<PAGE>
As filed with the Securities and Exchange Commission on September 27, 1996
Registration No. 333-5553
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
----------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DECOR GROUP, INC.
(Name of small business issuer in its charter)
Delaware 2590 [Applied For]
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Address and telephone number
of principal executive offices and principal place of business)
Donald Feldman
President
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Name, address and telephone number of agent for service)
Copies to:
Hartley T. Bernstein, Esq. Steven A. Morse, Esq.
Bernstein & Wasserman, LLP Lester Morse, P.C.
950 Third Avenue 111 Great Neck Road
New York, NY 10022 Great Neck, NY 11021
(212) 826-0730 (516) 487-1446
(212) 371-4730 (Fax) (516) 487-1452 (Fax)
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: | X | continued overleaf
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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 of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<TABLE>
<CAPTION>
==============================================================================================================================
CALCULATION OF REGISTRATION FEE
==============================================================================================================================
Title of Each Class of Securities to be Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Registered Offering Price Per Aggregate Offering Registration
Security (1) Price Fee
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, consisting of two (2) shares of
Common Stock, par value $.0001 per
share and one (1) Class A Warrant (2) 345,000 $ 10.00 $ 3,450,000 $ 1,189.56
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, included in the Units 690,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Class A Warrants included in the Units (3) 345,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying the Class A Warrants (4) 345,000 $ 4.00 $ 1,380,000 $ 475.82
- ------------------------------------------------------------------------------------------------------------------------------
Representative's Unit Purchase Option 30,000 $ .001 $ 30.00 $ 0.01
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Units, each Unit consisting of two (2)
shares of Common Stock, par value $.0001
per share, and one (1) Class A Warrant (5) 30,000 $ 16.50 $ 495,000 $ 170.67
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying Representative's Unit
Purchase Option 60,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Class A Warrants, underlying
Representative's Unit Purchase Option 30,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying Class A Warrants in
Representative's Unit Purchase Option (6) 30,000 $ 4.00 $ 120,000 $ 41.38
- ------------------------------------------------------------------------------------------------------------------------------
Selling Securityholders
- ------------------------------------------------------------------------------------------------------------------------------
Unit, consisting of two (2) shares of
Common Stock, par value $.001 per share,
and one (1) Class A Warrant(7) 25,000 $ 10.00 $ 250,000 $ 86.20
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, included in the Units 50,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Class A Warrants, included in the Units (3) 25,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying the Class A Warrants 25,000 $ 4.00 $ 100,000 $ 34.48
- ------------------------------------------------------------------------------------------------------------------------------
Class A Warrants (8) 3,000,000 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share underlying Class A Warrants 3,000,000 $ 4.00 $12,000,000 $ 4,137.93
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per 2,062,000 $ 5.00 $10,310,000 $ 3,554.89
share (9)
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share(10) 500,000 $ 5.00 $ 2,500,000 $ 862.00
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL -- -- $30,605,000 $ 10,552.93
Previously Paid -- -- -- 9,690.93
-------------
Amount Due -- -- -- $ 862.00
=============
==============================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating registration fee.
(2) Includes 45,000 Units subject to the Representative's over-allotment
option (the "OverAllotment Option"), consisting of 90,000 shares of
Common Stock, 45,000 Class A Warrants and 45,000 shares of Common
Stock underlying the Class A Warrants.
<PAGE>
(3) The Class A Warrants are exercisable over a four (4) year period
commencing one (1) year following the effective date of this Offering
into one (1) share of Common Stock per Class A Warrant at an exercise
price of $4.00 per share.
(4) The number of shares of Common Stock specified is the number which
may be acquired by the holders of the Units upon exercise of the
Class A Redeemable Common Stock Purchase Warrants ("Class A
Warrants") at the maximum exercise price thereof.
(5) The Representative's unit purchase option entitles the Representative
to purchase up to 30,000 Units at 165% of the offering price (the
"Representative's Unit Purchase Option").
(6) Issuable upon exercise of the Class A Warrants included in the
Representative's Unit Purchase Option.
(7) Represents the resale of 25,000 Units held by a Selling Securityholder.
(8) Represents the resale of 3,000,000 Class A Warrants issuable in connection
with certain Bridge Loans.
(9) Represents the resale of 2,062,000 shares of Common Stock held by certain
Selling Securityholders.
(10) Represents the resale of 500,000 shares of Common Stock issuable to
Interiors, Inc. upon the conversion of 500,000 shares of the Company's
Series A Convertible Preferred Stock.
<PAGE>
DECOR GROUP, INC.
CROSS REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I, of Form SB-2)
Item in Form SB-2 Prospectus Caption
----------------- ------------------
1. Front of Registration
Statement and Outside Front
Cover of Prospectus................ Facing Page of Registration
Statement; Outside Front
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Inside Front Cover Page of
Prospectus; Outside Back Cover
Page of Prospectus
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Outside Front Cover Page of
Prospectus; Underwriting;
Risk Factors
6. Dilution........................... Dilution; Risk Factors
7. Selling Securityholders........... Description of Securities; Selling
Securityholders
8. Plan of Distribution............... Outside Front Cover Page of
Prospectus; Risk Factors;
Underwriting
9. Legal Proceedings.................. Business-Litigation
10. Directors, Executive Officers,
Promoters and Control Persons...... Management
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders
i
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Item in Form SB-2 Prospectus Caption
----------------- ------------------
12. Description of Securities.......... Description of Securities;
Underwriting
13. Interest of Named Experts and
Counsel............................ Experts; Legal Matters
14. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities......... Underwriting; Certain Transactions
15. Organization Within Last 5 Years... Prospectus Summary; The Company;
Business
16. Description of Business............ Business; Risk Factors
17. Management's Discussion and Analysis
or Plan of Operation............... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property............ Business - Facilities
19. Certain Relationships and
Related Transactions............... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters........ Outside Front Cover Page of
Prospectus; Prospectus Summary;
Description of Securities;
Underwriting
21. Executive Compensation............. Management - Executive
Compensation
22. Financial Statements............... Selected Financial Data;
Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosures.......... *
- ----------
* Omitted because Item is not applicable.
ii
<PAGE>
Explanatory Note
This registration statement covers (i) the primary offering ("Offering") of
Units by Decor Group, Inc. (the "Company") and Units owned and offered by a
certain holder of Units (the "Unit Holder") and (ii) the concurrent offering of
securities by certain selling securityholders. The Company is registering, under
the primary prospectus ("Primary Prospectus"), (i) 345,000 Units, each Unit
consisting of two (2) shares of Common Stock and one (1) Class A Warrant
(including 45,000 Units subject to the over-allotment) and (ii) 25,000 Units on
behalf of the Unit Holder. The Company is also registering under an alternate
prospectus ("Alternate Prospectus") the resale of (i) 2,062,000 shares of Common
Stock issued in March 1996 to certain stockholders (the "Selling Stockholders"),
(ii) 3,000,000 Class A Warrants issuable to certain bridge lenders to the
Company (the "Bridge Lenders") upon the effective date of this offering and the
shares of Common Stock issuable upon the exercise thereof and (iii) 500,000
shares of Common Stock issuable to Interiors, Inc., an affiliate of the Company,
upon the conversion of 500,000 shares of Series A Preferred Stock held thereby.
See "Bridge Financing." The Alternate Prospectus pages, which follow the Primary
Prospectus, are to be combined with all of the sections contained in the Primary
Prospectus, with the following exceptions: the front and back cover pages and
the sections entitled "Concurrent Sales," "Selling Securityholders," and "Plan
of Distribution." Such sections from the Alternate Prospectus pages will be
added to the Primary Prospectus. The "Underwriting" section contained in the
Primary Prospectus will not be included in the Alternate Prospectus.
Furthermore, all references contained in the Alternate Prospectus to "the
Offering" or "this Offering" shall refer to the Company's Offering under the
Primary Prospectus.
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1996
DECOR GROUP, INC.
325,000 Units, Each Unit Consists of Two (2) Shares of Common Stock
and
One (1) Class A Redeemable Common Stock Purchase Warrant
Offering Price Per Unit - $10.00
Decor Group, Inc. ("Decor" or the "Company") is offering 300,000 units (the
"Units") at an offering price of $10.00 per Unit. Each Unit consists of two (2)
shares of common stock, par value $.0001 per share (the "Common Stock") and one
(1) Class A Redeemable Common Stock Purchase Warrant (the "Class A Warrants").
The securities comprising the Units will be separately transferable immediately
upon the date of this prospectus. This offering also includes 25,000 Units owned
and offered by the holder thereof (the "Unit Holder"). The Company anticipates
receiving approximately $2,010,000 in net proceeds of the total proceeds of
$3,000,000 from this offering (assuming the Over-Allotment Option is not
exercised by the Underwriters). Of the net proceeds of $2,010,000, approximately
$260,000, or 12.9% of the net proceeds, will be used to repay certain
indebtedness incurred by the Company in March 1996. See "Use of Proceeds." The
Company will not receive any of the proceeds from the sale of the Units by the
Unit Holder. See "Risk Factors" and "Description of Securities." The Risk Factor
section begins on page 14 of this Prospectus.
The Class A Warrants shall be exercisable commencing one (1) year after the
date hereof (the "Effective Date"). Each Class A Warrant entitles the holder to
purchase one (1) share of Common Stock at a price of $4.00 per share during the
four (4) year period commencing one (1) year from the Effective Date. The Class
A Warrants are redeemable by the Company for $.05 per Warrant, at any time after
, 1997, upon thirty (30) days' prior written notice, if the average closing
price or bid price of the Common Stock, as reported by the principal exchange on
which the Common Stock is traded, Nasdaq or the National Quotation Bureau
Incorporated, as the case may be, equals or exceeds $12.00 per share, for any
twenty (20) trading days within a period of thirty (30) consecutive trading days
ending five (5) days prior to the date of the notice of redemption. Upon thirty
(30) days' written notice to all holders of the Class A Warrants, the Company
shall have the right to reduce the exercise price and/or extend the term of the
Class A Warrants. See "Description of Securities." Although the Company has no
current plans to reduce the exercise price and/or
1
<PAGE>
extend the term of the Class A Warrants, it may consider taking such action
depending upon the Company's financial condition, its financial needs and based
upon general market conditions.
The Company has applied for inclusion of the Units, the Common Stock and
the Class A Warrants on The Nasdaq SmallCap Market, although there can be no
assurance that an active trading market will develop even if the securities are
accepted for quotation. Additionally, even if an active trading market develops,
the Company is still required to maintain certain minimum criteria established
by Nasdaq, of which there can be no assurance. See "Risk Factors - Lack of Prior
Market for Units, Common Stock and Class A Warrants; No Assurance of Public
Trading Market" and "Penny Stock Regulations May Impose Certain Restrictions on
Marketability of Securities."
Prior to this Offering, there has been no public market for the Units, the
Common Stock or the Class A Warrants. It is currently anticipated that the
initial public offering price will be $10.00 per Unit. The price of the Units,
as well as the exercise price of the Class A Warrants, have been determined by
negotiations between the Company and VTR Capital, Inc., the representative (the
"Representative") of the underwriters of this Offering (the "Underwriters"), and
do not necessarily bear any relationship to the Company's assets, book value,
net worth or results of operations or any other established criteria of value.
For additional information regarding the factors considered in determining the
initial public offering price of the Units and the exercise price of the Class A
Warrants, see "Risk Factors No Prior Public Market; Possible Volatility of Stock
Price," "Description of Securities" and "Underwriting."
The registration statement of which this Prospectus forms a part also
covers the resale of (i) 3,000,000 Class A Warrants issuable to certain bridge
lenders (the "Bridge Lenders") in connection with the Company's recent bridge
financings (the "Bridge Loans") and 3,000,000 shares of Common Stock issuable
upon exercise of the Class A Warrants, (ii) 2,062,000 shares of Common Stock
held by certain stockholders (the "Selling Stockholders"), and (iii) 500,000
shares of Common Stock issuable to Interiors, Inc. ("Interiors"), an affiliate
of the Company, upon the conversion of 500,000 shares of Series A Preferred
Stock held thereby. The Bridge Lenders, the Selling Stockholders and Interiors
are hereinafter collectively referred to as the "Selling Securityholders." None
of the securities offered by the Selling Securityholders are being underwritten.
The Class A Warrants issuable to the Bridge Lenders are identical to the Class A
Warrants included in the Units offered hereby. The fact that additional Class A
Warrants may become tradeable may have a depressive effect on the market price
of the Class A Warrants. The officers and directors of the Company as well as
certain members of their immediate families (including certain Selling
Securityholders holding an aggregate of 250,000 shares of Common Stock) and
Interiors have agreed not to sell or transfer the securities of the Company held
thereby for a period of twenty-four (24) months following the Effective Date,
subject to earlier release by the Representative. The Company will not receive
any of the proceeds on the sale of the securities by the Selling
Securityholders. The resale of the securities of the Selling
2
<PAGE>
Securityholders are subject to Prospectus delivery and other requirements of the
Securities Act of 1933, as amended (the "Act"). Sales of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Selling Securityholders" and "Risk
Factors - Shares Eligible for Future Sale May Adversely Affect the Market."
----------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
INCLUDED IN THE UNITS OFFERED HEREBY AND SHOULD BE CONSIDERED ONLY BY PERSONS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" AND "RISK
FACTORS."
----------------
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.
<TABLE>
<CAPTION>
====================================================================================================
Underwriting Proceeds to Selling
Discount and Proceeds to Securityholders
Price to Public Commissions(1) Company(2) (3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Unit Offered by
the Company........ $10.00 $1.00 $9.00 $----
- ----------------------------------------------------------------------------------------------------
Per Unit Offered by
Selling
Securityholders $10.00 $1.00 $---- $9.00
- ----------------------------------------------------------------------------------------------------
Total(4).......... $3,250,000 $275,000 $2,610,000 $225,000
====================================================================================================
</TABLE>
The date of this Prospectus is September ______, 1996
VTR CAPITAL, INC.
Investment Bankers
(Notes to Cover)
- ----------
3
<PAGE>
(1) Does not reflect additional compensation to be received by the
Representative in the form of: (i) a non-accountable expense allowance of
$97,500, $7,500 of which is being paid on behalf of the Unit Holder,
($103,500 if the Over-Allotment Option (as hereinafter defined) is
exercised in full), (ii) a two (2) year financial advisory and investment
banking agreement providing for an aggregate fee of $100,000 payable in
advance at the closing of this Offering, and (iii) an option to purchase
30,000 Units at $16.50 per Unit (the "Representative's Unit Purchase
Option"), exercisable for a period of four (4) years, commencing one (1)
year from the effective date of this Offering. The Company and the
Representative have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act"). The Company has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy and is therefore unenforceable. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $682,500 including the Representative's non-accountable expense
allowance ($97,500) and the financial advisory fee referred to in Footnote
(1) (not assuming exercise of the OverAllotment Option (as hereinafter
defined), registration fees, transfer agent fees, NASD fees, Blue Sky
filing fees and expenses, legal fees and expenses, and accounting fees and
expenses. See "Use of Proceeds" and "Underwriting."
(3) The Company will not receive any of the proceeds from the sale of the Units
by the Unit Holder. The Unit Holder will not bear any expenses of this
offering. See "Selling Securityholders" and "Underwriting."
(4) Does not include 45,000 additional Units from the Company to cover
over-allotments which the Representative has an option to purchase for
thirty (30) days from the date of this Prospectus at the initial public
offering price, less the Representative's discount (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the total
price to the public, underwriting discounts and commissions and the
estimated expenses including the Representative's non-accountable expense
allowance will be $3,450,000, $1,048,500 (including the financial advisory
fee paid to the Representative), respectively, and the net proceeds to the
Company will be $2,401,500. See "Underwriting."
The Units are offered by the Representative on a "firm commitment" basis,
when, as and if delivered to and accepted by the Representative, and subject to
prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Representative named herein and subject to its
right to reject orders in whole or in part and to certain other conditions. It
is expected that the delivery of the certificates representing the securities
and payment therefor will be made at the offices of the Representative on or
about _____, 1996.
AVAILABLE INFORMATION
4
<PAGE>
The Company does not presently file reports and other information with the
Securities and Exchange Commission (the "Commission"). However, following
completion of this Offering, the Company intends to furnish its stockholders
with annual reports containing audited financial statements examined and
reported upon by its independent public accounting firm and such interim
reports, in each case as it may determine to furnish or as may be required by
law. After the effective date of this Offering, the Company will be subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and in accordance therewith will file reports, proxy
statements and other information with the Commission.
Reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form SB-2
(herein together with all amendments and exhibits referred to as the
"Registration Statement") under the Act of which this Prospectus forms a part.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information
reference is made to the Registration Statement.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, THE
COMMON STOCK AND/OR THE CLASS A WARRANTS CONTAINED THEREIN AT A LEVEL ABOVE THAT
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED IN THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THIS OFFERING MAY BE SOLD
TO CUSTOMERS OF THE UNDERWRITERS WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY
OF THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT
MAKE A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN NO ASSURANCE.
SALES WILL NOT BE MADE BY THE UNDERWRITERS TO DISCRETIONARY ACCOUNTS. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE UNITS OR THE COMMON STOCK AND/OR THE CLASS A WARRANTS CONTAINED THEREIN
THROUGH AND/OR WITH THE UNDERWRITERS.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITERS MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITERS, IF THEY PARTICIPATE IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE
5
<PAGE>
MARKET FOR THE UNITS OR THE COMMON STOCK AND CLASS A WARRANTS CONTAINED THEREIN.
HOWEVER, THERE IS NO ASSURANCE THAT THE UNDERWRITERS WILL OR WILL NOT CONTINUE
TO BE A DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED
HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE
UNDERWRITERS PARTICIPATION IN SUCH MARKET. SEE "RISK FACTORS - LACK OF PRIOR
MARKET FOR UNITS, COMMON STOCK AND CLASS A WARRANTS; NO ASSURANCE OF PUBLIC
TRADING MARKET." THE UNDERWRITERS MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME.
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, all information appearing
herein does not give effect to (i) 325,000 shares of Common Stock issuable upon
exercise of the Class A Warrants; (b) 90,000 shares of Common Stock issuable
upon exercise of the Over-Allotment Option; (c) 45,000 shares of Common Stock
issuable upon exercise of the Class A Warrants included in the Over-Allotment
Option; (d) 60,000 shares of Common Stock issuable upon exercise of the
Representative's Unit Purchase Option; (e) 30,000 shares of Common Stock
issuable upon exercise of the Class A Warrants included in the Representative's
Unit Purchase Option; (f) 3,000,000 shares of Common Stock issuable upon
exercise of Class A Warrants issuable to certain Selling Securityholders, (g)
500,000 shares of Common Stock issuable upon the conversion of 500,000 shares of
Series A Convertible Preferred Stock and (h) 94,167 shares of Common Stock
issuable to Interiors, Inc. upon conversion of 109,867 shares of Series C
Preferred Stock. See "Description of Securities," "Certain Transactions"
"Underwriting," and "Management - Stock Option Plans and Agreements." Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"), was
incorporated in March 1996. Artisan Acquisition Corporation, a Delaware
corporation wholly owned by the Company ("AAC"), was incorporated in March 1996
for the purpose of entering into an Asset Purchase Agreement with Artisan House,
Inc. ("Artisan House") pursuant to which AAC has agreed to purchase
substantially all of the operating assets, and assume certain liabilities, of
Artisan House (the "Artisan House Transaction") for an aggregate purchase price
of $3,626,400, subject to certain adjustments. The Company anticipates closing
the Artisan House Transaction prior to, or contemporaneously with, the closing
of this Offering. Unless otherwise indicated, references made hereinafter to the
Company include AAC and Artisan House. See "Business -
6
<PAGE>
Acquisition of Artisan House."
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing and marketing of metal wall, table and
freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400. The
primary goal of the Company is to supply a broad spectrum of design driven
sculpture and decorative accessories at moderate prices.
Artisan House markets its products through a network of independent
commissioned sales representatives, both domestically and internationally, as
well as through strategically located showrooms servicing the home furnishing
and decorative accessory industries. Artisan House has permanent showrooms
located in High Point, NC and San Francisco, CA that are leased and controlled
by the Artisan House, as well as sales representative showrooms in Atlanta and
Dallas.
Artisan House's typical customers include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Levitz and Wickes, and catalogue houses. For the fiscal
year ended June 30, 1996, sales to Sears, JC Penny, Levitz and Wickes
represented 5.1%, 4.3%, 8.6%, and 2.7%, respectively of total sales. See
"Business" and "Recent Developments."
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses. The
Company intends to capitalize on the fragmented nature of the supply side of the
home decorative accessory industry and the consolidation of such industry
through the acquisition of manufacturers and distributors of art-related
decorative accessories. Through such acquisitions, the Company intends to
increase the number and nature of products manufactured by the Company. Other
than the acquisition of Artisan House, there are no plans, arrangements, or
understandings with regard to potential acquisitions. It should be noted that
under certain circumstances acquisitions by the Company shall require the prior
written approval of the Representative.
Following this Offering, Interiors will own (i) 500,000 shares of the
Company's Series A Preferred Stock (non-voting shares), (ii) 20,000,000 shares
of Series B Non-Convertible Preferred Stock and (iii) 109,867 shares of Series C
Preferred Stock, representing 88.3% of the total voting stock outstanding (based
upon 3,225,000 shares of Common Stock outstanding and assuming conversion of
500,000 of Series A Preferred Stock). Since holders of Series B Preferred Stock
and Common Stock do not have any cumulative voting rights and directors are
elected by a majority vote of the voting shares outstanding, Interiors is in a
position to control the election of directors as well as the affairs of the
Company. In addition, Max Munn, a member of the Company's Board of Directors, is
also the President and director of Interior's Board of Directors.
Notwithstanding the foregoing, Interiors has entered into a voting agreement
with the Company's Board of Directors, pursuant to which
7
<PAGE>
the Board shall have the right to vote the 20,000,000 shares of Series B
Preferred Stock held by Interiors until December 31, 1997. Further, the Company
has entered into a two year Management Services Agreement with Interiors.
Interiors has, pursuant to such agreement, agreed to advise the Company on the
manufacturing, sale, marketing and distribution of the Company's products as
well as providing the Company accounting and administrative services and
strategic planning with regard to joint ventures, acquisitions, and other long
term business initiatives. See "Risk Factors - Control by Interiors" and
"Business Relationship with Interiors, Inc."
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400. See "Risk
Factors" for a discussion of certain factors that should be considered in
evaluation the Company and its business.
8
<PAGE>
The Offering
Securities Offered by the
Company (1)......................... 300,000 Units(2)
Securities Offered by the
Unit Holder......................... 25,000 Units
Redemption of Class A
Warrants .......................... The Class A Warrants are each
redeemable by the Company for $.05 per
Warrant, at any time after ___________,
upon thirty (30) days' prior written
notice, if the average closing price of
bid price of the Common Stock, as
reported by the principal exchange on
which the Common Stock is quoted, The
Nasdaq SmallCap Market or the National
Quotation Bureau Incorporated, as the
case may be, equals or exceeds $12.00
per share for any twenty (20) trading
days within a period of thirty (30)
consecutive trading days ending five
(5) days prior to the date of the
notice of redemption. Upon thirty (30)
days' written notice to all holders of
the Class A Warrants, the Company shall
have the right to reduce the exercise
price and/or extend the term of the
Class A Warrants. See "Description of
Securities."
- ----------
(1) Concurrently with this Offering, the Company is registering (i) 2,062,000
shares of Common Stock on behalf of certain Selling Stockholders, (ii)
3,000,000 Class A Warrants on behalf of certain Selling Warrantholders and
(iii) 500,000 shares of Common Stock issuable to Interiors, Inc., an
affiliate of the Company, upon the conversion of 500,000 shares of Series A
Preferred Stock held thereby. See " Selling Securityholders" and "Certain
Transactions".
(2) Each Unit consists of two (2) shares of Common Stock and one (1) Class A
Warrant. The securities comprising the Units are separately transferable
immediately upon the Effective Date of this Offering. The Class A Warrants
shall be exercisable commencing one (1) year from the Effective Date. Each
Class A Warrant entitles the holder to purchase one (1) share of Common
Stock at a price of $4.00 per share during the four (4) year period
commencing one (1) year from the Effective Date of this Offering. The
exercise price of the Warrants was determined by negotiations between the
Company and the Representative. Among the factors used in fixing the
exercise price were the market price of the Company's Common Stock, the
general condition of the securities market at the time of this Offering,
demand for similar securities of comparable companies and the
9
<PAGE>
benefit to the Company and purchasers of the Company's securities of an
exercise price which is below the initial offering price of the Common
Stock. See "Description of Securities."
Securities Outstanding Prior to
the Offering:
Series A Convertible
Preferred Stock.......................500,000 Shares
Series B Non-Convertible
Preferred Stock........................20,000,000 Shares
Series C Convertible
Preferred Stock ........................109,867 Shares
Common Stock................................2,625,000 Shares(1)
Class A Warrants............................25,000 Warrants(2)
Securities Outstanding Subsequent
to the Offering:
Series A Convertible
Preferred Stock.......................500,000 Shares
Series B Non-Convertible
Preferred Stock........................20,000,000 Shares
Series C Convertible
Preferred Stock ........................109,867 Shares
Common Stock................................3,225,000 Shares(3)
Class A Warrants............................3,325,000 Warrants(4)
Use of Proceeds.............................The net proceeds to the Company
from the sale of the 300,000
Units offered hereby, after
deducting offering expenses and
the $100,000 financial advisory
fee, are estimated to be
$2,010,000. The net proceeds
are expected to be applied for
the following purposes:
purchase of all of the
operating assets and
assumptions of certain
liabilities of Artisan House,
repayment of certain
indebtedness, and working
capital. "See use of Proceeds".
10
<PAGE>
- ----------
(1) Includes 50,000 shares included in the Units held by the Unit Holder.
(2) Includes 25,000 Class A Warrants included in the Units held by the Unit
Holder but does not include 3,000,000 Class A Warrants issuable to the
Bridge Lenders.
(3) Excludes 100,000 shares issuable to Artisan House, Inc. upon the closing of
the Artisan House Transaction.
(4) Assumes the issuance of 3,000,000 Class A Warrants to the Bridge Lenders as
of the Effective Date.
Risk Factors............................. Qualified Auditor's Report of
Accountants, Limited Operating
History, No Assurance that the Company
will Successfully Commence Business,
Dependence on Offering Proceeds;
Possible Need for Additional
Financing, Significant Industry
Competition, Dilution; Equity
Securities and Sold Previously at
Below Offering Price, Conflicts of
Interest, Governmental Regulation,
Dependence on Interiors, Dependence on
Key Personnel, Control by Interiors,
Acquisition of Artisan House,
Trademark Protection, Broad Discretion
in Application of Proceeds, Charges
for Interest Expense Relating to
Bridge Notes, Dependence on Skilled
Craftsmen and Salespersons,
Significant Customer, Absence of
Dividends, No Prior Public Market;
Possible Volatility of Stock Price,
Lack of Prior Market for Units, Common
Stock and Class A Warrants; No
Assurance of Public Trading Market,
Current Prospectus and State Blue Sky
Registration in Connection with the
Exercise of the Warrants, Impact on
Market of Warrant Exercise,
Representative's Unit Purchase Option,
"Penny Stock" Regulations May Impose
Certain Restrictions on Marketability
of Securities, Redemption of
Redeemable Warrants, Limitation on
Director Liability, Limited Number of
Management Personnel, Shares Eligible
of Future Sale May Adversely Affect
the
11
<PAGE>
Market and Anti-Takeover Effect of
General Corporation Law of Delaware.
An investment in the securities
offered hereby involves a high degree
of risk and immediate substantial
dilution of the book value of the
Common Stock included in the Units and
should be considered only by persons
who can afford the loss of their
entire investment. See "Dilution" and
"Risk Factors."
Proposed Nasdaq Small-Cap Market
Symbol(1)............................ Units -_____
Common Stock-_____
Class A Warrants-_____
- ----------
(1) Although the Company intends to apply for inclusion of the Units, the
Common Stock and Class A Warrants on The Nasdaq SmallCap Market, there can
be no assurance that the Company's securities will be included for
quotation, or if so included that the Company will be able to continue to
meet the requirements for continued quotation, or that a public trading
market will develop or that if such market develops, it will be sustained.
See "Risk Factors-Lack of Prior Market for Units, Common Stock and Class A
Warrants; No Assurance of Public Trading Market."
12
<PAGE>
Summary Financial Information
The selected historical financial data for the period ended June 30, 1996
and for the period ended March 31, 1996 presented below are derived from the
unaudited pro forma combined financial statements and the historical financial
statements of the Company. The data set forth below should be read in
conjunction with and is qualified in its entirety by the Company's financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Financial Statements," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following summary financial information has been summarized
from the Company's financial statements included elsewhere in this Prospectus.
The information should be read in conjunction with the financial statements and
the related notes thereto See "Financial Statements."
Summary Statement of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
As of June As of June 30, As of March As of March
30, 1996 1996, As 31, 1996, (4) 31, 1996, As
($)(1) Adjusted(1)(2)(3) Adjusted(3)
($) (4)(5)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ---- 1,386,976 ---- 4,809,422
Gross Profit ---- 647,262 ---- 2,213,039
Operating Income (Loss) (138,851) (32,614) (100,000) 99,448
Net (Loss) (246,001) (176,765) (99,750) (20,054)
Net (Loss) per share (.04) (.03) (.02) (---)
Weighted Average number of 5,625,000 5,725,000 5,625,000 5,725,000
Common Shares outstanding
- ----------------------------------------------------------------------------------------------
</TABLE>
Summary Balance Sheet Data
- --------------------------------------------------------------------------------
At June 30, 1996 At June 30, 1996, As
($) Adjusted(2)($)
- --------------------------------------------------------------------------------
Working Capital (deficit) (216,109) 1,740,297
Total Assets 2,574,399 7,172,572
Total Liabilities 300,850 1,837,681
Stockholder's Equity 2,273,549 5,334,891
- --------------------------------------------------------------------------------
- ----------
(1) Includes results for the three months ended June 30, 1996 for Decor Group,
Inc.
13
<PAGE>
(2) Adjusted to reflect the closing of the Artisan House Transaction and
adjusted to reflect the sale of 300,000 Units offered hereby and the net
proceeds therefrom of $2,010,000 and preferred stock sale for $824,000.
(3) Includes results for the three months ended June 30, 1996 for Artisan
House.
(4) Includes results for the period March 1, 1996 (Inception) through March 31,
1996 for Decor Group, Inc.
(5) Includes results for the fiscal year ended
January 31, 1996 for Artisan House.
14
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and substantial dilution and should only be purchased by
investors who can afford to lose their entire investment. Prospective
purchasers, prior to making an investment, should carefully consider the
following risks and speculative factors, as well as other information set forth
elsewhere in this Prospectus, associated with this Offering, including the
information contained in the Financial Statements herein.
1. Qualified Auditor's Report of Accountants. As a result of the Company's
current financial condition, the Company's independent auditors have qualified
their report on the Company's financial statement for the period from March 1,
1996 (inception) to March 31, 1996. The Company's ability to continue in the
normal course of business is dependent upon successful completion of its planned
public offering of securities to raise capital and the success of future
operations. These uncertainties raise substantial doubt about its ability to
continue as a going concern. As of June 30, 1996, the Company had a working
capital deficit of approximately $216,000 and a lack of cash flow from
operations. The Company's operations during the aforementioned period have
solely related to identifying and negotiating with acquisition candidates.
Substantially all of these activities related to the acquisition of Artisan
House. Because of the Company's inability to generate cash from
operations, the Company's auditors have issued a going concern opinion with
respect to the Company's audited financial statements. There can be no assurance
that the Company will not incur net losses in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business, " "Use of Proceeds, " and "Financial Statements and Notes."
2. Limited Operating History, No Assurance that the Company will
Successfully Commence Business. The Company was organized on March 1, 1996 and
is in its early stage of development. The Company's business consists primarily
of the assets acquired from Artisan House (the "Artisan House Transaction"). For
the five months ended June 30, 1996, Artisan House generated revenues of
$2,310,976, had stockholder's equity of $754,305 and working capital of
$683,605. Like any relatively new business enterprise operating in a specialized
and intensely competitive market, the Company is subject to many business risks
which include, but are not limited to, unforeseen marketing and promotional
expenses, unforeseen negative publicity, competition, product liability and lack
of operating experience. If the Company is successful with its proposed public
offering the Company on a pro forma basis at June 30, 1996 would have working
capital of approximately $1,600,000 and stockholders equity of approximately
$4,500,000 including the finalization of the acquisitions of Artisan House and
the receipt of $706,250 resulting from the sale of Preferred Stock in August of
1996. Many of the risks may be unforeseeable or beyond the control of the
Company. There can be no assurance that the Company will successfully implement
its business plan in a timely or effective manner, or that management of the
Company will be able to market and sell enough products to generate sufficient
15
<PAGE>
revenues and continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," "Use of
Proceeds," "Certain Transactions" and "Financial Statements."
3. Dependence on Offering Proceeds; Possible Need for Additional Financing.
The Company's cash requirements will be significant. The Company is dependent on
the proceeds from this Offering to close the Artisan House Transaction. The
Company anticipates, based on its currently proposed plans, that the proceeds of
this Offering, together with funds generated from operations, will be sufficient
to satisfy its anticipated cash requirements for approximately twelve (12)
months following the consummation of this Offering. In the event that these
plans change, or the costs of development of operations prove greater than
anticipated, the Company could be required to modify its operations, curtail its
expansion or seek additional financing sooner than currently anticipated. The
Company believes that its operations would be restricted absent expansion. Other
than with respect to obtaining the Secured Loan, the Company has no current
arrangements with respect to such additional financing and there can be no
assurance that such additional financing, if available, will be on terms
acceptable to the Company. See "Use Of Proceeds and "Business - Secured Loan
Agreement"."
4. Significant Industry Competition. The market for sculptures and
decorative art products is highly competitive. Although the Company does not
believe there is significant competition in the wall sculpture market,
management believes that the Company competes with numerous manufacturers of
picture framed art as well as manufacturers of decorative accessories. There can
be no assurance that the Company will be able to continue to be able to generate
interest in wall sculptures or to compete successfully with manufacturers of
picture framed art and decorative accessories. See "Business - Competition."
5. Dilution; Equity Securities Sold Previously at Below Offering Price.
Upon completion of this Offering assuming no exercise of the Over-Allotment
Option, and without giving effect to the exercise of the Representative's Unit
Purchase Option, the net tangible book value per share of the Company's Common
Stock will be $1.31. At the initial public offering price of $10.00 per Unit,
assuming that no portion of the Unit purchase price is allocated to the Class A
Warrant, investors in this Offering will experience an immediate dilution of
approximately $3.69 or 73.8% in net tangible book value per share and existing
investors will experience an increase of approximately $.47 per share. The
exercise of the Class A Warrants sold to the public will result in future
dilution to the public investors. See "Dilution." The present stockholders of
the Company have acquired their respective equity interest at costs
substantially below the public offering price. Accordingly, to the extent that
the Company incurs losses, the public investors will bear a disproportionate
risk of such losses.
6. Conflicts of Interest. After this Offering, Interiors, Inc.
("Interiors") will continue to own 500,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") or 13.4% of the Company's
shares of Common Stock on an as converted basis, 20,000,000 shares of the
Company's of Series B Non-Convertible Preferred Stock (the "Series B Preferred
Stock")
16
<PAGE>
and 109,867 shares of Series C Convertible Preferred Stock. Since the Common
Stock and the Series B Preferred Stock vote together as a class, Interiors will
own following the completion of this Offering (assuming the Over-Allotment
Option is not exercised, and the Series A Preferred Stock is converted), 88.3%
of the total number of voting shares outstanding. Notwithstanding the foregoing,
Interiors has entered into a voting agreement with the Company's Board of
Directors, pursuant to which the Board shall have the right to vote the
20,000,000 shares of Series B Preferred Stock held by Interiors until December
31, 1997. See "Certain Transactions". In addition, Interiors has agreed,
pursuant to the terms of that certain Management Service Agreement between the
Company and Interiors, to provide management, administrative and marketing
services to the Company. Further, Max Munn, the Chairman of the Board of the
Company, is also the President and a director of Interiors, and Donald Feldman,
the Company's President and Chief Financial Officer, is a director of Interiors.
Because of Interior's ownership interest in the Company, the common identity of
certain directors and Interior's role under the Management Services Agreement,
certain conflicts of interest may occur between the Company and Interiors. In
circumstances where a conflict of interest exists, members of the Board of
Directors who are also members of the Interiors Board of Directors may be
precluded from participating in corporate decisions. Specifically circumstances
may arise where the Company and consider issues regarding compensation to be
paid to Interiors for services rendered to the Company, or when the Company
considers strategic decisions which may negatively impact Interiors.
Accordingly, no assurance can be given that such conflicts will be resolved in a
manner favorable to the Company. Although the Board of Directors of the Company
has not adopted any written policy on this matter, the General Corporation Law
of the State of Delaware contains specific provisions governing such conflicts.
7. Governmental Regulation. The Company's operations are subject to
numerous Federal, state and local laws and regulations relating to the
environment and health safety and other regulatory matters. Certain materials
used in the manufacturing of the Company's products such as paints, solvents and
other water-based related finishes may be classified by Federal and certain
state and local governments as "hazardous materials." Control of those
substances is regulated by the Environmental Protection Agency ("EPA") and
certain state and local environmental protection agencies which require reports
and inspect facilities to monitor compliance. In addition, under the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"),
any generator of hazardous waste sent to a hazardous waste disposal site is
potentially responsible for the clean up and remediation costs required for such
site in the event that the site is not properly closed by the owner or operator,
irrespective of the amount of waste sent to the site. The Company's
manufacturing facilities have been and will continue to be inspected by the
Occupational Safety and Health Administration and by certain state and local
inspection agencies and departments. The Company has obtained all permits and
anticipates that its facilities and operations will be in substantial compliance
with all material applicable laws and regulations. Nevertheless, no assurance
can be given that the Company will be able to obtain such permits in the future
or that future events, such as changes in or modified interpretations of
existing laws or regulations or enforcement policies, may give rise to
additional compliance costs
17
<PAGE>
that could have a material adverse effect on the Company.
8. Dependence on Interiors. In May 1996, the Company entered into a two
year Management Services Agreement with Interiors, Inc. ("Interiors"). Interiors
has, pursuant to such agreement, agreed to advise the Company on the
manufacturing, sale, marketing and distribution of the Company's products as
well as providing the Company with accounting and administrative services and
strategic planning with regard to joint ventures, acquisitions, and other long
term business initiatives. In exchange for such services, the Company has agreed
to pay to Interiors an annual amount equal to the greater of (i) $75,000 or (ii)
1 1/2% of Excess Cashflow (as defined in the agreement). The Management Services
Agreement is automatically renewable for an additional one (1) year term unless
terminated by either party not less than sixty (60) days prior to the end of the
term. In the event that the Management Services Agreement is terminated for any
reason, the Company's business may be negatively effected. In such an event, the
Company may be required to hire additional personnel or engage one or more
independent contractors at an added cost to the Company. See "Business -
Management Services Agreement" and "Certain Transactions."
9. Dependence on Key Personnel. The Company is substantially dependent on
the continued services of Donald Feldman, the Company's Chief Executive Officer
and Chief Financial Officer, and Henry Goldman who will serve as the President
and Chief Executive Officer of Artisan Acquisition Corp. ("AAC") following the
acquisition of Artisan House. The Company has entered into three (3) year
employment agreement with Mr. Feldman and AAC has entered into a three (3) year
employment agreement with Mr. Goldman. Should Mr. Feldman or Mr. Goldman not be
able to continue as officers of the Company and AAC, respectively, the Company's
prospects could be adversely affected and as a result the loss of either of
these individuals could materially adversely affect the Company's operations.
The Company currently does not maintain key personnel life insurance for any of
its employees. See "Management."
10. Control by Interiors; Voting Agreement. Following this Offering,
Interiors will own (i) 500,000 shares of the Company's Series A Preferred Stock
(non-voting shares), (ii) 20,000,000 shares of Series B Preferred Stock and
(iii) 109,867 shares of Series C Preferred Stock, representing 88.3% of the
total voting stock outstanding (based upon 3,225,000 shares of Common Stock
outstanding and assuming conversion of 500,000 of Series A Preferred Stock).
Since holders of Series B Preferred Stock and Common Stock do not have any
cumulative voting rights and directors are elected by a majority vote of the
voting shares outstanding, Interiors is in a position to control the election of
directors as well as the affairs of the Company. Notwithstanding the foregoing,
Interiors has entered into a voting agreement with the Company's Board of
Directors, pursuant to which the Board shall have the right to vote the
20,000,000 shares of Series B Preferred Stock held by Interiors until December
31, 1997. As a result, the Board of Directors will be in position to elect the
persons nominated thereby as directors. Such control could preclude any
unsolicited acquisition of the Company
18
<PAGE>
which may adversely effect the market price of the shares of Common Stock. In
addition, Max Munn, a member of the Company's Board of Directors is also the
President and director of Interior's Board of Directors. Such control could also
preclude an unsolicited acquisition of the Company and consequently, adversely
affect the market price of the Common Stock. See "Description of Securities."
Further, the Company has entered into a Management Services Agreement with
Interiors, pursuant to which Interiors has agreed to advise and assist the
Company in exchange for payments to be made by the Company. As a result,
Interiors may derive substantial revenue from the Company and may influence the
Company's day-to-day operations. See "Business - Management Services Agreement"
and "Certain Transactions."
11. Limited Number of Management Personnel. There is currently only one (1)
executive officer of the Company. Following this Offering, there can be no
assurance that, if the Company grows, that current management will be able to
continue to properly manage the Company's affairs. Further, there can be no
assurance that the Company will be able to identify additional qualified
managers on terms economically feasible to the Company.
12. Dependence on Trademarks, Copyrights and License Rights. The trademarks
"Artisan House", "C. Jere", "Sautere", and "Glendale Ironworks" have been
registered with the United States Patent and Trademark Office ("PTO"). The
Company also has copyright protection on virtually all of its designs used to
manufacture the Company's sculptures. The Company presently intends to make all
appropriate filings and registrations and take all other actions necessary to
protect all of its intellectual property rights. There can be no assurance,
however, that the Company will be able to effectively protect such property
rights. The failure by the Company to protect such rights from unlawful and
improper appropriation may have a material adverse effect on the Company.
Although to date no claims have been brought against the Company alleging that
it infringes on the intellectual property rights of others, there can be no
assurance that such claims will not be brought against the Company in the
future, or that if made, such claims will not be successful. In addition to any
potential monetary liability for damage, the Company could be required to obtain
a license in order to continue to use the trademarks in question or could be
enjoined from using such trademarks if such license were not made available on
acceptable terms. If the Company becomes involved in such litigation, it may
divert significant Company resources, which could have a material adverse effect
on the Company and its results or operations, and, if such a claim were
successful, the Company's business could be materially adversely affected. See
"Business- Products; Trademarks."
The Company manufactures several products pursuant to the terms of certain
license agreements with the owners of such rights. All of such agreements are
non-exclusive and require the Company to pay royalties to the licensors based
upon revenues from the sale by the Company of such products. In the event that
such licenses are terminated or that the Company is unable to renew such
licenses, or the Company may only renew licenses on terms and conditions
unfavorable to the Company, the Company's businesses may be materially and
adversely effected. See "Business - License Agreements."
13. Charges for Interest Expense Relating to Bridge Notes. In March 1996
the
19
<PAGE>
Company issued $250,000 in principal amount of 8% Notes in connection with a
bridge financing. Management believes that based on the nature of such
borrowings, the Company's position and the current economic environment, such
interest rates may not be reflective of the effective position and the market
rate of interest. Accordingly, the Company recorded a discount on the bridge
notes of $214,300 at June 30, 1996 which will be amortized over the life of the
loans. See "Bridge Financing" and "Management's Discussion and Analysis."
14. Dependence on Skilled Craftsmen and Salespersons. The Company relies on
its skilled craftsmen with specialized skills in the design, crafting and
manufacture of its products. Although the Company attempts to hire and train
skilled craftsmen, the inability of the Company to retain craftsmen and creative
designers may adversely affect operations. The loss of such persons could have a
material adverse impact on the Company.
