<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1996
REGISTRATION NO. 33-_____
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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YOUNG MINDS, INCORPORATED
(Name of small business issuer in its charter)
CALIFORNIA 7371 33-0351148
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(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(909) 335-5780
(Address and telephone number of principal executive offices)
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(Address of principal place of business or intended principal place of business)
DAVID H. COTE, PRESIDENT
YOUNG MINDS, INCORPORATED
1906 ORANGE TREE LANE, SUITE 220
REDLANDS, CA 92374
(Name, address and telephone number of agent for service)
COPIES TO:
EDWARD T. SWANSON, ESQ. CHARLES SNOW, ESQ.
Swanson & Meepos Snow Becker Krauss P.C.
100 Wilshire Boulevard, Suite 200 605 Third Avenue
Santa Monica, California 90401-1113 New York, New York 10158-0125
Phone: (310) 576-4841 Phone:(212) 687-3860
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of each class of securities Proposed maximum aggregate Amount of registration fee
to be registered offering price*
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<S> <C> <C>
Common Stock (no par value) $ 16,445,000 $ 5,671
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</TABLE>
*Estimated for the purpose of calculating the registration fee in accordance
with Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER __, 1996
1,100,000 Shares
YOUNG MINDS, INCORPORATED
COMMON STOCK
____________________
Of the 1,100,000 shares of Common Stock (the "Common Stock") offered
hereby, 725,000 shares are being sold by Young Minds, Incorporated (the
"Company") and 375,000 shares are being sold by certain shareholders of the
Company (the "Selling Shareholders"). See "Principal and Selling
Shareholders." The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. Prior to this offering, there has been
no public market for the Common Stock, and there can be no assurance that
such a public market will develop or be sustained after the public offering.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price. It is currently estimated
that the initial public offering price per share of Common Stock will be
between $11.00 and $13.00.
The Company has applied for inclusion of the Common Stock for quotation on
the Nasdaq National Market under the symbol "YMCD," subject to official notice
of issuance.
____________________
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" (COMMENCING ON PAGE 3 HEREOF) AND "DILUTION."
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS TO SELLING
PUBLIC AND COMMISSIONS COMPANY (1) SHAREHOLDERS
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Per Share...... $ $ $ $
Total (2)...... $ $ $ $
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(1) Before deducting expenses payable by the Company estimated at $249,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
165,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
--------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Sharpe Capital, Inc., New York, New York, on or about ,
1996.
MERIDIAN CAPITAL GROUP, Inc.
SHARPE CAPITAL, INC.
THE DATE OF THIS PROSPECTUS IS ______, 1996
<PAGE>
Information contained herein is subject to completion or amendmant. A
registration statement relating to these securities has been files with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
affective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these secutities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Young Minds, Incorporated (the "Company"), designs, develops, markets and
sells a comprehensive line of software products, embedded controllers, and
related services for creating, storing and accessing Compact Disc - Read Only
Memory ("CD-ROM") discs on computer workstations and networks. The Company
focuses on the development of state-of-the-art software bundled with advanced
compact disc recordable drives ("CD-R") and read-only CD-ROM "jukeboxes" to
facilitate the rapid transfer of high volumes of information in a variety of
computing environments. The Company believes that it has achieved a
strategic advantage by introducing sophisticated, platform neutral, industry
compliant (ISO 9660) software solutions for the mass storage industry.
The Company's strategy is to serve the markets for CD-ROM Jukeboxes and CD
Recorders through its proprietary software technology. The Company's products
have been developed to operate on a broad range of widely used computer
platforms. The Company believes that its platform neutrality is unique in the
industry, enabling the Company to introduce new products quickly in contrast to
most other companies which must develop a separate driver for each hardware-
operating system combination.
The Company was awarded the "Kodak Integration Excellence" Award (July 15,
1996), the Imaging Magazine "Product of the Year for 1995" Award (January 1996),
and PC Magazine "Editor's Choice" Award (May 17, 1994). In addition, the
Company was named as one of the 500 fastest growing technology-based companies
in the United States for 1996 (August 1996) and recognized as a member of the
1996 Southern California Technology Fast 50 (July 8, 1996). The Company
believes that, based on its reputation for superior innovation, quality and
product reliability it has emerged as a recognized industry leader in
establishing the CD-R industry as well as introducing its CD-R technology to a
wide range of hardware and operating system combinations. The Company
participated with Sun Microsystems, Hewlett-Packard, and Digital Equipment
Corporation to establish the Rock Ridge Protocols, now accepted as the industry
standard. Based on these initiatives, the Company believes that it is well
positioned to maintain a leadership role and to actively participate in the
ongoing development of industry standards that will continue to impact the
method of storage and retrieval of large volumes of information within this
rapidly evolving market.
To date the Company has released the following six product lines based on
its proprietary technology:
CD STUDIO: Networkable CD-Recordable solution for UNIX and Windows NT.
MPS: High-volume CD-Recordable Mass Production System solution
for enterprise-wide data archival and distribution.
ULTRACAPACITY: Complete CD-ROM mass storage jukebox solutions.
ULTRASTUDIO: CD-ROM mass storage jukebox solutions with integrated CD-
Recording.
AUTOCDR: CD-Recordable solution for Novell networks.
SIMPLICD: CD-Recordable software for Windows.
In addition, the Company is addressing the increased need for data security
technology with new product developments.
The Company was organized and incorporated in California in 1989. Its
principal executive offices are located at 1906 Orange Tree Lane, Suite 220,
Redlands, California 92374, and its telephone number is (909) 335-1350.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered by the Company . . . . . . . . . . . 725,000 shares
Common Stock offered by the Selling Shareholders. . . . . 375,000 shares
Common Stock to be outstanding after the offering . . . . 3,999,442 shares (1)
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . To repay short-term indebtedness of
approximately $2.8 million, with the remainder
to be used for research and development, capital
expenditures, marketing and working capital.
See "Use of Proceeds."
Proposed Nasdaq symbol. . . . . . . . . . . . . . . . . . YMCD________________
</TABLE>
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(1) Excludes (i) 2,047,462 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants at a weighted average exercise price of
approximately $0.82 per share, (ii) 165,000 additional shares of Common Stock
issuable upon exercise of the Underwriters' over-allotment option, and (iii)
110,000 additional shares issuable upon exercise of warrants granted to the
Underwriters. See "Underwriting."
<TABLE>
<CAPTION>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED JUNE 30, SEPTEMBER 30,
-----------------------------------------------------------------------------
1992(1) 1993 1994 1995(4) 1996(4) 1995(2) 1996(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales $1,928 $4,656 $7,647 $7,052 $6,702
Gross profit 1,130 2,705 4,631 3,777 3,569
Income (loss) from operations (721) (1,040) 1,121 255 (133)
Net income (loss) (811) (1,852) 102 (699) (760)
Net income (loss) per share $(0.31) $(0.60) $0.02 $(0.17) $(0.16)
Weighted average common stock shares outstanding 2,586,714 3,100,868 4,359,196 4,197,480 4,709,147
Actual common stock outstanding (5) 5,241,000 1,899,899 1,905,230 3,095,230 3,302,374
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: DECEMBER JUNE 30, 1996
31, 1995 ACTUAL AS ADJUSTED(3)
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<S> <C> <C> <C>
Working capital (deficiency) $(3,526) $(2,774) 2,730
Total assets 3,669 3,431 8,372
Total liabilities 6,084 5,889 3,486
Shareholders' equity (deficit) (2,415) (2,459) 4,862
Short term debt 1,917 661 142
Long term debt (less current portion) 1,380 2,112 243
Total debt 2,697 2,773 385
</TABLE>
- ---------------------
(1) The summary financial and operating data presented above in respect of the
fiscal year ended December 31, 1992 was derived from financial statements
audited by other independent certified public accountants.
(2) The summary financial and operating data presented above in respect of the
three month periods ended September 30, 1995 and 1996 and selected data and
balance sheet data have not been audited.
(3) As adjusted to reflect the sale of 725,000 shares of Common Stock by the
Company in connection with this offering and the application of the net proceeds
therefrom, assuming an initial public offering price of $12 per share. See "Use
of Proceeds."
(4) During 1996, the Company changed its fiscal year end for financial
reporting purposes to end June 30 from its former December 31 year end.
Accordingly, the summary financial and operating data includes financial results
for the fiscal year ended June 30, 1996 as well as the fiscal year ended
December 31, 1995. Thus, the results of operations for the six months ended
December 31, 1995 are included in both years. Net sales, gross profit, net
loss, net loss per shares, and weighted average common stock outstanding for the
six month period ended December 31, 1995 were $3,648,412; $1,777,230;
$(440,057); $(0.10); and 4,481,230 shares, respectively.
(5) Does not include the effect of any options/warrants or SAB 83 stock, and
therefore represents only the actual outstanding stock at the end of the
fiscal year.
2
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
PAST OPERATING LOSSES; ACCUMULATED DEFICIT. At June 30, 1996, the Company
had a negative working capital of approximately $2.8 million and a shareholders'
deficiency of approximately $2.5 million. The Company sustained net losses of
$698,917 and $760,341 for the fiscal years ended December 31, 1995 and June 30,
1996, respectively. There can be no assurance that the Company will be able to
achieve profitability and, if achieved, that profitability will be sustained.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements, the related notes thereto and other
financial information included herein.
EVOLVING TECHNOLOGY AND MARKET. The data storage industry is characterized
by evolving technology and industry standards. The Company's product offerings
are sold in various configurations to meet the needs of the Company's customers.
The Company is in the process of developing additional products and intends to
introduce such new products during the next fiscal year, although no assurance
can be given that the Company will be successful in developing any new products.
The Company's success will depend, in part, on its ability to maintain and
enhance its existing products and broaden its product offerings by developing
and introducing new products that keep pace with the technological developments
in a cost effective manner, respond to evolving customer preferences and
requirements, and achieve market acceptance. Lack of market acceptance for the
Company's existing or new products, or the Company's failure to achieve
technological advantage over its competition while also remaining price
competitive, would materially adversely affect the Company's results of
operations and financial condition. There can be no assurance that the
Company's products, even if successfully developed, will achieve timely market
acceptance. Moreover, the introduction of products embodying new technology and
the emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. See "Business-Products and Services."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will
depend in large part on its proprietary technology. The Company relies
principally upon copyright, trade secret, and contract law to protect its
proprietary technology. There can be no assurance that such measures are
adequate to protect the Company's proprietary technology. The Company has not
applied for and does not currently hold any patents, but may apply for patent
protection in the future.
The status of United States patent protection in the software industry is
not well defined and will evolve as the United States Patent and Trademark
Office grants additional patents. Patents may be issued which relate to
fundamental technologies incorporated in the Company's products. Since patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which, if issued as patents, would
relate to the Company's products. In addition, because the Company has not
applied for any patents the
3
<PAGE>
Company has never conducted a comprehensive patent search relating to the
technology used in its products. Accordingly, there may be issued patents which
relate to the Company's products. There can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
such claims will not be successful. The Company could incur substantial costs
in defending itself and its customers against any such claims. Parties making
such claims may be able to obtain injunctive or other equitable relief which
could effectively block the Company's ability to sell its products in the United
States and abroad, and could result in an award of substantial damages. In the
event of a claim of infringement, the Company and its customers may be required
to obtain one or more licenses from third parties. There can be no assurance
that the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost or at all. Defense of any lawsuit or failure to
obtain any such required license would have a material adverse effect on the
Company's results and operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend in
large part on the continued service of many of its technical, marketing, sales
and management personnel and on its ability to continue to attract, motivate,
and retain highly qualified employees. The Company's employees may voluntarily
terminate their employment with the Company at any time. Competition for such
employees is intense, and the process of locating technical, marketing, sales,
and management personnel with the combination of skills and attributes required
to execute the Company's strategy is often lengthy. The Company believes that
it will need to hire additional technical personnel in order to enhance its
existing products and to develop new products. If the Company is unable to hire
additional technical personnel, the development of new products and enhancements
would likely be delayed. The loss of the services of these and other key
personnel, particularly Messrs. Young, Cote, and Hornbeck, or the inability to
attract new personnel, could have a material adverse effect upon the Company's
results of operations and research and development efforts. See "Management."
FUTURE PROFITABILITY. The Company's ability to finance its operations and
to maintain profitable operations will depend upon a variety of factors,
including among others its ability to continually develop and market products
that can be manufactured, distributed and sold on a profitable basis. Market
acceptance of new products generally requires substantial time and effort.
There can be no assurance that the Company's new products will achieve
significant market acceptance, that the products will compete effectively
against alternative storage mediums or that the Company will derive sufficient
revenues to achieve and sustain profitability.
COMPETITION. The mass storage market in which the Company operates is
characterized by well established conventional storage methods. The principal
elements of the competition in the Company's markets include product features
and performance, price, quality and reliability, brand awareness, compatibility
with open systems, and level of customer service. The Company is and will be
competing with established companies which have greater financial, technical,
manufacturing, marketing, and research and development resources, as well as
greater product acceptance and experience. Accordingly, there is no assurance
that the Company will be able to compete successfully.
CD-R and CD-ROM mass storage devices, including systems sold by the
Company, currently account for only a small portion of the overall market for
mass data storage, distribution, and recording devices. If competition from
well-established industry participants with competing or improved versions of
existing technologies delays or reverses the adoption of CD-ROM mass storage
devices or CD-R devices or if competitive products are perceived by customers to
offer higher performance or to be more cost effective than the Company's
products, the Company's results of operations would be materially adversely
affected.
The Company believes its use of a platform neutral architecture is an
important competitive element. The Company also believes that the number of
competitors offering similar platform neutrality will grow over the next several
years. The Company anticipates that a significant force of such competition
will be from existing competitors as well as new market entrants. Due to the
potentially greater sales, marketing, product development and financial
resources of the Company's competitors, the Company anticipates that the
competition from these competitors will intensify in the future. In order to
effectively compete against these competitors, the Company will need to grow and
attain sufficient size to have the resources to timely develop new products in
response to evolving technology and customer demands and to sell products
through a broad distribution channel in competition with these other existing
potential customers. No assurance can be given that the Company will be able to
grow sufficiently to enable it to compete effectively in this marketplace.
The Company's competitors include Adaptec, Meridian Data, and Smart
Storage. Although the Company believes that it currently has a competitive
advantage with respect to these competitors from a technological and
4
<PAGE>
cost standpoint, including platform neutrality, there can be no assurance that
the Company will be able to maintain its competitive advantage or that these
existing competitors, or new competitors, will not develop competitive products
utilizing platform neutrality and with favorable pricing. Moreover, the
Company currently has little or no proprietary barriers to entry that could keep
a competitor from developing similar products and technology or selling
competing products in the Company's markets.
DILUTION. Purchasers in this offering will incur an immediate and
substantial dilution of $11.26 per share in the net tangible book value of their
shares, assuming that the initial offering price of the Common Stock is $12.00
per share and that the Underwriters' over-allotment option is not exercised.
The exercise of existing and/or future warrants and options may have an
additional dilutive effect on the interests of the investors in this offering.
See "Dilution."
MANAGEMENT OF GROWTH. The Company expects to achieve significant growth in
the near future. This growth will make significant demands on the Company's
management, resources and operations. To manage its growth effectively, the
Company intends to expand its operational, financial, sales and marketing
systems and to hire and train new employees. There can be no assurance that the
Company will be able to identify, hire, train and retain qualified individuals,
and such failure could have a material adverse effect on the Company's results
of operations and financial condition.
In addition, the Company plans to increase its operating expenses following
consummation of the offering contemplated hereby in order to increase its
research and development, increase sales and marketing operations, develop new
distribution channels and broaden its customer support capabilities. See "Use
of Proceeds." There can be no assurance that such internal expansion will be
successfully implemented, that the cost of such expansion will not exceed the
revenues generated or that the Company's sales and marketing organization will
be able to successfully compete against the sales and marketing organizations of
the Company's current or potential competitors. If the Company is unable to
effectively manage its internal expansion, the Company's results of operations
and financial condition could be materially adversely affected. Moreover, the
foregoing expenses will, by necessity, be incurred prior to any potential
positive impact on revenues. If such expenses are not subsequently followed by
sufficient increased revenues, the Company's operating result and financial
condition could be materially adversely affected.
POSSIBLE NEED FOR ADDITIONAL FUNDS. There can be no assurance that the
Company will not require additional financing after completion of this offering
to fund its future growth. Any additional required financing may not be
available on satisfactory terms to the Company, if at all. Future equity
financings may result in dilution to the holders of the Company's Common Stock.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and "Dilution."
ARBITRARY DETERMINATION OF OFFERING PRICE. The offering price for the
shares of Common Stock offered hereby has been arbitrarily determined by the
Company and the Underwriters, and the price bears no relationship to the
Company's assets, earnings, book value or other such criteria of value. See
"Dilution" and "Business."
RECENT PRIVATE SALE OF SECURITIES. Between December 1995 and March 1996,
the Company sold 92 units, each unit consisting of one $20,000 note, 5,000
shares of Common Stock and 5,000 warrants (with an exercise price of $1 per
share), for $25,000 per unit.
CONTROL BY EXISTING MANAGEMENT. Following the offering, the present
executive officers and directors of the Company and their affiliates will
beneficially own a majority of the shares of the Company's common stock on a
fully diluted basis. Accordingly, they will continue to have the ability to
determine the outcome of elections of the Company's directors and other matters
presented to a vote of shareholders.
POTENTIAL ISSUANCE OF PREFERRED STOCK. The Board of Directors has the
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the preferences, limitations and relative rights of shares of Preferred Stock
and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by the Company's shareholders.
The Preferred Stock could be issued with voting, liquidation, dividend and other
rights superior to the rights of the Common Stock. The Board of Directors has
no present intention to issue Preferred Stock. The potential issuance of
Preferred Stock may delay or prevent a change in control of the Company,
discourage bids for the Common Stock at a premium over the market price, and
adversely affect the market price and the voting and other rights of the holders
of the Common Stock.
5
<PAGE>
DIVIDENDS NOT LIKELY. There can be no assurance that the proposed
operations of the Company will result in sufficient revenues to enable the
Company to operate at profitable levels or to generate a positive cash flow.
For the foreseeable future it is anticipated that any earnings which may be
generated from operations of the Company will be used to finance the growth of
the Company and that cash dividends will not be paid to shareholders.
ABSENCE OF PUBLIC MARKET. Prior to this offering, there has been no public
market for the Common Stock. There can be no assurance that an active trading
market will develop after the completion of this offering or, if developed, that
it will be sustained. There can be no assurance that the market price of the
Common Stock will not decline below the initial offering price. The securities
of many emerging growth companies have experienced price and volume
fluctuations which are, at times, unrelated or disproportionate to the operating
performance of such companies. These conditions may have a material adverse
effect on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE RESALE. Sales of the Company's Common Stock in
the public market following this offering could adversely affect the market
price of the Company's Common Stock. Of the 3,999,442 shares of Common Stock to
be outstanding after the offering (assuming that the Underwriters' over-
allotment option is not exercised), the 1,100,000 shares sold in this offering
will be available for resale without restriction under the Securities Act,
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act. In addition, approximately
1,772,282 shares will be eligible for immediate resale in the public market
without restriction pursuant to Rule 144, after the expiration of the 90-day
period after the date of this Prospectus. The executive officers and directors
of the Company (who in the aggregate hold approximately 747,981 shares eligible
for resale under Rule 144) have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any of their shares for a period of 18 months after
the effective date of the Registration Statement. Sales of Common Stock in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock. See "Shares Eligible for Future
Resale."
6
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 725,000 shares of
Common Stock offered by the Company hereby are estimated to be $7,320,000
($9,042,600) if the Underwriters' over-allotment option is exercised in full) at
an assumed initial public offering price of $12 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company will receive none of the proceeds from the sale of the shares being
offered hereunder by the Selling Shareholders.
The primary purposes of this offering are to create a public market for the
Company's Common Stock, to facilitate future access to public markets and to
obtain additional equity capital. The Company estimates that it will use
approximately $2,800,000 of the net proceeds for the repayment of outstanding
indebtedness, including approximately $1,900,000 in principal and accrued
interest on certain notes due in December 1997), and the balance for
miscellaneous short-term obligations. In addition, the Company presently
intends to use approximately $1,500,000 for research and development, $2,000,000
for marketing, $700,000 for capital expenditures, and the balance for general
working capital. A portion of the net proceeds may also be used for the
acquisition of businesses, products and technologies that are complementary to
those of the Company. The Company, however, has no present plans, agreements or
commitments and is not currently in any negotiations with respect to any such
acquisition.
The Company has not determined the exact amounts it plans to expend on
each of such uses or the timing of such expenditures. The amounts actually
expended for each such use, if any, are at the discretion of the Company and may
vary depending upon a number of factors, including future revenue growth, the
amount of cash generated by the Company's operations, and changing competitive
conditions. Pending their use as set forth above, the net proceeds of this
offering will be invested in U.S. government securities and other short-term
investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs.
7
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 and as adjusted to give effect to the sale of 725,000 shares of Common
Stock by the Company and the application of the net proceeds as described in
"Use of Proceeds." The financial data in the following table should be read in
conjunction with the Company's Financial Statements and notes thereto and other
financial information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Historical As Adjusted (1)(2)
----------- ------------------
<S> <C> <C>
Short term debt:
Notes payable, current portion $ 242,500 $110,000
Due to factor 396,008 0
Current portion of capital lease obligations (3) 22,154 22,154
------ ------
Total short-term debt 660,662 142,154
Long-term debt
Notes payable, less current portion 1,913,000 243,000
Notes payable to related parties, less current portion 198,609 0
------- -
Total long-term debt 2,111,609 243,000
Shareholders equity (deficiency)
Preferred Stock, no par value, 5,000,000 shares
authorized, none of which are issued and
outstanding - -
Common Stock, no par value, 15,000,000 shares
authorized, 3,303,374 shares (historical) and
4,028,374 shares (4) (as adjusted) issued and 1,965,140 9,285,140
outstanding (5);
Additional paid-in capital 290,338 290,338
Shareholders notes receivable (406,620) (406,620)
Accumulated deficit (4,307,368) (4,307,368)
----------- -----------
Total stockholders equity (deficiency) $(2,458,510) 4,861,490
----------- ---------
Total capitalization 82,247 5,246,644
------ ---------
------ ---------
</TABLE>
- -------------------
(1) Does not reflect the issuance of up to 165,000 additional shares subject to
the Underwriters' over-allotment option or the proceeds of the sale thereof.
(2) As adjusted to give effect to the receipt of net proceeds from the sale by
the Company of 725,000 shares of Common Stock pursuant to this offering, after
deducting underwriting discounts and estimated expenses payable by the Company,
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." An initial offering price of $12.00 per share is assumed.
(3) See Note 8 to Financial Statements for additional information concerning
capital lease obligations.
(4) Does not reflect the cancellation, subsequent to June 30, 1996, of 28,932
shares as part of a settlement with the Company.
(5) Excludes (i) 2,047,462 shares of Common Stock issuable upon exercise of
options or warrants outstanding at June 30, 1996, and (ii) 110,000 shares of
Common Stock reserved for issuance upon the exercise of the Underwriters'
warrants. See "Underwriting."
8
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company at June 30, 1996 was
$(4,353,254), or $(1.32) per share. The net tangible deficit comprises
shareholders' deficiency of $(2,458,510), less software development costs of
$1,714,444 and deferred loan costs of $180,300. After giving effect to the
sale of 725,000 shares of Common Stock offered by the Company hereby (after
deducting underwriting discounts and commissions and estimated offering
expenses) and application of the net proceeds therefrom as set forth in "Use of
Proceeds," and assuming an initial offering price of $12.00 per share, the net
tangible book value of the Company at June 30, 1996 would have been $2,990,746,
or $0.74 per share, representing an immediate increase in the net tangible book
value of $2.06 per share to existing shareholders and an immediate dilution of
$11.26 per share to new investors purchasing shares in this offering. The
following table illustrates the resulting per share dilution with respect to the
shares of common Stock offered hereby:
Assumed initial public offering price per share------------- $12.00
Net tangible book value per share at June 30, 1996---------- $(1.32)
Increase per share attributable to new investors------- 2.06
Net tangible book value per share after the offering--------- 0.74
-----
Dilution per share to new investors-------------------------- $11.26
The table below summarizes the difference, at June 30, 1996, between the
existing shareholders and the new investors with respect to the number of shares
purchased from the Company, the total consideration paid and the average price
per share paid (before deducting underwriting discounts and commissions and
estimated offering expense payable by the Company), assuming an initial public
offering price of $12 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
---------------- ------------------- Per Share(1)
-------------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1) 3,303,374 82.0% $ 1,965,140 18.4% $ 0.59
New investors 725,000 18.0% 8,700,000 81.6% 12.00
------- ----- ---------- ------
Total 4,028,374(2) 100.0% $ 10,665,140 100.0%
</TABLE>
- -----------------------
(1) The sale by the Selling Shareholders in this offering will cause the number
of shares held by existing shareholders to be reduced to 2,928,374 shares, or
73% of the total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares held by new investors to
1,100,000 shares, or 27% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal and Selling Shareholders."
(2) Does not reflect the cancellation, subsequent to June 30, 1996, of 28,932
shares as part of a settlement with the Company.
The foregoing tables assume no exercise of any outstanding stock options or
warrants or the Underwriters' over-allotment option. As of June 30, 1996, there
were outstanding options and warrants to purchase 2,047,462 shares of Common
Stock at a weighted average exercise price of approximately $0.82 per share.
See "Underwriting" for information concerning the Underwriters' over-allotment
option. To the extent that the outstanding options, warrants or any options
granted in the future are exercised, there will be further dilution to new
investors.
9
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere herein. The
financial statement data as of and for the fiscal years ended December 31, 1994
and 1995 and June 30, 1996 are derived from the audited Financial Statements
included elsewhere in this Prospectus and should be read in conjunction with
those Financial Statements and the Notes thereto. The statement of operations
data with respect to the fiscal year ended December 31, 1993 are derived from
audited financial statements not included in this Prospectus. The statement of
operations data with respect to the fiscal year ended December 31, 1992 are
derived from audited financial statements not included in this Prospectus which
were audited by other independent certified public accountants. The statement
of operations data for the three months ended September 30, 1995 and 1996 have
not been audited. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Three Months Ended
Year Ended December 31, Ended June 30, September 30,
-------------------------------------------------- -------------- ------------------
1992 1993 1994 1995(1) 1996(1) 1995 1996
---- ---- ---- ------- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $1,928 $4,656 $7,647 $7,052 $6,702
Cost of goods 798 1,951 3,016 3,275 3,133
--- ----- ----- ----- -----
Gross profit 1,130 2,705 4,631 3,777 3,569
----- ----- ----- ----- -----
Operating costs and expenses
Research and development 181 597 437 365 403
Selling, general and administrative 1,670 3,148 3,073 3,157 3,299
----- ----- ----- ----- -----
Total operating expense 1,851 3,745 3,510 3,522 3,702
----- ----- ----- ----- -----
Income (loss) from operations (721) (1,040) 1,121 255 (133)
Other income (expense) 17 (654) (409) (207) 81
Interest expense (107) (158) (610) (747) (808)
----- ----- ----- ----- -----
Income (loss) before income taxes (811) (1,852) 102 (699) (860)
Income tax benefit 0 1 0 0 100
- - - - ---
Net income (loss) (811) (1,853) 102 (699) (760)
----- ------ --- ----- -----
Net income (loss) per share $(0.31) $(0.60) $0.02 $(0.17) (0.16)
Weighted average number of shares 2,586,714 3,100,868 4,359,196 4,197,480 4,709,147
of common stock outstanding
Actual common stock outstanding (3) 3,241,000 1,899,899 1,905,230 3,095,230 3,303,374
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1996
------------------------------------------ ----------------
1992 1993 1994 1995 ACTUAL AS ADJUSTED (1)
------------------------------------------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $(1,374) $(3,039) $(3,670) $(3,526) $(2,774) $2,730
Total assets 1,059 1,431 3,563 3,669 3,431 8,372
Short term debt 713 866 1,918 1,317 661 142
Long term debt (less current portion) 93 47 31 1,380 2,112 243
Total debt 806 913 1,949 2,697 2,773 385
Total liabilities 1,846 3,500 5,512 6,084 5,889 3,486
Shareholders equity (deficit) (786) (2,069) (1,949) (2,415) (2,459) 4,862
</TABLE>
- -----------------------
(1) During 1996, the Company changed its fiscal year end for financial
reporting purposes to end June 30 from its former December 31 year end.
Accordingly, the summary financial and operating data includes financial
results for the fiscal year ended June 30, 1996 as well as the fiscal year
ended December 31, 1995. Thus, the results of operations for the six months
ended December 31, 1995 are included in both years. Net sales, gross profit,
net loss, net loss per shares, and weighted average common stock outstanding
for the six month period ended December 31, 1995 were $3,648,412; $1,777,230;
$(440,057); $(0.10); and 4,481,230 shares, respectively.
(2) As adjusted to reflect the sale of 725,000 shares of Common Stock by the
Company in connection with this offering and the application of the net proceeds
therefrom, assuming an initial public offering price of $12 per share. See "Use
of Proceeds."
(3) Does not include the effect of any options/warrants or SAB 83 stock, and
therefore represents only the actual outstanding stock at the end of the fiscal
year.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Company for the fiscal years ended December 31,
1994 and 1995 and June 30, 1996. The following should be read in connection
with the financial statements and related notes appearing elsewhere herein.
Certain statements set forth herein are forward-looking and involve risks and
uncertainties. For information regarding potential factors that could have a
material adverse effect on the Company's business, operating results and
financial condition, refer to the "Risk Factors" section.
GENERAL OVERVIEW
The Company was formed in 1989 to exploit the juncture between the CD-ROM
industry, which was experiencing substantial revenue growth, and the development
of server technology, based at that time on the UNIX operating system. The
Company developed a core technology wrapped around CD technology, with the focus
being on high end, highly reliable solutions for CD access and CD recording. In
1993, the Company completed development of CD Studio, which not only achieved
significant sales for the Company but also received critical acclaim. The
Company has developed five additional products based on its core technology, and
has been the recipient of several awards in recent years.
Since its inception, the Company has suffered from chronic
undercapitalization. Although revenues increased dramatically each year from
1989 through 1994, increasing from approximately $39,000 in 1989 to over $7
million in 1994, the Company incurred losses in every year other than 1994 due
primarily to the substantial costs of developing products, the small size of the
Company relative to such costs, the costs related to discontinuing its
publishing operations, and the significant cost of borrowing money. The Company
has attempted to address its undercapitalization by borrowing money from various
related and unrelated third parties, which has had a substantial adverse effect
on its profitability. Interest expense represented 8.0%, 10.6% and 12.1% of net
sales for the years ended December 31, 1994, December 31, 1995 and June 30,
1996, respectively. Such interest expense exceeded the Company's losses for
each of the years ended December 31, 1995 and June 30, 1996.
Despite earning a modest profit in 1994, the Company incurred a substantial
loss during 1995, due in part to the departure in early 1995 of the Vice
President of Sales and approximately 50% of the sales force. The former Vice
President and three other former employees of the Company formed a business
which unsuccessfully attempted to compete with the Company. The Company's
business was substantially disrupted as a result. This disruption was
exacerbated by the lack of capital available to the Company at that time. As a
result of this lack of equity funding, the Company was forced to seek working
capital through an arrangement with a factor.
In early 1996, management began a substantial realignment and
reorganization of the Company, providing new focus on the expansion of sales and
marketing and the addition of a Vice President for research and development.
The results of such realignment and reorganization have begun to take effect
during the first quarter of fiscal 1997.
Based on the number of units shipped during July and August 1996 and the
amount of backlog at August 31, 1996, the Company believes that net sales will
be significantly greater for the three months ending September 30, 1996 compared
to the three months ended September 30, 1994 and 1995 and to the three months
ended June 30, 1996 and that the Company will realize net income for such
quarter. No assurance can be given, however, as to the amount of any net
income, or if net income is realized, whether profitability can be sustained.
As a result of the operating losses incurred through June 30, 1996 in
connection with the development of the Company and its current product
achievements, the Company has federal net operating loss carryforwards of
approximately $3,488,000 as of June 30, 1996, which can be utilized to offset
future income. The net operating loss carryforwards expire at various dates
through 2011.
The CD-Recordable industry is in a rapid growth phase and there are supply
shortages from time to time. Rapid pricing changes and shortages of third party
hardware have slowed down Company shipments to customers. The Company believes
that CD-Recordable and Jukebox hardware are increasingly becoming commodity
items and that it will be extremely difficult to continue to create a
significant competitive advantage by
11
<PAGE>
reselling these items. Moreover, Company sales mau be affected by the economic
conditions in the small computer industry which may suffer from cyclical
depressed business conditions.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
YEARS ENDED DECEMBER 31,YEAR ENDED
JUNE 30,
1994 1995 1996
------- ------- -------
Net Sales 100.0% 100.0% 100.0%
Cost of sales 39.4% 46.4% 46.8%
------ ------ ------
Gross profit 60.6% 53.6% 53.2%
Research and development 5.7% 5.2% 6.0%
Selling, general and administrative 40.2% 44.8% 49.2%
------ ------ ------
Income (loss) from operations 14.7% 3.6% -2.0%
Interest -8.0% -10.6% -12.1%
Other income (expense) -5.4% -2.9% 1.3%
----- ----- ----
Income (loss) before income taxes 1.3% -9.9% -12.8%
Taxes benefit/(tax) 0.0% 0.0% 1.5%
---- ---- ----
Net income (loss) 1.3% -9.9% -11.3%
---- ----- ------
During 1996, the Company changed its fiscal year for financial reporting
purposes to end June 30 from its former December 31 year end. Thus, this
Prospectus includes financial results for the fiscal year ended June 30, 1996 as
well as the fiscal year ended December 31, 1995. Accordingly, the results of
operations for the six month period ended December 31, 1995 are included in both
years.
COMPARISON OF THE YEARS ENDED JUNE 30, 1996 AND DECEMBER 31, 1995
NET SALES
Net sales for the year ended June 30, 1996 were $6,702,237, a decrease of
$349,317, or 5%, from net sales of $7,051,554 for year ended December 31, 1995.
Total unit sales for Company products were virtually unchaged and the weighted
average unit price decreased by 5.4%. These decreases were caused by lower-end
competitors eroding the Company's market share, the restructuring of the
Company's sales force undertaken from February through June of 1996 and the
factors affecting the Federal Government during the end of 1995 and early 1996.
These factors included the budget crisis at the end of 1995 and the diversion of
funds to support military operations in Bosnia. The Company anticipates that
Federal Government agencies will continue to account for a significant
percentage of Company revenue in the foreseeable future. Accordingly, any
reduction, deferral of spending or significant government budget shifts may
adversely affect the Company's financial condition and results of operations.
GROSS PROFIT
The gross profit percentage of 53.2% for the year ended June 30, 1996 was
virtually unchanged from 53.6% achieved during the year ended December 31, 1995.
The Company was able to keep its gross margin percentage stable through a shift
in the Company's product mix to products with higher gross margins, and by
negotiating with suppliers to ensure that the Company was able to decrease its
material costs in a similar ratio relative to decreases the Company was
experiencing in unit sales prices of individual products. Gross profit was
$3,568,719 for year ended June 30, 1996 and $3,777,164 for the year ended
December 31, 1995. The decrease is due to the decrease in net sales.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists of salaries and related expenses
incurred in the development and maintenance of the Company's products, less
amounts capitalized related to the development of new products after
technological feasibility has been reached. The Company devotes a substantial
share of its engineering resources towards software development. The Company
capitalizes its new software development and amortizes these costs over a five
year life. Research and development expense increased by $37,637, or 10%, to
$402,560
12
<PAGE>
for the year ended June 30, 1996 compared to $364,923 for the year ended
December 31, 1995. Total research and development expenditures during the year
ended June 30, 1996 were $1,122,077 compared to $1,083,904 for the year ended
December 31, 1995. Software capitalization for the year ended June 30, 1996 was
$720,000 or 64% of total engineering expenditures and was virtually the same
($719,000 or 66%) for the year ended December 31, 1995. This high level of
capitalization was due to the Company significantly increasing its product line
during these eighteen months including the development of MPS and ULTRASTUDIO.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses have increased $142,279, or
5%, for the year ended June 30, 1996, compared to the year ended December 31,
1995. Selling, general and administrative expenses were $3,299,405 for the year
ended June 30, 1996, compared to $3,157,126 for the year ended December 31,
1995. This modest increase reflects an increase in the number of employees and
the compensation per employee of the sales and marketing staff, as well as
increased legal fees related to the defense and settlement of lawsuits in the
first six months of calendar year 1996.
INTEREST EXPENSE
Interest expense increased by $61,654, or 8%, to $808,192 for the year
ended June 30, 1996 from $746,538 for the year ended December 31, 1995. This
increase is primarily due to interest expense incurred on notes payable
financing raised in the Company's private placement conducted from December 1995
through March 1996.
