<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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CORNERSTONE BRANDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5961 01-0520036
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
----------------
415 CONGRESS STREET, SUITE 600
PORTLAND, MAINE 04101
(207) 780-6585
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
WILLIAM T. END
CHIEF EXECUTIVE OFFICER
CORNERSTONE BRANDS, INC.
415 CONGRESS STREET, SUITE 600
PORTLAND, MAINE 04101
(207) 780-6585
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ.
PATRICK J. RONDEAU, ESQ. ROPES & GRAY
HALE AND DORR LLP ONE INTERNATIONAL PLACE
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 951-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 951-7050
TELECOPY: (617) 526-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
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,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
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<S> <C> <C>
Common Stock, $.001 par value........................ $103,500,000 $30,532.50
</TABLE>
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed
maximum aggregate offering price.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 26, 1998
SHARES
CORNERSTONE BRANDS, INC.
COMMON STOCK
Of the shares of Common Stock offered hereby, shares are being sold by
Cornerstone Brands, Inc. ("Cornerstone" or the "Company") and shares are
being sold by certain stockholders of the Company (the "Selling Stockholders").
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for listing on .
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
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<S> <C> <C> <C> <C>
Per Share....... $ $ $ $
Total(3)........ $ $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public, Underwriting Discount,
Proceeds to Company and Proceeds to Selling Stockholders will total $ ,
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities LLC on or about , 1998.
-----------
NATIONSBANC MONTGOMERY SECURITIES LLC
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
, 1998
<PAGE>
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS, THE PURCHASE OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
----------------
Certain trademarks and trade names referred to in this Prospectus are the
property of Cornerstone or a Cornerstone company. See "Business--Trademarks."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
contained elsewhere in this Prospectus. Except as otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option. The Company's fiscal year ends on the Saturday closest to
January 31. Unless the context otherwise requires, any reference to the
Company's financial and operating data in a given year refers to the fiscal
year ended on the Saturday closest to January 31 of the following year (for
example, references to net sales in 1997 refer to net sales in the fiscal year
ended January 31, 1998).
THE COMPANY
Cornerstone is a family of seven leading direct marketing companies that
offer high-quality home, leisure and casual apparel products, primarily through
catalogs. Each Cornerstone company is distinguished by a strong brand image, a
clearly focused merchandising concept, high-quality creative execution and
exceptional customer service. The Cornerstone family of companies currently
includes Ballard Designs, Frontgate, Garnet Hill, Smith+Noble, The Territory
Ahead, TravelSmith and Whispering Pines. A substantial portion of the products
that the Cornerstone companies offer is comprised of "branded" products (i.e.,
sold under that Cornerstone company's brand name), many of which are designed
by that company and not available in other catalogs. All of the Cornerstone
companies target the same customer segment, comprised of affluent and well-
educated consumers, generally age 35 to 54. Management believes Cornerstone's
focus on providing distinctive, high-quality merchandise to the same target
customer segment has contributed to the Company's strong sales and earnings
growth and to the growth in its customer database. Cornerstone's highly
experienced corporate management team and team of talented catalog
entrepreneurs have a successful track record of operating and growing leading
direct marketing companies. In the four quarters ended August 1, 1998, the
Company's net sales and pro forma net income (adjusted to include tax
provisions for non-taxed companies) were $274.8 million and $7.5 million,
respectively.
Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of leading direct marketing companies targeting affluent and well-
educated consumers and on the growing popularity of purchasing merchandise
through direct channels such as catalog shopping and the Internet. Cornerstone
has achieved significant scale through its seven acquisitions and internal
growth by these companies. The Company has selectively pursued those strategic
acquisitions that satisfy its focused acquisition criteria, which include:
high-quality merchandise offerings in the home, leisure and casual apparel
markets; an affluent target customer base; a strong brand identity; exceptional
customer service; a talented and entrepreneurial management team; profitable
operations, high average order value and high net sales per catalog mailed; a
track record of growth; and substantial opportunity for future growth and
improved profitability. As a result of both acquisitions and internal growth,
Cornerstone's net sales increased 72% between the first six months of 1997 and
the first six months of 1998.
Cornerstone's operating model, which it believes is unique in the direct
marketing industry, enables each Cornerstone company to retain the creativity,
entrepreneurial spirit and responsiveness of a smaller company while also
realizing the benefits and efficiencies offered by a larger enterprise.
