230 shares of Common Stock issuable upon exercise of currently
exercisable warrants to purchase Common Stock.
(12)Includes 1,203,758 shares of Common Stock issuable upon exercise of
currently exercisable warrants to purchase Common Stock.
(13)Includes 2,159,988 shares of Common Stock issuable upon exercise of
currently exercisable warrants to purchase Common Stock. Technology Leaders
II Management L.P. ("TLM II") is the sole general partner of TL II and co-
general partner of TLO II. TL II and TLO II are venture capital funds which
are required by their governing documents to make all investment, voting and
disposition actions in tandem. TLM II has sole authority and responsibility
for all investment, voting and disposition decisions for TL II and TLO II,
which powers are exercised through its eleven-person executive committee, by
whose decisions the general partner has agreed to be bound. As a result of
TLM II's investment control over all of the Company's Common Stock held by
TL II and TLO II, TLM II may be deemed to beneficially own all of the shares
beneficially owned by TL II and TLO II. TLM II disclaims beneficial
ownership of all such shares except to the extent of its proportionate
pecuniary interest therein.
(14)Includes 763,166 shares of Common Stock issuable upon exercise of stock
options.
22
<PAGE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
In June 1994, the Company received proceeds of approximately $2,000,000 from
a key man life insurance policy on the life of Paul Goldin, the Company's former
Chairman of the Board, Chief Executive Officer and President. In accordance with
Mr. Goldin's employment agreement, the Company is required to pay approximately
$900,000 to Mr. Goldin's estate. During 1996, $220,000 was paid, and the amount
payable to Mr. Goldin's estate as of December 31, 1996 was $248,000.
On November 6, 1996, the Company issued 1,600,000 shares of its Common Stock
at $2.49 per share and warrants to acquire 2,720,000 shares of its Common Stock
at $3.07 per share to purchasers led by TL II and TLO II. Pursuant to the
securities purchase agreement, TL II and TLO II have the right to name a
director of the Company and have designated Ira M. Lubert as their nominee.
In December 1996, the Company entered into a five-year strategic distribution
agreement with Frontier relating to the development and marketing of prepaid
phone cards for the domestic and international markets. As part of that
transaction, Frontier was issued 125,000 warrants to purchase the Company's
stock at prices ranging from $3.00 to $10.00 per share. Also, the Company agreed
to nominate a representative of Frontier to the Company's Board of Directors.
James G. Dole was selected by Frontier for this position.
23
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------
(a)(1) The following financial statements are filed as part of this Report:
(i) Reports of Independent Public Accountants;
(ii) Consolidated Balance Sheets as of December 31, 1996 and
January 31, 1996;
(iii) Consolidated Statements of Operations for the eleven
months ended December 31, 1996 and years ended
January 31, 1996 and January 31, 1995;
(iv) Consolidated Statements of Stockholders' Equity for the
period from January 31, 1995 to December 31, 1996; and
(v) Consolidated Statements of Cash Flow for the eleven
months ended December 31, 1996 and years ended January
31, 1996 and January 31, 1995.
(2) The following financial statement schedule is filed as part of
this report:
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is either
inapplicable or presented in the financial statements or related notes.
(3) The following Exhibits are filed as part of this Report.
3.1 Certificate of Incorporation, including certain amendments
thereto (1)
3.2 Amendment to Certificate of Incorporation, filed on January 14,
1991 (2)
3.3 Amendment to Certificate of Incorporation, filed on October 26,
1993 (10)
3.4 By-Laws (10)
3.5 Amendment to By-Laws, dated June 21, 1990 (3)
10.1 Employment Agreement with Kenneth Goldin* (10)
10.2 401(k) Plan* (2)
10.3 Lease Agreement with Woodlands Joint Venture for office and
warehouse space at Troon Circle, Austell, Georgia (5), and
amendment thereto, dated June 30, 1992 (8)
10.4 Lease Agreement with Woodlands Joint Venture for warehouse space
at Troon Circle, Austell, Georgia (10)
10.5 Lease Agreement with Cherry Hill Commerce Center for office and
warehouse space at Cuthbert Road, Cherry Hill, New Jersey (4)
10.6 Lease Agreement with Cherry Hill Commerce Center for office and
warehouse space at Cuthbert Road, Cherry Hill, New Jersey (10)
24
<PAGE>
10.7 Lease Agreement with Cherry Hill Commerce Center for office and
warehouse space at Cuthbert Road, Cherry Hill, New Jersey (10)
10.8 Sales Representation Agreement with Howard Kay, dated August 31,
1992 and amendments thereto, dated July 20, 1993 and November 4,
1993 (10)
10.9 Form of Indenture, dated September 1, 1992, between The Score
Board, Inc. and Bank America Trust Company of New York, as
Trustee (6)
10.10 Form of 9% Convertible Subordinated Debenture (6)
10.11 Loan and Security Agreement by and between Congress Financial
Corporation and The Score Board, Inc. dated July 31, 1995 (12)
10.12 The Score Board, Inc. 1992 Stock Incentive Plan* (7)
10.13 The Score Board, Inc. 1992 Directors Stock Option Plan* (7)
10.14 The Score Board, Inc. 1993 Non-Employee Stock Option Plan* (9)
10.15 Merchandise License Agreement between Paramount Pictures and The
Score Board, Inc., dated June 25, 1991, and Amendments thereto
dated October 30, 1991, June 1, 1992, August 13, 1992, August 1,
1993, September 15, 1993 (10) and November 10, 1994 (11) re: Star
Trek memorabilia.
10.16 License Agreement No. ML-2483D with Major League Baseball
Properties, Inc. re: autographed and unautographed memorabilia,
dated May 16, 1994 (11)**
10.17 License Agreement with Major League Baseball Players Association
re: autographed and unautographed memorabilia, dated May 16, 1994
(11)**
10.18 Securities Purchase Agreement, dated November 5, 1996, by and
among The Score Board, Inc. and certain investors (13)
21.1 Subsidiaries (13)
23.1 Consent of Arthur Andersen (13)
27. Financial Data Schedule (13)
- ------------------
25
<PAGE>
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K.
** Confidential Treatment was requested for portions of this document.
(1) Reference is made to the Company's report on Form 10-K for the year ended
January 31, 1989, as filed on May 1, 1989, which is hereby incorporated by
reference.
(2) Reference is made to the Company's Form S-8 Registration Statement, as
filed on February 5, 1991, which is hereby incorporated by reference.
(3) Reference is made to the Company's Form S-1 Registration Statement (File
No. 33-36741) as filed on September 10, 1990, which is hereby incorporated
by reference.
(4) Reference is made to the Company's report on Form 10-K for the year ended
January 31, 1991, as filed on May 1, 1991, which is hereby incorporated by
reference.
(5) Reference is hereby made to the Company's report on Form 10-K, for the
year ended January 31, 1992, as filed on April 1, 1992, which is hereby
incorporated by reference.
(6) Reference is hereby made to the Company's report on Form 8-K, as filed on
August 13, 1992, which is hereby incorporated by reference.
(7) Reference is made to the Company's report on Form 10-Q, for the quarter
ended October 31, 1992, as filed on December 15, 1992, which is hereby
incorporated by reference.
(8) Reference is hereby made to the Company's report on Form 10-K for the year
ended January 31, 1993, as filed on May 3, 1993, which is hereby
incorporated by reference.
(9) Reference is hereby made to the Company's Form S-3 Registration Statement,
as filed on September 2, 1993, which is hereby incorporated by reference.
(10) Reference is hereby made to the Company's report on Form 10-K, for the
fiscal year ended January 31, 1994, as filed on May 2, 1994 which is
hereby incorporated by reference.
(11) Reference is hereby made to the Company's report on Form 10-K/A-1, as
filed on May 31, 1995, which is hereby incorporated by reference.
(12) Reference is hereby made to the Company's report on Form 8-K, as filed on
August 25, 1995, which is hereby incorporated by reference.
(13) Filed herewith.
(b) Reports on Form 8-K during the fourth quarter of the period covered by this
Report: On December 19, 1996, the Company filed a report on Form 8-K reporting
upon Item 8.
26
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
--------------------------------------
REPORT ON FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED DECEMBER 31, 1996 AND
YEARS ENDED JANUARY 31, 1996 AND 1995
27
<PAGE>
THE SCORE BOARD, INC AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
ELEVEN MONTHS ENDED DECEMBER 31, 1996 AND
-----------------------------------------
YEARS ENDED JANUARY 31, 1996 AND 1995
-------------------------------------
INDEX
-----
REPORTS OF THE INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOW F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Score Board, Inc.:
We have audited the accompanying consolidated balance sheets of The Score Board,
Inc. and subsidiaries as of December 31, 1996 and January 31, 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the eleven months ended December 31, 1996 and the year ended
January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Score Board, Inc. and
subsidiaries as of December 31, 1996 and January 31, 1996, and the results of
their operations and their cash flows for the eleven months ended December 31,
1996 and for the year ended January 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company (i) has suffered recurring losses from
operations, (ii) has a stockholders' deficit of $1,292,000 at December 31, 1996,
(iii) has experienced and continues to experience limitations on its ability to
borrow, and (iv) is subject to certain litigation and other contingencies.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Arthur Andersen LLP
Philadelphia, Pa.,
April 10, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholder and Directors
The Score Board, Inc.
We have audited the consolidated statements of operations, stockholders' equity
and cash flows of The Score Board, Inc. for the period ended January 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Score Board,
Inc. as of January 31, 1995 and the results of its operations and cash flows for
the period ended January 31, 1995 in conformity with generally accepted
accounting principles.
BDO SEIDMAN
Philadelphia, Pa.,
April 12, 1995
F-2
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, JANUARY 31,
1996 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 470,000 $ 142,000
Accounts receivable, net of reserve for returns and doubtful
accounts of $3,200,000 and $1,925,000 6,157,000 14,895,000
Inventories 10,250,000 16,449,000
Prepaid expenses and other 741,000 2,784,000
Prepaid contracts 269,000 1,674,000
Income tax receivable -- 514,000
------------- -------------
Total current assets 17,887,000 36,458,000
FIXED ASSETS, net 1,578,000 1,616,000
INTANGIBLE AND OTHER ASSETS, net 815,000 2,044,000
------------- -------------
$ 20,280,000 $ 40,118,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank indebtedness $ 6,743,000 $ 9,884,000
Accounts payable 6,749,000 9,122,000
Accrued liabilities 4,080,000 4,419,000
------------- -------------
Total current liabilities 17,572,000 23,425,000
------------- -------------
SUBORDINATED DEBENTURES 4,000,000 10,500,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - $.01 par value, authorized
10,000,000 shares; none issued -- --
Common stock - $.01 par value, authorized
30,000,000 shares; issued 14,689,142 shares at
December 31, 1996 and 11,822,642 at January 31, 1996 147,000 118,000
Additional paid-in capital 29,427,000 19,505,000
Accumulated deficit (30,866,000) (13,430,000)
------------- -------------
Total stockholders' equity (deficit) (1,292,000) 6,193,000
------------- -------------
$ 20,280,000 $ 40,118,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN
MONTHS ENDED
DECEMBER 31, YEAR ENDED JANUARY 31,
----------------------
1996 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
NET SALES $ 42,593,000 $ 74,953,000 $ 72,799,000
COST OF GOODS SOLD 39,201,000 45,211,000 57,885,000
-------------- ------------- --------------
GROSS PROFIT 3,392,000 29,742,000 14,914,000
-------------- ------------- --------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 20,444,000 28,126,000 30,082,000
REALIGNMENT, RESTRUCTURING AND DISCONTINUANCE
OF PRODUCT LINES -- 5,675,000 23,800,000
SECURITIES LITIGATION SETTLEMENT -- 2,175,000 --
NET PROCEEDS FROM INSURANCE -- -- (1,100,000)
-------------- ------------- --------------
NET LOSS FROM OPERATIONS (17,052,000) (6,234,000) (37,868,000)
INTEREST EXPENSE 1,338,000 1,970,000 2,388,000
-------------- ------------- --------------
NET LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN (18,390,000) (8,204,000) (40,256,000)
INCOME TAX BENEFIT -- -- (6,440,000)
-------------- ------------- --------------
NET LOSS BEFORE EXTRAORDINARY GAIN (18,390,000) (8,204,000) (33,816,000)
EXTRAORDINARY GAIN RESULTING
FROM EARLY EXTINGUISHMENT OF
DEBT 954,000 -- --
-------------- ------------- --------------
NET LOSS $ (17,436,000) $ (8,204,000) $ (33,816,000)
============== ============= ==============
NET LOSS PER SHARE BEFORE
EXTRAORDINARY GAIN $ (1.42) $ (0.71) $ (3.01)
============== ============= ==============
NET LOSS PER SHARE $ (1.35) $ (0.71) $ (3.01)
============== ============= ==============
WEIGHTED AVERAGE SHARES
OUTSTANDING 12,919,000 11,558,000 11,243,000
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
-------------------------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 31, 1994 11,205,748 $ 112,000 $ 16,851,000 $ 28,590,000
Exercise of stock options 44,000 -- 168,000 --
Net loss -- -- -- (33,816,000)
-------------- -------------- -------------- --------------
BALANCE, JANUARY 31, 1995 11,249,748 112,000 17,019,000 (5,226,000)
Exercise of stock options 142,500 2,000 490,000 --
Issuance of shares in settlement of
securities litigation 430,394 4,000 1,996,000 --
Net loss -- -- -- (8,204,000)
-------------- -------------- -------------- --------------
BALANCE, JANUARY 31, 1996 11,822,642 118,000 19,505,000 (13,430,000)
Exercise of stock options 154,500 2,000 312,000 --
Issuance of shares related
to early extinguishment of
debt 912,000 9,000 5,225,000 --
Issuance of shares related to
private placement 1,600,000 16,000 3,833,000 --
Options granted in lieu of compensation -- -- 214,000 --
Stock issued in lieu of compensation 200,000 2,000 338,000 --
Net loss -- -- -- (17,436,000)
-------------- -------------- -------------- --------------
BALANCE, DECEMBER 31, 1996 14,689,142 $ 147,000 $ 29,427,000 $(30,866,000)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN
MONTHS ENDED
DECEMBER 31, YEAR ENDED JANUARY 31,
----------------------
1996 1996 1995
OPERATING ACTIVITIES: ------------ ------------- -------------
<S> <C> <C> <C>
Net loss $(17,436,000) $ (8,204,000) $(33,816,000)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Realignment,restructuring and discontinuance of product lines -- 5,675,000 23,800,000
Cash used in restructuring (405,000) (1,425,000) (4,514,000)
Depreciation 1,299,000 1,477,000 1,406,000
Provision for doubtful accounts and returns 2,456,000 1,092,000 5,522,000
Amortization of intangible assets 714,000 919,000 968,000
Settlement of lawsuit -- 2,000,000 --
Gain on early extinguishment of debt (954,000) -- --
Options granted in lieu of cash 214,000 -- --
Stock issued in lieu of cash 340,000 -- --
Deferred taxes -- -- 1,168,000
Changes in operating assets and liabilities:
Accounts receivable 6,282,000 (2,073,000) 7,967,000
Inventories 6,199,000 (498,000) 2,209,000
Prepaid expenses and contracts 3,438,000 943,000 1,594,000
Other assets 132,000 (179,000) (97,000)
Accounts payable (2,373,000) (2,339,000) 1,883,000
Accrued liabilities 514,000 (443,000) (1,002,000)
Income tax receivable 514,000 7,660,000 (8,089,000)
------------ ------------- ------------
Net cash provided by (used in)
operating activities 934,000 4,605,000 (1,001,000)
------------ ------------- ------------
INVESTING ACTIVITIES:
Purchases of fixed assets (1,261,000) (152,000) (367,000)
------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
ELEVEN
MONTHS ENDED
DECEMBER 31, YEAR ENDED JANUARY 31,
----------------------
1996 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net borrowings (repayments) of bank indebtedness (3,141,000) (4,212,000) (1,934,000)
Proceeds from the exercise of stock options 314,000 492,000 168,000
Net proceeds from private placement of equity 3,849,000 -- --
Payments of capital lease obligations (367,000) (312,000) (372,000)
Deferred financing costs -- (380,000) (116,000)
------------ ------------- ------------
Net cash provided by (used in)
financing activities 655,000 (4,412,000) (2,254,000)
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH 328,000 41,000 (3,622,000)
CASH, BEGINNING OF PERIOD 142,000 101,000 3,723,000
------------ ------------- ------------
CASH, END OF PERIOD $ 470,000 $ 142,000 $ 101,000
============ ============= ============
SUPPLEMENTARY DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 1,401,000 $ 2,218,000 $ 2,369,000
============ ============= ============
Cash (received) paid for income taxes $ (602,000) $ (7,660,000) $ 481,000
============ ============= ============
New capital leases $ -- $ -- $ 354,000
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statments
F-7
<PAGE>
THE SCORE BOARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF ACCOUNTING POLICIES:
Business Description
The Company designs, manufactures, markets, and distributes sports trading cards
and sports and entertainment related memorabilia products in the United States.
The Company sells on credit to many of its customers which include television
shopping programs, large national retail chain stores, distributors, and hobby
stores.
Change in Reporting Period
In December 1996, the Company changed its fiscal year-end from January 31 to
December 31, making the fourth quarter ended December 31, 1996, a two month
period and the year ended December 31, 1996 an eleven-month period.
Principles of Consolidation
The consolidated financial statements include the accounts of The Score Board,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Use of Estimates
The preparation of financial statements 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.