15. Significant Customers. For the period year ending June 1996, Artisan
House's five largest customers purchased approximately 24.5% of the net sales of
Artisan House. The top five customers Levitz/Homemaker, Sears, JC Penney, Parke
Bell, and Wicks represented 8.6%, 5.1%, 4.3%, 3.8% and 2.7% of net sales,
respectively. In light of the fact that such customers are not parties to any
on-going contract to purchase the Company's products, there can be no assurance
that these significant customers will continue to make purchases at the same
level or at all. Failure by these customers to continue to purchase products
from the Company could have an adverse effect on the Company's business.
16. Absence of Dividends. The Company has not paid and does not anticipate
paying any cash dividends on its Common and Preferred Stock in the foreseeable
future but instead intends to retain all working capital and earnings, if any,
for use in the Company's business operations and in the expansion of its
business. See "Dividend Policy" and "Description of Securities".
17. No Prior Public Market; Possible Volatility of Stock Price. Prior to
this Offering, there has been no public market for the Units, Common Stock or
Class A Warrants. The initial public offering price of the Units, as well as the
exercise price for the Class A Warrants was determined by negotiation between
the Company and the representatives of the Representative, and may not be
indicative of the market price for such securities in the future, and does not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations of the Company or any other established criteria of
value. Among the factors considered in determining the price of the Units were
the history of and prospects for the industry in which the Company competes,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. There is, however, no relationship whatsoever between the
offering price of the Units, the exercise price of the Class A Warrants and the
Company's net worth, projected earnings, book value, or any other objective
criteria of value on the other. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. See
"Underwriting - Determination of Public Offering Price," "Description
20
<PAGE>
of Securities" and "Financial Statements."
18. Lack of Prior Market for Units, Common Stock and Class A Warrants; No
Assurance of Public Trading Market. Prior to this Offering, no public trading
market existed for the Units, Common Stock and Warrants. There can be no
assurances that a public trading market for the Units, Common Stock and Warrants
will develop or that a public trading market, if developed, will be sustained.
Although the Company anticipates that upon completion of this Offering, the
Units, Common Stock and Warrants will be eligible for inclusion on The Nasdaq
SmallCap Market, no assurance can be given that the Units, Common Stock and
Warrants will be listed on The Nasdaq SmallCap Market as of the Effective Date.
Consequently, there can be no assurance that a regular trading market for the
Units, Common Stock and Warrants, other than the pink sheets, will develop after
the completion of this Offering. If a trading market does in fact develop for
the Units, Common Stock and Class A Warrants offered hereby, there can be no
assurance that it will be maintained. If for any reason the Units, Common Stock
and Warrants are not listed on The Nasdaq SmallCap Market or a public trading
market does not develop, purchasers of the Units, Common Stock and Warrants may
have difficulty in selling their securities should they desire to do so. In any
event, because certain restrictions may be placed upon the sale of securities at
prices under $5.00, unless such securities qualify for an exemption from the
"penny stock" rules, such as a listing on The Nasdaq SmallCap Market, some
brokerage firms will not effect transactions in the Company's securities and it
is unlikely that any bank or financial institution will accept such securities
as collateral, which could have an adverse effect in developing or sustaining
any market for the Units, Common Stock and Warrants. See "Risk Factors - Penny
Stock Regulations May Impose Certain Restrictions on Marketability of
Securities."
Although it has no legal obligation to do so, the Representative from time
to time may act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Representative will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's securities may
be significantly affected by the degree, if any, of the Representative's
participation in the market. The Representative may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's securities may be adversely affected by the fact that a significant
amount of the Units may be sold to customers of the Representative.
Under prevailing rules of the National Association of Securities Dealers,
Inc ("NASD"), in order to qualify for initial quotation of securities on The
Nasdaq SmallCap Market, a company, among other things, must have at least
$4,000,000 in total assets, $2,000,000 in total capital and surplus, $1,000,000
in market value of public float and a minimum bid price of $3.00 per share.
Although the Company may upon the completion of this Offering qualify for
initial quotation of its securities on The Nasdaq SmallCap Market, for continued
listing on The Nasdaq SmallCap Market, a company, among other things, must have
$2,000,000 in total assets, $1,000,000 in total capital and surplus, $1,000,000
in market value of public float and a minimum bid price of $1.00 per share. If
the Company is unable to satisfy the requirements for quotation on The Nasdaq
21
<PAGE>
SmallCap Market, trading, if any, in the Units, Common Stock and Class A
Warrants offered hereby would be conducted in the over-the-counter market in
what are commonly referred to as the "pink sheets" or on the NASD OTC Electronic
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the securities offered
hereby. The above-described rules may materially adversely affect the liquidity
of the market for the Company's securities. See "Underwriting."
19. Current Prospectus and State Blue Sky Registration in Connection with
the Exercise of the Warrants. The Company will be able to issue the securities
offered hereby, shares of its Common Stock upon the exercise of the Class A
Warrants and Representative's Unit Purchase Option only if (i) there is a
current prospectus relating to the Common Stock issuable upon the exercise of
the Warrants under an effective registration statement filed with the Securities
and Exchange Commission, and (ii) such Common Stock is then qualified for sale
or exempt therefrom under applicable state securities laws of the jurisdictions
in which the various holders of Warrants reside. There can be no assurance,
however, that the Company will be successful in maintaining a current
registration statement. After a registration statement becomes effective, it may
require updating by the filing of a post-effective amendment. A post-effective
amendment is required (i) anytime after nine (9) months subsequent to the
Effective Date when any information contained in the prospectus is over sixteen
(16) months old, (ii) when facts or events have occurred which represent a
fundamental change in the information contained in the registration statement,
or (iii) when any material change occurs in the information relating to the plan
or distribution of the securities registered by such registration statement. The
Company anticipates that this Registration Statement will remain effective for
at least nine (9) months following the date of this Prospectus or until , 1997,
assuming a post-effective amendment is not filed by the Company. The Company
intends to qualify the sale of Units in a limited number of states, although
certain exemptions under certain state securities ("blue sky") laws may permit
the Warrants to be transferred to purchasers in states other than those in which
the Warrants were initially qualified. The Company will be prevented, however,
from issuing Common Stock upon exercise of the Warrants in those states where
exemptions are unavailable and the Company has failed to qualify the Common
Stock issuable upon exercise of the Warrants. The Company may decide not to
seek, or may not be able to obtain qualification of the issuance of such Common
Stock in all of the states in which the ultimate purchasers of the Warrants
reside. In such a case, the Warrants of those purchasers will expire and have no
value if such Warrants cannot be exercised or sold. Accordingly, the market for
the Warrants may be limited because of the Company's obligation to fulfill both
of the foregoing requirements. See "Description of Securities."
20. Impact on Market of Warrant Exercise. As of the date of this
Prospectus, there will be 3,275,000 Class A Warrants outstanding (including
3,000,000 Class A Warrants issuable to the Bridge Lenders), and there will be
3,275,000 shares of Common Stock issuable upon the exercise thereof. In the
event of the exercise of a substantial number of Class A Warrants offered as
part of the Units within a reasonably short period of time after their right to
exercise commences, the resulting increase in the amount of Common Stock of the
Company in the trading
22
<PAGE>
market could substantially affect the market price of the Common Stock. See
"Description of Securities - Class A Warrants."
21. Representative's Unit Purchase Option. In connection with this
Offering, the Company will sell to the Representative, for nominal
consideration, an option to purchase an aggregate of 30,000 Units (the
"Representative's Unit Purchase Option"). The Representative's Unit Purchase
Option will be exercisable commencing one year from the Effective Date of this
Offering and ending four (4) years from such date, at an exercise price of
$16.50 per Representative's unit (the "Representative's Units") subject to
certain adjustment with the underlying warrants (the "Representative's
Warrants") exercisable at $4.00 per share. The holders of the Representative's
Unit Purchase Option will have the opportunity to profit from a rise in the
market price of the Units, Warrants and/or the Common Stock, if any, without
assuming the risk of ownership. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Unit Purchase Option is outstanding. At any time when
the holders thereof might be expected to exercise them, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by the Representative's Unit Purchase Option. See "Dilution" and
"Underwriting."
22. Shares Eligible for Immediate Sale May Adversely Affect the Market;
Lack of Restrictions on Sale of Company's Outstanding Common Stock. The
registration statement of which this Prospectus forms a part also covers the
resale of (i) 3,000,000 Class A Warrants issuable to the Bridge Lenders and
3,000,000 shares of Common Stock issuable upon exercise of the Class A Warrants,
and (ii) 2,562,000 shares of Common Stock held by the Selling Stockholders. The
securities being registered on behalf of the Selling Securityholders are not
subject to any restriction on resale by the Company or the Representative
(except for (a) 50,000 shares of Common Stock held by Matthew Harriton, a
director of the Company, (b) 500,000 shares of Common Stock issuable to
Interiors, Inc. upon the conversion of 500,000 shares of Series A Preferred
Stock held thereby and (c) 200,000 shares of Common Stock held by Laurie Munn,
the wife of Max Munn, the Company's Chairman of the Board, which may not be sold
or transferred for a period of two (2) years following the Effective Date,
without the prior written consent of the Representative). As a result, certain
securities may be sold by the Selling Securityholders immediately after the
public offering which may have a material adverse effect on the market for, and
price of, the Company's securities. See "Selling Securityholders."
23. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define"penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Since it is intended that the securities offered hereby will be
authorized for quotation on The Nasdaq Small Cap Market, such securities will
initially be exempt from the definition of "penny stock." If the securities
offered hereby are removed from listing by The Nasdaq SmallCap Market at any
time following the Effective Date, the Company's securities may
23
<PAGE>
become subject to rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally those with assets in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market and the price at which such purchasers can
sell any such securities.
24. Redemption of Redeemable Warrants. The Class A Warrants are subject to
redemption by the Company, at any time, commencing one (1) year following the
date of this Prospectus, at a price of $.05 per Warrant if the closing bid price
for the Common Stock equals or exceeds $12.00 per share for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the date of the notice of redemption. In the
event that the Warrants are called for redemption by the Company, Warrantholders
will have thirty (30) days during which they may exercise their rights to
purchase shares of Common Stock. If holders of the Warrants elect not to
exercise them upon notice of redemption thereof, and the Warrants are
subsequently redeemed prior to exercise, the holders thereof would lose the
benefit of the difference between the market price of the underlying Common
Stock as of such date and the exercise price of such Warrants, as well as any
possible future price appreciation in the Common Stock. As a result of an
exercise of the Warrants, existing stockholders would be diluted and the market
price of the Common Stock may be adversely affected. If a Warrantholder fails to
exercise his rights under the Warrants prior to the date set for redemption, the
Warrantholder will be entitled to receive only the redemption price, or $.05 per
Warrant. In addition, the Warrants may only be exercised when a Prospectus is
current and meets the requirements of Section 10 of the Securities Act of 1933.
See "Description of Securities - Class A Warrants."
25. Limitation on Director Liability. The Company's Certificate of
Incorporation limits the liability of Directors to the Company or its
stockholders to monetary damages for breach of a Director's fiduciary duty
except for liability in certain instances. Section 145 of the Delaware General
Corporation Law empowers a corporation to indemnify its directors and officers
and to purchase insurance with respect to liability arising out of the
performance of their duties as directors and officers provided that this
provision shall not eliminate or limit the liability of a
24
<PAGE>
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) arising
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. As a
result of the Company's charter provision and Delaware law, stockholders may
have a more limited right to recover against Directors for breach of their
fiduciary duty other than as existed prior to the enactment of the law. See
"Description of Securities - Limitation on Liability of Directors."
26. Shares Eligible for Future Sale May Adversely Affect the Market. All of
the Company's currently outstanding shares of Common Stock are "restricted
securities" and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act of 1933, as amended. Rule 144 provides, in
essence, that a person holding "restricted securities" for a period of two (2)
years may sell only an amount every three (3) months equal to the greater of (a)
one percent (1%) of the Company's issued and outstanding shares, or (b) the
average weekly volume of sales during the four (4) calendar weeks preceding the
sale. The amount of "restricted securities" which a person who is not an
affiliate of the Company may sell is not so limited, since non-affiliates may
sell without volume limitation their shares held for three (3) years if there is
adequate current public information available concerning the Company. It should
be noted, however, that the Commission is currently considering changing the two
(2) year holding period to one (1) year and the three (3) year holding period to
two (2) years. In such an event, "restricted securities" would be eligible for
sale to the public at an earlier date. Immediately prior to the Effective Date,
the Company will have 2,625,000 shares of its Common Stock issued and
outstanding, which are "restricted securities", and 2,062,000 shares of which
are being registered under the Registration Statement of which this Prospectus
forms a part. Excluding shares of Common Stock issuable upon the exercise of the
Class A Warrants included in the Offering, there are, as of the date of this
Prospectus, a total of 3,500,000 shares of Common Stock issuable (i) upon the
exercise of 3,000,000 Class A Warrants issuable to the Bridge Lenders and (ii)
upon the conversion of 500,000 shares of Series A Preferred Stock and 109,867
shares of Series C Preferred Stock held by Interiors. The officers and directors
of the Company as well as certain members of their immediate families (including
certain Selling Securityholders holding an aggregate of 250,000 shares of Common
Stock) and Interiors, Inc. have agreed not to sell or transfer the securities of
the Company held thereby for a period of twenty-four (24) months following the
Effective Date, subject to earlier release by the Representative.
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Company's Common Stock
in any market which may develop, and therefore, the ability of any investor to
market his shares may be dependent directly upon the number of shares that are
offered and sold. Affiliates of the Company may sell their shares during a
favorable movement in the market price of the Company's Common Stock which may
have a depressive effect on its price per share. See "Description of
Securities."
27. Anti-Takeover Effect of General Corporation Law of Delaware. The
Company is governed by the provisions of Section 203 of the General Corporation
Law of Delaware, an
25
<PAGE>
anti-takeover law enacted in 1988. In general, the law prohibits a Delaware
public corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three (3) years after the date of the transaction
in which the person became an interested stockholder, unless it is approved in a
prescribed manner. As a result of Section 203, potential acquirors of the
Company may be discouraged from attempting to effect acquisition transactions
with the Company, thereby possibly depriving holders of the Company's securities
of certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions. See "Description of
Securities."
28. Inexperience of Representative. This is the ___ public offering
underwritten by VTR Capital, Inc. There can be no assurance that the
Representative's limited experience as an underwriter of public offerings will
not adversely affect the proposed public offering of the Company's securities,
the subsequent development of a trading market, if any, or the market for and
liquidity of the Company's securities. Therefore, purchasers of the securities
offered hereby may suffer a lack of liquidity in their investment or a material
diminution of the value of their investment.
26
<PAGE>
USE OF PROCEEDS
This Registration Statement covers the offering of 325,000 Units, 300,000
of which are being offered by the Company, and 25,000 of which are being offered
by the Unit Holder. The net proceeds to the Company from the sale of the 300,000
Units are estimated to be $2,010,000 (after deducting approximately $300,000 in
underwriting discounts, and other expenses of this Offering estimated to be
$690,000, which includes the Representative's non-accountable expense allowance
of $90,000, and a $100,000 financial consulting fee payable to the
Representative at the closing) (but not considering any exercise of the
Over-Allotment Option, or the Representative's Unit Purchase Option). The
Company, based upon all currently available information, intends to utilize such
proceeds approximately as follows:
Approximate Approximate
Amount of Net Percentage(%) of
Proceeds Net Proceeds
------------- ----------------
Acquisition of Assets of Artisan
House, Inc. (1) $1,535,000 76.3%
Repayment of Certain Indebtedness (2) 260,000 12.9%
Working Capital (3) 215,000 10.7%
---------- ------
Total $2,010,000 100.0%
(1) Represents a partial payment, of $1,535,000, which will be financed by the
public offering, of the total purchase price to be paid to close the
Artisan House Transaction. In addition, to the foregoing, the Company
intends to use approximately $700,000 from the proceeds of the sale of the
Series C Non-Voting Convertible Preferred Stock to fund the remainder of
the purchase price to close the Artisan House Transaction. See
"Business-Artisan House Transaction."
(2) Represents the repayment of Bridge Loans in the aggregate principal amount
of $250,000 plus accrued and unpaid interest. The Bridge Loans were made by
nine (9) unaffiliated parties. The Bridge Loans are due and payable upon
the earlier of March 1997 or the closing of the Company's initial public
offering and bear interest at the rate of 8% per annum. The proceeds of the
Bridge Loans were used for working capital and as a source of funds to pay
expenses associated with this Offering. See "Bridge Financing" and See
"Certain Transactions."
(3) To be used for general operating and overhead expenses and the funding of
inventory.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to increase its annual revenues through the expansion of its business
and development of product lines. As a result, the Company believes that the net
proceeds of this Offering, together with increased revenues generated from
operations, will be sufficient to conduct the Company's operations for at least
twelve (12) months. The terms of the underwriting agreement between the
27
<PAGE>
Company and the Representative restrict the Company from entering into any
acquisition or merger of the Company or obtaining additional capital financing,
without the prior approval of the Representative, for the issuance of additional
equity securities for a period of five (5) years, in either public or private
offerings. The underwriting agreement does not prevent the Company from seeking
bank financing although there can be no assurance that such financing will be
available on commercially reasonable terms. See "Risk Factors - Dependence on
Offering Proceeds; Possible Need for Additional Financing."
To the extent that the Company's expenditures are less than projected
and/or the proceeds of this Offering increase as a result of the exercise of the
Class A Warrants or by the Representative of its Over-Allotment Option, the
resulting balances will be retained and used for general working capital
purposes. Conversely, to the extent that such expenditures require the
utilization of funds in excess of the amounts anticipated, additional financing
may be sought from other sources, such as debt financing from financial
institutions, although there can be no assurance that such additional financing,
if available, will be on terms acceptable to the Company. See "Risk Factors -
Dependence on Offering Proceeds; Possible Need For Additional Financing." The
net proceeds of this Offering that are not expended immediately may be deposited
in interest bearing accounts, or invested in government obligations or
certificates of deposit.
28
<PAGE>
DILUTION
At June 30, 1996, the Company had outstanding an aggregate of 2,625,000
shares of Common Stock having an aggregate net tangible book value of $2,198,891
or $.84 per common share, based upon operating activity through June 30, 1996.
Net tangible book value per share consists of total assets less intangible
assets and liabilities, divided by the total number of shares of Common Stock
outstanding. The shares of capital stock described above do not include any
securities subject to outstanding warrants or options.
After giving effect to the sale of 300,000 Units consisting of 600,000
shares of Common Stock and 300,000 Class A Warrants by the Company (assuming no
value is attributable to the Class A Warrants and the 100,000 shares to be
issued in connection with the closing of Artisan House Transaction) with net
proceeds of $2,010,000, the pro forma net tangible book value of the Common
Stock would have been $4,208,891 or approximately $1.31 per share. This
represents an immediate increase in pro forma net tangible book value of $.47
per share to the present stockholders and an immediate dilution of $3.69 per
share (73.8%) to the public purchasers. The following table illustrates the
dilution which investors participating in this Offering will incur and the
benefit to current stockholders as a result of this Offering:
As
As Adjusted
Adjusted(6) Pro Forma(5)
----------- ------------
Public offering price of per share
offered hereby(l)(4) $ 5.00 $ 5.00
Net tangible book value per share $ .84 $ .49
Increase per share attributable to
units offered hereby $ .47 $ .52
Pro Forma net tangible book value
per share after offering(3) $ 1.31 $ 1.01
Dilution of net tangible book value per
share to purchasers in this offering(2)(3) $ 3.69 $ 3.99
- ----------
(1) Before deduction of underwriting discounts, commissions, fees and offering
expenses.
(2) Assuming no exercise of the Over-Allotment Option, the Representative's
Unit Purchase Option or Class A Warrants. See "Underwriting" and
"Description of Securities."
(3) Assuming no exercise of the 3,000,000 Class A Warrants issuable in
connection with Bridge Loans. See "Selling Security Holders" and "Certain
Transactions."
(4) The Units offered hereby are comprised of two (2) shares of Common Stock
and one (1) Class A Warrant. No portion of the offering price per Unit
price has been assigned to the Class A Warrants.
(5) Gives effect to both the offering and the acquisition of Artisan House,
Inc.
(6) Gives effect to the Offering but not the acquisition of Artisan House, Inc.
29
<PAGE>
The following table shows the number and percentage of shares of Common
Stock purchased and acquired and the amount and percentage of consideration and
average price per share paid by existing stockholders as of June 30, 1996 and to
be paid by purchasers pursuant to this Offering (based upon the anticipated
public offering price of $10.00 per Unit before deducting underwriting discounts
and commission and estimated Offering expenses).
<TABLE>
<CAPTION>
Shares of Aggregate
Common Cash Percent of
Stock Percent of Consideration Total cash Average Price
Purchased Equity Owned Paid Consideration Per Share
<S> <C> <C> <C> <C> <C> <C>
New Stockholders 600,000 18.6% $3,000,000 96.7% $5.00
Existing Stockholders(1) 2,625,000 81.4% $ 103,000 3.3% $0.04
---------- ------------ ------------- ------------- -------------
Total 3,225,000 100% $3,103,000 100%
</TABLE>
The foregoing table gives effect to the sale of the Common Stock and Class
A Warrants underlying the Units offered hereby but without giving effect to the
exercise of the Representatives' Unit Purchase Option, or any securities
issuable upon the exercise of the Over-Allotment Option or any outstanding
options or warrants, including those held by the Bridge Lenders.
(1) Excludes 3,000,000 shares of Common Stock issuable upon exercise of Class A
Warrants by the Bridge Lenders at an exercise price of $4.00 per share.
30
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and as adjusted gives effect to the sale of 300,000 Units consisting of
Common Stock and Class A Warrants offered hereby and the application of net
proceeds therefrom. The table is not adjusted to give effect to the exercise of
the Over-Allotment Option, the Class A Warrants, the Representative's Unit
Purchase Option or any other outstanding warrants or options. This table should
be read in conjunction with the Financial Statements of the Company, including
the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
As of June 30, 1996 As of June 30, 1996,
($) As Adjusted(1)(2)
($)(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes Payable 192,850 1,309,462
Stockholders Equity:
Common Stock 262 332
Series A Convertible Preferred 50 50
Stock, $.0001 par value per share,
5,000,000 shares authorized,
500,000 shares of Series A
Convertible Preferred Stock
issued and outstanding
-------- 2,000
Series B Non-Convertible
Preferred Stock, $.0001 par value
per share, 20,000,000 shares
authorized, issued and
outstanding.
Series C Non-Voting Convertible
Preferred Stock, $.0001 par value 824,000
per share, 1,000,000 shares
authorized, 109,867 shares issued
and outstanding
Additional Paid In Capital 1,918,988 4,179,260
Retained Earnings (deficit) (345,751) (370,751)
Unrealized Gain on Investment 700,000 700,000
Total Capitalization 2,466,399 6,644,353
- --------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) Adjusted to reflect the closing of the Artisan House Transaction.
(2) Adjusted to reflect the sale of 300,000 Units offered hereby and the net
proceeds therefrom of $2,010,000.
(3) Includes equity financing for Series C Non-Voting Convertible Preferred
Stock of $824,000 received in August and September 1996. See "Certain
Transactions."
31
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. Holders of the Company's Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock are not entitled to receive dividends. The
Company has not in the past and does not currently anticipate the declaration or
payment of any dividends in the foreseeable future. The Company intends to
retain earnings, if any, to finance the development and expansion of its
business. Future dividend policy will be subject to the discretion of the Board
of Directors and will be contingent upon future earnings, if any, the Company's
financial condition, capital requirements, general business conditions and other
factors. Therefore, there can be no assurance that any dividends of any kind
will ever be paid.
BRIDGE FINANCING
In March 1996, the Company borrowed an aggregate of $250,000 from nine (9)
lenders ( the "Bridge Lenders") whom were previously unaffiliated with the
Company. In exchange for making loans to the Company, each Bridge Lender
received a promissory note (the "Bridge Notes"). Each of the Bridge Notes bears
interest at a rate of eight percent (8%) per annum. The Bridge Notes are due and
payable upon the earlier of (i) March 18, 1997 or (ii) the closing of an initial
underwritten public offering of the Company's securities. The Company intends to
use a portion of the proceeds of this Offering to repay the Bridge Lenders. See
"Use of Proceeds." In addition, the Bridge Lenders were issued the right to
receive commencing on the Effective Date an aggregate of 3,000,000 Class A
Warrants, pro rata, based upon the principal amount of the Bridge Loan made to
the Company. The Company entered into the bridge financing transactions because
it required additional financing and no other sources of financing were
available to the Company at that time. Further, the Company agreed to register
the Class A Warrants as well as the shares of Common Stock issuable upon
exercise of the Class A Warrants in the first registration statement filed by
the Company following the date of the loan. Therefore, the Registration
Statement, of which this Prospectus forms a part, relates to the resale of
3,000,000 Class A Warrants issuable to the Bridge Lenders and the shares of
Common Stock issuable upon the exercise thereof. Certain of the Bridge Lenders
were introduced to the Company by the Representative. No remuneration or other
consideration was paid to the Representative for such introduction. See "Selling
Securityholders", "Certain Transactions" and "Underwriting."
32
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected historical financial data for the period ended June 30, 1996
and for the period ended March 31, 1996 presented below are derived from the
unaudited pro forma combined financial statements and the historical financial
statements of the Company. The data set forth below should be read in
conjunction with and is qualified in its entirety by the Company's financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Financial Statements," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following summary financial information has been summarized
from the Company's financial statements included elsewhere in this Prospectus.
The information should be read in conjunction with the financial statements and
the related notes thereto See "Financial Statements."
Summary Statement of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
As of June As of June 30, As of March As of March
30, 1996 1996, As 31, 1996, (4) 31, 1996, As
($)(1) Adjusted(1)(2)(3) Adjusted(3)
($) (4)(5)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ---- 1,386,976 ---- 4,809,422
Gross Profit ---- 647,262 ---- 2,213,039
Operating Income (Loss) (138,851) (32,614) (100,000) 99,448
Net (Loss) (246,001) (176,765) (99,750) (20,054)
Net (Loss) per share (.04) (.03) (.02) (---)
Weighted Average number of 5,625,000 5,725,000 5,625,000 5,725,000
Common Shares outstanding
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Summary Balance Sheet Data
- --------------------------------------------------------------------------------
At June 30, 1996 At June 30, 1996, As
($) Adjusted(2) ($)
- --------------------------------------------------------------------------------
Working Capital (deficit) (216,109) 1,740,297
Total Assets 2,574,399 7,172,572
Total Liabilities 300,850 1,837,681
Stockholder's Equity 2,273,549 5,334,891
- --------------------------------------------------------------------------------
- ----------
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(1) Includes results for the three months ended June 30, 1996 for Decor Group,
Inc.
(2) Adjusted to reflect the closing of the Artisan House Transaction and
adjusted to reflect the sale of 300,000 Units offered hereby and the net
proceeds therefrom of $2,010,000 and preferred stock sale for $824,000.
(3) Includes results for the three months ended June 30, 1996 for Artisan
House.
(4) Includes results for the period March 1, 1996 (Inception) through March 31,
1996 for Decor Group, Inc.
(5) Includes results for the fiscal year ended
January 31, 1996 for Artisan House.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996.
The primary activities of Decor prior to the acquisition of Artisan House, Inc.
["Artisan"] have been investing and financing activities [See "Liquidity and
Capital Resources"]. In March of 1996, the Company entered into an Asset
Purchase Agreement to acquire Artisan House, Inc. for approximately $3,526,400,
subject to certain adjustments. Artisan is engaged in the manufacture,
marketing, selling and distribution of wall hanging sculptures.
As a result of negotiations between the Company and Interiors, Inc.
("Interiors"), on March 3, 1996, the Company issued to Interiors, Inc., 500,000
shares of Series A Non-Voting Convertible Preferred Stock and an option to
purchase 20,000,000 shares of Series B NonConvertible Voting Preferred Stock at
an exercise price of $.0001 in exchange for the issuance by Interiors to the
Company of 200,000 shares of Common Stock with a market closing price of
$600,000 and 200,000 shares of Series A Convertible Preferred Stock with a
market closing price of $1,200,000. The issuance of options instead of stock was
done at the request of Interiors, Inc. The valuation of the investment in both
classes of Interiors, Inc.'s securities approximated 89% of market closing price
at the time of issuance. Accordingly, aggregate fair value on the investment
approximates carrying value. As disclosed at note 11(A) on May 28, 1996 the
Company entered into a management agreement with Interiors, Inc. whereby
Interiors, Inc. will provide to the Company certain marketing and management
services. The exchange of shares between the Company and Interiors described
above is pursuant to the Company's intentions to ensure the ongoing and
long-term availability of these services. It is the Company's intention to
maintain a long-term position in its investment in Interiors. As of June 30,
1996, the per share closing market price of Interiors's Common Stock and Series
A Convertible Preferred Stock was $4.25 and $7.25, respectively. Accordingly,
gross unrealized holding gains of $250,000 and $450,000 exist of June 30, 1996
for the Common Stock and Series A Convertible Preferred Stock, respectively.
Following the proposed public offering, Interiors will own approximately 88.3%
if the total voting stock outstanding assuming the exercise of the options to
purchase 20,000,000 shares of Class B Preferred Stock and conversion of 500,000
shares of the Series A Preferred Stock. Such ownership is consistent with the
Company's intentions stated above as well as the provision by Interiors, Inc.,
of additional equity contributions disclosed at Note 11E.
On August 9, 1996, the Company agreed to issue to Interiors, Inc. 56,667
shares of Series C Non-Voting Convertible Preferred Stock in exchange for a cash
subscription payment of $425,000. On August 24, 1996, the Company agreed to
issue an additional 37,500 shares of Series C Non-Voting Convertible Preferred
Stock in exchange for cash subscription of $281,250. In September 1996, the
Company agreed to issue 15,700 shares of Series C Preferred Stock to Interiors
in exchange for the payment of $117,750.
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Artisan House, Inc. for the fiscal year ended January 31, 1996
Results of Operations
Artisan had income before provision for pro forma income taxes for the
years ended January 31, 1996 and 1995 of $451,083 and $330,517, respectively.
The net sales for Artisan House, Inc. for the years ended January 31, 1996
and 1995 were $4,809,422 and $3,994,909, respectively, an increase of
approximately $800,000 or 20%. Sales increased because of the general acceptance
by the marketplace of new products such as "Casablanca", Norman Rockwell scenes,
and musical scenes. In addition, sales to large catalog houses increased during
the current period.
Artisan's selling, general and administrative expenses for the years ended
January 31, 1996 and 1995 were $1,684,591 and $1,464,224, respectively, an
increase of approximately $220,000 or 15%. Increases in selling, general and
administrative expenses were largely due to increased expenditures for
advertising, to support new product introductions, and increased commissions
resulting from sales increases.
Artisan's interest expense for the years ended January 31, 1996 and 1995
was approximately $84,000 and $68,000, respectively. Interest expense increased
because of the addition of an equipment lease for computer equipment and an
automobile lease for an Artisan House manager.
Liquidity and Capital Resources
Artisan House, Inc. at January 31, 1996 had working capital of
approximately $400,000. During the years ended January 31, 1996 and 1995,
Artisan generated cash of approximately $132,000 and $208,000, respectively,
from operations. During the years ended January 31, 1996 and 1995, Artisan
purchased equipment for approximately $17,000 and $67,000, respectively. During
the years ended January 31, 1996 and 1995, Artisan repaid officers' loans of
$58,313 and $19,342, respectively, and repaid notes payable of $42,359 and
$67,063, respectively. At January 31, 1996, Artisan House's cash balance was
$96,771.
Decor Group, Inc.
Results of Operations for the period March 1, 1996 (Inception) to March 31, 1996
For the month ended March 31, 1996, Decor Group, Inc. generated a loss before
income taxes of $99,750.
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Liquidity and Capital Resources
Decor had positive working capital of $69,550 at March 31, 1996. The
Company utilized $98,000 from operations for the period March 1, 1996 through
March 31, 1996. This largely was due to activities relating to the acquisition
of Artisan House, including expenditures for accounting and legal due diligence,
as well as out-of-pocket expenses relating thereto. Investing activities
required the use of $200,000 for this same period. Of this amount, $150,000 was
a partial payment for the acquisition of Artisan House. The balance of $50,000
related to a note due from an affiliate which was collected subsequent to the
March 31, 1996. The Company generated $345,000 in cash from financing activities
from the period March 1, 1996 through March 31, 1996 resulting from the sale of
stock to the founders of the Company with cash proceeds of $95,000 (balance of
$8,000 received in May 1996) and proceeds from bridge loans of $250,000.
Artisan House, Inc.
Results of Operations for the five months ended June 30, 1996
Artisan had pro forma net income for the five months ended June 30, 1996 of
$170,780.
The net sales for Artisan House, Inc. for the five months ended June 30,
1996 were $2,310,976 and $1,904,832, respectively, an increase of approximately
$400,000 or 21%. Sales increased because of the general acceptance by the
marketplace of new products such as "Casablanca", Norman Rockwell scenes, and
musical scenes. In addition, sales to large catalog houses increased during the
current period.
Artisan's selling, general and administrative expenses for the five months
ended June 30, 1996 and 1995 were $764,625 and $648,671, respectively, an
increase of approximately $116,000 or 18%. Increases in selling, general and
administrative expenses were largely due to increased expenditures for
advertising, to support new product introductions, and increased commissions
resulting from sales increases.
Artisan's interest expense for the five months ended June 30, 1996 and 1995
was approximately $28,000 and $26,000, respectively. Interest expense increased
because of the addition of an equipment lease for computer equipment and an
automobile lease for an Artisan House manager.
Liquidity and Capital Resources
Artisan House, Inc. at June 30, 1996 had working capital of approximately
$684,000. During the period, Artisan generated cash of approximately $64,000 and
$85,000, respectively, from operations. During the five months ended June 30,
1996 and 1995, Artisan purchased equipment for approximately $2,000 and $9,000,
respectively. During the five
37
<PAGE>
months ended June 30, 1996, Artisan made repayments on officers' loans of
$270,360 and $11,606, respectively, and repaid notes payable of $64,332 and
$14,429, respectively. At June 30, 1996, Artisan House's cash balance was
$37,876. See Note B to Pro Forma Financial Statements.
Decor Group, Inc.
Results of Operations for the three months ended June 30, 1996.
The Company generated a loss before income taxes of $246,001.
Liquidity and Capital Resources
At June 30, 1996, Decor had a working capital deficit of $216,109.
Unamortized bridge loan liabilities, together with expenses accrued in the
finalization of the asset Purchase Agreement (see "Business-General") exceeded
cash and related party receivables by this amount. For the three months ended
June 30, 1996, the Company used $30,601 for operating activities. The Company
incurred approximately $126,000 in fees and expenses relating to the Asset
Purchase Agreement (see "Business-General"), of which $30,851 was paid at June
30, 1996, comprising the primary cause of the operating use of cash for the
period. For the three months ended June 30, 1996, investing activities generated
additional cash of $35,000, due to proceeds of $50,000 from a note with a
related party, partially offset by the payment of $15,000 as an extension
payment to the seller of Artisan House, Inc. For the three months ended June 30,
1996, financing activities required the use of $31,158, caused by the generation
of deferred offering costs of $74,658, partially offset by proceeds of $8,000
from the sale of common stock an $35,500 from stockholder loans. The cash
balance at June 30, 1996 was 20,241.
The Company anticipates that the net proceeds from the proposed public
offering will generate approximately $2,010,000. The proceeds are primarily
intended to finance the purchase of Artisan House, and for working capital
needs.
In March 1996, the Company issued to Interiors, Inc. 500,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B NonConvertible Voting Preferred Stock in exchange for Interiors, Inc.
issuing to the Company 200,000 shares of Common Stock valued at $600,000 and
200,000 shares of Series A Convertible Preferred Stock valued at $1,000,000.
[See Note 8].
In May 1996, the Company entered into a management agreement with
Interiors, Inc. which specializes in the home furnishings and decorative
accessories industries. The agreement calls for a management fee to Interiors of
$75,000 or 1.5% of gross sales, whichever is greater, per annum. The management
fee will be accrued quarterly and paid quarterly to the extent that there is
excess cash flow available to the Company. Excess cash
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<PAGE>
flow is defined in the agreement to mean cash flow from operations adjusted to
reflect changes in working capital, interest payments, principal repayments and
capital expenditures. No payment in any quarter will exceed 50% of excess cash
flow as defined. The agreement has a term of two years with renewal options at
the mutual consent of both parties [See Note 8].
In June 1996, the Company entered into an employment contract with the
President of the Company for which an initial base salary of approximately
$117,000 will take effect upon the close of the acquisition of Artisan House.
On May 31, 1996, the Company received a commitment letter for a revolving
credit agreement for a maximum loan amount of $1,100,000. The agreement requires
the satisfaction of a number of conditions prior to funding including the
completion of a due diligence review. The terms of the loan include an annual
interest rate of prime plus 4%, a management fee of 3% of sales, a security
interest in all of the Company's accounts receivable, inventory, and equipment,
and any proceeds therefrom, a guaranty of the Company's Chairman of the Board,
and a prepayment fee of $25,000 in the event of a prepayment. In the event that
the Company is unable to satisfy such conditions, the Company will not receive
the proceeds from such loan. Subsequent to the Offering contemplated herein, the
Company will have sufficient funding to complete the transaction without the
benefit of the proceeds from the Secured Loan.
Management believes that the proceeds of the Offering and the other
transactions contemplated herein will provide the Company with sufficient
capital to fund ongoing operations for at least 12 months from the Effective
Date. Management believes that capital requirements relating to research and
development and capital expenditures will be met by funds derived from
operations.
39
<PAGE>
BUSINESS
General
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"), was
incorporated in March 1996. Artisan Acquisition Corporation, a Delaware
corporation wholly owned by the Company ("AAC"), was incorporated in March 1996
for the purpose of entering into an Asset Purchase Agreement with Artisan House,
Inc. ("Artisan House") pursuant to which AAC has agreed to purchase
substantially all of the operating assets, and assume certain liabilities, of
Artisan House (the "Artisan House Transaction") for an aggregate purchase price
of $3,626,400, subject to certain adjustments. The Company anticipates closing
the Artisan House Transaction prior to, or contemporaneously with, the closing
of this Offering. Unless otherwise indicated, references made hereinafter to the
Company include AAC and Artisan House. See "Business Acquisition of Artisan
House."
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing and marketing of metal wall, table and
freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400. The
primary goal of the Company is to supply a broad spectrum of design driven
sculpture and decorative accessories at moderate prices.
Artisan House markets its products through a network of independent
commissioned sales representatives, both domestically and internationally, as
well as through strategically located showrooms servicing the home furnishing
and decorative accessory industries. Artisan House has permanent showrooms
located in High Point, NC and San Francisco, CA that are leased and controlled
by the Artisan House, as well as sales representative showrooms in Atlanta and
Dallas.
Artisan House's typical customers include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Levitz and Wickes, and catalogue houses. For the fiscal
year ended June 30, 1996, sales to Sears, JC Penny, Levitz and Wickes
represented 5.1%, 4.3%, 8.6%, and 2.7%, respectively of total sales. See
"Business" and "Recent Developments."
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses. The
Company intends to capitalize on the fragmented nature of the supply side of the
home decorative accessory industry and the consolidation of such industry
through the acquisition of manufacturers and distributors of art-related
decorative accessories. Through such acquisitions, the Company intends to
increase the number and nature of products manufactured by the Company. Other
than the acquisition of Artisan House, there are no plans, arrangements, or
understandings with regard to potential acquisitions. It should be noted that
under certain circumstances acquisitions by the Company shall require the prior
written approval of the Representative.
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<PAGE>
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400. See "Risk
Factors" for a discussion of certain factors that should be considered in
evaluation the Company and its business.
Acquisition of Artisan House
On March 25, 1996, the Company's wholly-owned subsidiary, Artisan
Acquisition Co., ("AAC"), agreed to purchase substantially all of the assets
(the "Artisan House Transaction") and to assume certain of the liabilities of
Artisan House, Inc. ("AHI") pursuant to that certain Asset Purchase Agreement
(the "Agreement"), dated March 25, 1996, by and among AAC, the Company, AHI and
Henry Goldman ("Goldman"). AHI is engaged in the business of manufacturing,
marketing, selling and distributing wall hanging sculptures. The consideration
for the Artisan House assets to be purchased pursuant to the Agreement
(excluding the liabilities assumed by AAC) will be an aggregate of $3,526,400,
less the amount of cash reflected on the closing date balance sheet and retained
by AHI (the "Retained Cash Amount") and subject to adjustment if the net assets
of AHI are more then $835,000 or less than $750,000 (the "Balance Sheet
Adjustment") as set forth on a balance sheet to be delivered to AAC within
thirty days after the closing of the purchase (the "Closing"). The assets to be
purchased by AAC include (i) trade receivables; (ii) inventories; (iii) prepaid
expenses and (iv) intangible assets. It is currently anticipated that the
Retained Cash Amount and the Balance Sheet Adjustment will be approximately
$5,000 and approximately $160,000, respectively, subject to adjustment at
closing.
The consideration is to be satisfied by (i) the payment of $150,000 to AHI
which was paid on the date of execution of the Agreement; (ii) the payment of
$2,250,000 at the Closing (the "Cash Amount"); (iii) the delivery of a
promissory note issued by AAC in the principal amount of $926,400 less the
Retained Cash Amount and subject to the Balance Sheet Adjustment; and (iv) the
issuance of 100,000 shares of common stock of the Company (the "Shares") which
for purposes of the Agreement is valued at $200,000 (the fair market value
utilized in the pro forma statements herein values this component of the
Purchase Price at $300,000). With respect to the Note, $100,000 is payable
ninety days after the Closing without any payment of interest; $676,400 (subject
to the Balance Sheet Adjustment) is payable over a five year period in sixty
equal monthly installments, the first installment of which is due one hundred
twenty days after the Closing; and $150,000 is payable on the date on which the
last installment is paid as set forth above, without any payment of interest.
The Note is secured by a second security interest in the assets purchased
pursuant to the Agreement which is subordinate to a first priority security
interest, such first interest not to exceed 55% of the value of said assets from
time to time (subject to a minimum of 55% of the value of said assets on the
date of closing). In the event that the shares of the Company issuable to AHI
are worth less than $200,000 on the second anniversary of the Closing, AAC
shall, at its option, either pay the difference to AHI in cash or the Company
shall issue additional shares having a fair market value equal to such
difference to AHI. If the Company has not effected a public offering of its
common stock by said second anniversary, AHI can require that AAC or Decor
repurchase the shares for the sum of $200,000.
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<PAGE>
The Closing was originally scheduled for May 31, 1996. In exchange for the
payments of $15,000, in each of June, July and August, AHI agreed to extend the
Closing Date to August 30, 1996. These payments will reduce the Cash Amount of
the Purchase Price due by the Company at Closing. On September 10, 1996, the
Company, AAC, Goldman and AHI entered into in Amendment No. 1 to the Agreement
("Amendment No. 1"). Amendment No. 1 contemplates that the Closing shall occur
immediately prior to, or contemporaneously with, the Company's initial public
offering, but in no event later than October 30, 1996. In exchange for such
extension, the Company has agreed to pay $40,000 which will reduce the Cash
Amount of the Purchase Price and to amend Mr. Goldman's employment agreement as
described in the following paragraph. It also contemplated that prior to the
Effective Date, the Company and Artisan House will execute and deliver all
documents necessary to consummate the Transaction. Such documents will then be
held in escrow pending delivery of the Cash Amount and the Shares. It is
anticipated that the Cash Amount and the Shares will be delivered
contemporaneously with the closing of this Offering. The Closing is subject to
AAC's due diligence investigation, which permitted AAC to terminate the
Agreement without penalty prior to April 8, 1996, if such investigation
disclosed any material change in AHI's business, operations or conditions or in
its assets, liabilities, net worth or properties. If the Agreement is terminated
prior to the Closing, (other than due to the fault of AHI or Goldman), AHI may
retain any payments made by AAC. The Agreement also contains restrictions on AHI
and Goldman from competing with AAC for a five year period after the Closing.
The Agreement further contains provisions relating to the confidentially of
information and the non-solicitation of suppliers and employees by AAC should
the transaction fail to close.
Any disputes are to be submitted to binding arbitration in Los Angeles,
California. Under the terms of Amendment No. 1, prior to bringing a legal action
against Goldman, AAC agreed to deposit an amount of not less than $25,000 with
Goldman's attorney for payment of reasonable, bona fide legal expenses incurred
by Goldman in connection with such action. In the event that the funds held by
Goldman's attorney are properly disbursed and the remaining balance falls below
$10,000, AAC shall deposit with Goldman's attorney, an amount so that the
existing balance and the amount deposited equals $25,000. If AAC fails to
forward such funds in a timely manner, AAC's claim against Goldman shall be
dismissed with prejudice. If AAC prevails in the legal action against Goldman,
Goldman shall pay to AAC the amount paid by AAC for Goldman's legal expenses
plus interest at the rate of 8% per annum.