Cornerstone recognizes the importance of brand personality and vision in
maintaining differentiated brand images and places great emphasis on the
retention and preservation of the entrepreneurial spirit and management teams
of the individual Cornerstone companies. Rather than totally integrating the
acquired business into Cornerstone's existing operations, Cornerstone generally
leaves the management and headquarters of the acquired company intact and
allows the management team to retain responsibility for critical "front-end"
business functions such as merchandising, creative presentation, marketing and
catalog circulation, while assuming responsibility for certain "back-end"
services, such as order fulfillment, certain customer service operations,
customer database management and certain administrative functions, that can be
more efficiently performed in a centralized manner.
3
<PAGE>
In recent years there has been a significant shift of retail market share
from traditional retail sales to direct marketing sales, which include the sale
of merchandise through catalogs, telemarketing, print media, radio and
television advertising and the Internet. Cornerstone believes that the trend
toward non-store retailing, and catalog shopping in particular, is being driven
by a number of factors, including: the ease and convenience of shopping at
home, which is particularly attractive to time-constrained families; increasing
dissatisfaction with the level of customer service from many retailers; and
increasing consumer confidence in and awareness of the quality of customer
service and reliability offered by leading direct marketers. The Internet is
also becoming an increasingly significant global medium for communication and
commerce, and management believes that international markets represent a
sizeable consumer base and growth opportunity for direct marketing sales.
COMPETITIVE STRENGTHS
The Cornerstone family of brands includes some of the leading direct
marketing companies in the home, leisure and casual apparel markets.
Cornerstone believes the following competitive strengths are critical to its
success:
. Unique Operating Model. Cornerstone's unique operating model allows the
management teams of the individual Cornerstone companies to retain
responsibility for critical front-end business functions and supports them
with certain back-end services more efficiently performed in a centralized
manner.The Company believes that the executives of the Cornerstone companies
include some of the top merchandising and creative talents in the direct
marketing industry, and the Cornerstone corporate management team is
comprised of five individuals with approximately 100 years of direct
marketing experience at companies such as L.L. Bean, Lands' End, Smith &
Hawken, Cincinnati Microwave and Sportman's Market. This model enables each
Cornerstone company to retain the creativity, entrepreneurial spirit and
responsiveness of a smaller company while also realizing the benefits and
efficiencies offered by a larger enterprise.
. Well Known and Highly Regarded Brands. Each Cornerstone company emphasizes a
strong brand image with the goal of establishing its brand as the
authoritative source for its lifestyle products. A substantial portion of
the products that the Cornerstone companies offer are branded products, many
of which are designed by that company and not available in other catalogs.
Branded product offerings reinforce a differentiated brand image and
generally provide higher profit margins than other merchandise. Cornerstone
believes that its strong brand identities enhance the performance of its
catalogs, provide a competitive advantage by fostering loyalty and long-term
customer relationships and will position Cornerstone to capitalize on other
market opportunities such as the Internet, international markets and retail.
. Distinctive, High-Quality Products. The Cornerstone companies offer
attractive, high-quality merchandise designed to appeal to the Company's
affluent target customers, at prices that provide them with significant
value. These products are intended to enhance customers' enjoyment of their
leisure time by improving their home decor and comfort and by enhancing
their hobbies, travel and other recreational activities. The Cornerstone
companies devote substantial resources to the development, design and
sourcing of products that are consistent with and enhance the brand image of
that company and are not readily available from other sources.
. Focus on Attractive Demographic Market. All of the Cornerstone companies
target their merchandise offerings primarily at affluent and well-educated
consumers, generally age 35 to 54. Cornerstone believes that focusing on a
single market segment enables it to understand and serve its customers
better and enhances the benefits that can be derived from sharing customer
databases and the results of various marketing initiatives among the
Cornerstone companies. The market segment targeted by Cornerstone is
particularly attractive because it is expected to increase in size over the
next several years and because Cornerstone believes that the affluence and
time-constrained lifestyles of this group increase the likelihood that they
will respond to the convenience and efficiency offered by home shopping.
4
<PAGE>
. Exceptional Customer Service. Each Cornerstone company maintains a customer-
focused approach at all stages of its business which is aimed at building
lifetime customer relationships. Cornerstone believes that offering truly
exceptional customer service through high in-stock positions, same-day
shipping, in-depth product knowledge and liberal return policies encourages
repeat purchases and enhances the brand identity and reputation of the
Cornerstone companies within their target customer market.