Financial Instruments
The carrying value of the Company's outstanding bank indebtedness is considered
to approximate fair value on December 31, 1996. The fair value of the Company's
$4,000,000 convertible subordinated debentures is estimated at $800,000 based on
discussions with investment advisors.
Revenue Recognition
The Company recognizes revenue when merchandise is shipped to customers.
Allowances for estimated returns are provided when sales are recorded.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
Prepaid Contracts
The Company has personal service contracts with athletes and entertainers which
provide for autograph services. The contracts generally require the Company to
make up-front payments, which are recorded as prepaid contracts, and upon
receipt of the services the autograph cost is included in inventory. Future
contract commitments generally require future autograph services and, therefore,
are not recorded as a liability until the services are performed. The Company
continually evaluates whether events or circumstances have occurred that
indicate that prepaid contract balances or future contract payments will not be
recoverable. When factors indicate that contract amounts may not be realizable,
the Company
F-8
<PAGE>
makes an estimate of the unrecoverable amounts and records such amounts in cost
of goods sold.
Fixed Assets and Depreciation
Fixed assets, which include assets leased under capital lease obligations, are
stated at cost. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, which range from three to five years.
Intangible Assets
Intangible assets are amortized on a straight-line basis over the term of the
related agreements. Goodwill is amortized over the expected period of benefit,
not to exceed five years. Subsequent to its acquisitions, the Company
continually evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful lives may warrant revision or that the
remaining intangible asset balances may not be recoverable. When factors
indicate that intangible assets should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted cash flow over the
remaining life in measuring whether intangible assets are recoverable.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires a company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Net Loss Per Share
Loss per share is based on the weighted average number of common shares and
common stock equivalents outstanding during the respective periods. Common stock
equivalents are not considered in the calculation of net loss per share since
they would be antidilutive.
New Accounting 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 No. 121), SFAS No. 121 established accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill. The
Company adopted SFAS No. 121 effective February 1, 1996. The adoption did not
have an effect on the Company's financial condition or results of operations.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 established financial accounting and
reporting standards for stock-based employee compensation plans. This statement
also applied to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. The Company has adopted the
disclosure requirement of this statement (see Note 10).
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
F-9
<PAGE>
2. GOING CONCERN
The Company has incurred significant operating losses during each of the past
three years, including a net loss of $17,436,000 for the eleven months ended
December 31, 1996. In addition, stockholders equity has decreased from
$6,193,000 at January 31, 1996 to a deficit of $1,292,000 at December 31, 1996
and working capital has decreased from $13,033,000 at January 31, 1996 to
$315,000 at December 31, 1996. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.
As discussed in Note 8, at December 31, 1996, the Company was in violation of
certain loan covenants under the loan agreement with its bank. Effective March
31, 1997, the violations were waived and the covenants modified. The Company
expects to be in compliance with the revised covenants during 1997; however,
such compliance cannot be assured. Further, as discussed in Note 11, the Company
became aware of an incident that could be deemed to be in violation of certain
laws or in breach of certain contractual obligations. There is no assurance
that this incident will not result in a material adverse effect on the Company.
The Company's continued existence is dependent upon its ability to attain
satisfactory levels of future cash flows from operations and its ability to meet
the new bank covenants.
The Company has started a plan to increase working capital by entering into a
strategic distribution agreement with a telecommunication services company for
the development and marketing of telephone calling cards. In addition, the
Company is implementing various cost cutting measures. The Company has also
added new directors to its Board and has hired a new President and Chief
Operating Officer. Although the results of these actions cannot be predicted,
the Company believes these steps are appropriate and will help the Company
reorganize its operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
3. REALIGNMENT, RESTRUCTURING AND PRODUCT LINE ADJUSTMENT COSTS
In fiscal 1996, the Company recorded pre-tax charges of $5,675,000 for the costs
associated with a strategic realignment program designed to reduce costs,
improve operating efficiencies and to concentrate the Company's efforts on its
core product lines. This realignment included the discontinuance of the Hockey
Draft card products, the write-down of certain license agreements, elimination
of small lot inventories and employee termination costs. In addition, the
charge also includes a $500,000 litigation reserve. (See Note 11)
In fiscal 1995, the Company recorded pre-tax charges of $23,800,000 for the
costs associated with a major restructuring of the business, including the
closing of its Classic Games subsidiary, discontinuance of several product
lines, acceleration of inventory dispositions of those product lines through
alternate distribution channels and personnel reductions. The costs associated
with these actions are summarized, as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------
1996 1995
---------- -----------
<S> <C> <C>
Closing of subsidiary $ 265,000 $ 7,100,000
Severance costs 160,000 1,700,000
Discontinuance of Product Lines 4,750,000 15,000,000
Litigation 500,000 --
---------- -----------
$5,675,000 $23,800,000
========== ===========
</TABLE>
F-10
<PAGE>
At December 31, 1996 and January 31, 1996, approximately $446,000 and
$850,000, respectively, remains in accrued liabilities for costs
primarily associated with the closing of the subsidiary and severance.
4. NET PROCEEDS FROM OFFICER'S LIFE INSURANCE
In May 1994, the Company's President and Chief Executive Officer passed away.
The Company received proceeds from the key man life insurance policy of
approximately $2,000,000 in June 1994. In accordance with the officer's
employment agreement, the Company is required to pay approximately $900,000 to a
named beneficiary. The liability outstanding at December 31, 1996 is $248,000,
which is due to a relative of the Company's current President and Chief
Executive Officer.
5. INVENTORIES
<TABLE>
<CAPTION>
December 31, January 31,
1996 1996
------------- ------------
<S> <C> <C>
Raw materials $ 2,865,000 $ 1,940,000
Work-in-process 579,000 1,616,000
Finished goods 10,881,000 17,516,000
Valuation reserve (4,075,000) (4,623,000)
------------ -----------
$ 10,250,000 $16,449,000
============ ===========
</TABLE>
6. FIXED ASSETS
<TABLE>
<CAPTION>
December 31, January 31,
1996 1996
------------ -----------
<S> <C> <C>
Computer equipment and
software $ 3,681,000 $ 3,069,000
Equipment 893,000 965,000
Furniture and fixtures 565,000 833,000
Automobiles -- 78,000
Leasehold improvements 1,115,000 1,134,000
------------ -----------
6,254,000 6,079,000
Less accumulated depreciation
and amortization ( 4,676,000) (4,463,000)
------------ -----------
$ 1,578,000 $ 1,616,000
============ ===========
</TABLE>
Computer equipment and software includes amounts under capital leases of
$934,000 at December 31, 1996 and $1,367,000 at January 31, 1996. Accumulated
amortization of leased property is approximately $768,000 at December 31, 1996
and $1,032,000 at January 31, 1996.
F-11
<PAGE>
7. INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
December 31, January 31,
1996 1996
------------- -------------
<S> <C> <C>
License agreements and other $ -- $ 2,342,000
Deferred financing costs 1,087,000 1,568,000
Goodwill -- 595,000
---------- ------------
1,087,000 4,505,000
Less accumulated amortization (620,000) ( 2,959,000)
---------- ------------
Net intangible assets 467,000 1,546,000
Other assets 348,000 498,000
---------- ------------
$ 815,000 $ 2,044,000
========== ============
</TABLE>
8. BANK INDEBTEDNESS AND SUBORDINATED DEBENTURES
In July 1995, the Company obtained a three-year revolving credit facility with
Congress Financial Corporation. This facility replaced the previous financial
arrangement with Mellon Bank, N.A. Borrowings under the facility are available
up to $12,000,000, subject to availability, based on eligible accounts
receivable and inventories, as defined. Interest is charged at prime plus 2%.
The facility is secured by essentially all of the Company's assets and subject
to financial and non-financial covenants. The available credit, based on
collateral at December 31,1996, was $6,925,000, of which $6,743,000 was
outstanding.
At December 31, 1996, the Company was in violation of certain loan covenants
under the loan agreement with its bank. Effective March 31, 1997, the
violations were waived and the covenants modified. The Company expects to be in
compliance with the revised covenants during 1997; however, such compliance
cannot be assured.
The weighted average interest rate on bank debt was 10.3%, 11.5%, and 8.31% for
the eleven months ended December 31, 1996 and fiscal 1996 and 1995 respectively.
Year-end interest rates were 10.3%, 10.5% and 10.0% -10.5% ; maximum outstanding
bank debt during the eleven months ended December 31, 1996 and fiscal years 1996
and 1995 was $10,538,000, $14,096,000 and $18,380,000; average outstandings were
$8,186,000, $8,544,000 and $15,580,000.
In fiscal 1993, the Company completed two private placements for a total of
$10,500,000 principal amount of 9% convertible, subordinated debentures and
received $9,429,000, net of expenses. On May 28, 1996, one of the holders of the
Company's convertible subordinated debentures exchanged $3,500,000 and
$3,000,000 in principal amount of debentures due September 1, 2002 and February
1, 2003, respectively for 912,000 shares of the Company's Common Stock. The
early retirement of the debentures resulted in a one time extraordinary pretax
gain of $954,000. The remaining $4,000,000 are due February 1, 2003 and are
convertible at $11.37 per share. They became callable in 1996 starting at 106%
and declining pro-rata over the respective lives of the obligations.
F-12
<PAGE>
9. INCOME TAXES
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
Eleven
Months Ended
December 31, Year Ended January 31,
----------------------
1996 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $( 7,624,000)
State -- -- (550,000)
----------- ----------- ------------
-- ( 8,174,000)
----------- ----------- ------------
Deferred:
Federal (5,928,000) (2,720,000) (4,523,000)
State (1,046,000) ( 480,000) ( 265,000)
----------- ----------- ------------
6,947,000 3,200,000 4,788,000
----------- ----------- ------------
Increase in valuation allowance 6,947,000 (3,200,000) (6,522,000)
----------- ------------ ------------
$ -- $ -- $(6,440,000)
============ =========== ============
</TABLE>
A reconciliation of the effective income tax rate with the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
Eleven
Months Ended
December 31, Year Ended January 31,
----------------------
1996 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Statutory rate (34%) (34)% (34)%
State income taxes, net
of Federal benefit ( 6%) (6)% ( 1)%
Other 1% 1% 2%
Increase in valuation allowance 39% 39% 17%
----------- ------------ ------------
--% --% (16)%
=========== ============ ============
</TABLE>
The major components of the net deferred tax asset as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Inventory valuation $ 1,630,000
Property 360,000
Accounts receivable reserve 120,000
Other reserves and accrued expenses 204,000
Net operating loss carry forwards 14,000,000
-----------
16,314,000
Valuation allowance (16,314,000)
------------
$ - -
============
</TABLE>
F-13
<PAGE>
Management has established a full valuation allowance for the net deferred asset
due to the uncertainty of its realization. At December 31, 1996, the Company
has approximately $ 35,000,000 of net operating loss carry forwards that begin
to expire in 2010 for federal tax purposes and in varying years for state tax
purposes.
10. STOCKHOLDERS' EQUITY
Stock Option Plans
The Company maintains four stock option plans that permit the grant of options
to purchase shares of common stock. Under the plans, Incentive Stock Options may
be granted to key employees, including officers and directors who are also
employees, and Non-Qualified Options may be granted to key employees, officers,
directors, athletes, advisors and consultants. The maximum term of any option
under the plans is ten years and the option price per share may not be less than
100% of the fair market value of the Company's common stock on the date the
option is granted (110% in the case of incentive stock options granted to
persons owning more than 10% of the voting stock of the Company and 120% in the
case of certain non-qualified stock options granted under the Director's Plan).
Aggregate option activity is as follows:
<TABLE>
<CAPTION>
Number Price
of shares Range
------------ -----------
<S> <C> <C>
Outstanding, January 31, 1994 1,623,200 .67-17.00
Granted 340,000 2.50- 2.75
Exercised (44,000) .67- 9.13
Canceled ( 307,800) 8.13-17.00
--------- -----------
Outstanding, January 31, 1995 1,611,400 1.54-17.00
Granted 905,750 3.875-7.20
Exercised ( 142,500) 2.75- 4.25
Canceled ( 329,710) 1.54-17.00
--------- -----------
Outstanding, January 31, 1996 2,044,940 1.75-17.00
Granted 874,750 1.625-5.13
Exercised ( 154,500) 1.625-4.31
Canceled ( 621,440) 2.50 -17.00
--------- -----------
Outstanding, December 31, 1996 2,143,750 1.625-13.95
========= ===========
</TABLE>
At December 31, 1996, 50,100 options were available for grant under the
plans and 1,381,948 outstanding options, with an average exercise price of
$6.69 per share, were exercisable.
The Company applies Accounting Principal Board Opinion No. 25,
"Accounting for stock Issued to Employees", and the related interpretations in
accounting for its stock option plans. The disclosure requirement of SFAJ 123
was adopted by the Company in 1996. Had compensation cost for the Company's
stock option plans been determined based upon the fair value of the options at
the date of grant, as prescribed under SFAS 123, the Company's net loss would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Eleven
Months Ended Year Ended
December 31, January 31,
1996 1996
------------- -----------
<S> <C> <C>
Net loss, as reported $(17,436,000) $(8,204,000)
Pro forma loss $(18,053,000) $(9,405,000)
</TABLE>
F-14
<PAGE>
The fair value of the options granted during the period ranges from $1.82 to
$7.20 per share on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield - 0%, volatility - 87%,
weighted average risk-free interest rate - 7%, and an expected life ranging
from 3 to 5 years.
Private Equity Placement
On November 4, 1996, the Company completed a private placement of $4,000,000 of
its Common Stock and received $3,849,000, net of expenses. Pursuant to the
private placement agreement, the Company issued 1,600,000 shares of its Common
Stock at $2.49 per share and warrants to acquire 2,720,000 shares of Common
Stock at $3.07 per share to the Investors. The expiration date of the warrants
are as follows:
<TABLE>
<CAPTION>
Number of Warrants Expiration Date
------------------ ---------------
<S> <C> <C>
Series A 1,925,000 November 5, 2006
Series B 233,333 November 5, 2001
Series C 233,333 November 5, 2002
Series D 128,334 November 5, 2006
Series E 200,000 November 5, 2001
</TABLE>
The series B, C and D have earlier expiration dates in the event stock price is
greater than $6.00, $7.25 and $9.00 per share, respectively for any 30 day
period during the term.
Other Warrants
In December 1996, the Company signed a five-year distribution agreement with
Frontier Communications International, Inc. ("Frontier") relating to the
development and marketing at prepaid phone cards for the domestic and
international markets. As part of the agreement, the Company issued warrants to
acquire 125,000 shares of its common stock, 25,000 at $3.00 per share, 50,000 at
$5.00 per share and 50,000 at $10.00 per share. The warrants expire on
December 2001.
11. COMMITMENTS AND CONTINGENCIES
Personal Service Contracts
The Company has entered into personal service contracts with current and former
professional athletes and entertainers to purchase autographs on a per signature
basis, and also, in some cases, for performing other services, including
personal appearances and licensed product rights on behalf of the Company.
Minimum future commitments as of December 31, 1996, under these contracts are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $3,967,000
1998 1,015,000
1999 525,000
2000 526,000
2001 526,000
Thereafter 3,217,000
</TABLE>
The Company is often required to make initial cash payments on personal service
contracts. As of December 31, 1996 and January 31, 1996, the Company has
prepaid $269,000 and $1,674,000, respectively, under these contracts.
F-15
<PAGE>
Lease Agreements
The Company leases office and warehouse space under leases accounted for as
operating leases. At December 31, 1996, future minimum annual rentals for
leases with remaining lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 924,000
1998 907,037
1999 487,117
2000 417,433
2001 425,600
</TABLE>
Rent expense for the eleven months ended December 31, 1996 and years ended
January 31, 1996 and 1995 was $555,000, $701,000 and $1,008,000 respectively.
Subleasing income of $343,000, $337,000 and $70,000 is expected to be received
in 1997, 1998 and 1999 respectively.
Litigation
During 1996, the Company distributed trading card products that were advertised
to contain so-called "vintage" cards, thereby creating the impression that these
cards were in actuality printed in prior years. A small percentage of these
products contained reprints of cards previously published by the Company rather
than originals of these "vintage" cards. The sale of the products, which had
been approved by the Company's Chief Executive officer, ceased in February 1997,
and internal procedures were reinforced to ensure that such activity does not
recur. Although the Company believes the incident has been handled in a
professional and thorough manner, the inclusion of the reprinted cards could be
deemed to be in violation of certain laws or to be in breach of certain
contractual obligations and, accordingly, there is no assurance that it will not
result in a material adverse effect on the Company. The Company incurred
approximately $300,000 of charges related to this incident in the quarter ended
December 31, 1996.
In August 1996, a purported class action was filed against the Company in the
United States District Court for the District of New Jersey. The suit alleges,
among other things, that the practice of randomly inserting chase cards in
packages of trading cards constitutes illegal gambling activity in violation of
state and federal law, including the Racketeer influenced and Corrupt
Organization Act. Plaintiffs seek certification of a class of persons who,
within the applicable statute of limitations, purchased packages of the
Company's trading cards that might contain randomly inserted chase cards. The
Company's motion to dismiss the suit is currently pending. No discovery has
commenced.
On February 14, 1995, Upper Deck Authenticated, Ltd. ("UDA") filed suit against
the Company and three unaffiliated entities in the United States District Court
for the Southern District of California alleging, inter alia, that the Company
had engaged in unfair competition and violated UDA's right to use the indicia of
certain athletes on sports memorabilia and collectibles. The Company has
responded to UDA's suit by denying all wrongdoing and filing its own claims
against UDA, Upper Deck Company and their President, charging them with unfair
competition, defamation and tortious interference with current and prospective
contractual relations. Discovery in this matter is ongoing and the Company
provided a $500,000 reserve in fiscal 1996 for estimated legal fees related to
this suit, as management plans to vigorously defend these actions. The Company
does not expect the outcome of these actions to have a material adverse effect
on its financial position or results of operations.