The Agreement also provides that AAC enter into an Employment Agreement
with Goldman pursuant to which Goldman will be employed as the President and
Chief Executive Officer of AAC with (i) an annual salary of $75,000; (ii) a
signing bonus of $70,000, $30,000 of which is to be paid at Closing and $40,000
of which is to be paid in equal monthly installments of $3,333.33 during the
first year of the employment agreement, (iii) reimbursement of expenses incurred
by Mr. Goldman for lease and insurance payments with respect to his automobile,
(iv) an annual performance bonus equal to 1% of the Company's sales in excess of
those achieved by Artisan as of the Closing on an annualized basis, and (v) 2.5%
of the consideration paid by the Company in connection with an acquisition of an
unrelated third party introduced to the Company by Goldman. The Employment
Agreement also contains provisions protecting the confidential information of
AAC and restricting Goldman from competing with AAC. The Agreement further
42
<PAGE>
provides for AAC to lease facilities from Goldman and his wife for a five year
term, with an initial monthly rent of approximately $14,000. The Company
believes that the rent payable to Mr. Goldman is at or below the fair market
value for such premises.
Manufacturing
Artisan House manufactures substantially all of its sculptures and
decorative pieces at its facility in Glendale, California. Virtually all of
Artisan House's products are made of assorted metals, such as brass, bronze,
steel and aluminum which are then formed and hand finished. Artisan House's
manufacturing operations include customized proprietary metal fabrication
equipment, using tools, jigs and dies especially created for the Company.
Production also includes finishing, which involves hand painting and toning. The
Company has developed and installed a finishing process which uses proprietary
techniques and management believes the results of this process substantially
improves the appearance of the product.
The Company maintains an inventory of various metal such as brass, bronze
and stainless steel and other materials for use in its manufacturing processes.
The Company's tool and die inventory allows for the manufacturing of a broad
range of designs. These tools can be used to produce over hundreds of styles of
decorative wall sculptures.
No single outside manufacturer supplies 5% or more of the Company's raw
materials, and the Company's management is not aware at this time of any product
or manufacturer which the Company cannot replace with a comparable product from
an alternative manufacturer. See "Risk Factors."
Products
Artisan House products include metal wall, table and freestanding
sculpture. The Company's product styles range from contemporary to neoclassical,
from Americana to transitional. Artisan House also manufactures products based
on popular themes such as sports, music, and nostalgia. In addition, the Company
has several licensing programs pursuant to which Artisan House produces
sculptures with designs derived from Norman Rockwell images, the popular 1940's
movie entitled, "Casablanca" and RCA's Little Nipper. In total, Artisan House
produces hundreds of different styles within its product line.
License Agreements
The Company currently manufacturers products pursuant to license agreements
for (i) the cartoon character, "Betty Boop", (ii) the movie classic,
"Casablanca", (iii) the "Nipper Dog" (the RCA dog), and (iv) up to ten (10)
Norman Rockwell illustrations. Generally, all of the license agreements are
non-exclusive, permit sales in the United States and requires the Company to
make periodic royalty payments based upon revenues from the sale of licensed
works. The Company anticipates pursuing additional license agreements to assist
in expanding the Company's product line.
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Marketing
Artisan House markets its products through a network of independent
commissioned sales representatives. Domestically, the Company has twenty-two
(22) commissioned sales representatives. Internationally, the Company has
distributors in Taiwan, Australia, the Untied Kingdom, France, Belgium, and
Holland. In addition, the Company has non-exclusive representation in the Middle
East, Japan and parts of Europe. Artisan House has permanent showrooms located
in High Point, NC and San Francisco, CA that are leased and controlled by the
Company, as well as sales representative showrooms in Atlanta and Dallas. These
showrooms are strategically located in an effort to efficiently service the home
furnishing and decorative accessory industries.
Suppliers
Substantially all of the products sold by the Company are manufactured by
the Company in its facility in Los Angeles, California. The Company purchases
metal and other materials from a wide variety of sources, and has at least two,
and often more, suppliers for each item used in its manufacturing process, and
is not dependent upon any one supplier. The Company currently purchases from a
vendor base of more than 150 suppliers. While there are many suppliers of most
materials, the Company has chosen to limit the majority of its purchases to the
one or two vendors with whom it has developed long-term relationships. The
Company generally does not need to enter into contracts with its suppliers as
most merchandise is readily available from multiple sources.
The suppliers for those decorative accessory products which are not
manufactured by the Company include items such as marble, glass, mirror, and
wood. The Company does not currently purchase 5% or more of any of its products
from any one outside supplier. Products purchased from suppliers are produced
exclusively for the Company and therefore are not commonly available. Management
does not anticipate that significant capital expenditures will be required in
the near future.
Competition
The sculpture and decorative accessory industry in the United States is
highly fragmented and consists primarily of small, local manufactures and
assemblers. Only a few companies are basic manufacturers of metal wall hangings
and sculptures. However, there can be no assurance that the Company's position
in this industry will continue.
Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors and management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Artisan House.
The Company believes that its competitive advantage lies in its ownership
of a substantial
44
<PAGE>
number of models, tools, jigs and dies and its continuing ability to manufacture
quality products. Management also believes that the Company is further protected
by what the Company considers to be its excellent reputation with its customer
base and management's estimation that the cost to build tools, jigs, dies and
molds, make the entry of meaningful competition extremely difficult. Management
also believes that it would be difficult to establish a trained work force of
skilled crafts people. However, there can be no assurance that such assets will
continue to afford the Company any competitive advantage. See
"Business-Manufacturing."
Relationship with Interiors, Inc.
As a result of negotiations between the Company and Interiors, Inc.
("Interiors"), on March 3, 1996, the Company issued to Interiors, Inc., 500,000
shares of Series A Non-Voting Convertible Preferred Stock and an option to
purchase 20,000,000 shares of Series B NonConvertible Voting Preferred Stock at
an exercise price of $.0001 (the "Series B Option") in exchange for the issuance
by Interiors to the Company of 200,000 shares of Common Stock with a market
closing price of $600,000 and 200,000 shares of Series A Convertible Preferred
Stock with a market closing price of $1,200,000. The issuance of options instead
of stock was done at the request of Interiors, Inc. In September 1996, Interiors
exercised the Series B Option and currently holds 20,000,000 shares of Series B
Preferred Stock.
Following this Offering, Interiors will own (i) 500,000 shares of the
Company's Series A Preferred Stock (non-voting shares), (ii) 20,000,000 shares
of Series B Preferred Stock and (iii) 109,867 shares of Series C Preferred
Stock, representing 88.3% of the total voting stock outstanding (based upon
3,225,000 shares of Common Stock outstanding and assuming conversion of 500,000
shares of Series A Preferred Stock). Since holders of Series B Preferred Stock
and Common Stock do not have any cumulative voting rights and directors are
elected by a majority vote of the voting shares outstanding, Interiors is in a
position to control the election of directors as well as the affairs of the
Company. Notwithstanding the foregoing, Interiors has entered into a voting
trust agreement with the Company's Board of Directors, pursuant to which the
Board shall have the right to vote the 20,000,000 shares of Series B Preferred
Stock held by Interiors until December 31, 1997. In addition, Max Munn, a member
of the Company's Board of Directors is also the President and director of
Interior's Board of Directors.
In May 1996, the Company entered into a two year Management Services
Agreement with Interiors. Interiors has, pursuant to such agreement, agreed to
advise the Company on the manufacturing, sale, marketing and distribution of the
Company's products as well as providing the Company accounting and
administrative services and strategic planning with regard to joint ventures,
acquisitions, and other long term business initiatives. In exchange for such
services, the Company has agreed to pay to Interiors an annual amount equal to
the greater of (i) $75,000 or (ii) 1 1/2% of Excess Cashflow (as defined in the
agreement). The Management Services Agreement is automatically renewable for an
additional one (1) year term unless terminated by either party not less than
sixty (60) days prior to the end of the term may be terminated by the Company or
Interiors upon sixty (60) days prior written notice. The Company believes that
Interiors has the management expertise and personnel available to perform its
obligations
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<PAGE>
under the Management Services Agreement. However, in the event that the
Management Services Agreement is terminated for any reason, the Company's
business may be negatively effected. In such an event, the Company may be
required to hire additional personnel or engage one or more independent
contractors at an added cost to the Company. See "Certain Transactions."
Secured Loan Agreement
On May 31, 1996, the Company received a commitment from United Credit
Corporation ("UCC"), pursuant to which UCC has agreed to loan to the Company up
to an aggregate amount of $1,100,000 (the "Secured Loan") under a revolving
credit arrangement (the "Secured Loan Agreement"). UCC has agreed to fund the
Loan upon completion of its due diligence review. The terms of the Secured Loan
include (i) an annual interest rate of the prime rate, plus 4%, (ii) a
collateral management fee of 3% of sales, (iii) a security interest in all of
the Company's accounts receivable, inventory and equipment, and any proceeds
therefrom, (iv) a guaranty of the Company's obligations by Max Munn, the
Company's Chairman of the Board, Laurie Munn, the wife of Max Munn, Interiors,
Inc. and Italia Collection, Inc., a wholly owned subsidiary of Interiors, (v) a
prepayment fee of $25,000 in the event of a prepayment and (vi) a borrowing base
to be agreed upon by the parties.
Trademark Protection
The trademarks "Artisan House", "C. Jere", "Sautere", and "Glendale
Ironworks" have been registered with the United States Patent and Trademark
Office ("PTO"). The Company presently intends to make all appropriate filings
and registrations and take all other actions necessary, to protect all of its
intellectual property rights. There can be no assurance, however, that the
Company will be able to effectively protect such property rights. The failure by
the Company to protect such rights from unlawful and improper appropriation may
have a material adverse effect on the Company. Although to date no claims have
been brought against the Company alleging that it infringes on the intellectual
property rights of others, there can be no assurance that such claims will not
be brought against the Company in the future, or that if made, such claims will
not be successful. In addition to any potential monetary liability for damage,
the Company could be required to obtain a license in order to continue to use
the trademarks in question or could be enjoined from using such trademarks if
such license were not made available on acceptable terms. If the Company becomes
involved in such litigation, it may divert significant Company resources, which
could have a material adverse effect on the Company and its results or
operations, and, if such a claim were successful, the Company's business could
be materially adversely affected.
Research and Development
The Company continually seeks to develop additional designs and related
tooling. The Company estimates that it expends approximately $100,000 per annum
on such activities. So long as the Company generates sufficient cash flow, the
Company expects to continue to increase its expenditures for product development
as it expands its in-house manufacturing to expand its
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<PAGE>
finishing and fabrication capabilities. However, there can be no assurance that
such product development will yield profitable growth.
Government Regulation
The Company's operations are subject to numerous Federal, state and local
laws and regulations relating to the environment and health safety and other
regulatory matters. Certain materials used in the manufacturing of the Company's
products such as paints, solvents and other water-based related finishes may be
classified by Federal and certain state and local governments as "hazardous
materials." Control of those substances is regulated by the Environmental
Protection Agency ("EPA") and certain state and local environmental protection
agencies which require reports and inspect facilities to monitor compliance. In
addition, under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), any generator of hazardous waste sent to a hazardous
waste disposal site is potentially responsible for the clean up and remediation
costs required for such site in the event that the site is not properly closed
by the owner or operator, irrespective of the amount of waste sent to the site.
The Company's manufacturing facilities have been and will continue to be
inspected by the Occupational Safety and Health Administration and by certain
state and local inspection agencies and departments. The Company has obtained
all permits and anticipates that its facilities and operations will be in
substantial compliance with all material applicable laws and regulations.
Nevertheless, no assurance can be given that the Company will be able to obtain
such permits in the future or that future events, such as changes in or modified
interpretations of existing laws or regulations or enforcement policies, may
give rise to additional compliance costs that could have a material adverse
effect on the Company.
Employees
As of March 31, 1996, the Company had a total of approximately 71 full-time
employees , 11 of whom are engaged in performing administrative functions, and
60 of whom are engaged in manufacturing and shipping. The Company and its
employees are not parties to any collective bargaining agreements. The Company
believes its relationship with all of its personnel is satisfactory.
Legal Proceedings
There are no legal proceedings pending, or to the Company's knowledge
threatened, against the Company.
Properties
The Company has its principal offices at 320 Washington Street, Mt. Vernon,
New York, where it has sub-leased approximately 500 square feet of
administrative offices from Interiors, Inc., a stockholder of the Company. The
Company's manufacturing and warehousing facilities and factory showroom are
located at 1755 Glendale Boulevard, Los Angeles, California in a 38,000 square
foot leased facility. The Company's lease with Henry Goldman on the Los Angeles
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facility expires five years following the date of closing of the Artisan House
Transaction. The Company has determined that there is substantial manufacturing
and warehousing space available in the vicinity if the Company were required to
expand or relocate some or all of its current facilities. However, there can be
no assurances that when the current sublease for the Company's principal
facility expires that the Company will be able to negotiate a renewal thereof on
acceptable terms or obtain alternative manufacturing and warehousing space on
terms acceptable to the Company.
The Company also operates two (2) leased showrooms, which are in San
Francisco, CA and High Point, NC.
The Company believes all of such facilities are adequate for its current
needs; however, there can be no assurance that the Company will be able to
obtain appropriate facilities on terms acceptable to the Company in the future.
MANAGEMENT
The names and ages of the Directors, executive officers and key personnel of the
Company are as follows:
Name Age Position(s) Held with the Company
Donald Feldman 58 President and Chief Financial Officer
Max Munn 51 Chairman of the Board
Matthew L. Harriton 32 Director
Michael Lulkin 41 Director and Secretary
Henry Goldman President and Chief Executive Officer of
Artisan Acquisition Corp.
Brief biographies of the Directors, executive officers, and key personnel
of the Company are set forth below. All Directors hold office until their
resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining Directors. Officers of
the Company serve at the will of the board of Directors.
Max Munn, has been the Chairman of the Board of Directors since the
Company's inception and was the President of the Company from inception until
May 9, 1996. Mr. Munn is currently President and Chief Executive Officer of
Interiors, and has been since September 1995. Mr. Munn has also been the
Executive Vice President-Operations and Secretary of
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Interiors, Inc., a principal stockholder of, and consultant to, the Company,
since February 1994 and a Director thereof since March 1994. He served as Vice
President of Interiors from May 1993 until September, 1995. From November 1990
to May 11, 1993, Mr. Munn served as a consultant to Interiors, Inc., as well as
a consultant directly and indirectly to Imperial Enterprises, Inc., a catalog
company in Japan, and the IEI Corporation, a direct marketer, in Princeton, NJ.
From 1981 to February 1990 he was Chairman, President and Chief Executive
Officer and from February 1990 to June 1990 he served as a consultant to
Collector's Guild International, Inc.. In June 1990 Collector's Guild filed a
petition for relief under the U.S. Bankruptcy Code and was subsequently
liquidated. Mr Munn is subject to a Consent Order entered by the FTC in
September 1991. See "Management - Consent Order." Mr. Munn holds a Bachelor of
Architecture from Massachusetts Institute of Technology and subsequently did
graduate level study in Art History at Columbia University.
Donald Feldman, has served as President and Chief Financial Officer of the
Company since May 31, 1996. From June 1, 1995 until the Effective Date of this
Offering he served as Vice President of Sales and Marketing for Interiors, Inc.,
a principal stockholder of, and consultant to, the Company and from December
1995 Mr. Feldman served as a director of Interiors. Commencing on the Effective
Date, Mr. Feldman will work for the Company on a full time basis. From April
1990 to May 1995, he served as Vice President of Sales and Marketing of Toyo
Trading Co. in Los Angeles, CA, a major importer and marketer of decorative
accessories. Previously, Mr. Feldman also served as Corporate Merchandise
Manager for Decorative Accessories for Sears Roebuck & Co.
Matthew L. Harriton, has served on the Company's Board of Directors since
March 1996 and as interim President of the Company from May 9, 1996 to May 31,
1996. Mr. Harriton has been the Chief Financial Officer of Embryo Development
Corporation since January 1996. Embryo Development Corporation is a public
company which trades on The Nasdaq SmallCap Market and which specializes in
developing and distributing medical devices. Prior to joining Embryo Development
Corporation, Mr. Harriton's professional experience included positions at CIBC
Wood Gundy Securities Corporation as an associate (from June 1994 to December
1995), Coopers & Lybrand as a senior associate (from December 1990 to May 1994),
and The First Boston Corporation as a senior accountant (from June 1986 to May
1988). Mr. Harriton has also served as a director of Perry's Majestic Beer, Inc.
since January 1996, a company involved in the microbrewery industry. He is a
graduate of Lehigh University and received his M.B.A. from Duke University's
Fuqua School of Business.
Michael Lulkin, has served on the Company's Board of Directors and as
Secretary of the Company since March 1996. Since May 1995, Mr. Lulkin has served
as the general counsel for PDK Labs, Inc., a manufacture of over-the-counter
pharmaceuticals which trades on The Nasdaq SmallCap Market. Prior to joining PDK
Labs, Mr. Lulkin was engaged in the private practice of law as a sole
practitioner for over 13 years. Mr. Lulkin also serves as a director and
Chairman of the Board of Directors of Embryo Development Corporation. Embryo
Development corporation is a public company which trades on The Nasdaq SmallCap
Market and which specializes in developing and distributing medical devices. He
graduated from State University of New York at Buffalo and received his J.D.
from Emory University School of Law.
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<PAGE>
Henry Goldman will serve, upon consummation of the acquisition Artisan
House, as the President and Chief Executive Officer of Artisan Acquisition
Corp., a wholly owned subsidiary of the Company. Mr. Goldman has been the
President and Chief Executive Officer of Artisan House since 1982.
There are no family relationships between the officers and directors of the
Company.
Consent Order
In September 1991, Mr. Munn, without admitting or denying the allegations,
agreed with the FTC to the entry of a Consent Order for Permanent Injunction for
Defendant Max Munn (previously defined as the "Consent Order") in an action
brought in the U.S. District Court for the Southern District of New York (90
CIV. 2554 (LMM)) against Collectors' Guild Ltd, Inc., Collectors' Guild, Mr.
Munn and J. Robert Leshufy which action arose out of the sale of certain
lithographs of original works of art. The Consent Order arose out of a complaint
alleging that Collectors Guild, and its officer, Mr. Munn, had made advertising
representations implying that the artist had played a substantial role in the
creation and production of the lithographs. Collectors Guild and Mr. Munn denied
the allegations. The case was settled before trial or discovery, solely with
entry of the above Consent Order. The Consent Order permanently enjoins Mr. Munn
from making certain false representations in connection with the promotion, sale
or offering for sale of any art works, from removing certain mandated
disclosures on certain art, and, for a period of five years, from destroying,
mutilating, altering, or disposing of any books, records, tapes, checks, and
other business records enumerated in the Consent Order in his possession or the
possession of any business entities directly or indirectly under Mr. Munn's
control for a period of three years after creation or receipt of such documents.
Mr. Munn is also required for a period of five years to notify the FTC of any
change in his residence or employment within 30 days of any change and must
permit FTC officials access to his office upon five days notice for inspection
purposes. The Consent Order extends to Mr. Munn, his successors, assigns,
agents, servants and employees, and all persons or entities in active concert or
participation with him who receive actual notice of the Consent Order and, in
part, to any business entities directly or indirectly under his control or in
which he owns a controlling interest, directly or indirectly.
Executive Compensation
No cash or other compensation was paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer or any of the other executive
officers of the Company since its formation. Each director of the Company is
entitled to receive reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors of the Company. The members of the Board of
Directors intend to meet at least quarterly during the Company's fiscal year,
and at such other times duly called.
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<PAGE>
Employment Agreement
The Company intends to enter into a three (3) year employment agreement
with Donald Feldman to be effective as of the Effective Date of this offering.
Mr. Feldman is the President and will continue to serve as the President of the
Company. The agreement will provide for Mr. Feldman to receive a salary of
$117,500 per annum and an annual bonus equal to two percent (2%) of the amount
by which the Company's net sales exceed the sales recorded by the Company for
the year ending June 30, 1997. In addition, Mr. Feldman will be granted options
to purchase 10,000 shares of Common Stock of the Company at an exercise price of
$2.50 per share for each full year of employment under the agreement. The
Company also agreed to reimburse Mr. Feldman for bona fide business expenses
including up to $400 a month for the use of an automobile and $200 a month for
insurance.
AAC, a wholly owned subsidiary of the Company, intends to enter into a
three (3) year employment agreement with Henry Goldman to be effective as of the
closing of the acquisition of Artisan House. Mr. Goldman will be employed as the
President and Chief Executive Officer of AAC with (i) an annual salary of
$75,000; (ii) a signing bonus of $70,000, $30,000 of which is to be paid at
Closing and $40,000 of which is to be paid in equal monthly installments of
$3,333.33 during the first year of the employment agreement, (iii) reimbursement
of expenses incurred by Mr. Goldman for lease and insurance payments with
respect to his automobile, (iv) an annual performance bonus equal to 1% of the
Company's sales in excess of those achieved by AHI for the twelve months ended
June 30, 1996, payable within 60 days after the end of AAC's fiscal year, with
the first and last payments being calculated pro rated basis, and (v) 2.5% of
the consideration paid by the Company in connection with an acquisition of an
unrelated third party introduced to the Purchaser, the Company, Interiors, or
any affiliate of them by Goldman. The Employment Agreement also contains
provisions protecting the confidential information of AAC and restricting
Goldman from competing with AAC. The Agreement further provides for AAC to lease
facilities from Goldman and his wife for a five year term, with an initial
monthly rent of approximately $14,000.
1996 Stock Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align employees with the interests of stockholders of the
Company by linking benefits to stock performance and to retain the services of
such employees, as well as to attract new key employees. In furtherance of that
purpose, the 1996 Plan authorizes the grant to executives and other key
employees of the Company stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The 1996 Plan is expected to provide flexibility to the Company's compensation
methods, after giving due consideration to competitive conditions and the impact
of federal tax laws. The Company anticipates that the
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<PAGE>
stockholders will be requested to approve the adoption of the 1996 Plan in the
near future.
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 500,000 shares. Shares
issuable under the 1996 Plan may be either treasury shares or authorized but
unissued shares. The number of shares available for issuance will be subject to
adjustment to prevent dilution in the event of stock splits, stock dividends or
other changes in the capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year no person may be granted under the 1996 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or capitalization of the
Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive stock
options" ("Incentive Options") within the meaning of Section 422 of the Code or
stock options which are not incentive stock options ("Non-Incentive Options"
and, collectively with Incentive Options, hereinafter referred to as "options").
The persons to whom Options will be granted, the number of shares subject to
each Option grant, the prices at which Options may be exercised (which shall not
be less than the fair market value of shares of common Stock on the date of
grant), whether an Option will be an Incentive Option or a Non-Incentive Option,
time or times and the extent to which Options may be exercised and all other
terms and conditions of options will be determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from the
date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined No Incentive Option may be
granted at any time after October 2005. Each Non-Incentive Option shall
terminate no later than ten (10) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the Fair Market
Value of shares of Common Stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% Stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or a parent or subsidiary of the Company ("10% Stockholder") shall in no
event be less than 110% of the Fair Market Value of the shares of the Common
Stock at the time the Incentive Option is granted. The term of an Incentive
Option granted to a 10% Stockholder shall not exceed five (5) years from the
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date of grant.
The exercise price of the shares to be purchased pursuant to each Option
shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares
of the Company's Common Stock owned by the option at the time of the exercise of
the Option (iii) in installments, payable in cash, if permitted by the Committee
or for any combination of the foregoing. The stock-for-stock payment method
permits an optionee to deliver one (1) or more shares of previously owned Common
Stock of the Company in satisfaction of the exercise price of subsequent
Options. The optionee may use the shares obtained on each exercise to purchase a
larger number of shares on the next exercise. (The foregoing assumes an
appreciation in value of previously acquired shares). The result of the
stock-for-stock payment method is that the optionee can generally avoid
immediate tax liability with respect to any appreciation in the value of the
stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option may
not be sold or otherwise disposed of for a period determined by the Board upon
grant of the Option, which period shall be not less than six (6) months nor more
than three (3) years from the date of acquisition of the shares (the "Restricted
Period"), except that, during the Restricted Period (i) the optionee may offer
the shares to the Company and the Company may, in its discretion, purchase up to
all the shares offered at the exercise price and (ii) if the optionee's
employment terminates during the Restricted Period (except in limited
instances), the optionee upon written request of the Company, must offer to sell
the shares to the Company at the exercise price within seven (7) business days.
The Restricted Period shall terminate in the event of a Change in Control of the
Company (as defined), or at the discretion of the Board. After the Restricted
Period, an optionee wishing to sell must first offer such shares to the Company
at the Fair Market Value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant the holder of
such Option a limited stock appreciation right ("LSAR"), entitling the holder to
receive, within sixty (60) days following a Change in Control, an amount in cash
equal to the difference between the exercise price of the Option and the market
value of the Common Stock on the effective date of the Change in Control. The
LSAR may be granted in tandem with an Option or subsequent to grant of the
Option. The LSAR will only be exercisable to the extent the related Option is
exercisable and will terminate if and when the Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions by the Committee at the
time of grant. In the event that the holder of restricted stock cease to be
employed by the Company during the applicable restrictive period, restricted
stock that is at the time subject to restrictions shall be forfeited and
reacquired by the Company. Except as otherwise provided by the Committee at the
time of the grant, a holder of restricted stock shall have all the rights of a
stockholder including, without limitation, the right to vote restricted stock
and the right to recover dividends thereon. An award of deferred stock is an
award that provides for the issuance of stock upon expiration of a deferral
period established by the Committee. Except as otherwise determined by the
Committee, upon termination of employment of the
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recipient of the award during the applicable deferral period, all stock that is
at the time subject to deferral shall be forfeited until such time as the stock
which is the subject of the award is issued, the recipient of the award has no
rights as a stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient the
right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of Common
Stock. A dividend equivalent right may be granted as a component of another
award or as a freestanding award.
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures, or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding shares of
the Company's Common Stock by (i) any holder of more than five percent (5%) of
the outstanding shares; (ii) the Company's officers and directors; and (iii) the
directors and officers of the Company as a group:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage (%) of Percentage (%) of Shares of Series
Shares of Common Stock Common Stock B Preferred Stock Percentage (%) of
Name and Address of Common Owned Before Owned After Beneficially Series B Preferred
Beneficial Owner Stock Owned Offering Offering Owned Stock Owned
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
M.D. Funding, Inc.(7) 1,827,500 69.6% 11.3%(1) ---- ----
5 Old Woods
Harrison, NY 10528
- ------------------------------------------------------------------------------------------------------------------------------------
Laurie Munn 200,000 7.6% 1.2%(2) ---- ----
c/o Interiors, Inc.
320 Washington Street
Mt. Vernon, NY 10553
- ------------------------------------------------------------------------------------------------------------------------------------
First National 250,000 9.5% 1.6%(3) ---- ----
Funding(8)
P.O. Box N-4755
Nassau, Bahamas
- ------------------------------------------------------------------------------------------------------------------------------------
Matthew Harriton 50,000 1.9% .3%(4) ---- ----
750 Lexington Avenue
27th Floor
New York, NY 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Donald Feldman ---- ---- ---- ---- ----
Decor Group, Inc.
320 Washington Street
Mt. Vernon, NY 10553
- ------------------------------------------------------------------------------------------------------------------------------------
Max Munn 700,000(5)(6) 22.4% 18.6%(2) 20,000,000(9) 100%
Interiors, Inc.
320 Washington Street
Mt. Vernon, NY 10553
- ------------------------------------------------------------------------------------------------------------------------------------
Michael Lulkin ---- ---- ---- ---- ----
750 Lexington Avenue
27th Floor
New York, NY 10022
- ------------------------------------------------------------------------------------------------------------------------------------
Interiors, Inc. 500,000(6) 16.0% 13.4% 20,000,000(9) 100%
320 Washington Street
Mt. Vernon, NY 10553
- ------------------------------------------------------------------------------------------------------------------------------------
All officers and 750,000(5)(6) 28.6% 23.2% 20,000,000(9) 100%
directors as a group (4
persons)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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(1) Assumes the sale of 1,462,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus form a part. See "Selling
Securityholder."
(2) Assumes the sale of 160,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus form a part. See "Selling
Securityholder."
(3) Assumes the sale of 200,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus forms a part. See "Selling
Securityholder."
(4) Assumes the sale of 40,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus forms a part. See "Selling
Securityholder."
(5) Includes 200,000 shares of Common Stock held by Laurie Munn, Mr. Munn's
wife. Mr. Munn disclaims beneficial ownership over such shares.
(6) Includes 500,000 shares of Common Stock issuable upon conversion of 500,000
shares of the Company's Series A Convertible Preferred Stock held by
Interiors, Inc. Interiors also holds 109,867 shares of Series C Preferred
Stock which is convertible into 109,867 shares of the Company's Common
Stock commencing on September 1, 1997.
(7) M.D. Funding, Inc. is wholly owned by Donna Fields.
(8) First National Funding is wholly owned by Greg Roberts and Noel Roberts.
(9) Includes 20,000,000 shares of Series B Preferred Stock covered by that
certain Voting Agreement by Interiors, Inc., Max Munn, Matt Harriton,
Michael Lulkin and the Company pursuant to which Messrs. Munn, Harriton and
Lulkin may vote the shares of Series B Preferred Stock held by Interiors,
Inc. on all matters presented to the vote of stockholders. See "Certain
Transactions."
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CERTAIN TRANSACTIONS
In March, 1996, the Company issued to certain investors (i) 1,827,500
shares of Common Stock to M.D. Funding, Inc. for cash consideration of $73,100,
(ii) 200,000 shares of Common Stock to Laurie Munn, the wife of Max Munn, the
Chairman of the Board of the Company, for cash consideration of $8,000, (iii)
122,500 shares of Common Stock to Judy Pace for cash consideration of $4,900,
(iv) 250,000 shares of Common Stock to First National Funding, Inc. for cash
consideration of $10,000, (v) 125,000 shares of Common Stock to Ulster
Investments, Ltd. for cash consideration of $5,000, and (vi) 50,000 shares of
Common Stock to Matthew Harriton, a director and formerly the President of the
Company, for cash consideration of $2,000. In addition, the Company also issued
in March 1996 25,000 Units to Gordon Brothers Capital Corporation ("GBCC") for
services rendered valued at an aggregate of $2,000. GBCC assisted the Company in
identifying and negotiating with potential acquisition candidates. Other than
the acquisition of Artisan House, there are no plans, arrangements, or
understandings with regard to potential acquisitions.
In March 1996, the Company issued to Interiors, Inc. 500,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B NonConvertible Voting Preferred Stock (the "Series B Option") in
exchange for Interiors, Inc. issuing to the Company 200,000 shares of Common
Stock valued at $600,000 and 200,000 shares of Series A Convertible Preferred
Stock valued at $1,000,000. The Series B Option was exercised by Interiors in
September 1996 at an exercise price of $.0001 per share. Immediately following
the exercise of the Series B Option, Interiors entered into a Voting Agreement
with the Company and Messrs. Max Munn, Matt Harriton and Michael Lulkin
(collectively, the "Voting Trustees") each of whom is a director of the Company.
Under the terms of the Voting Agreement, the Voting Trustees have the right to
vote the shares of Series B Preferred Stock held by Interiors on all matters
presented to the stockholders prior to December 31, 1997. A majority of the
Voting Trustees shall determine the manner in which the shares of Series B
Preferred Stock are to be voted.
The Company intends to enter into a three (3) year employment agreement
with Donald Feldman to be effective as of the Effective Date of this offering.
Mr. Feldman is the President and will continue to serve as the President of the
Company. The agreement will provide for Mr. Feldman to receive a salary of
$117,500 per annum and an annual bonus equal to two percent (2%) of the amount
by which the Company's net sales exceed the sales recorded by the Company for
the year ending June 30, 1997. In addition, Mr. Feldman will be granted options
to purchase 10,000 shares of Common Stock of the Company at an exercise price of
$2.50 per share for each full year of employment under the agreement. The
Company also agreed to reimburse Mr. Feldman for bona fide business expenses
including up to $400 a month for the use of an automobile and $200 a month for
insurance.
In May 1996, the Company entered into a two year Management Services
Agreement with Interiors, Inc. ("Interiors"). Interiors has, pursuant to such
agreement, agreed to advise the
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Company on the manufacturing, sale, marketing and distribution of the Company's
products as well as providing the Company accounting and administrative services
and strategic planning with regard to joint ventures, acquisitions, and other
long term business initiatives. In exchange for such services, the Company has
agreed to pay to Interiors an annual amount equal to the greater of (i) $75,000
or (ii) 1 1/2% of Excess Cashflow (as defined in the agreement). The Management
Services Agreement is automatically renewable for an additional one (1) year
term unless terminated by either party not less than sixty (60) days prior to
the end of the term may be terminated by the Company or Interiors upon sixty
(60) days prior written notice. In the event that the Management Services
Agreement is terminated for any reason, the Company's business may be negatively
effected. In such an event, the Company may be required to hire additional
personnel or engage one or more independent contractors at an added cost to the
Company. See "Business - Management Services Agreement."
In June 1996, the Company borrowed an aggregate of $50,000 from the
Company's stockholders, other than Gordon Brothers Capital Corporation, on a pro
rata basis based upon ownership of the Company's shares of Common Stock. Each
lender received a promissory note obligating the Company to repay the loan on
the earlier of (i) fifteen (15) months following the Effective Date of (ii) June
21, 1998. The Company utilized the proceeds from the loan for working capital
purposes.
In August 1996, the Company agreed to issue 94,167 shares of Series C
Preferred Stock to Interiors, Inc. in exchange for the payment of $706,250. In
September 1996, the Company agreed to issue 15,700 shares of Series C Preferred
Stock to Interiors in exchange for the payment of $117,750.
With respect to each of the foregoing transactions, the Company believes
that the terms of such transactions were as fair to the Company as could be
obtained from an unrelated third party. Future transactions with affiliates will
be on terms no less favorable than could be obtained from unaffiliated parties
and will be approved by a majority of the independent and/or disinterested
members of the board of directors.
DESCRIPTION OF SECURITIES
The Company is offering 300,000 Units, each Unit consisting of two (2)
shares of Common Stock, par value $.0001 per share, and one (1) Class A Warrant.
Upon completion of this Offering, the securities comprising the Units will be
separately transferable.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
of which 3,225,000 will be issued and outstanding as of the date of this
Prospectus. All of the issued and outstanding shares of Common Stock will be
fully paid, validly issued and non-assessable.
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Subject to the rights of holders of Preferred Stock, holders of shares of
Common Stock of the Company are entitled to share equally on a per share basis
in such dividends as may be declared by the Board of Directors out of funds
legally available therefor. There are presently no plans to pay dividends with
respect to the shares of Common Stock. See "Dividend Policy." Upon liquidation,
dissolution or winding up of the Company, after payment of creditors and the
holders of any senior securities of the Company, including Preferred Stock, if
any, the assets of the Company will be divided pro rata on a per share basis
among the holders of the shares of Common Stock. The Common Stock is not subject
to any liability for further assessments. There are no conversion or redemption
privileges nor any sinking fund provisions with respect to the Common Stock and
the Common Stock is not subject to call. The holders of Common Stock do not have
any pre-emptive or other subscription rights.
Holders of shares of Common Stock are entitled to cast one (1) vote for
each share held at all stockholders' meetings including the annual meeting, for
all purposes, including the election of directors. The Common Stock does not
have cumulative voting rights.
Preferred Stock
The Company's Certificate of Incorporation authorizes 35,000,000 shares of
Preferred Stock, whereby the Board of Directors of the Company shall have the
authority, without further action by the holders of the outstanding shares of
Common Stock, to issue shares of Preferred Stock from time to time in one or
more classes or series, to fix the number of shares constituting any class or
series and the stated value thereof, if different from the par value, and to fix
the term of any such series or class, including dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the liquidation
preference of such class or series. As of the date of this Prospectus, there are
(i) 5,000,000 shares of Series A Convertible Preferred Stock authorized, of
which 500,000 shares are issued and outstanding, (ii) 20,000,000 shares of
Series B Non-Convertible Preferred Stock authorized, all of which are issued and
outstanding, and (iii) 1,000,000 shares of Series C Convertible Preferred Stock
authorized, of which 109,867 shares are issued and outstanding. The Company does
not anticipate issuing dividends to the holders of its Preferred Stock. See
"Dividends."
Series A Convertible Preferred Stock
The number of shares constituting the Series A Convertible Preferred Stock
(the "Series A Preferred Stock") is 5,000,000, $.0001 par value per share,
500,000 of which are issued and outstanding as of the Effective Date of the
Offering.
Dividends. Each issued and outstanding share of Series A Preferred Stock of
the Company shall not be entitled to receive dividends.
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Voting. The holders of Series A Preferred Stock shall not have the right to
vote on matters presented to the stockholders of the Company, except as provided
by the General Corporation Law of the State of Delaware.
Rights on Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or involuntary, each issued and outstanding share of Series A
Preferred Stock shall entitle the holder of record thereof to payment at the
rate of $.0001 dollars per share, plus an amount equal to all accrued and unpaid
annual dividends, if any, before any payment or distribution of the net assets
of the Company (whether stated capital or surplus) shall be made to or set apart
for the holders of record of the issued and outstanding of any other shares of
preferred stock and shares of Common Stock ("Junior Securities").
Conversion. Shares of the Series A Preferred Stock of the Company shall be
convertible from time to time, subject to adjustment, at the option of the
holders of record thereof into one (1) share of the Company's Common Stock,
subject to certain anti-dilution provisions.
Series B Non-Convertible Preferred Stock
The number of shares constituting the Series B Non-Convertible Preferred
Stock (the "Series B Preferred Stock") is 20,000,000, par value $.0001 per
share, all of which are issued and outstanding as of the Effective Date of the
offering. Interiors, Inc., a stockholder of, and consultant to, the Company
holds all 20,000,000 shares of Series B Preferred Stock.
Dividends. Each issued and outstanding share of Series B Preferred Stock of
the Company shall not be entitled to receive dividends.
Voting. The holders of Series B Preferred Shares shall have the right to
vote on matters presented to the stockholders of the Company (including the
holders of Common Stock), each share of Series B Preferred Stock to have the
voting power of one (1) share of Common Stock.
Rights on Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or involuntary, each issued and outstanding share of Series B
Preferred Stock shall entitle the holder of record thereof to payment at the
rate of $.0001 dollars per share, plus an amount equal to all accrued and unpaid
dividends, if any, before any payment or distribution of the net assets of the
Company (whether stated capital or surplus) shall be made to or set apart for
the holders of record of the issued and outstanding of any shares of Common
Stock.
Conversion. Shares of the Series B Preferred Stock of the Company shall not
be convertible into shares of Common Stock.
Series C Convertible Preferred Stock
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The number of shares constituting the Series C Convertible Preferred Stock
(the "Series A Preferred Stock") is 1,000,000, $.0001 par value per share,
109,867 of which are issued and outstanding as of the Effective Date of the
Offering.
Dividends. Each issued and outstanding share of Series C Preferred Stock of
the Company shall not be entitled to receive dividends.
Voting. The holders of Series C Preferred Stock shall not have the right to
vote on matters presented to the stockholders of the Company, except as provided
by the General Corporation Law of the State of Delaware.
Rights on Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or involuntary, each issued and outstanding share of Series C
Preferred Stock shall entitle the holder of record thereof to payment at the
rate of $.0001 dollars per share, plus an amount equal to all accrued and unpaid
annual dividends, if any, before any payment or distribution of the net assets
of the Company (whether stated capital or surplus) shall be made to or set apart
for the holders of record of the issued and outstanding of any other shares of
preferred stock and shares of Common Stock ("Junior Securities").
Conversion. Shares of the Series C Preferred Stock of the Company shall be
convertible commencing on September 1, 1997, subject to adjustment, at the
option of the holders of record thereof into one (1) share of the Company's
Common Stock, subject to certain anti-dilution provisions.
Class A Warrants
Each Class A Warrant entities the holder to purchase one (1) share of
Common Stock at a price of $4.00 per share for a period of four (4) years
commencing one (1) year from the Effective Date of this Offering. Each Class A
Warrant is redeemable by the Company for $.05 per Class A Warrant at any time
after August 29, 1997 upon thirty (30) days' prior written notice, if the
closing price of the Common Stock, as reported by the principal exchange on
which the Common Stock is traded, The Nasdaq SmallCap Market or the National
Quotation Bureau Incorporated, as the case may be, exceeds $12.00 per share for
twenty (20) consecutive trading days prior to the date of the notice of
redemption. Upon thirty (30) days' written notice to all holders of Class A
Warrants, the Company shall have the right, subject to compliance with Rule
13E-4 under the Securities Exchange Act of 1934 and the filing of Schedule 13E-4
and, if required, a post-effective amendment to this registration statement, to
reduce the exercise price and/or extend the term of the Class A Warrants.
The Class A Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Class A Warrants. If the
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Company does not or is unable to maintain a current effective registration
statement, the holders of Class A Warrant certificates will be unable to
exercise the Class A Warrants and the Class A Warrants may become valueless.
Moreover, if the shares of Common Stock underlying the Class A Warrants are not
registered or qualified for sale in the state in which a holder of Class A
Warrant certificates resides, such holder might not be permitted to exercise the
Warrants. See "Risk Factors- Current Prospectus and State Blue Sky Registration
in Connection with the Exercise of the Warrants. Each Class A Warrant may be
exercised by surrendering the Warrant certificate, with the form of election to
purchase on the reverse side of the Class A Warrant certificate properly
completed and executed, together with payment of the exercise price, or $4.00
per share, to the Transfer Agent. The Class A Warrants may be exercised whole or
from time to time in part. If less than all of the Class A Warrants evidenced by
a Warrant certificate are exercised, a new Class A Warrant certificate will be
issued for the remaining number of Class A Warrants.
Holders of the Class A Warrants are protected against dilution of the
equity interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as to
terminate the Class A Warrants, the Class A Warrants may be exercised
immediately prior to such action. In the event liquidation, dissolution or
winding up of the Company, holders of the Class A Warrants are not entitled to
participate in the Company's assets.
For the life of the Class A Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
Common Stock. The exercise of the Class A Warrants will result in the dilution
of the then book value of the Common Stock of the Company held by the public
investors and would result in a dilution of their percentage ownership of the
Company.
Delaware Anti-Takeover Law
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three (3) years
after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner. As a result of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect acquisition transactions with the Company, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors
Section 145 of the Delaware General Corporation Law empowers a corporation
to
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indemnify its directors and officers and to purchase insurance with respect to
liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (I) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section 102
of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
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 does not currently have any liability insurance coverage for
its officers and directors.
Commission Policy
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and other agents of the Company, the Company
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Transfer Agent & Registrar
The transfer agent and registrar for the Company's securities is American
Stock Transfer & Trust Company (the "Transfer Agent").
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SELLING SECURITYHOLDERS
This offering includes 25,000 Units owned and offered by Gordon Brothers
Capital Corporation (the "Unit Holder"). In March 1996, the Unit Holder
rendered management services to the Company in exchange for which the Company
issued 25,000 Units thereto. Following this offering, the Unit Holder will not
hold any of the Company's securities. The Company will not receive any of the
proceeds from the sale of such Units by the Unit Holder. The registration
statement of which this Prospectus forms a part also covers the sale of (i)
3,000,000 Class A Warrants issuable to the Bridge Lenders, (ii) 2,062,000 shares
of Common Stock held by certain investors in the Company (the "Selling
Stockholders") and (iii) 500,000 shares of Common Stock issuable to Interiors,
Inc. ("Interiors"), upon the conversion of 500,000 shares of Series A Preferred
Stock held thereby; (the Bridge Lenders, the Selling Stockholders and Interiors
are collectively referred to as the "Selling Securityholders"). The officers and
directors of the Company as well as certain members of their immediate families
(including certain Selling Securityholders) and Interiors have agreed not to
sell or transfer the securities of the Company held thereby for a period of
twenty-four (24) months following the Effective Date, subject to earlier release
by the Representative. The Company will not receive any of the proceeds on the
sale of the securities by the Selling Securityholders. The resale of the
securities of the Selling Securityholders are subject to Prospectus delivery and
other requirements of the Securities Act of 1933, as amended (the "Act"). Sales
of such securities or the potential of such sales at any time may have an
adverse effect on the market prices of the securities offered hereby. See "Risk
Factors - Shares Eligible for Future Sale May Adversely Affect the Market."