OTHER INCOME AND EXPENSE
The Company had other income of $81,097 for the year ended June 30, 1996 as
opposed to expense of $207,494 for the year ended December 31,1995. In 1994,
the Company incurred transactional costs for financial consultants under
agreements which were terminated in 1995. In March of 1996, the Company
recovered $50,000 from a settlement of an outstanding legal matter and the
settlement of an outstanding liability for less than its recorded value.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
NET SALES
Net sales for the year ended December 31, 1995 were $7,051,554, a decrease
of $595,498, or 8%, from net sales of $7,647,052 for year ended December 31,
1994. Total unit sales for Company products declined by 5% and the weighted
average unit price decreased by 3%. These decreases were caused by lower-end
competitors eroding the Company's market share and the departure of the
Company's Vice President of Sales and approximately 50% of the Company's sales
force.
GROSS PROFIT
The Company's gross profit declined from $4,631,326 for the year ended
December 31, 1994 to $3,777,164 for the year ended December 31, 1995. The gross
profit percentage for the year ended December 31, 1995 declined to 53.6% from
60.6% achieved for the year ended December 31, 1994. The decline in gross
margin was primarily due to lower-end competitors eroding the Company's gross
margins achieved in selling its internally developed products, in addition to
the Company's market share discussed above, as well as declining gross margins
experienced from sales of third party hardware due to less favorable pricing
offered by these third party manufacturers.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense decreased by $72,454, or 17%, to $364,923
for the year ended December 31, 1995 from the year ended December 31, 1994.
Total research and development expenditures during the year ended December 31,
1995 were $1,083,904 compared to $1,312,336 for the year ended December 31,
1994. Software capitalization for the year ended December 31, 1995 was $718,981
and $874,959 for the year ended December 31, 1994. This high level of
capitalization was due to the Company significantly
13
<PAGE>
increasing its product line during these years by adding SIMPLICD and
ULTRACAPACITY in 1994 and adding/developing MPS and ULTRASTUDIO in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses have increased by $83,936, or
3%, for the year ended December 31, 1995 compared to the year ended December 31,
1994. This was due to an increase of $94,000 in marketing and selling salaries
and related benefits.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1995 was $746,538 which
represents a $136,696, or 22%, increase over the 1994 amount of $609,842. The
increase in 1995 was due primarily to interest expense incurred on the funds
received during the debt and equity private placement in 1995 and the additional
interest expense incurred related to the payroll taxes payable to the Internal
Revenue Service.
OTHER EXPENSE
Other expenses were $207,494 for the year ended December 31, 1995 as
compared to $408,874 for the year ended December 31, 1994. Other expense
decreased by $201,380, or 49%, during 1995 due to the termination of certain
contracts with financial consultants and reduction in fees for others.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the expansion of
its internal sales department, increase advertising and marketing, increase
research and development of new products, and the development of worldwide
markets. Since its inception, the Company has been required on an ongoing basis
to finance a portion of its working capital needs. Additionally, developing and
launching new products has increased the working capital requirements of the
Company. The Company has historically satisfied its cash requirements through
unsecured related party and unrelated third party notes payable, and by
factoring purchase orders and accounts receivable. In addition, the Company
completed a private placement in March 1996 which generated net proceeds of
$2,011,250 and improved its working capital position at June 30, 1996. Upon
receipt of the proceeds of this offering, the Company will use a portion to
repay outstanding principal and accrued interest balances owed to its private
placement noteholders, and will no longer need to factor purchase orders and
accounts receivable. The Company also anticipates establishing a working
capital line of credit of approximately $1,000,000 to $3,000,000 upon successful
completion of the offering.
The Company experienced an increase in cash of $62,107 for the year ended
June 30, 1996, compared to no change in the Company's cash balance for the year
ended December 31, 1995 and a decrease in cash of $27,514 for the year ended
December 31, 1994. The primary factors contributing to the Company's cash flow
during fiscal 1996 were a decrease in accounts receivable of $717,088, purchases
of property and equipment and expenditures related to the development of
computer software aggregating $853,660 and net proceeds received from the
private placement of $2,011,250.
During the year ended December 31, 1995, the primary factors contributing
to cash flow were a decrease in accounts receivable of $681,063, expenditures
related to the development of computer software aggregating $718,981 and net
proceeds received from the private placement of $818,500.
During the year ended December 31, 1994, the primary factors contributing
to cash flow were net income, after removing non-cash activity, of $350,826,
purchases of property and equipment and expenditures related to the development
of computer software aggregating $974,809 and an increase in the Company's
outstanding payable balance to its factor of $754,806.
The Company has approximately $1,348,000 of net deferred tax assets, which
consist primarily of federal and state net operating losses, as of June 30,
1996. The net operating loss carryforwards expire in various years through
2011. The Tax Reform Act of 1986 contains provisions which limit the federal
net operating loss carryforwards available that can be used in any given year in
the event of certain occurrences, which include significant ownership changes.
Based upon the expected results of management's plans as discussed in Note 1 of
the Financial Statements, management believes that it is more likely than not
that $100,000 of the net deferred tax
14
<PAGE>
asset will be realized. Due to management not being able to conclude that it is
more likely than not that the remaining deferred tax assets will be realized, a
valuation allowance has been recorded on these remaining assets as of June
30,1996.
The Company anticipates that the net proceeds from this offering, together
with cash flows generated by operations, should be adequate to meet operating
and capital needs for the next 18 months. However, see "Risk Factors - Possible
Need for Additional Funds."
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), issued by the Financial Accounting
Standards Board (FASB), is effective for specific transactions entered into
after December 15, 1995, while the disclosure requirements of SFAS No. 123
are effective for financial statements for fiscal years beginning after
December 15, 1995. The new standard established fair value method of
accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from non-employees in exchange for
equity instruments. At the present time, the Company has not determined if
it will change its accounting policy for stock-based compensation or only
provide the required financial disclosures. As such, the impact on the
Company's financial position and results of operations is unknown.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125), issued by the Financial Accounting Standards Board (FSAB), is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive applications are not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
15
<PAGE>
BUSINESS
GENERAL
Young Minds, Incorporated (the "Company"), designs, develops, markets and
sells a comprehensive line of software products, embedded controllers, and
related services for creating, storing and accessing CD-ROM discs on computer
workstations and networks. The Company focuses on the development of
state-of-the-art software bundled with advanced recordable compact disc
("CD-R") drives and read-only compact disc ("CD-ROM") accessible storage
facilities for multiple discs (jukeboxes). These products facilitate the
rapid transfer of high volumes of information in a variety of computing
environments. The Company believes that it has achieved a strategic
advantage by introducing sophisticated, platform neutral, industry compliant
(ISO 9660) software solutions for mass storage.
The Company was recently awarded the "Kodak Integration Excellence" Award
(July 15, 1996), the Imaging Magazine "Product of the Year for 1995"
(January, 1996) Award, and "PC Magazine Editor's Choice" Award (May 17,
1994). In addition, the Company was selected as one of the 500 fastest
growing technology-based companies in the United States for 1996 (August
1996) and recognized as a member of the 1996 Southern California Technology
Fast 50 (July 8, 1996). The Company believes that, based on its reputation
for superior innovation, quality and product reliability, it has emerged as a
recognized leader in establishing the CD-R industry. The Company introduced
CD-R technology to a wide range of hardware and operating system
combinations. The Company participated with Sun Microsystems,
Hewlett-Packard, and Digital Equipment to establish the Rock Ridge Protocols,
now accepted as the industry standard. Based on these initiatives, the
Company believes that it is well positioned to maintain a leadership role
and actively participate in the ongoing development of industry standards.
The Company believes that this leadership will continue to impact the method
of storage and retrieval of large volumes of information within this rapidly
evolving market.
Philips Corporation has estimated that the market for CD-R technology will
increase from 200,000 units in 1995, to 2,000,000 in 1996 and 5,500,000 in
1997. These CD-R units are used in such key vertical markets as Government
Logistics, Banking, Medical Imaging and Engineering/Aerospace. To date the
Company has established itself as an innovator and early entrant in two key
market segments:
1. THE RAPIDLY GROWING CLIENT-SERVER MARKET WITH INDUSTRY-LEADING CD
RECORDABLE AND CD-ROM JUKEBOX SOFTWARE AND EMBEDDED SOLUTIONS BASED AT THE
SERVER AND FOCUSED ON MASS STORAGE SOLUTIONS
2. THE NETWORKED CD-ROM JUKEBOX AND AUTOMATED RECORDABLE DRIVE SUBSYSTEMS
MARKET WITH PRICE COMPETITIVE SOFTWARE SOLUTIONS.
INDUSTRY OVERVIEW
The Company believes that the CD Recorder is an output device equal in
importance to the laser printer. Documents "printed" on CD-R disks provide as
durable a record as documents printed on paper.
Most corporate information is currently stored on magnetic media, such as
hard disks, floppy disks and magnetic tape. Unlike CD-ROMs, magnetic media is
limited in usefulness by its fundamental properties. Magnetic Media is mutable
and therefore unsuitable for storing information with historical, legal or other
enduring significance. Secondly, tape, the most commonly used archival media, is
particularly unsuitable for long term storage because it deteriorates rapidly,
resulting in a loss of reliability in as few as three years.
Compared with CD-ROM, the cost of storing information on current random
access adaptations of magnetic media is relatively expensive. The cost per
megabyte of CD-R media is approximately three cents and falling rapidly,
compared with the cost of hard disk media which is currently approximated to be
$0.25 per megabyte. This cost differential is expected to widen further due to
the rapidly evolving technology surrounding CD-ROM density. In addition, other
direct and indirect expenses, such as periodic backups, increase the real cost
of hard disk data storage substantially.
The computing environment is becoming more reliant on complex local-area
networks ("LANs"), wide-area networks ("WANs") and the Internet. The increasing
connectivity of computing environments points to the need for increasingly
powerful, cost-effective data servers with attributes which are not available on
existing hard disk file servers in use today.
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More complex and data intensive forms of information are now being stored
and accessed across networks and occupying an increasingly large share of the
data storage capacity. These newer forms of data, such as video, audio and
complex images, require far greater storage capacity. This development has
resulted in increasing employment of CD-ROM jukeboxes for data storage and
retrieval.
THE MARKET OPPORTUNITY
These market dynamics require a standardized, inexpensive, compact, durable
and reliable method for mass storage and output. Accordingly, the demand for
CD-R and mass storage CD-ROM jukeboxes is in a rapid growth phase.
Among the industries with a current need for storing large amounts of
critical information are the following:
1) Banking - Check image management and credit card
transactions.
2) Medical Imaging - Storing results of MRI, CAT scans and
other non-invasive procedures.
3) Government - Data, document and logistics management.
4) Engineering/Aerospace- Storage of historical design and
engineering change documentation, and
manual production.
5) Telecommunications - Account management (bills and records)
for large-volume customers.
COMPANY BUSINESS STRATEGY
The Company's strategy is to serve the markets for CD-ROM Jukeboxes and CD
Recorders through its proprietary software and embedded controller technology.
The Company's products have been developed to operate on a broad range of widely
used computer platforms. The Company believes that its platform neutrality is
unique in the industry, using a combination of highly portable software and
platform independent intelligent controller technology. This approach enables
the Company to introduce new products quickly, in contrast to most other
companies, who must develop a separate driver for each hardware-operating system
combination.
As a significant worldwide supplier of CD-ROM recording and mass storage
capabilities for networks and single-users, the Company will continue to
implement the following business strategies:
THIRD PARTY DISTRIBUTION CHANNEL RELATIONSHIPS WITH VERTICAL MARKET FOCUS.
Through the Company's focus on the Vertical Markets described above, the Company
is expanding Reseller relationships in order to better serve the growing market
for high value automated CD-R systems.
PLATFORM NEUTRALITY (OPEN ARCHITECTURE) AND EXPANSION CAPABILITY. The
Company's product offerings are designed for seamless integration between the
hardware and operating systems (UNIX, Windows 95, Windows NT and OS/2)
eliminating the costly requirement for driver generation. The Company believes
that this flexibility and open architecture is critical to broad market
penetration.
TECHNOLOGICAL ADVANTAGE AND CLEAR UPGRADE PATH. The Company's strategy is
to continue to develop new software and systems incorporating the latest
developments in software, systems and networking technology. Additionally, the
ability of the Company's technical leadership to design each product generation
anticipating and geared to supporting the next three to four generations of data
storage technology is critical. The Company's history, heretofore, in terms of
the successful introduction of state-of-the-art products, as well as its
involvement in the definition of industry standards, demonstrates the importance
of a clear design path/philosophy.
PRODUCT-TO-MARKET TIME ADVANTAGE. In the fast paced computer industry, the
window of opportunity for launching new products and capturing a new market can
be measured in months, not years. The Company intends to leverage its core
technology in order to expand product offerings and increase market penetration.
See "Use of Proceeds."
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CUSTOMER SERVICE FOCUS. The Company believes that superior technical
support is its most significant resource for achieving customer satisfaction and
loyalty. The Company has three qualified senior support engineers and expects
to hire several more over the next year as the customer base expands.
INDUSTRY STANDARDS-LEADERSHIP ROLE. To date the Company has worked with
such major companies as Sony, Toshiba, Kodak, IBM, Sun Microsystems and
Hewlett-Packard in establishing industry standards. Andrew J .Young, a
Company Founder (see Key Personnel) is recognized as an industry leader and
continues to actively participate in defining the evolving standards.
PRODUCTS
To date the Company has released the following six product lines based on
its proprietary technology. All are based on reusable code design and are
marketed as follows:
CD STUDIO provides a cost effective method for desktop recording on CD-R
discs. The Company is the dominant supplier of CD-R product to the Unix market
and was awarded the "Product of the Year for 1995" by Imaging Magazine for CD
STUDIO. CD STUDIO operates with substantially all of the leading CD writers
including those from Philips, Yamaha, Kodak and Sony, and across all major
versions of the Unix operating system. Versions are also available for Windows
NT and OS/2. CD STUDIO works with a multitude of solutions provided by company
resellers. CD STUDIO is used in applications requiring a cost effective means
to rapidly produce a limited quantity of CD's, typically for archival or backup
applications, and custom or beta publishing.
MPS provides automated, high volume production of unique CD-R images. MPS
utilizes and expands on the support for high-end CD writers, autoloaders and
disc label printers offered by Young Minds' CD STUDIO product while delivering
greatly enhanced performance. This design allows networked users to fully
utilize the capabilities of current, high speed automated CD writer equipment.
It will also support High Speed automated DVD recorders when they become
available. MPS recently received the "Kodak Integration Excellence" Award.
ULTRACAPACITY is the Company's CD-ROM storage and retrieval system. It
enables network users to access up to 1,300 GB of information (1.3 trillion
letters or digits), centrally stored in a single CD-ROM jukebox. ULTRACAPACITY
offers the ability to expand support to multiple jukeboxes from a single server.
It is platform neutral and can support a wide range of client/server computing
environments. ULTRACAPACITY can be sold as part of a bundle that includes a
jukebox or as stand alone software.
ULTRASTUDIO combines the capabilities of CD-R and jukebox management to
allow integrated CD recording within a jukebox. ULTRASTUDIO enables a single
server to simultaneously record new CD-R discs and allow network users to access
existing recorded discs. As soon as a new disc is recorded it can be made
immediately available for user access.
SIMPLICD is the Windows version of the Company's CD-R software. SIMPLICD
links directly to Windows file-management utilities enabling desktop users to
assemble data and to store it on CD-R discs by importing files and directories,
or by using drag and drop techniques from within the Windows file manager. In
1994, SIMPLICD received the PC Magazine Editors Choice Award for Windows PC CD-R
premastering.
AUTOCDR is an automated, high volume, network-based CD-R production system
that permits multiple network users to record CD-R discs. Conceptually, AUTOCDR
is similar to a network print server in that AUTOCDR software polls the network
seeking CD-R write commands and places a prepared job in the CD-R recording
queue. The AUTOCDR system uses automated CD-R systems that hold up to 75 blank
CDs with recorder speeds up to 6X. This is roughly the output equivalent of up
to 20,000 pages of data per minute.
In addition, the Company is addressing the increased need for data security
technology. The Company has recognized the applications of CD-R and CD-ROM
jukebox technology to this area and has products currently under development
intended to address this need.
PRODUCT DISTRIBUTION
Historically, the Company has relied on its own direct sales force for the
distribution of its products. This strategy has been utilized for two reasons:
1) the products are complex and sales success has depended on the level
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of training and sophistication of its sales representatives; and 2), the Company
desired to maintain direct contact with its customer base which is comprised
predominantly of Fortune 500 companies and government agencies.
Additionally, within the last 24 months, the Company has been increasing
the distribution of its products through strategic relationships with VARs such
as Unisys, IACorp and BTG. By expanding the role of its sales force to include
the support of its resellers, the Company has been able to fully participate in
the rapidly expanding market.
MARKETING AND SALES
The Company's current marketing strategy is to focus on its target vertical
markets and the management of major accounts. Its primary market targets are:
banking - check image management and credit card transactions; medical imaging -
storing results of MRI and CAT scans and other non-invasive procedures;
government - data, document and logistics management; engineering/aerospace -
storage of historical design and engineering change documentation, and manual
production; and telecommunications - account management (bills and records) for
large volume customers.
The Company promotes its products through direct sales, direct mail,
exhibiting at trade shows, participating in conferences, and industry-wide
publicity).
The Company consults with its Resellers to assist in identifying potential
enhancements and new products. The Company also focuses on additional methods to
promote its products, including product refinement, new product introduction and
competitive pricing, all with the goal of increasing the distribution of the
Company's products. Following the completion of this offering, the Company
intends to commence more significant marketing activities, including targeted
trade advertising and public relations. See "Use of Proceeds."
The objective of the Company's marketing strategy is to position the
Company as the dominant leader in state-of-the-art mass storage technology.
The Company believes that, for the next seven to ten years or more, the
state-of-the-art in mass storage will be CD-ROM, DVD-ROM, optical WORM
(write-once-read-many) and magneto-optical media. The Company plans to lead
the expansion of the CD and DVD storage markets by attempting to capture some
areas currently held by optical disc and tape library markets as well as
providing systems to replace microfilm and paper outputs for complex
documents.
During the early stage of a product life cycle, it is the Company's goal to
price its products to value rather than cost. In the current environment,
customers perceive a substantial cost advantage to CD-R and CD-ROM jukebox
technology over existing mass storage alternatives. As CD-R and CD-ROM jukeboxes
become more prevalent, and approach a commodity status, the Company will be
forced to move towards competitive pricing, which may have an adverse effect on
Gross Margins. The Company therefore intends to upgrade products regularly and
to introduce a steady stream of new innovative products, again pricing to value
as the market allows.
The Company's marketing and sales staff currently consists of 21
individuals reporting directly to the Executive VP Sales and Marketing.
Commissions for sales representatives are established by a product and product
category basis. The Company intends to increase its sales force by
approximately one-third during fiscal year 1997, through external recruitment
and the training and promotion of its employees.
The sales staff is augmented by ten pre-sales support and sales support
personnel. The Company's technical support staff currently consists of three
people responsible for telephonic and field support. The Company intends to
increase its technical support staff consistent with the customer support
requirements. See "Use of Proceeds."
MANUFACTURING
The Company's manufacturing consists of light assembly of off-the-shelf
components to produce its proprietary embedded controller for both CD STUDIO,
MPS, and ULTRASTUDIO products. The Company purchases supplies from third party
manufacturers. The Company believes that it would not be materially adversely
affected by the loss of any of its suppliers, all of which could be replaced,
and that such loss would not negatively impair the results of its operations.
The Company employs three assemblers and intends to add two additional
assemblers during Fiscal Year 1997.
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QUALITY CONTROL
The Company performs full functionality testing on all third party system
components. Additionally, the Company performs extensive burn in and quality
control on all internally assembled products. This addresses standards for
conformity, consistency and functionality. Prior to shipping, the Company
performs a completeness inspection of all shipments.
BACKLOG
The Company's approximate backlog at December 31, 1994, December 31, 1995
and June 30, 1996 was respectively $200,887, $489,209 and $255,406. No end-user
of the Company accounts for more than 5% of its sales revenues (although two
resellers have accounted for more than this percent of sales revenues) and the
Company believes that the loss of any single customer would not have a material
adverse effect on the results of its operations.
RESEARCH AND DEVELOPMENT
Eleven employees work in research and development of software products.
The Company utilizes object oriented architecture in its research and
development activities. Under this approach, researchers and developers utilize
previously created programming modules, thereby eliminating the time and expense
of rewriting large numbers of lines of programming code. The current development
effort is focused on expanding the breadth and depth of the Company's core
technologies as well as the development of new products. The Company expended
approximately $1,312,000, $1,084,000 and $1,122,000 (of which $874,959, $718,981
and $719,517 was capitalized), respectively, during its fiscal years ended
December 31, 1994, December 31,1995 and June 30, 1996 on research and
development. These amounts constituted respectively 16.1%, 15.3% and 16.7% of
the Company's gross revenues during such fiscal years. The Company intends to
use a portion of the net proceeds from this offering to intensify its research
and development program. See "Use of Proceeds."
INTELLECTUAL PROPERTY
The Company relies primarily on a combination of nondisclosure agreements,
copyright law and trade secret law to protect its intellectual property. The
Company holds no patents and believes that its competitive position is not
materially dependent upon patent protection. However, the Company constantly
evaluates new technological opportunities for patentability and may in the
future seek patents when that is the appropriate form of protection. In most
cases, the Company distributes its products under shrink-wrap software license
agreements. This allows end-users to use the Company products and contains
various provisions to protect the Company's underlying technology. Shrink-wrap
licenses, which are not signed by the end-user, may be unenforceable in certain
jurisdictions. The Company also requires its employees and other parties with
access to its confidential information to execute agreements prohibiting the
unauthorized use or disclosure of the Company's technology. Despite these
precautions, it is possible for a third party to misappropriate the Company's
technology or to independently develop similar technology.
The Company intends to make all appropriate filings and registrations, and
take all other actions necessary, to obtain and protect all trademarks,
copyrights, tradenames and all other intellectual property rights relating to
the Company's products. Management believes that no single copyright, patent or
technology license is material to the Company's business.
The Company believes that, due to the rapid pace of technological
innovation with the CD-ROM industry, the Company's ability to establish and
maintain a position of technological leadership in the CD-ROM industry is more
dependent upon the skills of its development personnel than upon the legal
protection afforded its existing technology.
COMPETITION
The market for the Company's products is highly competitive and the Company
expects this competition to increase as CD-R drives and CD-ROM jukeboxes become
more universally applied. The principal elements of the competition in the
Company's markets include product features, performance, price, quality,
reliability, brand awareness, platform neutrality and level of customer service.
The Company's competitors, as well as certain potential competitors, may be more
established, benefit from greater name recognition, have significantly greater
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financial, technological, production and marketing resources, and have more
extensive distribution networks than the Company.
The Company believes that its platform neutrality is an important
competitive element. The Company also believes that the number of competitors
incorporating platform neutrality into their product offerings will grow over
the next several years. The Company anticipates that a significant source of
such future competition may be from existing competitors that are attempting to
develop a product offering similar platform neutrality. The sales, marketing,
product development and financial resources of the Company's competitors are
becoming greater. As a result, the Company anticipates that the efforts of and
competition from these competitors will intensify in the future. In order to
overcome the effect of these competitors on the market, the Company will need
to attain sufficient size and to have the resources to timely develop new
products in response to evolving technology and customer demands. The Company
believes it will need to sell products through a broad distribution channel in
competition with these existing and potential competitors. No assurance can be
given that Company will be able to grow sufficiently to enable it to compete
effectively in this marketplace.
The Company's competitors include companies such as Adaptec, Meridian Data,
and Smart Storage.
Moreover, the Company has few proprietary barriers to entry that could keep
its competitors or new competitors from developing similar products and
technology or selling competing products in the Company's markets.
PERSONNEL
The Company currently employees 54 full-time employees, consisting of the
following: 7 in management, administration and finance, 12 in operations, 21 in
sales and marketing, 3 in customer support, and 11 in research and development.
In addition, the Company employs three part-time employees, 2 in research and
development and 1 in operations. None of the Company's employees are
represented by a labor union and the Company believes that its employee
relations are satisfactory.
PROPERTY AND EQUIPMENT
The Company occupies an aggregate of approximately 15,000 square feet of
office and operations space in three adjacent modern office and light industrial
buildings in an office park in Redlands, California. The Company's occupancy is
on a month-to-month basis and provides for a monthly gross rental of $14,000.
There is considerable available space in this park and in the immediately
surrounding area and the Company believes that it will be able to continue its
present occupancy under its present terms on an indefinite basis, although there
can be no assurance that this will be the case. In any event, the Company
intends to explore alternative business space, both in the area of its present
space and in other locations in California, for the purpose of consolidating its
administrative and operating activities in a single facility and to accommodate
its anticipated growth.
The Company both owns and borrows its equipment, in approximately equal
amounts. The loans of equipment are normally made by manufacturers or customers
in conjunction with software requirements being handled by the Company. The
equipment, both owned and borrowed, includes operating system and application
software, computers, computer printers, testing equipment, CD-R and CD-ROM
drives, scanners, jukeboxes, telecommunications and networking equipment, and
other peripheral computer equipment.
The Company considers both its real estate facilities and its equipment as
currently satisfactory for its needs.
LEGAL PROCEEDINGS
The Company has received correspondence from an individual claiming to be a
"finder" with respect to unspecified services, demanding fees in an unspecified
amount and warrants to purchase Common Stock of the Company. The Company
believes that such individual did not perform his obligations under the
applicable agreement, and that he fraudulently induced the Company to enter into
the agreement. For these reasons, the Company does not believe itself liable in
this regard in any amount. There can be no assurance, however, that if this
matter is litigated, a court would not hold the Company liable to the
individual.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the executive
officers, directors and key employees of the Company.
Name Age Position
---- --- --------
Andrew J. Young 37 Chairman of the Board of Directors,
Secretary and Treasurer
David H. Cote 52 President, Chief Executive Officer and
Director
Matthew Hornbeck 29 Executive Vice President
Gerald Quealy 49 Executive Vice President, Sales and Marketing
and Director
Patrick Fisher 42 Vice President, Development and Operations
All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified. Officers serve at the
discretion of the Board of Directors. No family relationship exists between
any director or executive officer of the Company. The Board of Directors
intends to elect two persons who are not affiliates of the Company as directors,
who will be members of the Compensation Committee and the Audit Committee. No
decisions have been made at this time as to who will be elected. The Company
also is searching at this time for a chief financial and accounting officer.
The following is a brief description of the business experience of each
director and executive of the Company during the past five years.
Andrew J. Young has been the Company's Chairman of the Board of Directors
since its formation in 1989 and is a founder of the Company. From the formation
of the Company in 1989 until September 1995, Mr. Young also was President of the
Company, and has served as a director of the Company since its formation. He is
primarily responsible for maintaining Company contracts with software and
hardware developers and initiating Company research and development. Mr. Young
also serves on the executive committee of the Institute of Electrical and
Electronic Engineers (IEEE) Standards Committee on Optical Disc and Multimedia
Platforms. He is a prominent figure in the CD-R industry. He is the
principal author of the Rock Ridge Interchange Protocol, the de facto format
standard for Unix CD-ROM publications. From 1984 to 1989, Mr. Young was an
Assistant Professor of Mathematics at Glendale Community College. He obtained
an M.A. in Mathematics from the University of California, San Diego and a B.S.
in Mathematics from the University of California, Irvine.
David H. Cote has been the Chief Executive Officer of the Company for more
than the past five years and President since September 1995, and also is a
founder of the Company. He has served as an executive officer and a director of
the Company since its formation in 1989. Until August 1994, Mr. Cote was the
Chief Financial Officer of the Company. He provides leadership and direction to
the Company's diverse team of managerial and technical staff, including
planning, product research and development, marketing, sales campaigns,
production planning and control.
Matthew Hornbeck, also a founder of the Company, has been an executive
officer since 1989 and currently serves as Executive Vice President of the
Company. Mr. Hornbeck is directly responsible for new product research. In this
capacity he developed the initial code for CD STUDIO, the Company's flagship
product, and continues to provide technical guidance on the development of new
versions of CD STUDIO and ULTRASTUDIO. Mr. Hornbeck obtained a B.S. in
Computer Science from the University of California at Riverside.
Gerald Quealy has served as Executive Vice President, Sales for the Company
since February 1996, and was elected to the Board of Directors of the Company in
August 1996. Mr. Quealy brings 18 years of
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management experience in high technology to his position. From March 1995 to
November 1995, he was Regional Sales Manager of Equifax Check Services, which
provided check guarantee service to merchants, and from August 1993 until March
1995 he was National Sales Manager of Data Rentals & Sales (a division of
Electro Rent Corp.). Prior thereto, he was National Sales/Marketing Manager
from November 1992 to August 1993 for Atoll Holdings, Inc., which markets high
technology "niche" products to the food market, payroll processing and digital
imaging industries. Mr. Quealy also served as Vice President,
Marketing/Production, for G&S Industries, Inc. (costume jewelry and pre-printed
apparel) from October 1988 to November 1992. Mr. Quealy holds an Associate of
Arts, Liberal Arts degree from Iowa Central University and was an honor graduate
of the U.S. Army Military Instructor School.
Patrick Fisher has been Vice President, Development and Operations since
August 1996. From May 1995 to February 1996 Mr. Fisher was a Senior Systems
Engineer with RF Microsystems, which provided engineering support to the U.S.
Air Force in developmental and initial operational testing and from July 1995 to
January 1996 he operated Acumenics Research & Technology, Incorporated, which
provided engineering reports to the U.S. Air Force in support of litigation.
From June 1993 to July 1995 he was Chief of Engineering, Litigation Support
Team, U.S. Air Force and from September 1991 to June 1993 he was Space Systems
Engineering Manager, U.S. Air Force, where he was responsible for acquisition,
development and installation for three satellite communications systems. Mr.
Fisher received a Masters of Business Administration degree from Golden State
University in 1992 and a Bachelor of Science degree in electrical and electronic
engineering from California State University, Sacrament.
The Company's directors currently do not receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings.
EXECUTIVE REMUNERATION
The following table sets forth the compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the twelve
months ended June 30, 1996 by the Company's Chief Executive Officer and the
Company's other most highly compensated executive officers whose total annual
salary and bonus exceeded $100,000 during such fiscal year (the "Named
Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL
--------------------------- ----- ----- COMPENSATION (1) (2)
--------------------
<S> <C> <C> <C>
David H. Cote
President and Chief Executive Officer $107,608 $5,500 $8 652 (3)
Andrew J. Young
Chairman of the Board, Secretary and
Treasurer 99,108 5,500 8,652 (3)
Matthew Hornbeck
Executive Vice President 99,108 5,500 8,654 (3)
</TABLE>
- --------------------
(1) Does not include dollar value of perquisites and other personal benefits
furnished to the Named Officers, including premiums for health insurance, life
insurance and other personal benefits provided to such individuals in connection
with their employment. The value of such benefits and other compensation to
such individuals did not exceed the lesser of $50,000 or 10% of such officers'
cash compensation.
(2) There were no grants of stock options, stock appreciation rights, or stock
options granted in tandem with stock appreciation rights made by the Company
during the twelve months ended June 30, 1996 to the Named Officers, and there
were no exercises by any of the Named Officers of any stock options, stock
appreciation rights or stock options granted in tandem with stock appreciation
rights during the twelve months ended June 30, 1996.
(3) Represents the price paid by the Company to purchase 200 hours of accrued
and unused personal time off from each of the Named Officers.
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EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Young,
Cote and Hornbeck providing for three-year terms of employment. Under the
agreement with Mr. Cote, he will receive an annual salary of $150,000, plus
annual increases, which increases may not be less than 10% of the preceding
year's salary, and such incentive compensation as the Board of Directors
determines. Under the agreements with Messrs. Young and Hornbeck, each of
them will receive an annual salary of $120,000, plus annual increases, which
increases may not be less than 10% of the preceding year's salary, and such
incentive compensation, which may not be less than $30,000 for the fiscal
year ending June 30, 1997 if the Company is profitable for such year, as the
Board of Directors determines. Such officers will also be entitled to such
other benefits, including medical, insurance and death and disability
benefits, as are available to executive officers of the Company generally, as
well as automobile expense allowances and reasonable expense allowances.
Messrs. Young, Cote and Hornbeck currently receive five weeks per year
of personal time off ("PTO"), which can be used for either illness or
vacation. Unused PTO can be accrued by these officers. During the twelve
months ended June 30, 1996, the Company purchased 200 hours of accrued PTO
from each of these persons. See "Management - Executive Compensation." As
of the date of this Prospectus, Messrs. Young, Cote and Hornbeck had
approximately 900, 1,100 and 1,200 hours of accrued PTO, respectively.
As part of the terms of the employment of Gerald Quealy by the Company
in February 1996, the Company issued to Mr. Quealy warrants to purchase
30,000 shares of Common Stock at an exercise price of $1.00 per share. One
third of the warrants vest after 12 months of employment, one third vest
after 18 months of employment, and the balance vest after 24 months of
employment. The warrants are exercisable for five years.
STOCK OPTION AND STOCK PURCHASE PLANS
As of the date of this Prospectus, the Company's Board of Directors had
not adopted any stock option, stock purchase or similar plans. However, it
is anticipated that the Board will consider the adoption of one or more such
plans during fiscal 1997. Shareholder approval may be sought for any plan
adopted by the Board, but is not required.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of the
Company's directors for monetary damages to the fullest extent permitted
under California law. The Articles authorize the Company to indemnify its
agents in excess of the indemnification otherwise permitted by Section 317 of
the California General Corporation Law, subject only to the applicable limits
set forth in Section 204 of the California General Corporation Law with
respect to actions for breach of duty to the corporation and its
shareholders. The Company's Bylaws provide that the Company shall indemnify
Company agents to the fullest extent permitted by law.
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CERTAIN TRANSACTIONS
On April 18, 1995, the Company made loans, evidenced by promissory
notes, to three officers of the Company, Andrew J. Young, David H. Cote and
Matthew Hornbeck. Each loan was in the principal amount of $62,500 and was
for a ten-year term bearing interest at the annual rate of 7.53%, with
principal and interest due at maturity. The proceeds were used by each of the
officers to purchase 250,000 shares of Common Stock. Each loan is secured
by a pledge of 250,000 shares of Common Stock of the Company.
On May 31, 1995, the Company made a loan of $3,750, evidenced by a
promissory note, to Genene G. Miller, an employee of the Company and the wife
of David H. Cote. The proceeds were used by Ms. Miller to purchase 75,000
shares of Common Stock. The note bears interest at the annual rate of 7.53%,
with the principal and accrued interest due on May 31, 2005. The loan is
secured by the 75,000 shares of Common Stock.
On December 28, 1995, the Company made loans, evidenced by promissory
notes to three officers of the Company, Andrew J. Young, David H. Cote and
Matthew Hornbeck, in the principal amount of $120,000, $60,000 and $90,000,
respectively. The loans are for a ten-year term, bearing interest at the
annual rate of 7.53%, with principal and interest due at maturity. The
proceeds were used by each of the officers to purchase shares of Common Stock
at a purchase price of $3.00 per share. Each loan is secured by a pledge of
the purchased shares.
Certain of the officers of the Company, and certain relatives of these
persons have participated in various ways in the issuance of promissory notes
of the Company. As of June 30, 1996, approximately $231,000 was owed to such
persons for unpaid principal and interest.
At various times commencing in 1993 through September 1995 Joseph O.
Young, the father of Andrew J. Young, was issued warrants to purchase an
aggregate of 127,500 shares of Common Stock for a ten-year term at a per
share price of $0.50. At the time of the issuance of the warrants, their
exercise price was significantly higher than the per share book value of the
Common Stock.