. Synergies and Efficiencies Resulting from Combined Enterprise. Cornerstone's
business structure is designed to enable each Cornerstone company to realize
sales growth, performance benefits and cost savings from the combined
enterprise. Among the benefits enjoyed by the Cornerstone companies are the
exchange of customer databases with proprietary purchase histories, the
sharing of "best practices," and access to the technology, financial
resources and capital-raising ability of Cornerstone. Cornerstone has been
successful in improving the financial results of each Cornerstone company
since the time it was acquired, and Cornerstone expects to realize further
improvements as these initiatives continue.
GROWTH INITIATIVES
Cornerstone's objective is to build the direct marketing industry's leading
family of brands offering high-quality home, leisure and casual apparel
products to affluent and well-educated consumers. Cornerstone's key growth
initiatives are as follows:
. Build Existing Catalogs. Cornerstone's primary growth strategy is to build
aggressively the sales and productivity of its existing catalog titles by
increasing the size of each Cornerstone company's customer database and by
increasing the productivity of its customer database and catalog mailings.
Initiatives aimed at increasing the size of the customer database include
increasing catalog circulation to prospective customers and developing
proprietary mailing lists. To increase the productivity of its customer
database and mailings, the Company is pursuing initiatives such as
increasing the number of editions mailed, expanding merchandise offerings,
increasing page counts, reformatting the creative presentation and
increasing the proportion of branded products.
. Selectively Pursue Strategic Acquisitions. The Company intends to pursue
strategic acquisitions within the direct marketing industry that meet its
focused criteria, which include: high-quality merchandise offerings in the
home, leisure and casual apparel markets; an affluent target customer base;
a strong brand identity; exceptional customer service; a talented and
entrepreneurial management team; profitable operations, high average order
value and high net sales per catalog mailed; a track record of growth; and
substantial opportunity for future growth and improved profitability.
Cornerstone believes the experience gained from the acquisitions it has made
to date and its strategy of allowing the management teams of the acquired
companies to retain significant responsibility make Cornerstone an
attractive partner for many target companies and facilitate the process of
integrating acquired companies.
. Develop New Titles. The Company may introduce new catalog titles to serve
market niches that are not currently addressed effectively by the Company.
Cornerstone believes that new titles could capitalize on the brand identity
of a Cornerstone company, Cornerstone's operational infrastructure, the
customer databases of the various Cornerstone companies and the experience
accumulated by Cornerstone management in addressing its target market.
Examples of titles introduced by Cornerstone companies are Splash and The
Ultimate Grill, offered by Frontgate, and Isabella Bird, introduced by The
Territory Ahead.
. Develop Additional Growth Opportunities. Cornerstone believes that, due to
its strong brand identities and its expertise in fulfillment, customer
service and marketing, it is well positioned to capitalize on additional
growth opportunities such as the Internet, international markets and retail.
5
<PAGE>
The Cornerstone Brands Group, Inc. was organized as a Delaware corporation in
June 1995. In August 1998, Cornerstone Brands, Inc. (the "Company") was
organized as a Delaware corporation to serve as a holding company for The
Cornerstone Brands Group, Inc. The Company's principal office is located at 415
Congress Street, Suite 600, Portland, Maine 04101, and its telephone number is
(207) 780-6585.
References in this Prospectus to the "Cornerstone companies" mean the
following subsidiaries of the Company: Ballard Designs, Inc., a Georgia
corporation ("Ballard Designs"); Cinmar, Inc., an Ohio corporation, which
operates the Frontgate catalog ("Frontgate"); Garnet Hill, Inc., a New
Hampshire corporation ("Garnet Hill"); Smith & Noble LLC, a Delaware limited
liability company ("Smith+Noble"); The Territory Ahead, Inc., a Delaware
corporation ("The Territory Ahead"); TravelSmith Outfitters, Inc., a California
corporation ("TravelSmith"); and Whispering Pines LLC, a Delaware limited
liability company ("Whispering Pines"). The Company owns all or a majority of
the equity interest in each Cornerstone company. References in this Prospectus
to "the Company" or "Cornerstone" include, except where the context otherwise
requires, Cornerstone Brands, Inc. and its subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by: The
Company.......................... shares
The Selling Stockholders.......... shares
Common Stock to be outstanding
after the offering............... shares(1)
Use of proceeds................... To repay bank debt, and for working capital
and other general corporate purposes,
including possible acquisitions. See "Use
of Proceeds."