In August 1994, eight separate proposed class action lawsuits were filed against
the Company and individual defendants alleging, inter alia, securities fraud
under the federal securities laws. On November 17, 1994, the plaintiffs in
these lawsuits filed a consolidated amended class action complaint. On June 27,
1995, the Company reached an agreement for the full settlement and dismissal of
shareholder litigation,
F-16
<PAGE>
and on November 6, 1995 the settlement received final court approval. The
settlement required the Company to pay $300,000 in cash (paid by insurance) and
$2,000,000 in the Company's Common Stock (430,394 shares). Accordingly, the
Company recorded a one-time pre-tax, non cash charge of $2,000,000 to reflect
the fair value of Common Stock on the settlement date. In addition, the Company
incurred legal and other fees of approximately $175,000 associated with the
shareholder litigation.
The Company is involved in various other legal proceedings and claims incident
to the conduct of its business which management believes will not have a
significant adverse impact on the financial position or results of operations.
12. ROYALTY AGREEMENTS
The Company has signed various royalty agreements which permit the Company to
produce and market products utilizing licensed names, logos, likenesses and
trademarks. Most royalty agreements require the Company to pay a royalty equal
to a percentage of specified net sales ranging from 3.75% to 20% subject to
minimum guarantees aggregating $4,817,000 of which the Company has paid
$3,921,000 as of December 31, 1996. The royalty agreements expire at various
dates through October 30, 2002. Royalty expense under the agreements for the
eleven months ended December 31, 1996 and years ended January 31, 1996 and 1995
was $4,146,000, $6,167,000 and $4,165,000 respectively.
13. SIGNIFICANT CUSTOMER AND SUPPLIER CONCENTRATIONS
During the eleven months ended December 31, 1996 and the years ended January
31, 1996 and 1995 sales to national and regional cable television networks
accounted for approximately 31%, 22% and 18% of the Company's net sales. Sales
to one of these television shopping networks during the eleven months ended
December 31, 1996 and fiscal 1996 and 1995 were approximately $7,981,000,
$12,872,000 and $11,289,000, respectively. The Company has no written
agreement with this customer. The loss of this customer, or cable television as
a sales outlet for the Company's products, could have a material adverse impact
on the Company's results of operations.
At January 31, 1996, the Company had accounts receivable totaling $4,378,000, or
27% of gross receivables due from another major customer who is in the retail
business. Sales to that customer in fiscal 1996 were $7,097,000.
The Company relies on one key vendor as the sole supplier of its trading card
products. Although management believes that other vendors could provide similar
products on relatively comparable terms, an unanticipated change in this
vendor's supply to the Company could have a material adverse impact on the
Company's results of operations. At December 31, 1996 and January 31, 1996, the
Company had payables to this vendor totaling $1,584,000 and
$1,661,000, respectively.
14. BENEFIT PLAN
The Company has a defined contribution (401K) plan under which participation is
available to all employees meeting minimum service and age requirements.
Participants may contribute a percentage of their compensation limited to a
dollar amount set by law. The Company may contribute a discretionary matching
contribution up to 4% of the employees salary, and an additional discretionary
amount determined each year by the Company. Employer contributions for the
eleven months ended December 31, 1996 and the years ended January 31, 1996 and
1995 were $32,000, $100,000 and $120,000, respectively.
F-17
<PAGE>
15. UNAUDITED QUARTERLY DATA - ( IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of unaudited quarterly data for the eleven months
ended December 31, 1996 and the year ended January 31, 1996:
<TABLE>
<CAPTION>
Two
Eleven Months First Second Third Months
Ended December 31, 1996 Quarter Quarter Quarter Ended
------- ------- ------- -----
<S> <C> <C> <C> <C>
Net sales $14,167 $ 9,543 $14,567 $ 4,316
Gross profit (loss) 3,555 ( 4,799) 5,713 ( 1,077)
Income (loss) from operations (1,543) (11,637) 907 ( 4,779)
Net income (loss) (2,062) (11,964) 600 ( 4,964)
Net income (loss) per share ( 0.17) ( 0.94) 0.05 ( .34)
<CAPTION>
Year Ended First Second Third Fourth
January 31, 1996 Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $15,562 $16,499 $23,947 $18,945
Gross profit 6,853 7,881 9,533 5,475
Income (loss) from operations 990 (1,080) 2,277 ( 8,421)
Net income (loss) 526 (1,538) 1,768 ( 8,960)
Net income (loss) per share 0.05 ( 0.14) 0.16 (0.76)
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Score Board, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of The Score Board, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated April 10,
1997. Our report on the financial statements includes an explanatory paragraph
with respect to the Company's ability to continue as a going concern as
discussed in Note 2 to the financial statements. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14a(2) is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Philadelphia, Pa.,
April 10, 1997
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stockholders and Directors
The Score Board, Inc.
The audits referred to in our report dated April 12, 1995 relating to the
consolidated financial statements of The Score Board, Inc., which is contained
in Item 8 of this Form 10-K, included in the audit of the financial statement
schedule listed in the accompanying index. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly in all
material respects, the information set forth therein.
BDO SEIDMAN
Philadelphia, Pa.,
April 12, 1995
F-20
<PAGE>
THE SCORE BOARD, INC.
---------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
ELEVEN MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED JANUARY 31, 1996 AND 1995
- -------------------------------------------------------------------------------
INDEX
II. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
All other financial statement schedules are omitted because the conditions
requiring their filing do not exist or because the required information is
disclosed in the financial statements filed, including the notes thereof.
F-21
<PAGE>
THE SCORE BOARD, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
<TABLE>
<CAPTION>
Balance at Additions Deduction Balance at
Beginning Charged to from End of
Description of Period Expense Reserves(a) Period
- ----------- --------- --------- ----------- ------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts and returns:
Eleven months ended
12/31/96 $1,925,000 $ 2,456,000 $(1,181,000) $3,200,000
Year ended 1/31/96 $2,258,000 $ 1,092,000 $(1,425,000) $1,925,000
Year ended 1/31/95 $1,203,000 $ 5,522,000 $(4,467,000) $2,258,000
Inventory valuation
allowance:
Eleven months ended $4,623,000 $ 5,190,000 $(5,738,000) $4,075,000
12/31/96
Year ended 1/31/96 $9,690,000 $( 823,000) $(4,244,000) $4,623,000
Year ended 1/31/95 $1,219,000 $13,939,000 $(5,468,000) $9,690,000
</TABLE>
(a) Uncollectible accounts charged against the reserve, net of recoveries.
F-22
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on April 15, 1997.
THE SCORE BOARD, INC.
By: /s/ Kenneth Goldin
--------------------------------------
Kenneth Goldin, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Kenneth Goldin Chairman of the Board and April 15, 1997
- ---------------------- Chief Executive Officer
Kenneth Goldin
/s/ Michael D. Hoppman Vice President - Finance, April 15, 1997
- ---------------------- Principal Financial Officer and
Michael D. Hoppman Principal Accounting Officer
/s/ James G. Dole Director April 15, 1997
- ----------------------
James G. Dole
/s/ Ira M. Lubert Director April 15, 1997
- ----------------------
Ira M. Lubert
/s/ Allan R. Lyons Director April 15, 1997
- ----------------------
Allan R. Lyons
/s/ Gerald B. Shreiber Director April 15, 1997
- ----------------------
Gerald B. Shreiber
/s/ Richard C. Yancey Director April 15, 1997
- ----------------------
Richard C. Yancey
</TABLE>
47
<PAGE>
EXHIBIT 10.18
THE SCORE BOARD, INC.
SECURITIES PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SECTION 1. SALE AND PURCHASE OF COMMON STOCK AND WARRANTS;
CLOSING.......................................................1
1.1 Sale of Common Stock and Warrants.............................1
1.2 Purchase Price................................................2
1.3 Closing.......................................................3
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................3
2.1 Organization and Good Standing................................3
2.2 Authorization.................................................4
2.3 No Conflict with Law or Documents.............................4
2.4 Capital Stock of Company......................................4
2.5 The Common Shares, Warrants and Warrant Shares................5
2.6 Consents and Approvals........................................5
2.7 Private Offering..............................................5
2.8 Certificate of Incorporation and By-Laws......................6
2.9 Subsidiaries..................................................6
2.10 SEC Filings...................................................6
2.11 Litigation....................................................6
2.12 Compliance with Laws..........................................7
2.13 Financial Statements..........................................7
2.14 Assets........................................................7
2.15 Dividends and Other Distributions.............................8
2.16 Tax Matters...................................................8
2.17 Agreements Affecting the Company's Capital Stock..............9
2.18 Patents, Trademarks, Proprietary Rights.......................9
2.19 Insurance....................................................11
2.20 Employee Benefit Plans.......................................11
2.21 Contracts and Agreements.....................................14
2.22 Absence of Certain Developments..............................14
2.23 Contracts with Insiders......................................15
2.24 Environmental Matters........................................15
2.25 Certain Agreements...........................................17
2.26 Accounts Receivable..........................................17
2.27 Inventory....................................................17
2.28 Books and Records............................................18
2.29 Certain Payments.............................................18
2.30 U.S. Real Property Holding Company...........................18
2.31 Minute Books.................................................18
2.32 Labor Agreements and Actions.................................19
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2.33 Entire Business; Etc.........................................19
2.34 Conditions Affecting Company and Subsidiaries................19
2.35 Projections..................................................19
2.36 Information..................................................20
SECTION 3. PURCHASERS' REPRESENTATIONS AND WARRANTIES...................20
3.1 Pre-Existing Entity..........................................20
3.2 Principal Place of Business..................................20
3.3 Purchase Without View to Distribute..........................20
3.4 Restrictions on Transfer.....................................21
3.5 Access to Information........................................21
3.6 Additional Representations of the Purchaser..................21
SECTION 4. CONDITIONS PRECEDENT TO PURCHASERS' OBLIGATIONS..............22
4.1 Representations and Warranties...............................22
4.2 Performance..................................................22
4.3 Approvals and Consents.......................................22
4.4 Delivery of Common Stock Certificates and Warrants...........22
4.5 Opinion of Counsel to the Company............................22
4.6 Proceedings; Certified Copies................................22
4.7 Investigation................................................23
4.8 No Proceeding or Litigation..................................23
4.9 No Material Adverse Change...................................23
4.10 Environmental Obligations....................................23
4.11 NNM..........................................................23
4.12 Executive Officer Agreements.................................23
4.13 Cancellation of Options......................................23
4.14 Waiver by Bookman............................................23
4.15 Waiver by Holders of Registration Rights.....................24
4.16 Waiver by Congress Financial Corporation.....................24
4.17 Lock-up Agreements...........................................24
4.18 Other Documents..............................................24
SECTION 5. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS............24
5.1 Representations and Warranties...............................24
5.2 Performance..................................................25
5.3 No Proceeding or Litigation..................................25
SECTION 6. COVENANTS OF THE COMPANY PRIOR TO CLOSING....................25
6.1 Payment of Expenses..........................................25
6.2 Operation of Business in Ordinary Course.....................25
6.3 Conditions Precedent.........................................25
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SECTION 7. COVENANTS OF THE COMPANY AFTER CLOSING.......................25
7.1 Rule 144.....................................................25
7.2 Financial Statements; SEC Reports............................26
7.3 Maintenance of Existence; Insurance..........................27
7.4 Compliance with Laws.........................................27
7.5 Board Representative.........................................27
7.6 Right to Acquire Additional Voting Securities................28
7.7 Press Releases...............................................30
7.8 NNM Listing..................................................30
7.12 Waivers, Consents, Etc.......................................31
SECTION 8. COMPLIANCE WITH 1933 ACT; RESTRICTIONS ON TRANSFERABILITY OF
COMMON SHARES, WARRANTS AND WARRANT SHARES...................31
8.1 Compliance with 1933 Act.....................................31
8.2 Restrictive Legend...........................................31
8.3 Restrictions on Transferability..............................31
8.4 Termination of Restrictions on Transferability...............32
SECTION 9. DISPUTE RESOLUTION...........................................32
9.1 Good-Faith Negotiations......................................32
SECTION 10.SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.........
SECTION 11.MISCELLANEOUS................................................34
11.1 Owner of Common Shares, Warrants and Warrant Shares..........34
11.2 Successors...................................................34
11.3 Broker or Finder.............................................34
11.4 Governing Law................................................35
11.5 Notice.......................................................35
11.6 Full Agreement...............................................35
11.7 Headings.....................................................35
11.8 No Waiver; Cumulative Remedies...............................35
11.9 Amendments, Waivers and Consents.............................35
</TABLE>
-iii-
<PAGE>
SECURITIES PURCHASE AGREEMENT (the "Agreement") made as of this 5th
day of November, 1996 by and among THE SCORE BOARD, INC. (the "Company") and
each of the persons listed on Schedule 1 hereto (each, a "Purchaser" and
collectively, the "Purchasers").
BACKGROUND:
----------
The Company is issuing an aggregate of 1,600,000 shares of its
Common Stock, $.01 par value per share ("Common Stock") and Warrants (as defined
in Section 1.1 hereof) to purchase up to 2,720,000 shares, subject to adjustment
as provided in the Warrants, of its Common Stock.
Each Purchaser, desiring to purchase Common Stock and Warrants,
hereby subscribes for the number of shares of Common Stock set forth on Schedule
1 hereto and Warrants to purchase the number of shares, subject to adjustment as
provided therein, of Common Stock as set forth on Schedule 1 hereto.
Intending to be legally bound hereby, the parties hereto agree as
follows:
SECTION 1. SALE AND PURCHASE OF COMMON STOCK AND WARRANTS; CLOSING
-------------------------------------------------------
1.1 Sale of Common Stock and Warrants.
---------------------------------
(a) The Company shall authorize the issuance of an aggregate of
1,600,000 shares of Common Stock (the "Common Shares").
(b) The Company shall authorize the issuance of warrants having
the terms and provisions provided herein and in the form of warrant attached
hereto as Exhibit A to purchase an aggregate of 1,925,000 shares of Common
Stock, subject to adjustment as provided in such warrants, at a purchase price
of $3.07 per share (individually, a "Series A Warrant" and collectively, the
"Series A Warrants").
(c) The Company shall authorize the issuance of warrants having
the terms and provisions provided herein and in the form of warrant attached
hereto as Exhibit B to purchase an aggregate of 233,333 shares of Common Stock,
subject to adjustment as provided in such warrants, at a purchase price of $3.07
per share (individually, a "Series B Warrant" and collectively, the "Series B
Warrants").
(d) The Company shall authorize the issuance of warrants having
the terms and provisions provided herein and in the form of warrant attached
hereto as Exhibit C to purchase an aggregate of 233,333 shares of Common Stock,
subject to adjustment as provided in such warrants, at a purchase price of $3.07
per share (individually, a "Series C Warrant" and collectively, the "Series C
Warrants").
-1-
<PAGE>
(e) The Company shall authorize the issuance of warrants having
the terms and provisions provided herein and in the form of warrant attached
hereto as Exhibit D to purchase an aggregate of 128,334 shares of Common Stock,
subject to adjustment as provided in such warrant, at a purchase price of $3.07
per share (individually, a "Series D Warrant" and collectively, the "Series D
Warrants").
(f) The Company shall authorize the issuance of warrants having
the terms and provisions provided herein and in the form of warrant attached
hereto as Exhibit E to purchase an aggregate of 200,000 shares of Common Stock,
subject to adjustment as provided in such warrant, at a purchase price of $3.07
per share (individually, a "Series E Warrant" and collectively, the "Series E
Warrants").
The Series A Warrants, the Series B Warrants, the Series C Warrants,
the Series D Warrants and the Series E Warrants are hereinafter referred to as
the Warrants. The shares of Common Stock purchasable upon exercise of the
Warrants are hereinafter referred to as the "Warrant Shares". The Common Shares
and Warrant Shares are hereinafter referred to as the "Shares".
(g) Subject to the terms and conditions herein set forth, on the
Closing Date (as defined in Section 1.3), the Company agrees to sell, issue and
deliver to each Purchaser, for the purchase price provided for in Section 1.2,
such number of Common Shares set forth on Schedule 1, and Warrants of such
series and to purchase the number of shares of Common Stock, subject to
adjustment as provided in the Warrants, set forth on Schedule 1, and each
Purchaser severally agrees to purchase such number of Common Shares and such
Warrants at such Purchase Price.
(h) The stock certificates representing the Common Shares to be
delivered to each Purchaser on the Closing Date shall be duly executed by the
Company, registered in such Purchaser's name (or the name of its nominee), free
of all restrictive and other legends (other than the legend specified in Section
8.2 or other legends reasonably acceptable to the Purchasers) and otherwise in
form for good delivery. The certificates evidencing the Series A Warrants,
Series B Warrants, Series C Warrants, Series D Warrants and Series E Warrants
shall be in substantially the form of Exhibits A, B, C, D and E, as the case may
be, with blanks appropriately completed, for the number of shares of Common
Stock applicable to such Purchaser, duly executed by the Company, registered in
such Purchaser's name (or the name of such nominee), free of all restrictive and
other legends (other than the legend specified in Section 8.2 or other legends
reasonably acceptable to the Purchasers) and otherwise in form for good
delivery. The Company will bear all of its own expenses in connection with the
preparation and issuance to the Purchasers of the certificates representing the
Common Shares and the Warrants.