25
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 30, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding amount of Common Stock, (ii) each director and the Named Executive
Officers of the Company, (iii) all directors and executive officers of the
Company as a group, and (iv) the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Prior to Offering (2)(3) Shares to After Offering (2)(3)
------------------------ Be Sold ---------------------
Name and Address of Beneficial Owner (1) Number Percent in Offering Number Percent
- ---------------------------------------- ---------- ------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
Andrew J. Young (4) 606,698 18.5% ___ 606,698 15.2%
David H. Cote (5) 455,588 13.9% ___ 455,588 11.4%
Matthew Hornbeck 550,695 16.8% ___ 550,695 13.8%
Gerald Quealy (6) 0 * ___ 0 *
Patricia Brafford 10,000 * 10,000 0 *
Wade A. Brotherson 5,000 * 5,000 0 *
Antonio Califano 10,000 * 10,000 0 *
Biagio Califano 10,000 * 10,000 0 *
Ming-Schyong Chen 75,000 * 75,000 0 *
DeSantis & Spinelli, Esq. 15,000 * 15,000 0 *
Dr. Anthony G, Dimatteo 5,000 * 5,000 0 *
Richard H. Fagin 5,000 * 5,000 0 *
Jo Anne Kast 5,000 * 5,000 0 *
KPM, Inc. 100,000 3.1% 100,000 0 *
Robert G. Lerch 15,000 * 15,000 0 *
Etienne P. Lizzi 5,000 * 5,000 0 *
Arthur W. Morgan 5,000 * 5,000 0 *
Dr. S. Edwin Noffel 5,000 * 5,000 0 *
Les Rogoff 5,000 * 5,000 0 *
Francesco Romano 25,000 * 25,000 0 *
Kenneth B. Rowan 30,000 * 30,000 0 *
Vincent Santa Maria 5,000 * 5,000 0 *
Randall K. Schick 5,000 * 5,000 0 *
Moses Siedler 5,000 * 5,000 0 *
Robert F. Sullivan 5,000 * 5,000 0 *
John J. Tack 5,000 * 5,000 0 *
Richard J. Tienken 5,000 * 5,000 0 *
Robert J. Vitamante 5,000 * 5,000 0 *
Brian J. Walsh 10,000 * 10,000 0 *
All directors and executive officers
as a group (4 persons) (4)(5)(6) 1,612,981 49.3% 1,612,981 40.3%
</TABLE>
- --------------------------
* Less than one percent.
(1) The address of each of Messrs. Young, Cote, Hornbeck and Quealy is c/o the
Company, 1906 Orange Tree Lane, Suite 220, Redlands, California 92374.
(2) Each person's beneficial ownership is determined by assuming that options
and warrants that are held by such person or entity (but not those held by any
other person or entity) and which are exercisable within 60 days have been
exercised.
26
<PAGE>
(3) Unless otherwise noted, the Company believes that all persons and entities
named in the table have sole voting and investment power with respect to all
shares of stock beneficially owned by them.
(4) Does not include an aggregate of 201,924 shares owned by relatives of Mr.
Young, as to which Mr. Young disclaims any beneficial interest.
(5) Does not include 80,000 shares and 80,000 warrants owned by Mr. Cote's
spouse or 5,232 shares owned by Mr. Cote's adult children, as to which Mr. Cote
disclaims any beneficial interest.
(6) Does not include 30,000 shares of Common Stock which are the subject of
warrants not currently exercisable.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to corporation laws of the State of
California, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company has authorized 15,000,000 shares of Common Stock, no par value,
of which 3,274,442 shares were issued and outstanding as of August 31, 1996.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of shareholders. The holders of Common Stock are entitled to
receive dividends when and as declared by the Board of Directors out of funds
legally available therefor. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in the assets of the
Company legally available for distribution to shareholders after payment of all
debts and other liabilities. Shares of Common Stock are not redeemable, have no
conversion rights and carry no preemptive or other rights to subscribe to or
purchase additional shares in the event of a subsequent offering. All
outstanding shares of Common Stock are, and the shares offered hereby will be
upon completion of this offering, when issued, fully paid and non-assessable.
CUMULATIVE VOTING
The Company is subject to the California General Corporation Law, which
provides, in connection with the election of directors, that all shareholders
may cumulate votes if any shareholder gives notice, prior to the voting, of an
intention to cumulate votes. Under cumulative voting, a shareholder is entitled
to a number of votes for election of directors equal to the number of shares
held by such shareholder times the number of directors to be elected. Such
votes may be cast all for one nominee, or distributed among two or more
directors, as the shareholder wishes.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors
has authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series, with such designations, rights, preferences and voting rights as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without shareholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the Preferred Stock could be
utilized, under certain circumstances, as a way of discouraging, delaying or
preventing an acquisition or change of control of the Company. The Company does
not currently intend to issue any shares of its Preferred Stock.
27
<PAGE>
WARRANTS
The Company has outstanding 2,047,462 warrats ("Warrants") to purchase an
equivalent number of shares of Common Stock at various purchase prices. The
weighted average exercise price is $0.82 per share. The Warrants expire at
various dates. Certain of the Warrants contain provisions that protect the
holders thereof against dilution by adjustment of the exercise price in certain
events and provisions requiring the Company to include the shares which may be
acquired upon exercise of the Warrants in a registration statement filed under
the Securities Act (other than the initial registration statement filed under
the Securities Act by the Company) permitting resale of such shares.
TRANSFER AGENT AND REGISTRAR
The Company has selected U.S. Stock Transfer Corporation as the transfer
agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of the offering, the Company will have a total of 3,999,442
shares of Common Stock outstanding (assuming that the Underwriters'
over-allotment option is not exercised). Of these shares, the 1,100,000
shares of Common Stock offered hereby will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined in the Securities Act, who would be
required to sell such shares under Rule 144 under the Securities Act. The
remaining 2,899,442 shares of Common Stock outstanding will be "restricted
securities" as that term is defined by Rule 144 (the "Restricted Shares").
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the
Securities Act.
Of the Restricted Shares, approximately 1,772,282 Restricted Shares will be
eligible for sale in the public market pursuant to Rule 144, certain of which
may be sold under Rule 144, beginning 90 days after the date of this Prospectus.
Approximately 747,981 of such shares are subject to the lock-up agreements
described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an affiliate), including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of one percent of the number of shares of Common
Stock then outstanding (approximately 40,000 shares upon completion of the
offering) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements, and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
three years (including the holding period of any prior owner except an
affiliate), would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. Rule 144 also provides that
affiliates who are selling shares that are not Restricted Shares must
nonetheless comply with the same restrictions applicable to Restricted Shares
with the exception of the holding period requirement. The Securities and
Exchange Commission has recently proposed to reduce the two and three-year
holding periods under Rule 144 to one and two-year holding periods. If adopted,
such amendment will permit earlier resales of shares of Common Stock.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to the exercise of outstanding options or the
grant of Common Stock pursuant to written compensation plans or contract prior
to this offering may be resold by persons other than affiliates, beginning 90
days after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its two-year
minimum holding period.
The Company's executive officers and director (who in the aggregate hold
approximately 1,612,981 Restricted Shares) have agreed not to sell or offer
to sell or otherwise dispose of any shares of Common Stock currently held
by them
28
<PAGE>
for a period of 18 months after the date of this Prospectus without the prior
written consent of Sharpe Capital, Inc. In addition, the Company has agreed
that for a period of 18 months after the date of this Prospectus it will not,
without the prior written consent of Sharpe Capital, Inc., offer, sell or
otherwise dispose of any shares of Common Stock.
As of August 31, l996, options and warrants to purchase an aggregate of
2,047,462 shares of Common Stock were outstanding.
The holders of options and/or warrants to purchase an aggregate of
approximately 2,000,000 shares of Common Stock have the right in certain
circumstances to require the Company to include such shares in a registration
statement filed by the Company. See "Certain Transactions."
Prior to the offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors-Shares Eligible for Future Sale."
UNDERWRITING
The Underwriters named below, represented by Meridian Capital Group, Inc.
and Sharpe Capital, Inc., ("the Representatives"), have severally agreed,
subject to the terms contained in the Purchase Contract, to purchase from the
Company the number of shares of Common Stock indicated below opposite their
respective names at the public offering price less the underwriting discount
and commissions set forth on the cover page of this Prospectus. The Purchase
Contract provides that the obligations of the Underwriters are subject to
certain conditions and that the Underwriters are committed to purchase all of
such shares (other than the Common Stock covered by the over-allotment option as
described below), if any are purchased.
Number of
Underwriters Shares
------------ ------
Meridian Capital Group, Inc.
Sharpe Capital, Inc.
Total....................
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price less
a concession of not more than $.__ per share, and that the Underwriters an such
dealers may reallow to other dealers, including the Underwriters, a discount not
in excess of $___ per share. After the public
29
<PAGE>
offering, the public offering price and concessions and discounts may be changed
by the Representatives. No change in such terms shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted an option to the Underwriters, exercisable in the
discretion of the Representatives for a period of 30 days after the date of this
Prospectus, to purchase up to an additional 165,000 shares of Common Stock, at
the public offering price set forth on the cover page of this Prospectus less
the underwriting discounts and commissions. The Representatives may exercise
this option only to cover over-allotments, if any. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase pro rata from the Company an aggregate percentage of
such additional shares approximately equal to the percentage of shares it was
obligated to purchase from the Company pursuant to the Purchase Contract.
The Representatives have informed the Company that they do not expect any
sales in excess of 5% of the number of shares of Common Stock offered hereby to
be made to discretionary accounts by the Underwriters.
The Company has agreed to pay the Representatives a non-accountable
expense allowance of 3% of the offering proceeds, including any proceeds from
the sale of shares subject to the Underwriter's over-allotment option, if
exercised. The Representatives' expenses in excess of the non-accountable
expense allowance, including its legal expenses, will be borne by the
Representative. To the extent that the expenses of the Representatives are less
than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representative.
The Purchase Contract provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to make
in respect thereof. The company and the Selling Shareholders have been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
The Company has agreed to sell to the Representatives for a total of $110,
warrants (the "Representatives Warrants") to purchase up to 110,000 shares of
Common Stock at an exercise price per share equal to 120 % of the initial public
offering price per share. The Representatives Warrants are exercisable for a
period of four years beginning one year from the date of this Prospectus, and
are not transferable for a period of one year except to officers of the
Representatives or any successor to the Representatives. In addition, the
Company has granted certain rights to the holders of the Representatives
Warrants to register the Common Stock underlying the Representatives Warrants.
The Company and the officers and directors of the Company have agreed not
to sell any shares of Common Stock prior to the expiration of eighteen (18)
months from the date of this Prospectus, without the prior written consent of
Sharpe Capital, Inc. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no market for the Common Stock of
the Company. Accordingly, the initial public offering price has been determined
by negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price were the Company's
results of operations, current financial condition and products, the markets
addressed by the Company's products, the Company's future prospects, the
experience of its management, the general condition of the equity securities
market and the demand for similar securities of companies considered comparable
to the Company.
The foregoing sets forth the material terms and conditions of the Purchase
Contract, but does not purport to be a complete statement of the terms and
conditions thereof, copies of which are on file at the offices of the Company
and the Securities and Exchange Commission, Washington , D.C. See "Additional
Information."
The Company has granted the Representatives of the Underwriters a right of
first refusal for three (3) years from the date of this offering on any public
offering of its shares by the Company and by existing officers and directors,
and the right to appoint a designee as an observer for five (5) years to
meetings of the Board of Directors of the Company. The Company is obliged to
pay the out-of-pocket expenses of such observer and compensation equal to that
paid independent directors, if any.
30
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Swanson & Meepos, Santa Monica, California. Certain
legal matters related to this offering will be passed upon for the Underwriters
by Snow Becker Krauss P.C., New York, New York.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement on Form SB-2 under the Securities Act
with respect to the Common Stock being offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed therewith. For further
information about the Company and the securities offered by this Prospectus,
reference is made to the registration statement and to the financial statements,
schedules and exhibits filed as a part of it. Statements contained in this
Prospectus about the contents of any contract or any other documents are not
necessarily complete, and in each instance, references made to the copy of the
contract of document filed as an exhibit to the registration statement, each
such statement being qualified in all respects by such reference.
A copy of the registration statement may be inspected by anyone without
charge and may be obtained at prescribed rates at the Commission at the Public
Reference Section of the Commission, maintained by the Commission at its
principal office located at 450 Fifth Street, N.W., Washington, D.C., 20549, the
New York Regional Office located at Seven World Trade Center, New York, New York
10048, and the Chicago Regional Office located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Such material may
also be accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by its independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial information.
31
<PAGE>
YOUNG MINDS, INCORPORATED
CONTENTS
==============================================================================
Report of Independent Certified Public
Accountants F-2
Financial statements
Balance sheets F-3 - F-4
Statement of operations F-5
Statement of stockholders' deficiency F-6 - F-8
Statement of cash flows F-9 - F-11
Summary of accounting policies F-12 - F-15
Notes to financial statements F-16 - F-25
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Young Minds, Incorporated
We have audited the accompanying balance sheets of Young
Minds, Incorporated as of December 31, 1995, and June 30,
1996 and the related statements of operations, stockholders'
deficiency and cash flows for each of the years ended
December 31, 1994 and 1995 and June 30, 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 Young Minds, Incorporated as of December 31,
1995, and June 30, 1996 and the results of its operations and
its cash flows for each of the years ended December 31, 1994
and 1995, and June 30, 1996, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 31, 1996
F-2
<PAGE>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
==============================================================================
DECEMBER 31, JUNE 30,
1995 1996
- ------------------------------------------------------------------------------
ASSETS (NOTE 5)
CURRENT ASSETS
Cash and cash equivalents $ - $ 120,567
Accounts receivable, net of allowance for
doubtful accounts of $5,000 and
$5,000 (Note 4) 819,820 597,410
Inventories (Note 3) 147,350 182,316
Prepaid expenses and other 15,908 3,419
Deferred income taxes (Note 12) - 100,000
Receivable from private placement (Note 10) 195,750 -
- ------------------------------------------------------------------------------
Total current assets 1,178,828 1,003,712
PROPERTY AND EQUIPMENT,
net (Note 2) 427,858 453,349
SOFTWARE DEVELOPMENT COSTS, net of accumu-
lated amortization of $688,246 and $920,605 1,594,856 1,714,444
DEFERRED LOAN COSTS, net of accumulated
amortization of $0 and $90,700 (Note 10) 185,200 180,300
OTHER ASSETS 282,583 78,826
- ------------------------------------------------------------------------------
Total assets $3,669,325 $3,430,631
==============================================================================
F-3
<PAGE>
YOUNG MINDS, INCORPORATED
BALANCE SHEETS
==============================================================================
DECEMBER 31, JUNE 30,
1995 1996
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Checks issued against future deposits $ 87,080 $ -
Accounts payable 1,709,979 1,602,340
Due to factor (Note 4) 596,459 396,008
Accrued expenses 284,395 304,511
Accrued interest 285,594 232,350
Accrued vacation 156,960 290,035
Payroll taxes payable (Note 5) 511,535 329,526
Deferred revenue 351,685 358,108
Notes payable to related parties, current portion
(Note 6) 196,195 -
Notes payable, current portion (Note 7) 500,617 242,500
Obligations under capital leases, current portion
(Note 8) 23,984 22,154
- -------------------------------------------------------------------------------
Total current liabilities 4,704,483 3,777,532
OBLIGATIONS UNDER CAPITAL LEASES, less current
portion (Note 8) 6,786 -
NOTES PAYABLE, less current portion
(Notes 7 and 10) 1,153,000 1,913,000
NOTES PAYABLE TO RELATED PARTIES, less current
portion (Notes 6 and 10) 220,000 198,609
- -------------------------------------------------------------------------------
Total liabilities 6,084,269 5,889,141
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIENCY
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, no par value, 15,000,000 shares
authorized; 3,051,230 and 3,303,374 shares
issued and outstanding at December 31, 1995
and June 30, 1996 (Note 10) 1,733,340 1,965,140
Additional paid-in capital 287,038 290,338
Accumulated deficit (3,987,084) (4,307,368)
Shareholders notes receivable (Note 11) (448,238) (406,620)
- -------------------------------------------------------------------------------
Total stockholders' deficiency (2,414,944) (2,458,510)
- -------------------------------------------------------------------------------
Total liabilities and stockholders' deficiency $3,669,325 $3,430,631
===============================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF OPERATIONS
=======================================================================================
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1994 1995 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $7,647,052 $7,051,554 $6,702,237
COST OF SALES 3,015,726 3,274,390 3,133,518
- --------------------------------------------------------------------------------------
GROSS PROFIT 4,631,326 3,777,164 3,568,719
OPERATING COSTS AND EXPENSES
Research and development 437,377 364,923 402,560
Selling, general and administrative 3,073,190 3,157,126 3,299,405
- --------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 1,120,759 255,115 (133,246)
INTEREST EXPENSE (609,842) (746,538) (808,192)
OTHER INCOME (EXPENSE)(NOTE 15) (408,874) (207,494) 81,097
- --------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 102,043 (698,917) (860,341)
INCOME TAX BENEFIT - - 100,000
- --------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 102,043 $ (698,917) $ (760,341)
======================================================================================
NET INCOME (LOSS) PER SHARE $ 0.02 $ (0.17) $ (0.16)
======================================================================================
WEIGHED AVERAGE COMMON
STOCK OUTSTANDING 4,359,196 4,197,480 4,709,147
======================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
============================================================================================================================
COMMON STOCK SHAREHOLDERS
------------------------- ADDITIONAL ACCUMULATED NOTES
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,899,899 1,040,390 281,013 (3,390,210) - (2,068,807)
Conversion of trade payables to common
stock 13,446 12,500 - - - 12,500
1:1.028 reverse stock split, January, 1994 (52,115) - - - - -
Issuance of common stock to employees 44,000 5,500 - - - 5,500
Net income - - - 102,043 - 102,043
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 1,905,230 1,058,390 281,013 (3,288,167) - (1,948,764)
Stock purchased with notes
(Note 11) 825,000 191,250 - - (191,250) -
Net loss (January 1, 1995 - June 30, 1995) - - - (258,860) - (258,860)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
=======================================================================================================================
COMMON STOCK SHAREHOLDERS
--------------------- ADDITIONAL ACCUMULATED NOTES
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 2,730,230 1,249,640 281,013 (3,547,027) (191,250) (2,207,624)
Issuance of shares in private placement,
net of offering costs (Note 10) 210,000 163,700 -- -- -- 163,700
Stock purchased with notes (Note 11) 90,000 270,000 -- -- (270,000) --
Payment on notes receivable -- -- -- -- 13,012 13,012
Shareholder contribution -- -- 6,025 -- -- 6,025
Stock for services 65,000 50,000 -- -- -- 50,000
Net loss (July 1, 1995 - December 31, 1995) -- -- -- (440,057) -- (440,057)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
=======================================================================================================================
COMMON STOCK SHAREHOLDERS
--------------------- ADDITIONAL ACCUMULATED NOTES
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 3,095,230 1,733,340 287,038 (3,987,084) (448,238) (2,414,944)
Issuance of shares in private placement,
net of offering costs (Note 10) 250,000 237,600 -- -- -- 237,600
Shareholder contributions -- -- 3,300 -- -- 3,300
Repayments of shareholders notes receivable -- -- -- -- 41,618 41,618
Cancellation of shares in conjunction with
lawsuit settlement (41,856) (5,800) -- -- -- (5,800)
Net loss (January 1, 1996 - June 30, 1996) -- -- -- (320,284) -- (320,284)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 3,303,374 $1,965,140 $290,338 $(4,307,368) $(406,620) $(2,458,510)
=======================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
=========================================================================================
INCREASE (DECREASE) IN CASH
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 102,043 $(698,917) $(760,341)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation 117,997 150,622 160,044
Amortization of capitalized software costs 206,235 361,592 430,217
Amortization of deferred loan costs -- -- 90,700
Interest on capital lease obligations 6,253 4,538 2,740
Nonmonetary exchange included in sales (99,702) (70,582) --
Stock issued for services 12,500 50,000 --
Stock compensation expenses 5,500 -- --
Deferred income taxes -- -- (100,000)
Increase (decrease) from changes in:
Accounts receivable (1,162,583) 681,063 717,088
Inventories (162,295) 41,308 (73,423)
Prepaid expenses and other current
assets (99,863) 106,251 9,401
Other assets 15,347 (464,085) 187,466
Accounts payable 682,417 (74,387) (231,880)
Accrued liabilities 62,970 234,231 114,384
Payroll taxes payable (18,441) (157,203) (219,546)
Deferred revenue 213,091 (229,828) (250,900)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (118,531) (65,397) 75,950
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (99,850) (7,913) (134,143)
Capitalized software development costs (874,959) (718,981) (719,517)
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (974,809) (726,894) (853,660)
- -----------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
=========================================================================================
INCREASE (DECREASE) IN CASH
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------ JUNE 30,
1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable
to related parties 109,500 225,000 --
Payments on notes payable to related
parties (10,000) (14,132) (411,716)
Proceeds from repayments of
notes receivable from shareholders -- 13,012 54,631
Due to factor 754,806 (158,347) (473,727)
Proceeds from issuance of notes payable 200,000 6,963 --
Payments on notes payable (4,376) (135,196) (333,934)
Payments on obligations under capital
leases (20,359) (20,359) (19,492)
Checks issued against future deposits 36,255 50,825 --
Shareholder contribution and other sales
of securities -- 6,025 12,805
Net proceeds from private placement (Note 10) -- 818,500 2,011,250
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 1,065,826 792,291 839,817
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (27,514) -- 62,107
CASH AND CASH EQUIVALENTS, at beginning of year 27,514 -- 58,460
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ -- $ -- 120,567
=========================================================================================
CASH PAYMENTS DURING THE PERIOD FOR
INTEREST $ 478,559 $ 636,280 $765,084
=========================================================================================
</TABLE>
F-10
<PAGE>
YOUNG MINDS, INCORPORATED
STATEMENT OF CASH FLOWS
================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
During the year ended December 31, 1994, the Company issued common stock in
exchange for services in the amount of $12,500.
During the years ended December 31, 1995 and June 30, 1996, the Company
issued common stock in exchange for services relating to the private
placement in the amount of $50,000.
During the year ended December 31, 1995, the Company issued 915,000 shares of
common stock to shareholders in exchange for notes receivable in the
aggregate amount of $461,250.
During the year ended June 30, 1996, the Company issued 90,000 shares of
common stock to shareholders in exchange for notes receivable in the
aggregate amount of $270,000.
During the year ended June 30, 1996, the Company cancelled 41,856 shares of
common stock in conjunction with the settlement of a lawsuit.
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES, NOTES TO FINANCIAL STATEMENTS.
F-11
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
ORGANIZATION
Young Minds, Incorporated (the "Company") was incorporated in the state of
California on March 15, 1989 as an "S" Corporation. The Company changed its
incorporation to that of a "C" Corporation in February, 1993. The Company
develops, manufactures and markets CD-ROM software and hardware products.
In July 1996, the Company changed its year end from December 31 to June 30
for financial reporting purposes (Note 13). The six month period ended
December 31, 1995, is included in the results of operations for the years
ended December 31, 1995 and June 30, 1996.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
CREDIT RISK
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments and trade
accounts receivable. The Company's cash investments are placed with high
credit quality financial institutions and may exceed the amount of federal
deposit insurance. Concentrations of credit risk with history before
extending credit. The Company reviews a customers credit history before
extending credit.
INVENTORIES
Inventories consist primarily of computer hardware and are stated at the
lower of cost, "first-in, first-out," or market.
PROPERTY AND EQUIPMENT
Property and equipment, including certain assets under capital leases, are
stated at cost, less accumulated depreciation and amortization. Depreciation
is provided using the straight-line method over estimated useful lives of
five to seven years, or over the lesser of the term of the lease or the
estimated useful life for assets under capital leases.
F-12
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
SOFTWARE DEVELOPMENT COSTS
Software development costs include direct costs related to certain ongoing
software product and products enhancement projects. Such costs primarily
consist of direct salaries and related benefits, payroll taxes and overhead.
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility has been established upon completion of a detail program design.
The Company ceases capitalizing such costs when the product derived from the
project is available for general release to customers. These costs are
amortized on a product-by-product basis at the greater of the amount computed
using (a) the ratio of current revenues for a product to the total of current
and anticipated future revenues or (b) the straight-line method over the
remaining estimated economic life of the product. The current products
underlying the balance of software development costs have estimated economic
lives of five years. The Company evaluates the recoverability of any
software development costs capitalized by comparing the net realizable value,
determined pursuant to management's estimates of future product cash flows,
with the unamortized balance of software development costs. Amortization of
$206,235, $361,592 and $430,217 was included in cost of sales for the year
ended December 31, 1994 and 1995 and June 30, 1996.
DEFERRED LOAN COSTS
Deferred loan costs are capitalized and amortized over the life of the
related notes payable, which is two years.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of software upon delivery of
the software to the customer, provided certain other conditions have been
met. The Company also has post customer support ("PCS") agreements bundled
with certain systems and offers renewals to customers on the PCS agreement.
The Company recognizes revenues relating to the PCS portion of bundled
systems and PCS agreements over the terms of the agreements.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
F-13
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
INCOME TAXES
The Company accounts for income taxes in accordance with the Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires a company to recognize deferred tax assets and liabilities
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 assets and liabilities 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.
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the 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 121
establishes guidelines regarding when impairment losses on long-lived assets,
which include plant and equipment, and certain identifiable intangible
assets, should be recognized and how impairment losses should be measured.
Adoption did not have a material effect on its financial position or results
of operations.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and due to factor
approximated fair value as of December 31, 1995 and June 30, 1996, because of
the relatively short maturity of these instruments. It is not practicable to
estimate the fair value of the related party notes payable or shareholders
notes receivable of the Company due to their related party nature. The
carrying amounts of notes payable approximate their fair values due to the
rates of these notes approximating the rates for loans with similar terms and
maturities.
F-14
<PAGE>
YOUNG MINDS, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is based upon the weighted average number of common
shares and common stock equivalents outstanding during each period, as
adjusted for the effect of the application of Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 83. Pursuant to SAB No. 83,
common stock issued by the Company at a price less than the initial public
offering price during the twelve months immediately preceding the initial
filing of the offering together with common stock options and convertible
debt issued during such period with an exercise price less than the initial
public offering price, are treated as outstanding for all periods presented.
Earnings (loss) per share is computed using a treasury stock method, under
which the number of shares outstanding reflects an assumed use of the
proceeds from the issuance of such shares and from the assumed exercise of
such options and convertible debts, to repurchase shares of the Company's
common stock at the initial public offering price. Except for the provisions
of SAB No. 83 described above, common stock equivalents have been excluded in
all years presented in the Statements of Operations when the effect of their
inclusion would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into
after December 15, 1995, while the disclosure requirements of SFAS No. 123
are effective for financial statements for fiscal years beginning after
December 15, 1995. The new standard established a fair value method of
accounting for stock-based compensation plans and for transactions in which
an entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the
Company's financial position and results of operations is currently unknown.
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards
Board (FSAB) is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive applications is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The Company does not expect adoption to have a material effect
on its financial position or results of operations.
F-15
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. At June 30, 1996, the Company
has negative working capital of approximately $2.8 million and a
stockholders' deficiency of approximately $2.5 million.
The funding of the Company's operations and servicing of existing debt is
dependent upon increasing sales of its core products and extending payment
terms on various current liabilities. During the months of March 1996
through June 1996, the Company hired a new Executive Vice President of
Sales, who has redefined the Company's approach to selling its products in
conjunction with hiring additional sales and marketing personnel to help
bolster sales during fiscal 1997. This redefinition of the Company's
selling approach, from its former regional, territorial approach, includes
(1) securing sales agreements with value added resellers in specific,
targeted industries, (2) developing relationships with targeted personnel
in the Company's largest customers to allow the Company to market its
products horizontally and vertically within the various divisions of these
customers, (3) hiring a manager of government sales, who is currently
located in Washington D.C., with experience in government sales and moving
sales and products through this environment and (4) hiring a manager of
international sales to promote and sell the Company's products worldwide.
In addition to the above, the Company has established verbal agreements
with significant short-term creditors to allow for the repayment of debts
over periods in excess of one year on an as needed basis. Based on the
above plans and their ongoing implementation, management believes that the
Company will return to profitable operations and meet its obligations on a
timely basis. However, there is no assurance that these plans will be
successful.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Computer equipment and purchased software $ 759,592 $ 862,841
Office equipment 57,926 57,926
Vehicles 20,808 20,808
Leasehold improvements 14,197 14,197
- -------------------------------------------------------------------------------
852,523 955,772
Accumulated depreciation (424,665) (502,423)
- -------------------------------------------------------------------------------
$427,858 $ 453,349
===============================================================================
F-16
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND EQUIPMENT, NET (CONTINUED)
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------
Equipment acquired under capital
leases included above:
Computer equipment $ 77,186 $ 77,186
Accumulated depreciation (47,598) (55,315)
- --------------------------------------------------------------------------
$ 29,588 $ 21,871
==========================================================================
3. INVENTORIES
Inventory consists of:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------
Raw Materials $ 72,062 $119,976
Work in process 3,798 18,366
Finished goods 71,490 43,974
- --------------------------------------------------------------------------
$ 147,350 $182,316
==========================================================================
4. DUE TO FACTOR
During 1994, the Company entered into an agreement with a factor whereby
funds are advanced on sales orders and advances of up to 50% of sales
orders and 80% of accounts receivable. The factor charges a fee of 2.5%
every fifteen days on sales orders and 1.25% every fifteen days on
accounts receivable. Upon collection by the factor, the factor deducts
total interest earned and remits the remaining funds, less amounts
previously advanced, to the Company. At June 30 1996, the Company has
$587,689 of purchase orders and receivables factored with recourse.
The weighted average amounts outstanding under the factoring agreement
were $827,137, $699,918 and $542,617 for the years ended December 31,
1994 and 1995, and June 30, 1996. The weighted average annual interest
rates were 59%, 38% and 43% for the years ended December 31, 1994 and
1995, and June 30, 1996.
F-17
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. PAYROLL TAXES PAYABLE
As of December 31, 1995 and June 30, 1996, the Company owes delinquent
payroll taxes of $511,535, and $329,526 to the IRS, which includes
interest and penalties. During 1994, the Company reached an agreement
with the IRS, whereby the Company pays $25,000 a month to satisfy its
delinquent liabilities. As of June 30, 1996, the Company was in
compliance with the agreement. In accordance with its general procedure
for delinquent taxes that are to be satisfied under a deferred
arrangement, the IRS has filed formal liens against the assets of the
Company.
6. NOTES PAYABLE TO RELATED PARTIES
A summary of notes payable to related parties is as follows:
DECEMBER 31, JUNE 30,
1995 1996
- ------------------------------------------------------------------------------
Unsecured notes payable to stockholders,
interest payable at 12% per year, due
December 31, 1997 $ - $180,000
Unsecured notes payable to stockholders,
interest payable at 10% per year, due
December 31, 1997, amount was repaid
during June, 1996. 220,000 -
Unsecured notes payable to stockholders,
interest payable at 12% per annum, payable
on demand, amount was repaid during March, 1996. 108,695 -
Unsecured notes payable to a stockholder,
interest payable at 10% per year. The unpaid
principal and accrued interest on the
notes are delinquent and therefore
the notes are payable on demand, amount was
repaid during March, 1996. 75,000 -
F-18
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. NOTES PAYABLE TO RELATED PARTIES (Continued)
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Unsecured notes payable to a stockholder,
interest payable at 10%, due on demand 12,500 -
Other - 18,609
- --------------------------------------------------------------------------------
416,195 198,609
Less current portion (196,195) -
- --------------------------------------------------------------------------------
$ 220,000 $198,609
================================================================================
7. NOTES PAYABLE
A summary of notes payable is as follows:
DECEMBER 31, JUNE 30,
1995 1996
- --------------------------------------------------------------------------------
Unsecured notes payable to individuals and companies,
interest payable at 12% per year, due December 31,
1997 (Note 10) $840,000 $1,660,000
Unsecured note payable to an individual, with interest
at 16% per year. The unpaid principal and accrued
interest were due on March 4, 1993. The note is
personally guaranteed by two officers of the Company.
Subsequent to year end, the terms of the note were
modified in conjunction with the settlement of a
lawsuit (Note 9) 163,000 163,000
Unsecured note payable to an individual, interest
payagle at 16% per year. The unpaid principal and
accrued interest were due on April 10, 1993. The note
is personally guaranteed by two officers of the Company.
Subsequent to year end, the terms of the note were
modified in conjunction with the settlement of a
lawsuit (Note 9) 200,000 200,000
F-19
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. NOTES PAYABLE (Continued)
DECEMBER 31, JUNE 30,
1995 1996
- -------------------------------------------------------------------------------
Unsecured note payable to an individual, with
interest at 24% per year. The principal and
accrued interest were due on September 15, 1993 10,000 5,000
Unsecured notes payable to individuals, with
interest at 10% to 12% per year. The unpaid
principal and accrued interest on the notes
are delinquent and therefore the notes are
payable on demand 327,500 127,500
Unsecured note payable to a company with interest
at 10% per year. The principal and accrued interest
were due on August 3, 1994. The note is personally
guaranteed by an officer of the Company, amount was
repaid during March, 1996. 50,000 -
Note payable to an individual, noninterest-bearing,
payable from the proceeds of a software project,
due on demand. Amount was repaid during March, 1996. 5,000 -
Other 8,117 -
- -------------------------------------------------------------------------------
1,653,617 2,155,500
Less current portion (500,617) (242,500)
- -------------------------------------------------------------------------------
$1,153,000 $1,913,000
===============================================================================
F-20
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. OBLIGATIONS UNDER CAPITAL LEASES
The future minimum lease payments under capitalized equipment leases
together with the present value of the minimum lease payments as of
June 30, 1996 are as follows:
AMOUNT
- -------------------------------------------------------------------------
Total minimum lease payments $23,534
Less amount relating to interest (1,380)
- -------------------------------------------------------------------------
Present value of minimum lease payments under capital leases $22,154
=========================================================================
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities on a month to month basis. Rent expense
was $166,388, $170,190 and $156,265 for the years ended December 31, 1994
and 1995 and June 30, 1996.
The Company is in a dispute with an individual for amounts representing
additional interest owed, if any, by the company under two promissory
notes payable with aggregate unpaid principal of $363,000 which has been
recorded in the Company's balance sheets at December 31, 1995 and June 30,
1996. Subsequent to year end, the Company and the individual agreed to
settle this lawsuit whereby the Company will repay the $363,000 in
principal in monthly installments beginning on October 15, 1996. No
interest will accrue on these notes until February 1998, at which time the
then outstanding balance will accrue interest at 10% per annum until that
remaining principal is repaid.
The Company is a defendant in one other lawsuit, which is considered to be
in the normal course of business. In the opinion of management, the
outcome of the lawsuit now pending will not materially affect the
operations or the financial position of the Company.
In 1996, the Company entered into three year employment agreements with
three members of management.
F-21
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. COMMON STOCK
In December 1995, in conjunction with a private placement of notes
payable and common stock, the Company generated gross proceeds of
$1,050,000. The Company sold 42 units, with each unit consisting of one
$20,000 note, 5,000 shares of common stock and 5,000 warrants granted at
an exercise price of $1 per share which represents the fair market value
of the Company's common stock at that time. Of the gross proceeds,
$840,000 (80%) relates to notes payable and $210,000 (20%) relates to the
sale of 210,000 shares of common stock. Expenses relating to the private
placement amounted to $231,500, of which $185,200 (80%) was recorded as a
deferred loan cost and $46,300 (20%) was offset against the proceeds
allocated to common stock. Although the notes payable and common stock
were issued during the year ended December 31, 1995, $195,750 of net
proceeds were not received until after year end. Thus, this amount is
shown as a receivable from private placement in the balance sheet at
December 31, 1995 and was collected in the first quarter of 1996.
In the first quarter of 1996, the Company completed this private
placement through the issuance of 50 additional units, generating gross
proceeds of $1,250,000. Expenses related to the private placement in the
first quarter of 1996 amounted to $107,250, of which $85,800 was recorded
as a deferred loan cost and $21,450 was offset against the proceeds of
common stock.
During the year ended December 31, 1995, stock was issued to shareholders
through the issuance of notes receivable to those shareholders. See Note 11.
During the year ended December 31, 1995, the Company issued 65,000 shares
of stock for services in the amount of $50,000, which represents the fair
market value of these services.
F-22
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. COMMON STOCK (CONTINUED)
COMMON STOCK WARRANTS/OPTIONS SHARES
- ----------------------------------------------------------------
Balance outstanding, January 1, 1994 261,606
Warrants/options granted at $.05 per share 145,000
Warrants/options granted at $1.00 per share 325,500
Warrants/options granted at $1.50 per share 100,000
Warrants/options granted at $2.00 per share 30,000
- ----------------------------------------------------------------
Balance outstanding, December 31, 1994 862,106
Warrants/options exercised at $.05 per share (75,000)
Warrants/options expired at $1.00 per share (290,000)
Warrants/options expired at $1.91 per share (26,161)
Warrants/options expired at $3.82 per share (78,483)
Warrants/options granted at $0.50 per share 690,000
Warrants/options granted at $1.00 per share 210,000
- ----------------------------------------------------------------
Balance outstanding, December 31, 1995 1,292,462
Warrants/options granted at $1.00 per share 755,000
- ----------------------------------------------------------------
Balance outstanding, June 30, 1996 2,047,462
================================================================
The above warrants/options to shareholders and vendors at grant date were
for exercise prices at or above the estimated fair market value of the
common stock. All warrants/options are currently exercisable and expire
between one and five years subsequent to June 30, 1996.
F-23
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
========================================================================
11. SHAREHOLDERS NOTES RECEIVABLE
On April 18, 1995, three shareholders entered into note
agreements with the Company for an aggregate amount of
$187,500. The proceeds were used by the shareholders to
purchase 750,000 shares of common stock at fair market value.