Proposed symbol...............
</TABLE>
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(1) Based on the number of shares of Common Stock outstanding on August 31,
1998. Excludes an aggregate of (i) 1,539,315 shares of Common Stock
issuable pursuant to options outstanding as of August 31, 1998 at a
weighted average exercise price of $4.33 per share and (ii) 315,000 shares
of Common Stock issuable upon the exercise of warrants outstanding as of
August 31, 1998 at a weighted average exercise price of $.96 per share.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------- --------------------------
JAN. 31, AUG. 2,
JAN. 27, JAN. 25, JAN. 31, 1998 (PRO AUG. 2, 1997 (PRO AUG. 1,
1996 1997 1998 FORMA)(1) 1997 FORMA)(1) 1998
-------- -------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $60,536 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Gross profit............ 27,719 51,350 104,084 115,472 38,398 49,785 68,253
General and
administrative......... 3,509 6,911 13,450 15,695 4,992 7,238 9,168
Restructuring charge.... -- -- 943 943 -- -- 2,838
Operating income........ 578 6,296 10,733 9,985 5,551 4,802 3,724
Equity in net income
(loss) of affiliate.... (5) 392 1,809 1,809 995 995 2,208
Net income.............. 320 6,070 9,506 9,024 4,983 4,500 5,653
Pro forma net
income(2).............. 264 4,600 7,381 6,899 3,854 3,371 4,007
</TABLE>
<TABLE>
<CAPTION>
AUG. 1, 1998
---------------------
PRO PRO FORMA AS
FORMA(3) ADJUSTED (4)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,014 $
Working capital........................................... 1,188
Total assets.............................................. 149,314
Long-term debt (net of current maturities)................ 313
Stockholders' equity...................................... 90,754
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
JAN. 25, JAN. 31,
JAN. 25, JAN. 31, 1997 (PRO 1998 (PRO
1997 1998 FORMA) FORMA)
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA(5):
Net sales growth....................... 75% 104% 26% 34%
Total catalogs circulated (000s)....... 41,939 77,144 65,038 84,853
12-month buyers (000s) (6)............. 512 1,032 884 1,128
Average order value.................... $ 160 $ 170 $ 158 $ 169
</TABLE>
7
<PAGE>
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(1) Gives effect to the acquisitions of The Territory Ahead, Garnet Hill and
Whispering Pines as if they had occurred on January 26, 1997. In addition
to combining historical results of operations, the unaudited pro forma
amounts shown include adjustments for the estimated effect of amortization
associated with the acquisitions of these companies. The unaudited pro
forma amounts shown are not indicative of the results of operations that
would have been achieved if such acquisitions had occurred at the beginning
of 1997. See Note 2 of Notes to Consolidated Financial Statements. The
Territory Ahead and Garnet Hill have historically been more profitable in
the second half of the year, so the inclusion of first-half operating
results of such companies in these pro forma operating results has a
negative impact on the Company's net income for the periods shown.
(2) Pro forma net income and pro forma net income per share, assuming dilution,
have been computed by adjusting net income, as reported, to record an
income tax provision (or benefit) for Ballard Designs and Smith+Noble,
which were not subject to income tax at the entity level prior to their
acquisitions by the Company. See Note 3 of Notes to Consolidated Financial
Statements.
(3) Reflects conversion of all outstanding shares of Convertible Preferred
Stock into an aggregate of 14,148,786 shares of Common Stock. See Notes 6
and 7 of Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the sale by the Company of shares of Common
Stock at an assumed initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses payable
by the Company. See "Use of Proceeds" and "Capitalization."
(5) Pro forma operating data include data for The Territory Ahead, Garnet Hill
and Whispering Pines for all of the periods presented (including periods
prior to their acquisition by Cornerstone). Operating data do not include
data for TravelSmith, as TravelSmith financial results are not consolidated
with those of the Company.
(6) Represents the combined number of buyers who have purchased from the
Cornerstone companies in the preceding 12 months or since date of
acquisition, whichever is less, without deductions for persons who have
purchased from more than one Cornerstone company. Accordingly, the numbers
of individual names in the Cornerstone database are less than the numbers
indicated.
8
<PAGE>
RISK FACTORS
Before purchasing the shares of Common Stock offered hereby, a prospective
investor should consider the specific factors set forth below as well as the
other information set forth elsewhere in this Prospectus.