1.2 Purchase Price.
--------------
(a) The aggregate purchase price of the Common Shares and
Warrants to be issued and sold to the Purchasers on the Closing Date shall
aggregate $4,000,000 (the "Purchase Price").
-2-
<PAGE>
(b) The portion of the Purchase Price for the Common Shares
and Warrants payable by each Purchaser shall be as set forth on Schedule 1 and
shall be paid to the Company by wire transfer of immediately available funds to
an account designated by the Company. Each Purchaser shall only be responsible
for such portion of the Purchase Price attributable to the Common Stock and
Warrants being purchased by such Purchaser.
(c) The Company and the Purchasers agree to allocate the
Purchase Price between the Common Shares and Warrants as follows:
(i) to the Common Shares, an amount equal to
$3,972,800, and
(ii) to the Warrants, an amount equal to $27,200 or
$.01 per each Warrant Share issuable under such Warrants.
(d) Each Purchaser and the Company shall prepare and file
their respective Federal income tax returns in a manner which is consistent with
the allocation of the Purchase Price to the Common Shares and the Warrants as
provided in clause (c) above and consistent with the treatment on the Federal
income tax return of each other party of matters related to such allocation.
1.3 Closing. The closing of the issuance and sale of the Common
-------
Shares and Warrants to the Purchasers hereunder shall be held at the offices of
Klehr, Harrison, Harvey, Branzburg & Ellers, 1401 Walnut Street, Philadelphia,
Pennsylvania as soon as practicable following the satisfaction or waiver of all
the closing conditions set forth in Section 4, but no later than November
10, 1996. As used herein "Closing" shall mean the closing of the issuance and
sale of the Common Shares and Warrants to the Purchasers hereunder and the
"Closing Date" shall mean the date on which such Closing takes place.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
Other than as set forth on the Disclosure Letter (as hereinafter defined)
attached hereto as Exhibit B, the Company represents and warrants to each
Purchaser as follows (which representations shall be true and correct as of the
date hereof and on the Closing Date as if made on each of such dates):
-3-
<PAGE>
2.1 Organization and Good Standing. Each of the Company and each
------------------------------
of its Subsidiaries (as defined herein) is a corporation duly organized, validly
existing and in good standing under the laws of its incorporation and has all
requisite power and authority, and all necessary licenses and permits, to own
and lease its properties and assets and to conduct its business as now
conducted. Each of the Company and each of its Subsidiaries is qualified to do
business as a foreign corporation and is in good standing in all states where
the conduct of its business or its ownership or leasing of property requires
such qualification, except where the failure to so qualify may have a material
adverse effect on the business, properties, assets, prospects, operations or
condition (financial or otherwise) of the Company or any Subsidiary (a "Material
Adverse Effect").
2.2 Authorization. The Company has all requisite power and
-------------
authority to execute and deliver this Agreement and the other agreements and
documents required to be executed and delivered by the Company to the Purchasers
prior to or at the Closing and to carry out the transactions contemplated hereby
and thereby. The execution, delivery and performance by the Company of this
Agreement has been duly authorized by all requisite corporate action, and this
Agreement has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms.
2.3 No Conflict with Law or Documents. The execution, delivery
---------------------------------
and performance of this Agreement by the Company will not violate any provision
of law, any rule or regulation of any governmental authority, or any judgment,
decree or order of any court binding on the Company or any of its Subsidiaries
and will not conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute a default under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties, assets or outstanding stock of the Company or any of its
Subsidiaries under their respective certificates or articles of incorporation,
by-laws or other organizational documents or any indenture, mortgage, lease,
agreement or other instrument to which the Company or any of its Subsidiaries is
a party or by which any of them or any of their properties are bound.
2.4 Capital Stock of Company. The authorized capital stock of
------------------------
the Company consists of: (i) 30,000,000 shares of Common Stock, $.01 par value
per share, of which, prior to the issuance of any of the Common Shares and
Warrants pursuant to the Agreement, (A) 13,089,148 shares have been duly and
validly issued and are currently outstanding, fully paid and nonassessable, (B)
921,400 shares have been reserved for issuance upon the awarding of stock grants
or the exercise of options granted and to be granted by the Company (the
"Options" and "Option Shares") under the Company's 1987 Stock Option Plan, the
Company's 1992 Stock Incentive Plan, the Company's 1992 Directors Stock Option
Plan or the Company's 1993 Non-employee Stock Option Plan (collectively, the
"Existing Stock Plans") and (c) 418,410 shares have been reserved of issuance
upon the exercise or conversion of outstanding securities issued by the Company
(the "Convertible Securities" and "Conversion Shares") and (ii) 10,000,000
shares of preferred stock, $.01 par value per share, none of which shares are
presently issued and outstanding. The number of shares of Common Stock issuable
as Option Shares or upon the exercise of Options under the Existing Stock Plans
or as
-4-
<PAGE>
Conversion Shares is not subject to adjustment by reason of the issuance
and sale of the Common Shares or Warrants hereunder, or the Warrant Shares upon
exercise of the Warrants, and no other shares of Common Stock have been reserved
by the Company for issuance. There are no preemptive or similar rights to
purchase or otherwise acquire shares of capital stock of the Company pursuant to
any provision of law or the Certificate of Incorporation or By-Laws of the
Company or by agreement or otherwise. Except as set forth in this Section 2.4
and the disclosure letter from the Company to the Purchasers of even date
herewith (the "Disclosure Letter"), there are no outstanding subscriptions,
warrants, options or other rights or commitments of any character to subscribe
for or purchase from the Company, or obligating the Company to issue, any shares
of capital stock of the Company or any securities convertible into or
exchangeable for such shares.
2.5 The Common Shares, Warrants and Warrant Shares. The Common
----------------------------------------------
Shares, when issued and delivered against payment therefor in accordance with
this Agreement, will be duly authorized, validly issued, fully paid and non-
assessable, and free from all taxes, liens (imposed through the actions or
failure to act of the Company) and charges with respect to the issue thereof.
The Warrants, when issued and delivered against payment therefor in accordance
with this Agreement, will be duly authorized and executed by the Company and
will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their terms. The requisite number of shares of
duly authorized and unissued Common Stock of the Company have been duly
authorized and reserved for issuance upon the exercise of the Warrants, and no
further corporate action is required for the valid issuance of the Warrant
Shares upon the exercise of the Warrants. The Warrant Shares will, at the time
of the Closing and thereafter, not be subject to preemptive or similar rights of
any person, and when issued against payment therefor in accordance with the
terms of the Warrants, will be duly and validly issued, fully paid and
nonassessable, and free from all taxes, liens (imposed through the actions or
failure to act of the Company) and charges with respect to the issue thereof.
2.6 Consents and Approvals. Except for filings under Federal and
----------------------
applicable state securities laws with respect to the Warrant Shares, no permit,
consent, approval or authorization of, or declaration to or filing with, any
federal, state, local or foreign governmental or regulatory authority or other
person, not made or obtained, other than the notification of the National
Association of Securities Dealers, Inc. (the "NASD") with respect to the listing
of the Shares on The Nasdaq National Market System (the "NMS"), is required in
connection with the execution or delivery of this Agreement by the Company, the
offer, issuance, sale or delivery of the Common Shares, Warrants or Warrant
Shares, or the carrying out by the Company of the other transactions
contemplated hereby. Neither the issuance and sale by the Company of the Common
Shares and Warrants as contemplated hereby nor the issuance of the Warrant
Shares upon exercise of the Warrants shall require compliance with the
notification or other requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (collectively, "the HSR Act"), or require any action by or in respect
of, or filing with, any governmental body, agency or official, nor any consent
or approval of shareholders as such or of any other individual or entity (except
that if either Technology Leaders II L.P. ("TLLP") or Technology
-5-
<PAGE>
Leaders II C.V. ("TLCV", and together with TTLP, "Tech Leaders") exercises all
or a portion of its Warrants and such exercise would result in TLLP or TLCV
owning in the aggregate 15 percent (15%) or more of the Company's Common Stock,
then prior compliance with the HSR Act would be required before the exercise of
such Warrants).
2.7 Private Offering. Assuming the accuracy of the Purchasers'
----------------
representations and warranties contained in Section 3 herein, the offer,
issuance and delivery to the Purchasers pursuant to the terms of this Agreement
of the Common Shares and Warrants and, assuming compliance by the Purchasers
with the terms of this Agreement and applicable law, the Warrant Shares, are
exempt from registration under the Securities Act of 1933, as amended (the "1933
Act"). Based on the representations of the Purchasers contained in Section 3, it
is not necessary, under the circumstances contemplated by this Agreement, to
register the Common Shares, Warrants or Warrant Shares under the 1933 Act or
under any applicable state securities or blue sky laws.
2.8 Certificate of Incorporation and By-Laws. The copies of the
----------------------------------------
Company's Certificate of Incorporation and By-Laws previously delivered to the
Purchasers are true and correct and are copies of such documents as in full
force and effect as of the date hereof.
2.9 Subsidiaries. The Disclosure Letter states the name
------------
of each of the Company's subsidiaries (each, a "Subsidiary" and collectively,
the "Subsidiaries"). The Disclosure Letter also states each Subsidiary's
jurisdiction of incorporation and the percentage of its voting stock owned by
the Company and each other Subsidiary. Other than the Subsidiaries, the Company
has no corporate or joint venture affiliates. The Company and each Subsidiary
has good and marketable title to all of the shares it purports to own of the
stock of each Subsidiary, free and clear in each case of any mortgage, lien,
security interest, charge or encumbrance. All such shares have been duly issued
and are fully paid and nonassessable. There are no outstanding warrants, options
or other rights or commitments of any character to subscribe for or purchase
from the Company or a Subsidiary, or obligating such Subsidiary to issue, any
shares of capital stock of such Subsidiary or any securities convertible into or
exchangeable for such shares.
2.10 SEC Filings. The Company has delivered to the Purchasers
-----------
prior to the date hereof true and correct copies of (i) its Annual Report on
Form 10-K for the fiscal year ended January 31, 1996 as amended by Form 10-K/A
dated April 29, 1996, (ii) its Quarterly Report on Form 10-Q for the quarter
ended July 31, 1996 and (iii) its Current Reports on Form 8-K and any other
reports and documents filed with the Securities and Exchange Commission since
January 31, 1996. All documents described in this Section are hereinafter
referred to as the "SEC Reports."
2.11 Litigation. The Disclosure Letter lists all material pending
----------
or, to the Company's knowledge, threatened litigation involving the Company
and/or its Subsidiaries. For purposes of this Section 2.11, any one litigation
will not be deemed "material" and need not be disclosed unless the amount at
issue is greater than $50,000, provided, however, that if the amount at issue
with respect to all immaterial litigation is, in the aggregate, greater than
$300,000, then all
-6-
<PAGE>
such litigation must be disclosed. By separate letter the Company has provided
the Purchasers with a summary of the current status of each litigation set forth
on the Disclosure Letter which summary is true and correct. Except as so
disclosed, there is no pending or, to the knowledge of the Company, threatened
suit, action or litigation, or administrative, arbitration or other proceeding
or governmental inquiry or investigation questioning the validity of this
Agreement or the transactions contemplated hereby, or which may have a Material
Adverse Effect, nor is there, to the knowledge of the Company, any basis for any
such suit, action, litigation, proceeding, inquiry or investigation.
2.12 Compliance with Laws. The Company and each Subsidiary is in
--------------------
compliance with all laws, ordinances, rules and regulations of governmental
authorities applicable to or affecting it, its properties or its business except
where non-compliance would not have a Material Adverse Effect, and neither the
Company nor any Subsidiary has received notice of any claimed default with
respect to such laws, ordinances, rules and regulations.
2.13 Financial Statements.
--------------------
(a) (i) The audited consolidated balance sheets and related
audited statements of consolidated income, cash flow and stockholders' equity of
the Company and its Subsidiaries as at and for each of the three fiscal years of
the Company in the three fiscal year period ended January 31, 1996, and (ii) the
unaudited consolidated balance sheet and related unaudited consolidated
statements of income, cash flow and stockholders' equity of the Company and its
Subsidiaries, as at and for the six months ended July 31, 1996, together with
the notes thereto, copies of all of which have heretofore been furnished to the
Purchasers, in each case, present fairly in all material respects the
consolidated financial position of the Company and its Subsidiaries at such
dates and the consolidated results of their operations and their consolidated
cash flows for the periods then ended, in conformity with generally accepted
accounting principles, consistently applied ("GAAP").
(b) Since July 31, 1996 ("the Balance Sheet Date") there has been
no material adverse change in the business, properties, assets, operations or
condition (financial or otherwise) of the Company and its Subsidiaries taken as
a whole.
(c) The consolidated balance sheet of the Company and its
Subsidiaries at the Balance Sheet Date (the "Balance Sheet") reflects all
liabilities and obligations of the Company and of each Subsidiary, whether
accrued, contingent or otherwise as of the date thereof, that are of a nature
required to be set forth as a liability on a consolidated balance sheet under
GAAP.
(d) As of the date hereof and at the time of the issuance and sale
of the Common Shares and Warrants to the Purchasers hereunder, neither the
Company nor any of its Subsidiaries will have any liabilities or obligations,
whether absolute, accrued, contingent, or otherwise, other than (i) current
liabilities reflected on the Balance Sheet not paid since the date of the
Balance Sheet, (ii) current liabilities incurred after the Balance Sheet Date in
the ordinary course
-7-
<PAGE>
of business and (iii) the other indebtedness of the Company or of its
Subsidiaries described in the Disclosure Letter.
2.14 Assets. Neither the Company nor any Subsidiary owns any
------
real property. The Company and each Subsidiary has good and marketable title to
all of the real and personal properties and assets reflected on the Balance
Sheet as being owned by the Company or such Subsidiary at the Balance Sheet
Date, except for properties and assets sold or otherwise disposed of in the
ordinary course of business since the Balance Sheet Date or that are not
material to its business, subject to no liens, mortgages, security interests,
pledges, encumbrances, or charges of any kind except: (1) liens for taxes or
assessments or other government charges or levies if not yet due and payable or
if due and payable if they are being contested in good faith by appropriate
proceedings and for which appropriate reserves are maintained; (2) liens imposed
by law, such as mechanic's, materialmen's, warehousemen's and carrier's liens,
and other similar liens, securing obligations incurred in the ordinary course of
business which are not past due for more than 30 days, or which are being
contested in good faith by appropriate proceedings and for which appropriate
reserves have been established; (3) liens under workmen's compensation,
unemployment insurance, social security or similar legislation; (4) liens,
deposits or pledges to secure the performance of bids, tenders, contracts (other
than contracts for the payment of money), leases, public or statutory
obligations, surety, stay, appeal, indemnity, performance or other similar
bonds, or other similar obligations arising in the ordinary course of business;
and (5) the liens securing other indebtedness of the Company or its Subsidiaries
described in the Disclosure Letter, or liens which do not and could not
individually or in the aggregate, have a material adverse effect on the
business, properties or assets of the Company and its Subsidiaries taken as a
whole, provided that any such one lien does not secure an individual obligation
of the Company and its Subsidiaries in excess of $25,000, and all such liens in
the aggregate do not secure obligations of the Company and its Subsidiaries in
the aggregate in excess of $100,000 ("Permitted Liens").
2.15 Dividends and Other Distributions. Since the Balance Sheet Date,
---------------------------------
neither the Company nor any Subsidiary has declared, set aside, or made any
payment of a dividend or made any other distribution in respect of the Company's
capital stock, repurchased or redeemed any of the Company's capital stock, or
except as disclosed in the SEC Reports, made any other payments to any holder of
5% or more of the Company's outstanding Common Stock other than salary paid to
such stockholder for bona fide services to the Company or a Subsidiary as an
---- ----
officer or employee and in accordance with the historical employment arrangement
between the Company and such stockholder or reimbursement of reasonable expenses
incurred in the ordinary course of business.
2.16 Tax Matters. The Company and each Subsidiary has timely filed (and,
-----------
through and including the Closing Date, will timely file) with the appropriate
governmental entities all Federal, state, local, foreign and other tax returns
required to be filed on or before the Closing Date and has timely paid (and
through and including the Closing Date, will timely pay) all taxes which have
become due and payable. All such reports and returns (copies of which have been
made available to the Purchasers) were (or, with respect to returns and reports
not filed as of the date hereof, will be)
-8-
<PAGE>
materially accurate and complete when filed and reflect all taxes required to be
paid by the Company and its Subsidiaries for the periods reported therein. The
provision for taxes made on the Balance Sheet at the Balance Sheet Date was
sufficient for the payment of all accrued and unpaid taxes of the Company and
its Subsidiaries with respect to the periods then ended. No additional material
assessments, deficiencies or penalties in respect of taxes have been made or
claimed in writing against the Company or any Subsidiary which remain unpaid.
Except as otherwise set forth in the Disclosure Letter, no tax returns or
reports of the Company or any Subsidiary are or ever have been under audit. No
issue has been raised by any governmental authority with respect to any tax
returns of the Company or any Subsidiary which could result in the assertion of
a tax deficiency for any taxable year. As of July 31, 1996, the Company's
aggregate net operating loss carryovers and capital loss carryovers for federal
income tax purposes was $30,080,106, which amount arose in the years reflected
in the notes included in the Company's audited financial statements. The amount
of such carryover is true and accurate, not subject to adjustment other than
immaterial adjustments as a result of audits of the Company or in connection
with the preparation of tax returns, and was properly reported to all applicable
regulatory and taxing authorities. There currently are no limitations on the
utilization of the net operating losses or capital losses under any section of
the Code, including Section 382, or of the Treasury regulations. There will not
be any limitation on the utilization of the net operating losses or capital
losses solely by reason of transactions contemplated by this Agreement. Neither
the Company nor any Subsidiary is a party to, bound by, or obligated under any
tax sharing, indemnification or similar agreement or arrangement.