The notes bear interest at the rate of 7.53% per year. The
principal and accrued but unpaid interest for each note is due
on April 18, 2005.
On May 31, 1995, one shareholder entered into a note agreement
with the Company for the amount of $3,750. The proceeds were
used by the shareholder, upon exercise of a warrant granted
during 1994, to purchase 75,000 shares of common stock. The
note bears interest at the rate of 7.53% per year. The
principal and accrued but unpaid interest for the note is due
on May 31, 2005.
On December 28, 1995, three shareholders entered into note
agreements with the Company for an aggregate amount of
$270,000. The proceeds were used by the shareholders to
purchase 90,000 shares of common stock. The notes bear
interest at the rate of 7.53% per year. The principal and
accrued but unpaid interest for each note is due on December
31, 2005.
12. INCOME TAXES
The Company has approximately $1,249,000 and $1,348,000 of
net deferred tax assets at December 31, 1995, and June 30,
1996. The deferred taxes are primarily a result of a net
operating loss carryforwards of $3,068,000 and $3,488,000 for
federal income taxes and $1,533,000 and $1,743,000 for state
income taxes at December 31, 1995, and June 30, 1996. The net
operating loss carryforwards expire in various years through
2011. The Tax Reform Act of 1986 contains provisions which
limit the federal net operating loss carryforwards available
that can be used in any given year in the event of certain
occurrences, which include significant ownership changes. The
remaining deferred tax differences are a result of the
vacation accrual and differences between accumulated
depreciation for books and tax. Based upon the expected
results of management's plans as discussed in Note 1,
management believes that it is more likely than not that
$100,000 of the net deferred tax asset will be realized. Due
to management not being able to conclude that it is more
likely than not that the remaining deferred tax assets will be
realized, a valuation allowance has been recorded on these
remaining assets as of December 31, 1995, and June 30, 1996.
F-24
<PAGE>
YOUNG MINDS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
========================================================================
13. CONDENSED FINANCIAL DATA - UNAUDITED
In July 1996, the Company changed its year end from December
31 to June 30 for financial reporting purposes. Unaudited
condensed financial data for the six month period ended
December 31, 1995, which is included in the results of
operations for the years ended December 31, 1995, and June 30,
1996, is as follows:
AMOUNT
- --------------------------------------------------------------------
Net sales $3,648,412
Net loss (440,057)
Loss per share of common stock $ (0.10)
Weighted average number of shares outstanding 4,481,230
====================================================================
14. SIGNIFICANT CUSTOMER
During the years ended December 31, 1995 and June 30, 1996,
approximately 12% and 11% of the Company's net sales were made
to one customer. During the year ended June 30, 1996, one
additional customer accounted for 10% of the Company's net
sales. The Company did not have net sales to one customer
equal to or in excess of 10% during the year ended December
31, 1994.
15. OTHER INCOME (EXPENSE)
Other expense for the years ended December 31, 1994 and 1995
primarily relate to consulting and legal fees incurred in
connection with an unsuccessful initial public offering in
1994, and an unsuccessful private placement attempt in the
first six months of 1995. Other income for the year ended
June 30, 1996 primarily consists of amounts received from the
settlement of a lawsuit and the settlement of an outstanding
liability for less than its recorded value.
16. SUBSEQUENT EVENTS
The Company anticipates an initial public offering of its
common stock. Net proceeds of the offering are expected to
repay certain indebtedness and provide additional working
capital.
F-25
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 317 of the California Corporations Code permits a corporation to
grant indemnification to directors, officers and other agents in terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities, including expenses, arising in connection with federal securities
laws, including but not limited to the Securities Act of 1933, as amended.
Pursuant to the Articles of Incorporation, as amended, and the Bylaws of the
Company, the Company is authorized to indemnify its directors, officers and
other agents to the full extent permitted by law and has indemnified its
directors for monetary damages to the full extent permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
ITEM AMOUNT
---- ------
Registration fee $5,671
Blue Sky fees and expenses* 45,000
Legal fees and expenses (other than Blue Sky)* 75,000
Accounting fees and expenses* 45,000
Printing costs* 45,000
Transfer agent fees* 2,000
Miscellaneous* 31,000
------
Total.............................. $248,671
- ------------------
*Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The numbers for shares shown below have been adjusted, were appropriate, to
reflect two reverse stock splits effected by the Company in December 1993 and
January 1994.
In September 1993, as partial consideration for consulting services to be
performed, the Company granted an option to purchase 78,481 shares at $.25
per share, with the right to exercise the option for 13,080 shares accruing
every six months. The option grants the holder certain registration rights
with respect the shares which may be acquired upon exercise of options. Such
rights have been waived with respect to this offering. The Company believes
that the offering was exempt from registration under the Securities Act by
reason of Section 4(2) thereof and/or Regulation D under the Securities Act
as a non-public sale of securities due to the absence of a general
solicitation, the general nature and circumstances of the sale, including the
qualifications of the purchasers, and the restrictions on resales of the
securities acquired.
In October 1993, the Company issued 26,160 shares of Common Stock to an
employee of the Company as a bonus in exchange for services rendered. For
purposes of the issuance, such shares were valued at $.25 per share. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In October 1993, the Company issued options to purchase 39,240 shares of
Common Stock in exchange for legal services to be provided. The options were
exercisable at $.25 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
<PAGE>
In November 1993, the Company entered into a Stock Option Agreement with
two individuals as part of an arrangement pursuant to which such persons lent
$50,000 to the Company. The holders of the options would be entitled to acquire
at a purchase price of $50,000 (i) an amount of securities from the Company
equivalent to that which an investor of $50,000 in the Company's then proposed
bridge financing plan would be able to acquire or (ii) if no bridge financing
transaction had occurred by January 15, 1994, the number of shares of Common
Stock determined by dividing $50,000 by the most recent price at which the
company had sold its Common Stock. If no bridge financing occurred by January
15, 1994, the option would expire on January 31,1994. The options were
exercisable at $.25 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
At various times commencing in 1993 through September 1995, Joseph O.
Young, the father of Andrew J. Young, was issued warrants to purchase an
aggregate of 127,500 shares of Common Stock for a ten-year term at a per share
price of $0.50. At the time of the issuance of the warrants, their exercise
price was significantly higher than the per share book value of the Common
Stock. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and/or Regulation D
under the Securities Act as a non-public sale of securities due to the absence
of a general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In January 1994, the Company issued 13,446 shares of Common Stock to an
individual in exchange for services in the amount of $12,500. The Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof and/or Regulation D under the Securities Act
as a non-public sale of securities due to the absence of a general solicitation,
the general nature and circumstances of the sale, including the qualifications
of the purchasers, and the restrictions on resales of the securities acquired.
In January 1994, the Company issued 13,466 in payment of accounts payable
in the amount of $12,500. The Company believes that the offering was exempt
from registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of securities
due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In January 1994, The Company borrowed $50,000 from a lender, pursuant to a
Promissory Note, which note bore interest at the rate 24% per annum and was due
on February 28, 1994. In the event of default by the Company in repayment of
the note, the lender was entitled to an additional option to purchase sahres of
Common Stock, which shares were provided to the Company by Mr. Cote. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In January 1994, The Company borrowed $75,000 each from two individuals.
The Company also granted each lender an option to purchase 15,000 shares of
Common Stock. The purchase price for the shares would be $1.50 per share, later
amended to $2 per share, subject to adjustment downward if the Company did not
conduct an initial public offering of its Common Stock. In order to comply with
the requirements of the Company's proposed underwriters, Mr. Cote offered, for
no consideration, to donate the shares of Common Stock to be delivered upon
exercise of the option. As a result of the termination of the proposed
underwriting, the Company did not accept his offer. The option terminates on
the date which is three months after the Company has notified the holders that
the Company is prepared to delivered registered shares upon the exercise of such
option. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and/or Regulation D
under the Securities Act as a non-public sale of securities due to the absence
of a general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In February 1994, in connection with a loan of $150,000 to the Company, it
granted an option to purchase 100,000 shares of Common Stock at $1.50 per share.
The option must be exercised no later than one year after the Company notifies
the holder that the Company is prepared to deliver registered shares upon the
exercise of the option. The option grants the holder certain registration
rights with respect the shares which may be acquired upon
<PAGE>
exercise of options. Such rights have been waived with respect to this
offering. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and/or Regulation D
under the Securities Act as a non-public sale of securities due to the absence
of a general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In August 1994, in recognition of extraordinary efforts the Company granted
to four individuals warrants to purchase an aggregate of 175,500 shares of
Common Stock at $1 per share and to three individuals warrants to purchase an
aggregate of 145,000 shares of Common Stock at $.05 per share; and in
consideration of services performed, the Company granted to one individual
warrants to purchase 15,000 shares of Common Stock at $.25 per share. All
warrants expire July 31, 1999. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In January 1995, in exchange for the extension of the term of certain loans
the Company granted to three individuals warrant to purchase an aggregate of
150,000 shares of common Stock at a price of $1 per share. Such warrants expire
on January 8, 2000. The Company also donated to three individuals an aggregate
of 10,726 shares of Common Stock. Pursuant to the Company's Stock Bonus
Program, in recognition of achieving Company sales goals, the Company awarded 11
individuals an aggregate of 44,000 shares of Common Stock. The Company believes
that the offering was exempt from registration under the Securities Act by
reason of Section 4(2) thereof and/or Regulation D under the Securities Act as a
non-public sale of securities due to the absence of a general solicitation, the
general nature and circumstances of the sale, including the qualifications of
the purchasers, and the restrictions on resales of the securities acquired.
In April 1995, the Company made loans, evidenced by promissory notes, to
three officers of the Company, Andrew J. Young, David H. Cote and Matthew
Hornbeck. Each loan was in the principal amount of $62,500 and was for a
ten-year term bearing interest at the annual rate of 7.53%, with principal
and interest due at maturity. The proceeds were used by each of the officers
to purchase 250,000 shares of Common Stock. Each loan is secured by a
pledge of 250,000 shares of Common Stock of the Company. The Company
believes that the offering was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on
resales of the securities acquired.
In May 1995, the Company made a loan of $3,750, evidenced by a promissory
note, to Genene G. Miller, the wife of David H. Cote. The proceeds were used by
Ms. Miller to purchase 75,000 shares of Common Stock. The note bears interest
at the annual rate of 7.53%, with the principal and accrued interest due on May
31, 2005. The loan is secured by the 75,000 shares of Common Stock. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In May 1995, in recognition of extraordinary efforts the Company granted to
three individuals warrants to purchase an aggregate of 90,000 shares of Common
Stock at $1 per share and to one firm warrants to purchase 40,000 shares of
Common Stock at $.05 per share. All warrants expire May 5, 2001. The Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof and/or Regulation D under the Securities Act
as a non-public sale of securities due to the absence of a general solicitation,
the general nature and circumstances of the sale, including the qualifications
of the purchasers, and the restrictions on resales of the securities acquired.
In September 1995, in recognition of extraordinary efforts the Company
granted to five individuals warrants to purchase an aggregate of 205,000 shares
of Common Stock at $.50 per share. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
<PAGE>
In September 1995, in exchange for services performed in arranging a
proposed financing for the Company, it granted to an individual an option to
purchase 50,000 shares of Common Stock at a purchase price of $1 $.50 per share.
The options expire if unexercised five years from the date of grant. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on resales
of the securities acquired.
In September 1995, in recognition of valuable services performed for the
Company, it granted to an employee options to purchase 75,000 shares of Common
Stock at a purchase price of $.50 per share. The options expire if unexercised
five years from the date of grant. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
In December 1995, the Company issued options to three officers to purchase
an aggregate of 90,000 shares of Common Stock at $3.00 per share. The
options expire if unexercised five years from the date of grant. The options
expire if unexercised five years from the date of grant. The Company
believes that the offering was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and/or Regulation D under the
Securities Act as a non-public sale of securities due to the absence of a
general solicitation, the general nature and circumstances of the sale,
including the qualifications of the purchasers, and the restrictions on
resales of the securities acquired.
in December 1995, the Company made loans, evidenced by promissory notes to
three officers of the Company, Andrew J. Young, David H. Cote and Matthew
Hornbeck, in the principal amount of $120,000, $60,000 and $90,000,
respectively. The loans are for a ten-year term, bearing interest at the annual
rate of 7.53%, with principal and interest due at maturity.. The proceeds were
used by each of the officers to purchase 40,000 shares, 20,000 shares and 30,000
shares, respectively, of Common Stock at a purchase price of $3.00 per share. At
the time of the transaction, the fair market value of the Common Stock was $1
per share or less. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and/or
Regulation D under the Securities Act as a non-public sale of securities due to
the absence of a general solicitation, the general nature and circumstances of
the sale, including the qualifications of the purchasers, and the restrictions
on resales of the securities acquired.
In December 1995 and early 1996, the Company sold 92 units, with each unit
consisting of one $20,000 note, 5,000 shares of common stock and 5,000 warrants
granted at an exercise price of $1, for a purchase price of $25,000 per unit.
The units were sold in a private placement to the 25 persons listed in the
Prospectus as Selling Shareholders. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof and/or Regulation D under the Securities Act as a non-public sale of
securities due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired. The units were sold
principally by Sharpe Capital, Inc. as selling agent for the Company. In
conjunction with the private placement, 425,000 warrants purchase common stock
at an exercise price of $1 per share were earned by the selling agents.
In April 1996, in recognition of valuable services rendered to the Company,
it granted to an individual warrants to purchase 60,000 shares of Common Stock
at a purchase price of $1.00 per share. The warrants expire if unexercised five
years from the date of grant. The Company believes that the offering was exempt
from registration under the Securities Act by reason of Section 4(2) thereof
and/or Regulation D under the Securities Act as a non-public sale of securities
due to the absence of a general solicitation, the general nature and
circumstances of the sale, including the qualifications of the purchasers, and
the restrictions on resales of the securities acquired.
<PAGE>
ITEM 27. EXHIBITS.
SEQUENTIALLY
NUMBERED
PAGES UPON WHICH
EXHIBIT DESCRIPTION EXHIBIT APPEARS
------- ----------- ---------------
1. Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation
of the Registrant
3.2 Bylaws of the Registrant
5.1 Opinion of Swanson & Meepos*
10.1 Employment agreement with Andrew J. Young.
10.2 Employment agreement with David H. Cote.
10.3 Employment agreement with Matthew Hornbeck.
11.1 Computation of Weighted Average Common Stock Outstanding.
21 Subsidiaries of Registrant: None
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Swanson & Meepos (included in opinion
filed as Exhibit 5.1).*
24.1 Powers of attorney (included on page II-3 hereof).
27. Financial data schedule.
------------------
* To be filed by amendment.
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(b) That insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling persons of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling persons in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) That for determining any liability under the Act, the Registrant
will treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h)
under the Act as part of this registration statement as of the time the
Securities ad Exchange Commission declared it effective.
(d) That for determining any liability under the Act, each
post-effective amendment that contains a form of prospectus will be treated
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time will
be treated as the initial bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the city of
Redlands, state of California, on September 10, 1996.
YOUNG MINDS, INC.
By DAVID H. COTE
_______________________
David H. Cote, President
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints David H. Cote and Andrew J. Young., and each of
them, with full power to act without the others, his true attorney-in-fact and
agent, with full power of substitution and re substitution, for him and in his
name, place and stead, in any and all capacities (until revoked in writing) to
sign any and all amendments (including post-effective amendments and
amendments thereto) to this Form S-B2 Registration Statement of Young Minds,
Inc., and to file the same, with all exhibits thereto, and other documents sin
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes,
may lawfully do or cause to be done by virtue hereof.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City ofRedlands, and State of California, on the 10th day of September, 1996.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
ANDREW YOUNG Chairman of the Board and Director September 10, 1996
- ---------------- (Principal Financial Officer and
(Andrew Young) Principal Accounting Officer)
DAVID H. COTE Chief Executive Officer, President September 10, 1996
- ---------------- and Director
(David H. Cote)
GERALD QUEALY Director September 10, 1996
- ----------------
(Gerald Quealy)
<PAGE>
EXHIBIT 1
1,100,000 SHARES
YOUNG MINDS, INC.
COMMON STOCK
($.[ ] PAR VALUE)
AGREEMENT AMONG UNDERWRITERS
OCTOBER _, 1996
Sharpe Capital, Inc. As Representative of the several Underwriters named in
Schedule I to the Purchase Contract 120 Broadway, New York, New York 10271.
1. PURCHASE CONTRACT. We understand that YOUNG MINDS, INC. (the
"Company"), a [ ] corporation, is planning to enter into an
agreement substantially in the form of Exhibit A hereto (which agreement as
and when executed, is herein called the "Purchase Contract") with you and
other prospective Underwriters (including ourselves) providing for the
purchase, severally, by the Underwriters of an aggregate of 1,100,000 shares
of Common Stock, $.[ ] par value ("Common Stock") of the Company (the
"Company Shares") from the Company. In addition, certain shareholders of the
Company named in Schedule II to the Purchase Contract (the "Selling
Shareholders") propose severally to sell to the Underwriters an aggregate of
375,000 shares (the "Selling Shareholder Shares") of Common Stock. The
Company Shares and the Selling Shareholder Shares are herein called the "Firm
Shares". In addition, to cover over-allotments in connection with the sale of
the Firm Shares, the Company proposes to grant to the Underwriters an option
to purchase up to an additional 165,000 shares (the "Option Shares") of
Common Stock. The Firm Shares and any Option Shares purchased pursuant to the
Purchase Contract are herein called the "Stock". Pursuant to the Purchase
Contract we will agree, in accordance with the terms thereof, to purchase the
number of shares of Common Stock set forth opposite our name in Schedule I
thereto, subject to increase as provided herein.
At or prior to the time of the offering, you will advise us, to the
extent applicable, as to the expected offering date, the expected closing
date, the initial public offering price, the underwriting discount, the
selling concession and the reallowance, except that if the public offering
price of the securities is to be determined as contemplated by Rule 430A
under the Securities Act of 1933 (such procedure being hereinafter referred
to as "430A Pricing"), you shall so advise us and shall specify the maximum
underwriting discount and selling concession. Such information may be
conveyed by you in one or more communications. If the Purchase Contract
provides for the granting of an option to purchase additional securities to
cover over-allotments, you will notify us, of such option and of our maximum
obligation upon exercise of such option.
2. REGISTRATION STATEMENT AND PROSPECTUS. The Stock is more particularly
described in a registration statement (Registration No. [ ]) filed on
September __, 1996 with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"). One
or more amendments to such registration statement have been or may be filed
in which, with our consent hereby confirmed, we have been named as the
Underwriters of the Stock. Copies of the registration statement and any
amendments so filed ( excluding exhibits ) have heretofore been delivered to
us. The registration statement and the related prospectus may be further
amended, but no such amendment shall release or affect our obligations
hereunder or under the Purchase Contract. The registration statement and
related prospectus, as finally amended and revised prior to becoming
effective, are hereinafter respectively referred to as the "Registration
Statement" and the "Prospectus". The Registration Statement has not yet
<PAGE>
become effective.
3. AUTHORITY OF THE REPRESENTATIVE. We hereby authorize you, as our
representative (the "Representative"), and on our behalf (a) to complete,
execute and deliver the Purchase Contract in substantially the form attached
hereto, with such variations, if any, as in your judgment are appropriate and
are not materially adverse to the Underwriters, provided that the number of
Firm Shares set forth opposite our name in Schedule I thereto shall not be
increased without our consent, except as provided herein, (b) to waive
performance or satisfaction by the Company of obligations or conditions
included in the Purchase Contract if in your judgment such waiver will not
have a material adverse effect upon the interests of the Underwriters, (c) to
exercise all authority and discretion vested in the Underwriters and in you
by the provisions of the Purchase Contract and to take such action as in your
discretion may be necessary or advisable to carry out the provisions of the
Purchase Contract, this Agreement, the transactions for the accounts of the
several Underwriters contemplated thereby and hereby and the sale and
distribution of the Stock. To the extent applicable, you are also authorized
to determine (i) the amount of Options Shares, if any, to be purchased by the
Underwriters pursuant to any over-allotment option and (ii) with respect to
offerings using 430A Pricing, the initial public offering price and the price
at which the Stock is to be purchased in accordance with the Purchase
Contract. We also authorize you to determine all matters relating to the
public advertisement of the Offering. The parties on whose behalf you execute
the Purchase Contract are herein collectively called the "Underwriters".
4. PUBLIC OFFERING AND OFFERING TO DEALERS. A public offering of the
Firm Shares is to be made, as herein provided, as in your judgment is
advisable as soon after the Registration Statement relating to the Stock
becomes effective. The purchase price to be paid by the Underwriters for the
Stock and the initial public offering price are to be determined by agreement
between you and the Company, as set forth in the Purchase Contract and on the
cover page of the Prospectus, respectively. You will advise us by wire,
telegraph or telephone when the Firm Shares have been released for offering,
when the Registration Statement relating to the Stock shall become effective
and the price at which the Firm Shares are to be initially offered. We agree
not to offer the Firm Shares until they have been released for public
offering. We authorize you, with respect to any of the Stock which we agree
to purchase, to reserve for offering and sale, and on our behalf to sell, to
dealers selected by you (such dealers, including you or any of the other
Underwriters so selected, being hereinafter referred to as "Dealers") and to
others, including institutions or other retail purchasers, all or part of our
Stock as you may determine. Except for such sales which are designated by a
purchaser to be for the account of a particular underwriter, such
reservations and sales to persons other than Dealers shall be as nearly as
practicable in proportion to the respective underwriting obligations of the
Underwriters, unless you agree to a smaller proportion at our request.
Reservations for sales to Dealers need not be in such proportion. All sales
of reserved Stock shall be as nearly as practicable in proportion to the
respective reservations as calculated from day to day.
We authorize you to determine the form and manner of any communications
or agreements with Dealers. In the event that there shall be any such
agreements with Dealers, you are authorized to act as Representative
thereunder and we agree, in such event, to be governed by the terms and
conditions of such agreements. The form of Selected Dealers Agreement
attached hereto as Exhibit B is satisfactory to us. You may arrange for any
Underwriter, including yourself to become one such Dealer. Each Underwriter
agrees that it will not offer any Stock for sale at a price below the
offering price or allow any concession therefrom, except as herein otherwise
provided.
In your discretion, from time to time, you may add to the reserved Stock
any Stock retained by us remaining unsold, and you may upon our request
release to us any of our Stock reserved but not sold. Any Stock so released
shall not thereafter be deemed to have been reserved. Upon termination of this
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Agreement, or prior thereto at your discretion, you shall deliver to us any
of our Stock reserved but not sold and delivered, except that if the
aggregate number of Stock of all reserved but unsold and undelivered Stock is
less than 155,000 of the aggregate number of shares of Stock, you are
authorized to sell such Stock for the accounts of the several Underwriters at
such price or prices as you may determine.
Sales of reserved Stock shall be made to Dealers at the public offering
price less a Dealers' concession, initially not in excess of $. per share and
to others, including institutions and other retail purchasers at the public
offering price. Underwriters and Dealers may reallow a concession from the
public offering price, initially not in excess of $. per share to other
dealers, who are (a) members of the National Association of Securities
Dealers, Inc. ("NASD") and conform to the provisions of Section 24 of Article
III of the Rules of Fair Practice of the NASD or (b) foreign dealers not
eligible for membership in the NASD who also agree (i) that, in making sales
of any Stock outside the United States of America, they will comply with the
requirements of the NASD's Interpretation with Respect to Free-Riding and
Withholding and (ii) (A) that, if they are registered broker-dealers under
the Securities Exchange Act of 1934 as amended (the "1934 Act"), they will
conform to Sections 8, 25 and 36 of Article III of the NASD's Rules of Fair
Practice in making sales of Stock in the United States or (B) that they will
not offer or sell any Stock in the United States.
After advice from you that the Firm Shares are released for sale to the
public, we will offer to the public, in conformity with the terms of offering
set forth in the Prospectus, such of our Firm Shares as to which you advise
us are not reserved. We authorize you, as Representative of the Underwriters,
after the Firm Shares are released for sale to the public, in your
discretion, to change the public offering price of the Stock and the
concessions at any time or from time to time by reason of changes in the
general market or otherwise.
Nothing contained in this Agreement will be deemed to restrict our
right, subject to the provisions of this Paragraph 4, to offer the Stock
prior to the effective date of the Registration Statement, provided that any
such offer will be made in full compliance with all applicable requirements
of the Act, and the 1934 Act and the rules and regulations of the Commission
thereunder and with all applicable state securities laws.
5. PAYMENT AND DELIVERY. At your request, and in all events at or before
9:00 a.m., New York time on the Closing Date, as defined in Section 3 of the
Purchase Contract, we will deliver to you at your offices at 120 Broadway,
New York, New York 10271, or at such other place as you may specify, by
certified or bank cashier's check in New York Clearing House Funds, payable
to your order, the funds needed to make payment pursuant to the Purchase
Contract for the Stock to be purchased by us or funds in an amount equal to
the initial public offering price of such Stock, as you may specify in such
request, and we authorize you to use such funds to make such payment pursuant
to the Purchase Contract. Any remaining balance shall be credited to our
account. If we fail (whether or not such failure constitutes a default
hereunder) to deliver to you, or you fail to receive our check for the Stock
which we have agreed to purchase at the time and in the manner provided in
this Section 5, you individually, and not as the Representative, are
authorized (but will not be obligated) to make payment to the Company and the
Selling Shareholders for such Stock for our account.
We also agree on demand to take up and pay for or deliver to you funds
sufficient to pay for at cost any Stock you purchase for our account pursuant
to the provisions of Section 7 hereof, and to deliver to you on demand any
Stock sold or over-allotted by you for our account pursuant to any provisions
of this Agreement.
We authorize you to deliver our Stock and any other Stock purchased by you
for our account
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<PAGE>
pursuant to the provisions of Section 7 hereof, against sales made by you for
our account pursuant to any provision of this Agreement.
In case any Stock reserved for sale to Dealers or others is not
purchased and paid for in due course as contemplated hereby, we agree (a) to
accept delivery when tendered by you of any Stock so reserved for our account
and not so purchased and paid for, and (b) in case we shall have received
payment from you in respect of any such Stock, to reimburse you on demand for
the full amount which you shall have paid us in respect of such Stock. Any
such payment by you shall not relieve us from any of our obligations
hereunder or under the Purchase Contract and we agree to repay you on demand
the amount so advanced for our account.
We authorize you, for our account, to accept delivery of the Stock from
the Company, to give receipts therefor, and to hold such of our Stock as you
have reserved for sale to Dealers and others and to deliver such Stock
against such sales. You will deliver to us our unreserved Stock as promptly
as practicable. Unless we notify you at least three full business days prior
to the date of delivery of the Stock to make other arrangements, you may, in
your discretion, advise the Company to register our Stock in our name.
As promptly as practicable after you receive payment for reserved Stock
sold for our account, you will remit to us the lesser of the amount of such
payment or the purchase price of such Stock under the Purchase Contract.
6. AUTHORITY TO BORROW. In connection with the transactions contemplated
in the Purchase Contract or this Agreement, we authorize you, in your
discretion, to advance your own funds for our account, charging current
interest rates, to arrange loans for our account, and in connection therewith
to execute and deliver any notes or other instruments and hold or pledge as
security any of our Stock. Any lender may rely upon your instructions in all
matters relating to any such loan. We will repay any such advances or loans
on demand.
Any of our Stock and any other securities purchased for our account
hereunder held by you may, from time to time, be delivered to us for carrying
purposes, and, if so delivered, any such securities will be redelivered to
you upon demand.
7. STABILIZATION AND OVER-ALLOTMENT. We authorize you, until the
termination of this Agreement, (a) to make purchases and sales of Stock in
the open market or otherwise, for long or short account, and on such terms
and at such prices as you in your sole discretion may deem desirable, (b) in
arranging for sales of Stock to Dealers, to over-allot, and (c) either before
or after the termination of this Agreement, to cover any short position or
liquidate any long position incurred pursuant to this Section 7, subject,
however, to the applicable rules and regulations of the Commission under the
1934 Act. All such purchases, sales and over-allotments shall be made for the
accounts of the several Underwriters as nearly as practicable in proportion
to their respective underwriting obligations; provided, however, that our net
position, in the case of short accounts computed on the assumption that all
the Option Shares are acquired, resulting from such purchases and sales and
over-allotments shall not at the end of any business day exceed, either for
long or short account, 15% of the aggregate number of shares of Firm Stock
agreed to be purchased by us on the assumption that all Option Shares are
purchased. We will on demand take up at cost any Stock so purchased and
deliver any Stock so sold or over-allotted for our account, and, if any other
Underwriter, defaults in its corresponding obligations we will assume our
proportionate share of such obligation without relieving the defaulting
Underwriter from liability.
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If you effect any stabilizing purchases pursuant to this Section, you
shall promptly notify us of the date and time of the first stabilizing
purchase and the date and time when stabilizing was terminated. You shall
prepare and maintain such records as are required to be maintained by you as
manager pursuant to Rule 17a-2 under the 1934 Act.
We agree to advise you, from time to time upon request until the
settlement of accounts hereunder, of the number of shares of Stock at any
time retained by us remaining unsold, and we will upon request sell to you
for the accounts of one or more of the several Underwriters such number of
our unsold Stock as you may designate, at the Offering Price less such
amount, not in excess of the concession to Dealers, as you may determine.
8. OPEN MARKET TRANSACTIONS. We agree that, except with your consent and
except as herein provided, we will not, prior to the termination of this
Agreement, bid for, purchase or sell directly or indirectly for our own
account, in the open market or otherwise, or attempt to induce others to bid
for, purchase or sell, either before or after the issuance or sale of the
Stock, and, either for long or short account, any Stock, and prior to the
completion (as defined in Rule 10b-6 under the 1934 Act) of our participation
in the distribution, and we will otherwise comply with said Rule 10b-6.
Nothing contained in this Section 8 shall prohibit us from acting as broker
or agent in the execution of unsolicited orders of customers for the purchase
or sale of any securities of the Company.
9. REPURCHASES IN THE OPEN MARKET. In recognition of the importance of
distributing the Stock to bona fide investors, we agree to repurchase on
demand any Stock sold by us and purchased by you in the open market or
otherwise during a period terminating as provided in Section 12, at a price
equal to the cost of such purchase, including commissions and transfer and
other taxes, if any, on redelivery. The certificates delivered to us need not
be the identical certificates delivered to you in respect of the Stock
purchased. In lieu of requiring repurchase, you may, in your discretion, sell
such Stock for our account at such prices, upon such terms and to such
persons, including any of the other Underwriters, as you may determine,
charging the amount of any loss and expense, or crediting the amount of any
net profit, resulting from such sale, to our account, or you may charge our
account with an amount determined by you not in excess of the Dealers'
concession.
10. BLUE SKY. Prior to the initial offering by Underwriters, you will
inform us as to the jurisdictions in which it is believed that the Stock has
been qualified or registered or is exempt for sale under the respective
securities or "blue sky" laws of such jurisdictions, but you do not assume
any responsibility or obligation as to the accuracy of such information or as
to the right of any Underwriter or Dealer to sell the Stock in any
jurisdiction. You agree, however, to cause to be filed a Further State Notice
with respect to the Stock if, in the opinion of counsel for the Underwriters,
such filing is required by Article 23-A of the General Business Law of the
State of New York.
We authorize you, if you deem it inadvisable in arranging sales of Stock
for our account hereunder to sell any of our Stock to any particular Dealer
or other buyer because of the securities or "blue sky" laws of any
jurisdiction, to sell our Stock to one or more other Underwriters at the
offering price less, in the case of a sale for resale to a Dealer, such
amount, not in excess of the concession to Dealers thereon, as you may
determine. The transfer tax, if any, on any such sales among Underwriters
shall be treated as an expense and charged to the respective accounts of the
several Underwriters in proportion to their respective underwriting
obligations.
Upon the completion of the public offering contemplated herein, each
Underwriter agrees to promptly furnish to you, upon your request, territorial
distribution reports setting forth each jurisdiction
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in which sales of the Stock were made by such Underwriter, the number of
shares of Stock sold in such jurisdiction, and any further information as you
may request, in order to permit you to file on a timely basis any report
which you as Representative may be required to file pursuant to the
securities or "blue sky" laws of any jurisdiction.
11. ALLOCATION OF EXPENSES AND SETTLEMENT. We authorize you to charge
our account with and we agree to pay, to the extent not covered by the
accountable expense allowance provided for in Section 3(c) of the Purchase
Contract, (a) all transfer taxes on the Stock purchased by us pursuant to the
Purchase Contract and sold by you for our account, (b) any and all expenses
incurred by you as Representative in connection with the purchase, marketing
and sale of the Stock for our account and (c) our proportionate share (based
on our underwriting obligation) of all other expenses incurred by you in
connection with this Agreement and in connection with the purchase, carrying,
sale and distribution of the Stock. Your determination of the amount of such
expenses and your allocation thereof shall be final and conclusive. In the
event of the default of any Underwriter in carrying out its obligations
hereunder, the expenses chargeable to such Underwriter pursuant to this
Agreement and not paid by it, as well as any additional losses or expenses
arising from such default, may be proportionately charged by you against the
other Underwriters not so defaulting subject to the provisions of Section 12
hereof without, however, relieving such defaulting Underwriter from its
liability therefor.
As soon as practicable after termination of this Agreement, the accounts
hereunder will be settled, but you may reserve from distribution such amount
as you deem necessary to cover possible additional expenses. You may at any
time make partial distribution of credit balances or call for payment of
debit balances. Any of our funds in your hands may be held with your general
funds without accountability for interest. Notwithstanding the termination of
this Agreement or any settlement, we will pay (a) our proportionate share
(based on our underwriting obligation) of all expenses and liabilities which
may be incurred by or for the accounts of the Underwriters, including any
liability based on the claim that the Underwriters constitute an association,
unincorporated business or other separate entity, and of any expenses
incurred by you or any other Underwriter with your approval in contesting any
such claim or liability, and (b) any transfer tax paid after such settlement
on account of any sale or transfer for our account.
12. TERMINATION OF AGREEMENT. Unless earlier terminated by you, the
provisions of Sections 4, 6, 7, 8, 9, 11 and 12 of this Agreement shall,
except as otherwise provided therein, terminate 45 full business days after
the effective date of the Registration Statement herein referred to, but may
be extended by you for an additional period or periods not exceeding an
additional 15 full business days in the aggregate. You may however, terminate
this Agreement or any provisions hereof at any time by written or telegraphic
notice to us. All other provisions of this Agreement shall remain operative
and in full force and effect with respect to such offering.
13. DEFAULT BY UNDERWRITERS. In conformity with and in furtherance of
the provisions of Section 8 of the Purchase Contract, the default by one or
more Underwriters in respect of their respective obligations under the
Purchase Contract shall not release us from any of our obligations hereunder
or in any way affect the liability of any defaulting Underwriter to you or to
the other Underwriters for damages resulting from such default. In case of
such default by one or more Underwriters you are authorized to increase, as
nearly as practicable pro rata with the other non-defaulting Underwriters,
the Stock which we shall be obligated to purchase under the Purchase
Contract, provided, however, that the aggregate amount of all such increases
for all non-defaulting Underwriters will not exceed 10% of the Firm Shares
and, if the aggregate number of shares of Common Stock not taken up by such
defaulting Underwriters exceed such 10%, you are further authorized, but not
obligated, to arrange for the purchase by other persons, who may include
yourself, of all or a portion of the Stock not taken up by such Underwriters.
In the event any
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such increases or arrangements are made, the Stock to be purchased by the
non-defaulting Underwriters and by such other person or persons will be taken
as the basis for the purchase obligation under this Agreement, but this shall
not in any way affect the liability of any defaulting Underwriters to the
other Underwriters for damages resulting from such default.
In the event of default by one or more Underwriters in respect of its or
their respective obligations under this Agreement to take up and pay for any
Stock including any Stock purchased by you for their respective accounts
pursuant to Section 8 hereof, or to deliver any such securities sold or
over-allotted by you for their respective accounts pursuant to any provision
of this Agreement, and to the extent that arrangements shall not have been
made by you or the Company for other persons to assume the obligations of
such defaulting Underwriter or Underwriters, each non-defaulting Under writer
shall assume its proportionate share (without regard to the obligation of
such defaulting Underwriter or Underwriters) of the aforesaid obligations of
each such defaulting Underwriter without relieving such Underwriter of its
liability therefor.