LIMITED OPERATING HISTORY
The Company was incorporated in June 1995 and has a limited operating
history. Although many of the Cornerstone companies operated before 1995, they
have operated under the ownership of Cornerstone for much shorter periods of
time. In light of the Company's limited operating history, the significant
number of acquisitions Cornerstone has completed within the last 18 months,
and Cornerstone's strategy of continuing to pursue strategic acquisitions, the
Company's historical operating results are not an indicator of future
operating performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS ASSOCIATED WITH NEW OPERATIONS CENTER
The Company is building a new operations center outside of Cincinnati, Ohio,
which has been designed to handle the fulfillment functions of all of the
Cornerstone companies, and certain other customer-related operations.
Cornerstone's current estimate of the total cost of the operations center,
including land, construction and equipment, is between $60 and $65 million.
However, the actual cost of this facility may exceed Cornerstone's current
estimate. Cornerstone has completed the design of the facility, has purchased
the land, and has commenced construction. Cornerstone currently expects that
the operations center will be operational in the summer of 1999, and that it
will transition the fulfillment operations of the Cornerstone companies (other
than Smith+Noble, which relies on direct delivery by its contract
manufacturers) there during the balance of 1999 and 2000. However, Cornerstone
may experience delays in opening the operations center or in moving
fulfillment operations to this new facility. Although the Company believes
that its current fulfillment centers will be sufficient to meet its needs
until the operations center opens, several Cornerstone companies are currently
using multiple fulfillment centers, resulting in operational and economic
inefficiencies. In addition, Cornerstone intends to install a new computer
system to manage the operations center, which could further complicate the
transition. Cornerstone has no experience managing or operating the
fulfillment services of all of the Cornerstone companies on a combined basis.
Any delays or problems in transitioning to the new operations center or in the
operation of this facility could result in an interruption in the receipt and
distribution of merchandise, customer service problems and continued
operational and economic inefficiencies. Any of the foregoing problems could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Cornerstone Operations Center."
DEPENDENCE ON KEY PERSONNEL
The success of Cornerstone depends to a significant extent on its five
executive officers. In addition, Cornerstone's strategy of allowing the
management teams of acquired companies to continue to exercise significant
management responsibility for that company makes it especially important that
Cornerstone retain the top executives (including the chief executive officers,
merchants and creative teams) of the Cornerstone companies and of any
additional companies Cornerstone acquires in the future. Cornerstone's success
will also depend in significant part on the ability of both Cornerstone and
the Cornerstone companies to continue to attract and retain qualified
personnel. Competition for qualified personnel is intense, particularly given
the scarcity of qualified and experienced management in the direct marketing
industry. The loss of the services of one or more key employees, or the
inability to continue to attract and retain qualified personnel, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Employees" and "Management."
9
<PAGE>
RISKS ASSOCIATED WITH ACQUISITIONS
Cornerstone has built its family of companies entirely through acquisitions.
Five of these acquisitions (The Territory Ahead, Garnet Hill, Ballard Designs,
Whispering Pines and Smith+Noble) have occurred since the beginning of 1997.
The success of Cornerstone's business will be largely dependent upon its
ability to integrate certain operations of these companies into Cornerstone's
overall operations on a timely and economic basis. This integration will
require that Cornerstone, among other things, integrate those business
services (such as fulfillment) that can be more efficiently performed in a
centralized manner; integrate and coordinate management information systems,
financial reporting, employee benefits and other administrative functions;
retain key employees and assimilate diverse corporate cultures; and
effectively manage geographically dispersed operations. Moreover, the presence
of minority ownership interests in certain Cornerstone companies and
Cornerstone's strategy of allowing the executives of the individual
Cornerstone companies to retain significant autonomy in the management and
operation of those companies may make the integration process somewhat more
difficult and may prevent Cornerstone from realizing certain cost efficiencies
that would be possible in a more centralized management structure. Any
difficulties encountered in the process of integrating these companies, or any
diversion of the attention of Cornerstone management resulting from this
process, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Cornerstone Family
of Brands."