2.17 Agreements Affecting the Company's Capital Stock. Except as disclosed
------------------------------------------------
in the Disclosure Letter, there are no agreements, written or oral, between the
Company and any holder of its capital stock or, to the knowledge of the Company,
among any holders of its capital stock, relating to the acquisition, disposition
or voting of the capital stock of the Company. Except as disclosed in the
Disclosure Letter and except for the Registration Rights Agreement by and among
the Company and the signatories thereto dated as of the date hereof (the
"Registration Rights Agreement") there are no agreements, either written or
oral, which obligate the Company or any of its Subsidiaries to effect the
registration of any of its securities under the 1933 Act.
2.18 Patents, Trademarks, Proprietary Rights.
---------------------------------------
(a) Except as disclosed in the Disclosure Letter, the Company and
its Subsidiaries have ownership of, or license to use, all patents, copyrights,
trademarks, servicemarks, tradenames, permits, trade secrets, customer lists,
manufacturing or other processes, computer programs, software designs and
related materials and other intellectual property that are used or to be used in
the business of the Company or any of its Subsidiaries and that are material to
the conduct of the Company's or a Subsidiary's business (collectively, the
"Intellectual Property Rights"). The Intellectual Property Rights are sufficient
to enable the Company and each Subsidiary to carry on its business as currently
conducted in all material respects and the Company's and each Subsidiary's use
and enjoyment of the Intellectual Property Rights does not violate any license
or conflict with or infringe the intellectual property rights of others in a
manner which would materially and adversely affect the business, assets,
properties, prospects, operations or condition (financial or otherwise) of the
Company or such Subsidiary and no proceedings have been instituted or are
pending (or to the knowledge of the
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<PAGE>
Company, threatened) which allege any violation, conflict or infringement of the
intellectual property rights of others. Other than as described in the
Disclosure Letter, there are no outstanding options, licenses or agreements of
any kind to which the Company or any Subsidiary thereof is a party or by which
it may be bound relating to or affecting any Intellectual Property, whether
owned by the Company or a Subsidiary thereof or another person (which term
"person" as used herein includes both individuals and entities of every kind and
description).
(b) Neither the Company nor any Subsidiary is aware that any of
its employees is obligated under any contract or contracts (including licenses,
agreements, covenants and other commitments of any nature), or is subject to any
order, writ, judgment, injunction, decree, determination or award of any court,
administrative agency or other tribunal, that restricts the employee's
activities on behalf of the Company or such Subsidiary as presently conducted or
interfere with the use of such employee's best efforts to promote the interests
of the Company or such Subsidiary.
(c) The Disclosure Letter sets forth each agreement pursuant to
which the Company or any of its Subsidiaries has obtained a license to utilize
Intellectual Property Rights (including, the use of any name or likeness) in
connection with products offered for resale by the Company or any of its
Subsidiaries and which requires or is reasonably expected to result in payments
by the Company in excess of $20,000 in any fiscal year. True and correct copies
of each such agreement (as in force as of the date hereof) has been provided to
the Purchasers and each of such agreements is in full force and effect. The
Company is not aware of any existing material default or event of default (or
event which with notice or lapse of time, or both, would constitute a material
default or an event of default) by any party under any of such agreements.
(d) The Disclosure Letter sets forth all patents, patent
applications, trademarks, trademark applications and registrations and
registered copyrights which are owned by or licensed to the Company or any of
its Subsidiaries or used or to be used by the Company or any of its Subsidiaries
in their business as presently conducted, and which are material to the Company
or a Subsidiary. All of such patents, patent applications, trademark
registrations, trademark applications and registered copyrights have been duly
registered in, filed in or issued by the United States Patent and Trademark
Office, the United States Register of Copyrights, or the corresponding offices
of other jurisdictions as identified on the Disclosure Letter, and have been
properly maintained and renewed in accordance with all applicable provisions of
law and administrative regulations in the United States and each such
jurisdiction.
(e) The Disclosure Letter sets forth all material licenses and
other agreements under which the Company or any of its Subsidiaries has granted
rights to others in Intellectual Property Rights owned or licensed by the
Company or any of its Subsidiaries. Except as described in the Disclosure
Letter, all of said licenses or other agreements are in full force and effect,
and there is no material default or event of default (or event which with notice
or lapse of time, or both, would certificate a material default or an event of
default) by any party thereto.
<PAGE>
(f) The Company and its Subsidiaries have taken all steps required
in accordance with sound business practice and business judgment to establish
and preserve their ownership of all material Intellectual Property Rights. To
the Company's knowledge, neither the Company nor its Subsidiaries made any such
information available to any person or entity other than employees of the
Company or any of its Subsidiaries except pursuant to written agreements
requiring the recipients to maintain the confidentiality of such information and
appropriately restricting the use thereof. To the knowledge to the Company,
there are no infringements by others of any of its or any Subsidiary's
Intellectual Property Rights.
2.19 Insurance. Except as described in the Disclosure Letter, all the
---------
insurable properties of the Company and the Subsidiaries are insured for the
benefit of the Company and the Subsidiaries against all risks usually insured
against by persons operating similar properties in the locality where such
properties are located under valid and enforceable policies issued by insurance
companies of recognized responsibility in reasonably sufficient amounts.
2.20 Employee Benefit Plans.
----------------------
(a) The Disclosure Letter contains a complete and correct list of
all Employee Benefit Plans and Employee Pension Benefit Plans currently
maintained for the benefit of any current or former employees of the Company or
any Subsidiary by the Company or any ERISA Affiliate or to which the Company or
any ERISA Affiliate currently contributes or is currently obligated to make
payments with respect to any current or former employees of the Company or any
Subsidiary.
(b) With respect to each Employee Benefit Plan listed on the
Disclosure Letter: (i) each Employee Benefit Plan has been administered in
accordance with its terms, and is in compliance in all material respects with
the applicable provisions of ERISA, the Code and all other federal, foreign,
state and other applicable laws, rules and regulations, as they relate to such
plan (including, without limitation, funding, filing, terminating, reporting and
disclosure and COBRA continuation coverage obligations); (ii) the Company has
made or provided for in a timely fashion all contributions to all Employee
Benefit Plans as required under the terms of such Plans through and including
the period ending on the Closing Date; (iii) no Employee Pension Benefit Plan
has incurred or has been the subject of a "reportable event" (as defined in
Section 4043 of ERISA) that is required to be reported to the PBGC, and neither
the Company nor any ERISA Affiliate has any liability to the PBGC with respect
to or arising from the maintenance of any such plan, and there have been no
"prohibited transactions" (as described in Section 4975 of the Code or in Part 4
of Subtitle B of Title I of ERISA) with respect to any Employee Benefit Plan;
(iv) there are and during the past three years there have been no inquiries,
proceedings, claims or suits pending or, to the Company's knowledge, threatened
by any governmental agency or authority or by any participant or beneficiary
against any of the Employee Benefit Plans, the assets of any of the trusts under
such Plans or the Plan sponsor or the Plan administrator, or against any
fiduciary of any of such Employee Benefit Plans with respect to the design or
operation of the Employee Benefit Plans; (v) each Employee Pension Benefit Plan
which is intended to be "qualified" within the meaning of Section 401(a) of the
Code is, and has from its inception been so qualified, and any trust created
pursuant to any such Employee Pension Benefit
<PAGE>
Plan is exempt from federal income tax under Section 501(a) of the Code and the
IRS has issued each such Plan a favorable determination letter which is
currently applicable; (vi) neither the Company nor any ERISA Affiliate is aware
of any circumstance or event which could jeopardize the tax-qualified status of
any such Employee Pension Benefit Plan or the tax-exempt status of any related
trust, or would cause the imposition of any liability, penalty or tax under
ERISA or the Code with respect to any Employee Benefit Plan; and (vii) no event
has occurred which would permit the PBGC to impose a lien against any of the
assets of the Company or any ERISA Affiliate under Title IV of ERISA.
(c) Neither the Company nor any ERISA Affiliate maintains a
Multiemployer Plan or an Employee Pension Benefit Plan which is a defined
benefit plan as defined in Section 3(35) of ERISA, and neither the Company nor
any ERISA Affiliate currently has any liability to make any withdrawal liability
payment to any Multiemployer Plan. Neither the Company nor any ERISA Affiliate
is delinquent in making any contributions required to be paid to any
Multiemployer Plan. There is no pending dispute between the Company or any ERISA
Affiliate and any Multiemployer Plan concerning payment of contributions or
payment of withdrawal liability payments.
(d) With respect to each Employee Benefit Plan maintained by the
Company or any ERISA Affiliate: (i) no unsatisfied liabilities to participants,
the IRS, the DOL, the PBGC or to any other person or entity have been incurred
as a result of the termination of any Employee Benefit Plan; (ii) no Employee
Pension Benefit Plan, which is subject to the minimum funding requirements of
Part 3 of Subtitle B of Title I of ERISA or subject to Section 412 of the Code,
has incurred any "accumulated funding deficiency" within the meaning of Section
302 of ERISA or Section 412 of the Code and there has been no waived funding
deficiency within the meaning of Section 303 of ERISA or Section 412 of the
Code; (iii) there has been no event with respect to an Employee Pension Benefit
Plan which would require disclosure under Sections 4062(c), 4063(a) or 4041(e)
of ERISA.
(e) All reports and information required to be filed with the DOL,
IRS and PBGC and with plan participants and their beneficiaries with respect to
each Employee Benefit Plan required to be listed on the Disclosure Letter have
been filed timely and have been complete and accurate in all respects, and all
annual reports (Form 5500 series) of such Plans were certified without
qualification by each Plan's accountants and actuaries.
(f) All Employee Benefit Plans listed on the Disclosure Letter
may, without liability, be amended, terminated or otherwise discontinued except
as specifically prohibited by federal law.
(g) Any bonding required under ERISA with respect to any Employee
Benefit Plan listed on the Disclosure Letter has been obtained and is in full
force and effect and no funds held by or under the control of the Company are or
could be deemed plan assets.
<PAGE>
(h) Except as set forth in the Disclosure Letter, neither the
Company nor any ERISA Affiliate maintains any plan, fund or program that
provides post retirement medical benefits, post retirement death benefits or
other post retirement welfare benefits.
(i) The consummation of the transactions contemplated by this
Agreement will not (i) entitle any employee of the Company to severance pay,
unemployment compensation or any other payment, (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due to any such
employee, or (iii) result in any liability of the Company under Title IV of
ERISA or otherwise.
(j) Each Employee Benefit Plan that provides medical benefits has
been operated in compliance with all requirements of Sections 601 through 608 of
ERISA and either (i) Section 162(i)(2) and (k) of the Code and regulations
thereunder (prior to 1989); or (ii)Section 4980B of the Code and regulations
thereunder (after 1988), relating to the continuation of coverage under certain
circumstances in which coverage would otherwise cease.
(k) With respect to each Employee Benefit Plan which is subject to
Title IV of ERISA, the present value of accrued benefits under each such plan,
based upon both (i) the actuarial assumptions used for funding purposes in the
most recent actuarial report prepared by such plan's actuary with respect to
such plan, and (ii) the actuarial assumptions specified in Section 412 of the
Code, did not, as of its latest valuation date, exceed the then current value of
the assets of such plans allocable to such accrued benefits determine as of the
latest valuation date.
(l) For purposes hereof:
(i) "COBRA" shall refer to Title V of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended.
(ii) "Code" shall refer to the Internal Revenue Code of 1986,
as amended.
(iii) "DOL" shall refer to the United States Department of
Labor.
(iv) "Employee Benefit Plan" shall have the meaning ascribed
to such term by Section 3(3) of ERISA.
(v) "Employee Pension Benefit Plan" shall have the meaning
ascribed to such term by Section 3(2) of ERISA.
(vi) "ERISA" shall refer to the Employee Retirement Income
Security Act of 1974, as amended.
<PAGE>
(vii) "ERISA Affiliate" shall refer to any trade or business,
whether or not incorporated, under common control with the Company within the
meaning of Section 414(b), (c), (m) or (o) of the Code.
(viii)"IRS" shall refer to the Internal Revenue Service.
(ix) "Multiemployer Plan" shall have the meaning ascribed to
such term by Section 4001(a)(3) of ERISA.
(x) "PBGC" shall refer to the Pension Benefit Guaranty
Corporation.
2.21 Contracts and Agreements.
------------------------
(a) The Company has filed as exhibits to its annual report on Form
10-K, as amended, for the fiscal year ended January 31, 1996 and its quarterly
reports on Form 10-Q for the quarters ended April 30, 1996 and July 31, 1996,
all of the contracts and agreements required to be so filed by the rules and
regulations of the Securities and Exchange Commission (the "SEC"). True and
correct copies of all such agreements requested by the Purchasers have been
provided to the Purchasers prior to the date hereof. Other than (i) the
contracts and agreements filed as exhibits to its annual report on Form 10-K, as
amended, for the fiscal year ended January 31, 1996 and its quarterly reports on
Form 10-Q for the quarter ended July 31, 1996 and (ii) as described in the SEC
Reports or the Disclosure Letter, neither the Company nor any Subsidiary is a
party to any contract or agreement which is material to the business,
properties, assets, prospects, operations or condition (financial or otherwise)
of the Company and its Subsidiaries taken as a whole.
(b) Except as disclosed in the Disclosure Letter, neither the Company
nor any Subsidiary is (i) in default under any agreement, contract or instrument
to which it is a party or by which it is bound, which default may have a
Material Adverse Effect, (ii) in violation of its Certificate of Incorporation
or By-Laws (or other organizational documents), each as amended to date, or
(iii) in default with respect to any order, writ, injunction or decree of any
court or governmental agency binding on it, and no event has occurred which with
notice or lapse of time, or both, would create any default or violation
described in clauses (i) through (iii).
2.22 Absence of Certain Developments. Except as described in the
-------------------------------
Disclosure Letter, since the Balance Sheet Date, neither the Company nor any
Subsidiary has (i) incurred or become subject to any material liabilities
(absolute or contingent) except current liabilities incurred, and liabilities
under contracts entered into, in the ordinary course of business; (ii)
mortgaged, pledged or subjected to lien, charge or any other encumbrance any of
its assets, tangible or intangible, except Permitted Liens; (iii) sold, assigned
or transferred any of its tangible or intangible assets or rights or canceled
any debts or obligations except in the ordinary course of business; (iv)
suffered any material losses of assets (whether tangible or intangible) or
rights (including without limitation, license rights), or waived any rights of
substantial value (whether or not in the ordinary course of business); (v) made
any changes in officer compensation except for annual increases consistent with
past practices; (vi) entered into any material transaction other than in the
ordinary course of business, except for the
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<PAGE>
transactions contemplated by this Agreement; (vii) made any material change in
any of its material contracts, its Certificate or Articles of Incorporation or
Bylaws (or other organizational documents), or in any arrangements or agreements
of any nature relating to its officers and directors; (viii) granted any stock
options or other rights to acquire its capital stock or modified any outstanding
stock options, grants, awards or other rights to acquire its capital stock; (ix)
become aware of any change in the regulatory climate applicable to its business,
including any proposed legislation or regulations which could have a Material
Adverse Effect or (x) otherwise experienced any material change in its assets,
financial condition or results of operation.
2.23 Contracts with Insiders. Except as set forth in the SEC Reports or
-----------------------
the Disclosure Letter, no officer or director of the Company, or, to the
Company's knowledge, holder of more than 5% of the Company's outstanding Common
Stock, is a party to any contract, agreement, or arrangement providing for (a)
the Company's or a Subsidiary's employment of, (b) the furnishing of services to
the Company or a Subsidiary by, (c) the rental of real or personal property by
the Company or a Subsidiary from, or (d) the payment by the Company or a
Subsidiary to, any such person, or, to the Company's knowledge, any member of
such person's family, or any corporation, partnership or other entity in which
such person, or, to the Company's knowledge, any member of his family, has an
interest or of which such person, or, to the Company's knowledge, any member of
his family, is an officer, director, trustee, or beneficiary.