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any
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profits realized or commissions received may be deemed underwriting
compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
Offering, including the name or names of any underwriters, dealers or agents,
if any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholder or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Representative has agreed to purchase from the Company
300,000 Units offered hereby from the Company and 25,000 Units from the Unit
Holder, on a "firm commitment" basis, as follows:
Underwriters Units
------------ -----
VTR Capital, Inc.
The Representative has advised the Company that it proposes to offer the
Units to the public at $10.00 per Unit as set forth on the cover page of this
Prospectus and that it may allow to certain dealers who are NASD members
concessions not to exceed $___ per Unit, of which not in excess of $___ per Unit
may be reallowed to other dealers who are members of the NASD. After the initial
public offering, the public offering price, concession and reallowance may be
changed by the Representative. The Underwriter does not intend to sell any of
the securities offered hereby to accounts for which it exercises discretionary
authority.
The public offering price of the Units and the exercise price and other
terms of the Class A Warrants was arbitrarily determined by negotiations between
the Company and the Representative and do not necessarily relate to the assets,
book value or results of operations of the Company or any other established
criteria of value.
The Company has granted an option to the Representative, exercisable during
the thirty (30) day period from the date of this Prospectus, to purchase up to a
maximum of 45,000 additional Units at the Offering price, less the underwriting
discount, to cover over-allotments, if any.
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The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Representative against certain liabilities in connection
with the Registration Statement, including liabilities arising under the Act.
Insofar as indemnification for liabilities arising under the Act may be provided
to officers, directors or persons controlling the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Representative a non-accountable
expense allowance of three percent (3%) of the aggregate Offering price of the
Units offered hereby, including any Units purchased pursuant to the
Over-Allotment Option.
The Company has agreed to sell to the Representative, or its designees, for
an aggregate purchase price of $30, an option (the "Representative's Unit
Purchase Option") to purchase up to an aggregate of 30,000 Units. The
Representative's Unit Purchase Option shall be exercisable during a four (4)
year period commencing one (1) year from the Effective Date. The
Representative's Unit Purchase Option may not be assigned, transferred, sold or
hypothecated by the Representative until twelve (12) months after the Effective
Date of this Prospectus, except to officers of the Representative or to selling
group members in this Offering. Any profits realized upon the sale of the Units
issuable upon exercise of the Representative's Unit Purchase Option may be
deemed to be additional underwriting compensation. The exercise price of the
Units issuable upon exercise of the Representative's Unit Purchase Option during
the period of exercisability shall be one hundred sixty five percent (165%) of
the initial public offering price of the Units. The exercise of the
Representative's Unit Purchase Option and the number of shares covered thereby
are subject to adjustment in certain events to prevent dilution. For the life of
the Representative's Unit Purchase Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of the
Company's Units, Common Stock and Class A Warrants with a resulting dilution in
the interest of other stockholders. The Company may find it more difficult to
raise capital for its business if the need should arise while the
Representative's Unit Purchase Option is outstanding. At any time when the
holders of the Representative's Unit Purchase Option might be expected to
exercise it, the Company would probably be able to obtain additional capital on
more favorable terms.
If the Company enters into a transaction (including a merger, joint
venture, equity financing, debt financing, or the acquisition of another entity)
introduced to the Company by the Representative, the Company has agreed to pay
the Representative a finder's fee equal to five percent (5%) of the first
$4,000,000 of consideration involved in the transaction, ranging in $1,000,000
increments down to two percent (2%) of the excess, if any, over $6,000,000.
The Representative has the right to designate a director or a non-voting
advisor to the Board for a period of five years after the Effective Date. Said
designee, shall attend meetings of the Board and receive no more or less
compensation than is paid to other non-management directors of the Company and
shall be entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings, including but not limited to, food, lodging and
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transportation. Moreover, to the extent permitted by law, the Company agree to
indemnify the Representative and its designee for the actions of such designee
as director or as an advisor of the Company. In the event the Representative
designates a director, then the Company will utilize its best efforts to obtain
officer and director liability insurance of at least $1,000,000 dollars prior to
such person serving as a director and if obtained, to maintain such policy in
effect until five years from the Effective Date. To the extent permitted under
the policy, it will also include each of the Representative and its designee as
an insured under such policy.
Upon the closing of the sale of the Units offered hereby, the Company will
enter into a two (2) year financial advisory and investment banking agreement
with the Representative, pursuant to which the Company will be obligated to pay
the Representative $100,000 in advance upon the closing of the Offering, for
financial and investment advisory services to the Company for no more than two
(2) business days per month.
The Company has agreed with the Representative that the Company will pay to
the Representative a warrant solicitation fee (the "Warrant Solicitation Fee")
equal to four percent (4%) of the exercise price of the Class A Warrants
exercised beginning one (1) year after the Effective Date and to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission. Such Warrant Solicitation Fee will be paid to the Representative
if (a) the market price of the Common Stock on the date that any Class A
Warrants is exercised is greater than the exercise price of the Class A Warrant;
(b) the exercise of such Class A Warrant was solicited by the Representative;
(c) prior specific written approval for exercise is received from the customer
if the Class A Warrant is held in a discretionary account; (d) disclosure of
this compensation agreement is made prior to or upon the exercise of such Class
A Warrant; (e) solicitation of the exercise is not in violation of Rule 10b-6 of
the Exchange Act; and (f) solicitation of the exercise is in compliance with
NASD Notice to Member 81-38. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Representative and any
soliciting broker-dealers are prohibited from engaging in any market making
activities or solicited brokerage activities with respect to the Company's
securities for the period from nine (9) business days prior to any solicitation
of the exercise of any Class A Warrant or nine (9) business days prior to the
exercise of any Class A Warrant based on a prior solicitation until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right the Representative and soliciting broker-dealers may
have to receive a fee for the exercise of Class A Warrants following such
solicitation. As a result, the Representative may be unable to continue to
provide a market for the Company's securities during that certain period while
the Class A Warrants are exercisable. See "Risk Factors - Lack of Prior Market
for Units, Common Stock and Class A Warrants; No Assurance of Public Trading
Market."
The Company has agreed not to issue any securities for a period of five (5)
years from the Effective Date, without the prior written consent of the
Representative. The officers and directors of the Company, certain of their
immediate family members (including certain Selling
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Securityholders) and Interiors, Inc. have agreed not to sell or transfer the
securities of the Company held thereby for a period of twenty-four (24) months
following the Effective Date, subject to earlier release by the Representative.
The Representative has limited experience as an Representative of public
offerings. There can be no assurance that the Representative's limited
experience as an Representative of public offerings will not adversely affect
the proposed public offering of the Units, the subsequent development of a
trading market, if any, or the market for and liquidity of the Company's
securities. Therefore, purchasers of the securities offered hereby may suffer a
lack of liquidity in their investment or a material diminution of the value of
their investment.
In connection with the Offering, the Representative has agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Securities Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Representative specifically for or in
connection with the preparation of the registration statement, the prospectus,
or any such amendment or supplement thereto.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Representative's Unit Purchase Option which have been filed as
exhibits hereto.
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Units, the
Common Stock and the Class A Warrants. The initial public offering price for the
Units and the exercise price of the Class A Warrants have been determined by
negotiations between the Company and the Representative. Among the factors
considered in the negotiations were the market price of the Company's Common
Stock, an analysis of the areas of activity in which the Company is engaged, the
present state of the Company's business, the Company's financial condition, the
Company's prospects, an assessment of management, the general condition of the
securities market at the time of this Offering and the demand for similar
securities of comparable companies. The public offering price of the Units and
the exercise price of the Class A Warrants does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
The Company anticipates that the Units, the Common Stock and the Class A
Warrants will be listed for quotation on The Nasdaq SmallCap Market under the
symbols _____, _____, and _____, respectively, but there can be no assurances
that an active trading market will develop, even if the securities are accepted
for quotation. The Representative intends to make a market in all of the
publicly-traded securities of the Company.
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LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022.
Bernstein & Wasserman, LLP, has served, and continues to serve, as counsel to
the Representative in matters unrelated to this Offering. Certain legal matters
will be passed upon for the Representative by Lester Morse, P.C., 111 Great Neck
Road, Great Neck, NY 11021.
EXPERTS
Certain of the financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been examined by Moore Stephens,
P.C., independent certified public accountants, whose reports contain an
explanatory paragraph regarding uncertainties as to the ability of the Company
to continue as a going concern, which appear elsewhere herein and in the
Registration Statement.
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form SB-2
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act and omits certain information contained
in the Registration Statement. Reference is hereby made to the Registration
Statement and to its exhibits for further information with respect to the
Company and the Units, the Common Stock and Class A Warrants offered hereby.
Statements contained herein concerning provisions of documents are necessarily
summaries of such documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at: 450 Fifth Street, Washington, D.C. 20549; and at the offices of
the Commission located at 7 World Trade Center, New York, NY 10048; and copies
of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549 at prescribed rates.
69
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page to Page
------------
Pro Forma Combined Financial Statements
Introduction.......................................................... A-1
Notes to the Pro Forma Combined Financial Statements.................. A-2 A-3
Pro Forma Combined Balance Sheet as of June 30, 1996.................. A-4 A-5
Pro Forma Combined Statement of Operations for
the three months ended June 30, 1996................................. A-6
Pro Forma Statement of Operations for the year ended
March 31, 1996....................................................... A-7
Decor Group, Inc.
Independent Auditor's Report.......................................... B-1
Balance Sheets as of June 30, 1996 [Unaudited] and
March 31, 1996....................................................... B-2
Statements of Stockholders' Equity for the three months
ended June 30, 1996 [Unaudited] and for the period from
Inception [March 1, 1996] through the period
ended March 31, 1996................................................. B-3
Statements of Operations for the three months ended
June 30, 1996 and 1995 [Unaudited] and for the period
from Inception [March 1, 1996] through the period
ended March 31, 1996.................................................. B-4
Statements of Cash Flows for the three months ended
June 30, 1996 and 1995 [Unaudited] and for the period
from Inception [March 1, 1996] through the period
ended March 31, 1996................................................... B-5
Notes to Financial Statements.......................................... B-6 B-10
Artisan House, Inc.
Independent Auditor's Report........................................... C-1
Balance Sheets as of June 30, 1996 [Unaudited] and
January 31, 1996...................................................... C-2
Statements of Operations for the five months ended
June 30, 1996 and 1995
<PAGE>
[Unaudited] and the years ended January 31, 1996 and 1995.............. C-3
Statements of Stockholders' Equity for the five months
ended June 30, 1996 [Unaudited] and for the years
ended January 31, 1996 and 1995........................................ C-4
Statements of Cash Flows for the five months ended
June 30, 1996 and 1995 [Unaudited] and for the years
ended January 31, 1996 and 1995 ....................................... C-5 C-6
Notes to Financial Statements.......................................... C-7 C-10
--------------------
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
PRO FORMA COMBINED FINANCIAL STATEMENTS [UNAUDITED]
- --------------------------------------------------------------------------------
The following pro forma combined balance sheet as of June 30, 1996, and the pro
forma combined statements of operations for the three months ended June 30, 1996
and the year ended March 31, 1996 give effect to Decor Group, Inc. [the
"Company"] entering into an agreement to acquire certain assets and assume
certain liabilities of Artisan House, Inc. ["Artisan"] on March 25, 1996. The
agreement calls for a purchase price of $3,626,400 subject to certain
adjustments.
The pro forma information is based on the historical financial statements of the
Company and Artisan giving effect to the transaction under the purchase method
of accounting and the assumptions and adjustments in the accompanying notes to
the pro forma combined financial statements.
The acquisition will be accounted for using the purchase method. The pro forma
combined balance sheet assumes the acquisition was consummated on June 30, 1996.
The pro forma combined statements of operations give effect to this transaction
as if it had occurred at the beginning of the earliest period presented. The
historical statements of operations will reflect the effect of this transaction
from the date on which it occurred. The pro forma combined financial statements
are based on the historical financial statements of the Company and Artisan. The
pro forma combined statement of operations for the year ended March 31, 1996
include the operations of the Company for the one month period from inception on
March 1, 1996 to March 31, 1996 and the operations of Artisan for the year ended
January 31, 1996. The pro forma combined statement of operations for the three
months ended June 30, 1996 include the operations of the Company for the three
month period and the operations of Artisan for the five month period from
January 31, 1996 to June 30, 1996 [the latter have been adjusted to a three
month period ended June 30, 1996]. These pro forma combined financial statements
may not be indicative of the results that actually would have occurred if the
acquisition had taken place on the dates indicated.
A-1
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS [UNAUDITED]
- --------------------------------------------------------------------------------
[A] Assets and liabilities not acquired:
Deferred Revenues $165,000
Loan Payable - Stockholder 230,733
Accrued Rent 170,733
Interest Payable 423,018
Prepaid Expenses $ 71,615
Property and Equipment - Net 5,980
Other Assets 19,335
Paid-in Capital 854,678
Cash 37,876
[B] To reflect acquisition:
Net Assets Acquired 1,608,983
Trademark 150,000
Copyrights and Artwork 150,000
Customer Lists 200,000
Covenant 100,000
Goodwill 1,379,541
Cash 2,400,000
Note Payable [$926,400 - $37,876] 888,524
Common Stock: Par 10
Additional Paid-in Capital 299,990
[* C.S. $80,000 + P.I.C. $1,054,678 + R.E. $474,305]
[C] To adjust Decor's investment in Artisan House:
Cash 165,000
Investments 165,000
[D] To adjust short-term classification of note payable:
Note Payable - Long-Term 208,192
Note Payable - Short-Term 208,192
[E] To reflect annual 8% interest expense of $20,000 on $250,000 bridge note
payable and interest expense of $66,000 on acquisition notes of $888,524
or ($926,400 - $37,876).
[F] To reflect annual employment agreement of $75,000 and minimum annual
management services agreement of $75,000 [quarterly an aggregate of
$37,500].
[G] To reflect annual savings on stockholder's loan payable which has been
converted to equity and carried an annual interest cost of $43,613.
[H] To adjust pro forma income taxes.
[I] To reflect elimination of former President's annual employment contract
of approximately $113,000 and addition of annual employment contract for
new President of $117,000.
[J] To reflect annual amortization of goodwill and other intangibles of
approximately $175,000 annually [quarterly of $43,750], under the
straight-line method with a range of 10 to 15 years for the intangibles
acquired.
Goodwill and intangibles are calculated as follows:
A-2
<PAGE>
Purchase Price [See Adjustment B]
Cash $2,400,000
Stock 300,000
Note Payable 888,524
----------
Total Cost 3,588,524
Net Assets Acquired 1,608,983
----------
$1,978,541
==========
Allocated as follows:
Goodwill $1,379,541
Copyrights 150,000
Trademarks 150,000
Covenant 100,000
Customer Lists 200,000
----------
$ 1,979,541
===========
[K] To reflect net proceeds of public offering of approximately $2,010,000
and to reflect offset of deferred offering costs.
[L] To adjust five months operations of Artisan House, Inc. to three months
of operations.
[M] To reflect sale of Series C Non-Voting, Convertible, Preferred Stock in
August and September of 1996 with proceeds of $824,000.
[N] To reflect charge to retained earnings of $25,000 arising from grant of
options in connection with employment agreement. The charge was not
considered in the pro forma combined statements of operations and will
be included in the income of the registrant within the twelve months
succeeding the transaction.
[O] To reflect the exercise of existing option to purchase 20,000,000 shares
of Series B Non-Convertible Voting Preferred Stock at an exercise
price of $.0001 per share.
A-3
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Financial Statements
Decor Artisan
Group, Inc. House, Inc.
June 30, June 30, Pro Forma Pro Forma
1996 1996 Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Current Assets:
Cash $ 20,241 $ 37,876 $ 165,000 [C] $
(37,876)[A]
824,000 [M]
2,010,000 [K]
(2,400,000)[B]
2,000 [O] 621,241
Accounts Receivable -- 1,102,652 -- 1,102,652
Receivable - Related Party 14,500 -- -- 14,500
Inventory -- 968,081 -- 968,081
Other -- 144,060 (71,615)[A] 72,445
------------- ------------- ------------- -------------
Total Current Assets 34,741 2,252,669 491,509 2,778,919
------------- ------------- ------------- -------------
Investments 2,465,000 -- (165,000)[C] 2,300,000
------------- ------------- ------------- -------------
Property and Equipment - Net -- 113,128 (5,980)[A] 107,148
------------- ------------- ------------- -------------
Other Assets:
Goodwill -- -- 1,379,541[B] 1,379,541
Deferred Offering Costs 74,658 -- (74,658)[K] --
(19,335)[A]
Other Assets -- 26,299 600,000[B] 606,964
------------- ------------- ------------- -------------
Total Other Assets 74,658 26,299 1,885,548 1,986,505
------------- ------------- ------------- -------------
Total Assets $ 2,574,399 $ 2,392,096 $ 2,206,077 $ 7,172,572
============= ============= ============= =============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-4
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Financial Statements
Decor Artisan
Group, Inc. House, Inc.
June 30, June 30, Pro Forma Pro Forma
1996 1996 Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ -- $ 202,457 $ -- $ 202,457
Accrued Expenses 108,000 217,762 -- 325,762
Notes and Bridge Loan Payable 142,850 159,361 208,192 [D] 510,403
Loan Payable - Stockholder -- 230,733 (230,733)[A] --
Accrued Interest Payable - Stockholder -- 423,018 (423,018)[A] --
Accrued Rent Payable - Stockholder -- 170,733 (170,733)[A] --
Deferred Revenue -- 165,000 (165,000)[A] --
------------- ------------- ------------- -------------
Total Current Liabilities 250,850 1,569,064 (781,292) 1,038,622
------------- ------------- ------------- -------------
Long-Term Liabilities:
(208,192)[D]
Notes Payable 50,000 68,727 888,524[B] 799,059
------------- ------------- ------------- -------------
Stockholders' Equity:
Preferred Stock 50 -- 824,000[M] 826,050
2,000[O]
Common Stock 262 80,000 60[K]
(80,000)[B]
10[B] 332
Additional Paid-in Capital 1,918,988 200,000 854,678[A]*
(1,054,678)[B]
299,990[B]
1,935,282[K]
25,000[N] 4,179,260
Retained Earnings [Deficit] (345,751) 474,305 (474,305)[B]
(25,000)[N] (370,751)
Unrealized Gain on Investment
[Available for Sale] 700,000 700,000
------------- ------------- ------------- -------------
Total Stockholders' Equity 2,273,549 754,305 2,307,037 5,334,891
------------- ------------- ------------- -------------
Total Liabilities and Stockholders'
Equity $ 2,574,399 $ 2,392,096 $ 2,206,077 $ 7,172,572
============= ============= ============= =============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-5
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Financial Statements
Decor Artisan
Group, Inc. House, Inc.
For the For the
Three months Five months
Ended Ended
June 30, June 30, Pro Forma Pro Forma
1996 1996 Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales - Net $ -- $ 2,310,976 $ (924,000)[L] $ 1,386,976
Cost of Goods Sold -- 1,233,714 494,000[L] 739,714
------------- ------------- ------------- -------------
Gross Profit -- 1,077,262 (430,000) 647,262
------------- ------------- ------------- -------------
(305,850)[L]
(43,750)[J]
Selling, General and Administrative (1,000)[I]
Expenses 138,851 764,625 (37,500)[F] 679,876
------------- ------------- ------------- -------------
[Loss] Income from Operations (138,851) 312,637 (206,400) (32,614)
------------- ------------- ------------- -------------
Other [Income] Expense:
Interest Expense - Stockholder -- 13,356 (13,356)[G] --
Interest Income -- (774) -- (774)
Interest Expense 107,150 15,275 21,500[E] 143,925
Other Expense - Net 107,150 27,857 8,144 143,151
------------- ------------- ------------- -------------
[Loss] Income Before Pro Forma
Income Taxes (246,001) 284,780 (214,544) (175,765)
Provision for Pro Forma Income Taxes -- (114,000) 114,000[H] --
------------- ------------- ------------- -------------
Net [Loss] Income $ (246,001) $ 170,780 $ (100,554) $ (176,765)
============= ============= ============= =============
Number of Shares 5,625,000 5,725,000
============= =============
Net [Loss] Per Share $ (.04) $ (.03)
============= =============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-6
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
MARCH 31, 1996.
[UNAUDITED]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical Financial Statements
Decor
for the Period
March 1, 1996 Artisan
[Inception] For the
Through Year ended
March 31, January 31, Pro Forma Pro Forma
1996 1996 Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales - Net $-- $ 4,809,422 $ -- $ 4,809,422
Cost of Goods Sold -- 2,596,383 -- 2,596,383
------------- ------------- ------------- -------------
Gross Profit -- 2,213,039 -- 2,213,039
Selling, General and Administrative
Expenses 100,000 1,684,591 175,000[J]
4,000[I]
150,000[F] 2,113,591
[Loss] Income from Operations (100,000) 528,448 (329,000) 99,448
------------- ------------- ------------- -------------
Other [Income] Expense:
Interest Expense - Stockholder -- 43,613 (43,613)[G] --
Interest Income (250) (2,218) -- (2,468)
Interest Expense -- 40,466 86,000[E] 126,466
Other -- (4,496) -- (4,496)
------------- ------------- ------------- -------------
Other Expense - Net (250) 77,365 42,387 119,507
------------- ------------- ------------- -------------
[Loss] Income Before Pro Forma
Income Taxes (99,750) 451,083 (371,387) (20,054)
Provision for Pro Forma Income Taxes -- 180,000 180,000[H] --
------------- ------------- ------------- -------------
Net [Loss] Income $ (99,750) $ 271,083 $ (191,387) $ (20,054)
============= ============= ============= =============
Number of Shares 5,625,000 5,725,000
============= =============
Net [Loss] Per Share $ (.02) (.05)
============= =============
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of Decor Group, Inc.
New York, New York
We have audited the accompanying balance sheet of Decor Group, Inc. as of
March 31, 1996, and the related statements of operations, stockholders' equity,
and cash flows for the period from inception [March 1, 1996] through March 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Decor Group, Inc. as of
March 31, 1996, and the results of its operations, and its cash flows for the
period from inception [March 1, 1996] to March 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company has not generated cash from operations. This
factor raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 7. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 24, 1996
B-1
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
[Unaudited]
----------- -----------
<S> <C> <C>
Assets:
Current Assets:
Cash $ 20,241 $ 47,000
Stock Subscription Receivable -- 8,000
Note Receivable - Related Party -- 50,000
Accrued Interest Receivable - Related Party -- 250
Related Party Receivable 14,500 --
----------- -----------
Total Current Assets 34,741 105,250
----------- -----------
Non-Current Assets:
Investment - Related Party [8] 2,300,000 1,787,600
Investment in Artisan House, Inc. 165,000 150,000
Deferred Offering Costs 74,658 --
----------- -----------
Total Non-Current Assets 2,539,658 1,937,600
----------- -----------
Total Assets $ 2,574,399 $ 2,042,850
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accrued Expenses $ 108,000 $ --
Bridge Loan Payable [Net of Discount of $107,150 and
$214,300 for June 30, 1996 and March 31, 1996, Respectively] 142,850 35,700
----------- -----------
Total Current Liabilities 250,850 35,700
----------- -----------
Long-Term:
Stockholders' Loans Payable 50,000 --
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Stockholders' Equity:
Preferred Stock, $.0001 Par Value Per Share, 35,000,000 Blank Check Shares
Authorized of which 5,000,000 are Convertible Non-Voting Series A -
500,000 Shares Issued and Outstanding; 20,000,000 Non-Convertible Voting
Series B - No Shares Issued and Outstanding
[Note 8] 50 50
Additional Paid-in Capital - Preferred Stock 1,599,950 1,599,950
Common Stock - $.0001 Par Value, Authorized 20,000,000 Shares,
Issued and Outstanding, 2,625,000 Shares 262 262
Additional Paid-in Capital - Common Stock 319,038 319,038
Retained Earnings [Deficit] (345,751) (99,750)
----------- -----------
Unrealized Gain on Investment [Available for Sale][8] 700,000 187,600
----------- -----------
Total Stockholders' Equity 2,273,549 2,007,150
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,574,399 $ 2,042,850
=========== ===========
</TABLE>
See Notes to Financial Statements.
B-2
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Preferred Stock -----------------------
---------------------- Additional Additional
Paid-in Paid-in
Shares Amount Capital Shares Amount Capital
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued to Founders -- $ -- $ -- 2,625,000 $ 262 $ 104,738
Bridge Financing Warrants -- -- -- -- -- 214,300
500,000 Shares of Class A
Convertible Preferred Stock and
and Option to Purchase 20,000,000
Shares of Class B Non-Convertible
Preferred Stock 500,000 50 1,599,950 -- -- --
Unrealized Gain on Investment -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net [Loss] for the period ended
March 31, 1996 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance - March 31, 1996 500,000 50 1,599,950 2,625,000 262 319,038
Unrealized Gain on Investment
[Available for Sale] -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net [Loss] for the three months
ended June 30, 1996 [Unaudited] -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance - June 30, 1996
[Unaudited] 500,000 $ 50 $1,599,950 2,625,000 $ 262 $ 319,038
========== ========== ========== ========== ========== ==========
<CAPTION>
Retained Unrealized Total
Earnings Gain on Stockholders'
[Deficit] Investment Equity
---------- ---------- ----------
Common Stock Issued to Founders $ $ $ 105,000
Bridge Financing Warrants -- -- 214,300
500,000 Shares of Class A
Convertible Preferred Stock and
and Option to Purchase 20,000,000
Shares of Class B Non-Convertible
Preferred Stock -- -- 1,600,000
Unrealized Gain on Investment -- 187,600 187,600
---------- ---------- ----------
Net [Loss] for the period ended
March 31, 1996 (99,750) -- (99,750)
---------- ---------- ----------
Balance - March 31, 1996 (99,750) 187,600 2,007,150
Unrealized Gain on Investment
[Available for Sale] -- 12,400 12,400
---------- ---------- ----------
Net [Loss] for the three months
ended June 30, 1996 [Unaudited] (246,001) -- (246,001)
---------- ---------- ----------
Balance - June 30, 1996
[Unaudited] $ (345,751) $ 700,000 $2,273,549
========== ========== ==========
</TABLE>
See Notes to Financial Statements.
B-3
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the
For the Period From
Three Months March 1,
Ended 1996 to
June 30, March 31,
1996 1996
--------- ---------
[Unaudited]
Revenues $ -- $ --
Cost of Revenues -- --
--------- ---------
Gross Profit -- --
--------- ---------
Selling, General and Administrative Expenses:
Acquisition Fees and Expenses 52,829 98,000
Professional Fees 73,000 2,000
Administrative Expenses 13,022 --
--------- ---------
Total Selling, General and Administrative Expenses 138,851 100,000
--------- ---------
[Loss] from Operations (138,851) (100,000)
--------- ---------
Other Income [Expense]:
Interest Income - Related Party -- 250
Interest Expense (107,150) --
--------- ---------
Total Other [Expense] Income (107,150) 250
--------- ---------
[Loss] Before Provision for Income Taxes (246,001) (99,750)
Provision for Income Taxes -- --
--------- ---------
Net [Loss] $(246,001) $ (99,750)
========= =========
[Loss] Per Share $ (.04) $ (.02)
========= =========
See Notes to Financial Statements.
B-4
<PAGE>
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the
For the Period From
Three Months March 1,
Ended 1996 to
June 30, March 31,
1996 1996
--------- ---------
[Unaudited]
Operating Activities:
Net [Loss] $(246,001) $ (99,750)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Stock Issued for Services -- 2,000
Accrued Interest Receivable 250 (250)
Interest - Cost of Bridge Warrants 107,150 --
Accrued Expenses 108,000 --
--------- ---------
Net Cash - Operating Activities (30,601) (98,000)
--------- ---------
Investing Activities:
Collection of Note Receivable 50,000 --
Partial Payment on Acquisition of Artisan House, Inc. (15,000) (150,000)
Note Receivable -- (50,000)
--------- ---------
Net Cash - Investing Activities 35,000 (200,000)
--------- ---------
Financing Activities:
Deferred Offering Costs (74,658) --
Proceeds from Sale of Common Stock 8,000 95,000
Proceeds from Bridge Loans -- 250,000
Proceeds from Stockholder Loan 35,500 --
--------- ---------
Net Cash - Financing Activities (31,158) 345,000
--------- ---------
Net [Decrease] Increase in Cash (26,759) 47,000
Cash - Beginning of Periods 47,000 --
--------- ---------
Cash - End of Periods $ 20,241 $ 47,000
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ -- $ --
Income Taxes $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the period ended March 31, 1996, the Company recorded a discount on
the bridge loan of $214,300 resulting from the issuance of warrants for the
$250,000 bridge loan. For the three months ended June 30, 1996, the Company
amortized $107,150 as interest expense.
On March 3, 1996, the Company issued to Interiors, Inc. 500,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B Non-Convertible Preferred Stock in exchange for Interiors, Inc.
issuing to the Company 200,000 shares of Common Stock valued at $600,000 and
200,000 shares of Series A Convertible Preferred Stock valued at $1,000,000 and
a guarantee with respect to certain indebtedness.
In March 1996, the Company issued 2,625,000 shares of common stock to seven
parties for $105,000 of which $103,000 was in cash and $2,000 was for the fair
value of services. At March 31, 1996, $8,000 is reflected as a stock
subscription receivable, which was received May 21, 1996.
See Notes to Financial Statements.
B-5
<PAGE>
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
[Information Relating to June 30, 1996 is Unaudited]
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was formed March 1, 1996.
[B] Capital Stock - In March 1996, the Company issued 2,625,000 shares of common
stock to seven parties for a total of $105,000 of which $103,000 was in cash and
$2,000 was for the fair value of services. At March 31, 1996, $8,000 is
reflected as a stock subscription receivable, which was received May 21, 1996.
[C] Earnings Per Share - The number of shares to be used for earnings per share
calculation purposes will be based on the 2,625,000 common shares issued in the
initial capitalization and on the 3,000,000 common shares assumed issued from
the warrants in connection with the bridge loan, as if they were outstanding
since inception. Convertible preferred stock is not included because the effect
would be anti-dilutive [See Note 6].
[D] Cash Equivalents - The Company's policy is to classify all highly liquid
debt instruments purchased with an initial maturity of three months or less to
be cash equivalents. There were no cash equivalents at March 31, 1996.
[E] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from those estimates.
[F] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Artisan House, Inc. will be charged to goodwill. Goodwill is related
to revenues the Company anticipates realizing in future years. The Company has
decided to amortize its goodwill over a period of up to ten years under the
straight-line method. The Company's policy is to evaluate the periods of
goodwill amortization to determine whether later events and circumstances
warrant revised estimates of useful lives. The Company also evaluates whether
the carrying value of goodwill has become impaired by comparing the carrying
value of goodwill to the value of projected undiscounted cash flows from
acquired assets or businesses. Impairment is recognized if the carrying value of
goodwill is less than the projected undiscounted cash flow from the acquired
assets or business.
[G] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with APB
25 [Accounting for Stock Issued to Employees].
[H] Deferred Offering Costs - If the offering is not completed, such costs will
be expensed and not recorded as a reduction of the net proceeds of the offering.
[2] Business Combination - Artisan House
On March 25, 1996, the Company entered into an agreement to acquire certain
assets and assume certain liabilities of Artisan House, Inc. for $3,626,400,
subject to adjustment prior to closing of which $150,000 was paid in cash, and
an additional $2,250,000 will be paid in extension payments and at the closing
of the acquisition. A secured promissory note for $926,400 will be issued,
[subject to reduction by a cash balance of Artisan House at the closing date
estimated at $37,876 at June 30, 1996] of which $100,000 will be paid 90 days
after the closing and the balance will be paid in 60 equal monthly installments
of $12,947 with final payment of $150,000 at maturity with interest at 8%, and
100,000 shares of Decor common stock valued at $300,000 will be issued. Artisan
House, Inc. is engaged in the business of manufacturing, marketing, selling and
distributing wall hanging sculptures. The transaction will be recorded under
the purchase method.
B-6
<PAGE>
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information Relating to June 30, 1996 is Unaudited]
- --------------------------------------------------------------------------------
[2] Business Combination - Artisan House [Continued]
Goodwill of approximately $1,400,000 will be amortized over 10 years under the
straight-line method. Operations of Artisan will be included with the Company
from the date of the close of the acquisition onward.
Simultaneously with the execution of the Artisan House Asset Purchase Agreement,
on March 25, 1996 the Company entered into a three year employment agreement
with the Seller for base annual compensation of $50,000.
The following unaudited pro forma combined results of operations accounts for
the acquisition as if it had occurred at the beginning of the periods presented.
The pro forma results give effect to amortization of goodwill and other
intangible assets, interest expense, employment contracts and consulting
agreements.
Three months Ended Year ended
June 30, March 31,
1996 1996
----------- -----------
Total Revenues $ 1,386,976 $ 4,809,422
=========== ===========
Net [Loss] $ (37,765) $ (275,054)
=========== ===========
Net [Loss] Per Common Share $ (.01) $ (.05)
=========== ===========
Weighted Average Number of Shares Outstanding 5,725,000 5,725,000
=========== ===========
These pro forma amounts may not be indicative of results that actually would
have occurred if the combination had been in effect on the date indicated or
which may be obtained in the future.
[3] Related Party Transactions
On March 5, 1996, the Company advanced $50,000 with 8% interest to a firm that
renders management services to the Company. The Company was repaid on April 16,
1996. Interest income of $250 was recorded as of March 31, 1996 [See Notes 8 and
11A].
[4] 1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of the 1996 Stock Option Plan.
The maximum number of shares of common stock with respect to which awards may be
granted pursuant to the 1996 Plan is initially 500,000 shares.
[5] Proposed Public Offering
The Company is filing a registration statement for 300,000 units at $10 per
unit. Each unit consists of 2 shares of common stock and one Class A Redeemable
Common Stock purchase warrant exercisable at $4.00 per share for a four year
period commencing one year from the effective date. The Warrants are redeemable
by the company for $.05 per warrant, in 1997, upon 30 days prior written notice,
under certain quoted price conditions. The anticipated net proceeds from this
offering are approximately $2,010,000.
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information Relating to June 30, 1996 is Unaudited]
B-7
<PAGE>
- --------------------------------------------------------------------------------
[6] Bridge Loan
On March 31, 1996, the Company borrowed an aggregate of $250,000 from nine [9]
lenders [the "Bridge Lenders"]. In exchange for making loans to the Company,
each Bridge Lender received a promissory note [the "Bridge Note"]. Each of the
Bridge Notes bears interest at the rate of eight percent [8%] per annum. The
Bridge Notes are due and payable upon the earlier of (I) March 18, 1997 or (ii)
the closing of an initial underwritten public offering of the Company's
securities. The Company intends to use a portion of the proceeds of this
offering to repay the Bridge Lenders. The Bridge Lenders have the right to
receive a total of 3,000,000 Class A Warrants for 3,000,000 shares of common
stock which will be registered in the Company's first registration statement,
whereby the Company recorded a discount on the bridge notes at June 30, 1996 of
$214,300, which will be amortized it over the life of the bridge loan, which is
anticipated to be six months. For the three months ended June 30, 1996, the
Company amortized the discount of $107,150. as interest expense.
[7] Going Concern
As shown in the accompanying financial statements, the Company did not generate
cash from operations for the period ended March 31, 1996. This factor creates an
uncertainty about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern. The Company acquired
Artisan House, Inc. for $3,626,400 [See Note 2], and is pursuing a public
offering of common stock as a vehicle for financing future operations [See Note
5]. The continuation of the Company as a going concern is dependent upon the
success of these plans.
[8] Investment - Related Party
On March 3, 1996, the Company issued to Interiors, Inc. 500,000 shares of Series
A Non-Voting Convertible Preferred Stock and an option to purchase 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock at an exercise price
of $.0001 in exchange for Interiors, Inc. issuing to the Company 200,000 shares
of Common Stock valued at $600,000 and 200,000 shares of Series A Convertible
Preferred Stock valued at $1,000,000. The valuation of the investment in both
classes of Interiors, Inc's securities approximated the market closing price at
the time of issuance with an 11% discount. Accordingly, aggregate estimated fair
value of the investment approximates carrying value. As disclosed in Note 11A,
on May 28, 1996, the Company entered into a management agreement with Interiors,
Inc. whereby Interiors, Inc. will provide the Company certain marketing and
management services. The exchange of shares between the Company and Interiors,
Inc. is pursuant to the Company's intentions to secure the ongoing and long-term
availability of these services. Accordingly, the Company's intention is to
maintain a long-term position in its investment in Interiors, Inc. As of March
31, 1996, the per share market value of Interiors, Inc.'s Common Stock and
Series A Convertible Preferred Stock was $3,063 and $5,875, respectively.
Accordingly, gross unrealized holding gains of $12,600 and $175,000 existed at
March 31, 1996 on the Common Stock and Series A Convertible Preferred Stock,
respectively. As of June 30, 1996, the per share market value of Interiors,
Inc.'s common stock and Series A Convertible Preferred Stock was 4.25 and 7.25,
respectively. Accordingly, gross unrealized holding gains of $250,000 and
$450,000 exist at June 30, 1996 of the common stock and Series A Convertible
Preferred Stock, respectively. As of June 30, 1996, Interiors, Inc. owns
approximately 16% of the Company assuming the 500,000 shares of Series A
Convertible Preferred Stock were converted into common stock. Following the
proposed public offering Interiors, Inc. will own approximately 86.5% of the
total voting stock outstanding assuming the exercise of the options to purchase
20,000,000 shares of Class B Preferred Stock. Such ownership is consistent with
the Company's intentions stated above as well as the provision by Interiors,
Inc. of additional equity contributions disclosed in Note 11E.
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information Relating to June 30, 1996 is Unaudited]
- --------------------------------------------------------------------------------
B-8
<PAGE>
[9] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial note disclosure purposes in any event. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995; the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995.
The FASB has also issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company.
[10] Financial Instruments
The carrying amount of cash, notes receivable and notes payable approximates
fair value because of their short maturities.
[11] Subsequent Events [Unaudited]
[A] Management Agreements - Related Party - On May 28, 1996, the Company entered
into a management agreement with Interiors, Inc. which specializes in the home
furnishings and decorative accessories industries. The agreement calls for a
management fee of $75,000 or 1.5% of gross sales, whichever is greater, per
annum. The management fee will be accrued quarterly and paid quarterly to the
extent that there is excess cash flow available to the Company as defined in the
agreement. No payment in any quarter will exceed 50% of excess cash flow as
defined. The agreement has a term of two years with renewal options at the
mutual consent of both parties [See Note 8].
[B] Employment Agreement - President - In June 1996, the Company entered into an
employment contract with the President of the Company for which an initial base
salary of $117,000 will take effect upon the close of the acquisition of Artisan
House. In addition, the agreement calls for the granting of options to purchase
10,000 shares of Common Stock of the Company at an exercise price of $2.50 per
share for each full year of employment. Under the agreement and an annual bonus
equal to 2% of the amount by which the Company's net sales exceed the Company's
net sales for the year ended June 30, 1997.
[C] Commitment Letter - Secured Loan Agreement
On May 31, 1996, the Company received a commitment letter for a revolving credit
agreement for a maximum loan amount of $1,100,000. The agreement requires the
satisfaction of a number of conditions prior to funding including the completion
of a due diligence review. The terms of the loan include an annual interest rate
of prime plus 4%, a management fee of 3% of sales, a security interest in all of
the Company's accounts receivable, inventory, and equipment, and any proceeds
therefrom, a guaranty of the Company's Chairman of the Board, and a prepayment
fee of $25,000 in the event of a prepayment. In the event that the Company is
unable to satisfy such conditions, the Company will not receive the proceeds
from such loan.
Prime rate at June 30, 1996 was approximately 8%.
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information Relating to June 30, 1996 is Unaudited]
- --------------------------------------------------------------------------------
[11] Subsequent Events [Unaudited] [Continued]
B-9
<PAGE>
[D] Stockholder Loan Payable - On June 21, 1996, the Company received
commitments from its stockholders for an additional $50,000 in loan proceeds.
The Company received $35,500 as of June 30, 1996, and the balance of $14,500 was
received in July of 1996. The notes have interest of 12% per annum and a
maturity date which is the earlier of 15 months following the close of the
proposed public offering or June 21, 1998.
[E] Additional Equity Contribution - On August 9, 1996, the Company agreed to
issue to Interiors, Inc. 56,667 shares of Series C Non-Voting, Convertible,
Preferred Stock for cash of $425,000. On August 23, 1996, the Company agreed to
issue to Interiors, Inc. an additional 37,500 shares of Series C NonVoting,
Convertible, Preferred Stock for cash of $281,250. On September 6 and 13, 1996
the Company agreed to issue to Interiors, Inc. an additional aggregate 15,700
shares of Series C Non-Voting Convertible Preferred Stock for cash of $117,750.
[F] Exercise of Options - On September 3, 1996 the Option to purchase 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock was exercised for
$2,000.
[12] Unaudited Interim Statements
The financial statements as of June 30, 1996 and for the three months ended June
30, 1996 are unaudited; however, in the opinion of management all adjustments
[consisting solely of normal recurring adjustments] which are necessary in order
to make the interim financial statements not misleading have been made. The
results of the interim period are not necessarily indicative of the results to
be obtained for a full fiscal year.
--------------------
B-10
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholder of
Artisan House, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of Artisan House, Inc. as of
January 31, 1996, and the related statements of operations, stockholder's
equity, and cash flows for each of the two fiscal years in the period ended
January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Artisan House, Inc. as of
January 31, 1996, and the results of its operations and its cash flows for each
of the two fiscal years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
MORTENSON AND ASSOCIATES, P.C.
Certified Public Accountants.
Cranford, New Jersey
May 15, 1996
C-1
<PAGE>
ARTISAN HOUSE, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30, January 31,
1996 1996
---------- ----------
[Unaudited]
Assets:
Current Assets:
Cash $ 37,876 $ 96,771
Accounts Receivable - Net 1,102,652 838,108
Inventory 968,081 911,951
Prepaid Expenses 144,060 161,422
---------- ----------
Total Current Assets 2,252,669 2,008,252
Property and Equipment - Net 113,128 121,880
Other Assets 26,299 20,052
---------- ----------
Total Assets $2,392,096 $2,150,184
========== ==========
Liabilities and Stockholder's Equity:
Current Liabilities:
Accounts Payable $ 202,457 $ 193,646
Accrued Expenses 217,762 163,135
Loan Payable - Stockholder 230,733 501,093
Notes Payable 159,361 169,134
Accrued Interest Payable - Stockholder 423,018 409,632
Accrued Rent Payable - Stockholder 170,733 170,733
Deferred Revenue 165,000 --
---------- ----------
Total Current Liabilities 1,569,064 1,607,373
---------- ----------
Long-Term Liability:
Notes Payable 68,727 73,286
---------- ----------
Commitments and Contingencies -- --
---------- ----------
Stockholder's Equity:
Common Stock - No Par Value, 75,000 Shares
Authorized, 8,000 Issued and Outstanding 80,000 80,000
Additional Paid-in Capital 200,000 200,000
Retained Earnings 474,305 189,525
---------- ----------
Total Stockholder's Equity 754,305 469,525
---------- ----------
Total Liabilities and Stockholder's Equity $2,392,096 $2,150,184
========== ==========
See Notes to Financial Statements.