14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this
Agreement, you shall act only as agent of the several Underwriters. Your
authority as the Representative of the several Underwriters shall include the
taking of such actions as you may deem advisable in respect of all matters
pertaining to any and all offers and sales of the Stock, including the right
to make any modifications which you consider necessary or desirable in the
arrangements with Dealers or others. You shall be under no liability for or
in respect of the value of the Stock or the validity or the form thereof, the
Registration Statement, the Prospectus, the Purchase Contract or other
instruments executed by the Company or others; or for or in respect of the
issuance, transfer or delivery of the Stock; or for the performance by the
Company or others of any agreement on its or their part of the exercise or
failure to exercise the Options granted pursuant to Section 2(a) of the
Purchase Contract; nor shall you, as such Representative or otherwise, be
liable to the several Underwriters under any of the provisions hereof or for
any matters connected herewith, except for want of good faith; and no
obligation not expressly assumed by you as such Representative herein shall
be implied from this Agreement. Nothing herein contained will constitute a
waiver of any liability arising under the Act and no obligation not expressly
assumed by you as such Representative herein will be inferred from this
Agreement. In representing the Underwriters hereunder, you shall act as the
Representative of each of them respectively. Nothing herein contained shall
constitute the several Underwriters partners with you or with each other, or
render any Underwriter liable for the commitments of any other Underwriter,
except as otherwise provided in Section 13 hereof. The commitments and
liabilities of each of the several Underwriters are several in accordance
with their respective underwriting obligations and are not joint or joint and
several.
15. ACKNOWLEDGEMENT OF REGISTRATION STATEMENT, ETC. We confirm that we
have examined the Registration Statement (including all subsequent amendments
thereto) relating to the Stock as heretofore filed with the Commission, that
we are familiar with any amendment or amendments to the Registration
Statement and the final form of Prospectus proposed to be filed, that we are
willing to accept the responsibilities of an underwriter thereunder, and that
we are willing to proceed as therein contemplated. We further confirm that
the statements made under the heading "Underwriting" in such proposed final
form of Prospectus, insofar as they relate to us, are correct, that there is
no information about us required to be stated in the Registration Statement
or Prospectus or any preliminary prospectus other than as set forth in the
Underwriters' Questionnaire previously delivered by us to you and the
Company, and we authorize you to so advise the Company on our behalf. We
understand that the aforementioned documents are subject to further change
and that we will be supplied with copies of any amendment or amendments to
the Registration Statement and Prospectus promptly, if and when received by
you, but the making of such changes and amendments shall not release us or
affect our obligations hereunder or under the Purchase
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Contract.
16. INDEMNIFICATION.
(a) We agree to indemnify and hold harmless each other Underwriter
and each person, if any, who controls any such Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the 1934 Act, to the extent and
upon the terms on which we agree to indemnify and hold harmless the Company
as set forth in the Purchase Contract.
(b) Each Underwriter (including you) will pay, upon your request, as
contribution, its proportionate share, based upon its underwriting
obligation, of any losses, claims, damages or liabilities, joint or several,
paid or incurred by any Underwriter, arising out of or based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus, any amendment or supplement thereto
or any preliminary prospectus or any other selling or advertising material
approved by you for use by the Underwriters in connection with the sale of
the Stock, or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading (other than an untrue statement or alleged untrue
statement or omission or alleged omission made in conformity with written
information furnished to the Company by or on behalf of an Underwriter
through you expressly for use therein or relating to any transaction
contemplated by this Agreement); and will pay such proportionate share of any
legal or other expenses reasonably incurred by you or with your consent in
connection with investigating or defending any such loss, claim, damage or
liability, on any action in respect thereof. In determining the amount of our
obligation under this paragraph, appropriate adjustment may be made by you to
reflect any amounts received by any one or more Underwriters in respect of
such claim from the Company pursuant to Section 7 of the Purchase Contract or
otherwise. There will be credited against any amount paid or payable by us
pursuant to this paragraph any loss, damage, liability or expense which is
incurred by us as a result of any such claim asserted against us, and if such
loss, claim, damage, liability or expense is incurred by us subsequent to any
payment by us to this paragraph, appropriate provision will be made to effect
such credit by refund or otherwise. If any such claim is asserted, you may
take such action in connection therewith as you deem necessary or desirable,
including retention of counsel for the Underwriters, and in your discretion
separate counsel for any particular Underwriter or group of Underwriters, and
the fees and disbursements of any counsel so retained by you shall be
included in the amounts payable pursuant to this paragraph. In determining
amounts payable pursuant to this paragraph, any loss, claim, damage,
liability or expense incurred by any person who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the 1934 Act
which has been incurred by reason of such control relationship shall be
deemed to have been incurred by such Underwriter. Any Underwriter may elect
to retain at its own expense its own counsel. You may settle or consent to
the settlement of any such claim, on advice of counsel retained by you, with
approval of a majority in interest of the Underwriters. Whenever you receive
notice of the assertion of any claim to which the provisions of this
paragraph would be applicable, you will give prompt notice thereof to each
Underwriter. If any Underwriter or Underwriters default in their obligation
to make any payments under this paragraph, each non-defaulting Underwriter
shall be obligated to pay its proportionate share of all defaulted payments
based upon such Underwriter's underwriting obligation related to the
underwriting obligations of all non-defaulting Underwriters. Nothing
contained herein shall relieve a defaulting Underwriter from liability for
its default.
(c) Our indemnity and contribution agreement contained in this
Section 16 shall remain in full force and effect regardless of any
investigation made by or on behalf of such other Underwriter or controlling
person and shall survive the delivery of and payment for the Stock and the
termination of this Agreement and the similar agreements entered into with
the other Underwriters.
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17. COMPENSATION TO THE REPRESENTATIVE. As compensation for your
services in connection with the purchase of the Stock and the management of
the public offering thereof, we agree to pay you, and authorize you to charge
our account on the Closing Date, as defined in the Purchase Contract, with an
amount equal to $.[ ] per share of Common Stock for each share of Common
Stock which we have agreed to purchase pursuant to the Purchase Contract.
18. CAPITAL REQUIREMENTS. We confirm that our ratio of aggregate
indebtedness to net capital is such that we may, in accordance with and
pursuant to Rule 15c3-1, promulgated by the Commission under the 1934 Act,
and any applicable rules relating to capital requirements of the NASD and any
securities exchange to which we are subject, agree to purchase the number of
shares of Common Stock we may be obligated to purchase under any provision of
the Purchase Contract or this Agreement.
19. UNDERTAKING TO MAIL PROSPECTUS. As contemplated by Rule 15c2-8 under
the 1934 Act, you agree to mail a copy of the Prospectus mentioned in the
Purchase Contract to any person making a written request therefor during the
period referred to in the rules and regulations adopted under such Act, the
mailing to be made to the address given in the request. We confirm that we
have delivered all preliminary prospectuses and amended preliminary
prospectuses, if any, required to be delivered under the provisions of Rule
15c2-8 and agree to deliver all Prospectuses required to be delivered
thereunder. You have heretofore delivered to us such preliminary prospectuses
as have been required by us, receipt of which is hereby acknowledged, and
will deliver such Prospectuses as may be requested by us.
20. MISCELLANEOUS. Any notice hereunder from you to us shall be deemed
to have been duly given if sent by registered mail, wire, telegram or
teletype, to us at our address as set forth in our Underwriters'
Questionnaire previously delivered to you.
We agree that we will not, without your consent, sell any Stock to an
account over which we exercise discretionary authority.
We understand that you are a member in good standing of the NASD. We
hereby confirm that each of us is actually engaged in the investment banking
or securities business and is a member in good standing of the NASD and each
of us agrees to comply with all applicable rules of the NASD including,
without limitation, the NASD's Interpretation with Respect to Free-Riding and
Withholding and Section 24 of Article III of the NASD's Rule of Fair
Practice, or, if we are not such a member, that we are a foreign dealer who
is not eligible for membership in the NASD (a) who agrees to make no sales
within the United States, its territories or its possessions (except that we
may participate in sales to others, including sales to institutions or other
retail purchasers under Section 4 above) or to persons who are citizens
thereof or residents therein, and, in making sales, to comply with the NASD's
Interpretation with Respect to Free-Riding and Withholding and Section 2, 8,
and 35 of Article III of the NASD's Rules of Fair Practice as if we were a
NASD member and Section 25 of Such Article III as it applies to a non-member
broker or dealer in a foreign country, and (b) who in connection with sales
and offers to sell Stock made by us outside the United States, (i) will
either furnish to each person to whom any such sale or offer to sell is made,
a copy of the then current preliminary prospectus or the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto), as the case may be, or inform such person that such
preliminary prospectus or Prospectus will be available upon request, and (ii)
will furnish to each person to whom any such sale or offer to sell is made
such prospectus, advertisement or other offering document containing
information relating to the Stock of the Company as may be required under the
law of the jurisdiction in which such sale or offer to sell is made. Any
prospectus, advertisement or other offering document furnished by us to any
person in accordance with clause (b) (ii) of the preceding sentence, and any
such additional offering material as we may furnish to any
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person, (i) shall comply in all respects with the law of the jurisdiction in
which it is so furnished, (ii) shall be prepared and so furnished at our sole
risk and expense, and (iii) shall not contain information relating to the
Stock or the Company which is inconsistent in any respect with the
information contained in the then current preliminary prospectus or in the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), as the case may be.
This Agreement may be signed by the Underwriters in various counterparts
which together shall constitute one and the same agreement among all the
Underwriters and shall become effective at such time as all the Underwriters
shall have signed such counterparts and you shall have confirmed all such
counterparts. Your signature to such confirmation may be by facsimile.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without giving effect to
conflicts of law.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
By:
(AS ATTORNEY-IN-FACT FOR EACH OF THE SEVERAL UNDERWRITERS
NAMED IN SCHEDULE I TO THE PURCHASE CONTRACT)
Confirmed as of the date first above written
New York, New York
SHARPE CAPITAL, INC. As Representative of the several Underwriters
By
Frank J. Lockwood
VICE-PRESIDENT
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EXHIBIT A
1,100,000 Shares
Young Minds, Inc.
Common Stock
($.[_] Par Value)
PURCHASE CONTRACT
October _, 1996
Sharpe Capital, Inc., As Representative of the Several Underwriters named in
Schedule I hereto, 120 Broadway New York, New York 10271
Dear Sirs:
YOUNG MINDS, INC. (the "Company"), a [ ] corporation, proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), 725,000 shares of Common Stock, $.[ ] par value of the
Company (the "Company Shares"). In addition, certain shareholders of the
Company named in Schedule II hereto (the "Selling Shareholders") propose
severally to sell to the Underwriters an aggregate of 375,000 shares of
Common Stock (the "Selling Shareholder Shares"). The Company Shares and the
Selling Shareholder Shares are herein called the "Firm Shares". In addition,
to cover over-allotments in connection with the sale of the Firm Shares, the
Company proposes to grant to the Underwriters an option to purchase up to an
additional 165,000 shares (the "Option Shares") of Common Stock. The Firm
Shares and any Option Shares purchase pursuant to this Purchase Contract are
herein called the "Stock".
The Company and each of the Selling Shareholders severally hereby
confirm their agreement contained herein with respect to the purchase of
Stock by you and the Underwriters. You represent and warrant that you are
acting as the representative (the "Representative") of the Underwriters and
that you have been authorized by each of the other Underwriters to enter into
this Agreement on its behalf and to act for it in the manner herein provided.
Prior to the purchase and public offering of the Stock by the
Representative, the Company and the Representative shall enter into an
agreement substantially in the form of Exhibit A hereto (the "Pricing
Agreement"). The Pricing Agreement may take the form of an exchange of any
standard form of written telecommunication between the Company and the
Underwriters and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Stock will be governed by this Purchase
Contract, as supplemented by the Pricing Agreement. From and after the date
of the execution and delivery of the Pricing Agreement, this Agreement shall
be deemed to incorporate the Pricing Agreement.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (No. [ ] and a related
preliminary prospectus for the registration of the Stock under the Securities
Act of 1933 (the "1933 Act") and has filed such amendments thereto, if any,
and such amended preliminary prospectuses as may have been required to the
date hereof, and will file such additional amendments thereto and such
amended prospectuses as may hereafter be required. Such registration
statement (as amended, if applicable) and the prospectus constituting a part
thereof (including, in each case, the information, if any, deemed to be part
thereof pursuant to Rule 430A(b) of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations"), as from time to
time amended or supplemented pursuant to the 1933 Act, are hereinafter
referred to as the "Registration
<PAGE>
Statement" and the "Prospectus", respectively, except that if any revised
prospectus shall be provided to the Underwriters by the Company for use in
connection with the offering of the Stock which differs from the Prospectus
on file at the Commission at the time the Registration Statement becomes
effective (whether or not such revised prospectus is required to be filed by
the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time
it is first provided to the Underwriters for such use.
The Company understands that you propose to make a public offering of
the Stock as soon as you deem advisable after the Registration Statement
becomes effective and the Pricing Agreement has been executed and delivered.
1. REPRESENTATIONS AND WARRANTIES. (I) The Company represents and
warrants to the Underwriters as of the date hereof and as of the date of the
Pricing Agreement as follows:
(a) As of the above times and at the time the Registration Statement
becomes effective, the Registration Statement will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations
and will not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, (unless the term
"Prospectus" refers to a prospectus which has been provided to the
Underwriters by the Company for use in connection with the offering of the
Stock which differs from the Prospectus on file at the Commission at the time
the Registration Statement becomes effective, in which case at the time it is
first provided to the Underwriters for such use) and at Closing Dates as
herein defined, will not include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in conformity
with information furnished to the Company in writing by the Underwriters
expressly for use in the Registration Statement or Prospectus.
(b) The Registration Statement has become effective under the 1933
Act.
(c) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at
the time of the filing thereof, did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; except that the
foregoing shall not apply to statements in, or omissions from, any
Preliminary Prospectus which are based upon and conform to written
information furnished to the Company by you or any Underwriter through you
specifically for use in the preparation thereof.
(d) The financial statements of the Company, together with the
related schedules and notes as set forth, or incorporated by reference, in
the Registration Statement and Prospectus, or in any amendment thereof or
supplement thereto, do and will fairly present the financial condition and
results of operations and changes in financial condition of the Company at
the respective dates or for the respective periods to which they apply; such
financial statements and schedules (including the related notes) have been
and will be prepared in accordance with generally accepted principles of
accounting consistently applied throughout the periods concerned; and BDO
Seidman & Co., who have certified or shall certify certain of the financial
statements and schedules and who shall have performed a limited review on
certain of the interim financial statements filed or to be filed with the
Commission as parts of the Registration Statement and Prospectus, are
independent public accountants as required by the Act and Regulations.
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<PAGE>
(e) The Company has an authorized and outstanding capitalization as
set forth in the Prospectus; all of the outstanding shares of Common Stock,
including the Selling Shareholder Shares, [and preferred stock of the Company]
have been duly and validly authorized and issued, are fully paid and
nonassessable, and conform to the description thereof contained in the
Prospectus; and the Stock, when issued, will be registered under the Act; no
sales of securities have been made by the Company in violation of the Act or
the Securities Exchange Act of 1934 (the "1934 Act"); and there are no
preemptive or other rights to subscribe for or purchase any Common Stock or,
except as set forth in the Prospectus, any options, warrants, agreements or
similar rights calling for the issuance by the Company of any of its
securities. Except as set forth in the Registration Statement and the
Prospectus, there is no restriction upon the voting or transfer of any shares
of Stock pursuant to the Company's articles of incorporation, by-laws or any
agreement or other instrument to which the Company or any subsidiary is a
party. Neither the filing of the Registration Statement nor the offering or
sale of the Stock as contemplated in this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock.
(f) The Stock has been duly authorized and upon delivery and payment
therefore as contemplated herein, will be duly and validly issued, fully paid
and nonassessable.
(g) The Stock conforms to the description thereof in the Prospectus.
(h) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, and prior to the delivery of
the Stock hereunder (a) the Company has not incurred nor contemplates it will
have incurred any material liabilities or obligations, direct or contingent,
nor entered into any material transaction not in the ordinary course of
business and (b) there has not been and there is not contemplated any
material change in the Common Stock, preferred stock or long term
indebtedness of the Company or any material adverse change in the general
affairs, capitalization, financial position, results of operations or net
worth of the Company, in each case otherwise than as indicated or
contemplated in the Registration Statement and Prospectus or any supplement
or amendment thereto.
(i) Each of the Company and its material subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation with full corporate power
to own and hold its properties and to conduct its business as described in
the Prospectus and is duly registered or qualified to conduct business and
holds all material licenses in each jurisdiction or place in which its
ownership of property or its conduct of business legally requires such
licenses, registration or qualification and its said ownership of property
and conduct of its business is in compliance in all material respects with
all laws, ordinances and regulations applicable thereto.
(j) The Company has no significant subsidiaries, other than as set
forth in the Registration Statement.
(k) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms with respect to the Company, except
as enforceability of the indemnification provisions may be limited under
federal securities laws and except to the extent enforceability may be
limited by applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and by general equitable principles; and the
performance of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with or result in any breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed of trust, note agreement or
other agreement or instrument to which the Company is a party or by which it
is bound or to which any of its property is subject, nor will it conflict
with or result in any breach or violation of any of the terms or provisions
of, or constitute a
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<PAGE>
default under the Company's articles of incorporation, as amended, or
by-laws, or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its respective
activities or properties; and no consent, approval, authorization or order of
any court or governmental agency is required for the consummation of the
transactions contemplated hereby, or thereby, except such as may be required
under the Act or state securities or Blue Sky laws.
(l) Except as set forth in the Registration Statement or Prospectus,
the Company is not (i) in default in the performance of any obligations,
agreements or conditions contained in any material contract to which it is a
party, including, without limitation, any instruments evidencing
indebtedness, (ii) a party to any contract or agreement or subject to any
charter or other corporate restriction materially adversely affecting its
business, financial condition, property or assets, or (iii) a party to, or to
the knowledge of the Company threatened by, any material legal proceedings or
governmental action which might result in a material adverse change in the
business operations, property, assets, or in the condition, financial or
otherwise, of the Company. All material operations of the Company have been
duly and validly authorized and approved by all Federal and state regulatory
authorities having jurisdiction thereof to the extent that such authorization
or approval is legally required and the material franchises, licenses,
easements, consents and permits which may be held by the Company are in all
material respects adequate and sufficient for the conduct of its business and
are free of burdensome restrictions, except as set forth in the Registration
Statement or Prospectus.
(m) Except as set forth in the Registration Statement or Prospectus,
the Company has not received any material notice of infringement of, or
conflict with asserted rights of others with respect to, any patent, patent
rights, inventions, trademarks, trade names or copyrights.
(n) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed, and has paid all taxes shown on such
returns and on all assessments received to the extent that such taxes have
become due. All taxes with respect to which the Company is obligated have
been paid or adequate accruals have been set up to cover any such unpaid
taxes.
(o) The Company has good and marketable title in fee simple to all
material real property described in the Prospectus as being owned by it, free
and clear of all liens, encumbrances and defects, other than as reflected in
the Registration Statement, except such as are not material and do not
interfere with the use made and proposed to be made thereof by the Company;
and the material properties referred to in the Prospectus as held under lease
by the Company are held under valid and enforceable leases with such
exceptions as do not materially interfere with the conduct of its business.
(p) There are no contracts or other documents to which the Company
is a party which are required to be described or incorporated in the
Registration Statement or Prospectus or to be filed with the Commission, as
required by the Act or Regulations, as exhibits to the Registration Statement
which have not been so described or filed as required.
(q) The Company knows of no outstanding claims for services in the
nature of a finder's or origination fee with respect to the sale of the Stock
hereunder resulting from its acts for which the Underwriters may be
responsible except as disclosed in the Prospectus.
(r) Except as described in the Prospectus, there is no material
suit, action or proceeding to which the Company is a party, or to which the
property of the Company is subject, pending before or brought by a court or
governmental agency or body nor is any such action, suit or proceeding to the
knowledge of the Company threatened which would result in any material
adverse change in the business, financial position or results of operation,
presently or prospectively, or which would materially adversely
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<PAGE>
affect the properties or assets of the Company.
(s) Neither the Company nor any subsidiary has, directly or
indirectly, at any time during the past five years (i) made any unlawful
contribution to any candidate for political office, or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal, state or foreign governmental officer or official or other person
charged with similar public or quasi public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof. The Company's internal accounting controls and procedures are
sufficient to cause the Company to comply, in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(II) Each Selling Shareholder, for such Selling Shareholder only and not
for any other Selling Shareholder, represents and warrants to, and agrees
with, each Underwriter that:
(a) Such Selling Shareholder has full right, power and authority to
enter into this Agreement, the Power of Attorney (the "Power of Attorney")
and the Custody Agreement (the "Custody Agreement") hereinafter referred to,
and at the date hereof such Selling Shareholder has, and at the time of
delivery of the Selling Shareholder Shares to the Underwriters hereunder such
Selling Shareholder will have, full right, power and authority to sell and
deliver the Selling Shareholder Shares to be sold by such Selling Shareholder
to the Underwriters, and at the date hereof such Selling Shareholder is, and
at the time of delivery of the Selling Shareholder Shares to the Underwriters
such Selling Shareholder will be, the lawful owner of and has, and will have,
marketable title to such shares free and clear of any claims, liens,
encumbrances or security interests.
(b) The performance of this Agreement, the Power of Attorney and the
Custody Agreement, and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach of, or
default under, any agreement, indenture or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder is bound,
or any law, rule, administrative regulation or court decree applicable to
such Selling Shareholder. This Agreement, the Power of Attorney and the
Custody Agreement have been validly executed and delivered by such Selling
Shareholder and each constitutes the valid and binding agreement of such
Selling Shareholder.
(c) When the Registration Statement becomes effective, the
Registration Statement and Prospectus, and any amendments thereof and
supplements thereto at the time they become effective, will not contain an
untrue statement of a material fact regarding such Selling Share holder or
omit to state a material fact regarding such Selling Shareholder required to
be stated therein or necessary in order to make the statements therein
regarding such Selling Shareholder not misleading, and at such time such
Selling Shareholder shall be unaware of any material misstatement in or
omission from the Registration Statement and Prospectus or of any material
adverse information regarding the business or operations of the Company or
its subsidiaries which is not set forth in the Registration Statement and
Prospectus.
(d) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Stock hereby.
(e) Certificates in negotiable form representing all of the Selling
Shareholder Shares to be sold by such Selling Shareholders have been placed
in custody under a Custody Agreement, in the form heretofore furnished to
you, duly executed and delivered by such Selling Shareholders to David H.
Cote as custodian (the "Custodian"), and such Selling Shareholders have duly
executed and delivered a Power of Attorney, in the form heretofore furnished
to you, appointing David H. Cote or [ ] and
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<PAGE>
each of them as such Selling Shareholders' attorney-in-fact (the
"Attorney-in-Fact") with authority to execute and deliver this Agreement on
behalf of such Selling Shareholders, to authorize the delivery of the Selling
Shareholders Shares to be sold by such Selling Shareholders hereunder and
otherwise to act on behalf of such Selling Shareholders in connection with
the transactions contemplated by this Agreement and the Custody Agreement.
(f) The Selling Shareholders Shares represented by the certificates
held in custody for such Selling Shareholders under the Custody Agreement are
subject to the interests of the Underwriters hereunder, and the arrangements
made by such Selling Shareholders for such Selling Shareholders for such
custody, as well as the appointment by such Selling Shareholders of the
Attorney-in-Fact, are, to that extent, irrevocable. Each Selling Shareholder
specifically agrees that the obligations of such Selling Shareholders
hereunder shall not be terminated by operation of law, whether by the death
or incapacity of any such Selling Shareholders, or by the occurrence of any
other event. If any individual Selling Shareholder should die or become
incapacitated, or if any other such event should occur, before the delivery
of the Selling Shareholder's Shares hereunder, certificates representing the
Selling Shareholder's Shares shall be delivered by or on behalf of such
Selling Shareholder in accordance with the terms and conditions of this
Agreement and of the Custody Agreement, and the actions taken by the
Attorney-in-Fact pursuant to the Power of Attorney shall be as valid as if
such death, incapacity or other event had not occurred. whether or not the
Custodian or the Attorney-in-Fact shall have received notice of such death,
incapacity or other event.
2. PURCHASE AND SALE OF THE SHARES. (a) On the basis of the
representations and warranties herein contained but subject to the terms and
conditions herein set forth, the Company, hereby agrees to issue and sell the
Company Shares to the Underwriters and each of the Underwriters, severally
and not jointly, hereby agrees to purchase from the Company and the Selling
Shareholders the number of Firm Shares set forth opposite such Underwriter's
name in Schedule I hereto, at the purchase price per share set forth in the
Pricing Agreement. Each of the Selling Shareholders, agrees, severally and
not jointly, to sell the number of Selling Shareholder Shares set forth
opposite his name in Schedule II hereto, to each of the Underwriters set
forth in Schedule I hereto, severally and not jointly, in the proportion that
the number of shares of Common Stock opposite the name of each Underwriter on
Schedule I bears to the total number of shares of Common Stock to be
purchased by the Underwriters as set forth on Schedule I hereto. The
Underwriters agree to offer the Firm Shares to the public as set forth in the
Prospectus.
(b) In addition, the Company hereby grants to the Representative an
option to purchase from the Company, solely for the purpose of covering
over-allotments in the sale of Firm Shares, all or any portion of the Option
Shares at the purchase price per Share set forth in the Pricing Agreement for
30 days after the date the Registration Statement becomes effective (or, if
the Company has elected to rely upon Rule 430A, 30 days after execution of
the Pricing Agreement), which option may be exercised in whole or part from
time to time. Option Shares shall be purchased, severally and not jointly,
for the accounts of the several Underwriters in proportion to the number of
Firm Shares set forth opposite such Underwriter's name in Schedule I hereto,
except that the respective purchase obligations of each Underwriter may be
adjusted by the Representative so that no Underwriter shall be obligated to
purchase Option Shares other than in 100 Share amounts.
(c) (i) If the Company has elected not to rely upon Rule 430A under
the 1933 Act Regulations, the public offering price and the purchase price
per share to be paid by the Underwriters for the Stock have been or will be
determined and set forth in the Pricing Agreement, and an amendment to the
Registration Statement and the Prospectus will be filed before the
Registration Statement becomes effective.
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<PAGE>
(ii) If the Company has elected to rely upon Rule 430A under the
1933 Act Regulations, the purchase price per share to be paid by the
Underwriter for the Stock shall be an amount equal to the public offering
price, less an amount per share to be determined by agreement between the
Representative and the Company. The public offering price per share of the
Stock shall be a fixed price to be determined by agreement between the
Representative, the Company and the Selling Shareholders. The public offering
price and the purchase price, when so determined, shall be set forth in the
Pricing Agreement. In the event that such prices have not been agreed upon
and the Pricing Agreement has not been executed and delivered by all parties
thereto by the close of business on the fourth business day following the
date of this Agreement, this Agreement shall terminate forthwith, without
liability of any party to any other party, unless otherwise agreed to by the
Company, the Selling Shareholders and the Representative.
(d) It is understood that, in making this Agreement, the
Underwriters are contracting severally and not jointly or jointly and
severally, and that their several agreements to purchase Firm Shares on the
basis of the representations, warranties and agreements of the Company herein
contained shall be several and not joint and shall apply only to the
respective number of Firm Shares set forth opposite their respective names in
Schedule I hereto, except as provided in Section 8 hereof.
3. PAYMENT AND DELIVERY. (a) Payment of the purchase price for, and
delivery of certificates for, the Stock shall be made at the office of Sharpe
Capital, Inc., 120 Broadway, New York, New York 10271, or at such other place
as shall be agreed upon by you and the Company at 10:00 A.M. on the fifth
business day following the date the Registration Statement becomes effective
(or, if the Company has elected to rely upon Rule 430A, at 10:00 A.M. on the
fifth business day following execution of the Pricing Agreement), or such
other time not later than ten business days after such date as shall be
agreed upon by you and the Company. In addition, in the event that any or all
of the Option Shares are purchased by the Underwriter, payment of the
purchase price for, and delivery of certificates for, such Option Shares
shall be made at the above mentioned office of Sharpe Capital, Inc. or at
such other place as shall be agreed upon by you and the Company, on each
Delivery Date as specified in the notice from you to the Company. Payment
shall be made to the Company and the Selling Shareholders by certified or
official bank check or checks drawn in New York Clearing House funds or
similar next day funds payable to the order of the Company and the Selling
Shareholders against delivery to you of certificates for the Stock to be
purchased by you. Certificates for the Firm Shares and the Option Shares
shall be in such denominations and registered in such names as the case may
be.
(b) The certificates for Firm Shares shall be made available to you
at the office of Sharpe Capital, Inc. for inspection, checking and packaging
at least one full business day in advance of the Closing Date and shall be
delivered to you on the Closing Date for the respective accounts of the
several Underwriters against payment of the purchase price.
(c) On the Closing Date, at the time of the delivery of the Firm
Shares and payment therefor, the Company shall pay a maximum sum equal to
three (3%) percent of the gross proceeds from the public offering of the Firm
Shares, as a non-accountable expense allowance to the Representative, by
certified or official bank check to the order of Sharpe Capital, Inc., for
the expenses (excluding fees and expenses of its counsel for other than blue
sky purposes) incurred by the Representative incidental to the public
offering, as to which the Representative shall not be required to account.
4. COVENANTS. The Company covenants and agrees with each Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement and any subsequent amendments thereto to become effective as
promptly as possible and will notify you, promptly
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<PAGE>
after it shall receive notice thereof, of the time when the Registration
Statement or any subsequent amendment to the Registration Statement has
become effective or any supplement to the Prospectus has been filed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; it will prepare and file with the Commission, promptly upon your
request, any amendments or supplements to the Registration Statement or
Prospectus which, in your reasonable opinion may be necessary or advisable in
connection with the distribution of the Stock by the Underwriters; and it
will file no amendment or supplement to the Registration Statement or
Prospectus, or any document incorporated in the Prospectus by reference, to
which you shall reasonably object by notice to the Company after having been
furnished a copy within a reasonable time prior to the filing.
(b) The Company will advise you, promptly after it shall receive or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or the initiation
or threatening of any proceeding for that purpose and it will use promptly
its best efforts to prevent the issuance of any stop order or to obtain the
withdrawal thereof if such a stop order should be issued.
(c) Within the time during which a Prospectus relating to the Stock
is required to be delivered under the Act, the Company will comply with all
requirements imposed upon it by the Act, as now and hereafter amended, and by
the Regulations as from time to time in force, so far as necessary to permit
the continuance of sales of, or, dealings in the Stock as contemplated by the
provisions hereof and the Prospectus. If during such period any event occurs
as a result of which the Prospectus, as then amended or supplemented, would
include an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period it is
necessary to amend or supplement the Prospectus to comply with the Act, the
Company will promptly notify you and will amend or supplement the Prospectus
(at the expense of the Company) so as to correct such statement or omission
or effect such compliance.
(d) The Company will use its best efforts to qualify the Stock for
sale under the securities laws of such jurisdictions as you reasonably
designate and to continue such qualifications in effect so long as required
for the distribution of the Stock, provided that the Company shall not be
required in connection therewith to qualify as a foreign corporation or to
execute a general consent to service of process in any state.
(e) The Company will furnish to the Underwriters, as soon as
available and without charge, copies of the Registration Statement (three of
which will be signed and will include all exhibits and conformed copies in
such reasonable quantities as you may request), each Preliminary Prospectus,
the Prospectus, and all amendments and supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a) (3)
of the Act, all in such quantities as you may from time to time reasonably
request.
(f) The Company will make generally available to its security
holders and deliver to you as soon as practicable but in any event not later
than 15 months after the end of the Company's current fiscal quarter, an
earnings statement (which need not be audited) covering a twelve month period
beginning after the effective date of the Registration Statement conforming
to the requirements of Section 11 (a) of the Act.
(g) The Company will apply the net proceeds from the sale of the
Stock for the purposes set forth under "Use of Proceeds" in the Prospectus.
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<PAGE>
(h) The Company will not, during the 120 days following the
effective date of the Registration Statement, except with the prior consent
of the Representative, sell or otherwise dispose of any shares of Common
Stock or sell or grant options, rights of warrants with respect to the
Company's Common Stock, otherwise than in accordance with this Agreement or
in connection with the exercise of outstanding stock options or warrants or
as contemplated in the Prospectus.
(i) On or before the effective date of the Registration Statement,
the Company shall have caused to be duly executed and shall have in its
possession and make available to the Representative for review, legally
binding and enforceable agreements pursuant to which the officers and
directors shall have agreed that for a period of not less than eighteen (18)
months following such effective date, no such person will sell securities of
the Company whether pursuant to Rule 144 or otherwise, without the prior
written consent of Sharpe Capital, Inc.
(j) Each of the Selling Shareholders covenants and agrees, severally
and not jointly, that such Selling Shareholder will not, during the 120 days
following the effective date of the Registration Statement, except with the
prior written consent of the Representative, offer for sale, sell, distribute
or otherwise dispose of any shares of Common Stock, otherwise than in
accordance with this Agreement or as contemplated in the Prospectus.
(k) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance upon
Rule 430A of the 1933 Act Regulations, then immediately following the
execution of the Pricing Agreement, the Company will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A and
Rule 424(b) of the 1933 Act Regulations, copies of an amended Prospectus, or,
if required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(1) For a period of five years from the effective date of the
Registration Statement, the Company will provide you with copies of all
documents made available to security holders generally, and at the same time
as filed, copies of all filings made with the Commission.
5. PAYMENT OF EXPENSES. The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented from
becoming effective under the provisions of Section 10(a) hereof or is
terminated, will pay all costs and expenses incident to the performance of
the obligations of the Company hereunder, including, without limitation, the
fees and expenses of the Company's accountants and counsel, all costs
incident to the preparation, printing, reproducing and filing under the Act
of the Registration Statement (including all exhibits thereto),
post-effective amendments, each Preliminary Prospectus, the Prospectus and
all amendments and supplements thereto, the fee payable to the NASD, all fees
and disbursements incurred by the Company and by the Underwriters in
connection with the qualification of the Stock under the laws of various
jurisdictions as provided in Section 6(e) hereof (including the legal fees
and disbursements, of counsel for the Underwriters in connection with
assisting the Company's counsel in such qualification, provided such legal
fees shall be at regular hourly rates for the persons performing actual
services in such matters and in no event more than $25,000, and which such
fees plus disbursements (including filing fees) shall be paid by the Company
in addition to any payments under Section 3(c) hereof), the cost of
furnishing to the Underwriters copies of the Registration Statement, each
Preliminary Prospectus, the Prospectus and each amendment and supplement
thereto, in such numbers as you may reasonably request, the cost of printing
the Agreement Among Underwriters, and exhibits thereto, and the costs and
charges of any transfer agent or registrar and the cost of preparing,
engraving, printing and delivering the certificates for the Stock, including
any original issue taxes payable in connection therewith. If the sale of the
Stock provided for herein is not consummated by reason of action by the
Company pursuant to Section 10(a) hereof which prevents this Agreement from
becoming effective,
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or by reason of any failure, refusal or inability on the part of the Company
to perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled
by the Company is not fulfilled, or by reason of any event set forth in
subparagraph 10(b) (i) or 10(b) (vi) hereof, the Company will reimburse the
several Underwriters for all reasonable out-of-pocket disbursements
(including fees and disbursements of counsel) incurred by the Underwriters in
connection with their investigation, marketing and preparing to market the
Stock or in contemplation of performing their obligations hereunder. The
Company shall not in any event be liable to any of the Underwriters for loss
of anticipated profits from the transactions covered by this Agreement.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock as provided herein,
shall be subject to the accuracy and compliance and the continuing accuracy
and compliance in all material respects of, and with, the representations and
warranties of the Company as of the date hereof and as of both Closing Dates,
to the accuracy in all material respects of statements of officers of the
Company made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective and on
the Closing Date no stop order shall have been issued or proceedings therefor
initiated or, to the knowledge of the Company or any Underwriter, threatened
by the Commission, and any request by the Commission for additional
information (to be included in the Registration Statement or the Prospectus,
or otherwise) shall have been complied with to the satisfaction of counsel
for the Underwriters, and no Underwriter shall have discovered and advised
the Company prior to such Closing Date that the Registration Statement or the
Prospectus, or any amendment or supplement thereto, contains an untrue
statement of a fact which, in the opinion of counsel for the Underwriters, is
material, or omits to state a fact which, in the opinion of such counsel is
material and is required to be stated therein, or is necessary to make the
statements therein not misleading. If the Company has elected to rely upon
Rule 430A of the 1933 Act Regulations, the price of the Stock and any price
related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations
within the prescribed time period, and prior to Closing Time the Company
shall have provided evidence satisfactory to the Representative of such
timely filing, or a post effective amendment providing such information shall
have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the 1933 Act Regulations.
(b) On the Closing Dates you shall have received the favorable
opinion of Messrs. Swanson and Meepos, counsel for the Company, dated the
Closing Date, addressed to the Underwriters and in form, scope and substance
satisfactory to counsel for the Underwriters, with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) Each of the Company and its subsidiaries (the
"Subsidiaries") is a corporation validly existing and in good standing under
the laws of the jurisdiction of its incorporation, has full corporate power
and authority under such laws to own its properties and to conduct its
business as described in the Prospectus and is duly qualified to do business
as a foreign corporation and is in good standing in such jurisdictions as the
Representative may request.