2.24 Environmental Matters.
---------------------
(i) With respect to the Company and each of its Subsidiaries:
(a) Each of the Company and its Subsidiaries, and all operations,
processes and other activities on any real properties owned, used, lease,
operated or occupied by them (collectively, the "Company Properties", and
individually, a "Company Property") are, and have been, in compliance with all
Environmental Laws (as defined below);
(b) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or
threatened, before any court, governmental agency or board or other forum
against the Company or any of its Subsidiaries or with respect to any Company
Property (x) for alleged noncompliance (including by any predecessor) with, or
liability under, any Environmental Law or (y) relating to the release into the
environment of any Hazardous Material (as defined below) or oil, whether or not
occurring at or on a Company Property;
(c) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or
threatened, before any court, governmental agency or board or other forum
relating to or against any Company Property (or the Company or any of its
subsidiaries in respect of such Company Property) (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the release into the environment of any
Hazardous Material or oil whether or not occurring at or on Company Property;
-15-
<PAGE>
(d) There is no factual basis for any suit, claim, action,
demand, executive or administrative order, directive or proceeding of a type
described in Section 2.24 (i)(b) or (c);
(e) The Company Properties and any properties formerly owned,
used, lease, operated or occupied by the Company or any of its Subsidiaries
(including, without limitation, soil, groundwater or surface water on or under
the properties, and buildings thereon) do not contain any Hazardous Material (as
defined below) other than as permitted or acceptable under applicable
Environmental Law or for which the Company or its subsidiaries would be liable
under applicable Environmental Law (provided, however, that with respect to
properties formerly owned, used, leased, operated or occupied by the Company or
any of its Subsidiaries, such representation is limited to the period the
Company or any such Subsidiary owned, used, lease, operated or occupied such
properties);
(f) None of the Company or any of its Subsidiaries has
received any notice, demand letter, executive or administrative order, directive
or request for information from any Federal, state, local or foreign
governmental entity or any third party indicating that it may be in violation
of, or liable under, any Environmental Law;
(g) There are no underground storage tanks on, in or under any
Company Properties and no underground storage tanks have been closed or removed
from any of the Company Properties which are, or during any period of time when
they have been, in the ownership of the Company or any of its Subsidiaries; and
(h) During the period of (1) the Company's or any of its
Subsidiaries' ownership, use, leasing, operation or occupation of any of the
Company Properties, or (m) the Company's or any of its Subsidiaries'
participation in the management of any Company Properties, there has been no
release of Hazardous Material or oil in, on, under or affecting such properties
which would subject the Company or its Subsidiaries to liability under any
Environmental Law.
(ii) The following definitions apply for purposes of this Section
2.24: (x) "Environmental Law" means any federal, state or local law, statute,
ordinance, rule regulation, code, license, permit, authorization, approval,
consent, legal doctrine, order, directive, executive or administrative order,
judgment, decree, injunction, requirement or agreement with any governmental
entity, (A) relating to the protection, preservation or restoration of the
environment (which includes, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, structures, soil, surface land,
subsurface land, plant and animal life or any other natural resource), or to
human health or safety, or (B) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of, Hazardous Materials, in each case as amended
and as now or hereafter in effect, including all current Environmental Laws and
all future Environmental Laws and subsequent interpretations thereof; and (y)
"Hazardous Material" means any substance which is or could be detrimental to
human health or safety or to the environment, currently or hereafter listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any substance containing any such substance as a
<PAGE>
component. Hazardous Material includes, without limitation, any toxic waste,
pollutant, contaminant, hazardous substance, toxic substance, hazardous waste,
special waste, industrial substance, oil or petroleum or any derivative or by-
product thereof, radon, radioactive material, asbestos, asbestos-containing
material, urea formaldehyde foam insulation, lead and polychlorinated biphenyl.
2.25 Certain Agreements. The Disclosure Letter lists all
------------------
employment and severance agreements (the "Employment and Severance Agreements")
that the Company and each Subsidiary has entered into with its officers and
employees. Except as disclosed in the Disclosure Letter, the issuance and sale
of the Common Shares and Warrants to the Purchasers hereunder, the issuance of
the Warrant Shares upon the exercise of the Warrants, and the completion of the
other transactions provided for herein will not result in (i) a "change of
control" of the Company, as that term is used in any of the Employment and
Severance Agreements or give any employee the right thereunder to terminate his
employment or receive severance or other payments from the Company or any
Subsidiary, or (ii) the acceleration of vesting of any outstanding Option or
Option Share issued by the Company to any employee under the Existing Stock
Plans.
2.26 Accounts Receivable. All accounts and notes receivable
-------------------
of the Company and its Subsidiaries represent valid obligations from sales made
or services rendered in the ordinary course of business, and are collectible in
full in the ordinary course of business, without any set-off or discount, except
to the extent of the amount of the reserve for possible losses set forth on the
Disclosure Letter, which reserve amount may be adjusted from time to time in
accordance with normal business practices of the Company or such Subsidiary. The
Disclosure Letter includes a correct and complete accounts and notes receivable
aging of the Company and its Subsidiaries as of a recent date including the
reserves for possible losses as of such date.
2.27 Inventory. The Disclosure Letter sets forth, as of
---------
October 31, 1996, the location and fair market value of all inventory of the
Company. Except as described in the Disclosure Letter, all inventory of the
Company and its Subsidiaries is valued on the Company's consolidated books and
records at the lower of cost, determined by the "first in, first out" method of
accounting, or the fair market value thereof. All such inventory consisting of
finished goods is, to the Company's knowledge, of merchantable quality, and is
saleable in the ordinary course of business consistent with past practice.
2.28 Books and Records. The books and records of the Company
-----------------
and its Subsidiaries accurately and fairly reflect their respective income,
expenses, assets and liabilities, and the Company and its Subsidiaries maintain
internal accounting controls which provide reasonable assurance that: (i)
transactions are executed in accordance with management's authorization; (ii)
transactions are recorded as necessary to permit preparation of reliable
financial statements and to maintain accountability for earnings and assets;
(iii) access to assets is permitted only in accordance with management's
authorization; (iv) the recorded accountability of all assets is compared with
existing assets at reasonable intervals; and (iv) all intercompany transactions,
charges and expenses among or between the Company, any Subsidiary, or any other
affiliate of the Company are accurately reflected in all financial statements.
<PAGE>
2.29 Certain Payments. Neither the Company nor any of its
----------------
Subsidiaries, nor any director, officer, agent or employee of any such person,
or any other person associated with or acting for or on behalf of the Company or
any of its Subsidiaries has directly or indirectly (a) made any unlawful
contributions, gift, bribe, rebate, payoff, influence payment, kickback, or
other payment to any person, private or public, regardless of form, whether in
money, property or services, (i) to obtain favorable treatment in securing
business, (ii) to pay for favorable treatment for business secured, or (iii) to
obtain special concessions or special concessions already obtained, for or in
respect of the Company or any of its Subsidiaries, or (b) established or
maintained any fund or asset that has not been recorded in the books and records
of the Company and its Subsidiaries, or (c) taken any other action in violation
of any provision of the Foreign Corrupt Practices Act of 1977, as amended.
2.30 U.S. Real Property Holding Company. The Company is not
----------------------------------
now and has never been a "United States real property holding corporation," as
defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the
Regulations promulgated by the Internal Revenue Service, and the Company has
filed with the Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.897-2(h) of such
Regulations.
2.31 Minute Books. The minute books of the Company and its
------------
Subsidiaries heretofore made available for inspection by the Purchasers contain
complete summaries of all meetings of directors and shareholders since the
incorporation of the Company or such Subsidiary, as applicable, and reflect
accurately in all material respects all transactions referred to in such minutes
or records. No corporate action has been taken on the part of the board of
directors or the executive committee of the Company or any Subsidiary thereof,
nor has any action been taken on the part of the stockholders of the Company as
such, which is not recorded in such minute books, except for actions which will
not have a Material Adverse Effect.
2.32 Labor Agreements and Actions. Neither the Company nor
----------------------------
any Subsidiary thereof is bound by or subject to, any written or oral, express
or implied, contract, commitment or arrangement with any labor union, and no
labor union has requested or, to the knowledge of the Company, has sought to
represent any of the employees, representatives or agents of the Company or any
such Subsidiary thereof. There is no strike or other labor dispute involving the
Company or any Subsidiary thereof pending, or to the knowledge of the Company
threatened, which could have a material adverse effect on the business, assets,
properties, prospects, operations or condition (financial or otherwise) of the
Company or any of its Subsidiaries nor is the Company aware of any labor
organization activity involving any of the employees of the Company or any
Subsidiary thereof. The Company is not aware that any officer or key employee,
or that any group of key employees, intends to terminate his, her or their
employment with the Company or any Subsidiary thereof, nor does the Company or
any such Subsidiary have a present intention to terminate the employment of any
of the foregoing. Except as set forth in the Disclosure Letter, the employment
of each employee of the Company or a Subsidiary thereof is terminable at the
will of the applicable employer without further liability of such employer to
such employee except for the payment of such employee's normal salary accrued
but not paid through the date of such termination and amounts due pursuant to
change of control or severance provisions as set forth on the Disclosure Letter.
<PAGE>
2.33 Entire Business; Etc. Except as set forth in the
--------------------
Disclosure Letter, all of the assets (including the Company's and its
Subsidiaries' interests under franchises, licenses, Intellectual Property,
leases and permits) necessary for the conduct of the business of the Company and
its Subsidiaries as presently conducted are held exclusively by the Company or a
Subsidiary thereof.
2.34 Conditions Affecting Company and Subsidiaries. Except as
---------------------------------------------
disclosed in an SEC Report, there is no fact, development or threatened
development with respect to the markets, products, services, clients, customers,
facilities, computer software, databases, personnel, vendors, suppliers,
licensors, operations, assets or prospects of the business of the Company or any
of its Subsidiaries which are known to the Company which is reasonably likely to
materially adversely affect the business, operation or prospects of the Company
and its Subsidiaries considered as a whole, other than such conditions as may
affect as a whole the economy generally.
2.35 Projections. The Company has previously provided the
-----------
Purchasers with a true, correct and complete copy of its Consolidated Income
Statement Forcast Quaterly Summary (the "Projections"). The Projections were
prepared in good faith by the senior management of the Company as of October 25,
1996. The Company believes there is a reasonable basis (in the aggregate and
not necessarily as to specific sources of revenues, expenses and profits) for
such Projections. With respect to the foregoing, it shall be understood that
the Projections are based on certain assumptions which may or may not be proved
accurate over time and the results projected are subject to all of the
uncertainties associated with Projections. Because of the number and range of
variables and assumptions involved in a forecast of this nature, actual results
may vary from the results shown therein.
2.36 Information. The SEC Reports are correct and complete
-----------
and comply as to form with the requirements of the Securities Exchange Act of
1934, as amended, and the regulations promulgated thereunder. Neither this
Agreement nor any document delivered to the Purchasers pursuant hereto,
including the SEC Reports, contains an untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading. There is no fact known to the Company which could have a Material
Adverse Effect which has not been set forth in this Agreement, the Disclosure
Letter or the other documents furnished to the Purchasers on or prior to the
date hereof in connection with the transactions contemplated hereby.
2.37 Cash Flow. Based upon the net proceeds to be received
---------
by the Company upon the closing of the transactions contemplated hereby and the
Company's good faith best estimate of its expected cash flow from operations and
expected cash expenditures, the Company will have sufficient funds to satisfy
its requirements through June 30, 1997 and to cause all of its accounts payable
to be current as of such date (i.e., less than 60 days outstanding).
<PAGE>
SECTION 3. PURCHASERS' REPRESENTATIONS AND WARRANTIES
------------------------------------------
Each Purchaser understands that the offer and sale of the
Common Shares and Warrants pursuant to this Agreement will not be registered
under the 1933 Act on the grounds that such offers and sales are exempt pursuant
to Section 4(2) of the 1933 Act and/or Regulation D promulgated under Section
4(2) of the 1933 Act, and that the reliance of the Company on such exemptions is
predicated in part on such Purchaser's representations, warranties, covenants
and acknowledgments set forth in this Section 3. The representations of each
Purchaser under this Section 3 are made exclusively by and with respect to such
Purchaser and no Purchaser shall be liable or responsible for the breach of any
representation or warranty made by any other Purchaser.
3.1 Pre-Existing Entity. Each Purchaser severally (and not
-------------------
jointly) represents and warrants to the Company that such Purchaser was not
organized for the specific purpose of purchasing the Common Shares and Warrants
purchased by it hereunder.
3.2 Principal Place of Business. Each Purchaser severally
---------------------------
(and not jointly) represents and warrants to the Company that the address of its
principal place of business is as set forth on Schedule 1 hereto.
3.3 Purchase Without View to Distribute. Each Purchaser
-----------------------------------
severally (and not jointly) represents and warrants to the Company that the
Common Shares and Warrants to be purchased by it are being, and any Warrant
Shares acquired upon exercise of such Warrants will be, acquired by such
Purchaser for its own account (with its own funds and not for the account or
benefit of or with funds obtained from any officer, director or affiliate of the
Company or any of its Subsidiaries), not as a nominee or agent, and not with a
view to resale or distribution within the meaning of the 1933 Act, and the rules
and regulations thereunder, and such Purchaser will not distribute the Common
Shares, Warrants or Warrant Shares in violation of the 1933 Act.
3.4 Restrictions on Transfer. Each Purchaser severally (and
------------------------
not jointly) (i) acknowledges that the Common Shares, Warrants and Warrant
Shares are not registered under the 1933 Act and that the Common Shares,
Warrants and Warrant Shares (if any) to be acquired by it must be held
indefinitely by it unless they are subsequently registered under the 1933 Act or
an exemption from registration is available, (ii) is aware that any routine
sales under Rule 144 of the Securities and Exchange Commission under the 1933
Act of Common Shares, Warrants, and Warrant Shares may be made only in limited
amounts and in accordance with the terms and conditions of that Rule and that in
such cases where the Rule is not applicable, compliance with some other
registration exemption will be required, (iii) is aware that Rule 144 is not
presently available for use by such Purchaser for resale of any such Common
Shares, Warrants and Warrant Shares and (iv) is aware that, except as provided
for in the Registration Rights Agreement, the Company is not obligated to
register under the 1933 Act any sale, transfer or other disposition of the
Common Shares, Warrants or Warrant Shares.
3.5 Access to Information. Each Purchaser confirms that the
---------------------
Company has made available to it the opportunity to ask questions of and receive
answers from the Company's officers
<PAGE>
and directors concerning the terms and conditions of the offering and the
business and financial condition of the Company, and to acquire, and such
Purchaser has received to its satisfaction, such additional information, in
addition to that set forth herein, about the business and financial condition of
the Company and the terms and conditions of the offering as it has requested.
Neither such inquiries nor any other due diligence investigation conducted by
any Purchaser or any of its advisors or representatives shall modify, amend or
affect any Purchaser's right to rely on the Company's representations and
warranties contained in Section 2 hereof. Each of the Purchasers acknowledges
that each of TLLP, TLCV and their respective affiliates has acted for its own
account with respect to the transactions contemplated hereby, that no
information provided by the Company to the Purchasers has been subject to
independent verification by Tech Leaders and Tech Leaders makes no
representations or warranty with respect to the accuracy or completeness of any
such information.
3.6 Additional Representations of the Purchaser. Each
-------------------------------------------
Purchaser severally (and not jointly) represents that (i) it is an "accredited
investor" as such term is defined in Rule 501 promulgated under the 1933 Act,
(ii) its financial situation is such that it can afford to bear the economic
risk of holding the Common Shares, Warrants and Warrant Shares for an indefinite
period of time and suffer complete loss of its investment in the Common Shares,
Warrants and Warrant Shares, (iii) its knowledge and experience in financial and
business matters are such that it is capable of evaluating the merits and risks
of its purchase of the Common Shares, Warrants and Warrant Shares as
contemplated by this Agreement and (iv) the purchase of the Common Shares,
Warrants and Warrant Shares by it has been duly and properly authorized and this
Agreement has been duly executed by it or on its behalf.
SECTION 4. CONDITIONS PRECEDENT TO PURCHASERS' OBLIGATIONS
-----------------------------------------------
The Purchasers' obligation to purchase and make payment for the
Common Stock and Warrants subscribed for hereunder on the Closing Date is
subject, at their option, to the satisfaction of each of the following
conditions:
4.1 Representations and Warranties. On the Closing Date, the
------------------------------
representations and warranties contained in Section 2 hereof shall be true and
correct in all material respects with the same effect as though made on and as
of the Closing Date, and the Company shall have so certified to the Purchasers
in writing.
4.2 Performance. All the covenants, agreements and
-----------
conditions contained in this Agreement to be performed or complied with by the
Company on or prior to the Closing Date shall have been performed or complied
with in all material respects, and the Company shall have so certified to the
Purchasers in writing.
4.3 Approvals and Consents. The Company (and if applicable,
----------------------
the Purchasers) shall have duly obtained, received or effected (and all
applicable waiting and termination periods, if any, including any extensions
thereof, under any applicable law, statute, regulation or rule, including,
without limitation, the applicable waiting period, if any, under the HSR Act,
shall have expired or
<PAGE>
terminated) all authorizations, consents, approvals, licenses, franchises,
permits and certificates by or of, and shall have made all filings and effected
all notifications, registrations and qualifications with, all federal, state,
local and foreign governmental and regulatory authorities to the extent required
to be obtained, received, effected or filed by the Company for the issuance,
sale and delivery of the Common Stock and Warrants being issued and sold on the
Closing Date and the consummation of the transactions contemplated hereby.
4.4 Delivery of Common Stock Certificates and Warrants. The
--------------------------------------------------
Purchaser shall have received duly executed stock certificates of the Company
evidencing the ownership of the Common Stock being purchased by such Purchaser
hereunder and warrant certificates duly executed by the Company with respect to
the Warrants being purchased by such Purchaser hereunder.
4.5 Opinion of Counsel to the Company. On the Closing Date,
---------------------------------
the Purchasers shall have received an opinion from counsel for the Company dated
the Closing Date, addressed to Purchasers covering such matters as may be
specified by the Purchasers, including, without limitation, that no approval of
the stockholders of the Company is required to authorize the transactions
contemplated by this Agreement, and which opinion of counsel shall be in form
and substance satisfactory to the Purchasers in their sole discretion.
4.6 Proceedings; Certified Copies. All proceedings to be
-----------------------------
taken in connection with the transactions contemplated by this Agreement and to
be consummated on or prior to the Closing Date, and all documents incident
thereto, shall be satisfactory in form and substance to the Purchasers. The
Purchasers shall have received such certified copies or other copies of such
documents as they may reasonably request.