C-2
<PAGE>
ARTISAN HOUSE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months ended Years ended
June 30, January 31,
-------- -----------
1996 1995 1996 1995
----------- ----------- ----------- -----------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Sales - Net $ 2,310,976 $ 1,904,832 $ 4,809,422 $ 3,994,909
Total Cost of Goods Sold 1,233,714 1,024,672 2,596,383 2,134,086
----------- ----------- ----------- -----------
Gross Profit 1,077,262 880,160 2,213,039 1,860,823
----------- ----------- ----------- -----------
Selling, General and Administrative
Expenses:
Selling, Advertising and Promotion 460,954 395,179 1,011,314 856,874
General and Administrative Expenses 303,671 253,492 673,277 607,350
----------- ----------- ----------- -----------
Total Selling, General and
Administrative Expenses 764,625 648,671 1,684,591 1,464,224
----------- ----------- ----------- -----------
Income from Operations 312,637 231,489 528,448 396,599
----------- ----------- ----------- -----------
Other [Income] Expenses:
Interest Expense - Stockholder 13,356 18,540 43,613 44,182
Interest Expense 15,275 8,104 40,466 23,460
Interest Income (774) (963) (2,218) (1,483)
Other Income -- -- (6,751) (2,601)
Loss on Asset Disposals -- -- 2,255 2,524
----------- ----------- ----------- -----------
Other Expenses - Net 27,857 25,681 77,365 66,082
----------- ----------- ----------- -----------
Income Before Provision for
Pro Forma Income Taxes 284,780 205,808 451,083 330,517
Provision for Pro Forma Income
Taxes 114,000 82,000 180,000 132,000
----------- ----------- ----------- -----------
Pro Forma Net Income $ 170,780 $ 123,808 $ 271,083 $ 198,517
=========== =========== =========== ===========
Pro Forma Earnings Per Share $ 21.35 $ 15.48 $ 33.89 $ 24.81
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
C-3
<PAGE>
ARTISAN HOUSE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Stockholder's
--------------------- Paid-in Earnings Equity
Shares Amount Capital [Deficit] [Deficit]
------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1994 8,000 $80,000 $200,000 $(592,075) $(312,075)
Net Income -- -- -- 330,517 330,517
----- ------- -------- --------- ---------
Balance at January 31, 1995 8,000 80,000 200,000 (261,558) 18,442
Net Income -- -- -- 451,083 451,083
----- ------- -------- --------- ---------
Balance at January 31, 1996 8,000 80,000 200,000 189,525 469,525
Net Income -- -- -- 284,780 284,780
----- ------- -------- --------- ---------
Balance at June 30, 1996
[Unaudited] 8,000 $80,000 $200,000 $ 474,305 $ 754,305
===== ======= ======== ========= =========
</TABLE>
See Notes to Financial Statements.
C-4
<PAGE>
ARTISAN HOUSE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months ended Years ended
June 30, January 31,
1996 1995 1996 1995
--------- --------- --------- ---------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Operating Activities:
Net Income $ 284,780 $ 205,808 $ 451,083 $ 330,517
--------- --------- --------- ---------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Provision for Bad Debts 22,458 18,265 19,243 12,691
Depreciation and Amortization 10,729 12,319 35,895 20,865
Interest Capitalized into Notes
Payable -- -- 7,000 --
Loss on Asset Disposals -- -- 2,255 2,524
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (287,002) (52,237) (200,224) (118,511)
Inventory (56,130) (76,721) (180,278) (43,198)
Other Assets (4,721) 797 3,828 7,289
Prepaid Expenses 17,362 (16,472) (68,841) (17,251)
Increase [Decrease] in:
Accounts Payable 8,811 2,300 (5,460) (8,505)
Accrued Expenses 54,627 (27,638) 55,725 16,459
Accrued Expenses - Stockholder 13,386 18,541 12,041 5,528
--------- --------- --------- ---------
Total Adjustments (220,480) (120,846) (318,816) (122,109)
--------- --------- --------- ---------
Net Cash - Operating Activities 64,300 84,962 132,267 208,408
--------- --------- --------- ---------
Investing Activities:
Purchase of Property and Equipment (1,977) (8,661) (16,952) (67,052)
Increase in Cash Surrender Value of
Life Insurance (1,526) -- (1,803) --
Deferred Revenue 165,000 -- -- --
--------- --------- --------- ---------
Net Cash - Investing Activities 161,497 (8,661) (18,755) (67,052)
--------- --------- --------- ---------
Financing Activities:
Repayment of Loan Payable -
Stockholder (270,360) (11,606) (58,313) (19,342)
Repayment of Notes Payable (64,332) (14,429) (42,359) (67,063)
Borrowings Under Notes Payable 50,000 -- -- --
--------- --------- --------- ---------
Net Cash - Financing Activities (284,692) (26,035) (100,672) (86,405)
--------- --------- --------- ---------
Net [Decrease] Increase in Cash (58,895) 50,266 12,840 54,951
Cash - Beginning of Periods 96,771 83,931 83,931 28,980
--------- --------- --------- ---------
Cash - End of Periods $ 37,876 $ 134,197 $ 96,771 $ 83,931
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
C-5
<PAGE>
ARTISAN HOUSE, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five months ended Years ended
June 30, January 31,
-------- -----------
1996 1995 1996 1995
--------- --------- --------- ---------
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $21,435 $8,963 $44,759 $28,643
Income Taxes $ 1,500 $4,995 $ 4,995 $ 8,977
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the year ended January 31, 1996, the Company acquired $35,033 of
equipment utilizing financing arrangements.
During the year ended January 31, 1996, $7,000 of accrued interest payable
was added into the principal amount of a new note payable.
See Notes to Financial Statements.
C-6
<PAGE>
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
[Information Relating to June 30, 1996 and 1995 is Unaudited]
- --------------------------------------------------------------------------------
[1] Organization and Summary of Significant Accounting Policies
Organization - Artisan House, Inc. [the "Company"] a California Corporation, was
incorporated on November 18, 1982. The Company is engaged in the business of
manufacturing, marketing, selling and distributing wall hanging sculptures. The
Company manufacturers its products at one location in southern California and
sells through sales representatives and from its showrooms in San Francisco and
North Carolina to furniture retailers and department stores throughout the
United States and internationally.
Cash and Cash Equivalents - The Company classifies all highly liquid debt
instruments purchased with an initial maturity of three months or less to be
cash equivalents. The Company had no cash equivalents at January 31, 1996.
Inventory - Inventory is stated at the lower of cost or market, is comprised of
materials, labor and factory overhead, and is determined on the first-in,
first-out ["FIFO"] basis. At June 30, 1996, inventory was calculated utilizing
the gross profit method.
Property and Equipment - Property and equipment is stated at cost and is net of
accumulated depreciation. The cost of additions and improvements are capitalized
and expenditures for repairs and maintenance are expensed in the period
incurred. Depreciation and amortization of property and equipment is provided
utilizing the straight-line method over the estimated useful lives of the
respective assets as follows:
Vehicles 3 Years
Machinery and Equipment 5 - 10 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized utilizing the straight-line method over the
shorter of the remaining term of the lease or the useful life of the
improvement.
Income Taxes - The Company has elected to be taxed as an S corporation whereby
the stockholder is liable for federal and state income taxes on the Company's
taxable income. A California S corporation is subject to a nominal tax on
income. The pro forma effects of income tax expense as if the entity had been a
C corporation are shown based on an effective tax rate of 40% for the years
ended January 31, 1996 and 1995.
Risk Concentrations - Financial instruments that potentially subject the Company
to concentrations of credit risk include cash and accounts receivable arising
from its normal business activities. The Company places its cash with a high
credit quality financial institution and periodically has cash balances subject
to credit risk beyond insured amounts.
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, has established
an allowance for uncollectible accounts of $57,182 and as a consequence,
believes that its accounts receivable credit risk exposure beyond this allowance
is limited. The Company does not obtain collateral on its accounts receivable.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising Costs - The Company expenses advertising costs as incurred.
Advertising expense was $49,862 and $30,426 for the years ended January 31,
1996 and 1995, respectively. C-7
<PAGE>
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information Relating to June 30, 1996 and 1995 is Unaudited]
- --------------------------------------------------------------------------------
[2] Inventories
The components of inventory are as follows:
June 30, January 31,
1996 1996
[Unaudited]
-------- --------
Raw Materials $443,067 $297,224
Work-in Process 207,245 221,157
Finished Goods 317,769 393,570
-------- --------
Totals $968,081 $911,951
======== ========
[3] Property and Equipment
Property and equipment consist of the following at January 31, 1996:
Machinery and Equipment $ 171,088
Leasehold Improvements 125,727
Furniture and Fixtures 108,149
Office and Computer Equipment 66,058
Vehicles 76,040
---------
Total - At Cost 547,062
Less: Accumulated Depreciation (425,182)
---------
Net $ 121,880
=========
Depreciation and amortization was $35,895 and $20,865 for the years ended
January 31, 1996 and 1995, respectively.
[4] Related Party Transactions
The Company was indebted to its sole stockholder and president in the amounts of
$501,093 and $409,632 for principal and accrued interest, respectively at
January 31, 1996. The loan carries interest at 8% with no fixed repayment plan
or maturity date. Interest expense on the loan was $43,613 and $44,182 for the
years ended January 31, 1996 and 1995, respectively.
The Company rents its principal premises from its sole stockholder and president
under a lease expiring in October 1997. Monthly rent is $16,500 and the Company
is responsible for maintenance, utilities and real estate taxes. Accrued but
unpaid rent at January 31, 1996 was $170,733. Future minimum lease payments
included in future lease commitments are $198,000 and $148,500 for the years
ended January 31, 1997 and January 31, 1998, respectively.
The Company had sales of $13,034 and $6,344 during the years ended January 31,
1996 and 1995, respectively, to a company owned by the sole stockholder and
president of the Company. The related party relationship ceased in July 1995.
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information Relating to June 30, 1996 and 1995 is Unaudited]
- --------------------------------------------------------------------------------
C-8
<PAGE>
[5] Notes Payable
Revolving line of credit [A] $136,539
Note payable with interest at bank prime plus 1.25% maturing in April
1999, collateralized by substantially all the assets of the Company
and guaranteed by the Company's stockholder. 76,000
Note payable with interest ranging from 9.5% to 13.4% maturing
through 2001, collateralized by various equipment, and guaranteed
by the Company's stockholder. 29,881
Total 242,420
Less: Current Portion 169,134
-------
Long-Term Portion $ 73,286
========
Bank prime at January 31, 1996 was 8.25%.
[A] The Company is party to a revolving line of credit agreement. The line of
credit provides for advances based on a percentage of accounts receivable as
defined in the agreement to a maximum available balance of $350,000. At January
31, 1996, the Company can borrow up to the full $350,000. The line of credit
carries interest at bank prime plus 1%, matures November 6, 1996, is
collateralized by substantially all the assets of the Company, and is guaranteed
by the stockholder of the Company. The weighted average interest rate on
short-term borrowings for the year ended January 31, 1996 was 11.6%.
Annual maturities of long-term debt are as follows:
January 31,
- -----------
1997 $169,134
1998 34,525
1999 28,613
2000 7,572
2001 2,576
Thereafter --
--
--------
Total $242,420
========
[6] Commitments and Contingencies
The Company leases office space under operating leases which expire through
2000. The leases provide for various terms including additional rent based on
increases in operating costs. The Company also leases equipment under operating
leases expiring through 2001.
Future minimum lease payments under noncancelable operating leases with
remaining terms of one year or more are as follows at January 31, 1996:
January 31,
- -----------
1997 $277,661
1998 230,056
1999 69,882
2000 36,895
2001 3,008
Thereafter --
--
--------
Total $617,502
========
C-9
<PAGE>
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information Relating to June 30, 1996 and 1995 is Unaudited]
- --------------------------------------------------------------------------------
[6] Commitments and Contingencies [Continued]
Rent expense, including real estate taxes and escalation charges, for the years
ended January 31, 1996 and 1995 was $285,800 and $282,691, respectively.
[7] Financial Instruments
The carrying amount of cash, accounts receivable and trade payables approximates
fair value because of their short maturities. The carrying amount of notes
payable and loan payable - stockholder approximates their fair value because
they bear interest at various rates that approximates the Company's cost of
capital.
[8] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," in March of
1995. SFAS No. 121 established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 is not expected to have a material impact on the
Company's financial statements.
[9] Subsequent Event
On March 25, 1996, the Company agreed to sell substantially all of its assets
and certain liabilities for an aggregate of $3,626,400 less the amount of cash
held by the Company on the closing date [the retained cash amount] and subject
to adjustment based on certain net asset requirements. The sale price will be
paid by (I) the payment of $150,000 upon execution of the agreement, (ii) the
payment of $2,250,000 in extension payments and at the closing, (iii) the
delivery of a promissory note in the principal amount of $926,400 less the
retained cash amount and any adjustment based on net assets bearing interest at
8%, and (iv) the issuance of 100,000 shares of the parent company of the
acquiror valued at $300,000.
[10] Unaudited Interim Statements
The financial statements as of June 30, 1996 and for the five months ended June
30, 1996 and 1995 are unaudited; however, in the opinion of management all
adjustments [consisting solely of normal recurring adjustments] necessary in
order to make the interim financial statements not misleading have been made.
The results of the interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year.
--------------------
C-10
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Representative. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus does not
constitute an offer of any securities other than the securities to which it
relates or an offer to any person in any jurisdiction in which such an offer
would be unlawful.
--------------------
TABLE OF CONTENTS
Page
----
Available Information ................................................
Prospectus Summary ...........................,.......................
The Company ..........................................................
The Offering .........................................................
Summary Financial ....................................................
Information ........................................................
Risk Factors .........................................................
Use of Proceeds ......................................................
Dilution .............................................................
Capitalization .......................................................
Dividend Policy ......................................................
Selected Financial Data ..............................................
Management's Discussion and ..........................................
Analysis of Financial ................................................
Condition and Results of ............................................
Operations ..........................................................
Business .............................................................
Management ...........................................................
Principal Stockholders ...............................................
Certain Transactions .................................................
Description of .......................................................
Securities ..........................................................
Selling Securityholders ..............................................
Underwriting .........................................................
Legal Matters ........................................................
Experts ..............................................................
Additional Information ...............................................
Financial Statements .................................................
--------------------
Until ___________, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Representatives and with respect to their unsold allotments or
subscriptions.
325,000 Units
Each Unit Consists of Two (2) Shares of Common Stock and One (1) Class A
Redeemable Common Stock Purchase Warrant
DECOR GROUP, INC.
----------
PROSPECTUS
----------
VTR CAPITAL, INC.
_________, 1996
----------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1996
ALTERNATE
PROSPECTUS
DECOR GROUP, INC.
2,562,000 shares of Common Stock
and
3,000,000 Class A Warrants
This Prospectus relates to the sale of (I) 3,000,000 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") issuable to certain
unaffiliated bridge lenders to the Company (the "Bridge Lenders"), (ii)
2,062,000 shares of Common Stock which are held by certain stockholders of the
Company (the "Selling Stockholders") and (iii) 500,000 shares of Common Stock
issuable to Interiors, Inc. ("Interiors") upon the conversion of 500,000 shares
of Series A Preferred Stock held thereby. The Bridge Lenders, the Selling
Stockholders and Interiors are hereinafter collectively referred to as the
"Selling Securityholders." The officers and directors of the Company as well as
certain members of their immediate families (including certain Selling
Securityholders holding an aggregate of 250,000 shares of Common Stock) and
Interiors have agreed not to sell or transfer the securities of the Company held
thereby for a period of twenty-four (24) months following the Effective Date,
subject to earlier release by the Representative. The Company will not receive
any of the proceeds on the sale of the securities by the Selling
Securityholders. The resale of the securities of the Selling Securityholders are
subject to Prospectus delivery and other requirements of the Securities Act of
1933, as amended (the "Act"). Sales of such securities or the potential of such
sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See "Selling Securityholders" and "Risk Factors -
Shares Eligible for Future Sale May Adversely Affect the Market."
The Class A Warrants shall be exercisable commencing one (1) year after the
date hereof (the "Effective Date"). Each Class A Warrant entitles the holder to
purchase one (1) share of Common Stock at a price of $4.00 per share during the
four (4) year period commencing one (1) year from the Effective Date. The Class
A Warrants are redeemable by the Company for $.05 per Warrant, at any time after
, 1997, upon thirty (30) days' prior written notice, if the closing bid price of
the Common Stock, as reported by the principal exchange on which the Common
Stock is traded, The Nasdaq SmallCap Market or the National Quotation Bureau
Incorporated, as the case may be, equals or exceeds $12.00 per share, for any
twenty (20) consecutive trading days ending five (5) days prior to the date of
the notice of redemption. Upon thirty (30) days' written notice to all holders
of the Class A Warrants, the Company shall have the right to reduce the exercise
price and/or extend the term of the Class A Warrants. See "Description of
Securities."
The Company has applied for inclusion of the Units, the Common Stock and
the Class A Warrants on The Nasdaq Small Cap Market, although there can be no
assurances that an active trading market will develop even if the securities are
accepted for quotation. Additionally, even if the Company's securities are
accepted for quotation and active trading develops, the Company is still
required to maintain certain minimum criteria established by The Nasdaq Small
Cap Market, of which there can be no assurance. See "Risk Factors - Lack of
Prior Market for Units, Common Stock and Class A Warrants; No Assurance of
Public Trading Market."
The Common Stock offered by this Prospectus may be sold from time to time
by the Selling Securityholders, or by their transferees. No underwriting
arrangements have been
<PAGE>
entered into by the Selling Securityholders and such Selling Securityholders are
not obligated to sell the Company securities through VTR Capital, Inc., the
representative (the "Representative") of the underwriters of the Company's
initial public offering or any other NASD member. See "Company Offering". The
distribution of the securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more dealers for resale of such shares as principals at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with sales of such securities.
The Selling Securityholders and intermediaries through whom such securities
may be sold may be deemed "Underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Act"), with respect to the securities offered and
any profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities under the Act.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders. All costs incurred in the
registration of the securities of the Selling Securityholders are being borne by
the Company. See "Selling Securityholders."
--------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
OFFERED HEREBY AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" and "RISK FACTORS."
--------------------
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.
The date of this Prospectus is September , 1996
Alt - ii
<PAGE>
ALTERNATE
COMPANY OFFERING
On the date of this Prospectus, a Registration Statement under the Act with
respect to an underwritten public offering (the "Offering") of 300,000 Units by
the Company and 25,000 Units owned and offered by Gordon Brothers Capital
Corporation (the "Unit Holder") was declared effective by the Securities and
Exchange Commission ("SEC"), and the Company commenced the sale of Units offered
thereby. Each Unit is comprised of two (2) shares of Common Stock and one (1)
Class A Warrant. Sales of securities under this Prospectus by the Selling
Securityholders or even the potential of such sales may have an adverse effect
on the market price of the Company's securities.
SELLING SECURITYHOLDERS
This Prospectus relates to the sale of (a) 3,000,000 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") issuable to certain
unaffiliated bridge lenders to the Company (the "Bridge Lenders"), (b) 2,062,000
shares of Common Stock which are held by certain stockholders of the Company
(the "Selling Stockholders") and (c) 500,000 shares of Common Stock issuable to
Interiors upon the conversion of 500,000 shares of Series A Preferred Stock held
thereby. The Bridge Lenders and the Selling Stockholders are hereinafter
collectively referred to as the "Selling Securityholders." The officers and
directors of the Company as well as certain members of their immediate families
(including certain Selling Securityholders) holding an aggregate of 250,000
shares of Common Stock) and Interiors have agreed not to sell or transfer the
securities of the Company held thereby for a period of twenty-four (24) months
following the Effective Date, subject to earlier release by the Representative.
The Company will not receive any of the proceeds on the sale of the securities
by the Selling Securityholders. The resale of the securities of the Selling
Securityholders are subject to Prospectus delivery and other requirements of the
Securities Act of 1933, as amended (the "Act"). Sales of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Selling Securityholders" and "Risk
Factors - Shares Eligible for Future Sale May Adversely Affect the Market."
The following table sets forth the holders of the shares of Common Stock
which are being offered by the Selling Securityholders and the number of shares
owned before the Offering, the number of shares being offered and the number of
shares and the percentage of the class to be owned after the Offering is
complete.
Alt - iii
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Name Shares of Class A Shares of
Common Warrants Common Class A
Stock Owned Owned Stock Warrants
Before Before Offered Offered
Offering Offering(1) Hereby Hereby
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
M.D. Funding, Inc. 1,827,500 480,000 1,462,000 480,000
- -----------------------------------------------------------------------------------
Laurie Munn(2) 200,000(4) 0 160,000(4) 0
- -----------------------------------------------------------------------------------
Judy Pace 122,500 0 100,000 0
- -----------------------------------------------------------------------------------
First National 250,000 120,000 200,000 0
Funding, Inc.
- -----------------------------------------------------------------------------------
Ulster Investments, 125,000 120,000 100,000 120,000
Ltd.
- -----------------------------------------------------------------------------------
Matthew Harriton(3) 50,000(4) 0 40,000(4) 0
- -----------------------------------------------------------------------------------
Clint Hill 0 1,000,000 0 1,000,000
Investments, Inc.
- -----------------------------------------------------------------------------------
Dune Holdings, Inc. 0 1,200,000 0 1,200,000
- -----------------------------------------------------------------------------------
Michael Yordy 0 20,000 0 20,000
- -----------------------------------------------------------------------------------
Harold Yordy 0 20,000 0 20,000
- -----------------------------------------------------------------------------------
Bruce Ungerleider 0 20,000 0 20,000
- -----------------------------------------------------------------------------------
Stephen Osman 0 20,000 0 20,000
- -----------------------------------------------------------------------------------
Interiors, Inc. 500,000(4)(5) 0 500,000 0
- -----------------------------------------------------------------------------------
Total 3,075,000 3,000,000 2,562,000 3,000,000
- -----------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------
Name Shares of Percent of
Common Class A Percent of Class A
Stock Owned Warrants Common Warrants
After Owned After Stock After After
Offering Offering Offering Offering
- -----------------------------------------------------------------------------------
M.D. Funding, Inc. 365,500 0 11.3% 0
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Laurie Munn(2) 40,000(4) 0 1.3% 0
- -----------------------------------------------------------------------------------
Judy Pace 22,500 0 .7% 0
- -----------------------------------------------------------------------------------
First National 50,000 0 1.6% 0
Funding, Inc.
- -----------------------------------------------------------------------------------
Ulster Investments, 25,000 0 .8% 0
Ltd.
- -----------------------------------------------------------------------------------
Matthew Harriton(3) 10,000(4) 0 .3% 0
- -----------------------------------------------------------------------------------
Clint Hill 0 0 0 0
Investments, Inc.
- -----------------------------------------------------------------------------------
Dune Holdings, Inc. 0 0 0 0
- -----------------------------------------------------------------------------------
Michael Yordy 0 0 0 0
- -----------------------------------------------------------------------------------
Harold Yordy 0 0 0 0
- -----------------------------------------------------------------------------------
Bruce Ungerleider 0 0 0 0
- -----------------------------------------------------------------------------------
Stephen Osman 0 0 0 0
- -----------------------------------------------------------------------------------
Interiors, Inc. 0 0 0 0
- -----------------------------------------------------------------------------------
Total 513,000 0 -- 0
- -----------------------------------------------------------------------------------
</TABLE>
(1) Assumes the issuance of Class A Warrants to the Bridge Lenders as of the
Effective Date.
(2) Ms. Munn is the wife of Max Munn, the Chairman of the Board of the Company.
(3) Mr. Harriton is a director of the Company.
(4) Such securities may not be sold or transferred for a period of twenty four
(24) months following the Effective Date, without prior written consent of
the Representative.
(5) Assumes the conversion of 500,000 shares of Series A Preferred Stock into
500,000 shares of Common Stock. Interiors, Inc. also holds 20,000,000
shares of Series B Preferred Stock and 109,867 shares of Series C Preferred
Stock.
Alt - iv
<PAGE>
Alt - v
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through Representatives, dealers or agents.
The distribution of securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
Offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholders or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby. See "Company Offering."
Alt - vi
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Representative. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus does not
constitute an offer of any securities other than the securities to which it
relates or an offer to any person in any jurisdiction in which such an offer
would be unlawful.
-------------------
TABLE OF CONTENTS
Page
----
Available Information ................................................
Prospectus Summary ...................................................
The Company ..........................................................
The Offering .........................................................
Summary Financial ....................................................
Information ........................................................
Risk Factors .........................................................
Use of Proceeds ......................................................
Dilution .............................................................
Capitalization .......................................................
Dividend Policy ......................................................
Selected Financial Data ..............................................
Management's Discussion and ..........................................
Analysis of Financial ................................................
Condition and Results of ............................................
Operations ..........................................................
Business .............................................................
Management ...........................................................
Principal Stockholders ...............................................
Certain Transactions .................................................
Description of .......................................................
Securities ..........................................................
Selling Securityholders ..............................................
Underwriting .........................................................
Legal Matters ........................................................
Experts ..............................................................
Additional Information ...............................................
Financial Statements .................................................
-------------------
Until _______, 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Representatives and with respect to their unsold allotments or
subscriptions.
[ALTERNATE]
2,562,000 Shares of Common Stock
and
3,000,000 Class A Warrants
DECOR GROUP, INC.
----------
PROSPECTUS
----------
September __, 1996
Alt - vii
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In connection with the Offering, the Representative agreed to indemnify the
Company, its directors, and each person who controls it within the meaning of
Section 15 of the Act with respect to any statement in or omission from the
registration statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the Representative specifically for or in connection
with the preparation of the registration statement, the prospectus, or any such
amendment or supplement thereto.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (I) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of Stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
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 does not currently have any liability insurance coverage for
its officers and directors.
II-1
<PAGE>
Items 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this Offering are as follows:
SEC filing fee* ............................... $ 10,000
The Nasdaq SmallCap Market
filing fee .................................. $ 11,000
NASD filing fee ............................... $ 2,000
Accounting fees and expenses* ................. $125,000
Legal fees and expenses* ...................... $200,000
Blue Sky fees and expenses* ................... $ 55,000
Printing and engraving* ....................... $ 75,000
Transfer Agent's and Registrar's fees* ........ $ 4,000
Miscellaneous expenses* ....................... $ 18,000
--------
Total ......................................... $500,000
========
- ----------
* Estimated
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all securities of the Company sold by
it since inception, which securities were not registered under the Securities
Act of 1933, as amended:
In March, 1996, the Company issued (I) 1,827,500 shares of Common Stock to
M.D. Funding, Inc. for cash consideration of $73,100, (ii) 200,000 shares of
Common Stock to Laurie Munn, the wife of Max Munn, the Chairman of the Board of
the Company, for cash consideration of $8,000, (iii) 122,500 shares of Common
Stock to Judy Pace for cash consideration of $4,900, (iv) 250,000 shares of
Common Stock to First National Funding, Inc. for cash consideration of $10,000,
(v) 125,000 shares of Common Stock to Ulster Investments, Ltd. for cash
consideration of $5,000, (vi) 50,000 shares of Common Stock to Matthew Harriton,
a director and formerly the President of the Company, for cash consideration of
$2,000 and (vii) 25,000 Units to Gordon Brothers Capital Corporation for
management services rendered valued at an aggregate of $2,000.
In March 1996, the Company borrowed an aggregate of $250,000 from nine (9)
unaffiliated lenders ( the "Bridge Lenders"). In exchange for making loans to
the Company, each Bridge Lender received a promissory note (the "Bridge Notes").
Each of the Bridge Notes bears interest at a rate of eight percent (8%) per
annum. The Bridge Notes are due and payable upon the earlier of (I) March 18,
1997 or (ii) the closing of an initial underwritten public offering of the
Company's securities. The Company intends to use a portion of the proceeds of
this Offering to repay the Bridge Lenders. See "Use of Proceeds." In addition,
the Bridge Lenders were issued the right to receive commencing on the Effective
Date an aggregate of 3,000,000 Class A Warrants, pro rata, based upon the
principal amount of the Bridge Loan made to the Company. The Company entered
into the bridge financing transactions because it required additional financing
and no other sources of financing were available to the Company at that time.
Further, the Company agreed to register the Class A Warrants as well as the
shares of Common Stock issuable upon exercise of the Class A Warrants in the
first registration statement filed by the Company following the date of the
loan. Therefore, the Registration Statement, of which this Prospectus forms a
part, relates to the resale of 3,000,000 Class A Warrants issuable to the Bridge
Lenders and the shares of Common Stock issuable upon the exercise thereof. See
"Selling Securityholders" "Certain Transactions" and "Underwriting."
II-2
<PAGE>
In August 1996, the Company agreed to issue 94,167 shares of Series C
Preferred Stock to Interiors, Inc. in exchange for the payment of $706,500. In
September 1996, the Company agreed to issue 15,700 shares of Series C Preferred
Stock to Interiors in exchange for the payment of $117,750.
The Company has relied on Section 4(2) of the Securities Act of 1933, as
amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering.
Reference is also made hereby to "Certain Transactions," "Dilution,"
"Principal Stockholders" and "Description of Securities" in the Prospectus for
more information with respect to the previous issuance and sale of the Company's
securities.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are "restricted securities" as defined in Rule 144 of the
rules and the regulations of the Securities and Exchange Commission, Washington
D.C. 20549. All of the aforesaid securities were issued for investment purposes
only and not with a view to redistribution, absent registration. All of the
aforesaid persons have been fully informed and advised concerning the
Registrant, its business, financial and other matters. Transactions by the
Registrant involving the sales of these securities set forth above were issued
pursuant to the "private placement" exemptions under the Securities Act of 1933,
as amended, as transactions by an issuer not involving any public offering. The
Registrant has been informed that each person is (i) a sophisticated investor
capable of assessing the risks inherent in a private offering, (ii) able to bear
the economic risk of his investment and (iii) aware that the securities were not
registered under the Securities Act of 1933, as amended, and cannot be
re-offered or re-sold until they have been so registered or until the
availability of an exemption therefrom. The Transfer Agent and registrar of the
Registrant will be instructed to mark "stop transfer" on its ledgers to assure
that these securities will not be transferred absent registration or until the
availability of an exemption therefrom is determined.
II-3
<PAGE>
Item 27. Exhibits.
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
1.03* Agreement Among Underwriters
1.04* Warrant Exercise Fee Agreement
3.01* Certificate of Incorporation of the Company dated March 1, 1996.
3.02* By-Laws of the Company.
3.03 Certificate of Designation for the Series C Convertible Preferred
Stock.
4.01+ Specimen Certificate for shares of Common Stock.
4.02+ Specimen Certificate for shares of Series A Convertible Preferred
Stock.
4.03+ Specimen Certificate for shares of Series B Non-Convertible Preferred
Stock.
4.04+ Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.
4.05+ Form of Warrant Agreement by and among the Company and American Stock
Transfer & Trust Company.
4.06* Form of Representative's Unit Purchase Warrant.
4.07+ Option Agreement between the Company and Interiors, Inc.
4.08 Voting Agreement between Interiors, Inc., Max Munn, Matt Harriton,
Michael Lulkin and the Company.
4.09+ Specimen Certificate for shares of Series C Preferred Stock.
5.01+ Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
10.01* Asset Purchase Agreement among the Company, Artisan Acquisition Co.,
Artisan House, Inc. and Henry Goldman dated as of March 25, 1996.
10.02* Management Services Agreement between the Company and Interiors, Inc.
10.03 Employment Agreement between the Company and Donald Feldman.
10.04* Form of Bridge Loan Agreements.
10.05* Form of Subscription Agreements.
10.06 1996 Stock Plan.
10.07+ Commitment Letter from United Credit Corporation.
10.08* Financial Advisory Agreement with the Representative.
II-4
<PAGE>
10.09 Amendment No. 1 to Asset Purchase Agreement with Artisan House, Inc.
23.01+ Consent of Bernstein & Wasserman, LLP (to be included in Exhibit
5.01).
23.02 Consent of Moore Stephens, P.C.
+ To be filed by amendment.
* Previously filed.
Item 28. Undertakings.
(a) Rule 415 Offering
The undersigned Registrant will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(I) Include any prospectus required by Section 10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) Include any additional or changed material information on the plan of
distribution.
2. For determining liability under the Act, treat each such post-effective
amendment as a new registration statement of the securities offered, and the
Offering of such securities at that time shall be deemed to be the initial bona
fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
(b) Equity Offerings of Nonreporting Small Business Issuers
The undersigned Registrant will provide to the Representative at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Representative to
permit prompt delivery to each purchaser.
(c) Indemnification
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions referred to in Item 22 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
II-5
<PAGE>
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) Rule 430A
The undersigned Registrant will:
1. For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of a prospectus filed by
the small business issuer under Rule 424(b)(1) or (4) or 497(h) under the Act as
part of this Registration Statement as of the time the Commission declared it
effective.
2. For any liability under the Act, treat each post-effective amendment
that contains a form of prospectus as a new registration statement for the
securities offered in the Registration Statement, and that the Offering of the
securities at that time as the initial bona fide Offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant, certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in New
York, New York on September 27, 1996.
DECOR GROUP, INC.
By: /s/Donald Feldman
--------------------
Donald Feldman
President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/Donald Feldman President and September 27, 1996
- ---------------------- Chief Financial Officer
Donald Feldman
/s/Max Munn Chairman of the Board September 27, 1996
- ---------------------- of Directors
Max Munn
/s/Matthew L. Harriton Director September 27, 1996
- ----------------------
Matthew L. Harriton
/s/Michael Lulkin Director September 27, 1996
- ----------------------
Michael Lulkin
<PAGE>
EXHIBIT 1.01
<PAGE>
Decor Group, Inc.
320 Washington Street
Mt. Vernon, New York 10553
UNDERWRITING AGREEMENT
VTR Capital Inc. __________, 1996
99 Wall Street
New York, NY 10005
Gentlemen:
Decor Group, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to VTR Capital Inc. ("VTR" or the "Representative") and to each
of the other underwriters named in Schedule I hereto (the "Underwriters"), for
each of whom you are acting as Representative, an aggregate of 250,000 Units
(the "Company Units"), each Unit consisting of two shares of Common Stock, par
value $.0001 ("Common Stock"), and one Redeemable Class A Common Stock Purchase
Warrant (the "Warrants") of the Company at a public offering price of $10.00 per
Unit. In addition, 25,000 Units (the "Selling Security Holder Units") will be
sold to the Underwriters named in Schedule I by Gordon Brothers Capital
Corporations (the "Selling Security Holder") also at a public offering price of
$10.00 per Unit.
Each Warrant shall entitle the holder to purchase one share of Common Stock
for a four year period commencing one year from the Effective Date (hereinafter
defined) at a price of $4.00 per share. The Unit Warrants will be immediately
detachable from the Common Stock on the Effective Date. The Warrants may be
called by the Company commencing one year from the Effective Date upon at least
thirty days prior written notice at a price of $.05 per Warrant at any time
provided the closing bid for the Common Stock is at least $12.00 during each day
of the twenty (20) trading day period ending on the fifth day preceding the date
of the written notice. The Warrant Agreement will provide that no such notice
will be given until there is a current Registration Statement and Prospectus on
file with the Securities and Exchange Commission at the time such notice is
given to Warrant Holders and that the notice may not be mailed to Warrant
Holders during the aforesaid one-year period from the Effective Date. The
Company Units and the Selling Security Holder Units are hereinafter sometimes
referred to as the "Firm
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Units." Upon the request of the Representative, and as provided in Section 3
hereof, the Company will also issue and sell to the Underwriters up to a maximum
of an additional 37,500 Units for the purpose of covering over-allotments. Such
additional Units are hereinafter sometimes referred to as the "Optional Units."
Both the Firm Units and the Optional Units are sometimes collectively referred
to herein as the "Units." All of the securities which are the subject of this
Agreement are more fully described in the Prospectus of the Company described
below. In the event that the Representative does not form an underwriting group
but decides to act as the sole Underwriter, then all references to VTR herein as
Representative shall be deemed to be to it as such sole Underwriter and Section
14 hereof shall be deemed deleted in its entirety.
The Company and the Selling Security Holder understand that the
Underwriters propose to make a public offering of the Units as soon as the
Representative deems advisable after the Registration Statement hereinafter
referred to becomes effective. The Company and the Selling Security Holder
hereby confirm their agreement with the Representative and the other
Underwriters as follows:
SECTION 1. Description of Securities. The Company's authorized and
outstanding capitalization when the public offering of securities contemplated
hereby is permitted to commence, under the Securities Act of 1933, as amended
(the "Act"), and at the Closing Date (hereinafter defined) and the terms of the
Warrants and other securities will be as set forth in the Prospectus
(hereinafter defined).
SECTION 2. Representations and Warranties of the Company and the Selling
Security Holder. The Company hereby represents and warrants to, and agrees with,
the Underwriters as follows:
(a) A Registration Statement on Form SB-2 and amendments thereto (No.
333-_____) with respect to the Units, including a form of prospectus relating
thereto, copies of which have been previously delivered to you, have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission under the Act. The Company, subject to the provisions of Section 6(a)
hereof, may file one or more amendments to such Registration Statement and
Prospectus. The Underwriters will receive copies of each such amendment.
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The date on which such Registration Statement is declared effective
under the Act and the public offering of the Units as contemplated by this
Agreement is therefore authorized to commence, is herein called the "Effective
Date." The Registration Statement and Prospectus, as finally amended and revised
immediately prior to the Effective Date, are herein called respectively the
"Registration Statement" and the "Prospectus." If, however, a prospectus is
filed by the Company pursuant to Rule 424(b) of the Rules and Regulations which
differs from the Prospectus, the term "Prospectus" shall also include the
prospectus filed pursuant to Rule 424(b).
(b) The Registration Statement (and Prospectus), at the time it
becomes effective under the Act, (as thereafter amended or as supplemented if
the Company shall have filed with the Commission an amendment or supplement),
and, with respect to all such documents, on the Closing Date (hereinafter
defined), will in all material respects comply with the provisions of the Act
and the Rules and Regulations, and will not contain an untrue statement of a
material fact and will not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subsection (b)
shall extend to the Underwriters in respect of any statements in or omissions
from the Registration Statement and/or the Prospectus, based upon information
furnished in writing to the Company by the Underwriters specifically for use in
connection with the preparation thereof.
(c) The Company has been duly incorporated and is now, and on the
Closing Date will be, validly existing as a corporation in good standing under
the laws of the State of Delaware, having all required corporate power and
authority to own its properties and conduct its business as described in the
Prospectus. The Company is now, and on the Closing Date will be, duly qualified
to do business as a foreign corporation in good standing in all of the
jurisdictions in which it conducts its business or the character or location of
its properties requires such qualifications except where the failure to so
qualify would not materially adversely affect the Company's business, properties
or financial condition. The Company has no subsidiaries, except as are set forth
in the Prospectus.
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(d) The financial statements of the Company (audited and unaudited)
included in the Registration Statement and Prospectus present fairly the
financial position and results of operations and changes in financial condition
of the Company at the respective dates and for the respective periods to which
they apply; and such financial statements have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved, and are in accordance with the books and records of the
Company.
(e) To the best of the Company's knowledge, Mortenson & Associates,
P.C., independent auditors, who have given their report on certain financial
statements which are included as a part of the Registration Statement and the
Prospectus are independent public accountants as required under the Act and the
Rules and Regulations.
(f) Subsequent to the respective dates as of which information is
given in the Prospectus and prior to the Closing Date and, except as set forth
in or contemplated in the Prospectus, (i) the Company has not incurred, nor will
it incur, any material liabilities or obligations, direct or contingent, nor has
it, nor will it have entered into any material transactions, in each case not in
the ordinary course of business; (ii) there has not been, and will not have
been, any material change in the Company's Certificate of Incorporation or in
its capital stock or funded debt; and (iii) there has not been, and will not
have been, any material adverse change in the business, net worth or properties
or condition (financial or otherwise) of the Company whether or not arising from
transactions in the ordinary course of business.
(g) Except as otherwise set forth in the Prospectus, the real and
personal properties of the Company as shown in the Prospectus and Registration
Statement to be owned by the Company are owned by the Company by good and
marketable title free and clear of all liens and encumbrances, except those
specifically referred to in the Prospectus, and except those which do not
materially adversely affect the use or value of such assets and except the lien
for current taxes not now due, or are held by the Company by valid leases, none
of which is in default. Except as disclosed in the Prospectus and Registration
Statement, the Company in all material respects has full right and licenses,
permits and governmental authorizations required to maintain and operate its
business and properties as the same are now operated and, to its best knowledge,
none of the activities or business of the Company
5
<PAGE>
is in material violation of, or causes the Company to violate any laws,
ordinances and regulations applicable thereto, the violation of which would have
a material adverse impact on the condition (financial or otherwise), business,
properties or net worth of the Company.
(h) The Company has no material contingent obligations, nor are its
properties or business subject to any material risks, which may be reasonably
anticipated, which are not disclosed in the Prospectus.
(i) Except as disclosed in the Prospectus and Registration Statement,
there are no material actions, suits or proceedings at law or in equity of a
material nature pending, or to the Company's knowledge, threatened against the
Company which are not adequately covered by insurance, which might result in a
material adverse change in the condition (financial or otherwise), properties or
net worth of the Company, and there are no proceedings pending or, to the
knowledge of the Company, threatened against the Company before or by any
Federal or State Commission, regulatory body, or administrative agency or other
governmental body, wherein an unfavorable ruling, decision or finding would
materially adversely affect the business, properties or net worth or financial
condition or income of the Company, which are not disclosed in the Prospectus.
(j) All of the outstanding shares of Common Stock and Series A
Convertible Preferred Stock are duly authorized and validly issued and
outstanding, fully paid, and non-assessable, and are free of preemptive rights.
The Series B Non-Convertible Preferred Stock which is issuable upon exercise of
options to purchase 20,000,000 share held by Interiors, Inc., will upon payment
and issuance be deemed validly issued and outstanding, fully-paid and
non-assessable and free of pre-emptive rights. (The Series A Convertible
Preferred Stock and Series B Non-Convertible Preferred Stock are hereinafter
collectively referred to as the "Preferred Stock.") The Common Stock and the
shares of Common Stock issuable upon exercise of the Warrants, when paid for,
issued and delivered in accordance with this Agreement and the Warrant Agreement
between the Company and American Stock Transfer & Trust Company, dated as of
_______________, will be duly authorized, validly issued, fully paid and
non-assessable and will not be issued in violation of any preemptive rights. The
Underwriters will receive good and marketable title to the Units purchased by
them from the Company, free and clear of all liens, encumbrances,
6
<PAGE>
claims, security interests, restrictions, stockholders' agreements and voting
trusts whatsoever. Except as set forth in the Prospectus, there are no
outstanding options, warrants, or other rights, providing for the issuance of,
and no commitments, plans or arrangements to issue, any shares of any class of
capital stock of the Company, or any security convertible into, or exchangeable
for, any shares of any class of capital stock of the Company. All of the
securities of the Company to which this Agreement relates conform to the
statements relating to them that are contained in the Registration Statement and
Prospectus.
(k) The certificate or certificates required to be furnished to the
Underwriters pursuant to the provisions of Section 11 hereof will be true and
correct.
(l) The execution and delivery by the Company of this Agreement has
been duly authorized by all necessary corporate action and it is a valid and
binding obligation of the Company, enforceable against it in accordance with its
terms except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws pertaining to creditors
rights generally.
(m) No default exists, and no event has occurred which, with notice or
lapse of time, or both, would constitute a default in the due performance and
observance of any material term, covenant or condition by the Company or any
other party, of any material indenture, mortgage, deed of trust, note or any
other material agreement or instrument to which the Company is a party or by
which it or its business or its properties may be bound or affected, except (i)
as disclosed in the Prospectus, (ii) such defaults as have been waived by all
parties who would otherwise have a remedy or right with respect thereto or (iii)
such defaults which will not cause any material adverse change in the business,
net worth, properties or conditions (financial or otherwise), of the Company.
The Company has full power and lawful authority to authorize, issue and sell the
Units to be sold by it hereunder on the terms and conditions set forth herein
and in the Registration Statement and in the Prospectus. No consent, approval,
authorization or other order of any regulatory authority is required for such
authorization, issue or sale, except as may be required under the Act or State
securities laws. The execution and delivery of this Agreement, the consummation
of the transactions herein contemplated, and compliance with the terms hereof
will not conflict with, or constitute a default under any indenture, mortgage,
deed of trust, note or any other agreement or instrument
7
<PAGE>
to which the Company is now a party or by which it or its business or its
properties may be bound or affected; the Certificate of Incorporation and any
amendments thereto; the by-laws of the Company, as amended; or any law, order,
rule or regulation, writ, injunction or decree of any government, governmental
instrumentality, or court, domestic or foreign, having jurisdiction over the
Company or its business or properties.
(n) No officer or director of the Company has taken, and each officer
and director has agreed that he will not take, directly or indirectly, any
action designed to stabilize or manipulate the price of the Units, the Common
Stock or the Warrants in the open market following the Closing Date or any other
type of action designed to, or that may reasonably be expected to cause or
result in such stabilization or manipulation, or that may reasonably be expected
to facilitate the initial sale, or resale, of any of the securities which are
the subject of this Agreement.
(o) The Warrants to be issued to the Representative (the
"Underwriters' Warrants") hereunder will be, when issued, duly and validly
authorized and executed by the Company and will constitute valid and binding
obligations of the Company, legally enforceable in accordance with their terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws pertaining to creditors rights
generally), and the Company will have duly authorized, reserved and set aside
the shares of its Common Stock issuable upon exercise of the Underwriters'
Warrants, and such stock, when issued and paid for upon exercise of the
Underwriters' Warrants in accordance with the provisions thereof, will be duly
authorized and validly issued, fully-paid and non-assessable.