(ii) the Company has an authorized and outstanding
capitalization as set forth under the caption "Capitalization" in the
Prospectus; and the Common Stock [and preferred stock] conform in all
material respects as to legal matters to the description thereof contained in
the Prospectus. The Company has all requisite corporate power and authority
to issue, sell and deliver the Company Shares and Option Shares in accordance
with and upon the terms and conditions set forth in this Agreement and in the
Registration Statement and Prospectus, and all corporate action required to
be taken by the Company for
- 10 -
<PAGE>
the due and proper authorization, issuance, sale and delivery of the Company
Shares has been validly and sufficiently taken. The Company Shares, upon
issuance and delivery and payment therefor in the manner herein described,
will be, duly authorized, validly issued, fully paid and nonassessable. The
Selling Shareholder Shares are duly authorized, validly issued, fully paid
and non-assessable. The terms and provisions of the capital stock of the
Company conform in all material respects to the description thereof contained
under the caption "Description of Capital Stock" in the Prospectus; and
except as set forth in the Registration Statement and the Prospectus and
except as previously disclosed to the Representative in writing, there are no
preemptive or other rights to subscribe for or to purchase, or any
restriction upon the voting or transfer of, any shares of Stock pursuant to
the Company's certificate of incorporation, or by-laws.
(iii) the Registration Statement has become effective under
the Act and to the best knowledge of such counsel no stop ordering suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act;
(iv) this Agreement and the execution and performance by the
Company has been duly and validly authorized, executed and delivered by the
Company;
(v) no consent, approval, authorization or order of any
court or governmental agency or body is required in connection with the
consummation of the transactions contemplated by this Agreement, except such
as may be required under the Act or state or foreign securities or Blue Sky
laws;
(vi) the Registration Statement and the Prospectus and any
amendments or supplements thereto (other than the financial statements and
other financial and statistical data included therein, as to which no
opinion, need be rendered) as of their respective dates comply as to form in
all material respects with the requirements of the Act and the Rules and
Regulations thereunder;
(vii) except as set forth in the Registration Statement and
the Prospectus and except as previously disclosed to the Representative in
writing, there are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any shares of
Stock pursuant to any agreement or other instrument known to such counsel to
which the Company or any subsidiary is a party; and to the best of such
counsel's knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Stock as contemplated by this Agreement gives rise to
any registration rights or other rights, other than those which have been
waived or satisfied for or relating to the registration of any shares of
Common Stock;
(viii) to the best of such counsel's knowledge, there are no
contracts or other documents required to be filed as exhibits to the
Registration Statement other than those filed as exhibits thereto, and, there
are no legal or governmental proceedings pending or threatened before or by
any court or governmental agency or body against the Company of a character
required to be disclosed in the Registration Statement and the Prospectus
which have not been so disclosed;
(ix) the statements in the Prospectus under "Capitalization",
"Business", "Properties" and "Description of Capital Stock" insofar as they
are descriptions of contracts or other documents filed as exhibits to the
Registration Statement, have been prepared or reviewed by such counsel and,
to the best of such counsel's knowledge, are accurate and correct in all
material respects;
(c) On the Closing Dates, you shall have received from Snow Becker
Krauss P.C., counsel for the several Underwriters, such opinion or opinions
with respect to the incorporation of the Company,
-11-
<PAGE>
the Registration Statement, the Prospectus and other related matters as you
reasonably may request and such counsel, shall have received such papers and
information as it may reasonably request to enable them to pass upon such
matters. In addition, such counsel shall also state that they have
participated in conferences with representatives of the Underwriters and with
representatives of the Company and its accountants concerning the
Registration Statement and the Prospectus and have considered the matters
required to be stated therein and the statements contained therein, although
they have not independently verified the accuracy, completeness or fairness
of such statements. Such counsel shall also state that based upon and subject
to the foregoing, nothing has come to their attention to cause them to
believe that the Registration Statement, at its issue date, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, at the time it was first filed with the
Commission pursuant to Rule 424(b) under the 1933 Act or as of the date of
their opinion contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading (it being understood that they have not been
requested to and do not make any comment with respect to the financial
statements, schedules and other financial and statistical information
contained in the Registration Statement or the Prospectus).
(d) Prior to either Closing Date (i) there shall have been no
material adverse change in the condition of the Company or its business or
business activities, financial or otherwise, from the date as of which such
condition is set forth in the Registration Statement and Prospectus, except
as referred to therein; (ii) there shall have been no material transaction,
not in the ordinary course of business, entered into by the Company from the
date as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus, other than transactions referred to or
contemplated therein or to which you have given your written consent; (iii)
the Company shall not be in default under any provisions of any instruments
relating to any outstanding indebtedness; (iv) no material amount of the
assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and Prospectus; (v) no action, suit or
proceeding, at law or in equity, shall have been pending or to the Company's
knowledge threatened against the Company or affecting its properties or
business before or by any court or federal or state commission, board or
other administrative agency wherein an unfavorable decision, ruling or
finding would materially adversely affect the business, operations, income or
financial condition of the Company, except as set forth in the Registration
Statement and Prospectus; and (vi) no stop order shall have been issued under
the Act and no proceedings therefor shall have been initiated or threatened
by the Commission.
(e) On the Closing Dates the Representative shall have received a
certificate of the President, Chairman of the Board and Treasurer of the
Company, dated the Closing Date, to the effect that the conditions set forth
in subsection (d) above have been satisfied, as to the accuracy as of the
Closing Date of the representations and warranties set forth in Section 1
hereof, and that the Company has performed all its obligations and satisfied
all conditions on its part to be performed or satisfied at or prior to the
Closing Date.
(f) At the time this Agreement is executed, and on the Closing
Dates, the Representative shall have received letters, addressed to the
Underwriters in form, scope and substance satisfactory to the Representative
in all respects (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) with reproduced copies
of signed counterparts thereof for each of the Underwriters, from
[ Accountants ] dated, respectively, as of the date of this Agreement and as
of the Closing Date:
(i) confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published regulations thereunder, including that
-12-
<PAGE>
they are in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, and stating in effect that the answer to Item 24 of Part II of
the Registration Statement is correct insofar as it relates to it:
(ii) stating in effect that in its opinion the financial
statements and schedules in the Registration Statement and Prospectus
examined by them comply as to form in all material respects with the
applicable accounting requirements of the Act and the regulations thereunder
with respect to registration statements on Form S-1;
(iii) stating that, on the basis of a limited review (but not
an examination made in accordance with generally accepted auditing standards)
which includes a reading of the Interim Results of Operations included in the
Registration Statement for the [ ] period ended
[ ] and the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of meetings of the stockholders and board of directors of
the Company, consultation with officers and other employees of the Company
responsible for financial and accounting matters and inquiries, including a
comparison of amounts contained in such Interim Results of Operations with
amounts contained in the general accounting records (including work sheets)
of the Company, nothing has come to their attention which would lead them to
believe that (A) the unaudited Interim Results of Operations of the Company
included in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the regulations
thereunder or are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements of the Company included in the Prospectus
(B) at a specified date not more than five business days prior to the date of
such letter, there was any change in the Common Stock, [preferred stock or long
term debt] of the Company, in each case as compared with amounts shown on the
[ 19_] consolidated balance sheets other than as set forth in or contemplated by
the Prospectus, or, if there was any change or decrease, setting forth the
amount of such change or decrease, or (C) during the period from [, 19 to a
specified date not more than five business days prior to the date of such
letter, there was any decrease in revenues, or in earnings before income
taxes, and extraordinary items or in the total or per share amounts of net
earnings or loss of the Company, in each case as compared with the
corresponding period beginning other than as set forth in or contemplated by
the Prospectus, or, if there was any decrease, setting forth the amount of
such decrease; and
(iv) stating that they have performed such review and made
such comparisons as shall be reasonably requested by and shall be
satisfactory in form and substance, to Snow Becker Krauss P.C., counsel for
the Underwriters.
In each case to the extent that such statements and information may be
derived from the general accounting records (including work sheets) of the
Company, and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter, and found them to be in agreement.
(g) The certificates for the Stock comprising the Firm Shares duly
registered shall have been duly tendered to the Representative for the
accounts of the several Underwriters.
(h) No order suspending the sale of the Firm Shares prior to the
Closing Date in any jurisdiction designated by the Representative shall have
been issued on or before the Closing Dates and no proceedings for that
purpose shall have been instituted or, to the Representative's knowledge or
that of the
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<PAGE>
Company, shall be contemplated.
(i) (i) The Company shall deliver to Sharpe Capital, Inc. the
number of warrants of the Company exercisable for four years commencing one
year from the date of the closing to purchase at one hundred twenty (120%)
percent of the offered price to the public Common Stock equal to ten (10%)
percent of the total number of shares sold to the public at a price of $.001
per warrant.
(ii) Pay to Sharpe Capital, Inc. the expenses of the
Underwriters, for which it shall not be required to account, in an amount
equal to three (3%) percent of the gross sales price of the total number of
shares of the Company's Common Stock sold to the public by the Underwriters.
(iii) Execute an agreement in form and substance satisfactory
to Sharpe Capital, Inc. and its counsel, granting Sharpe Capital, Inc. an
irrevocable right of first refusal executed by the Company and its existing
officers and directors for any public sale or financing by the Company or the
sale of securities by such officers and directors in the three (3) years
following the closing.
Any certificate signed by an officer of the Company and delivered to you
or to counsel for the Underwriters shall be deemed a representation and
warranty by the Company to the Underwriters as to the statements made
therein. If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date is not so fulfilled, the
Representative may on behalf of the several Underwriters terminate this
Agreement or, if it so elects, waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION. (a) Each Underwriter, Selling Shareholder and the
Company severally agree to indemnify and hold harmless each other from and
against any and all losses, claims, damages and liabilities, joint or
several, to which any such person may become subject under the Act or
otherwise, in so far as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of, or, are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, including the information deemed to be a
part of the Registration Statement pursuant to Rule 430A(b) of the 1933 Act
Regulations, if applicable, or arise out of or based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and to
reimburse each other for any legal or other expenses reasonably incurred in
connection with investigating or defending any such loss, claim, damage,
liability or action, but in each case to the extent, and only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any such amendment or supplement, is the responsibility, as
hereinafter set forth, of the party from whom such indemnification is sought;
provided, however, that the indemnity agreement contained in this Section
with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter (or of any person controlling such Underwriter) on account of
any such losses, claims, damages, liabilities, actions or expenses arising
from the sale of the Stock by such Underwriter to any person if a copy of the
Prospectus as amended or supplemented (if any amendment or supplements
thereto shall have been furnished to such Underwriter) shall not have been
given or sent to such person by or on behalf of such Underwriter with or
prior to the written confirmation of the sale involved. For the purposes of
this paragraph, the Company shall be responsible for all statements in and
omissions from the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, except that each
Underwriter and each Selling Shareholder shall be responsible for all
statements therein and omissions therefrom which were based upon information
furnished in writing to the Company by such Underwriter or by such Selling
Shareholder for use therein or in connection with the preparation thereof.
The indemnification by the Underwriters provided for by this Section shall
also inure to the benefit of the directors and officers of the Company and
each person, if any,
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<PAGE>
who controls the Company within the meaning of Section 15 of the Act. The
indemnification by the Company provided for by this paragraph shall also
inure to the benefit of each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act. These indemnity agreements will
be in addition to any liability which any such indemnitor may otherwise have.
(b) Promptly after receipt by a party indemnified under this Section
of notice of the commencement of any action, such indemnified party will, if
a claim based on such action is to be made against an indemnifying party
under this Section, notify the indemnifying party of the commencement of the
action, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise
than under this Section. In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the commencement
of the action, the indemnifying party will be entitled to participate in the
action and to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense of the action,
but such defense shall be conducted by counsel of good standing and
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume such
defense and the retaining of such counsel, the indemnifying party shall not
be liable to the indemnified party under this Section for any legal or other
expenses subsequently incurred by the indemnified party in connection with
such defense, other than reasonable costs of investigation incurred with the
consent of the indemnifying party, which consent shall not be unreasonably
withheld.
(c) The indemnity agreements contained in this Section are intended
solely to define the rights to indemnification as between the Underwriters
and any person controlling any of them on the one hand, and the other parties
to this Agreement on the other, and nothing herein is intended to impair or
amend any other indemnification agreements which such other parties may have
among themselves. In the event that any of the indemnity agreements contained
in this Section are determined by a court of competent jurisdiction to be
unenforceable, and to the extent that the party who, but for such
determination, would have been indemnified hereunder is entitled to
contribution under the Act from the other parties to this Agreement, the
amount of contribution from each other party shall be proportionate to the
portion of the total proceeds of the offering received by such other party.
8. DEFAULT OF UNDERWRITERS. (a) If any Underwriter or Underwriters
default in its or their obligation to purchase the number of shares of the
Stock agreed to be purchased by such Underwriter or Underwriters hereunder,
and if the aggregate number of shares of the Stock which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 15%
of the Firm Shares, then, the other Underwriters shall be obligated severally
in proportion to their respective commitments hereunder to purchase the
Stock, including all Option Shares purchased pursuant to the over allotment
provisions, which such defaulting Underwriter or Underwriters agreed but
failed to purchase. If any Underwriter or Underwriters so default and the
aggregate number of shares of the Stock with respect to which such default or
defaults occur is more than 15% of the Firm Shares and arrangements
satisfactory to the Representative and the Company for the purchase of such
Firm Shares by other persons (who may include one or more of the
non-defaulting Underwriters including the Representative) are not made within
36 hours after such default, this Agreement will terminate without liability
on the part of the Representative, any non-defaulting Underwriter or the
Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Section 5 and except for the provisions of Section 7 hereof. As
used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 8. Nothing herein shall
relieve a defaulting Underwriter from liability to the Company, the
Representative and the non-defaulting Underwriters for its default and such
liability will include, without limitation, all expenses reasonably incurred
by the Company and each Underwriter in connection with the proposed purchase
and sale of Stock.
(b) In the event that the Stock to which the default relates is to
be purchased by the
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<PAGE>
non-defaulting Underwriters, or is to be purchased by another party or
parties as aforesaid, the Representative or the Company shall have the right
to postpone the Closing Date for a reasonable period, but not in any event
exceeding seven business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus or
in any other documents and arrangements, and the Company agrees to file
promptly any amendment to the Registration Statement or the Prospectus which,
in the opinion of counsel for the Underwriters, may thereby be made
necessary. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 8 with like effect as if it had
originally been a party to this Agreement with respect to such Stock and the
purchase obligation of any Underwriter who has agreed, or is obligated under
this Section 8, to purchase any Stock which the defaulting Underwriter or
Underwriters had agreed to purchase will include such Stock in addition to
the Stock set opposite the name of such Underwriter in Schedule I hereto.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date; and such representations, warranties and
agreements of the Underwriters and the Company, including the indemnity
agreements contained in Section 7 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any controlling person, or by or on behalf of the Company or
any controlling person, and shall survive (i) any termination of this
Agreement and (ii) delivery of the Stock to the several Underwriters and
payment therefor.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF. (a) This
Agreement shall become effective (i) at 9:00 a.m. New York City Time, on the
first full business day following the day on which the Registration Statement
becomes effective or (ii) at the time of the initial public offering by the
Underwriters of the Firm Shares, whichever is earlier. The time of the
initial public offering, for the purpose of this Section 10, shall mean the
time, after the Registration Statement becomes effective, of the release by
the Representative for publication of the first newspaper advertisement which
is subsequently published relating to the Firm Shares or the time, after the
Registration Statement becomes effective, when the Firm Shares are first
released by the Representative for offering by the Underwriters or dealers by
wire, letter or telegram, whichever shall first occur. You or the Company may
prevent this Agreement from becoming effective without liability of any party
to any other party, except as noted below and in Section 5 hereof, by giving
the notice indicated below in this Section 10 before the time this Agreement
becomes effective.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date (i) in the event the Company shall have failed to
comply with any of the provisions of this Agreement to be performed by it, at
or prior to the Closing Date, or any of the representations, warranties,
covenants, agreements or conditions of or applicable to, the Company herein
contained shall not have been complied with or satisfied within the times
specified; or (ii) if any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, securities markets; or (iii) if trading on the New
York Stock Exchange, Inc. shall have been suspended, or minimum or maximum
prices for trading shall have been fixed or maximum ranges for prices for
securities shall have been required, on such Exchange by the Exchange or by
order of the Commission or any other governmental authority having
jurisdiction, or (iv) if the United States shall become involved in a war or
major hostilities; or (v) if a banking moratorium has been declared by a
state or federal authority, or a moratorium in foreign exchange trading by
major international banks or persons has been declared; or (vi) if the
Company shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not said loss shall have been insured, in
your opinion, makes it inadvisable to proceed with the delivery of the Stock;
or if, based on facts arising after or first being called to your attention
on or subsequent to the date of this Agreement,
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<PAGE>
there shall have been such change in the condition or prospects of the
Company as in your judgment would make it inadvisable to proceed with the
offering, sale and delivery of the Stock; or (vii) in your sole discretion,
acting in good faith, based on facts arising after or first being called to
your attention on or subsequent to the date of this Agreement, you believe no
favorable public market exists for the Stock.
(c) If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided for in this Section 10, the
Company shall be notified promptly by you by telephone or telegram confirmed
by letter. If the Company elects to prevent this Agreement from becoming
effective, you shall be notified promptly by the Company by telephone or
telegram, confirmed by letter.
(d) Notwithstanding any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise carried out,
the provisions of Section 7 hereof shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement
or any part hereof.
11. NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered or telegraphed and confirmed to Sharpe Capital,
Inc., 120 Broadway, New York, New York 10271, Attention: Capital Markets; and
if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed to the Company at 1910 Orange Tree Lane, Redlands, CA 92375.
12. PARTIES. You represent that you are authorized to act on behalf of
the several Underwriters named in Schedule I hereto, and the Company shall be
entitled to act and rely on any request, notice, consent, waiver or agreement
purportedly given on behalf of the Underwriters when the same shall have been
given by you on such behalf. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the several Underwriters, the Company and the
controlling persons, directors and officers referred to in Section 7 hereof,
and their respective successors, legal representatives and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained.
13. GOVERNING LAW. The validity and interpretation of this Agreement
shall be governed by and construed in accordance with the laws of the State
of New York.
14. EXECUTION BY COUNTERPARTS. This Agreement may be signed in various
counterparts which together will constitute one and the same instrument.
If the foregoing correctly sets forth the understanding between you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding contract among the parties
hereto.
Very truly yours,
YOUNG MINDS, INC.
By:
-----------------------------
Donald H. Cote
CHIEF EXECUTIVE OFFICER
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<PAGE>
Accepted as of the date first above written on behalf of ourselves and the
other several Underwriters named in Schedule I hereto.
SHARPE CAPITAL, INC.
By:
----------------------------
Frank J. Lockwood
VICE-PRESIDENT
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<PAGE>
YOUNG MINDS, INC.
SCHEDULE I
LIST OF UNDERWRITERS
PURCHASE AGREEMENT DATED , 1996
NUMBER
UNDERWRITERS OF SHARES
- ------------
Sharpe Capital, Inc. . . . . . . . . . . . . . . . . . . . . .
Meridian Capital Group, Inc. . . . . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
---------
---------
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<PAGE>
YOUNG MINDS, INC.
SCHEDULE II
LIST OF SELLING SHAREHOLDERS
PURCHASE AGREEMENT DATED , 1996
<TABLE>
<CAPTION>
NAME OF SELLING SHAREHOLDER NUMBER OF SELLING SHAREHOLDER SHARES
- --------------------------- ------------------------------------
<S> <C>
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
---------
---------
</TABLE>
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<PAGE>
EXHIBIT A
1,100,000 SHARES
YOUNG MINDS, INC.
COMMON STOCK
($.[ ] PAR VALUE)
PRICING AGREEMENT
-----------------
OCTOBER [ ], 1996
Sharpe Capital, Inc.
120 Broadway
New York, N.Y. 10271
Dear Sirs:
Reference is made to the Purchase Contract dated [September ___, 1996 (the
"Purchase Contract"), relating to the sale by Young Minds, Inc. (the "Company")
and the purchase by a group of underwriters represented by Sharpe Capital, Inc.,
Meridian Capital Group, Inc. and _____________________ (the "Underwriters"), of
the above shares of Common Stock of the Company from the Company and from the
Selling Shareholders, and relating to the option granted by the Company to the
Underwriters to purchase up to an additional 165,000 shares of Common Stock to
cover over-allotments. The above 1,100,000 shares of Common Stock together with
all or any portion of the 165,000 shares to cover over-allotments are
collectively herein called the "Stock".
Pursuant to Section 2 of the Purchase Agreement, the Company agrees with
the Underwriters as follows:
1. The public offering price per share for the Stock, determined as
provided in said Section 2, shall be [$ ].
2. The purchase price per share for the Stock to be paid by the
Underwriters shall be [$ ], being an amount equal to the public
offering price set forth above less [$ ] per share.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
YOUNG MINDS, INC.
By ____________________________
Daniel H. Cote
Chief Executive Officer
-21-
<PAGE>
CONFIRMED AND ACCEPTED, as of the date first above written.
_______________________
[David H. Cote]
AS ATTORNEY-IN-FACT FOR
THE SELLING SHAREHOLDERS
SHARPE CAPITAL, INC., AS
Representative of the Underwriters
BY: _______________________________________
Frank J. Lockwood
VICE PRESIDENT
-22
<PAGE>
EXHIBIT B
1,100,000 SHARES
YOUNG MINDS, INC.
COMMON STOCK
($.[ ] PAR VALUE)
SELECTED DEALERS AGREEMENT
_________________, 1996
Sharpe Capital, Inc.
120 Broadway
New York, N.Y. 10271
Dear Sirs:
The Underwriters named in the enclosed Prospectus have severally agreed,
subject to the terms and conditions of the Purchase Contract, to purchase
from YOUNG MINDS, INC. (the "Company") and certain selling shareholders an
aggregate of 1,100,000 shares of Common Stock ("Firm Shares") at a purchase
price of $[ ] per share. The several Underwriters have also been granted an
option to purchase from the Company an additional 165,000 shares as required
to cover over allotments in connection with the sale of the Firm Shares
(which 165,000 shares are herein called the "Option Shares"). The Firm Shares
and any Option Shares to be purchased are herein called the "Stock." The
Stock and the terms under which they are to be offered for sale by the
several Underwriters are more particularly described in the enclosed
Prospectus, the receipt of which you hereby acknowledged.
1. OFFERING TO DEALERS. The Underwriters are offering a portion of the
Stock for sale to certain selected dealers ("Dealers"), of whom you are one,
at the initial public offering price, less a concession of $[ ] per share
("Dealer's Concession"), subject to the terms and conditions stated herein
and in the Prospectus. Sales of Stock to you pursuant to such offering will
be evidenced by our written confirmation and will be on such terms and
conditions as therein set forth. In purchasing Stock, you will rely upon no
statement whatsoever, written or oral, other than statements in the
Prospectus.
2. REOFFERING BY DEALERS. Stock purchased by you may be reoffered in
conformity with the terms of the offering set forth in the Prospectus. You
may reallow a concession from the initial public offering price of not more
than $____ per share with respect to Stock sold by you to any member of the
National Association of Securities Dealers, Inc. ("NASD") or to any foreign
dealer not eligible for membership in the NASD who agrees in making sales to
purchasers in the United States to conform to the Rules of Fair Practice of
the NASD and with the NASD's Interpretation with Respect to Free Riding and
Withholding in making sales to purchasers outside of the United States.
It is assumed that Stock sold by you will be effectively placed for
investment. If we
<PAGE>
contract for or purchase in the open market or otherwise for the account of
any Underwriter any Stock sold to you and not effectively placed for
investment; we may charge you the Dealer's concession originally allowed you
on the Stock so repurchased, and you agree to pay such amount to us on demand.
You will advise us, upon request, of Stock purchased by you remaining
unsold, and we shall have the right to repurchase such unsold Stock on demand
for the accounts of the several Underwriters at the initial public offering
price less all or part of the Dealer's concession.
You agree to make prompt delivery of certificates for Stock purchased by
you to all of your customers who request delivery of Stock and represent that
you have delivered a copy of the current Preliminary Prospectus relating to
the Stock to all persons to whom you expect to mail confirmation of sale at
least 48 hours prior to the time you expect to mail such confirmation to such
persons as required under the Securities Act Release No. 4968.
3. PAYMENT AND DELIVERY. Payment for Stock purchased by you shall be
made by you on such dates as we advise you, by certified or bank cashier's
check payable to the order of Sharpe Capital, Inc. in New York Clearing House
funds as we advise and delivered to Sharpe Capital, Inc., 120 Broadway, New
York, New York 10271 against delivery of such Stock.
The above payment shall be made by you at the initial public offering
price or, if we so advise you, at a net price equal to the initial public
offering price less the Dealer's concession. If payment is made by you at the
initial public offering price, the Dealer's concession payable to you
hereunder shall be paid promptly after the termination of this Agreement (or
on such earlier date as we may determine), except that such concession may be
withheld and cancelled, at our discretion, as to Stock which we have
repurchased as set forth in the second paragraph of Section 2 hereof.
4. STATUS OF DEALERS AND UNDERWRITERS. You represent that you are a
member in good standing of the NASD, and have agreed to comply with the
provisions of Section 24 of Article III of the Rules of Fair Practice of the
NASD, or, if a foreign dealer, that in making sales in the United States you
will conform to the Rules of Fair Practice of the NASD, including, without
limitation, Article III, Sections 1, 8, 24, 25 and 36 thereof to the same
extent as though you were a member thereof and with the NASD's Interpretation
with Respect to Free-Riding and Withholding in making sales to purchasers
outside of the United States and will not use the mails or any means or
instrumentality of interstate commerce to effect such sales unless you are
registered under the Securities Exchange Act of 1934, as amended. You are not
authorized to give any information or make any representations other than as
contained in the Prospectus, or to act as agent for us or any other
Underwriter. Nothing herein contained shall constitute the Dealers an
association, or other separate entity or partners with us, any Underwriter,
or with each other, but you shall be liable for your proportionate share of
any tax, liability or expense based on any claim to the contrary. We shall be
under no liability to you, except for obligations expressly assumed by us in
this Agreement and liabilities under the Securities Act of 1933, as amended,
but no obligation on our part shall be implied or inferred
-2-
<PAGE>
herefrom.
5. BLUE SKY MATTERS. You will be informed upon application to us as to
the jurisdictions in which we believe that Stock may be offered or sold under
their respective securities laws, but we have no responsibility as to the
right of any Dealer to sell any Stock in any jurisdiction.
6. NOTICES. All communications from you to us shall be addressed to
Sharpe Capital, Inc., 120 Broadway, New York, NY 10271, Attention: Capital
Markets. Any notice from us to you shall be deemed to have been given if
delivered, mailed or telegraphed to you at the address to which this letter
is mailed.
7. TERMINATION. This Agreement shall terminate 45 business days after
the Closing Date specified in the Purchase Contract unless extended by us for
a period or periods not exceeding an additional 15 days in the aggregate, and
whether extended or not, may be terminated by us at any time. Such
termination shall not affect your obligation to pay for any Stock purchased
by you or any of the provisions of Section 4 hereof.
Please confirm your agreement to the foregoing by signing the duplicate
copy of this letter enclosed herewith and promptly returning it to us at the
address set forth in Section 6 above. Upon receipt thereof, this letter and
such signed duplicate copy will evidence the agreement between us.
Very truly yours,
SHARPE CAPITAL, INC.
As Representative of the several Underwriters
BY: ________________________________________
Frank J. Lockwood, Vice President
Confirmed as of the date first above written:
____________________________________________
(Name of Dealer)
BY _________________________________________
(Authorized Officer or Partner)
-3-
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
YOUNG MINDS, INCORPORATED
Andrew Young and David Cote certify that:
1. They are the duly elected and acting Secretary and President,
respectively, of Young Minds, Incorporated, a California corporation (the
"Corporation").
2. The Articles of Incorporation of the Corporation are hereby
amended and restated in their entirety to read in full as follows:
"ONE: The name of the Corporation is YOUNG MINDS, INCORPORATED.
TWO: The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code.
THREE: The Corporation is authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is Twenty
Million (20,000,000) shares. Fifteen Million (15,000,000) shares shall be
Common Stock. Five Million (5,000,000) shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby authorized to fix the number
of shares of any series of Preferred Stock and to determine the designation
of any such series. The Board of Directors is also authorized to determine or
alter the rights, preferences, privileges, and
<PAGE>
restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, to increase or decrease (but not
below the number of shares of such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
In case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
FOUR:
Section 1. The liability of the directors of this corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
Section 2. The Corporation is authorized to provide indemnification
of agents (as defined in Section 317 of the Corporations Code) for breach of
duty to the Corporation and its stockholders through bylaw provisions or
through agreements with the agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnifications set forth in Section 204 of the
Corporations Code with respect to actions for breach of duty to the
Corporation or its shareholders. The Corporation is further authorized to
provide insurance for agents as set forth in Section 317 of the California
Corporations Code, provided that, in cases where the Corporation owns all or
a portion of the shares of the company issuing the insurance policy, the
company and/or the policy must meet one of the two sets of conditions set
forth in Section 317, as amended."
* * *
2.
<PAGE>
The foregoing amendment and restatement of the Articles of
Incorporation have been duly approved by the Board of Directors of the
corporation.
The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of the Corporation entitled to vote on
such amendment and restatement was 2,626,231 shares of Common Stock. The
number of shares voting in favor of the amendment and restatement equaled or
exceeded the vote required. The percentage vote required was more than 50% of
the outstanding shares of the Common Stock.
3.
<PAGE>
The undersigned further declare under penalty of perjury under the
laws of the State of California that the matters set forth in this
certificate are true and correct of their own knowledge.
IN WITNESS WHEREOF, the undersigned have executed these Amended and
Restated Articles of Incorporation this 31st day of October, 1995, at
Redlands, California.
/s/ Andrew Young
----------------------------------
Andrew Young, Secretary
/s/ David H. Cote
----------------------------------
David Cote, President
4.
<PAGE>
BYLAWS
OF
YOUNG MINDS, INCORPORATED
TABLE OF CONTENTS
ARTICLE I. OFFICES
Section 1. Principal Executive Office
Section 2. Other Offices
ARTICLE II SHAREHOLDERS
Section 1. Place of Meetings
Section 2. Annual Meetings
Section 3. Special Meetings
Section 4. Notice of Annual or Special Meeting
Section 5. Quorum
Section 6. Voting
Section 7. Record Date
Section 8. Action Without Meeting
Section 9. Proxies
Section 10. Shareholder Agreement
ARTICLE III.DIRECTORS
Section 1. Powers
Section 2. Number and Qualification of Directors
Section 3. Election and Term of Office
Section 4. Vacancies and Removals
Section 5. Place of Meetings
Section 6. Regular Meetings
Section 7. Special Meetings
Section 8. Quorum
Section 9. Participation in Meetings by Conference
Telephone
Section 10. Waiver of Notice
Section 11. Adjournment
Section 12. Fees and Compensation
Section 13. Action Without Meeting
Section 14. Duties of Directors
Section 15. Rights of Inspection
i
<PAGE>
TABLE OF CONTENTS
(continued)
ARTICLE IV. OFFICERS
Section 1. Officers
Section 2. Election
Section 3. Removal and Resignation
Section 4. Vacancies
Section 5. Chairman of the Board
Section 6. President
Section 7. Vice Presidents
Section 8. Secretary
Section 9. Chief Financial Officer
ARTICLE V. OTHER PROVISIONS
Section 1. Inspection of Corporate Records
Section 2. Inspection of Bylaws
Section 3. Endorsement of Documents; Contracts
Section 4. Certificates of Stock
Section 3. Annual Report to Shareholders
Section 6. Construction and Definitions
ARTICLE VI. INDEMNIFICATIONS
Section 1. Definitions
Section 2. Indemnification in Actions by Third Parties
Section 3. Indemnification in Actions by or in the Right of the Corporation
Section 4. Indemnification Against Expenses
Section 5. Required Determinations
Section 6. Advance of Expenses
Section 7. Insurance
Section 8. Amendment to General Corporation Law
ARTICLE VII. AMENDMENTS
ii
<PAGE>
BYLAWS
Bylaws for the regulation, except
as otherwise provided by statute
or its Articles of Incorporation,
of
YOUNG MINDS, INCORPORATED
a California corporation
ARTICLE 1. OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive
office of the corporation is hereby fixed and located at 308 West State St.,
Suite 2-B, Redlands, California 92373.
The Board of Directors ("Board") is hereby granted full power and
authority to change said principal executive office from one location to
another. Any such change shall be noted on the Bylaws opposite this section,
or this section may be amended to state the new location.
Section 2. OTHER OFFICES. Branch or subordinate offices may be at
any time established by the Board at any place or places.
ARTICLE II. SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be
held either at the principal executive office of the corporation or at any
other place within or without the State of California which may be designated
either by the Board or by the written consent of all persons entitled to vote
thereat, given either before or after the meeting and filed with the
Secretary.
Section 2. ANNUAL MEETINGS. The annual meeting of shareholders
shall be held on the first Tuesday in May or such other date or such other
time as may he fixed by the Board; provided, however, that should said day
fall upon a Saturday, Sunday, or legal holiday observed by the corporation at
its principal executive office, then any such annual meeting of shareholders
shall be held at the same time and place on the next day thereafter ensuing
which is a full business day. At such meetings directors shall be elected
and any other proper business may be transacted.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders
may be called at any time by the Board, the Chairman of the Board, the
President, or by the holders of shares entitled to cast not less than 10
percent of the votes at such meeting. Upon request in writing to the Chairman
of the Board, the
<PAGE>
President, any Vice President or the Secretary, by any person (other than the
Board) entitled to call a special meeting of shareholders, the officer
forthwith shall cause notice to be given to the shareholders entitled to vote
that a meeting will be held at a time requested by the person or persons
calling the meeting, not less than 35 nor more than 60 days after the receipt
of the request. If the notice is not given within 20 days after receipt of
the request, the persons entitled to call the meeting may give the notice.
Section 4. NOTICE OF ANNUAL OR SPECIAL MEETING. Written notice of
each annual or special meeting or shareholders shall be given not less than
10 nor more than 60 days before the date of the meeting to each shareholder
entitled to vote thereat. Such notice shall state the place, date, and hour
of the meeting and (i) in the case of a special meeting the general nature of
the business to be transacted, and no other business may be transacted, or
(ii) in the case of the annual meeting, those matters which the Board, at the
time of the mailing of the notice, intends to present for action by the
shareholders, but, subject to the provisions of applicable law, any proper
matter may be presented at the meeting for such action. The notice of any
meeting at which directors are to be elected shall include the names of the
nominees intended at the time of the notice to be presented by the board of
directors for election.
Notice of a shareholders' meeting shall be given either personally
or by mail or by other means of written communication, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or, if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. Notice by mail shall be deemed to have
been given at the time a written notice is deposited in the United States
mails, postage pre-paid. Any other written notice shall be deemed to have
been given at the time it is personally delivered to the recipient or is
delivered to a common carrier for transmission, or actually transmitted by
the person giving the notice by electronic means, to recipient.
Section 5. QUORUM. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
the shareholders. Except as provided in the following sentence, the
affirmative vote of a majority of shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act
of the shareholders. The shareholders present at a duly called or held
meeting at which a quorum is present may continue
2
<PAGE>
to do business until adjournment, notwithstanding withdrawal of enough
shareholders to leave less than a quorum if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 6. VOTING. The shareholders entitled to notice any meeting
or to vote at any such meeting shall be only persons in whose name shares
stand on the stock records of the corporation on the record date determined
in accordance with Section 8 of this Article.
Any holder of shares entitled to vote on any matter may vote part of
the shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, other than elections to office,
but, if the shareholder fails to specify the number of shares such
shareholder is voting affirmatively, it will be conclusively presumed that
the shareholder's approving vote is with respect to all shares such
shareholder is entitled to vote.
Subject to the following sentence, every shareholder entitled to vote
at any election of directors may cumulate such shareholder's votes and give
one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which the shareholder's shares
are normally entitled, or distribute the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit. No
shareholder shall be entitled to cumulate votes for any candidate pursuant to
the preceding sentence unless such candidate's or candidates' names have been
placed in nomination prior to the voting and the shareholder has given
notice, at the meeting prior to the voting of the shareholder's intention to
cumulate the shareholder's votes. If any one shareholder has given such
notice, all shareholders may cumulate their votes for candidates in
nomination.
Elections need not be by ballot; provided, however, that all
elections for directors must be by ballot upon demand made by a shareholder
at the meeting and before the voting begins.
In any election of directors, the candidates receiving the highest
number of affirmative votes of the shares entitled to be voted for them up to
the number of directors to be elected by such shares are elected. Votes
against a director and votes withheld shall have no legal effect.