4.7 Investigation. The results of the Purchasers' due
-------------
diligence investigation of the Company shall be satisfactory to the Purchasers
in all respects in their sole and absolute discretion.
4.8 No Proceeding or Litigation. No suit, action, or other
---------------------------
proceeding seeking to restrain, prevent or change the transactions contemplated
hereby or otherwise questioning the validity or legality of such transactions
shall have been instituted and be pending.
4.9 No Material Adverse Change. There shall have been no
--------------------------
Material Adverse Change to the Company and its Subsidiaries taken as a whole
since the date of this Agreement.
4.10 Environmental Obligations. The Company will cause full
-------------------------
compliance by it and its Subsidiaries with the New Jersey Industrial Sites
Recovery Act, 13:1K-6 et seq. ("ISRA") prior to the Closing Date. The Company
-- ---
will provide to Purchaser at least five (5) days prior to Closing any and all
documents evidencing such compliance. If the Company believes that ISRA does not
apply to this transaction, it will provide a letter to that effect explaining
the reasoning therefor at least five (5) days prior to the Closing Date, and the
Company will be deemed thereby to have made a representation and warranty to
Purchaser incorporated into this Agreement that ISRA does not apply to this
transaction.
<PAGE>
4.11 NNM. The Company shall have notified the NASD of the
---
issuance of the Shares in accordance with the rules and regulations of the NNM.
4.12 Executive Officer Agreements. Ken Goldin shall have
----------------------------
entered into an employment agreement with the Company in form and substance
satisfactory to the Purchasers.
4.13 Cancellation of Options. The Company shall have
-----------------------
delivered evidence satisfactory to the Purchasers that options exercisable to
purchase at least 150,000 shares of Common Stock owned by Ken Goldin and
outstanding at October 31, 1996 have been cancelled.
4.14 Waiver by Bookman. The Company shall have delivered to
-----------------
the Purchasers an unconditional, non-revocable acknowledgment by Barry Bookman,
in form and substance satisfactory to the Purchasers, (a) that all references to
beneficial ownership of the Company's Common Stock or voting securities
contained in his employment agreement refer to the actual ownership of shares of
Common Stock or voting securities of the Company, and when determining
beneficial ownership thereunder, no consideration shall be given to any shares
of Common Stock or voting securities issuable upon exercise, conversion or
exchange of any other securities and (b) that Mr. Bookman shall not have any
rights to payment or other remuneration as a result of the execution of this
Agreement, the Registration Rights Agreement or the transactions contemplated
hereby or thereby (including, without limitation, the issuance of the Common
Shares and Warrants.
4.15 Waiver by Holders of Registration Rights. The Company
----------------------------------------
shall have delivered to the Purchasers either (a) an unconditional, non-
revocable waiver from holders of a majority of the Registrable Shares (as
defined in the Registration Rights Agreement dated May 28, 1996 (the "May 28,
1996 Registration Rights Agreement") by and between the Company and Fidelity
Convertible Securities Fund (the "Fidelity Fund")), in form and substance
satisfactory to the Purchasers, waiving the applicability of Section 7 of the
May 28, 1996 Registration Rights Agreement to the Common Shares and Warrants
issuable hereunder and to the Warrant Shares and other securities issuable upon
exercise of the Warrants or (b) evidence, satisfactory to the Purchasers, that
the Fidelity Fund has disposed of all of the shares of Common Stock constituting
Registrable Shares under the May 28, 1996 Registration Rights Agreement pursuant
to an effective Registration Statement within the meaning of the May 28, 1996
Registration Rights Agreement.
4.16 Waiver by Congress Financial Corporation. The Company
----------------------------------------
shall have delivered to the Purchasers an unconditional, non-revocable waiver
from Congress Financial Corporation ("Congress"), in form and substance
satisfactory to the Purchasers, waiving any ability of Congress to declare a
default or event of default under that certain Loan and Security Agreement dated
July 31, 1995 (as amended, the "Congress Loan Agreement") by and between the
Company and Congress (as amended to date) as a result of the execution of this
Agreement, the Registration Rights Agreement and the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Common
Shares and Warrants and the issuance of the Warrant Shares or other securities
upon exercise of the Warrants).
<PAGE>
4.17 Lock-up Agreements. The Company shall have delivered an
------------------
agreement, in form and substance satisfactory to Tech Leaders, restricting the
ability of Ken Goldin, Carole Goldin and the Estate of Paul Goldin from selling
shares of Common Stock.
4.18 Other Documents. The Company shall have delivered an executed
---------------
copy of the Registration Rights Agreement and such other certificates and
documents as the Purchasers shall have reasonably requested.
SECTION 5. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
-------------------------------------------------
The Company's obligation to sell the Common Shares and Warrants to each
Purchaser on the Closing Date is subject, at the Company's option, to the
satisfaction of each of the following conditions by the applicable Purchaser:
5.1 Representations and Warranties. On the Closing Date, the
------------------------------
representations and warranties of such Purchaser contained in Section 3 hereof
shall be true and correct in all material respects with the same effect as
though made on and as of the Closing Date and such Purchaser shall have so
certified to the Company in writing.
5.2 Performance. All the covenants, agreements and conditions
-----------
contained in this Agreement to be performed or complied with by such Purchaser
on or prior to the Closing Date shall have been performed or complied with in
all material respects, and such Purchaser shall have so certified to the Company
in writing.
5.3 No Proceeding or Litigation. No suit, action, or other proceeding
---------------------------
seeking to restrain, prevent or change the transactions contemplated hereby or
otherwise questioning the validity or legality of such transactions shall have
been instituted and be pending.
SECTION 6. COVENANTS OF THE COMPANY PRIOR TO CLOSING
-----------------------------------------
6.1 Payment of Expenses. The Company shall (i) pay the expenses
-------------------
incurred by it in connection with the issuance and sale of the Common Shares and
Warrants and the execution, delivery and performance of this Agreement and (ii)
at Closing, up to a maximum of $25,000, pay the legal, accounting, consulting
and other advisory fees and expenses incurred by the Purchasers with respect to
the negotiation and preparation of this Agreement.
6.2 Operation of Business in Ordinary Course. Prior to the Closing,
----------------------------------------
the Company will operate its business and the business of each of its
Subsidiaries only in the usual and normal course, and will not, without the
consent of the Purchasers, engage in any of the transactions described in
Section 2.22 hereof.
<PAGE>
6.3 Conditions Precedent. The Company and each Purchaser shall each
--------------------
use its best efforts to cause the conditions specified in Section 4 to be
satisfied by the Closing Date.
SECTION 7. COVENANTS OF THE COMPANY AFTER CLOSING
--------------------------------------
7.1 Rule 144.
--------
(a) The Company covenants that (i) the Company will use its best
efforts to comply with the current public information requirements of Rule
144(c)(1) under the 1933 Act; and (ii) at all such times as Rule 144 is
available for use by the holders of the Common Shares, Warrants or Warrant
Shares, the Company will furnish each such holder upon request with all
information within the possession of the Company required for the preparation
and filing of Form 144.
(b) At all times during which the Company is neither subject to
the reporting requirements of Section 13 or 15(d) of the 1934 Act, nor exempt
from reporting pursuant to Rule 12g3-2(b) under the 1934 Act, it will provide as
promptly as practicable (in any event not later than twenty (20) days after
initial request) in written form, upon the written request of any Purchaser or a
prospective buyer of the Common Shares, Warrants or Warrant Shares from such
Purchaser, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company further covenants, upon written request, as promptly
as practicable (in any event not later than twenty (20) days after initial
request) to cooperate with and assist the Purchaser or any member of the
National Association of Securities Dealers, Inc. System for Private Offerings
Resales and Trading through Automated Lindake ("PORTAL") in applying to
designate and thereafter maintain the eligibility of such securities for trading
through PORTAL. The Company's obligations under this Section shall at all times
be contingent upon the Purchaser's obtaining from a prospective buyer an
agreement to take all reasonable precautions to safeguard the Rule 144A
Information from disclosure to anyone other than a person who will assist such
buyer in evaluating the purchase of the Common Shares, Warrants or Warrant
Shares.
7.2 Financial Statements; SEC Reports. The Company and each Purchaser
---------------------------------
agrees that the Company shall deliver to each Purchaser owning any Shares or
Warrants the following:
(a) (i) within ninety (90) days after the end of each fiscal
year, an audited consolidated balance sheet, and related, audited consolidated
statements of income, cash flow, and stockholders' equity of the Company and its
Subsidiaries as at the end of and for such fiscal year prepared in accordance
with GAAP, and accompanied by the opinion of an independent public accountant
and (ii) within forty-five (45) days after the end of each of the first three
fiscal quarters of each fiscal year, a consolidated balance sheet and a
consolidated statement of income of the Company and its Subsidiaries as at the
end of and for such quarter and the year to date and as at the end of and for
the corresponding periods of the preceding fiscal year, and a consolidated
statement of cash flow for the year to date and for the corresponding period of
the preceding fiscal year;
<PAGE>
(b) promptly after the same are sent, copies of all proxy
statements, financial statements and reports which the Company sends to its
stockholders in their capacities as stockholders, and promptly after the same
are filed, copies of all financial statements and reports which the Company may
make to, or file with, any governmental authority, agency, commission, board or
bureau, including but not limited to 10-K's and 10-Q's as applicable, and any
prospectus or registration statement filed by the Company or any Subsidiary with
the Securities and Exchange Commission or any successor agency;
(c) promptly, such additional financial and other information as
the Purchaser may from time to time reasonably request;
(c) such further information regarding the Company's business,
condition, property, assets or operations, financial or otherwise, as any
Purchaser may from time to time reasonably request, all prepared in form and
detail satisfactory to such Purchaser;
(d) promptly upon becoming available, one copy of each report and
management letter submitted to the Company or any Subsidiary by independent
accountants in connection with any annual, interim or special audit or other
examination made by them of the books of the Company or any Subsidiary.
7.3 Maintenance of Existence; Insurance. The Company will keep, and
-----------------------------------
will cause each of its Subsidiaries to keep, its corporate existence, rights and
franchises in full force and effect (subject to the provisions of this
Agreement), and its properties in good repair, working order and condition,
normal wear and tear excepted. The Company will maintain, and will cause each of
its Subsidiaries to maintain, public liability, property damage and workmen's
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to substantially the same
extent presently maintained.
7.4 Compliance with Laws. The Company will, and will cause each
--------------------
Subsidiary to, comply in all material respects with all laws and regulations
applicable to the conduct of its business, including without limitation ERISA,
environmental laws, employee safety laws, and the rules and regulations of the
Federal Trade Commission and Consumer Product Safety Commission, and will
indemnify and hold harmless each holder of Common Shares, Warrants, or Warrant
Shares against any failure or alleged failure by the Company to do so.
7.5 Board Representative. (a) The Company shall use its best efforts
--------------------
to cause a person designated by Tech Leaders (any designation to be made by, or
consent required from, Tech Leaders hereunder shall be by the unanimous consent
of TLLP and TLCV for so long as either of them beneficially owns any Fully
Diluted Shares (as defined below)) to be appointed to the Company's Board of
Directors at the Company's first Board meeting after the Closing Date and
thereafter, for so long as Tech Leaders beneficially owns any Fully Diluted
Shares, shall use its best efforts to maintain such designee (or such
replacement for such designee as Tech Leaders may designate from time to time)
as a member of the Company's Board of Directors and as a member of the Audit
Committee and Compensation Committee thereof. Upon the purchase by Tech Leaders
<PAGE>
of an aggregate of 540,000 Warrant Shares upon the exercise of all or any
portion of the Warrants purchased by Tech Leaders hereunder, the Company shall
use its best efforts to cause an additional person designated by Tech Leaders to
be appointed to the Company's Board of Directors at the Company's first Board
meeting following such exercise and thereafter, for so long as Tech Leaders
beneficially owns at least 500,000 shares of Common Stock (calculated based on
actual shares issued and outstanding and without giving effect to any shares
issuable upon exercise, exchange or conversion of other securities) shall use
its best efforts to maintain such designee (or such replacement for such
designee as Tech Leaders may designate from time to time) on the Company's Board
of Directors. As used herein, "Fully Diluted Shares" shall mean all shares of
Common Stock plus all shares of Common Stock issuable upon exercise, conversion
or exchange of any securities exercisable or exchangeable for, or convertible
into, shares of Common Stock (including, without limitation, the Warrants).
(b) The Company shall use its best efforts to identify and appoint, as soon
as practicable, an individual to serve as President of the Company (it being
agreed that the first of such candidates may be a current officer of the
Company), which individual shall report directly to both the Company's Chief
Executive Officer and to the Company's Board of Directors and shall have such
responsibilities and duties as are customary for the president of a public
company. At all times that a designee of Tech Leaders is a member of the
Company's Board of Directors, the Company shall not appoint any new President
(or any other officer performing similar functions) without the approval of a
majority of the Directors constituting the Company's Board of Directors and the
approval of the members(s) of the Company's Board of Directors designated by
Tech Leaders pursuant to Section 7.5(a). For the avoidance of doubt, the
President to be appointed pursuant to the first sentence of this Section 7.5(b)
shall require the approval of a majority of the Directors constituting the
Company's Board of Directors and the approval of the members(s) of the Company's
Board of Directors designated by Tech Leaders pursuant to Section 7.5(a).
7.6 Right to Acquire Additional Voting Securities.
---------------------------------------------
(a) Right to Maintain Proportionate Ownership of Voting
---------------------------------------------------
Securities. From and after the date of Closing, each Purchaser shall have the
- ----------
right, with respect to any issuance of additional Voting Securities by the
Company other than Permitted Issuances (but including any issuance of Voting
Securities issuable as a result of any issuance of Voting Securities (including
a Permitted Issuance) to other parties with preemptive or similar rights), to
acquire all or any part of such proportion of the Voting Securities to be issued
as (A) the aggregate number of Votes represented by Voting Securities held by
such Purchaser at the time of the applicable issuance bears to (B) the aggregate
number of Votes represented by the Company's outstanding Voting Securities prior
to issuance of such additional Voting Securities; provided that such right to
acquire Voting Securities shall be at the same prices or, in the case of Voting
Securities offered for consideration other than cash, at a price equivalent to
the fair market value of such noncash consideration, valued at the time of the
first written agreement in principle (including any non-binding letter of
intent) or binding agreement with respect to such issuance of additional Voting
Securities, subject to adjustment if the definitive agreement provides for
materially different noncash consideration or if materially different noncash
consideration is paid upon closing of such issuance, and on the same terms and
<PAGE>
conditions as the prices, terms and conditions applicable to such issuance. The
right to acquire Voting Securities pursuant to this Section 7.6 (A) shall
terminate on the tenth anniversary of the Closing Date; and (B) shall not be
transferable. To the extent that other parties with preemptive or similar rights
do not exercise such rights with respect to a particular issuance, the number of
shares that such Purchaser has the right to purchase hereunder with respect to
such issuance shall be correspondingly reduced. The Company shall promptly
notify each Purchaser in writing of any and all agreements in principle
(including any nonbinding letter of intent) and binding agreements with respect
to a proposed issuance of additional Voting Securities (other than Permitted
Issuances) and of the actual date of issuance of additional Voting Securities
(other than Permitted Issuances). Any acquisition by a Purchaser pursuant to
this Section 7.6 with respect to an issuance of additional Voting Securities by
the Company shall occur at the date of issuance of such additional Voting
Securities if at least 20 business days have lapsed since the date of first
notice by the Company to such Purchaser of an agreement in principle (including
a nonbinding letter of intent) or binding agreement with respect thereof or, if
such 20 business day period has not lapsed, then within 20 business days
following such notice on a date selected by such Purchaser; provided that, if
such Voting Securities are offered for noncash consideration, any acquisition
shall occur within 20 business days of the determination of the Fair Value (as
defined below) of such noncash consideration on a date selected by such
Purchaser. The fair market value of any noncash consideration shall be
determined as set forth below and shall be made in good faith and utilizing
reasonable business judgment. In any circumstances in which the fair market
value of any such consideration ("Fair Value") is to be determined pursuant to
this Section 7.6, the Company shall give to each Purchaser written notice of the
proposed Fair Value, as determined in good faith by the Board of Directors of
the Company. If, within 30 days after the date such notice is given, the Company
and the Purchasers holding a majority of the Voting Securities held by all the
Purchasers (the "Majority Holders") agree upon the Fair Value then the Fair
Value for purposes of this Section 7.6 shall be as so agreed. If the Majority
Holders and the Company do not agree upon such Fair Value within such 30-day
period, then the Majority Holders and the Company shall appoint a recognized
investment banking firm of national reputation, reasonably acceptable to the
Majority Holders and the Company for the purpose of determining the Fair Value.
If the Company and the Majority Holders cannot agree on the appointment of a
mutually acceptable investment banking firm, or if the firm so appointed
declines or fails to serve, then the Majority Holders and the Company shall each
choose one such investment banking firm and the respective firms so chosen shall
appoint another recognized investment banking firm of national reputation for
the purpose of determining the Fair Value. The investment banking firm so
selected shall appraise the Fair Value for the purposes of this Section 7.6, and
such investment banking firm shall make such appraisal (which shall be in the
form of a written report signed by such investment banking firm) and, for the
purposes of determining the Fair Value pursuant to this Section 7.6, such
appraised Fair Value shall be determined as herein provided shall be final and
conclusive on the Company and the Purchasers. All costs of appraisal shall be
borne by the Company. Each of the Company and the Purchasers shall use all
reasonable efforts to take or cause to be taken all action required by this
Section 7.6 as promptly as possible.