(p) All of the aforesaid representations, agreements, and warranties
shall survive delivery of, and payment for, the Units.
The Selling Security Holder, represents and warrants to and agrees with the
several Underwriters that:
(i) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation before any court or
beneficiary, public body or board pending, threatened, or in prospect (or any
basis therefor known to the Selling Stockholder) with respect to the Selling
Stockholder. The Selling Stockholder is not in violation of, or in default with
respect to, any law, rule, regulation, order, judgment, or decree;
8
<PAGE>
nor is the Selling Stockholder required to take any action in order to avoid
such violation or default.
(ii) The Selling Stockholder has all requisite power and authority to
execute, deliver, and perform this Agreement. This Agreement has been duly
executed and delivered by or on behalf of the Selling Stockholder, is the legal,
valid and binding obligation of the Selling Stockholder, and is enforceable as
to the Selling Stockholder in accordance with its terms. No consent,
authorization, approval, order, license, certificate, or permit of or from, or
declaration or filing with, any federal, state, local or other governmental
authority or any court or other tribunal is required by the Selling Stockholder
for the execution, delivery or performance of this Agreement (except filings
under the Act which have been made before the applicable Closing Date and such
consents consisting only of consent under "blue sky" or securities laws which
have been obtained at or prior to the date of this Agreement) by the Selling
Stockholder. No consent of any party to any contract, agreement, instrument,
lease, license, indenture, mortgage, deed of trust, note, arrangement or
understanding to which the Selling Stockholder is a party, or to which any of
the Selling Stockholder's properties or assets are subject, is required for the
execution, delivery or performance of this Agreement; and the execution,
delivery and performance of this Agreement will not violate, result in a breach
of, conflict with, or (with or without the giving of notice of the passage of
time or both) entitle any party to terminate or call a default under such
contract, agreement, instrument, lease, license, indenture, mortgage, deed of
trust, note, arrangement or understanding, or violate, result in a breach of, or
conflict with, any law, rule, regulation, order, judgment or decree binding on
the Selling Stockholder.
(iii) The Selling Stockholder has good title to the Selling Stockholder
Units to be sold by the Selling Stockholder pursuant to this Agreement, free and
clear or all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements and voting trusts.
(iv) Neither the Selling Stockholder nor any of the Selling Stockholder's
affiliates (as defined in the Regulations) has taken or will take, directly or
indirectly, prior to the termination of the underwriting syndicate contemplated
by this Agreement, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or which might
in the future reasonably be expected to cause or result
9
<PAGE>
in, stabilization or manipulation of the price of any security of the Company,
to facilitate the sale or resale of any of the Selling Stockholder Units.
(v) All information furnished or to be furnished to the Company by or on
behalf of the Selling Stockholder for use in connection with the preparation of
the Registration Statement and the Prospectus is true in all respects and does
not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(vi) Except as may be set forth in the Prospectus, the Selling Stockholder
has not incurred any liability for a fee, commission or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Agreement.
(vii) The Selling Stockholder has no knowledge that, and does not believe
that, any representation or warranty of the Company in Section 2 is incorrect.
(viii) The Selling Stockholder has not, directly or indirectly: used any
corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity; made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful payment.
(ix) The Selling Stockholder Units to be sold by the Selling Stockholder
pursuant to this Agreement are duly and validly authorized and issued, fully
paid and non-assessable, and have not been issued and are not owned or held in
violation of any preemptive right of stockholders, optionholders, warrantholders
or other persons.
(x) No transaction has occurred between such person and the Company that is
required to be described in the Registration Statement or the Prospectus.
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<PAGE>
SECTION 3. Issuance, Sale and Delivery of the Firm Units, the Optional
Units and the Underwriters' Warrants.
(a) Upon the basis of the representations, warranties, covenants and
agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell the Company
Units and the Selling Security Holder agrees to sell the Selling Security Holder
Units to the several Underwriters, and the Underwriters, severally and not
jointly, agree to purchase from the Company, the number of the Firm Units set
forth opposite the respective names of the Underwriters in Schedule I hereto,
plus any additional Units which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 14 hereof.
The purchase price of the Units to be paid by the several Underwriters
shall be $9.00 per Unit ($10.00 per Unit less a ten percent discount equal to
$1.00 per Unit).
In addition, and upon the same basis, and subject to the same terms
and conditions, the Company hereby grants an option to you to purchase, but only
for the purpose of covering over-allotments, upon not less than two days' notice
from the Representative, the Optional Units, or any portion thereof, at the same
price per Unit as that set forth in the preceding sentence; and each Underwriter
agrees, severally and not jointly, to purchase Optional Units in the same
proportion in which it has agreed to purchase Firm Units. Notwithstanding
anything contained herein to the contrary, you individually and not as
Representative may purchase all or any part of the Optional Units and are not
obligated to offer the Optional Units to the other Underwriters. The Optional
Units may be exercised at any time, and from time to time, thereafter within a
period of 30 calendar days following the Effective Date. The time(s) and date(s)
(if any) so designated for delivery and payment for the Optional Units shall be
set forth in the notice to the Company. Such dates are herein defined as the
Additional Closing Date(s).
(b) Payment for the Company Firm Units shall be made by certified or
official bank checks in New York Clearing House funds, payable to the order of
the Company and the Selling Security Holder as the case may be, at the offices
of the Representative, or its clearing agent, or at such other place as shall be
agreed upon by the Representative and the Company, upon delivery of the Firm
Units to the Representative for the respective accounts of the
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<PAGE>
Underwriters. In making payment to the Company with respect to the Company
Units, the Representative may first deduct all sums due to it for the balance of
the non-accountable expense allowance and under the Financial Consulting
Agreement (as hereinafter defined). Such delivery and payment shall be made at
9:30 A.M., New York City Time on the third business day after the Effective Date
which may be extended by the Representative to not later than the fifth business
day following the Effective Date (unless postponed in accordance with the
provisions of Section 14 hereof) or at such other time as shall be agreed upon
by the Representative and the Company. The time and date of such delivery and
payment are hereby defined as the Closing Date. It is understood that each
Underwriter has authorized the Representative, for the account of such
Underwriter, to accept delivery of, receipt for, and make payment of the
purchase price for, the Firm Units which it has agreed to purchase. You,
individually, and not as Representative may (but shall not be obligated to) make
payment of the purchase price for the Firm Units to be purchased by any
Underwriter whose check shall not have been received by the Closing Date, for
the account of such Underwriter, but any such payment shall not relieve such
Underwriter from its obligations hereunder.
(c) Payment for the Optional Units shall be made at the offices of the
Representative, or its clearing agent or at such other place as shall be agreed
upon by the Representative and the Company, in accordance with the notice
delivered pursuant to Section 3(a) which shall be no later than seven business
days from the expiration of the 30-day option period.
(d) Certificates for the Firm Units and for the Optional Units shall
be registered in such name or names and in such authorized denominations as the
Representative may request in writing at least two business days prior to the
Closing Date, and the Additional Closing Date(s) (if any). The Company shall
permit the Representative to examine and package said certificates for delivery
at least one full business day prior to the Closing Date and prior to the
Additional Closing Date(s). The Company shall not be obligated to sell or
deliver any of the Firm Units except upon tender of payment by the Underwriters
for all of the Firm Units agreed to be purchased by them hereunder. The
Representative, however, shall have the sole discretion to determine the number
of Optional Units, if any, to be purchased.
(e) At the time of making payment for the Firm Units, the Company also
hereby agrees to sell to the Representative,
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Warrants to purchase 25,000 Units for an aggregate purchase price of $25
(hereinafter referred to as the "Underwriters' Warrants"). The 25,000 Units
underlying the Underwriters' Warrants shall be identical to the Units sold to
the public. Each Underwriters' Warrant shall entitle the owner thereof to
purchase one Unit of the Company at an exercise price of $12.00 per Unit. Such
Underwriters' Warrants are to become exercisable one year from the Effective
Date, and shall remain exercisable for a period of four years thereafter. From
the Effective Date and until one (1) year thereafter, such warrants may be
transferred only to officers or partners of the Underwriters and selling group
members and their officers or partners.
The Underwriters' Warrants shall contain customary clauses protecting
the holders thereof in the event the Company pays stock dividends, effects stock
splits, or effects a sale of assets, merger or consolidation.
(f) On and subject to the Closing Date, the Company will give
irrevocable instructions to its transfer agent and Depository Trust Company to
deliver to the Representative (at the Company's expense) for a period of five
years from the Closing Date, daily transfer sheets showing any transfers of the
Securities and in the case of the transfer agent, from time to time during the
aforesaid period a complete stockholders' list will be promptly furnished by the
Company when requested by the Representative on not more than two occasions per
year.
SECTION 4. Public Offering. The several Underwriters agree, subject to the
terms and provisions of this Agreement, to offer the Units to the public as soon
as practicable after the Effective Date, at the initial offering price of $10.00
per Unit and upon the terms described in the Prospectus. The Representative may,
from time to time, decrease the public offering price, after the initial public
offering, to such extent as the Representative may determine, however, such
decreases will not affect the price payable to the Company hereunder.
SECTION 5. Registration Statement and Prospectus. The Company will furnish
the Representative, without charge, two signed copies of the Registration
Statement and of each amendment thereto, including all exhibits thereto and such
amount of conformed copies of the Registration Statement and Amendments as may
be reasonably requested by the Representative for distribution to each of the
Underwriters and Selected Dealers.
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The Company will furnish, at its expense, as many printed copies of a
Preliminary Prospectus and of the Prospectus as the Representative may request
for the purposes contemplated by this Agreement. If, while the Prospectus is
required to be delivered under the Act or the Rules and Regulations, any event
known to the Company relating to or affecting the Company shall occur which
should be set forth in a supplement to or an amendment of the Prospectus in
order to comply with the Act (or other applicable law) or with the Rules and
Regulations, the Company will forthwith prepare, furnish and deliver to the
Representative and to each of the other Underwriters and to others whose names
and addresses are designated by the Representative, in each case at the
Company's expense, a reasonable number of copies of such supplement or
supplements to or amendment or amendments of, the Prospectus.
The Company and the Selling Security Holder authorize the Underwriters
and the selected dealers, if any, in connection with the distribution of the
Units and all dealers to whom any of the Units may be sold by the Underwriters,
or by any Selected Dealer, to use the Prospectus, as from time to time amended
or supplemented, in connection with the offering and sale of the Units and in
accordance with the applicable provisions of the Act and the applicable Rules
and Regulations and applicable State Securities Laws.
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SECTION 6. Covenants of the Company and the Selling Security Holder. The
Company covenants and agrees with each Underwriter that:
(a) After the date hereof, the Company will not at any time, whether
before or after the Effective Date, file any amendment to the Registration
Statement or the Prospectus, or any supplement to the Prospectus, of which the
Representative shall not previously have been advised and furnished with a copy,
or to which the Representative or the Underwriters' counsel shall have
reasonably objected in writing on the ground that it is not in compliance with
the Act or the Rules and Regulations.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective (provided, however, the Company shall not cause
the Registration Statement to become effective without the written consent of
VTR) and will advise the Representative, (i) when the Registration Statement
shall have become effective and when any amendment thereto shall have become
effective, and when any amendment of or supplement to the Prospectus shall be
filed with the Commission, (ii) when the Commission shall make request or
suggestion for any amendment to the Registration Statement or the Prospectus or
for additional information and the nature and substance thereof, and (iii) of
the issuance by the Commission of an order suspending the effectiveness of the
Registration Statement or of the initiation of any proceedings for that purpose,
and will use its best efforts to prevent the issuance of such an order, or if
such an order shall be issued, to obtain the withdrawal thereof at the earliest
possible moment.
(c) The Company will prepare and file with the Commission, promptly
upon the request of the Representative, such amendments, or supplements to the
Registration Statement or Prospectus, in form and substance satisfactory to
counsel to the Company, as in the reasonable opinion of Lester Morse P.C., as
counsel to the Underwriters, may be necessary or advisable in connection with
the offering or distribution of the Units, and will diligently use its best
efforts to cause the same to become effective.
(d) The Company will, at its expense, when and as requested by the
Representative, supply all necessary documents, exhibits and information, and
execute all such applications, instruments and papers as may be required, in the
opinion of the
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Underwriters' counsel, to qualify the Units or such part thereof as the
Representative may determine, for sale under the so-called "Blue Sky" Laws of
such states as the Representative shall designate, and to continue such
qualification in effect so long as required for the purposes of the distribution
of the Units, provided, however, that the Company shall not be required to
qualify as a foreign corporation or dealer in securities or to file a consent to
service of process in any state in any action other than one arising out of the
offering or sale of the Units.
(e) The Company will, at its own expense, file and provide, and
continue to file and provide, such reports, financial statements and other
information as may be required by the Commission, or the proper public bodies of
the States in which the Units may be qualified for sale, for so long as required
by applicable law, rule or regulation and will provide the Representative with
copies of all such registrations, filings and reports on a timely basis.
(f) During the period of five years from the Effective Date, the
Company will deliver to the Underwriter a copy of each annual report of the
Company, and will deliver to the Underwriter (i) within 50 days after the end of
each of the Company's first three quarter-yearly fiscal periods, a balance sheet
of the Company as at the end of such quarter-yearly period, together with a
statement of its income and a statement of changes in its cash flow for such
period (Form 10-Q or 10-QSB), all in reasonable detail, signed by its principal
financial or accounting officer, (ii) within 105 days after the end of each
fiscal year, a balance sheet of the Company as at the end of such fiscal year,
together with a statement of its income and statement of cash flow for such
fiscal year (Form 10-K or 10-KSB), such balance sheet and statement of cash flow
for such fiscal year to be in reasonable detail and to be accompanied by a
certificate or report of independent public accountants, (who may be the regular
accountants for the Company), (iii) as soon as available a copy of every other
report (financial or other) mailed to the stockholders, and (iv) as soon as
available a copy of every non-confidential report and financial statement
furnished to or filed with the Commission or with any securities exchange
pursuant to requirements by or agreement with such exchange or the Commission
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), or
any regulations of the Commission thereunder. If and for so long as the Company
has one or more active subsidiaries, the financial statements required by (i)
and (ii) above shall be furnished on a consolidated basis in
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respect of the Company and all of the Company's subsidiaries. The financial
statements referred to in (ii) shall also be furnished to all of the
stockholders of the Company as soon as practicable after the 105 days referred
to therein.
(g) The Company represents that with respect to the Warrants and the
shares of Common Stock, it will prepare and file a Registration Statement with
the Commission pursuant to Section 12 of the 1934 Act, prior to the Effective
Date with a request that such Registration Statement will become effective on
the Effective Date. The Company understands that, to register, it must prepare
and file with the Securities and Exchange Commission a General Form of
Registration of Securities (Form 8-A or Form 10). In addition, the Company
agrees to qualify its Units, Common Stock and the Warrants for listing on the
NASDAQ system and on the ___________ Exchange on the Effective Date and will
take all reasonable and necessary and appropriate action so that the securities
continue to be listed for trading in the NASDAQ system and the __________
Exchange for at least ten years from the Effective Date provided the Company
otherwise complies with the prevailing maintenance requirements. In addition, at
such time as the Company qualifies for listing its securities on the National
Market System of NASDAQ, the Company will use its best efforts to have the
Company's Units and components thereof listed on the National Market System of
NASDAQ in lieu of both listing as Small-Cap Issues on NASDAQ and on the
_________ Exchange. For so long as the Company is a reporting company under the
1934 Act, the Company shall comply with all periodic reporting and proxy
solicitation requirements imposed by the Commission pursuant to the 1934 Act.
(h) The Company will make generally available to its security holders,
as soon as practicable, but in no event later than 15 months after the Effective
Date, an earnings statement of the Company (which need not be audited) in
reasonable detail, covering a period of at least twelve months beginning after
the Effective Date, which earnings statement shall satisfy the provisions of
Section 11(a) of the Act.
(i) The Company will, on or about the Effective Date, apply for
listing in Standard and Poor's Corporation Records and Standard & Poor's Monthly
Stock Guide and shall use its best efforts to have the Company listed in such
reports for a period of not less than ten (10) years from the Closing Date. The
Company
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will request accelerated treatment in the Daily News Supplement of Standard and
Poor's Corporation Records.
(j) The Company shall cause the Board of Directors to meet, at least
quarterly, upon proper notice; and, the Representative shall receive notice of
any regular or special meetings of the Company's Board of Directors concurrently
with the sending of such notice to the Company's directors and shall have the
right to have a representative attend such meeting as an observer, but this
right shall be suspended (i) three years after the Effective Date or (ii) at any
time a designee of the Underwriter is a member of or advisor to the Company's
Board of Directors as more fully set forth in Section 17 below.
(k) The Company shall employ the services of an auditing firm
acceptable to the Representative in connection with the preparation of the
financial statements required to be included in the Registration Statement and
shall continue to appoint such auditors or such other auditors as are reasonably
acceptable to the Representative for a period of five (5) years following the
Effective Date of the Registration Statement. Said financial statements shall be
prepared in accordance with Regulation S-X under the Rules and Regulations. The
Company shall appoint American Stock Transfer & Trust Co., New York, New York as
transfer agent for the Common Stock (the "Transfer Agent") and as warrant agent
for the Warrants.
(l) Prior to the Effective Date, the Company will enter into an
employment contract with Donald Feldman satisfactory to the Representative.
(m) Within ninety (90) days subsequent to the Effective Date, the
Company will furnish "Key Man" Life Insurance in the amount of $1,000,000 on the
life of Donald Feldman with the Company as the beneficiary thereof and the
Company shall pay the annual premiums, therefore, for a period of not less than
five years from the Effective Date.
(n) The Company will for a period of five years:
(i) Furnish to the Representative and to the Company's
shareholders annual audited financial statements contained in an annual report
and unaudited financial statements
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contained in quarterly reports for each of the Company's first three quarters.
(ii) Designate an Audit Committee (the members of which shall be
subject to our reasonable approval) which will generally supervise the financial
affairs of the Company.
(iii) At its expense, shall cause its regularly engaged
independent certified public accountants to examine (but not audit) the
Company's financial statements for each of the first three (3) fiscal quarters
prior to the announcement of quarterly financial information, the filing of the
Company's Form 10-Q or 10- QSB quarterly report and the mailing of quarterly
financial information to security holders.
(o) Until such time as the securities of the Company are listed on the
New York Stock Exchange, the American Stock Exchange or NASDAQ/NMS, the Company
shall cause its legal counsel to provide the Representative with a survey, to be
updated at least annually, of those states in which the securities of the
Company may be traded in non-issuer transactions under the Blue Sky laws of the
states and the basis for such authority. At closing, the first such survey shall
be delivered by the Company's legal counsel, Bernstein & Wasserman, LLP.
(p) As soon as practicable after the Closing Date, the Company will
deliver to the Representative and its counsel a total of three bound volumes of
copies of all documents relating to the public offering which is the subject of
this Agreement.
(q) The Company, for a period of at least three years following the
public offering, shall retain the services of a financial public relations
firm(s) satisfactory to the Representative, said agreement(s) to commence no
later than 30 days after the Closing of the public offering.
(r) Stock certificates and Warrant certificates shall be first
submitted to the Representative for approval prior to printing. The Company
shall, as promptly as possible, after filing the Registration Statement with the
Commission, obtain a CUSIP number for the Units, shares and Unit Warrants and
have each of the securities eligible for closing through Depository Trust
Company.
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(s) The Company will not issue and sell any of its securities not
contemplated by the Registration Statement for a period of time to be mutually
agreed upon by the Company and the Representative.
The Selling Security Holder covenants and agrees with each Underwriter
that it will pay all of its costs and expenses incident to the performance of
its obligations under this Agreement and the sale of the Selling Security Holder
Units except for those expenses payable by the Company as set forth in Section 7
herein.
SECTION 7. Expenses of the Company.
The Company shall be responsible for and shall bear all expenses directly
and necessarily incurred in connection with the proposed financing, including:
(i) the preparation, printing and filing of the Offering Documents and
amendments thereto, including NASD, SEC, NASDAQ and __________ Exchange filing
and/or application fees, preliminary and final Prospectus and the printing of
the Underwriting Agreement, the Agreement Among Underwriters and the Selected
Dealers' Agreement, a Blue Sky Memorandum, material to be circulated to the
Underwriters by us and other incidental material; (ii) the issuance and delivery
of certificates representing the shares and Unit Warrants, including original
issue and transfer taxes, if any; (iii) the qualifications of the Company's
Units (covered by the "firm commitment" offering) under State Securities or Blue
Sky Laws, including counsel fees of the Representative relating thereto in the
sum of Thirty ($30,000) Dollars ($10,000 of which has been paid prior to the
Effective Date), together with appropriate state filing fees) plus disbursements
relating to, but not limited to, long-distance telephone calls, photocopying,
messengers, excess postage, overnight mail and courier services; (iv) the fees
and disbursements of counsel for the Company and the accountants for the
Company; and (v) any other costs of qualifying the Units and components thereof
for listing on NASDAQ and the __________ Exchange. The $30,000 payment shall not
include fees of special counsel if same is required to be incurred in a merit
review state which may require local counsel.
The Company shall, upon receipt of an invoice from the Representative,
reimburse the Representative for any costs of otherwise unreimbursed postage and
including mailing of preliminary and final prospectuses incurred by or on behalf
of the Representative and the Underwriters in preparation for, or in
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connection with the offering and sale and distribution of the Units on an
accountable basis. After closing of the public offering, the Company shall bear
the costs of tombstone announcements not to exceed $10,000.
SECTION 8. Payment of Underwriters' Expenses.
(a) On the Closing Date and Additional Closing Date(s) (if any) the
Company will pay to VTR an expense allowance equal to three (3%) percent of the
total gross proceeds derived from the sale of the 325,000 Units and Optional
Units, for the fees and disbursements of counsel to the Underwriters and for
costs of otherwise unreimbursed advertising, traveling, postage, telephone and
telegraph expenses and other miscellaneous expenses incurred by or on behalf of
the Representative and the Underwriters in preparation for, or in connection
with the offering and sale and distribution of the Units; and VTR shall not be
obligated to account to the Company for such disbursements and expenses. In the
event, however, that the Representative terminates this Agreement pursuant to
the provisions of Section 12 hereof, the Representative shall be obligated to
account for expenditures of any advance payment to VTR and to refund to the
Company any portion of the advance not expended. In the event that the
Representative terminates this agreement pursuant to the provisions of Section
12(b), the Representative shall be entitled to reimbursement of expenses on an
accountable basis.
(b) On the Effective Date, the Company will enter into an agreement
retaining VTR, as a management and financial consultant for a two-year period,
commencing as of the Effective Date at a fee equal to $100,000 payable in full
in advance on the Closing Date.
SECTION 9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act against any and all losses,
claims, damages and liabilities, joint or several (including any reasonable
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted), to which they, or any of them, may become subject under the Act, the
Exchange Act or other Federal or state law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities arise out of
or are
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based upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or the
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto, or arise out of or are based upon any omission or alleged omission to
state therein such fact required to be stated therein or necessary to make such
statements therein not misleading. The Selling Stockholder agrees to indemnify
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against
any and all losses, claims, damages and liabilities, joint or several (including
any reasonable investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or state law or regulation, at common law
or otherwise, insofar as such losses, claims, damages or liabilities, joint or
several (including any reasonable investigation, legal and other expenses
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Act, the Exchange Act or other Federal or state law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact with respect to the Selling Stockholder
contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto (which amendments or
supplements are furnished to the Selling Stockholder), or which arise out of or
are based upon any omission or alleged omission to state therein such fact
required to be stated therein or necessary to make such statements therein not
misleading, but only with reference to information relating to the Selling
Stockholder furnished in writing to the Company by or on behalf of the Selling
Stockholder expressly for use in connection with the preparation of the
Registration Statement and Prospectus or any amendment thereof or supplement
thereto (which amendments or supplements are furnished to the Selling
Stockholder), or which arise out of or are based upon any omission or alleged
omission to state therein such fact required to be stated therein or necessary
to make such statements therein not misleading, but only with reference to
information relating to the Selling Stockholder furnished in writing to the
Company by or on behalf of the Selling Stockholder expressly for use in
connection with the preparation of
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the Registration Statement and Prospectus or any amendment thereof or supplement
thereto. Such indemnity shall not inure to the benefit of any Underwriter (or
any person controlling such Underwriter) on account of any losses, claims,
damages or liabilities arising from the sale of the Units to any person by such
Underwriter if such untrue statement or alleged untrue statement or omission was
made in such preliminary prospectus, the Registration Statement or the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by the Representatives on
behalf of any Underwriter specifically for use therein. The obligations of the
Selling Stockholder, pursuant to this Section 9(a) shall be limited to an amount
not exceeding the product of the Per Unit Price to Public of the Units as set
forth on the cover page of the Prospectus and the number of Units being sold by
each of them. In no event shall the indemnification agreement contained in this
Section 9(a) inure to the benefit of any Underwriter on account of any losses,
claims, damages, liabilities or actions arising from the sale of the Units upon
the public offering to any person by such Underwriter if such losses, claims,
damages, liabilities or actions arise out of, or are based upon, a statement or
omission or alleged omission in a preliminary prospectus and if, in respect to
such statement, omission or alleged omission, the Prospectus differs in a
material respect from such preliminary prospectus and a copy of the Prospectus
has not been sent or given to such person at or prior to the confirmation of
such sale to such person. This indemnity agreement will be in addition to any
liability which the Company and the Selling Stockholder may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
director of the Company, and each officer of the Company who signs the
Registration Statement and the Selling Stockholder, to the same extent as the
foregoing indemnity from the Company and the Selling Stockholder to each
Underwriter, but only insofar as such losses, claims, damages or liabilities
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission which was made in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, which were made in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter for specific use
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therein; provided, however, that the obligation of each Underwriter to indemnify
the Company (including any controlling person, director or officer thereof) and
the Selling Stockholder shall be limited to the net proceeds received by the
Company and the Selling Stockholder, respectively, from such Underwriter. For
all purposes of this Agreement, the amounts of the selling concession and
reallowance set forth in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for inclusion
in any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus or any amendment or supplement thereto.
(c) Any party that proposes to assert the right to be indemnified under
this Section will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section, notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 9(a) or 9(b) shall be available to any party who shall fail to give
notice as provided in this Section 9(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for contribution
or otherwise than under this Section. In case any such action, suit or
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in, and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and the approval by the indemnified
party of such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided below and
except for the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The indemnified party
shall have the right to employ its counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of counsel by such indemnified party has been
authorized in writing by
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the indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party, or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the reasonable fees and expenses of counsel shall be at
the expense of the indemnifying parties. An indemnifying party shall not be
liable for any settlement of any action, suit, proceeding or claim effected
without its written consent.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Sections 9(a) and (b)
is due in accordance with its terms but for any reason is held to be unavailable
from the Company, the Selling Stockholder or the Underwriters, the Company, the
Selling Stockholder and the Underwriters shall contribute to the aggregate
losses, claims, damages and liabilities (including any investigation, legal and
other expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as the Selling Stockholder, persons who control the company
within the meaning of the Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may also be liable for
contribution) to which the Company and the Selling Stockholder and one or more
of the Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholder on the one hand and the Underwriters on the other from the offering
of the Units or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided herein in such proportion as is appropriate
to reflect not only the relative benefits referred to above but also the
relative fault of the Company and the Selling Stockholder on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant omissions which resulted
in such losses, claims, damages, liabilities or expenses, as well as
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any other relevant equitable considerations. The relative benefits received by
the Company, the Selling Stockholder and the Underwriters shall be deemed to be
in the same proportion as (x) the total proceeds from the Offering (net of
underwriting discounts but before deducting expenses) received by the Company or
the Selling Stockholder from the sale of the Units, as set forth in the table on
the cover page of the Prospectus (but not taking into account the use of the
proceeds of such sale of Units by the Company), bear to (y) the underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company, the Selling
Stockholder and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
related to information supplied by the Company, the Selling Stockholder or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable consideration referred to above. Notwithstanding the provisions of
this Section 9, (i) in no case shall any Underwriter (except as may be provided
in the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Units purchased by such
Underwriter hereunder, (ii) in no case shall the Selling Stockholder be liable
or responsible for any amount in excess of the product of the Per Unit Price to
Public of the Units as set forth on the cover page of the Prospectus and the
number of Units being sold by each of them subject to the limitation expressed
in Section 9(a), and (iii) the Company shall be liable and responsible for any
amount in excess of the underwriting discount and the amount referred to in
clause (ii) provided, however (i) that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have
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the same rights to contribution as the Company, subject in each case to clauses
(i), (ii) and (iii) in the immediately preceding sentence of this Section 9. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section, notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties from whom
contribution may be sought shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its written consent. The Underwriters' obligations to contribute
pursuant to this Section 9 are several in proportion to their respective
underwriting commitments and not joint.
SECTION 10. Effectiveness of Agreement. This Agreement shall become
effective (i) at 10:00 A.M., New York Time, on the first full business day after
the Effective Date, or (ii) at the time of the initial public offering by the
Underwriters of the Units, whichever shall first occur. The time of the initial
public offering by the Underwriters of the Units for the purposes 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 Units,
or the time, after the Registration Statement becomes effective, when the Units
are first released by the Representative for offering by the Underwriters or
dealers by letter or telegram, whichever shall first occur. The Representative
agrees to notify the Company immediately after it shall have taken any action,
by release or otherwise, whereby this Agreement shall have become effective.
This Agreement shall, nevertheless, become effective at such time earlier than
the time specified above, after the Effective Date, as the Representative may
determine by notice to the Company.
SECTION 11. Conditions of the Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Units which the
Underwriters have agreed to purchase hereunder are subject to: the accuracy, as
of the date hereof and as of the Closing Dates, of all of the representations
and warranties of the Company and the Selling Security Holder contained in this
Agreement; the Company's compliance with, or
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performance of, all of its covenants, undertakings and agreements contained in
this Agreement that are required to be complied with or performed on or prior to
each of the Closing Dates and to the following additional conditions:
(a) On or prior to the Closing Date, no order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or be pending or, to the
knowledge of the Company, shall be threatened by the Commission; any request for
additional information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of the Commission; and neither the Registration
Statement nor any amendment thereto shall have been filed to which counsel to
the Underwriters shall have reasonably objected, in writing.
(b) The Representative shall not have disclosed in writing to the
Company that the Registration Statement or Prospectus or any amendment or
supplement thereto contained, as of the date thereof, an untrue statement of a
fact which, in the opinion of counsel to 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 materially misleading.
(c) Between the date hereof and the Closing Date, the Company shall
not have sustained any loss on account of fire, explosion, flood, accident,
calamity or other cause, of such character as materially adversely affects its
business or property, whether or not such loss is covered by insurance.
(d) Between the date hereof and the Closing Date, there shall be no
litigation instituted or threatened against the Company, and there shall be no
proceeding instituted or threatened against the Company before or by any federal
or state commission, regulatory body or administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially adversely affect the business, licenses, permits,
operations or financial condition or income of the Company.
(e) Except as contemplated herein or as set forth in the Registration
Statement and Prospectus, during the period subsequent to the Effective Date and
prior to the Closing Date, (A) the
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Company shall have conducted its business in the usual and ordinary manner as
the same was being conducted on the date of the filing of the initial
Registration Statement and (B) except in the ordinary course of its business,
the Company shall not have incurred any material liabilities or obligations
(direct or contingent), or disposed of any of its assets, or entered into any
material transaction, and (C) the Company shall not have suffered or experienced
any material adverse change in its business, affairs or in its condition,
financial or otherwise. On the Closing Date, the capital stock and surplus
accounts of the Company shall be substantially as great as at its last financial
report without considering the proceeds from the sale of the Units except to the
extent that any decrease is disclosed in or contemplated by the Prospectus.
(f) The authorization of the Units, the Common Stock and the Warrants,
the Registration Statement, the Prospectus and all corporate proceedings and
other legal matters incident thereto and to this Agreement, shall be reasonably
satisfactory in all respects to counsel to the Underwriters.
(g) The Company shall have furnished to the Representative the
opinions, dated the Closing Date, and Additional Closing Date(s), addressed to
you, of Bernstein & Wasserman, LLP, counsel for the Company, that:
(i) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of Delaware
with full corporate power and authority to own and operate its properties and to
carry on its business as set forth in the Registration Statement and Prospectus;
it has authorized and outstanding capital as set forth in the Registration
Statement and Prospectus; and the Company is duly licensed or qualified as a
foreign corporation in all jurisdictions in which the ownership or leasing of
its properties requires such qualification or license, except where failure to
be so qualified or licensed would have no material adverse effect on the
business of the Company.
(ii) The Company has an authorized, issued and outstanding
capital stock as set forth under the caption "Capitalization" in the Prospectus.
All of the outstanding shares of Common Stock and Preferred Stock are duly
authorized, validly issued, fully paid, and non-assessable, and do not have any
preemptive rights. The Company will have duly authorized, reserved
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and set aside shares of Common Stock issuable upon exercise of the Warrants and
any other outstanding options, warrants or stock option plans and when issued in
accordance with the terms contained therein against payment therefor, will be
duly and validly issued, fully paid and non-assessable.
(iii) The Common Stock, Warrants and the Underwriters' Warrant
conform to descriptions thereof under "Description of Securities" contained in
the Prospectus.
(iv) The Underwriters will receive good and marketable title to
the Units purchased by them from the Company and the Selling Security Holder in
accordance with the terms and provisions of this Agreement, to the best of such
counsel's knowledge, free and clear of all liens, encumbrances, claims, security
interests, restrictions, stockholders' agreements and voting trusts whatsoever.
(v) Except as set forth in the Prospectus, there are no
outstanding options, warrants, or other rights, providing for the issuance of,
and, to the best of the knowledge of such counsel, no commitments, plans or
arrangements to issue, any shares of any class of capital stock of the Company,
or any security convertible into, or exchangeable for, any shares of any class
of capital stock of the Company.
(vi) To the best of such counsel's knowledge, no consents,
approvals, authorizations or orders of agencies, officers or other regulatory
authorities are necessary for the valid authorization, issue or sale of the
Units hereunder, except such as may be required under the Act or state
securities or Blue Sky Laws.
(vii) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no order suspending the
effectiveness of the Registration Statement is in effect and no proceedings for
that purpose have been instituted or are pending before or threatened by, the
Commission;
(viii) To the best of such counsel's knowledge and based upon the
investigation described below, the Registration Statement and Prospectus, and
each amendment thereof and supplement thereto, comply as to form in all material
respects with the applicable requirements of the Act and the Rules and
Regulations (except that no opinion need be expressed as to financial
statements, notes thereto, and financial data contained in the
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Registration Statement or Prospectus). Such counsel has participated in
conferences with officers and representatives of the Company and with its
certified public accountants in the preparation of the Registration Statement
and the Prospectus. At such conferences counsel has made inquiries of such
officers, representatives and accountants, and discussed the contents of the
Registration Statement and the Prospectus. Such counsel has not independently
verified, and, accordingly, does not assume any responsibility for, the
accuracy, completeness or fairness of the information contained in the
Registration Statement or the Prospectus, other than as set forth the Prospectus
insofar as such statements relate to the contents of particular documents
therein described. On the basis of the foregoing, nothing has come to the
attention of such counsel to cause such counsel to believe that the Registration
Statement, the Prospectus or any amendment or supplement thereto contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto and other financial and
statistical data and schedules contained therein, as to which such counsel need
express no opinion); and such counsel is familiar with all contracts referred to
in the Registration Statement or in the Prospectus and such contracts are
sufficiently summarized or disclosed therein, or filed as exhibits thereto, as
required, and such counsel does not know of any other contracts required to be
summarized or disclosed or filed; and such counsel does not know of any legal or
governmental proceedings to which the Company is a party, or in which property
of the Company is the subject, of a character required to be disclosed in the
Registration Statement or the Prospectus which are not so disclosed therein.
(ix) The statements in the Registration Statement under the
caption "Business" have been reviewed by such counsel and insofar as they refer
to descriptions of agreements, statutes, licenses, certifications, rules or
regulations or legal conclusions, are correct in all material respects.
(x) This Agreement has been duly authorized and executed by the
Company and the Selling Security Holder and is a valid and binding agreement of
the Company and the Selling Security Holder enforceable in accordance with its
terms subject to bankruptcy, insolvency, reorganization, moratorium and other
laws
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affecting creditors rights generally and except that no opinion need be given
with regard to the enforceability of Section 9 hereof or the availability of
equitable relief.
(xi) To the best knowledge of such counsel: (a) no default
exists, and no event has occurred which, with notice or lapse of time, or both,
would constitute a default in the due performance and observance of any material
term, covenant or condition by the Company or the Selling Security Holder, of
any indenture, mortgage, deed of trust, note or any other agreement or
instrument to which the Company or the Selling Security Holder is a party or by
which it or its business or its properties may be bound or affected, except
where such default would not have a material adverse effect on the business of
the Company and except as disclosed in the Prospectus; (b) the Selling Security
Holder has full power and legal authority to sell the Selling Security Holder
Units to the Underwriters free and clear of all liens and encumbrances; (c) the
Company has full power and lawful authority to authorize, issue and sell the
Units on the terms and conditions set forth herein and in the Registration
Statement and in the Prospectus; (d) no consent, approval, authorization or
other order of any regulatory authority is required for such authorization,
issue or sale, except as may be required under the Act or State securities laws,
clearance with the NASD and such other consent, approval, authorization or order
as has been obtained and is in full force and effect; and (e) the execution and
delivery of this Agreement, the consummation of the transactions herein
contemplated, and compliance with the terms hereof will not conflict with, or
constitute a default under, any material indenture, mortgage, deed of trust,
note or any other agreement or instrument to which the Company and the Selling
Security Holder is now a party or by which it or its business or its properties
may be bound or affected, the Certificate of Incorporation and any amendments
thereto, the by-laws of the Company or the Selling Security Holder, or any
order, rule or regulation, writ, injunction or decree of any government,
governmental instrumentality, or court, domestic or foreign, having jurisdiction
over the Company or the Selling Security Holder or its business or properties.
(xi) Except as disclosed in the Registration Statement and
Prospectus, to the best knowledge of such counsel, there are no material
actions, suits or proceedings at law or in equity of a material nature pending,
or to such counsel's knowledge, threatened against the Company or the Selling
Security Holder which are not adequately covered by insurance and there are
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no proceedings pending or, to the knowledge of such counsel, threatened against
the Company or the Selling Security Holder before or by any Federal or State
Commission, regulatory body, or administrative agency or other governmental
body, wherein an unfavorable ruling, decision or finding would materially and
adversely affect the business, operation or condition (financial or otherwise)
of the Company or the Selling Security Holder, which are not disclosed in the
Prospectus.
(xii) The Underwriters' Warrants to be issued to the
Representative hereunder will be, when issued, duly and validly authorized and
executed by the Company and will constitute valid and binding obligations of the
Company, legally enforceable in accordance with their terms except as
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws pertaining to creditors rights generally and the
Company will have duly authorized, reserved and set aside the shares of its
Common Stock issuable upon exercise of the Underwriters' Warrants and such
stock, when issued and paid for upon exercise of the Underwriters' Warrants in
accordance with the provisions thereof, will be duly and validly issued,
fully-paid and non-assessable.
Such opinion shall also cover such other matters incident to the
transactions contemplated by this Agreement as the Representative shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact.
(h) The Company shall have furnished to the Representative
certificates of the President and a Vice-President of the Company, dated as of
the Closing Date, and Additional Closing Date(s), to the effect that:
(i) Each of the representations and warranties of the Company
contained in Section 2 hereof is true and correct in all material respects at
and as of such Closing Date, and the Company has performed or complied with all
of its agreements, covenants and undertakings contained in this Agreement and
has performed or satisfied all the conditions contained in this Agreement on its
part to be performed or satisfied at the Closing Date;
(ii) The Registration Statement has become effective and no order
suspending the effectiveness of the Registration Statement has been issued, and,
to the best of the knowledge of the
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respective signers, no proceeding for that purpose has been
initiated or is threatened by the Commission;
(iii) The respective signers have each carefully examined the
Registration Statement and the Prospectus and any amendments and supplements
thereto, and to the best of their knowledge the Registration Statement and the
Prospectus and any amendments and supplements thereto and all statements
contained therein are true and correct in all material respects, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth except changes which the
Registration Statement and Prospectus indicate might occur.
(iv) Except as set forth or contemplated in the Registration
Statement and Prospectus, since the respective dates as of which, or periods for
which, information is given in the Registration Statement and Prospectus and
prior to the date of such certificate (A) there has not been any material
adverse change, financial or otherwise, in the business, business prospects,
earnings, general affairs or condition (financial or otherwise), of the Company
(in each case whether or not arising in the ordinary course of business), and
(B) the Company has not incurred any material liabilities, direct or contingent,
or entered into any material transactions, otherwise than in the ordinary course
of business other than as referred to in the Registration Statement or
Prospectus and except changes which the Registration Statement and Prospectus
indicate might occur.
(i) The Company shall have furnished to the Representative on the
Closing Date, such other certificates of executive officers of the Company
additional to those specifically mentioned herein, as the Representative may
have reasonably requested, as to: the accuracy and completeness of any statement
in the Registration Statement or the Prospectus, or in any amendment or
supplement thereto; the representations and warranties of the Company herein;
the performance by the Company of its obligations hereunder; or the fulfillment
of the conditions concurrent and precedent to the obligations of the
Underwriters
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hereunder, which are required to be performed or fulfilled on or
prior to the Closing Date.
(j) At the time this Agreement is executed, and on each Closing Date
you shall have received a letter from Mortenson & Associates, P.C., addressed to
the Representative, as Representative of the Underwriters, and dated,
respectively, as of the date of this Agreement and as of each Closing Date in
form and substance reasonably satisfactory to the Representative, to the effect
that:
(i) They are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations of the Commission;
(ii) In their opinion, the financial statements and related
schedules of the Company included in the Registration Statement and Prospectus
and covered by their reports comply as to form in all material respects with the
applicable accounting requirements of the Act and the published Rules and
Regulations of the Commission issued thereunder;
(iii) On the basis of limited procedures in accordance with
standards established by the American Institute of Certified Public Accountants,
including (1) a reading of the latest available financial statements of the
Company (a copy of which shall be attached to such letter), (2) a reading of the
latest available minutes of the meetings of the stockholders and the Board of
Directors of the Company as set forth in the minute books of the Company,
officials of the Company having advised you and them that the minutes of all
such meetings through that date were set forth therein, (3) consultations with
officials of the Company responsible for financial and accounting matters of the
Company, which procedures do not constitute an examination in accordance with
generally accepted accounting standards, and would not necessarily reveal
material adverse changes in the financial position or results of operations or
inconsistencies in the application of generally accepted accounting principles,
nothing has come to their attention which in their judgment would lead them to
believe that (a) the unaudited financial statements and related schedules of the
Company included in the Registration Statement and Prospectus do not comply as
to form in all material respects with the applicable accounting requirements of
the Act and the published Rules and Regulations of the Commission issued
thereunder, or were not prepared in accordance with generally accepted
accounting
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principles and practices consistent in all material respects with those followed
in the preparation of the comparable financial statements and schedules covered
by their reports included in the Registration Statement and Prospectus, or would
require any material adjustments for a fair presentation of the information
purported to be shown thereby or (b) during the period from the date of the
Capitalization table included in the Prospectus to a specified date not more
than four business days prior to the date of such letter, there has been any
material change in the capital stock or debt of the Company, or (c) during the
period from the date of the latest balance sheet and related statements of
operations, changes in stockholders' equity and changes in financial position
included in the Prospectus and covered by their reports contained therein to the
date of the letter, there has been any material adverse change in the financial
condition, or results of operations, of the Company; and
(iv) In addition to the examination referred to in their reports
included in the Registration Statement and the Prospectus and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are derived from the
general accounting records of the Company which appear in the Prospectus under
the captions "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Executive Compensation",
"Certain Transactions", "Selected Financial Data," "Dilution," and "Risk
Factors," as well as such other financial information as may be specified by the
Representative, and that they have compared such amounts, percentages and
financial information with the accounting records of the Company and have found
them to be in agreement.