Section 7. RECORD DATE. The Board may fix, in advance, a record
date for the determination of the shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any dividend or other
distribution, or any allotment of rights, or to exercise rights in respect of
any other lawful action. The record date so fixed shall be not more than 60
nor
3
<PAGE>
less than 10 days prior to the date of the meeting nor more than 60 days
prior to any other action. When a record date is so fixed, only shareholders
of record at the close of business on that date are entitled to notice of and
to vote at the meeting or to receive the dividend, distribution, or allotment
of rights, or to exercise of the rights, as the case may be, notwithstanding
any transfer of shares on the books of the corporation after the record date.
If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given, or if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held. The record date for determining shareholders for any
purpose other than set forth in this Section 7 or Section 8 of this Article
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto, or the sixtieth day prior to the date of such
other action, whichever is later.
Section 8. ACTION WITHOUT MEETING. Subject to Section 603 of the
California General Corporation Law, any action which, under any provision of
the California General Corporation Law, may he taken at any annual or special
meeting of shareholders, may be taken without a meeting and without prior
notice if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding shares having not less than a minimum
number of votes that would be necessary to authorize or to take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Unless a record data for voting purposes be fixed as provided in
Section 7 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 8, when no prior action by
the Board has been taken, shall be the day on which the first written consent
is given.
Section 9. PROXIES. Every person entitled to vote shares has the
right to do so either in person or by one or more persons authorized by a
written proxy executed by such shareholder and filed with the Secretary. Any
proxy duly executed is not revoked and continues in full force and effect
until revoked by the person executing it prior to the vote pursuant thereto
by a writing delivered to the corporation stating that the proxy is revoked
or by a subsequent proxy executed by the person executing the prior proxy and
presented to the meeting, or as to any meeting by attendance at such meeting
and voting in person by the person executing the proxy; provided, however,
that no proxy shall be valid after the expiration of 11 months from the date
of its execution unless otherwise provided in the proxy. The dates contained
on the forms of proxy
4
<PAGE>
presumptively determine the order of execution, regardless of the postmark
dates on the envelopes in which they are mailed.
Section 10. SHAREHOLDER AGREEMENT. Subject to the limitations of the
California General Corporation law, shares of any class or classes or series
of capital stock of the corporation may not be transferred or hypothecated by
any shareholder except in compliance with all restrictions on transfer or
hypothecation to which such shareholder or such shares are subject pursuant
to agreements between shareholders of the corporation or agreements between
shareholders and the corporation. Any attempted transfer or hypothecation of
shares in violation of this Section shall be null and void and of no legal
effect.
ARTICLE III. DIRECTORS
Section I. POWERS. Subject to limitations of the Articles, of these
Bylaws, and of the California General Corporation Law relating to action
required to be approved by the shareholders or by the outstanding shares, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board. The Board
may delegate the management of the day-to-day operation of the business of
the corporation to a management company or other person provided that the
business affairs of the corporation shall be managed and all corporate powers
shall be exercised under the ultimate direction of the Board. Without
prejudice to such general powers, but subject to the same limitations, it is
hereby expressly declared that the Board shall have the following powers in
addition to the other powers enumerated in these Bylaws:
(a) To select and remove all of the officers, agents, and employees
of the corporation, prescribe the powers and duties for them as may not be
inconsistent with law, or with the Articles or these Bylaws, fix their
compensation, and require from them security for faithful service.
(b) To conduct, manage, and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles or these Bylaws, as they may deem best.
(c) To adopt, make, and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of
such certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of and to designate par value, if any,
of shares of stock of the corporation and any options therefor from time to
time, upon such terms and for such
5
<PAGE>
consideration as may be lawful and in accordance with these Bylaws.
Shares may be issued:
(1) For such consideration consisting of any or all of the
following: money paid; labor done; services actually rendered to the
corporation or for its benefits or in its formation or reorganization; debts
or securities cancelled; and tangible or intangible property actually
received either by the issuing corporation or by a wholly owned subsidiary;
but neither promissory notes of the purchaser (unless adequately secured by
collateral other than the shares acquired or unless permitted by Article V,
Section 6 of these Bylaws) nor future services shall constitute payment or
part payment for shares of the corporation; or
(2) As a share dividend or upon a stock split, reverse stock
split, reclassification of outstanding shares into shares of another class,
conversion of outstanding shares into shares of another class, exchange of
outstanding shares for shares of another class or other change affecting
outstanding shares.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, securities convertible
into debt or equity securities, deeds of trust, mortgages, pledges,
hypothecations or other evidences of debt and securities therefor.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of directors shall not be less than three (3) nor more than five (5)
until changed by amendment of Bylaws. The exact number of directors shall be
fixed, within the limits specified, by the Board or shareholders in the same
manner provided in these Bylaws for the amendment hereof. However, if the
number of shareholders is one, there may be one director, or there may be two
directors; if the number of shareholders is two, there may be two directors.
The exact number of directors shall be three (3) until changed as provided in
this Section 2.
Section 3. ELECTION AND TERM OFFICE. The directors shall be elected
at each annual meeting of shareholders but if any such annual meeting is not
held or the directors are not elected thereat, the directors may be elected
at any special meeting of shareholders held for that purpose. Each director
shall hold office until the next annual meeting and until a successor has
been elected and qualified.
Notwithstanding Article II, Section 8, subject to Section 4 of this
Article, directors may not be elected by written
6
<PAGE>
consent except by unanimous written consent of all shares entitled to vote
for the election of directors.
Section 4. VACANCIES AND REMOVALS. Any director may resign
effective upon giving written notice to the Chairman of the Board, the
President, Secretary, or the Board, unless the notice specifies a later time
for the effectiveness of such resignation. If the resignation is effective
at a future time, a successor may be elected to take office when the
resignation becomes effective.
Vacancies in the Board, including those existing as a result of a
removal of a director, may be filled by a majority of the remaining
directors, whether or not less than a quorum, or by a sole remaining
director, and each director so elected shall hold office until the next
annual meeting and until such director's successor has been elected and
qualified.
A vacancy or vacancies in the Board shall be deemed to exist in case
of death, resignation, or removal of any director, or if the authorized
number of directors be increased, or if the shareholders fail, at any annual
or special meeting of shareholders at which any director or directors are
elected, to elect the full authorized number of directors to be elected at
that meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
Any or all of the directors may be removed without cause if such
removal is approved by the outstanding shares, subject to the following: (a)
No director may be removed (unless entire Board is removed) when the votes
cast against removal, or not consenting in writing to such removal, would be
sufficient to elect such director if voted cumulatively at an election at
which the same total number of votes were cast (or, if such action is taken
by written consent, all shares entitled to vote were voted) and the entire
number of directors authorized at the time of the director's most recent
election were then being elected; and (b) when by the provisions of the
articles the holders of the shares of any class or series, voting as a class
or series, are entitled to elect one or more directors, any director so
elected may be removed only by the required vote of the holders of the shares
of that class or series.
The shareholders may elect a director or directors at any time to
fill any vacancy or vacancies not filled by the directors. Any such election
by written consent other than to fill a vacancy created by removal requires
the consent of a majority of the outstanding shares entitled to vote. If the
Board accepts the resignation of a director tendered to take
7
<PAGE>
effect at a future time, the Board or the shareholders shall have power to
elect a successor to take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's
term of office.
Section 5. PLACE OF MEETING. Regular or special meetings of the
Board shall be held at any place within or without the State of California
which has been designation from time to time by the Board. In the absence of
such designation regular meetings shall be held at the principal executive
office of the corporation.
Section 6. REGULAR MEETINGS. Immediately following each annual
meeting of shareholders the Board shall ho1d a regular meeting for the
purpose of organization, election of officers, and the transaction of other
business.
Other regular meetings of the Board shall be held without call on
such dates as the Board of Directors may determine; provided, however, should
said day fall upon a Saturday, Sunday, or legal holiday observed by the
corporation at its principal executive office, then said meeting shall be
held at the same time on the next day thereafter ensuing which is a full
business day. Call and notice of all regular meetings of the Board are
hereby dispensed with.
Section 7. SPECIAL MEETINGS. Special meetings of the Board for any
purpose or purposes may be called at any time by the Chairman of the Board,
the President, or the Secretary or by any two directors.
Special meetings of the Board shall be given upon four days' written
notice or 48 hours' notice given personally or by telephone, telegraph,
telex, or other similar means of communication. Any such notice shall be
addressed or delivered to each director at such director's address as it is
shown upon the records of the corporation or as may have been given to the
corporation by the directors for purposes of notice or, if such address is
not shown on such records or is not readily ascertainable, at the place in
which the meetings of the directors are regularly held.
Notice by mail shall be deemed to have been given at the time a
written notice is deposited in the United States mails, postage prepaid.
Any other written notice shall be deemed to have been given at the time it
is personally delivered to the recipient or is delivered to a common carrier
for transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient. Oral notice shall be deemed
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to have been given at the time it is communicated, in person or by telephone
or wireless, to the recipient or to a person at the office of the recipient
who the person giving the notice has reason to believe will promptly
communicate it to the recipient.
Section 8. QUORUM. A majority of the authorized number of directors
constitutes a quorum of the Board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
some directors, if any action so taken is approved by at least a majority of
the required quorum for such meeting.
Section 9. PARTICIPATION OF MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such meeting can hear one another. Participation in a
meeting pursuant to this section constitutes presence in person at such
meeting.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
Board, however called and noticed or wherever held, are as valid as though
had at a meeting duly held after regular call and notice if a quorum is
present, if no director in attendance at the meeting protests prior thereto
or at the commencement thereof of the lack of notice to such director, and
if, either before or after the meeting, each of the directors not present
signs a written waiver of notice, a consent to holding such meeting or an
approval of the minutes thereof. All such waivers, consents, or approvals
shall be filed with the corporate records or made a part of the minutes of
the meeting.
Section 11. ADJOURNMENT. A majority of the directors present,
whether or not a quorum is present, may adjourn any directors' meeting to
another time and place. Notice of the time and place of holding an adjourned
meeting need not be given to absent directors if the time and place be fixed
at the meeting adjourned. If the meeting is adjourned for more than 24
hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the directors who were not
present at the time of the adjournment.
Section 12. FEES AND COMPENSATION. Directors and members of
committees may receive such compensation, if any, for their services, and
such reimbursement for expenses, as may be fixed or determined by the Board.
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Section 13. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the Board may be taken without a meeting if all members of the
Board shall individually or collectively consent in writing to such action.
Such consent or consents shall have the same effect as a unanimous vote of
the Board and shall be filed with the minutes of the proceedings of the board.
Section 14. DUTIES OF DIRECTORS. A director shall perform the duties
of a director, including duties as a member of any committee of the Board
upon which the director may serve, in good faith, in a manner such director
believes to be in the best interests of the corporation and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances.
In performing the duties of a director, a director shall be entitled
to rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by:
(a) One or more officers or employees of the corporation whom the
director believes to be reliable and competent in the matters presented;
(b) Counsel, independent accountants or other persons as to matters
which the director believes to be within such person's professional or expert
competence; or
(c) A committee of the Board upon which the director does not serve,
as to matters within its designated authority, which committee the director
believes to merit confidence, so long as, and in such case, the director acts
in good faith, after reasonable inquiry when the need therefor is indicated
by the circumstances and without knowledge that would cause such reliance to
be unwarranted.
Section l5. RIGHTS OF INSPECTION. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign.
Such inspection by a director may be made in person or by agent or attorney
and includes the right to copy and obtain extracts.
ARTICLE IV. OFFICERS
Section 1. OFFICERS. The required officers of the corporation
shall be a President, a Secretary, and a Chief Financial Officer. The
corporation may also have, at the discretion of the Board, one or more Vice
Presidents, and such
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other officers as may be elected or appointed in accordance with the
provisions of Section 2 of this Article.
Section 2. ELECTION. The officers of the corporation, except such
officers as may be elected or appointees in accordance with the provisions of
the second paragraph of this section or Section 4 of this Article, shall be
chosen annually by, and shall serve at the pleasure of, the Board, and shall
hold their respective offices until their resignation or removal from
service, or until their terms expire and their respective successors shall be
elected.
The chief executive officer may appoint such additional officers, as
the business of the corporation may require, each of whom shall hold office
for such period, have such authority, and perform such duties as are
provided in these Bylaws or as the chief executive officer may from time to
time determine.
Section 3. REMOVAL AND RESIGNATION. Any officer may be removed,
either with or without cause, by the Board of Directors at any time, or,
except in the case of an officer chosen by the Board, by any officer upon
whom such power of removal may be conferred by the Board. Any such removal
shall be without prejudice to the rights, if any, of the officer under any
contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation
shall take effect at the date of receipt of such notice or at any later time
specified therein; and, unless otherwise specific therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause shall be filled in
the manner prescribed in these Bylaws for regular election or appointment to
such office.
Section 5. CHAIRMAN OF THE BOARD. The chairman of the Board, if
there shall be such an officer, shall if present, preside at all meetings of
the Board and exercise and perform such other powers and duties as may be
from time to time assigned by the Board.
Section 6. PRESIDENT. Subject to such powers, if any, as may be
given, by the Board to the Chairman of the Board, if there be such an
officer, the President is the general manager and chief executive officer of
the corporation and has, subject to the control of the Board, general
supervision, direction, and control of the business and officers of the
corporation. The President shall preside at all meetings of the shareholders
and,
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in the absence of the Chairman of the Board, or if there be none, at all
meetings of the Board. The President has the general powers and duties of
management usually vested in the office of president and general manager of a
corporation and such other powers and duties as may be prescribed by the
Board.
Section 7. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board
or, if not ranked, the Vice President designated by the Board, shall perform
all the duties of the President, and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board.
Section 8. SECRETARY. The Secretary shall keep or cause to be kept,
at the principal executive office and such other place as the Board may
order, a book of minutes of all meetings of shareholders, the Board, and its
committees, with the time and place of holding, whether regular or special,
and if special, how authorized, the notice thereof given, the names of those
present at Board and committee meetings, the number of share present or
represented at shareholders' meetings, and the proceedings thereof. The
Secretary shall keep, or cause to be kept, a copy of the Bylaws of the
corporation at the principal executive office or business office in
accordance with Section 213 of the California General Corporation Law. The
Secretary shall keep, or cause to be kept, a copy of any shareholders'
agreement at the principal executive office, in accordance with Section
300(b) of the California General Corporation Law.
The Secretary shall keep, or cause to be kept, at the principal
executive office, a share register, showing the names of the shareholders and
their addresses, the number and classes of shares held by each, the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall given, or cause to be given, notice of all the
meetings of the shareholders and of the Board and of any committee thereof
required by these Bylaws or by law to be given, shall keep the seal of the
corporation in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the Board.
Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer of
the corporation shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of
the corporation, and shall send or cause to be sent to the shareholders of
the corporation such financial statements and reports as are by law
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or these Bylaws required to be sent to them. The books of account shall at
all times be open to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board. The Chief Financial Officer
shall disburse the funds of the corporation as may be ordered by the Board,
shall render to the President and directors, whenever they request it, an
account of all transactions as Chief Financial Officer and of the financial
condition of the corporation, and shall have such other powers and perform
such other duties as may be prescribed by the Board.
ARTICLE V. OTHER PROVISIONS
Section l. INSPECTION OF CORPORATE RECORDS.
(a) A shareholder or shareholders holding at least five percent in
the aggregate of the outstanding voting shares of the corporation shall have
an absolute right to inspect and copy the record of the shareholders' names
and addresses and shareholdings during usual business hours upon five
business days' prior written demand upon the corporation.
(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any
time during usual business hours upon written demand on the corporation, for
a purpose reasonably related to such holder's interest as a shareholder or
holder of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings of
the shareholders and the Board and committees of the Board shall be open to
inspection upon written demand on the corporation of any shareholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests
as a shareholder or as a holder of such voting trust certificate.
(d) Any inspection and copying under this Article may be made in
person or by agent or attorney.
Section 2. INSPECTION OF BYLAWS. The corporation shall keep in its
principal executive office the original or a copy of these Bylaws as amended
to date which shall be open to inspection by shareholders at all reasonable
times during office hours.
Section 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS. Subject to the
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance, or other instrument in writing and
any assignment or endorsement
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thereof executed or entered into between this corporation and any other
person, when signed by the Chairman of the Board, the President or any Vice
President, and the Secretary, and Assistant Secretary, the Chief Financial
Officer, or any assistant to the Chief Financial Officer of this corporation
shall be valid and binding on this corporation in the absence of actual
knowledge of invalidity on the part of the other person or persons and in
such manner as from time to time shall be determined by the Board and, unless
me authorized by the Board, no officer, agent, or employee shall have any
power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or amount.
Section 4. CERTIFICATE OF STOCK. Every holder of shares of the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman of the Board, the President or a Vice President
and by the Chief Financial Officer or an assistant to the Chief Financial
Officer or the Secretary or an Assistant Secretary, certifying the number of
shares owned by the shareholder. If any officer or registrar who has signed
a certificate shall have ceased to be such officer or registrar before such
certificate is issued, it may be issued by the corporation with the same
effect as if such person were an officer or registrar at the date of issue.
Certificates for shares may be issued prior to full payment under
such restrictions and for such purposes as the Board may provide; provided,
however, that on any certificate issued to represent any partly paid shares,
the total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on fully paid
shares, the dividend on partly paid shares shall be proportionate to the
consideration actually paid thereon.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the California General
Corporation law is expressly waived, but nothing herein shall be interpreted
as prohibiting the Board from issuing annual or other periodic reports to
shareholders.
Section 6. CONSTRUCTION AND DEFINITIONS. Unless the context
otherwise requires, the general provisions, rules of construction, and
definitions contained in the General Provisions of the California
Corporations Code and in the California General Corporation Law shall govern
the construction of these Bylaws.
ARTICLE VI. INDEMNIFICATION
Section l. DEFINITIONS. For the purposes of this Article, "agent"
includes any person who is or was a director, officer, employee, or other
agent of the corporation or who is or
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was serving as such for another foreign or domestic corporation, partnership,
point venture, trust, or other enterprise at the request of the corporation
or who was serving as such for a predecessor corporation of the corporation
or of another enterprise at the request of such predecessor corporation;
"proceeding" includes any threatened, pending, or completed action or
proceeding, whether civil, criminal, administrative, or investigative; and
"expenses" include, without limitations, attorneys' fees and any expenses of
establishing a right to indemnification under Section 4 or Section 5(c).
Section 2. INDEMNIFICATION IN ACTIONS BY THIRD PARTIES. The
corporation shall have power to indemnity any person who was or is a party or
is threatened to be made a party to any proceeding (other than an action by
or in the right of the corporation to procure a judgment in its favor) by
reason of the fact that such person is or was an agent of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually
and reasonably incurred in connection with such proceeding if such person
acted in goad faith and in a manner such person reasonably believed to be in
the best interests of the corporation and, in the case of a criminal
proceeding, had no reasonable cause to believe the conduct of such person
was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contender or its equivalent
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which the person reasonably believed to be in the
best interests of the corporation or that the person had reasonable cause to
believe that the person's conduct was unlawful.
Section 3. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party of any threatened,
pending, or completed action by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that such person is or was an
agent of the corporation, against expenses actually and reasonably incurred
by such person in connection with the defense or settlement of such action if
such person acted in good faith, in a manner such person believed to be in
the best interests of the corporation and its shareholders, and with such
care, including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances.
No indemnification shall be made under this Section 3:
(a) In respect of any claim, issue, or matter as to which a person
shall have been adjudged to be liable to the corporation in the performance
of such person's duty to the corporation and its shareholders, unless and
only to the extent that the court in which such action is or was pending shall
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determine upon application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for the
expenses and then only to the extent that such court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval; or
(c) Of expenses incurred in defending a threatened or pending action
which is settled or otherwise disposed of without court approval.
Section 4. INDEMNIFICATION AGAINST EXPENSES. To the extent that an
agent of the corporation has been successful on the merits in defense of any
proceeding referred to in Section 2 or 3 or in defense of any claim, issue,
or matter therein, the agent shall be indemnified against expenses actually
and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED DETERMINATION. Except as provided in Section 4,
any indemnification under this Article shall be made by the corporation only
if authorized in the specific case, upon a determination that indemnification
of the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 by:
(a) A majority vote of a quorum consisting of directors who are not
parties of such proceeding
(b) If such a quorums of directors is not obtainable, by independent
legal counsel in a written opinion;
(c) Approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon
application made by the corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by the
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation prior to the final disposition
of such proceeding upon receipt of an undertaking by or on behalf of the
agent to repay such amount unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this Article.
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Section 7. INSURANCE. The corporation shall have power to purchase
and maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or
arising out of the agent's status as such whether or not the corporation
would have the power to indemnify the agent against such liability under the
provisions of this Article.
Section 8. AMENDMENT TO GENERAL CORPORATION LAW. The corporation
may also indemnify its directors, officers, employees, and agents under other
or additional circumstances and in other or additional amounts in accordance
with amendments to the General Corporation Law as enacted from time to time.
ARTICLE VII. AMENDMENTS
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however, that
after the issuance of shares, a Bylaw specifying or changing from a fixed
number of directors or the maximum or minimum number or changing from a fixed
to a variable Board or vice versa may only he adopted by approval of the
outstanding shares.
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CERTIFICATE OF ADOPTION OF BYLAWS
I hereby certify that I am the duly elected and acting Secretary of
Young Minds, Incorporated, and that the foregoing Bylaws, comprised of 17
pages, constitute the Bylaws of said corporation as duly adopted by the sole
incorporator on April 28, 1989.
IN WITNESS WHEREOF, I have hereunto subscribed by name and affixed
the seal of said corporation on April 28, 1989.
-------------------------------------
Andrew Young, Secretary
(SEAL)
<PAGE>
CERTIFICATE OF SECRETARY
OF
YOUNG MINDS, INCORPORATED
I, the undersigned, do hereby certify that:
1. I am the duly appointed and acting secretary of the above-named
corporation;
2. The attached amendment to the bylaws of the corporation is a
true and correct copy of the amendment duly ratified by the board of
directors of the above-named corporation pursuant to action by unanimous
written consent of the board of directors, dated June 1, 1993, and approved
by the shareholders by mail ballot effective June 7, 1993;
3. Said amendment has not been rescinded or modified since its
ratification; and
4. Except for said amendment, the bylaws of the corporation have
not been modified, and are in full force and effect.
In witness whereof, the undersigned has signed this
certificate.
Dated: June 7, 1993 /s/ Matthew B. Hornbeck
----------------------------------
Matthew Hornbeck, Secretary
<PAGE>
Article III, Section 2 to the Bylaws of Young Minds, Incorporated is hereby
amended to read in full as follows:
"Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized
number of directors shall not be less than three (3) nor more than five (5)
until changed by amendment of Bylaws. The exact number of directors shall be
fixed, within the limits specified, by the Board or shareholders in the same
manner provided in these Bylaws for the amendment hereof. However, if
the number of shareholders is one, there may be one director, or there may
be two directors; if the number of shareholders is two, there may be two
directors. The exact number of directors shall be five (5) until changed as
provided in this Section 2."
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of July
1, 1996 by and between Young Minds, Inc., a California corporation (the
"Company"), and Andrew J. Young ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee desire to enter into this Agreement to
assure the Company of the continuing and exclusive service of Employee and to
set forth the terms and conditions of Employee's employment with the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties agree as follows:
1. TERM. The Company agrees to employ Employee and Employee hereby
accepts such employment, in accordance with the terms of this Agreement,
commencing as of July 1 1996 (the "Effective Date") and ending June 30, 1999,
unless this Agreement is earlier terminated as provided herein.
2. SERVICES AND EXCLUSIVITY OF SERVICES. So long as this Agreement
shall continue in effect, Employee shall devote Employee's substantial
business time, energy and ability exclusively to the business, affairs and
interests of the Company and its affiliates or subsidiaries ("Affiliates")
and matters related thereto, shall use Employee's best efforts and abilities
to promote the Company's interests, and shall perform the services
contemplated by this Agreement in accordance with policies established by and
under the direction of the board of directors of the Company (the "Board").
Without the prior express written authorization of the Board, Employee
shall not, directly or indirectly, during the term of this Agreement, engage
in any activity competitive with or adverse to the Company's business,
whether alone, as a partner, officer, director, employee or significant
investor of or in any other entity. (An investment of greater than 5% of the
outstanding capital or equity securities of an entity shall be deemed
significant for these purposes.)
Employee represents to the Company that Employee has no other
outstanding commitments inconsistent with any of the terms of this Agreement
or the services to be rendered hereunder.
3. DUTIES AND RESPONSIBILITIES. Employee shall serve as Chairman of the
Board and Secretary of the Company for the duration of this Agreement. In
the performance of Employee's duties, Employee shall report directly to the
Board and shall be subject to the supervision and direction of the Board and
to such limits on Employee's authority as the Board may from time to time
impose. Employee's responsibilities in his capacity as Chairman of the Board
and Secretary shall include
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such rights and responsibilities as are generally possessed by a chairman of
a board of directors and a secretary of a corporation. Employee shall have
such corporate power and authority as shall reasonably be required to enable
Employee to perform the duties required in any office that may be held.
Employee agrees to observe and comply with the rules and regulations of
the Company as adopted by the Board respecting the performance of Employee's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing.
4. COMPENSATION.
4.1 BASE COMPENSATION. Subject to increase as provided in
subsection 4.2 hereof, Employee will be paid an annual base salary of One
Hundred Twenty Thousand Dollars ($120,000) ("Base Salary") for the fiscal
year ending June 30, 1997. The Base Salary shall be payable in accordance
with established Company practices.
4.2 ANNUAL SALARY INCREASE. Employee shall receive an increase in
Base Salary on July 1, 1997 and July 1, 1998, in an amount determined by the
Board, provided, however, that any such annual increase shall not be less
than ten percent (10%) of Employee's Base Salary in effect for the fiscal
year ended on the preceding June 30.
4.3 INCENTIVE COMPENSATION. Employee shall be entitled to receive
for each fiscal year during the term of this Agreement such bonus or
incentive compensation in addition to Employee's Base Salary ("Bonus") as
shall be determined in the sole discretion of the Board, provided, however,
that if the Company records net profits, as determined by its independent
accountants, for the fiscal year ending June 30, 1997, such Bonus for such
fiscal year shall not be less than Thirty Thousand Dollars ($30,000).
4.4 VACATION. During the period for which Employee is employed by
Company, Employee shall be entitled to (a) Personal Time Off ("Personal Time
Off") of five (5) weeks per year and (b) up to ten additional holidays
customarily observed by companies similar to Company, and during such time,
Employee's compensation shall be paid in full. Unused Personal Time Off may
accrue to a subsequent period.
4.5 CAR ALLOWANCE. During the period for which Employee is
employed by Company, Company shall pay Employee an automobile allowance of
$750.00 per month.
4.6 ADDITIONAL BENEFITS. Employee shall also be entitled to all
rights and benefits for which Employee is otherwise eligible under any bonus
plan, incentive, participation or extra compensation plan, profit-sharing
plan, life, medical, dental, disability, or insurance plan or policy or
other plan or benefit that the Company may provide for executive officers or
(provided Employee is eligible to participate therein) for employees of the
Company generally, as from time to time in effect, during the term of this
Agreement (collectively, "Additional Benefits").
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5. TERMINATION. This Agreement and all obligations hereunder (except
the obligations contained in Sections 7, 8, 9, 10, 11 and 12 (Confidential
Information, Inventions and Patents, Non-Competition, Non-Solicitation of
Customers, Noninterference with Employees and Assistance in Patent
Applications), which shall survive any termination hereunder) shall terminate
upon the earliest to occur of any of the following:
5.1 EXPIRATION OF TERM. The expiration of the term provided for
in Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
5.2 DEATH OR DISABILITY OF EMPLOYEE. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the
absence of Employee performing Employee's duties with the Company on a
full-time basis for a period of six (6) consecutive months as a result of
incapacity due to mental or physical illness which is determined to be total
and permanent by a physician selected by the Company or its insurers and
acceptable to Employee or Employee's legal representative (such agreement as
to acceptability not to be withheld unreasonably). If Employee shall become
disabled, Employee's employment may be terminated by written notice from the
Company to Employee.
5.3 TERMINATION BY COMPANY FOR CAUSE. The Company may terminate
Employee's employment and all of Employee's rights to receive the Base Salary
(except accrued and unpaid Base Salary and Personal Time Off, accrued ratably
during the year for termination purposes only), Bonus and any Additional
Benefits hereunder for cause. For purposes of this Agreement, the term
"cause" shall be defined as any of the following:
(i) Employee's material breach of any of the duties and
responsibilities under this Agreement (other than as a result of incapacity
due to Employee's disability), provided that the Company has given Employee
not less than thirty (30) days' written notice specifying such breach and
such breach has not been cured within thirty (30) days after such notice has
been provided to Employee; or
(ii) Employee's conviction by, or entry of a plea of guilty
or nolo contendere in, a court of competent jurisdiction for a felony.
5.4 TERMINATION BY COMPANY WITHOUT CAUSE. The Board shall have
the right to terminate Employee's employment with the Company without cause
at any time, but any such early termination other than as expressly provided
in Section 5.3 shall be without prejudice to Employee's rights to receive the
Base Salary, Bonus, Personal Time Off and the Additional Benefits provided
under this Agreement for the remainder of the term specified in Section 1.
5.5 TERMINATION BY EMPLOYEE WITH CAUSE. Employee may terminate
Employee's employment under this Agreement for cause. For purposes of this
Agreement, the term "cause" shall be defined as a material breach by the
Company of any of its duties and responsibilities under this Agreement,
provided that the Employee has given the Company not less than ten (10) days'
written
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notice specifying such breach and such breach has not been cured within
thirty (30) days after such notice has been provided to the Company. In the
event of termination by Employee of his employment for cause, Employee shall
be entitled to receive the Base Salary Bonus, Personal Time Off and the
Additional Benefits provided under this Agreement for the remainder of the
term specified in Section 1.
5.6 TERMINATION BY EMPLOYEE WITHOUT CAUSE. Employee shall have
the right to terminate his employment with the Company without cause at any
time by giving not less than sixty (60) days' prior written notice to the
Company. In the event of such early termination by Employee without cause,
all of Employee's rights to receive the Base Salary (except accrued and
unpaid Base Salary and Personal Time Off, accrued ratably during the year for
termination purposes only), Bonus and any Additional Benefits hereunder shall
cease upon such termination.
5.7 EXCLUSIVE REMEDY. Employee agrees that the payments expressly
provided and contemplated by this Agreement shall constitute the sole and
exclusive obligation of the Company in respect of Employee's employment with
and relationship to the Company and that the payment thereof shall be the
sole and exclusive remedy for any termination of Employee's employment.
Employee covenants not to assert or pursue any other remedies, at law or in
equity, with respect to any termination of employment.
6. BUSINESS EXPENSES.
During the term of this Agreement, to the extent that such
expenditures satisfy the criteria under the Internal Revenue Code for
deductibility by the Company (whether or not fully deductible by the Company)
for federal income tax purposes as ordinary and necessary business expenses,
the Company shall reimburse Employee promptly for reasonable business
expenditures made and substantiated in accordance with policies, practices
and procedures established from time to time by the Company and incurred in
the pursuit and furtherance of the Company's business and good will.
7. CONFIDENTIAL INFORMATION. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee has and shall
have access to information of a confidential and/or trade secret nature which
has great value to the Company and which constitutes a substantial basis and
foundation upon which the business of the Company is based. Such information
includes financial, manufacturing and marketing data, techniques, processes,
formulas, developmental or experimental work, work in process, methods, trade
secrets (including, without limitation, customer lists and lists of customer
sources), or any other secret or confidential information relating to the
products, services, customers, sales or business affairs of the Company (the
"Confidential Information"). Employee shall keep all such Confidential
Information in confidence during the term of this Agreement and at any time
thereafter and shall not disclose any of such Confidential Information to any
other person, except to the extent such disclosure is (i) necessary to the
performance of this Agreement and in furtherance of the Company's best
interests, (ii) required by applicable law, (iii) lawfully obtainable from
other sources, or (iv) authorized in writing by the Company. Upon
termination of Employee's employment with the Company,
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Employee shall deliver to the Company all documents, records, notebooks, work
papers, and all similar material containing any of the foregoing information,
whether prepared by Employee, the Company or anyone else.
8. INVENTIONS AND PATENTS. Except as may be limited by Section 2870 of
the California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the period in which
Employee has been an employee or officer of the Company, whether prior to or
during the term of this Agreement, which are useful in or directly or
indirectly related to the business of the Company or to any experimental work
carried on by the Company, shall be the property of the Company. Employee
will promptly and fully disclose to the Company all such inventions, designs,
improvements, patents, copyrights and discoveries (whether developed
individually or with other persons) and shall take all steps necessary and
reasonably required to assure the Company's ownership thereof and to assist
the Company in protecting or defending the Company's proprietary rights
therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention
of Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
9. NON-COMPETITION. In order to protect the Confidential Information,
Employee agrees that during the term of Employee's employment, and for a
period of one year thereafter, Employee shall not, directly or indirectly,
whether as an owner, partner, shareholder, agent, employee, creditor, or
otherwise, promote, participate or engage in any activity or other business
competitive with the Company's business if such activity or other business
involves any use by the Employee of any of the Confidential Information.
10. NON-SOLICITATION OF CUSTOMERS. Employee agrees that for a period
of one year after the termination of employment with the Company, Employee
will not, on behalf of Employee or on behalf of any other individual,
association or entity, call on any of the customers of the Company for
purpose of soliciting or inducing any of such customers to acquire (or
providing to any of such customers) any product or service provided by the
Company, nor will Employee in any way, directly or indirectly, as agent or
otherwise, in any other manner solicit, influence or encourage such customers
to take away or to divert or direct their business to Employee or any other
person or entity by or with which Employee is employed, associated,
affiliated or otherwise related.
11. NONINTERFERENCE WITH EMPLOYEES. In order to protect the
Confidential Information, Employee agrees that during the term hereof and for
a period of one year thereafter, Employee will not, directly or indirectly
induce or entice any employee of the Company with access to or possession of
Confidential Information to leave such employment or cause anyone else to
leave such employment.
12. ASSISTANCE IN PATENT APPLICATIONS. Employee agrees to assist the
Company in obtaining United States or foreign letters patent and copyright
registrations covering inventions assigned
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hereunder to the Company and that Employee's obligation to assist the Company
shall continue beyond the termination of Employee's employment. If the
Company is unable because of Employee's mental or physical incapacity or for
any other reason to secure Employee's signature to apply or to pursue any
application for any United States or foreign letters patent or copyright
registrations covering inventions assigned to the Company, then Employee
hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Employee's agent and attorney-in-fact to
act for and in Employee's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of letters patent or copyright registrations thereon
with the same legal force and effect as if executed by Employee. Employee
thereby waives and quitclaims to the Company any and all claims of any patent
or copyright resulting from any such application for letters patent or
copyright registrations assigned hereunder to the Company. Employee will
further assist the Company in every way to enforce any copyrights or patents
obtained including, without limitation, testifying in any suit or proceeding
involving any of the copyrights or patents or executing any documents deemed
necessary by the Company, all without further consideration but at the
expense of the Company.
13. INDEMNITY. To the fullest extent permitted by applicable law and
the bylaws of the Company, as from time to time in effect, the Company shall
indemnify Employee and hold Employee harmless for any acts or decisions made
while performing services for the Company.
14. REMEDIES. The parties hereto agree that the services to be
rendered by Employee pursuant to this Agreement, and the rights and
privileges granted to the Company pursuant to this Agreement, are of a
special, unique, extraordinary and intellectual character, which gives them a
peculiar value, the loss of which cannot be reasonably or adequately
compensated in damages in any action at law, and that a breach by Employee of
any of the terms of this Agreement will cause the Company great and
irreparable injury and damage. Employee hereby expressly agrees that the
Company shall be entitled to the remedies of injunction, specific performance
and other equitable relief to prevent a breach of this Agreement by Employee.
This Section 14 shall not be construed as a waiver of any other rights or
remedies which the Company may have for damages or otherwise.
15. SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In
any event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
16. SUCCESSION. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such
successor or assignee shall be deemed substituted for the Company under the
terms of this Agreement for all purposes. As used herein, "successor" and
"assignee" shall include any person, firm, corporation or other business
entity which at any time, whether by purchase, merger or otherwise, directly
or indirectly acquires the stock of the Company or to which the Company
assigns this Agreement by operation of law or otherwise. The obligations
and duties of Employee hereunder are personal and otherwise not assignable.
Employee's obligations and representations under this Agreement will survive
the termination of Employees employment, regardless of the manner of such
termination.
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17. NOTICES. Any notice or other communication provided for in this
Agreement shall be in writing and delivered in person or sent by registered
or certified mail to the address set forth below.
If to the Company:
Young Minds, Inc.