(b) Certain Definitions. For purposes of Section 7.6, the
-------------------
following terms shall have the meanings ascribed to them below:
<PAGE>
(i) "Voting Securities" shall mean Common Stock and any other
securities or interests entitling the holder thereof to vote for or
designate a director or directors of the Company and securities or
instruments which are convertible into, exchangeable for or otherwise
evidencing the right to purchase or otherwise acquire shares of Common
Stock or other securities or interests entitling the holder thereof to vote
for or designate a director or directors of the Company;
(ii) "Votes" shall mean the right to vote for or designate a
director and the number of votes represented by a Voting Security shall be
(A) one Vote per share with respect to shares of Common Stock, (B) the
voting power relative to a share of Common Stock with respect to any other
securities or interests entitling the holder thereof to vote for or
designate a director or directors of the Company and (C) the voting power
of the underlying Common Stock or other securities or interests issuable
with respect to securities or instruments convertible into, exchangeable
for or otherwise evidencing the right to purchase or otherwise acquire
shares of Common Stock or other securities or interests entitling the
holder thereof to vote for or designate a director or directors of the
Company;
(iii) "Permitted Issuances" shall mean (A) issuances of Common
Stock by the Company upon exercise or conversion of presently outstanding
securities, (B) the grant of Plan Options (as defined in the Warrants) to
directors, officers, employees or other persons having a business
relationship with the Company and issuances of Common Stock upon the
exercise of such Plan Options, and (C) the issuance of Voting Securities
(other than for cash) in connection with mergers, acquisitions or similar
transactions.
7.7 Press Releases. The Purchaser shall have the right to reasonably
--------------
approve any press release with respect to the transactions contemplated by this
Agreement. In addition, at no time may the Company use or otherwise refer to the
name of any Purchaser or any Purchaser's affiliates in any press release,
publication or other report without the prior consent of such Purchaser.
7.8 NNM Listing. The Company shall use its best efforts to cause the
-----------
listing of the Common Shares and Warrant Shares pursuant to the notification
filed with the NASD pursuant to Section 4.11 to be declared effective as soon as
practicable after the Closing and shall use its best efforts to maintain such
listing of the Common Shares and Warrant Shares for so long as any Shares or
Warrants are outstanding.
7.9 License Agreements. Prior to the execution of any license or sub-
------------------
license agreement pursuant to which the Company is obligated or is reasonably
expected to pay in excess of $250,000 during any fiscal year, the Company shall
obtain the Board of Directors' approval.
7.10 Shaquile O'Neal. The Company will not, without the prior written
---------------
consent of Tech Leaders, pay all or any portion of that certain $425,000 payment
contemplated to be made to Shaquile O'Neal and/or his affiliates pursuant to
that certain Letter Agreement dated September 4, 1996 between Mine O'Mine,
Scoreboard & Classic Games and Management Plus Enterprises.
<PAGE>
7.11 Amendments to Agreements. For so long as Tech Leaders is
------------------------
entitled to designate a member(s) to the Company's Board of Directors, the
Company shall not amend the employment agreement of either Ken Goldin or Barry
Bookman without obtaining Tech Leaders' prior written consent.
7.12 Waivers, Consents, Etc. Compliance with any of the covenants
----------------------
in this Section 7 may be waived, either generally or in the particular instance,
and any consent required thereunder may be given by Tech Leaders on behalf of
all the Purchasers.
SECTION 8. COMPLIANCE WITH 1933 ACT; RESTRICTIONS ON TRANSFERABILITY OF
COMMON SHARES, WARRANTS AND WARRANT SHARES
------------------------------------------------------------
8.1 Compliance with 1933 Act. The Common Shares, Warrants and
------------------------
Warrant Shares shall not be transferable, except upon the conditions specified
in this Section 8, which conditions are intended to insure compliance with the
provisions of the 1933 Act and applicable state securities laws in respect of
any such transfer.
8.2 Restrictive Legend. The Warrants, and each certificate
------------------
representing the Common Shares, Warrant Shares and any shares of Common Stock or
other securities issued in respect of such Common Shares or Warrant Shares upon
any stock split, stock dividend, recapitalization, merger, consolidation,
similar event, shall (unless otherwise permitted by the provisions of Section
9.4 below) be stamped or otherwise imprinted with the following legend:
"[THIS WARRANT HAS] OR [THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE] NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAW AND THE TRANSFERABILITY [THEREOF IS SUBJECT TO THE
PROVISIONS OF A SECURITIES PURCHASE AGREEMENT BY AND AMONG THE COMPANY AND THE
SIGNATORIES THERETO"
8.3 Restrictions on Transferability. The Company shall not be
-------------------------------
required to register the transfer of the Common Shares or the Warrants or any
Warrant Shares on the books of the Company unless the Company shall have been
provided with an opinion of counsel reasonably satisfactory to it prior to such
transfer to the effect that registration under the 1933 Act or any applicable
state securities law is not required in connection with the transaction
resulting in such transfer; provided, however, that no such opinion of counsel
shall be necessary in order to effectuate a transfer in accordance with the
provisions of Rule 144(k) promulgated under the 1933 Act. Each certificate for
Common Shares or Warrant Shares issued upon any transfer as above provided shall
bear the restrictive legend set forth in Section 8.2 above, except that such
restrictive legend shall not be required if the opinion of counsel reasonably
satisfactory to the Company referred to above is to the further effect that such
legend is not required in order to establish compliance with the provisions of
the 1933 Act and any applicable state securities law, or if the transfer is made
in accordance with
<PAGE>
the provisions of Rule 144(k) under the 1933 Act or pursuant to a registration
statement in effect under the 1933 Act.
8.4 Termination of Restrictions on Transferability. The
----------------------------------------------
conditions precedent imposed by this Section 8 upon the transferability of the
Common Shares, Warrants and Warrant Shares shall cease and terminate as to any
of the Common Shares, Warrants or Warrant Shares when (i) such securities shall
have been registered under the 1933 Act and sold or otherwise disposed of in
accordance with the intended method of disposition by the seller or sellers
thereof set forth in the registration statement covering such securities, (ii)
at such time as an opinion of counsel satisfactory to the Company shall have
been rendered as required pursuant to the second sentence of Section 8.3 to the
effect that the restrictive legend on such securities is no longer required, or
(iii) when such securities are transferable in accordance with the provisions of
Rule 144(k) promulgated under the 1933 Act. Whenever the conditions imposed by
this Section 8 shall terminate as hereinabove provided with respect to any of
the Common Shares, Warrants or Warrant Shares, the holder of any such securities
bearing the legend set forth in this Section 8 as to which such conditions shall
have terminated shall be entitled to receive from the Company, without expense
(except for the payment of any applicable transfer tax) and as expeditiously as
possible, new Warrants in accordance with the terms thereof, or new stock
certificates, not bearing such legend.
SECTION 9. DISPUTE RESOLUTION
------------------
9.1 Good-Faith Negotiations.
------------------------
(a) If any dispute arises under this Agreement that is not
settled promptly in the ordinary course of business, the parties shall seek to
resolve any such dispute between them, first, by negotiating promptly with each
other in good faith in face-to face negotiations. These face-to-face
negotiations shall be conducted by the respective designated senior management
representative of each party (or in the case of a dispute involving the Company
and all Purchasers, a designated senior management representative of Tech
Leaders who shall negotiate on behalf of all the Purchasers). If the parties are
unable to resolve the dispute between them through these face-to-face
negotiations within 20 days (or such period as the parties shall otherwise
agree) following the date of notification (the "Notice Date") by one party to
the other of the existence of such dispute, then any such disputes shall be
resolved in the following manner.
(b) Mediation. The parties shall endeavor to resolve any dispute
---------
arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedures for Business Disputes. Unless otherwise agreed, the parties
will select a mediator from the CPR Panels of Neutrals and shall notify CPR to
initiate the selection process.
(c) Resolution of Disputes.
----------------------
(i) Any action, suit or proceeding where the amount in
controversy as to at least one party, exclusive of interest and costs, exceeds
$1,000,000 ("Summary Proceeding"),
<PAGE>
arising out of or relating to this Agreement, the Registration Rights Agreement,
the Warrants or any other agreement executed in connection herewith or therewith
or the breach, termination or validity thereof which has not been resolved by
mediation as provided herein within 90 days of the Notice Date, shall be
litigated exclusively in the Superior Court of the State of Delaware (the
"Delaware Superior Court") as a summary proceeding pursuant to Rules 124-131 of
the Delaware Superior Court, or any successor rules (the "Summary Proceeding
Rules"). Each of the parties hereto hereby irrevocably and unconditionally (A)
submits to the jurisdiction of the Delaware Superior Court for any Summary
Proceeding, (B) agrees not to commence any Summary Proceeding except in the
Delaware Superior Court, (C) waives, and agrees not to plead or to make, any
objection to the venue of any summary Proceeding in the Delaware Superior Court,
(D) waives, and agrees not to plead or to make any claim that any Summary
Proceeding brought in the Delaware Superior Court has been brought in an
improper or otherwise inconvenient forum, (E) waives, and agrees not to plead or
to make, any claim that the Delaware Superior Court lacks personal jurisdiction
where such courts are vested with sole and exclusive jurisdiction by statute and
(G) understands and agrees that it shall not seek a jury trial or punitive
damages in any Summary Proceeding based upon or arising out of or otherwise
related to this Agreement or any other agreement executed in connection herewith
or the breach, termination or validity thereof, and waives any and all rights to
any such jury trial or to seek punitive damages.
(ii) In the event any action, suit or proceeding where
the amount in controversy as to at least one party, exclusive of interest and
costs, does not exceed $1,000,000 (a "Proceeding"), arising out of or relating
to this Agreement, or any other agreement executed in connection herewith or the
breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
(iii) If a Summary Proceeding is not available to resolve
any dispute hereunder, the controversy or claim shall be settled by arbitration
conducted on a confidential basis, under the U.S. Arbitration Act, if
applicable, and the then current Commercial Arbitration Rules of the American
Arbitration Association (the "Association") strictly in accordance with the
terms of this Agreement and the substantive law of the State of Delaware,
including such law in respect of the statute of limitations. The arbitration
shall be conducted at the Association's regional office located in Philadelphia
by three arbitrators, one of whom shall be an attorney and one of whom shall be
a member of a "Big Six" accounting firm familiar with companies engaged in the
business conducted by the Company. The arbitrators are not empowered to award
damages in excess of compensatory damages and each party hereby irrevocably
waives any right to recover such damages with respect to any such disputes.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction.
(c) Neither party shall be precluded hereby from securing
equitable remedies in court of any jurisdiction, including, but not limited to,
temporary restraining orders and preliminary
<PAGE>
injunctions to protect its rights and interest but shall not be sought as a
means to avoid or stay arbitration or Summary Proceeding.
(d) Each party is required to continue to perform its
obligations under this contract pending final resolution of any dispute arising
out of or relating to this contract, unless to do so would be impossible or
impracticable under the circumstances.
SECTION 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
------------------------------------------------------
All covenants, agreements, representations and warranties made
herein and in the certificates delivered pursuant hereto shall survive the
execution and delivery of this Agreement and the issuance and sale of the Common
Shares and Warrants hereunder notwithstanding any due diligence investigation
conducted by or on behalf of the Purchasers.
SECTION 11. MISCELLANEOUS
-------------
11.1 Owner of Common Shares, Warrants and Warrant Shares. The
---------------------------------------------------
Company may deem and treat the person in whose name the Common Shares, Warrants
and Warrant Shares, as the case may be, are registered as the absolute owner
thereof for all purposes whatsoever, and the Company shall not be affected by
any notice to the contrary.
11.2 Successors. This Agreement shall be binding upon and except
----------
as provided herein, shall inure to the benefit of the respective successors,
executors, personal representatives, heirs and assigns of each of the parties
hereto.
11.3 Broker or Finder. Each party to this Agreement represents
----------------
and warrants that, to the best of its knowledge, no broker or finder has acted
for such party in connection with this Agreement or the transactions
contemplated by this Agreement and that no broker or finder is entitled to any
broker's or finder's fee or other commission in respect thereof based in any way
on agreements, arrangements or understandings made by such party. The Company
shall indemnify each Purchaser against, and hold it harmless from, any
liability, cost, or expense (including reasonable attorneys' fees and expenses)
resulting from any agreement, arrangement, or understanding made by the Company,
and each Purchaser shall indemnify the Company against, and hold the Company
harmless from, any liability, cost, or expense (including reasonable attorneys
fees and expenses) resulting from any agreement, arrangement, or understanding
made by such Purchaser with any third party, for brokerage or finder's fees or
other commissions in connection with this Agreement or any of the transactions
contemplated hereby.
11.4 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of Delaware with
regard to principles of conflict of laws and without regard to any rule
requiring strict construction against the draftsman.
<PAGE>
11.5 Notice. Any notice or other communications required or
------
permitted hereunder shall be deemed given when delivered personally, or upon
receipt by the party entitled to receive the notice when sent by registered or
certified mail, postage prepaid, addressed as follows or to such other address
or addresses as may hereafter be furnished in writing by notice similarly given
by one party to the other:
To the Company:
The Score Board, Inc.
1951 Old Cuthbert Road
Cherry Hill, New Jersey 08034
Attention: President
To the Purchasers at their address as reflected on Schedule I
hereto.
Notice to any holder of Common Shares, Warrants or Warrant Shares
other than a Purchaser shall be given in a like manner to such holder at the
address reflected in the Company's records.
11.6 Full Agreement. This Agreement, together with the
--------------
Registration Rights Agreement and Warrants and the Exhibits, Schedules and
Disclosure Letter attached hereto or delivered herewith, and other documents
delivered herewith, sets forth the entire understanding of the parties with
respect to the transactions contemplated hereby.
11.7 Headings. The headings of the sections of this Agreement are
--------
inserted for convenience of reference only and shall not be considered a part
hereof.
11.8 No Waiver; Cumulative Remedies. No failure or delay on the
------------------------------
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or remedy preclude any other or further exercise
thereof or the exercise of any other right, power or remedy hereunder. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
11.9 Amendments, Waivers and Consents. Any provision in the
--------------------------------
Agreement to the contrary notwithstanding, and except as hereinafter provided,
changes in, termination or amendments of or additions to this Agreement may be
made, and compliance with any covenant or provision set forth herein may be
omitted or waived, if the Company (i) shall obtain consent thereto in writing
from the holder or holders of at least a majority in interest of the Shares
(treating all Warrant Shares issuable upon exercise of the Warrants as
outstanding for this purpose) and (ii) shall deliver copies of such consent in
writing to any holders who did not execute such consent; provided that no
consents shall be effective to reduce the percentage in interest of the Shares
the consent of the holders of which is required under this Section 11.9. Any
waiver or consent may be given subject to
<PAGE>
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
IN WITNESS WHEREOF, each of the parties hereto has fully executed this
Agreement as of the date first set forth above.
THE SCORE BOARD, INC.
By:
---------------------------------
Name:
Title:
PURCHASERS:
TECHNOLOGY LEADERS II L.P.
By: Technology Leaders II Management L.P.,
the General Partner
By: Technology Leaders Management, Inc.,
a General Partner
By:
---------------------------------
Tami L. Fratis, Vice President
TECHNOLOGY LEADERS II OFFSHORE C.V.
By: Technology Leaders II Management L.P.,
a General Partner
By: Technology Leaders Management, Inc.,
a General Partner
By:
---------------------------------
Tami L. Fratis, Vice President
<PAGE>
------------------------------------
Ira Lubert
JONATHAN LUBERT TRUST
By:
---------------------------------
Howard E. Lubert, Trustee
KRISTINE LUBERT TRUST
By:
---------------------------------
Howard E. Lubert, Trustee
THE OUTSOURCING PARTNERSHIP, L.L.C.
By:
---------------------------------
Name:
Title:
------------------------------------
Dean Adler
------------------------------------
Robert A. Fox
NEWVALU, INC.
By:
---------------------------------
Name:
Title:
------------------------------------
Milton Koffman
<PAGE>
------------------------------------
Burton I. Koffman
------------------------------------
Ronald Rubin
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF COMPANY
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
<S> <C> <C>
1. Americana Memorabilia, Inc. New Jersey
2. Classic Games, Inc. Delaware
3. Classic Marketing, Inc. New Jersey
4. SB Acquisition Corp. New Jersey
5. The Score Board Holding Corporation Delaware
</TABLE>
48
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Form S-8 Registration Statements, file numbers 33-38905 and 33-54736 and Form
S-3 Registration Statements, file numbers 33-68348, 333-16171, 333-17153 and
333-7381.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
April 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> FEB-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 470,000
<SECURITIES> 0
<RECEIVABLES> 9,357,000
<ALLOWANCES> 3,200,000
<INVENTORY> 10,250,000
<CURRENT-ASSETS> 17,887,000
<PP&E> 6,254,000
<DEPRECIATION> (4,676,000)
<TOTAL-ASSETS> 20,280,000
<CURRENT-LIABILITIES> 17,572,000
<BONDS> 0
0
0
<COMMON> 147,000
<OTHER-SE> (1,439,000)
<TOTAL-LIABILITY-AND-EQUITY> 20,280,000
<SALES> 42,593,000
<TOTAL-REVENUES> 42,593,000
<CGS> 39,201,000
<TOTAL-COSTS> 39,201,000
<OTHER-EXPENSES> 20,444,000
<LOSS-PROVISION> 330,000
<INTEREST-EXPENSE> 1,338,000
<INCOME-PRETAX> (18,390,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,390,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 954,000
<CHANGES> 0
<NET-INCOME> (17,436,000)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