(k) The Representative shall have received on each Closing Date from
counsel to the Selling Stockholder, an opinion addressed to the Representative
and dated such Closing Date, to the effect that:
(i) The Selling Stockholder has all requisite power and authority
to execute, deliver and perform this Agreement and to issue and sell the Selling
Security Holder Units. This Agreement has been duly authorized, executed and
delivered by the Selling Stockholder, is the legal, valid and binding obligation
of the Selling Stockholder and (subject to applicable bankruptcy, insolvency,
and other laws affecting the enforceability of
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creditors' rights generally) is enforceable as to the Selling Stockholder in
accordance with its terms. No consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any federal
state, local or other governmental authority or any court or other tribunal is
required by the Selling Stockholder, for the execution, delivery or performance
by the Selling Stockholder of this Agreement (except filings under the Act which
have been made prior to the Closing Date and consents consisting only of
consents under "blue sky" or securities laws). To the knowledge of such counsel,
no consent of any party to any contract, agreement, instrument, lease, license,
indenture, mortgage, deed of trust, note, arrangement or understanding to which
the Selling Stockholder is a party, or to which any of their respective
properties or assets are subject, is required for the execution, delivery or
performance of this Agreement; and the execution, delivery and performance of
this Agreement will not violate, result in a breach of, conflict with, or (with
or without the giving of notice of the passage of time or both) entitle any
party to terminate or call a default under such contract, agreement, instrument,
lease, license, indenture, mortgage, deed of trust, note, arrangement or
understanding, in each case known to such counsel, or violate, result in a
breach of, or conflict with any law, rule, regulation, order, judgment, or
decree binding on the Selling Stockholder.
(ii) Such opinion delivered at each of the Closing Dates shall state
that each Selling Security Holder Unit, as the case may be, to be delivered on
that date is duly and validly issued, fully paid and the shares of Common Stock
included in the Selling Security Holder Units are non-assessable with no
personal liability attaching to the ownership thereof, and is not issued in
violation of any preemptive rights of stockholders, and the Underwriters have
received good title to the Selling Security Holder Units purchased by them,
respectively, from the Selling Stockholder, as applicable, for the consideration
contemplated herein and in good faith and without notice of any adverse claim
within the meaning of the Uniform Commercial Code, free and clear of any liens,
security interests, pledges, charges, encumbrances, stockholders' agreements,
voting trusts and other claims.
All the opinions, letters, certificates and evidence mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel to the
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Underwriters, whose approval shall not be unreasonably withheld, conditioned or
delayed.
If any of the conditions specified in this Section shall not have been
fulfilled when and as required by this Agreement to be fulfilled, this Agreement
and all obligations of the Underwriters hereunder may be terminated and
cancelled by the Representative by notifying the Company of such termination and
cancellation in writing or by telegram at any time prior to, or on, the Closing
Date and any such termination and cancellation shall be without liability of any
party hereto to any other party, except with respect to the provisions of
Sections 7 and 8 hereof. The Representative may, of course, waive, in writing,
any conditions which have not been fulfilled or extend the time for their
fulfillment.
SECTION 12. Termination.
(a) This Agreement may be terminated by the Representative by written
or telegraphic notice to the Company at any time before it becomes effective
pursuant to Section 10.
(b) This Agreement may be terminated by the Representative by written
or telegraphic notice to the Company, at any time after it becomes effective, in
the event that the Company or the Selling Security Holder, after notice from the
Representative and an opportunity to cure, shall have failed or been unable to
comply with any of the terms, conditions or provisions of this Agreement on the
part of the Company or the Selling Security Holder to be performed, complied
with or fulfilled within the respective times herein provided for, including
without limitation Section 6(g) hereof, unless compliance therewith or
performance or satisfaction thereof shall have been expressly waived by the
Representative in writing. This Agreement may also be terminated if (i)
qualifications are received or provided by the Company's independent public
accountants or attorneys or the Selling Security Holder's attorneys to the
effect of either inabilities in furnishing certifications as to material items
including, without limitation, information contained within the footnotes to the
financial statements, or as affecting matters incident to the issuance and sale
of the securities contemplated or as to corporate proceedings or other matters
or (ii) there is any action, suit or proceeding, threatened or pending, at law
or equity against the Company or the Selling Security Holder, or by any Federal,
State or other commission, board or agency wherein any
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unfavorable result or decision could materially adversely affect the business,
property, or financial condition of the Company or the Selling Security Holder
which was not disclosed in the Prospectus.
(c) This Agreement may be terminated by the Representative by written
or telegraphic notice to the Company or the Selling Security Holder at any time
after it becomes effective, if the offering of, or the sale of, or the payment
for, or the delivery of, the Units is rendered impracticable or inadvisable
because (i) additional material governmental restriction, not in force and
effect on the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally established on
the New York Stock Exchange or trading in securities generally on such exchange
shall have been suspended or a general banking moratorium shall have been
established by Federal or New York State authorities or (ii) a war or other
national calamity shall have occurred involving the United States or (iii) the
condition of the market for securities in general shall have materially and
adversely changed, or (iv) the condition of any matter materially affecting the
Company or the Selling Security Holder or its business or business prospects, is
such that it would be undesirable, impractical or inadvisable to proceed with,
or consummate, this Agreement or the public offering of the Units.
(d) Any termination of this Agreement pursuant to this Section 12
shall be without liability of any character (including, but not limited to, loss
of anticipated profits or consequential damages) on the part of any party
hereto, except that the Company shall remain obligated to pay the costs and
expenses provided to be paid by it specified in Sections 6, 7 and 8, to the
extent therein provided. In addition, the Underwriter shall account to the
Company for any advance and shall reimburse the Company for any portion of the
advance not expended for actual out-of-pocket expenses. In the event that the
Representative terminates this agreement pursuant to the provisions of Section
12(b), the Representative shall be entitled to reimbursement of expenses on an
accountable basis.
SECTION 13. Finder. The Company, the Selling Security Holders and the
Underwriters mutually represent that they know of no person who rendered any
service in connection with the introduction of the Company to the Underwriters
and that they know of no claim by anyone for a "finder's fee" or similar type of
fee,
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in connection with the public offering which is the subject of this Agreement.
Each party hereby indemnifies the other against any such claims by any person
known to it, and not known to the other party hereto, who shall claim to have
rendered services in connection with the introduction of the Company to the
Underwriters and/or to have such a claim.
SECTION 14. Substitution of Underwriters.
(a) If one or more Underwriters default in its or their obligations to
purchase and pay for Units hereunder and if the aggregate amount of such Units
which all Underwriters so defaulting have agreed to purchase does not exceed 10%
of the aggregate number of Units constituting the Units, the non-defaulting
Underwriters shall have the right and shall be obligated severally to purchase
and pay for (in addition to the Units set forth opposite their names in Schedule
I) the full amount of the Units agreed to be purchased by all such defaulting
Underwriters and not so purchased, in proportion to their respective commitments
hereunder. In such event the Representative, for the accounts of the several
non-defaulting Underwriters, may take up and pay for all or any part of such
additional Units to be purchased by each such Underwriter under this subsection
(a), and may postpone the Closing Date to a time not exceeding seven full
business days; or
(b) If one or more Underwriters (other than the Representative)
default in its or their obligations to purchase and pay for the Units hereunder
and if the aggregate amount of such Units which all Underwriters so defaulting
shall have agreed to purchase shall exceed 10% of the aggregate number of Units,
or if one or more Underwriters for any reason permitted hereunder cancel its or
their obligations to purchase and pay for Units hereunder, the non-canceling and
non-defaulting Underwriters (hereinafter called the "Remaining Underwriters")
shall have the right, but shall not be obligated to purchase such Units in such
proportion as may be agreed among them, at the Closing Date. If the Remaining
Underwriters do not purchase and pay for such Units at such Closing Date, the
Closing Date shall be postponed for one business day and the remaining
Underwriters shall have the right to purchase such Units, or to substitute
another person or persons to purchase the same or both, at such postponed
Closing Date. If purchasers shall not have been found for such Units by such
postponed Closing Date, the Closing Date shall be postponed for a further two
business days and the Company shall have the right to substitute another person
or persons, satisfactory to you to purchase such Units at such
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second postponed Closing Date. If the Company shall not have found such
purchasers for such Units by such second postponed Closing Date, then this
Agreement shall automatically terminate and neither the Company nor the
remaining Underwriters (including the Representative) shall be under any
obligation under this Agreement (except that the Company shall remain liable to
the extent provided in Paragraph 7 hereof). As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 14. Nothing in this subparagraph (b) will relieve a defaulting
Underwriter from its liability, if any, to the other Underwriters for damages
occasioned by its default hereunder (and such damages shall be deemed to
include, without limitation, all expenses reasonably incurred by each
Underwriter in connection with the proposed purchase and sale of the Units) or
obligate any Underwriter to purchase or find purchasers for any Units in excess
of those agreed to be purchased by such Underwriter under the terms of Sections
3 and 14 hereof.
SECTION 15. Registration of the Warrants and/or securities underlying the
Underwriters' Warrants. The Company agrees that it will, upon request by the
Representative or the holders of a majority of the Underwriters' Warrants and
Underlying Securities within the period commencing one year after the Effective
Date, and for a period of five years from the Effective Date, on one occasion
only at the Company's sole expense, cause the Underwriters' Warrants and/or the
Underlying Securities issuable upon exercise of the Underwriters' Warrants, to
be the subject of a post-effective amendment, a new Registration Statement, if
appropriate (hereinafter referred to as the "demand Registration Statement"), so
as to enable the Representative and/or its assigns to offer publicly the
Underwriters' Warrants and/or the underlying securities. The Company agrees to
register such securities expeditiously and, where possible, within forty-five
(45) business days after receipt of such requests. The Company agrees to use its
"best efforts" to cause the post-effective amendment, new Registration Statement
to become effective and for a period of nine (9) months thereafter to reflect in
the post-effective amendment, new Registration Statement, financial statements
which are prepared in accordance with Section 10(a)(3) of the Act and any facts
or events arising which, individually or in the aggregate, represent a
fundamental and/or material change in the information set forth in such
post-effective amendment or new Registration Statement. The holders of the
Underwriters' Warrants may demand registration without exercising such Warrants
and, in fact, are never required to exercise same.
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The Company understands and will agree that if, at any time within the
period commencing one year after the Effective Date and ending seven years after
the Effective Date of the Company's Registration Statement, it should file a
Registration Statement with the Securities and Exchange Commission pursuant to
the Securities Act, regardless of whether some of the holders of the
Underwriters' Warrants and Underlying Securities shall have theretofore availed
themselves of the right provided above, the Company, at its own expense, will
offer to said holders the opportunity to register the Underwriters' Warrants and
Underlying Securities. This paragraph is not applicable to a Registration
Statement filed by the Company with the SEC on Form S-8 or any other
inappropriate form.
In addition to the rights above provided, the Company will cooperate
with the then holders of the Underwriters' Warrants and Underlying Securities in
preparing and signing a Registration Statement, on one occasion only in addition
to the Registration Statements discussed above, required in order to sell or
transfer the aforesaid Underwriters' Warrants and underlying securities and will
supply all information required therefor, but such additional Registration
Statement shall be at the then holders' cost and expense unless the Company
elects to register additional shares of the Company's Common Stock in which case
the cost and expense of such Registration Statement will be prorated between the
Company and the holders of the Underwriters' Warrants and underlying securities
according to the aggregate sales price of the securities being issued. The
holders of the Underwriters' Warrants may include such Warrants in any such
filing without exercising the Underwriters' Warrants, and in fact, are never
required to exercise same. The Company can, at any time for any reason, withdraw
any such registration except in connection with a Registration Statement filed
pursuant to the Company's demand Registration Statement.
SECTION 16. Warrant Exercise Fee Agreement. Commencing twelve months after
the Effective Date, the Company will pay VTR an amount equal to four (4%)
percent of the aggregate exercise price of each Warrant exercised of which a
portion may be allowed to the dealer who solicited the exercise (which may also
be VTR); provided: (1) the market price of the Common Stock on the date the
Warrant was exercised was greater than the Warrant exercise price on that date;
(2) exercise of the Warrant was solicited by a member of the NASD; (3) the
Warrant was not held in a discretionary account; (4) disclosure of compensation
arrangements was made both
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at the time of the offering and at the time of exercise of the Warrant; and (5)
the solicitation of the exercise of the Warrant was not in violation of Rule
10b-6 promulgated under the Securities Exchange Act of 1934. The Warrant
Exercise Fee shall be paid in accordance with the provisions of this paragraph
and the Warrant Exercise Fee Agreement filed as an exhibit to the Registration
Statement (the "Warrant Exercise Fee Agreement"). The Company also agrees to
execute and deliver the Warrant Exercise Fee Agreement to VTR on the Closing
Date.
SECTION 17. Designation of a Director or Non-voting Advisor to the Board:
Unless waived by us, we shall have the right to designate a director or a
non-voting advisor to the Board for a period of five years after the Effective
Date. Said designee, shall attend meetings of the Board and receive no more or
less compensation than is paid to other non-management directors of the Company
and shall be entitled to receive reimbursement for all reasonable costs incurred
in attending such meetings, including but not limited to, food, lodging and
transportation. Moreover,to the extent permitted by law, the Company will agree
to indemnify the Representative and its designee for the actions of such
designee as director or as an advisor of the Company. In the event the
Underwriter designates a director, then the Company will utilize its best
efforts to obtain officer and director liability insurance of at least
$1,000,000 dollars prior to such person serving as a director and if obtained,
to maintain such policy in effect until five years from the Effective Date. To
the extent permitted under the policy, it will also include each of the
Representative and its designee as an insured under such policy.
SECTION 18. Finder's Fee: If the Company shall within five (5) years from
the Effective Date, enter into any agreement or understanding with any person or
entity introduced by the Representative involving (i) the sale of all or
substantially all of the assets and properties of the Company, (ii) the merger
or consolidation of the Company (other than a merger or consolidation effected
for the purpose of changing the Company's domicile) or (iii) the acquisition by
the Company of the assets or stock of another business entity, which agreement
or understanding is thereafter consummated, whether or not during such five (5)
year period, the Company, upon such consummation, shall pay to the
Representative an amount equal to the following percentages of the consideration
paid by the Company in connection with such transaction:
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5% of the first $4,000,000 or portion thereof, of such consideration;
4% of the next $1,000,000 or portion thereof, of such consideration;
3% of the next $1,000,000 or portion thereof of such consideration;
and
2% of such consideration in excess of the first $6,000,000 of such
consideration.
The fee payable to the Representative will be in the same form of
consideration and payable at the same time as that paid by or to the Company, as
the case may be, in any such transactions.
SECTION 19. Restriction on Securities All officers and directors, Laurie
Munn, Matt Harriton and Interiors, Inc. as of the Effective Date, have agreed
not to sell, transfer, hypothecate or convey any capital stock or derivative
securities by registration or otherwise for a "Lock-Up" period of two years from
the Effective Date without the prior written consent of the Representative
(except that, subject to compliance with applicable securities laws, any such
officer, director or stockholder may transfer his or her stock to a member of
his family or in the event of death, by will or operation of law, provided that
any such transferee shall agree, as a condition to such transfer, to be bound by
the restrictions set forth herein. An appropriate legend shall be marked on the
face of stock certificates representing all of such securities.
SECTION 20. Other Agreements The Alternate Prospectus included in the
Registration Statement covers the sale of 2,002,000 shares of Common Stock,
3,000,000 Class A Warrants and 3,000,000 shares of Common Stock issuable upon
exercise of the Class A Warrants. The aforesaid securities are not underwritten
by the Underwriters and are not covered by this Underwriting Agreement except
for lock-up letters executed by Matt Harriton and Laurie Munn in accordance with
Section 19 contained herein.
SECTION 21. Notice. Except as otherwise expressly provided in this
Agreement, (A) whenever notice is required by the provisions hereof to be given
to the Company, such notice shall be given in writing, by certified mail, return
receipt requested, addressed to the Company at 320 Washington Street, Mt.
Vernon, NY 10553, copy to Hartley T. Bernstein, Esq., Bernstein & Wasserman,
LLP, 950 Third Avenue, New York, NY 10022, telecopier (212) 371- 4730; and (B)
whenever notice is required by the provisions hereof
44
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to be given to the Underwriters, such notice shall be in writing addressed to
the Representative at 99 Wall Street, New York, NY 10005, copy to Steven Morse,
Esq., Lester Morse P.C., 111 Great Neck Road, Suite 420, Great Neck, New York
11021, telecopier (516) 487-1452. Any party may change the address for notices
to be sent by giving written notice to the other persons.
SECTION 22. Representations and Agreements to Survive Delivery. Except as
the context otherwise requires, all representations, warranties, covenants, and
agreements contained in this Agreement shall be deemed to be representations,
warranties, covenants, and agreements as at the date hereof and as at the
Closing Date and the Additional Closing Date(s), and all representations,
warranties, covenants, and agreements of the several Underwriters, the Selling
Security Holder and the Company, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any of the
Underwriters or the Company or any of their respective controlling persons, and
shall survive any termination of this Agreement (whensoever made) and/or
delivery of the Firm Units and the Optional Units to the several Underwriters.
SECTION 23. Miscellaneous. This Agreement is made solely for the benefit of
the Underwriters, the Selling Security Holder and the Company and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successor" or the term
"successors and assigns" as used in this Agreement shall not include any
purchaser, as such, of any of the Units.
This Agreement shall not be assignable by any party without the other
party's prior written consent. This Agreement shall be binding upon, and shall
inure to the benefit of, our respective successors and permitted assigns. The
foregoing represents the sole and entire agreement between us with respect to
the subject matter hereof and supersedes any prior agreements between us with
respect thereto. This Agreement may not be modified, amended or waived except by
a written instrument signed by the party to be charged. The validity,
interpretation and construction of this Agreement, and of each part hereof,
shall be governed by the internal laws of the State of New York, without giving
effect to the conflict of laws provisions thereof.
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This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall be deemed to be one
and the same instrument.
If a party signs this Agreement and transmits an electronic facsimile of
the signature page to the other party, the party who receives the transmission
may rely upon the electronic facsimile as a signed original of this Agreement.
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If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become a binding agreement between
the Company, the Selling Security Holder and the Underwriters in accordance with
its terms.
Very truly yours,
DECOR GROUP, INC.
By:_________________________________
Donald Feldman, President
GORDON BROTHERS CAPITAL CORPORATIONS
By:_________________________________
Authorized Officer
CONFIRMED AND ACCEPTED, as of the date first above written:
VTR CAPITAL, INC.
By:_____________________________________________
For itself and as the Representative of the
other Underwriters named in Schedule I hereto.
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SCHEDULE I
Underwriters Number of Units to be
------------ Purchased
---------------------
VTR Capital Inc.
_____________________
Total 275,000
=======
48
<PAGE>
EXHIBIT 3.03
CERTIFICATE OF DESIGNATION
ESTABLISHING A SERIES OF SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
DECOR GROUP, INC.
To the Secretary of State
of the State of Delaware:
DECOR GROUP, INC. (the "Company"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does hereby certify that: pursuant to the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware, the following resolution
establishing and designating a series of shares of preferred stock and fixing
and determining the relative rights and preferences thereof was duly adopted by
the Board of Directors of the Company as of September 3, 1996:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of this Company in accordance with the
provisions of its Certificate of Incorporation as amended, a series of
preferred stock, $.0001 par value per share, of the Company be established
and given the distinctive designation of "Series C Convertible Preferred
Stock" (the "Series C Preferred Stock"). The number of shares of the Series
C Preferred Stock authorized to be issued by the Company shall be 1,000,000
shares. The rights, preferences, privileges and restrictions granted to and
imposed upon the Series C Preferred Stock are as set forth on the attached
Exhibit A.
IN WITNESS WHEREOF, DECOR GROUP, Inc., has caused this Certificate to be
signed by its President, this 26th day of September, 1996.
DECOR GROUP, INC.
By: ____________________
Donald Feldman
President
<PAGE>
EXHIBIT A
1. Dividends
(a) Each issued and outstanding share of Series C Preferred Stock of the
Company shall not be entitled to receive dividends.
2. Voting
(a) The holders of Series C Preferred Shares shall have no right to vote on
matters presented to the stockholders, except as provided by the General
Corporation Law of the State of Delaware.
3. Rights on Liquidation, Dissolution or Winding Up
In the event of any liquidation, dissolution, or winding up of the affairs
of the Company, whether voluntary or involuntary, each issued and outstanding
share of Series C Preferred Stock shall entitle the holder of record thereof to
payment at the rate of $.0001 dollars per share, plus an amount equal to all
unpaid annual dividends, if any, before any payment or distribution of the net
assets of the Company (whether stated capital or surplus) shall be made to or
set apart for the holders of record of any shares of Common Stock ("Junior
Securities"). After setting apart or paying in full the preferential amounts
aforesaid to the holders of record of the issued and outstanding Series C
Preferred Stock, the remaining net assets (whether stated capital or surplus),
if any, shall be distributed exclusively to the holders of record of the issued
and outstanding Junior Securities, each issued and outstanding Junior Security
entitling the holder of record thereof to receive an equal proportion of said
remaining net assets relative to all other holders of any class or type of
Junior Security. If the net assets of the Company shall be insufficient to pay
in full the preferential amounts among the holders of the Series C Preferred
Stock as aforesaid, then each issued and outstanding share of Series C Preferred
Stock and such other shares having priority with the Series C Preferred Stock
shall entitle the holder of record thereof to a ratable proportion of said net
assets, and the holders of the Junior Securities shall in no event be entitled
to participate in the distribution of said net assets in respect to their Junior
Securities. Without excluding any other proceeding which does not in fact effect
a liquidation, dissolution, or winding up of the Company, a merger or
consideration of the Company into or with any other corporation, a merger of any
other corporation into the Company, participation by the Company in a plan for
share exchanges with any other corporation, or a sale, lease, mortgage, pledge,
exchange, transfer or other disposition by the Company of all or substantially
all of its assets shall not be deemed, for the purposes of this paragraph, to be
a liquidation, dissolution, or winding up of the Company, provided that in each
case, effective provision is made by the resulting and surviving corporation or
otherwise for the protection of the rights of the holders of the Series C
Preferred Stock.
4. Conversion
(a) Commencing on September 1, 1997, shares of the Series C Preferred Stock
of the
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Company shall be convertible, subject to adjustment, at the option of the
holders of record thereof into fully paid and nonassessable shares of Common
Stock of the Company upon surrender to the Company or its designee of the
certificate or certificates representing the share or shares of Series C
Preferred Stock to be converted, together with a written notice of election to
convert; and, upon receipt by the Company or its designee of such notice and of
such surrendered certificate or certificates with any appropriate endorsement
thereon, as may be prescribed by the Board of Directors, any such holder shall
be entitled to receive a certificate or certificates representing the shares of
Common Stock into which such share or shares of Series C Preferred Stock is
convertible, and any such holder shall be deemed to be a holder of record of
said share of Common Stock as of the time of said receipt by the Company or its
designee. The basis for such conversion shall be one (1) share of Common Stock
for each share of Series C Preferred Stock so converted.
(b) In connection with effecting any transfer to the Company for
cancellation of any Series C Preferred Stock upon conversion of the same into
shares of Common Stock, the Company may, but shall not be obliged to, issue a
certificate or certificates for fractions of a share of Common Stock. Any Series
C Preferred Stock which has been converted shall be canceled and shall be
restored to the status of authorized but unissued Preferred shares.
(c) Whenever the Company shall (i) pay a dividend in shares of Common Stock
to holders of Common Stock or a dividend to holders of Common Stock payable in
shares of the Company's capital stock other than shares of Common Stock, (ii)
subdivide or combine outstanding shares of Common Stock, (iii) issue to all
holders of shares of Common Stock, rights, warrants or options entitling them
for a period of not more than forty-five (45) days to purchase shares of Common
Stock (or securities convertible into shares of Common Stock) at a price per
share (or having a conversion price per share) less than the then current per
share market price for such shares of Common Stock, (iv) distribute to all
holders of shares of Common Stock evidences of indebtedness or assets (excluding
cash dividends) or rights or warrants (other than those referred to above) or,
(v) take or permit to be taken any other action which will result in the
dilution of the conversion rights and privileges of the Series C Preferred
Stock, then the Board of Directors of the Company shall forthwith cause to be
made any such adjustment on the basis of conversion as it shall determine to be
necessary to preserve to said holders of the Series C Preferred Stock those
rights and privileges which are substantially proportionate to the rights and
privileges of the Series C Preferred Stock existing prior to said event or
events, and an appropriate adjustment shall be made with respect to the
conversion rate of the Series C Preferred Stock such that the percentage
interests of shares of Common Stock of the Company that a holder of Series C
Preferred Stock would own upon the conversion of Series C Preferred Stock
subsequent to the occurrence of any of the events set forth in (i) - (v)
preceding shall be identical as if any such event shall not have occurred. No
adjustment of the conversion rate will be required until cumulative adjustments
would require any increase or decrease of at least 1% in the number of shares of
Common Stock into which each share of Series C Preferred Stock is then
convertible. No adjustment of the conversion rate will be made for cash
distributions or cash dividends.
(d) In case of any consolidation or merger to which the Company is a party
other than
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a merger or consolidation in which the Company is the surviving corporation, in
case of any statutory exchange of securities with another corporation, or in
case of any sale or conveyance to another corporation of all or substantially
all of the assets of the Company, there will be no adjustment of the conversion
rate of the Series C Preferred Stock but each holder of a share of Series C
Preferred Stock then outstanding will have the right thereafter to convert such
share of Series C Preferred Stock solely into the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, statutory
exchange, sale or conveyance by a holder of the number of shares of Common Stock
into which each such share of Series C Preferred Stock might have been converted
immediately prior to such consolidation, merger, statutory exchange, sale or
conveyance, assuming such holder of shares of Common Stock failed to exercise
his rights of election, if any, as to the kind or amount of securities, cash or
other property receivable upon such consolidation, merger, statutory exchange,
sale or conveyance (provided, that if the kind or amount of securities, cash or
other property receivable upon such consolidation, merger, statutory exchange,
sale or conveyance for each non-electing share shall be deemed to be the kind
and amount so receivable per share by plurality of the non-electing share).
(e) In the case of a cash merger of the Company into another corporation or
any other cash transaction of the type mentioned above, the effect of these
provisions would be that the conversion features of the Series C Preferred Stock
would thereafter be limited to converting the Series C Preferred Stock at the
conversion rate in effect at such time into the same amount of cash per share
that such holder would have received had such holder converted the Series C
Preferred Stock into Common Stock immediately prior to the effective date of
such cash merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash so received on conversion could be
more or less than the liquidation preference of the Series C Preferred Stock.
The Company has the option, exercisable at any time, to increase the conversion
rate, so long as such increase is for a minimum period of twenty (20) days and
is irrevocable during such period and the Company notifies holders of Series C
Preferred Stock at least fifteen (15) days prior to the date on which the
reduced conversion price takes effect.
5. Notices
Any notice or other communication under the provisions of this Certificate
shall be in writing, and shall be given by postage prepaid, registered or
certified mail, return receipt requested, by hand delivery with an
acknowledgment copy requested, or by the Express Mail service offered by the
United States Post Office or any other reputable service which guarantees
overnight delivery ("Overnight Mail"), directed to the Company at 320 Washington
Street, Mt. Vernon, NY and to the Holders at their respective addresses as set
forth in the records of the Company, or to any new address of which the Company
or any Holder shall have informed the others by the giving of notice in the
manner provided herein. Such notice or communication shall be effective, if sent
by mail, three (3) days after it is mailed within the continental United States;
if sent by Overnight Mail, one day after it is mailed; or by hand delivery, upon
receipt.
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<PAGE>
EXHIBIT 4.08
VOTING AGREEMENT
THIS AGREEMENT, dated as of September 3, 1996, by and among Interiors, Inc.
(the "Shareholder"), Max Munn ("Munn"), Matthew Harriton ("Harriton"), Michael
Lulkin ("Lulkin") and Decor Group, Inc. (the "Corporation").
WHEREAS, the Shareholder recently exercised an option and is presently the
owner of twenty million (20,000,000) shares of the Corporation's issued and
outstanding shares of Series B NonConvertible Preferred Stock of the
Corporation, par value $.0001 per share (collectively, the "Shares"); and
WHEREAS, it is deemed in the best interest of the Corporation and the
Shareholder that the voting power of the Shares held by the Shareholder be
vested in the Board of Directors of the Corporation; and
WHEREAS, the Board of Directors is currently comprised of Munn, Harriton
and Lulkin (collectively, "Voting Trustees"); and
WHEREAS, the Shareholder wishes to vest the power to vote the Shares on all
matters presented to the shareholders of the
<PAGE>
Corporation in the Voting Trustees, to the extent and upon the terms and
conditions stated herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Simultaneously with the execution of this Agreement, the Shareholder
shall deliver to the Voting Trustees, undated proxies representing the Shares
owned by the Shareholder, duly executed by the Shareholder on his behalf, in
favor of the Voting Trustees (collectively, the "Proxies").
2. The Voting Trustee shall vote the Shares represented by the Proxies
under the terms and conditions set forth herein.
3. The Shareholder shall be entitled to all cash dividends and other
distributions, if any, with respect to the Shares, including stock splits and
dividends.
4. As long as this Agreement is in effect, the Voting Trustees, in their
unrestricted discretion, shall have and are empowered and authorized to have,
the power and right to represent the holder of the Shares, and to vote said
Shares by exercising the Proxies, as in the sole judgement of the Voting
Trustees may be in the best interest of the Corporation, at all meetings of the
shareholders of the Corporation (and by written
2
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consent in lieu thereof), in the election of directors and upon any and all
matters and questions which may be brought before such meetings, as fully as the
Shareholder might do if personally present; provided however, that the Voting
Trustees agree (i) not to vote in favor of any merger, consolidation, Dilutive
Transaction (as hereinafter defined),significant acquisition, recapitalization
or reorganization (collectively, a "Specified Transaction") without the
unanimous approval of each of the Voting Trustees, (ii) to vote in favor of the
election of the other Voting Trustees at any meeting called for the re-election
of directors and (iii) not to vote in favor of expanding the Board of Directors
to more than five (5) members without the unanimous approval of each of the
Voting Trustees. "Dilutive Transaction" means any issuance by the Corporation of
capital stock, or securities exercisable for or convertible into the
Corporation's capital stock which would result in Interiors ownership of less
than 51% of the outstanding voting stock of the Corporation so long as Interiors
does not sell or transfer the Shares. Except for the transactions contemplated
by (i,ii) and (iii) above, any disputes among the Voting Trustees with respect
to the
3
<PAGE>
vote of the Shares shall be resolved by a majority of the Voting Trustees.
Further, the Voting Trustees agree not to approve, as directors of the
Corporation, any Specified Transaction or the expansion of the Board of
Directors to more than five (5) members, unless each of the Voting Trustees
votes in favor of such transaction.
5. The Voting Trustees shall serve without compensation as trustees and
shall not be required to give bond or security for the discharge of their duties
under this Agreement. They will exercise the powers and perform the duties of a
voting trustee hereunder according to their best judgment in the interest of the
Corporation.
6. The Voting Trustees may employ counsel and such agents as they may deem
desirable, may remove them with or without cause, and may fix the powers, duties
and compensation of such attorneys and agents.
7. The Voting Trustees shall have the right to cause the Corporation, to
the extent the Corporation is legally able to do so, to indemnify and hold
harmless the Voting Trustees, against any and all losses, claims, damages or
liabilities, to which the
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<PAGE>
Voting Trustees may become subjected, by reason of any action taken by them as
Voting Trustees under this Agreement. The Voting Trustees shall not incur any
responsibility as shareholder, trustee or otherwise for any mistake, act or
omission of any attorney, agent or by reason of any kind taken or omitted by
them except for their own gross negligence.
8. In the event that any of the Voting Trustees shall become unable to
serve as a Voting Trustee, then such Voting Trust shall select, in his sole
discretion, a replacement Trustee, or such Trustee may request that the
remaining Trustees select a replacement Trustee.
9. The Voting Trust hereby created shall commence on the date hereof and
continue until December 31, 1997 (the "Termination Date").
10. A duplicate copy of this Voting Trust Agreement shall be filed in the
principal office of the Corporation in the State of New York.
11. Any and all notices required or permitted to be given under any of the
provisions of this Agreement shall be in writing and shall be deemed to have
been duly given when personally
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<PAGE>
delivered or mailed by certified or registered mail, or by private overnight
mail service (e.g. Federal Express) addressed to the addresses set forth below,
or at such other address as any party entitled to receive notice may specify by
notice to all other parties given as aforesaid:
If to Shareholder: Interiors, Inc.
320 Washington Street
Mt. Vernon, New York 10533
If to Corporation: Decor Group, Inc.
320 Washington Street
Mt. Vernon, New York 10533
If to the
Voting Trustees: To their respective addresses on
the books and records of the
Corporation
12. The validity of this Agreement, or any part hereof, and the
interpretation of all the provisions herein, shall be governed by the laws of
the State of Delaware and each of the parties hereto consents to the
jurisdictions of the federal and state courts located in the State of New York.
13. The invalidity of any term or provision of this Agreement shall not
affect the validity of the remainder of this Agreement.
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<PAGE>
14. This Agreement shall bind and benefit the parties hereto, their heirs,
administrators, executors, successors, and assigns.
15. This Agreement may be executed simultaneously in one or more original
or facsimile counterparts, each of which shall be deemed an original, all of
which together shall constitute one and the same instrument. This Agreement may
only be modified by a writing signed by all of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in
duplicate on the date first above written.
INTERIORS, INC.
By:________________________________
Name: Max Munn
Title: President
By:________________________________ DECOR GROUP, INC.
Name: Max Munn, as trustee
By:________________________________
Name: Donald Feldman
By:________________________________ Title: President
Name: Matt Harriton, as trustee
By:________________________________
Name: Michael Lulkin, as trustee
8
<PAGE>
EXHIBIT 10.03
EMPLOYMENT AGREEMENT made and entered into as of the_____ day of
August, 1996 by and between Decor Group, Inc., a Delaware corporation with an
office for the transaction of business in New York located at 320 Washington
Street, Mount Vernon, New York 11053 ("Employer"), and Donald Feldman residing
at 2112 E. Westmoreland Dr., Brae, California 92621 ("Employer").
WHEREAS, Employee has extensive executive experience in the sales and
marketing of various products; and
WHEREAS, Employer is in the business of manufacturing and marketing
picture frames and home decorative accessories, by mail order catalogs and other
means;
WHEREAS, the parties wish to enter into an agreement for the
employment of the Employee by the Employer on the terms and conditions
specified below;
Now, therefore, it is mutually agreed as follows:
1. Employment. Employer hereby employs Employee as a Vice President of
Sales and Marketing.
2. Compensation. Employee will be paid as salary for his services
hereunder from the Employer, in any capacity during the term hereof including
without limitation services as an executive, officer, director or member of any
committee of the Employer or any subsidiary, affiliate or division hereof, at
the annual rate of $117,500.
In addition, Employer will pay Employee as a bonus, two percent of the
sum, if any, by which Employer's net sales for each fiscal year of this
agreement after the fiscal year ending June 30, 1997 (the "base year"), shall
exceed the base year's sales, excluding catalog sales. Bonuses on net sales of
acquired businesses or entities will be payable on increases in net
<PAGE>
sales of the acquired company over the period consisting of the first six (6)
months after acquisition, annualized, nearest to the end of Employer's fiscal
year after the acquisition. Employee will be paid a bonus on catalog sales in
the amount of one-half of one percent of the sum, if any, by which such net
sales shall exceed the base year's sales. For increases in net sales of more
than $10,000,000 the bonus will be in the amount of one-quarter of one percent.
No bonus will be payable on annual net sales of more than $20,000,000 until the
rate will be negotiated and agreed to.
Bonuses shall be payable in six (6) equal monthly installments
commencing the month in which Employer's accountants shall certify its financial
statements for the appropriate fiscal years.
Employee will be granted the option to purchase 10,000 shares of
Employer's common stock for every full year of employment under this agreement,
at a price of $2.50 per share, on the terms and conditions of Employer's
existing employee stock option plan. Employee acknowledges that the stock may be
sold by him subject only to the applicable securities laws and rules and
regulations of the Securities Exchange Commission and other authorities, and
that on exercise of the option he may be required to sign appropriate investment
representations.
3. Term. The term of this agreement shall be four (4) years from the
closing date of the Company's initial public offering ("IPO"). In the event that
the Employer shall decide to terminate this agreement at any time after the
first year, it will have the right to do so upon the continuation of payment of
eighty percent (80%) of Employee's salary. Employee will thereupon be obligated
to seek other employment, and the amounts payable by Employer will be reduced by
<PAGE>
Employee's other income.
4. Duties. Employee will devote all of his working time and attention
to Employer's business and to the performance of his duties which will include
the following:
(a) Development of additional sales and new marketing strategies for
Employer.
(b) Assist in marketing and merchandising of Employer's catalogs.
(c) Create a national sales market for Employer's custom frame
business.
(d) Arrange for direct importation of products to be sold by Employer.
(e) Develop a new direct line for national distribution.
(f) Supervise national sales representative organizations utilized and
to be utilized.
(g) Assist in identifying potential acquisitions.
(h) Utilize his best efforts with respect to sales, marketing and
merchandising.
5. Reimbursement. Employer shall reimburse Employee for all authorized
reasonable and necessary expenses incurred by him in performing his duties for
the Employer, including without limitation travel and entertainment expenses
within approved budgetary amounts. Such expenses will include up to $400 a month
for use of an automobile, $2,500 toward the down payment of a lease, and up to
$200 a month towards insurance, maintenance and license fees, all in connection
with the performance of his services hereunder. If the Employee is discharged
prior to the conclusion of the Employee's lease of an automobile, Employer at
its option will continue the lease payments on the automobile or will pay the
termination fee under the lease, and will assume or reimburse the Employee for
any of his lease obligations. The price of the automobile will not exceed
$40,000.
<PAGE>
Employee will relocate his home in the event that he and Employer
should agree that he will do so. The Employer will pay or reimburse Employee for
the cost of movers and of rental of a temporary residence for a reasonable
period of time, in amounts to be agreed to by Employer and Employee before they
are committed to or expended.
6. Insurance. Employer will reimburse Employee for his Cobra payments
for his and his family's existing health insurance through his former employer,
except to the extent that Employee heretofore contributed to the cost of such
insurance. Employer will reimburse Employee for the cost of his current
disability insurance under Cobra. After the expiration of the Cobra period,
Employer will obtain for Employee and his family a health insurance plan
comparable to that furnished other senior executive employees, and a disability
insurance policy in the amount of two thirds of employees initial salary
provided that the annual payments for the disability insurance will not exceed
$4,200. In addition, Employer will reimburse employee for the cost of $25,000 of
the Employee's existing term life insurance.
7. Vacation. Employee shall be entitled to paid vacations which are
appropriate for persons or his status, annually, to be taken by him at such
times an shall be appropriate in light of his Position and which will not
interfere with the performance of his duties.
8. Confidentiality. Employee will not disclose to third parties any
information or documents which are confidential and proprietary to Employer
except in furtherance of the Employer's business. In addition, during the term
of this agreement Employee will not own any stock or have any other direct or
indirect ownership or other interest in any business which compete or will be
competitive with Employer.
9. Modification. This agreement contains the entire understanding of
the parties
<PAGE>
hereto with respect to the subject matter herein contained, and no amendment or
modification or termination thereof shall be valid unless expressed in a written
instrument signed by the party or parties to be charged.
10. Successors and assigns. This agreement shall not be assignable by
the Employee but it is binding upon and shall inure to the benefit of the
parties hereto and Employee's heirs and personal representative and binding upon
and to the benefit of Employer's successors and assigns.
11. Applicable Law. This agreement shall be governed by the law of the
State of New York. If any provision of this will be determined to be
unenforceable, it will not effect the enforceability of the agreement's other
terms and provisions. The State Courts of the State of New York will have
exclusive jurisdiction in the event of litigation between Employer and Employee,
who waive their right to a jury trial.
Decor Group, Inc.
By:_____________________________
Name:
Title:
________________________________
Donald Feldman
<PAGE>
EXHIBIT 10.06
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DECOR GROUP, INC.
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1996 Stock Plan
<PAGE>
Decor Group, Inc.
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1996 Stock Plan
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Page
1. Purposes .............................................................. 1
2. Definitions ........................................................... 1
3. Administration ........................................................ 3
4. Shares Subject to the Plan ............................................ 4
5. Persons Eligible; Annual Limitations .................................. 4
6. Specific Terms of Awards .............................................. 5
7. Certain Provisions Applicable to Awards ............................... 10
8. Change in Control Provisions .......................................... 13
9. Adjustments ........................................................... 14
10. General Provisions .................................................... 15
i
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DECOR GROUP, INC.
1996 STOCK PLAN
1. Purposes. The 1996 Stock Plan (the "Plan") is intended to promote the
interests of Decor Group, Inc. (the "Company") and its stockholders and the
security of its employees and other key employees who are in a position to
contribute substantially to the progress to seek such results; to closely align
the interests of such employees with the interests of stockholders of the
Company by linking rewards hereunder to stock performance; to retain in the
Company the benefits of the services of such employees; and to attract to the
service of the Company new key employees of high quality.
2. Definitions. In addition to terms defined in Sections 1 and 8 of the
Plan, the following terms used in the Plan shall have the meanings set forth
below:
(a) "Award" shall mean any Option, LSAR, Restricted Stock, Deferred
Stock, Shares granted as a bonus or in lieu of other awards, Dividend
Equivalent, or Other Share-Based Award, or any other right or interest
granted to a Participant under the Plan.
(b) "Change in Control" shall have the meaning specified in Section
8(b).
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. References to any provisions of the Code shall be deemed
to include regulations and proposed regulations thereunder and successor
provisions and regulations thereto.
(d) "Committee" shall mean the Compensation Committee of the Board of
Directors, or such other Committee as may be designated by the Board of
Directors, subject to the requirements of Section 3.
(e) "Covered Employee" shall mean a person who is an executive officer
deemed by the Committee, prior to commencement of any fiscal year, as
reasonably likely to be a "named executive officer" in the Summary
Compensation Table of the Company's proxy statement reporting compensation
paid to such person for such fiscal year and whose compensation over $1
million would not be deductible under Section 162(m) of the Code, but for
the provisions of the Plan and any other "qualified performance-based
compensation" plan (as defined under Section 162(m) of the Code) of the
Company; provided, however, that the Committee may determine that a
Participant has ceased to be a Covered Employee prior to payout of any
Award.
(f) "Deferred Stock" shall mean a right, granted to a Participant
under Section
<PAGE>
6(e), to receive Shares at the end of a specified deferral period.
(g) "Directors," "Board of Directors" and "Board" shall mean the Board
of Directors of the Company as constituted from time to time.
(h) "Dividend Equivalent" shall mean a right, granted to a Participant
under Section 6(g), to receive cash, Shares, other Awards, or other
property equal in value to dividends paid with respect to a specified
number of Shares or other periodic payments. Dividend Equivalents may be
awarded on a free-standing basis or in connection with another Award, and
may be paid currently or on a deferred basis.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" of a Share shall be the mean average of the
bid and asked prices of a Share on The Nasdaq SmallCap Market (or, if the
Common Stock is not listed for trading on The Nasdaq SmallCap Market, such
principal exchange system on which such Shares are then listed or quoted)
on a specified date, or the last preceding date on which such prices were
reported; or if such Shares are not then listed on any exchange or quoted
in The Nasdaq SmallCap Market, then the Fair Market Value of such Shares
shall be the average of the bid and asked prices of the Shares in the
over-the-counter market on the specified date or the last preceding date on
which such bid and asked prices were quoted; or if no such prices are
available, the Fair Market Value shall be determined by the Committee in
its discretion using any reasonable method.
(k) "Incentive Stock Option" or "ISO" shall mean an incentive stock
option within the meaning of Section 422 of the Code.
(l) "LSAR" or "Limited Stock Appreciation Right" shall mean the right
granted to a Participant under Section 6(c) to be paid an amount, in the
event of a Change in Control, measured by the appreciation in the Fair
Market Value of a Share from the date of grant to the date of exercise of
the right, with payment to be made in cash, Shares, or other Awards as
specified in the Award or determined by the Committee.
(m) "Non-Incentive Stock Option" shall mean an Option which is not an
ISO.
(n) "Option" shall mean an option of the purchase of Shares granted
under Section 6(b) of the Plan, which will be either an ISO or
Non-Incentive Stock Option.
(o) "Other Share-Based Award" shall mean a right, granted to a
Participant under Section 6(h), that relates to or is valued by reference
to Shares, other Awards relating to Shares, or other property.
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<PAGE>
(p) "Participant" shall mean a person who, as an executive officer or
other key employee of the Company or a subsidiary, is selected by the
Committee to receive an Award under the Plan.