1906 Orange Tree Lane, Suite 220
Redlands, California 92374
Attention: Secretary
If to the Employee:
Andrew J. Young
27769 Norwood St.
Highland, CA 92346
or at such other address as the Company or Employee may from time to time in
writing designate. Each such notice or other communication shall be
effective (i) if given by mail, three days after such communication is
deposited in the mails with first class postage prepaid, addressed as
aforesaid or (ii) if given by any other means, when actually delivered at
such address.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of
the parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
19. AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
20. WAIVER. No failure on the part of any party to exercise or delay
in exercising any right hereunder shall be deemed a waiver thereof or of any
other right, nor shall any single or partial exercise preclude any further or
other exercise of such right or any other right.
21. GOVERNING LAW. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of
the State of California without regard to conflicts of law doctrines and any
court action arising out of this Agreement shall be brought in any court of
competent jurisdiction within the State of California, County of San
Bernardino.
22. ARBITRATION. Any dispute, controversy or claim arising out of or
in respect to this Agreement (or its validity, interpretation or
enforcement), the employment relationship or the subject matter hereof shall
at the request of either party be submitted and settled by arbitration
conducted in San Bernardino County, California in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. The
arbitration of such issues, including the determination of any
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amount of damages suffered, shall be final and binding upon the parties to
the maximum extent permitted by law. Judgment upon the award rendered by the
arbitrator(s) may be entered by any court having jurisdiction thereof. The
arbitration shall award reasonable expenses (including reimbursement of the
arbitration costs) to the prevailing party upon application therefor.
23. WITHHOLDING. All compensation payable hereunder, including salary,
bonus and other benefits, shall be subject to applicable taxes and required
withholdings.
24. COUNTERPARTS. This Agreement and any amendment hereto may be
executed in one or more counterparts. All of such counterparts shall
constitute one and the same agreement and shall become effective when a copy
signed by each party has been delivered to the other party.
25. HEADINGS. Section and other headings contained in this Agreement
are for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
26. REPRESENTATION BY COUNSEL; INTERPRETATION. The Company and
Employee each acknowledge that each party to this Agreement has had the
opportunity to be represented by counsel in connection with this Agreement
and the matters contemplated by this Agreement. Accordingly, any rule of
law, including but not limited to Section l654 of the California Civil Code,
or any legal decision that would require interpretation of any claimed
ambiguities in this Agreement against the party that drafted it has no
application and is expressly waived. The provisions of this Agreement shall
be interpreted in a reasonable manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY:
Young Minds, Inc.
By___________________________
Its
EMPLOYEE:
____________________________
Andrew J. Young
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of July 1,
1996 by and between Young Minds, Inc., a California corporation (the "Company"),
and David H. Cote ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee desire to enter into this Agreement to
assure the Company of the continuing and exclusive service of Employee and to
set forth the terms and conditions of Employee's employment with the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties agree as follows:
1. TERM. The Company agrees to employ Employee and Employee hereby
accepts such employment, in accordance with the terms of this Agreement,
commencing as of July 1 1996 (the "Effective Date") and ending June 30, 1999,
unless this Agreement is earlier terminated as provided herein.
2. SERVICES AND EXCLUSIVITY OF SERVICES. So long as this Agreement shall
continue in effect, Employee shall devote Employee's substantial business time,
energy and ability exclusively to the business, affairs and interests of the
Company and its affiliates or subsidiaries ("Affiliates") and matters related
thereto, shall use Employee's best efforts and abilities to promote the
Company's interests, and shall perform the services contemplated by this
Agreement in accordance with policies established by and under the direction of
the board of directors of the Company (the "Board").
Without the prior express written authorization of the Board, Employee
shall not, directly or indirectly, during the term of this Agreement, engage in
any activity competitive with or adverse to the Company's business, whether
alone, as a partner, officer, director, employee or significant investor of or
in any other entity. (An investment of greater than 5% of the outstanding
capital or equity securities of an entity shall be deemed significant for these
purposes.)
Employee represents to the Company that Employee has no other outstanding
commitments inconsistent with any of the terms of this Agreement or the
services to be rendered hereunder.
3. DUTIES AND RESPONSIBILITIES. Employee shall serve as President and
Chief Executive Officer of the Company for the duration of this Agreement. In
the performance of Employee's duties, Employee shall report directly to the
Board and shall be subject to the supervision and direction of the Board and to
such limits on Employee's authority as the Board may from time to time impose.
Employee's responsibilities in his capacity as President and Chief Executive
Officer
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shall include such rights and responsibilities as are generally possessed by
a president and chief executive officer of a corporation. Employee shall
have such corporate power and authority as shall reasonably be required to
enable Employee to perform the duties required in any office that may be held.
Employee agrees to observe and comply with the rules and regulations of the
Company as adopted by the Board respecting the performance of Employee's duties
and agrees to carry out and perform orders, directions and policies of the
Company and its Board as they may be, from time to time, stated either orally or
in writing.
4. COMPENSATION.
4.1 BASE COMPENSATION. Subject to increase as provided in subsection
4.2 hereof, Employee will be paid an annual base salary of One Hundred Fifty
Thousand Dollars ($150,000) ("Base Salary") for the fiscal year ending June 30,
1997. The Base Salary shall be payable in accordance with established Company
practices.
4.2 ANNUAL SALARY INCREASE. Employee shall receive an increase in
Base Salary on July 1, 1997 and July 1, 1998, in an amount determined by the
Board, provided, however, that any such annual increase shall not be less than
ten percent (10%) of Employee's Base Salary in effect for the fiscal year ended
on the preceding June 30.
4.3 INCENTIVE COMPENSATION. Employee shall be entitled to receive
for each fiscal year during the term of this Agreement such bonus or incentive
compensation in addition to Employee's Base Salary ("Bonus") as shall be
determined in the sole discretion of the Board.
4.4 VACATION. During the period for which Employee is employed by
Company, Employee shall be entitled to (a) Personal Time Off ("Personal Time
Off") of five (5) weeks per year and (b) up to ten additional holidays
customarily observed by companies similar to Company, and during such time,
Employee's compensation shall be paid in full. Unused Personal Time Off may
accrue to a subsequent period.
4.5 CAR ALLOWANCE. During the period for which Employee is employed
by Company, Company shall pay Employee an automobile allowance of $750.00 per
month.
4.6 ADDITIONAL BENEFITS. Employee shall also be entitled to all
rights and benefits for which Employee is otherwise eligible under any bonus
plan, incentive, participation or extra compensation plan, profit-sharing plan,
life, medical, dental, disability, or insurance plan or policy or other plan or
benefit that the Company may provide for executive officers or (provided
Employee is eligible to participate therein) for employees of the Company
generally, as from time to time in effect, during the term of this Agreement
(collectively, "Additional Benefits").
5. TERMINATION. This Agreement and all obligations hereunder (except the
obligations
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contained in Sections 7, 8, 9, 10, 11 and 12 (Confidential Information,
Inventions and Patents, Non-Competition, Non-Solicitation of Customers,
Noninterference with Employees and Assistance in Patent Applications), which
shall survive any termination hereunder) shall terminate upon the earliest to
occur of any of the following:
5.1 EXPIRATION OF TERM. The expiration of the term provided for in
Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
5.2 DEATH OR DISABILITY OF EMPLOYEE. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the absence
of Employee performing Employee's duties with the Company on a full-time basis
for a period of six (6) consecutive months as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Employee or
Employee's legal representative (such agreement as to acceptability not to be
withheld unreasonably). If Employee shall become disabled, Employee's
employment may be terminated by written notice from the Company to Employee.
5.3 TERMINATION BY COMPANY FOR CAUSE. The Company may terminate
Employee's employment and all of Employee's rights to receive the Base Salary
(except accrued and unpaid Base Salary and Personal Time Off, accrued ratably
during the year for termination purposes only), Bonus and any Additional
Benefits hereunder for cause. For purposes of this Agreement, the term "cause"
shall be defined as any of the following:
(i) Employee's material breach of any of the duties and
responsibilities under this Agreement (other than as a result of incapacity due
to Employee's disability), provided that the Company has given Employee not less
than thirty (30) days' written notice specifying such breach and such breach has
not been cured within thirty (30) days after such notice has been provided to
Employee or
(ii) Employee's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of competent jurisdiction for a felony.
5.4 TERMINATION BY COMPANY WITHOUT CAUSE. The Board shall have the
right to terminate Employee's employment with the Company without cause at any
time, but any such early termination other than as expressly provided in Section
5.3 shall be without prejudice to Employee's rights to receive the Base Salary,
Bonus Personal Time Off and the Additional Benefits provided under this
Agreement for the remainder of the term specified in Section 1.
5.5 TERMINATION BY EMPLOYEE WITH CAUSE. Employee may terminate
Employee's employment under this Agreement for cause. For purposes of this
Agreement, the term "cause" shall be defined as a material breach by the Company
of any of its duties and responsibilities under this Agreement, provided that
the Employee has given the Company not less than ten (10) days' written notice
specifying such breach and such breach has not been cured within thirty (30)
days after such
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<PAGE>
notice has been provided to the Company. In the event of termination by
Employee of his employment for cause, Employee shall be entitled to receive
the Base Salary, Bonus, Personal Time Off and the Additional Benefits
provided under this Agreement for the remainder of the term specified in
Section 1.
5.6 TERMINATION BY EMPLOYEE WITHOUT CAUSE. Employee shall have the
right to terminate his employment with the Company without cause at any time by
giving not less than sixty (60) days' prior written notice to the Company. In
the event of such early termination by Employee without cause, all of Employee's
rights to receive the Base Salary (except accrued and unpaid Base Salary and
Personal Time Off, accrued ratably during the year for termination purposes
only), Bonus and any Additional Benefits hereunder shall cease upon such
termination.
5.7 EXCLUSIVE REMEDY. Employee agrees that the payments expressly
provided and contemplated by this Agreement shall constitute the sole and
exclusive obligation of the Company in respect of Employee's employment with and
relationship to the Company and that the payment thereof shall be the sole and
exclusive remedy for any termination of Employee's employment. Employee
covenants not to assert or pursue any other remedies, at law or in equity, with
respect to any termination of employment.
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6. BUSINESS EXPENSES.
During the term of this Agreement, to the extent that such
expenditures satisfy the criteria under the Internal Revenue Code for
deductibility by the Company (whether or not fully deductible by the Company)
for federal income tax purposes as ordinary and necessary business expenses, the
Company shall reimburse Employee promptly for reasonable business expenditures
made and substantiated in accordance with policies, practices and procedures
established from time to time by the Company and incurred in the pursuit and
furtherance of the Company's business and good will.
7. CONFIDENTIAL INFORMATION. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee has and shall
have access to information of a confidential and/or trade secret nature which
has great value to the Company and which constitutes a substantial basis and
foundation upon which the business of the Company is based. Such information
includes financial, manufacturing and marketing data, techniques, processes,
formulas, developmental or experimental work, work in process, methods, trade
secrets (including, without limitation, customer lists and lists of customer
sources), or any other secret or confidential information relating to the
products, services, customers, sales or business affairs of the Company (the
"Confidential Information"). Employee shall keep all such Confidential
Information in confidence during the term of this Agreement and at any time
thereafter and shall not disclose any of such Confidential Information to any
other person, except to the extent such disclosure is (i) necessary to the
performance of this Agreement and in furtherance of the Company's best
interests, (ii) required by applicable law, (iii) lawfully obtainable from other
sources, or (iv) authorized in writing by the Company. Upon termination of
Employee's employment with the Company, Employee shall deliver to the Company
all documents, records, notebooks, work papers, and all similar material
containing any of the foregoing information, whether prepared by Employee, the
Company or anyone else.
8. INVENTIONS AND PATENTS. Except as may be limited by Section 2870 of
the California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the period in which
Employee has been an employee or officer of the Company, whether prior to or
during the term of this Agreement, which are useful in or directly or indirectly
related to the business of the Company or to any experimental work carried on by
the Company, shall be the property of the Company. Employee will promptly and
fully disclose to the Company all such inventions, designs, improvements,
patents, copyrights and discoveries (whether developed individually or with
other persons) and shall take all steps necessary and reasonably required to
assure the Company's ownership thereof and to assist the Company in protecting
or defending the Company's proprietary rights therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
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9. NON-COMPETITION. In order to protect the Confidential Information,
Employee agrees that during the term of Employee's employment, and for a period
of one year thereafter, Employee shall not, directly or indirectly, whether as
an owner, partner, shareholder, agent, employee, creditor, or otherwise,
promote, participate or engage in any activity or other business competitive
with the Company's business if such activity or other business involves any use
by the Employee of any of the Confidential Information.
10. NON-SOLICITATION OF CUSTOMERS. Employee agrees that for a period of
one year after the termination of employment with the Company, Employee will
not, on behalf of Employee or on behalf of any other individual, association or
entity, call on any of the customers of the Company for purpose of soliciting or
inducing any of such customers to acquire (or providing to any of such
customers) any product or service provided by the Company, nor will Employee in
any way, directly or indirectly, as agent or otherwise, in any other manner
solicit, influence or encourage such customers to take away or to divert or
direct their business to Employee or any other person or entity by or with which
Employee is employed, associated, affiliated or otherwise related.
11. NONINTERFERENCE WITH EMPLOYEES. In order to protect the Confidential
Information, Employee agrees that during the term hereof and for a period of one
year thereafter, Employee will not, directly or indirectly induce or entice
any employee of the Company with access to or possession of Confidential
Information to leave such employment or cause anyone else to leave such
employment.
12. ASSISTANCE IN PATENT APPLICATIONS. Employee agrees to assist the
Company in obtaining United States or foreign letters patent and copyright
registrations covering inventions assigned hereunder to the Company and that
Employee's obligation to assist the Company shall continue beyond the
termination of Employee's employment. If the Company is unable because of
Employee's mental or physical incapacity or for any other reason to secure
Employee's signature to apply or to pursue any application for any United States
or foreign letters patent or copyright registrations covering inventions
assigned to the Company, then Employee hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents as Employee's
agent and attorney-in-fact to act for and in Employee's behalf and stead to
execute and file any such applications and to do all other lawfully permitted
acts to further the prosecution and issuance of letters patent or copyright
registrations thereon with the same legal force and effect as if executed by
Employee. Employee thereby waives and quitclaims to the Company any and all
claims of any patent or copyright resulting from any such application for
letters patent or copyright registrations assigned hereunder to the Company.
Employee will further assist the Company in every way to enforce any copyrights
or patents obtained including, without limitation, testifying in any suit or
proceeding involving any of the copyrights or patents or executing any documents
deemed necessary by the Company, all without further consideration but at the
expense of the Company.
13. INDEMNITY. To the fullest extent permitted by applicable law and the
bylaws of the Company, as from time to time in effect, the Company shall
indemnify Employee and hold Employee harmless for any acts or decisions made
while performing services for the Company.
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14. REMEDIES. The parties hereto agree that the services to be rendered
by Employee pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique, extraordinary
and intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Employee. This Section 14 shall not be construed as a waiver of
any other rights or remedies which the Company may have for damages or
otherwise.
15. SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
16. SUCCESSION. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such successor
or assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" and "assignee" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
the stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise. The obligations and duties of Employee
hereunder are personal and otherwise not assignable. Employee's obligations and
representations under this Agreement will survive the termination of Employees
employment, regardless of the manner of such termination.
17. NOTICES. Any notice or other communication provided for in this
Agreement shall be in writing and delivered in person or sent by registered or
certified mail to the address set forth below.
If to the Company:
Young Minds, Inc.
1906 Orange Tree Lane, Suite 220
Redlands, California 92374
Attention: Secretary
If to the Employee:
David H. Cote
1540 Barton Rd., #343
Redlands, CA 92373
or at such other address as the Company or Employee may from time to time in
writing designate.
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Each such notice or other communication shall be effective (i) if given by
mail, three days after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (ii) if given by any
other means, when actually delivered at such address.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
19. AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
20. WAIVER. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.
21. GOVERNING LAW. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of the
State of California without regard to conflicts of law doctrines and any court
action arising out of this Agreement shall be brought in any court of competent
jurisdiction within the State of California, County of San Bernardino.
22. ARBITRATION. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted and settled by arbitration conducted in San Bernardino
County, California in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. Judgment upon the award
rendered by the arbitrator(s) may be entered by any court having jurisdiction
thereof. The arbitration shall award reasonable expenses (including
reimbursement of the arbitration costs) to the prevailing party upon application
therefor.
23. WITHHOLDING. All compensation payable hereunder, including salary,
bonus and other benefits, shall be subject to applicable taxes and required
withholdings.
24. COUNTERPARTS. This Agreement and any amendment hereto may be
executed in one or more counterparts. All of such counterparts shall constitute
one and the same agreement and shall become effective when a copy signed by each
party has been delivered to the other party.
25. HEADINGS. Section and other headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
26. REPRESENTATION BY COUNSEL; INTERPRETATION. The Company and Employee
each acknowledge that each party to this Agreement has had the opportunity to be
represented by counsel in connection with this Agreement and the matters
contemplated by this Agreement. Accordingly, any rule of law, including but not
limited to Section l654 of the California Civil Code, or any legal
8
<PAGE>
decision that would require interpretation of any claimed ambiguities in this
Agreement against the party that drafted it has no application and is
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
Young Minds, Inc.
By___________________________
Its
EMPLOYEE:
_____________________________
David H. Cote
9
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of July 1,
1996 by and between Young Minds, Inc., a California corporation (the "Company"),
and Matthew Hornbeck ("Employee").
WITNESSETH:
WHEREAS, the Company and Employee desire to enter into this Agreement to
assure the Company of the continuing and exclusive service of Employee and to
set forth the terms and conditions of Employee's employment with the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties agree as follows:
1. TERM. The Company agrees to employ Employee and Employee hereby
accepts such employment, in accordance with the terms of this Agreement,
commencing as of July 1 1996 (the "Effective Date") and ending June 30, 1999,
unless this Agreement is earlier terminated as provided herein.
2. SERVICES AND EXCLUSIVITY OF SERVICES. So long as this Agreement shall
continue in effect, Employee shall devote Employee's substantial business time,
energy and ability exclusively to the business, affairs and interests of the
Company and its affiliates or subsidiaries ("Affiliates") and matters related
thereto, shall use Employee's best efforts and abilities to promote the
Company's interests, and shall perform the services contemplated by this
Agreement in accordance with policies established by and under the direction of
the board of directors of the Company (the "Board").
Without the prior express written authorization of the Board, Employee
shall not, directly or indirectly, during the term of this Agreement, engage in
any activity competitive with or adverse to the Company's business, whether
alone, as a partner, officer, director, employee or significant investor of or
in any other entity. (An investment of greater than 5% of the outstanding
capital or equity securities of an entity shall be deemed significant for these
purposes.)
Employee represents to the Company that Employee has no other outstanding
commitments inconsistent with any of the terms of this Agreement or the
services to be rendered hereunder.
3. DUTIES AND RESPONSIBILITIES. Employee shall serve as Executive Vice
President of the Company for the duration of this Agreement. In the performance
of Employee's duties, Employee shall report directly to the Board and shall be
subject to the supervision and direction of the Board and to such limits on
Employee's authority as the Board may from time to time impose. Employee's
responsibilities in his capacity as Executive Vice President shall include such
rights and
1
<PAGE>
responsibilities as are generally possessed by an executive vice president.
Employee shall have such corporate power and authority as shall reasonably be
required to enable Employee to perform the duties required in any office that
may be held.
Employee agrees to observe and comply with the rules and regulations of the
Company as adopted by the Board respecting the performance of Employee's duties
and agrees to carry out and perform orders, directions and policies of the
Company and its Board as they may be, from time to time, stated either orally or
in writing.
4. COMPENSATION.
4.1 BASE COMPENSATION. Subject to increase as provided in subsection
4.2 hereof, Employee will be paid an annual base salary of One Hundred Twenty
Thousand Dollars ($120,000) ("Base Salary") for the fiscal year ending June 30,
1997. The Base Salary shall be payable in accordance with established Company
practices.
4.2 ANNUAL SALARY INCREASE. Employee shall receive an increase in
Base Salary on July 1, 1997 and July 1, 1998, in an amount determined by the
Board, provided, however, that any such annual increase shall not be less than
ten percent (10%) of Employee's Base Salary in effect for the fiscal year ended
on the preceding June 30.
4.3 INCENTIVE COMPENSATION. Employee shall be entitled to receive
for each fiscal year during the term of this Agreement such bonus or incentive
compensation in addition to Employee's Base Salary ("Bonus") as shall be
determined in the sole discretion of the Board, provided, however, that if the
Company records net profits, as determined by its independent accountants, for
the fiscal year ending June 30, 1997, such Bonus for such fiscal year shall not
be less than Thirty Thousand Dollars ($30,000).
4.4 VACATION. During the period for which Employee is employed by
Company, Employee shall be entitled to (a) Personal Time Off ("Personal Time
Off") of five (5) weeks per year and (b) up to ten additional holidays
customarily observed by companies similar to Company, and during such time,
Employee's compensation shall be paid in full. Unused Personal Time Off may
accrue to a subsequent period.
4.5 CAR ALLOWANCE. During the period for which Employee is employed
by Company, Company shall pay Employee an automobile allowance of $750.00 per
month.
4.6 ADDITIONAL BENEFITS. Employee shall also be entitled to all
rights and benefits for which Employee is otherwise eligible under any bonus
plan, incentive, participation or extra compensation plan, profit-sharing plan,
life, medical, dental, disability, or insurance plan or policy or other plan or
benefit that the Company may provide for executive officers or (provided
Employee is eligible to participate therein) for employees of the Company
generally, as from time to time in effect, during the term of this Agreement
(collectively, "Additional Benefits").
2
<PAGE>
5. TERMINATION. This Agreement and all obligations hereunder (except the
obligations contained in Sections 7, 8, 9, 10, 11 and 12 (Confidential
Information, Inventions and Patents, Non-Competition, Non-Solicitation of
Customers, Noninterference with Employees and Assistance in Patent
Applications), which shall survive any termination hereunder) shall terminate
upon the earliest to occur of any of the following:
5.1 EXPIRATION OF TERM. The expiration of the term provided for in
Section 1 or the voluntary termination by Employee or retirement from the
Company in accordance with the normal retirement policies of the Company.
5.2 DEATH OR DISABILITY OF EMPLOYEE. The death or disability of
Employee. For the purposes of this Agreement, disability shall mean the absence
of Employee performing Employee's duties with the Company on a full-time basis
for a period of six (6) consecutive months as a result of incapacity due to
mental or physical illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to Employee or
Employee's legal representative (such agreement as to acceptability not to be
withheld unreasonably). If Employee shall become disabled, Employee's
employment may be terminated by written notice from the Company to Employee.
5.3 TERMINATION BY COMPANY FOR CAUSE. The Company may terminate
Employee's employment and all of Employee's rights to receive the Base Salary
(except accrued and unpaid Base Salary and Personal Time Off, accrued ratably
during the year for termination purposes only), Bonus and any Additional
Benefits hereunder for cause. For purposes of this Agreement, the term "cause"
shall be defined as any of the following:
(i) Employee's material breach of any of the duties and
responsibilities under this Agreement (other than as a result of incapacity due
to Employee's disability), provided that the Company has given Employee not less
than tthirty(30) days' written notice specifying such breach and such breach has
not been cured within thirty (30) days after such notice has been provided to
Employee; or
(ii) Employee's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of competent jurisdiction for a felony.
5.4 TERMINATION BY COMPANY WITHOUT CAUSE. The Board shall have the
right to terminate Employee's employment with the Company without cause at any
time, but any such early termination other than as expressly provided in Section
5.3 shall be without prejudice to Employee's rights to receive the Base Salary,
Bonus, Personal Time Off and the Additional Benefits provided under this
Agreement for the remainder of the term specified in Section 1.
5.5 TERMINATION BY EMPLOYEE WITH CAUSE. Employee may terminate
Employee's employment under this Agreement for cause. For purposes of this
Agreement, the term "cause" shall be defined as a material breach by the Company
of any of its duties and responsibilities under this Agreement, provided that
the Employee has given the Company not less than ten (10) days' written
3
<PAGE>
notice specifying such breach and such breach has not been cured within
thirty (30) days after such notice has been provided to the Company. In the
event of termination by Employee of his employment for cause, Employee shall
be entitled to receive the Base Salary, Bonus, Personal Time Off and the
Additional Benefits provided under this Agreement for the remainder of the
term specified in Section 1.
5.6 TERMINATION BY EMPLOYEE WITHOUT CAUSE. Employee shall have the
right to terminate his employment with the Company without cause at any time by
giving not less than sixty (60) days' prior written notice to the Company. In
the event of such early termination by Employee without cause, all of Employee's
rights to receive the Base Salary (except accrued and unpaid Base Salary and
Personal Time Off, accrued ratably during the year for termination purposes
only), Bonus and any Additional Benefits hereunder shall cease upon such
termination.
5.7 EXCLUSIVE REMEDY. Employee agrees that the payments expressly
provided and contemplated by this Agreement shall constitute the sole and
exclusive obligation of the Company in respect of Employee's employment with and
relationship to the Company and that the payment thereof shall be the sole and
exclusive remedy for any termination of Employee's employment. Employee
covenants not to assert or pursue any other remedies, at law or in equity, with
respect to any termination of employment.
6. BUSINESS EXPENSES.
During the term of this Agreement, to the extent that such
expenditures satisfy the criteria under the Internal Revenue Code for
deductibility by the Company (whether or not fully deductible by the Company)
for federal income tax purposes as ordinary and necessary business expenses, the
Company shall reimburse Employee promptly for reasonable business expenditures
made and substantiated in accordance with policies, practices and procedures
established from time to time by the Company and incurred in the pursuit and
furtherance of the Company's business and good will.
7. CONFIDENTIAL INFORMATION. Employee acknowledges that the nature of
Employee's engagement by the Company is such that the Employee has and shall
have access to information of a confidential and/or trade secret nature which
has great value to the Company and which constitutes a substantial basis and
foundation upon which the business of the Company is based. Such information
includes financial, manufacturing and marketing data, techniques, processes,
formulas, developmental or experimental work, work in process, methods, trade
secrets (including, without limitation, customer lists and lists of customer
sources), or any other secret or confidential information relating to the
products, services, customers, sales or business affairs of the Company (the
"Confidential Information"). Employee shall keep all such Confidential
Information in confidence during the term of this Agreement and at any time
thereafter and shall not disclose any of such Confidential Information to any
other person, except to the extent such disclosure is (i) necessary to the
performance of this Agreement and in furtherance of the Company's best
interests, (ii) required by applicable law, (iii) lawfully obtainable from other
sources, or (iv) authorized in writing by the Company. Upon termination of
Employee's employment with the Company,
4
<PAGE>
Employee shall deliver to the Company all documents, records, notebooks, work
papers, and all similar material containing any of the foregoing information,
whether prepared by Employee, the Company or anyone else.
8. INVENTIONS AND PATENTS. Except as may be limited by Section 2870 of
the California Labor Code, all inventions, designs, improvements, patents,
copyrights and discoveries conceived by Employee during the period in which
Employee has been an employee or officer of the Company, whether prior to or
during the term of this Agreement, which are useful in or directly or indirectly
related to the business of the Company or to any experimental work carried on by
the Company, shall be the property of the Company. Employee will promptly and
fully disclose to the Company all such inventions, designs, improvements,
patents, copyrights and discoveries (whether developed individually or with
other persons) and shall take all steps necessary and reasonably required to
assure the Company's ownership thereof and to assist the Company in protecting
or defending the Company's proprietary rights therein.
Employee acknowledges hereby receipt of written notice from the Company
pursuant to California Labor Code Section 2872 that this Agreement (to the
extent it requires an assignment or offer to assign rights to any invention of
Employee) does not apply fully to an invention which qualifies fully under
California Labor Code Section 2870.
9. NON-COMPETITION. In order to protect the Confidential Information,
Employee agrees that during the term of Employee's employment, and for a period
of one year thereafter, Employee shall not, directly or indirectly, whether as
an owner, partner, shareholder, agent, employee, creditor, or otherwise,
promote, participate or engage in any activity or other business competitive
with the Company's business if such activity or other business involves any use
by the Employee of any of the Confidential Information.
10. NON-SOLICITATION OF CUSTOMERS. Employee agrees that for a period of
one year after the termination of employment with the Company, Employee will
not, on behalf of Employee or on behalf of any other individual, association or
entity, call on any of the customers of the Company for purpose of soliciting or
inducing any of such customers to acquire (or providing to any of such
customers) any product or service provided by the Company, nor will Employee in
any way, directly or indirectly, as agent or otherwise, in any other manner
solicit, influence or encourage such customers to take away or to divert or
direct their business to Employee or any other person or entity by or with which
Employee is employed, associated, affiliated or otherwise related.
11. NONINTERFERENCE WITH EMPLOYEES. In order to protect the Confidential
Information, Employee agrees that during the term hereof and for a period of one
year thereafter, Employee will not, directly or indirectly induce or entice
any employee of the Company with access to or possession of Confidential
Information to leave such employment or cause anyone else to leave such
employment.
12. ASSISTANCE IN PATENT APPLICATIONS. Employee agrees to assist the
Company in obtaining United States or foreign letters patent and copyright
registrations covering inventions assigned
5
<PAGE>
hereunder to the Company and that Employee's obligation to assist the Company
shall continue beyond the termination of Employee's employment. If the
Company is unable because of Employee's mental or physical incapacity or for
any other reason to secure Employee's signature to apply or to pursue any
application for any United States or foreign letters patent or copyright
registrations covering inventions assigned to the Company, then Employee
hereby irrevocably designates and appoints the Company and its duly
authorized officers and agents as Employee's agent and attorney-in-fact to
act for and in Employee's behalf and stead to execute and file any such
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of letters patent or copyright registrations thereon
with the same legal force and effect as if executed by Employee. Employee
thereby waives and quitclaims to the Company any and all claims of any patent
or copyright resulting from any such application for letters patent or
copyright registrations assigned hereunder to the Company. Employee will
further assist the Company in every way to enforce any copyrights or patents
obtained including, without limitation, testifying in any suit or proceeding
involving any of the copyrights or patents or executing any documents deemed
necessary by the Company, all without further consideration but at the
expense of the Company.
13. INDEMNITY. To the fullest extent permitted by applicable law and the
bylaws of the Company, as from time to time in effect, the Company shall
indemnify Employee and hold Employee harmless for any acts or decisions made
while performing services for the Company.
14. REMEDIES. The parties hereto agree that the services to be rendered
by Employee pursuant to this Agreement, and the rights and privileges granted to
the Company pursuant to this Agreement, are of a special, unique, extraordinary
and intellectual character, which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in any action at law,
and that a breach by Employee of any of the terms of this Agreement will cause
the Company great and irreparable injury and damage. Employee hereby expressly
agrees that the Company shall be entitled to the remedies of injunction,
specific performance and other equitable relief to prevent a breach of this
Agreement by Employee. This Section 14 shall not be construed as a waiver of
any other rights or remedies which the Company may have for damages or
otherwise.
15. SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable to the extent possible.
16. SUCCESSION. This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns and any such successor
or assignee shall be deemed substituted for the Company under the terms of this
Agreement for all purposes. As used herein, "successor" and "assignee" shall
include any person, firm, corporation or other business entity which at any
time, whether by purchase, merger or otherwise, directly or indirectly acquires
the stock of the Company or to which the Company assigns this Agreement by
operation of law or otherwise. The obligations and duties of Employee
hereunder are personal and otherwise not assignable. Employee's obligations and
representations under this Agreement will survive the termination of Employees
employment, regardless of the manner of such termination.
6
<PAGE>
17. NOTICES. Any notice or other communication provided for in this
Agreement shall be in writing and delivered in person or sent by registered or
certified mail to the address set forth below.
If to the Company:
Young Minds, Inc.
1906 Orange Tree Lane, Suite 220
Redlands, California 92374
Attention: Secretary
If to the Employee:
Matthew Hornbeck
1225 Olivine Ave.
P.O. Box 854
Mentone, CA 92359
or at such other address as the Company or Employee may from time to time in
writing designate. Each such notice or other communication shall be effective
(i) if given by mail, three days after such communication is deposited in the
mails with first class postage prepaid, addressed as aforesaid or (ii) if given
by any other means, when actually delivered at such address.
18. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and supersedes any prior
agreements, undertakings, commitments and practices relating to Employee's
employment by the Company.
19. AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and duly executed by both
parties.
20. WAIVER. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof or of any other
right, nor shall any single or partial exercise preclude any further or other
exercise of such right or any other right.
21. GOVERNING LAW. This Agreement, and the legal relations between the
parties, shall be governed by and construed in accordance with the laws of the
State of California without regard to conflicts of law doctrines and any court
action arising out of this Agreement shall be brought in any court of competent
jurisdiction within the State of California, County of San Bernardino.
22. ARBITRATION. Any dispute, controversy or claim arising out of or in
respect to this Agreement (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof shall at the request of
either party be submitted and settled by arbitration conducted in San Bernardino
County, California in accordance with the Commercial Arbitration Rules of the
7
<PAGE>
American Arbitration Association. The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. Judgment upon the award
rendered by the arbitrator(s) may be entered by any court having jurisdiction
thereof. The arbitration shall award reasonable expenses (including
reimbursement of the arbitration costs) to the prevailing party upon application
therefor.
23. WITHHOLDING. All compensation payable hereunder, including salary,
bonus and other benefits, shall be subject to applicable taxes and required
withholdings.
24. COUNTERPARTS. This Agreement and any amendment hereto may be
executed in one or more counterparts. All of such counterparts shall constitute
one and the same agreement and shall become effective when a copy signed by each
party has been delivered to the other party.
25. HEADINGS. Section and other headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
26. REPRESENTATION BY COUNSEL; INTERPRETATION. The Company and Employee
each acknowledge that each party to this Agreement has had the opportunity to be
represented by counsel in connection with this Agreement and the matters
contemplated by this Agreement. Accordingly, any rule of law, including but not
limited to Section l654 of the California Civil Code, or any legal decision that
would require interpretation of any claimed ambiguities in this Agreement
against the party that drafted it has no application and is expressly waived.
The provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of the parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
Young Minds, Inc.
By ___________________________
Its
EMPLOYEE:
____________________________
Matthew Hornbeck
8
<PAGE>
EXHIBIT 11.1
YOUNG MINDS, INCORPORATED
COMPUTATION OF WEIGHTED AVERAGE COMMON STOCK OUTSTANDING
Years Ended
-------------------------------
December 31, June 30,
----------------
1994 1995 1996
---- ---- ----
Weighted Common Stock Outstanding 1,861,230 2,457,480 2,969,147
Common Stock Equivalents per SAB 83
Common shares and warrants issued
subsequent to August 1995 at prices
or exercise prices below the expected
offering price(1) 1,895,000 1,895,000 1,895,000
Assumed buyback of public shares(3) (155,000) (155,000) (155,000)
--------- --------- ---------
1,740,000 1,740,000 1,740,000
--------- --------- ---------
Common Stock Equivalents per APB 15
Outstanding warrants and options(2) 862,306
Assumed buyback of public shares(3) (104,340)
---------
757,966 N/A N/A
---------
Weighted Average Common Stock
Outstanding - Primary and Fully Dilutive 4,359,196 4,197,480 4,709,147
--------- --------- ---------
--------- --------- ---------
- ----------------
(1) Amount represents all common stock and options and warrants issued
within one year of the initial filing of the Company's registration
statement at a per share or exercise price per share below the
anticipated public offering price of $12.00 per share.
(2) Amount represents the total amount of common stock equivalents
outstanding as of December 31, 1994.
(3) Amount represents the repurchase of shares at an assumed purchase price
of $12.00 per share utilizing the proceeds received on the sale of
common stock or exercise of options or warrants.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Shareholders of
Young Minds, Incorporated
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement on Form SB-2 of our report dated August 31, 1996,
relating to the financial statements of Young Minds, Incorporated which are
contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
September 9, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF YOUNG MINDS, INCORPORATED AS OF AND FOR THE YEAR ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 120,567
<SECURITIES> 0
<RECEIVABLES> 602,410
<ALLOWANCES> 5,000
<INVENTORY> 182,316
<CURRENT-ASSETS> 1,003,712
<PP&E> 955,712
<DEPRECIATION> 502,423
<TOTAL-ASSETS> 3,430,631
<CURRENT-LIABILITIES> 3,777,532
<BONDS> 0
0
0
<COMMON> 1,965,140
<OTHER-SE> (4,017,030)
<TOTAL-LIABILITY-AND-EQUITY> 3,430,631
<SALES> 6,702,237
<TOTAL-REVENUES> 6,702,237
<CGS> 3,133,518
<TOTAL-COSTS> 3,133,518
<OTHER-EXPENSES> 402,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 808,192
<INCOME-PRETAX> (860,341)
<INCOME-TAX> 100,000
<INCOME-CONTINUING> (760,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (760,341)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