(q) "Restricted Stock" shall mean an award of Shares to a Participant
under Section 6(d) that may be subject to certain restrictions and to a
risk of forfeiture.
(r) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect
and applicable to the Plan and Participants, promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act.
(s) "Share" shall mean a share of Common Stock, par value $.0001 per
share, of the Company, and such other securities as may be substituted or
resubstituted for Shares pursuant to Section 9.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two Directors designated by
the Board of Directors. Directors who serve on the Committee shall be
"disinterested persons" within the meaning of Rule 16b-3 and shall be
"outside directors" within the meaning of Section 162(m) of the Code
(including persons deemed to be outside directors pursuant to any
transitional rules adopted by the Internal Revenue Service). The Board of
Directors may fill any vacancy in the Committee. The Secretary of the
Company shall be ex officio the Secretary of the Committee. Subject to the
terms of the Plan, the Committee shall have full authority in its sole
discretion to administer the Plan, including, but without limiting the
generality of the foregoing, determining the persons to whom Awards shall
be granted; the type of Award and the number of Shares to which each Award
shall relate; the time of such grants; the terms of payment, if any
relating to any Award; the dates on which Awards may be exercised or the
risk of forfeiture or deferral period relating to Awards shall lapse or
terminate, and the acceleration of any such dates; the expiration date of
Awards; whether, to what extent, and under what circumstances an Award may
be settled, or the exercise price of an Award may be paid, in cash, Shares,
other Awards, or other property; and all other terms and conditions of
Awards. The Committee shall also have full power, in its sole discretion,
to interpret the Plan, and to prescribe, amend, and rescind rules and
regulations relating thereto and agreements relating to Awards, and to make
all other determinations under the Plan, subject to the terms of the Plan.
Decisions of the Committee with respect to the administration and
interpretation of the Plan shall be final, conclusive, and binding upon all
persons interested in the Plan.
(b) Manner of Exercise of Committee Authority. Unless authority is
specifically reserved to the Board of Directors under the terms of the
Plan, the Company's Certificate of Incorporation or Bylaws, or applicable
law, the Committee shall have sole
3
<PAGE>
discretion in exercising authority under the Plan. The Committee shall
select one of its members as its chairman and shall hold meetings at such
times and places as it shall deem advisable. Any action of the Committee
shall be taken with the approval of a majority of its members present and
voting at a meeting duly called and held at which a quorum is present. A
majority of the Committee's members shall constitute a quorum. Any action
may be taken by a written instrument signed by all members of the Committee
and such action shall be fully as effective as if taken by a majority of
the members at a meeting duly called and held. The Committee may delegate
to officers or managers of the Company or any subsidiary of the Company the
authority, subject to such terms as the Committee shall determine, to
perform administrative functions and, with respect to Participants not
subject to Section 16 of the Exchange Act, to perform such other functions
as the Committee may determine, to the extent permitted under Rule 16b-3
and applicable law.
(c) Limitation of Liability. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other
information furnished to him by any officer or other employee of the
Company or any subsidiary, the Company's independent certified public
accountants, or any executive compensation consultant, legal counsel or
other professional retained by the Company to assist in the administration
of the Plan. No member of the Committee, nor any officer or employee of the
Company or a subsidiary acting on behalf of the Committee, shall be
personally liable for any action, determination, or interpretation taken or
made in good faith with respect to the Plan, and such persons shall, to the
extent permitted by law, be fully indemnified and protected by the Company
with respect to any such action, determination, or interpretation.
4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 9 hereof, the total
number of Shares reserved for delivery to Participants in connection with
Awards under the Plan shall be 500,000 shares.
(b) No Award (including an Award that may only be settled in cash) may
be granted if the number of Shares to which such Award relates, when added
to the number of Shares previously delivered under the Plan and the number
of Shares to which other then-outstanding Awards relate, exceeds the number
of Shares deemed available under this Section 4. The Committee may adopt
procedures for the counting of Shares under this Section 4 to ensure
appropriate counting, avoid double counting (in the case of tandem or
substitute Awards), and provide for adjustments in any case in which the
number of Shares actually delivered differs from the number of Shares
previously counted in connection with an Award or awards made pursuant to
other Company plans. Any Shares delivered pursuant to an Award may consist,
in whole or in part, of authorized and unissued Shares or treasury Shares.
5. Persons Eligible; Annual Limitations. Persons eligible to receive Awards
shall be the executive officers and other key employees of the Company and/or
any of its subsidiaries (including
4
<PAGE>
officers or key employees who may be members of the Board of Directors). During
any calendar year, no Participant may be granted, under the Plan, Options or
other Awards under Section 6(b) through 6(h) relating to more than 100,000
Shares and in no event shall the aggregate amount of such grant exceed at the
time of grant an amount equal to $100,000, subject to adjustment in accordance
with Section 9 hereof. With respect to any Award that may be settled in cash, no
Participant may be paid during any calendar year an amount that exceeds the
greater of the Fair Market Value of the number of Shares set forth in the
preceding sentence at the date of grant or the date of settlement of the Award
(this limitation is separate and not affected by the number of Awards granted
during such calendar year subject to the limitation in the preceding sentence).
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6 and otherwise in accordance with the Plan. In
addition, the Committee may impose on any Award or the exercise thereof, at
the date of grant or thereafter (subject to Section 10(e)), such additional
terms and conditions, not inconsistent with the provisions of the Plan, as
the Committee shall determine, including terms requiring forfeiture of
Awards in the event of termination of employment by the Participant. Except
as provided in Sections 6(f), 6(h), 7(a), or 7(b), or to the extent
necessary to comply with requirements of the Delaware General Corporation
Law that lawful consideration be paid for Shares, only services may be
required as consideration for the grant (but not the exercise) of any
Award.
(b) Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per Share purchasable under an
Option shall be determined by the Committee; provided, however,
that, except as provided in Section 7(a), such exercise price
shall be not less than the Fair Market Value of a Share on the
date of grant of such Option and, in all cases, shall be not less
than par value of a Share.
(ii) Time and Method of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or in
part, the methods by which such exercise price may be paid or
deemed to be paid, the form of such payment, including, without
limitation, cash, Shares, other Awards or awards granted under
other Company plans, or other property (including notes or other
contractual obligations of Participants to make payment on a
deferred basis, such as through "cashless exercise" arrangements,
to the extent permitted by applicable law), and the methods by
which Shares will be delivered or deemed to be delivered to
Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall comply
in all respects with the provisions of Section 422 of the Code,
including but not limited to the requirement that no ISO shall be
granted more than ten years
5
<PAGE>
after the effective date of the Plan. Anything in the Plan to the
contrary notwithstanding, no provision of the Plan relating to
ISOs shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be exercised, so
as to disqualify either the Plan or any ISO under Section 422 of
the Code.
(iv) Restriction on Sale or Disposition of Shares Subject to Non-ISOs.
Upon the grant of an Option which is not an ISO, the Committee
shall specify a period of time during which the sale or other
disposition of Shares acquired pursuant to such Option shall be
restricted, which period shall be not less than six months nor
more than three years after exercise of an Option ("Restricted
Period"). In the case of Shares purchased upon the exercise of
non-ISOs:
(A) During the Restricted Period, such Shares may not be sold,
transferred, pledged, assigned or otherwise disposed by the
holder thereof except that the optionee may offer the Shares
to the Company and the Company may purchase up to all the
Shares offered, in its sole discretion, during such period
at a price equal to the exercise price of the Shares.
Furthermore, upon termination of optionee's employment with
the Company during the Restricted Period for reasons other
than death, disability or retirement due to advanced age,
such optionee shall be required, upon written request of the
Company made during the Restricted Period, within seven (7)
business days to sell to the Company up to all of the Shares
purchased at the exercise price. If the Company does not
require such sale, the optionee shall continue to hold such
shares subject to the restrictions imposed by this clause
(A).
(B) After the end of the Restricted Period, in the event the
holder of such Shares desires to sell such Shares, such
holder shall first offer by written notice such Shares to
the Company at the Fair Market Value thereof on the date of
such notice and the Company shall have until the close of
business on the seventh business day after receipt of such
offer to accept it in whole or in part by written notice
thereof. If the Company shall elect to purchase such Shares
it shall pay cash therefor on the fifth business day
following the date of the notice of the acceptance of the
offer. If the Company shall not elect to purchase such
Shares, the offering holder shall then be free to sell all
Shares offered to and not acquired by the Company for a
period of 30 days beginning on the first business day after
the date the Company gives notice that it does not elect to
purchase such Shares or after expiration of the period
within which the Company can elect to purchase, whichever is
sooner. Upon the expiration of such 30 day period, the
6
<PAGE>
holder must again offer the Shares to the Company as
aforesaid before any sale thereof. The restrictions
contained in this clause (B) shall be applicable to persons
who succeed, by will or by reason of the laws of descent and
distribution, to the rights of holders of Non-Incentive
Stock Options or Shares acquired upon exercise thereof.
(v) Right of First Refusal Concerning Shares Subject to ISOs. The
right of first refusal granted to the Company with respect to the
sale or disposition of Shares acquired pursuant to the exercise
of a Non-Incentive Stock Option set forth in Clause (B) of
subparagraph (iv) above also shall be applicable to Shares
acquired pursuant to the exercise of ISOs from the date of
exercise of such Options. These restrictions shall also be
applicable to persons who succeed by will or by reason of the
laws of descent and distribution to the rights of the holders of
ISOs or shares acquired upon exercise thereof.
(vi) Exercise Price and Term for 10% Stockholders. The exercise price
of an ISO granted to a person possessing more than 10% of the
total combined voting power of all shares of stock of the Company
or a parent or subsidiary of the Company ("10% Stockholder")
shall in no event be less than 110% of the Fair Market Value of
the shares of the Common Stock at the time the ISO is granted.
The term of an ISO granted to a 10% Stockholder shall not exceed
five years from the date of grant.
(c) Limited Stock Appreciation Rights. The Committee is authorized to
grant LSARs to Participants on the following terms and conditions:
(i) Grant. The Committee, in connection with any Option, either at
the time the Option is granted or any other time thereafter while
the Option is outstanding, may grant to any optionee an LSAR
entitling the holder, in the event of a Change in Control of the
Company, to receive from the Company at any time during the
60-day period following such Change in Control, in lieu of
exercising such Option, an amount of cash equal to the excess of
(x) the Fair Market Value of the number of Shares as to which the
LSAR is exercised (determined as of the effective date of the
Change in Control) over (y) the exercise price, times the number
of Shares as to which such LSAR is exercised.
(ii) Payment. An optionee who exercises an LSAR will receive payment
of the amount of cash due within 20 business days after such
exercise.
(iii) Conditions to Exercise. An LSAR will be exercisable only when
the underlying Option is otherwise exercisable and will be
transferable only when the Option is otherwise transferable. In
the event of the death of an optionee, an LSAR may be exercised
following a Change in Control only to
7
<PAGE>
the extent the related Option may be exercised by such person's
executor or legal representative. In addition, in the case of an
ISO, any exercise of an LSAR can only be made when the Fair
Market Value of the Shares subject to the ISO exceeds the
exercise price of such Option.
(iv) Termination. Upon the exercise of an Option pursuant to the Plan,
the LSAR relating to the Shares covered by such Option shall
terminate. Upon the exercise of an LSAR, the related Option, to
the extent the number of Shares with respect to which such LSAR
was exercised, shall terminate. If any Option shall expire or
terminate for any reason without having been exercised in full,
the LSAR with respect thereto shall terminate.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock to Participants on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions, if any,
as the Committee may impose, which restrictions may lapse
separately or in combination at such time, under such
circumstances, in such installments, or otherwise, as the
Committee may determine. Except to the extent restricted under
the terms of the Plan and any Award agreement relating to the
Restricted Stock, a Participant granted Restricted Stock shall
have all of the rights of a stockholder including, without
limitation, the right to vote Restricted Stock and the right to
receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment during the applicable restriction
period, Restricted Stock that is at that time subject to
restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Committee may provide, by rule or
regulation or in any Award agreement, or may determine in any
individual case, that restrictions or forfeiture conditions
relating to Restricted Stock will be waived in whole or in part
in the event of terminations resulting from specified causes.
(iii) Certificates of Shares. Restricted Stock granted under the Plan
may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in
the name of the Participant, such certificates shall bear an
appropriate legend referring to the terms, conditions, and
restrictions applicable to such Restricted Stock, the Company
shall retain physical possession of the Certificate, and the
Participant shall have delivered a stock power to the Company,
endorsed in blank, relating to the Restricted Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be either
paid at the
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<PAGE>
dividend payment date in cash or in unrestricted Shares having a
Fair Market Value equal to the amount of such dividends, or the
payment of such dividends shall be deferred and/or the amount or
value thereof automatically reinvested in additional Restricted
Stock, other Awards, or other investment vehicles, as the
Committee shall determine or permit the Participant to elect.
Shares distributed in connection with a stock split or stock
dividend, and other property distributed as a dividend, shall be
subject to restrictions and a risk of forfeiture to the same
extent as the Restricted Stock with respect to which such Shares
or other property has been distributed.
(e) Deferred Stock. The Committee is authorized to grant Deferred
Stock to Participants, subject to the following terms and
conditions:
(i) Award and Restrictions. Delivery of Shares will occur upon
expiration of the deferral period specified for an Award of
Deferred Stock by the Committee (or, if permitted by the
Committee, as elected by the Participant). In addition, Deferred
Stock shall be subject to such restrictions as the Committee may
impose, if any, which restrictions may lapse at the expiration of
the deferral period or at earlier specified times, separately or
in combination, in installments, or otherwise, as the Committee
may determine.
(ii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of employment (as determined under criteria
established by the Committee) during the applicable deferral
period or portion thereof to which forfeiture conditions apply
(as provided in the Award agreement evidencing the Deferred
Stock), all Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the
Participant) shall be forfeited; provided, however, that the
Committee may provide, by rule or regulation or in any Award
agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Deferred Stock
will be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other
cases waive in whole or in part the forfeiture of Deferred Stock.
(f) Bonus Shares and Awards in Lieu of Cash Obligations. The Committee
is authorized to grant Shares as a bonus, or to grant Shares or other
Awards in lieu of Company obligations to pay cash under other plans or
compensatory arrangements; provided, however, that, in the case of
Participants subject to Section 16 of the Exchange Act and unless otherwise
determined by the Board of Directors, such cash amounts are determined
under such other plans in a manner that complies with applicable
requirements of Rule 16b-3 so that the acquisition of Shares or Awards
hereunder shall be exempt from Section 16(b) liability. Shares or Awards
granted hereunder shall be subject to such other terms as shall be
determined by the Committee.
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<PAGE>
(g) Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to Participants. The Committee may provide that
Dividend Equivalents shall be paid or distributed when accrued or shall be
deemed to have been reinvested in additional Shares, Awards, or other
investment vehicles as the Committee may specify.
(h) Other Share-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other
Awards that may be denominated or payable in, valued in whole or in part by
reference to, or otherwise based on, or related to, Shares, as deemed by
the Committee to be consistent with the purposes of the Plan, including,
without limitation, convertible or exchangeable debentures or other debt
securities, other rights convertible or exchangeable into Shares, purchase
rights for Shares, Awards with value and payment contingent upon
performance of the Company or any other factors designated by the
Committee, and Awards valued by reference to the book value of Shares or
the value of securities of or the performance of specified subsidiaries.
The Committee shall determine the terms and conditions of such Awards.
Awards for which Participants are required to pay consideration, and Shares
delivered pursuant to an Award in the nature of a purchase right granted
under this Section 6(h) shall be purchased for such consideration, paid for
at such times, by such methods, and in such forms, including, without
limitation, cash, Shares, other Awards, or other property, as the Committee
shall determine. Cash awards, as an element of or supplement to any other
Awards under the Plan, shall also be authorized pursuant to this Section
6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Award granted under the Plan or awards made pursuant to other Company
plans, any subsidiary, or any business entity to be acquired by the Company
or a subsidiary, or any other right of a Participant to receive payment
from the Company or any subsidiary. Awards granted in addition to or in
tandem with other Awards or awards made pursuant to other Company plans may
be granted either as of the same time as or a different time from the grant
of such other Awards or awards made pursuant to other Company plans. The
per share exercise price of any Option or purchase price of any other Award
conferring a right to purchase Shares:
(i) Granted in substitution for an outstanding Award or award made
pursuant to other Company plans shall be not less than the lesser
of the Fair Market Value of a Share at the date such substitute
Award is granted or such Fair Market Value at that date reduced
to reflect the Fair Market Value at that date of the Award or
award made pursuant to other Company plans required to be
surrendered by the Participant as a condition to receipt of the
substitute Award; or
(ii) Restoratively granted in tandem with an outstanding Award or
award made
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pursuant to other Company plans shall be not less than the lesser
of the Fair Market Value of a Share at the date of grant of the
later Award or at the date of grant of the earlier Award or award
made pursuant to other Company plans.
(b) Exchange or Buyout Provisions. The Committee may at any time offer
to exchange or buy out any previously granted Award for a payment in cash,
Shares, other Awards (subject to section 7(a)), or other property based on
such terms and conditions as the Committee shall determine and communicate
to the Participant at the time that such offer is made.
(c) Term of Awards. The term of each Award shall be for such period as
may be determined by the Committee; provided, however, that in no event
shall the term of any ISO or an LSAR granted in tandem therewith exceed a
period of ten years from the date of its grant (or such shorter period as
may be applicable under Section 422 of the Code).
(d) Form of Payment Under Awards. Subject to the terms of the Plan and
any applicable Award agreement, payments to be made by the Company or a
subsidiary upon the grant or exercise of an Award may be made in such forms
as the Committee shall determine, including, without limitation, cash,
Shares, other Awards, or other property, and may be made in a single
payment or transfer, in installments, or on a deferred basis. Such payments
may include, without limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments or the grant or
crediting of Dividend Equivalents in respect of installment or deferred
payments denominated in Shares.
(e) Rule 16b-3 Compliance.
(i) Six-Month Holding Period. Unless a Participant could otherwise
exercise a derivative security or dispose of Shares delivered
upon exercise of a derivative security granted under the Plan
without incurring liability under Section 16(b) of the Exchange
Act, (x) Shares delivered under the Plan other than upon exercise
or conversion of a derivative security granted under the Plan
shall be held for at least six months from the date of
acquisition, and (y), with respect to a derivative security
granted under the Plan, at least six months shall elapse from the
date of acquisition of the derivative security to the date of
disposition of the derivative security (other than upon exercise
or conversion) or its underlying equity security.
(ii) Reformation To Comply with Exchange Act Rules. It is the intent
of the Company that this Plan comply in all respects with
applicable provisions of Rule 16b-3 or Rule 16a-1(c)(3) under the
Exchange Act in connection with any grant of Awards to or other
transaction by a Participant who is subject to Section 16 of the
Exchange Act (except for transactions exempted under alternative
Exchange Act Rules or acknowledged in writing to be non-exempt
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<PAGE>
by such Participant). Accordingly, if any provision of this Plan
or any Award agreement relating to an Award does not comply with
the requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then
applicable to any such transaction, such provision will be
construed or deemed amended to the extent necessary to conform to
the applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so
that such Participant shall avoid liability under Section 16(b).
(f) Installment Payment Arrangements. Upon grant or exercise of an
Award, the Committee may, in its discretion, permit the payment of any
exercise or purchase price or other consideration, in whole or in part, in
installments, subject to the terms of this Section 7(f). Each such
installment payment arrangement will be evidenced by a promissory note, the
terms and conditions of which shall be determined by the Committee subject
to the following: (a) the maximum term of any note shall be 15 years from
date of the original payment obligation, (b) the minimum interest rate with
respect to amounts loaned hereunder shall be such rate as may be determined
by the Committee from time to time, but in no event shall such rate be less
than the rate required to avoid imputation of interest (or original issue
discount) under Section 483 or any similar provision of the Code, (c) the
note shall be secured as and to the extent determined by the Committee, but
the employee shall be personally liable despite any security pledged, (d)
the note may be prepaid in full or in part at any time without penalty, and
(e) the unpaid principal and interest of any note will become due and
payable on the earlier to occur of the sale of any Shares in connection
with which the payment obligation was incurred and 30 days after the
Participant's employment with the Company terminates (unless the Committee,
in its discretion, extends the note for an additional period). In addition,
the Committee may authorize the Company to make, guarantee, or arrange for
a loan or loans to a Participant to enable the Participant to pay any
federal, state, or local income or other taxes due in connection with an
Award. The Committee shall have the authority to forgive repayment of, or
waive rights relating to, any note or loan authorized hereunder, including
interest thereon. Any arrangement under this Section 7(f) entered into to
permit a Participant to purchase or carry securities shall comply with the
applicable provisions of Regulation G promulgated by the Federal Reserve
Board, and arrangements shall be entered into and continue only to the
extent that such arrangements otherwise shall comply with all applicable
laws, regulations, and contractual obligations of the Company.
(g) Performance-Based Awards to Covered Employees. Other provisions of
the Plan notwithstanding and unless otherwise determined by the Committee,
the provisions of this Section 7(g) shall apply to any Award the
exercisability or settlement of which is subject to the achievement of
performance conditions (other than an Option granted with an exercise price
at least equal to 100% of Fair Market Value of Shares on the date of grant)
if such Award is granted to a person who, at the time of grant, is a
Covered Employee. The terms used in this Section 7(g) shall be interpreted
in a manner consistent with Section 162(m) of the Code and regulations
thereunder (including Proposed Regulation 1.162-27). The performance
objectives for an Award subject to this Section 7(g) shall consist of one
or more business criteria and a targeted level or levels of performance
with respect to such
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criteria, as specified by the Committee but subject to this Section 7(g).
Performance objectives shall be objective and shall otherwise meet the
requirements of Section 162(m)(4)(C) of the Code and regulations thereunder
(including Proposed Regulation 1.162- 27(e)(2)). The following business
criteria shall be used by the Committee in connection with a performance
objective:
(1) Consolidated net income;
(2) Pre-tax earnings from continuing operations of the Company, a
subsidiary or business unit;
(3) Revenues of the Company, a subsidiary or a business unit;
(4) Earnings per common share; and/or
(5) Return on common equity.
Achievement of performance objectives shall be measured over a period of
one, two, three, of four years, as specified by the Committee. No business
criteria other than those named for an Award to a Covered Employee under
this Section 7(g). For each such Award relating to a Covered Employee, the
Committee shall establish the targeted level or levels of performance for
each business criteria. Performance objectives may differ for Awards under
this Section 7(g) to different Covered Employees and from year to year. The
Committee may determine that an Award under this Section 7(g) shall be
payable upon achievement of any one of his performance objectives or may
require that two or more of the performance objectives must be achieved in
order for an Award to be payable. The Committee may, in its discretion,
reduce the amount of a payout otherwise to be made in connection with an
Award under this Section 7(g), but may not exercise discretion to increase
such amount, and the Committee may consider other performance criteria in
exercising such discretion. All determinations by the Committee as to the
achievement of performance objectives shall be made in writing. The
Committee may not delegate any responsibility under this Section 7(g).
8. Change in Control Provisions.
(a) Acceleration Provisions. In the event of a "Change in Control," as
defined in this Section 8, the following acceleration provisions shall
apply:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested,
subject only to the restrictions set forth in Sections 7(e)(i),
10(a), and 10(m); and
(ii) The restrictions, deferral limitations, and forfeiture conditions
applicable to any other Award granted under the Plan shall lapse
and such Awards shall be deemed fully vested, and any performance
conditions imposed with respect to Awards, shall be deemed to be
fully achieved (or in the case of an Award subject to Section
7(g), achieved to the extent of the actual achievement to the
date of the Change in Control), subject to the restrictions on
dispositions
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of equity securities set forth in Sections 7(e)(i), 10(a), and
10(m).
(b) Definition of "Change in Control." For purposes of the Plan, a
"Change in Control" shall have occurred if at any time prior to the
expiration or termination of the last Award granted under the Plan:
(i) The stockholders of the Company approve a merger or consolidation
of which the Company is not the surviving corporation, or a sale
or disposition of all or substantially all of the Company's
assets or a plan of complete liquidation of the Company;
(ii) A tender offer or exchange offer for securities of the Company is
made by any person (as such term is used in Section 13(d) and
14(d)(3) of the Exchange Act), other than any person who is a
member of the existing Board of Directors of the Company, as
defined, with the intent to take over and control the Company;
(iii) Any person, other than any person who is a member of the
existing Board of Directors, is or becomes the beneficial owner
(as such term is defined in Rule 13d-3 under the Exchange Act) of
Shares representing 25% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) The persons constituting the existing Board of Directors cease
for any reason whatsoever to constitute at least a majority of
the Company's Board of Directors;
provided, however, that no Change in Control shall be deemed to have
occurred with respect to any Award (other than an ISO or an LSAR in tandem with
an ISO if the exercise of discretion under this provision would cause such ISO
to lose its status as an Incentive Stock Option) if the Board shall determine,
prior to the occurrence of the event specified in Section 8(b)(i) through (iv)
hereof, that such event shall not constitute a Change in Control for purposes of
the Plan; and provided further, that a Change in Control shall not include
increases in the percentage of voting power of persons who beneficially own or
control Shares or other outstanding securities of the Company which occur solely
as a result of a reduction in the amount of Shares or other securities
outstanding or as a result of the exercise of Options or vesting of Awards
granted hereunder.
(c) Definition of "existing Board of Directors." For purposes of the
Plan, the term "existing Board of Directors" shall mean the persons
constituting the Board of Directors of the Company on the date of adoption
of the Plan, together with each new Director whose election, or nomination
for election by the Company's stockholders, is approved by a vote of the
majority of the members of the existing Board of Directors who are in
office immediately prior to the election or nomination of such Director.
9. Adjustments. In the event that the Committee shall determine that any
dividend or
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other distribution (whether in the form of cash, Shares, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Shares such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee shall, in such manner
as it may deem equitable, adjust any or all of (i) the number and kind of Shares
which may thereafter be delivered in connection with Awards, (ii) the number and
kind of Shares that may be delivered or deliverable in respect of outstanding
Awards, (iii) the number of shares with respect to which Awards may be granted
to a given Participant in the specified period as set forth in Section 5, and
(iv) the exercise price, grant price, or purchase price relating to any Award
or, if deemed appropriate, make provision for a cash payment with respect to any
outstanding Award; provided, however, in each case, that, with respect to ISOs,
no such adjustment shall be authorized to the extent that such authority would
cause the Plan to violate Section 422(b)(1) of the Code or previously issued
ISOs to lose their status as such. In addition, the Committee is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence) affecting the Company or
any subsidiary or the financial statements of the Company or any subsidiary, or
in response to changes in applicable laws, regulations, or accounting
principles, or tax rates and regulations, or accounting principles, or tax
adjustments are intended to be objectively determinable and non discretionary
and, as such, consistent with the qualification of Awards as "performance-based
compensation" under Section 162(m) of the Code, and shall be construed
accordingly. To the extent it shall be determined, based on an opinion of
counsel, that any such adjustment would likely cause compensation relating to an
Award to a Covered Employee to fail to be deductible under Section 162(m) of the
Code, such adjustment shall not be authorized or made, unless otherwise
determined by the Committee.
10. General Provisions.
(a) Compliance With Legal and Exchange Requirements. The Company shall
not be obligated to deliver Shares upon the exercise or settlement of any
Award or take other actions under the Plan until the Company shall have
determined that applicable federal and state laws, rules, and regulations
have been complied with and such approvals of any regulatory or
governmental agency have been obtained and contractual obligations to which
the Award may be subject have been satisfied. The Company, in its
discretion, may postpone the issuance or delivery of Shares under any Award
until completion of such stock exchange listing or registration or
qualification of such Shares or other required action under any federal or
state law, rule, or regulation as the Company may consider appropriate, and
may require any Participant to make such representations and furnish such
information as it may consider appropriate in connection with the issuance
or delivery of Shares under the Plan.
(b) Nontransferability. A Participant's rights under the Plan
(including any right that may constitute a "derivative security" under the
general definition of Rule 16a-1(c)(3)) may not be transferred, pledged,
mortgaged, hypothecated, or otherwise encumbered, and shall not be subject
to claims of the Participant's creditors; provided, however, that the
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Committee may permit transfers of Options and other Awards for estate
planning purposes if and to the extent such transfers do not cause a
Participant who is then subject to Section 16 of the Exchange Act who then
or thereafter has transactions with respect to such Option or Award to lose
the benefit of the exemption under Rule 16b-3 for such transactions (unless
the Participant acknowledges in writing that such transfer is non-exempt),
or violate other rules or regulations of the Securities and Exchange
Commission or the Internal Revenue Service or materially increase the cost
of the Company's compliance with such rules or regulations.
(c) No Right to Continued Employment. Neither the Plan nor any action
taken hereunder shall be construed as creating any contract of employment
between the Company or any of its subsidiaries and any employee or
otherwise giving any employee the right to be retained in the employ of the
Company or any of its subsidiaries, nor shall it interfere in any way with
the right of the Company or any of its subsidiaries to terminate any
employee's employment at any time.
(d) Taxes. In the event that the Company or any of its subsidiaries
shall be required to withhold any amount by reason of any federal, state,
or local tax law, rule, or regulation or by reason of the grant or exercise
of any Award, the Company or its subsidiaries shall be entitled to deduct
and withhold such amount from any other cash payment or payments to be made
by the Company or its subsidiaries (including from payroll) to such person.
In any such event, the Participant shall make available to the Company or
its subsidiaries, promptly when required, sufficient funds to meet the
Company's or subsidiary's requirement of such withholding; and the Company
shall be entitled to take such steps as the Committee may deem advisable in
order to have such funds available to the Company or its subsidiary at the
required time or times. This Committee authority shall include authority to
withhold or receive Shares or other property, on a mandatory basis or at
the election of the Participant, and to make cash payments in respect
thereof in satisfaction of a Participant's tax obligations (which may
include mandatory withholding obligations and obligations of the
Participant in excess of such mandatory obligations relating to an Award).
(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue, or terminate the Plan or the Committee's authority to
grant Awards under the Plan without the consent of stockholders or
Participants, except that any such action shall be subject to the approval
of the Company's stockholders at or before the next annual meeting of
stockholders after such Board action if such stockholder approval is
require by any federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Shares may then be
listed or quoted, and the Board may otherwise, in its discretion, determine
to submit other such changes to the Plan to stockholders for approval;
provided, however, that, without the consent of an affected Participant, no
amendment, alteration, suspension, discontinuation, or termination of the
Plan may materially impair the rights of such Participant under any Award
theretofore granted to him. The Committee may waive any conditions or
rights under, or amend, alter, suspend, discontinue, or terminate, any
Award theretofore granted and any Award agreement relating thereto;
provided, however,
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that, without the consent of an affected Participant, no such amendment,
alteration, suspension, discontinuation, or termination of any Award may
materially impair the rights of such Participant under such Award.
(f) No Rights to Awards; No Stockholder Rights. Nothing contained in
the Plan shall be deemed to give any person eligible to receive an Award
hereunder, or any heir, distributee, executor, administrator or personal
representative of any such person, any interest or title to any specific
property of the Company, or any of its subsidiaries, or any other right
against the Company or any of its subsidiaries other than as set forth in
the Plan. Neither the establishment of the Plan nor any other action taken
now or at any time with regard thereto shall be construed as giving any
person whatsoever any legal or equitable right against the Company unless
such right shall be specifically provided for in the Plan. There is no
obligation for uniformity of treatment of Participants and employees under
the Plan. No Award shall confer on any Participant any of the rights of a
stockholder of the Company unless and until Shares are duly issued or
transferred and delivered to the Participant in accordance with the terms
of the Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give
any such Participant any rights that are greater than those of a general
creditor of the Company; provided, however, that the Committee may
authorize the creation of trusts or make other arrangements to meet the
Company's obligations under the Plan to deliver cash, Shares, other Awards,
or other property pursuant to any Award, which trusts or other arrangements
shall be consistent with the "unfunded" status of the Plan unless the
Committee otherwise determines with the consent of each affected
Participant. If and to the extent authorized by the Committee, the Company
may deposit into such a trust Shares for delivery to the Participant in
satisfaction of the Company's obligations under any Award. If so provided
by the Committee, upon such a deposit of Shares or other assets for the
benefit of a Participant, there shall be substituted for the rights of the
Participant to receive delivery of Shares and other payments under this
Agreement a right to receive the assets of the trust (to the extent that
the deposited Shares or other assets represented the full amount of the
Company's obligation under the Award at the date of deposit). The trustee
of the trust may be authorized to dispose of trust assets and reinvest the
proceeds in alternative investments, subject to such terms and conditions
as the Committee may specify and in accordance with applicable law.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by
the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitation on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or
only in specific cases.
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(i) Binding Effect. The provisions of the Plan shall be binding upon
the heirs, distributees, executors, administrators and personal
representatives of any person participating under the Plan. Any person
claiming any rights under the Plan as a beneficiary or otherwise through a
Participant shall be subject to all of the terms and conditions of the Plan
and any additional terms and conditions as may be imposed by the Committee.
(j) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other awards, or other property shall be issued or paid in
lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(k) Compliance with Code Section 162(m). It is the intent of the
Company that, unless otherwise determined by the Committee, Options and
other Awards subject to the performance objectives specified under Section
7(g) granted under the Plan to persons who are Covered Employees within the
meaning of Code Section 162(m) and regulations thereunder (including
Proposed Regulation 1.162-27(c) (2) shall constitute "qualified
performance-based compensation" within the meaning of Code Section 162(m)
and regulations thereunder (including Proposed Regulation 1.162-27(e), and
subject to the transition rules under Proposed Regulation 1.162-27(h) (2)
thereunder. Accordingly, unless otherwise determined by the Committee, if
any provision of the Plan or any Award agreement relating to such Award
granted to a Covered Employee does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements, and no provision shall be deemed to confer
upon the Committee or any other person discretion to increase the amount of
compensation otherwise payable to a Covered Employee in connection with
such Award upon attainment of the performance objectives.
(l) Governing Law. The Plan and all related documents shall be
governed by, and construed in accordance with, the laws of the State of
Delaware (except to the extent provisions of federal law may be
applicable). If any provision hereof shall be held by a Court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of
the Plan shall continue to be fully effective.
(m) Effective Date; Plan Termination. The Plan shall become effective
as of April 1, 1996; provided, however, that the Plan shall have been
approved by the affirmative votes of the holders of a majority of voting
securities present in person or represented by proxy, and entitled to vote
at the next annual meeting of Company stockholders for which the record
date is after the effective date of the Plan, or any adjournment thereof,
or prior to such annual meeting at a special meeting of stockholders or by
the written consent of the holders of a majority of voting securities
entitled to vote, in accordance with applicable provisions of the Delaware
General Corporation Law. Any Awards granted under the Plan prior to such
approval of stockholders shall not be effective unless and until
stockholder approval is obtained, and, if stockholders fail to approve the
Plan as specified hereunder, any previously granted Award shall be
forfeited and canceled, and Participants shall repay to the
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Company any payments received pursuant to Dividend Equivalents or dividend
payments on Restricted Stock. Unless earlier terminated under Section 10(e)
hereto, the Plan shall terminate on and no further Awards may be granted
under the Plan after March 31, 2006.
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EXHIBIT 10.09
AMENDMENT NO.1 TO ASSET PURCHASE AGREEMENT
This Amendment No.1 to that certain Asset Purchase Agreement (this
"Amendment"), dated as of September 10, 1996, by and among Artisan Acquisition
Co., a Delaware corporation (the "Purchaser"), Decor Group, Inc., a Delaware
corporation ("Decor"), Artisan House, Inc., a California corporation (the
"Seller"), and Henry Goldman (the "Shareholder").
W I T N E S E T H :
WHEREAS, the Purchaser, Decor, the Seller and the Shareholder are parties
to that certain Asset Purchase Agreement dated as of March 25, 1996 (the
"Existing Agreement"); and
WHEREAS, the Purchaser, Decor, the Seller and the Shareholder desire to
amend the Existing Agreement to effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Concurrently with the execution of this Amendment, in consideration of
the extension of time to close set forth in section 2(B) hereof (amending
section 2.1(a) of the Existing Agreement), and as a condition precedent to the
effectiveness of this Amendment, the Purchaser shall pay the Seller the sum of
$40,000, which shall be treated as an additional Extension Payment, as that term
is used in the Existing Agreement.
2. Effective as of the date hereof, the Existing Agreement is hereby
amended as follows:
(A) Section 1.7 shall be amended by deleting the last sentence in its
entirety and in lieu thereof the following shall be inserted:
The Employment Agreement shall provide for the payment to the
Shareholder as follows: (i) an annual salary of $75,000; (ii) a
signing bonus of $70,000, $30,000 of which is to be paid at Closing
and $40,000 of which is to be paid in equal monthly installments of
$3,333.33 during the first year of the employment agreement, (iii)
reimbursement of expenses incurred by the Shareholder for lease and
insurance payments with respect to Shareholder's Jeep Cherokee, (iv)
an annual performance bonus equal to 1% of the Purchaser's sales in
excess of Seller's sales for the twelve (12) months ended June 30,
1996, payable within 60 days after
<PAGE>
the end of each of the Purchaser's fiscal years (or within 60 days
after the expiration of the Employment Agreement) with the first and
last such payments being calculated based on pro-rated sales figures,
(v) 2.5% of the consideration paid by the Purchaser, Decor, Interiors
or any affiliate of them, in connection with an acquisition by the
Purchaser, Decor, Interiors or any affiliate of them, of an unrelated
third party introduced to the Purchaser, Decor, Interiors, or any
affiliate of them, by the Shareholder, and (vi) 1% of the
consideration paid by the Purchaser, Decor, Interiors, or any
affiliate of them in connection with the acquisition by the Purchaser,
Decor, Interiors, or any affiliate of any of them of an unrelated
third party not introduced to the Purchaser, Decor, Interiors, or any
affiliate of any of them by the Shareholder, but which the Purchaser,
Decor, Interiors, or any affiliate of any of them asks the Shareholder
to take a material and substantial part in analyzing, negotiating,
documenting, or closing. In addition, the Shareholder shall be given
the title of President and Chief Executive Officer of the Purchaser.
(B) Section 2.1 shall be deleted in its entirety and in lieu thereof
the following shall be inserted:
(a) Upon satisfaction of the conditions contained in Article VII of this
Agreement, the consummation of the transactions contemplated by this Agreement
(the "Closing") shall be held at 10:00 a.m. (New York City time) by no later
than October 31, 1996 (such date and time being referred to herein as the
"Closing Date") at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue,
New York, NY 10022 or, at the agreement of the parties, at such other place as
the parties may agree or by facsimile transmission, with the original signature
pages to be held in escrow by the Seller's counsel, subject to written release
by the Purchaser of the Purchaser's signature pages. The parties acknowledge
that the Purchaser has previously paid to the Seller an aggregate of $85,000
(the "Extension Payments") to extend the closing of the transaction contemplated
hereby from May 31, 1996 which Extension Payments shall be deducted from the
Purchase Price set forth in Section 1.5(a)(iii)(z) above and due hereunder.
(b) At the Closing, the Seller and/or the Shareholder shall execute and
deliver or cause to be executed and delivered to the Purchaser, all documents
and instruments necessary to transfer to the Purchaser, all of the right, title
and interest of the Seller in and to the Assets, including, without limitation:
(i) the Assignment and Assumption Agreement, signed by the
Seller;
(ii) a Bill of Sale, signed by the Seller;
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(iii) the Lease Agreement, signed by the Shareholder and Shirley
Goldman; and
(iv) a legal opinion of the Seller's and the Shareholder's
counsel as set forth in Section 2.2(d) hereof.
(c) At the Closing, the Purchaser shall:
(i) execute and deliver to the Seller the Assignment and
Assumption Agreement;
(ii) assume the Assumed Liabilities and pay the outstanding
principal amount and all accrued and unpaid interest due in respect of
the Seller's bank debt referred to in Schedule 1.1(b) hereto;
(iii) execute and deliver to the Shareholder and Shirley Goldman
the Lease Agreement; and
(iv) deliver to the Seller (x)the Note and (y) the Shares;
(v) deliver to the Seller in the form of a cashier's check or by
wire transfer the sum of $2,250,000 as set forth in Section 1.5(a)(ii)
hereof (less the Extension Payments); and
(vi) cause the delivery to the Seller and the Shareholder of a
legal opinion of the Purchaser's counsel as set forth in Section 7.5
hereof.
(d) At the Closing, Interiors shall execute and deliver to the Seller the
Guaranty.
(e) The parties hereto agree that upon the reasonable belief of the
Purchaser that a registration statement with respect to an initial public
offering of the securities of Decor will be declared effective by the Securities
and Exchange Commission in the near future and at the request of the Purchaser,
the parties hereto shall execute and deliver all documents necessary to
consummate the transactions contemplated hereby (the "Closing Documents"). The
Closing Documents are to be held in escrow by Purchaser's attorney (the "Escrow
Agent") pending evidence of receipt of the Purchase Price by Seller. The Escrow
Agent shall then deliver the Closing Documents to the appropriate parties.
(C) Section 2.2(f) shall be deleted in its entirety and the following
shall be inserted in lieu thereof:
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The parties agree to waive compliance with the Bulk Transfer Division of
the California Uniform Commercial Code. In light of such waiver, the
Shareholder agrees to indemnify and hold harmless the Purchaser, Decor, its
officers, directors and affiliates for any of the Seller's liabilities
(other than Assumed Liabilities, as of the closing date) that the Purchaser
is required to pay. In the event of a Loss incurred by the Purchaser, the
Purchaser may set off the amount of such Loss against amounts owed by
Purchaser under this Agreement and the agreements contemplated hereby.
(D) Section 3.25 shall be amended by adding the following after the
last word in such section:
;provided however, notwithstanding the foregoing, in no event shall any of
the representations and warranties of Seller and the Shareholder contained
herein (other than Sections 3.13, and 3.17) survive the Closing Date for a
period of more than two (2) years following the Closing Date.
(E) A new Section 8.2(d) shall be added to the end of Section 8.2(d)
as follows:
Notwithstanding the foregoing, the Indemnified Party may not make a
claim against the Indemnifying Party unless the aggregate of all claims
brought by the Indemnified Party is not less than $50,000 (the "Threshold
Amount"). The Threshold Amount shall be deducted from amounts paid by the
Indemnifying Party; it being understood and agreed that in no event shall
an aggregate of more than the Threshold Amount be deducted from all claims
brought by the Indemnified Party.
(F) A new Section 9.7 shall be added as follows:
Prior to bringing a legal action against the Seller, the Purchaser agrees
to deposit an amount of not less than $25,000 with Seller's attorney for
payment of reasonable, bona fide legal expenses incurred by Seller in
connection with such action. In the event that the funds held by the
Seller's attorney are properly disbursed and the remaining balance falls
below $10,000, Seller shall immediately send by facsimile transmission and
overnight courier to Purchaser a copy of Seller's attorney's records fully
disclosing the disbursement of the funds, and within ten (10) days of
Purchaser receiving said records, Purchaser shall deposit with Seller's
attorney, an amount so that the existing balance and the amount deposited
equals $25,000. If the Purchaser fails to forward such funds in a timely
manner, Purchaser's claim against Seller shall be dismissed with prejudice.
The parties acknowledge and agree that the remedy of dismissal of the
Purchaser's claim with prejudice, as provided for herein, is reasonable and
does not constitute a forfeiture, in light of the fact that it would be
extremely difficult and
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impracticable, if not impossible to ascertain, with any degree of
certainty before a breach of the Purchaser's obligations under this
Section 9.7, the amount of damages which would be suffered by the Seller
and/or the shareholder as a result of any such breach. Unused funds held
by the Seller's attorney shall be returned to Purchaser. If the Purchaser
prevails in the legal action against Seller, the Seller shall pay to
Purchaser the amount paid by Purchaser for Seller's legal expenses plus
interest at a rate of 8% per annum.
(G) Following the Closing, the Purchaser agrees to pay accounts
payable in a timely manner in accordance with the practices followed before the
closing by Seller.
3. This Amendment shall be governed by and construed in accordance with the
laws of the State of New York, without regard to principles of conflicts of law.
4. Except as otherwise specifically set forth herein, all of the terms and
provisions of the Existing Agreement shall remain in full force and effect.
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IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day first above written.
DECOR GROUP, INC. ARTISAN HOUSE, INC.
By:_____________________ By:______________________
Name: Donald Feldman Name: Henry Goldman
Title: President Title: President
ARTISAN ACQUISITION CO.
_________________________
HENRY GOLDMAN
By:_____________________
Name: Donald Feldman
Title: President
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