Cornerstone plans to pursue additional acquisitions that are consistent with
its business strategy. Because competition for attractive acquisitions is
increasing and Cornerstone's acquisition strategy is specifically focused,
Cornerstone may not be able to identify additional acquisition candidates that
fit Cornerstone's acquisition criteria or consummate any desired acquisitions
on acceptable terms. In addition, Cornerstone may not be able to integrate
successfully any acquired businesses into Cornerstone's operations or derive
the benefits expected from any consummated acquisitions. Moreover, the
investigation and negotiation of acquisitions and the integration of acquired
businesses require a significant amount of management time, which may divert
management attention from other business issues. Acquisitions may also have an
adverse effect on the Company's results of operations due to non-recurring
charges associated with the acquisition or the amortization of goodwill and
other acquired intangible assets, and may also result in dilutive equity
issuances or the use of cash reserves or the incurrence of debt to fund the
purchase price of such acquisitions. See "Business--Growth Initiatives--
Selectively Pursue Strategic Acquisitions."
RISKS INHERENT IN DIRECT MARKETING BUSINESS
Cornerstone's business involves a number of risks inherent in the operation
of a direct marketing business. The production and mailing of a particular
catalog edition involve significant expenses, which cannot be adjusted based
upon the actual performance of the catalog. In addition, direct marketing
operations involve relatively high costs, such as merchandise costs and the
expenses associated with order-processing, fulfillment, merchandise returns
and management information systems, which also are difficult to adjust in a
limited time period based upon the success of a particular catalog or group of
catalogs. Moreover, the successful operation of a direct marketing business is
dependent upon the timely and efficient preparation and distribution of
catalogs. In addition, in light of Cornerstone's emphasis on exceptional
customer service, the efficient and uninterrupted operation of order-
processing and fulfillment functions is critical to its business. These
aspects of the Company's operations rely heavily on a number of different
outside service providers, such as printers, telecommunications companies and
delivery companies. Any interruption in services from outside service
providers, including delays or disruptions resulting from labor disputes (such
as the 1997 UPS strike), power outages, human error, adverse weather
conditions or natural disasters, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Merchandising" and "--Cornerstone Operations Center."
INABILITY TO CONTROL EXTERNAL COSTS
The Company's business is affected by a number of external costs that are
beyond Cornerstone's control and that have from time to time increased
significantly and unexpectedly. Examples of such costs include catalog
10
<PAGE>
paper prices, which have historically been volatile and increased dramatically
in 1995; postage rates, which have experienced significant increases, will
increase in January 1999 and can be expected to increase further in the
future; and commercial shipping rates. Another significant cost that the
Company has limited ability to control is labor, particularly in order-
processing and fulfillment operations, which are labor-intensive operations.
Although none of the Company's employees are represented by a union and the
Company is not aware of any union organizing activity, the unionization of a
group of Cornerstone employees (particularly at its new operations center)
could significantly increase the Company's labor costs. Any significant
increase in these costs, particularly an increase which was not anticipated by
the Company, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SUPPLIERS; FOREIGN SOURCING
The successful operation of Cornerstone's business is dependent on the
timely delivery of merchandise from its vendors and suppliers. Smith+Noble has
all of its products made to order and delivered directly to the customer by
its contract manufacturers, and is therefore even more reliant upon successful
relationships with its suppliers. The Cornerstone companies have few exclusive
or long-term contracts with any suppliers, and typically purchase merchandise
on a purchase order basis. Certain vendors are especially important to the
Cornerstone companies and, in particular, Smith+Noble purchases a majority of
its products from a single vendor. The loss of any of Cornerstone's principal
vendors, or any significant delay in the delivery of products by Cornerstone's
vendors could result in a loss of sales, increased fulfillment expenses, and
damage to Cornerstone's customer service reputation, and could therefore have
a material adverse effect on the Company's business, operating results and
financial condition.
The Company believes that a majority of the merchandise purchased by the
Cornerstone companies is sourced from foreign suppliers, either directly by
Cornerstone or by domestic vendors who resell the goods to Cornerstone. While
certain Cornerstone companies rely very little on foreign goods, other
Cornerstone companies purchase (directly or indirectly) substantially all of
their merchandise from foreign suppliers. Cornerstone believes that, on an
aggregate basis, the percentage of merchandise that it purchases (directly or
indirectly) from foreign vendors is likely to increase in the future. As a
result, Cornerstone's business is subject to the risks generally associated
with purchasing merchandise abroad, such as fluctuations in currency exchange
rates, import and export duties and quotas, foreign government regulations,
disruptions or delays in shipments and political instability. Any increase in
merchandise costs, merchandise shortages, quality problems or other
difficulties caused by such factors could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business--Purchasing and Inventory Management."
CHANGING CONSUMER PREFERENCES; GENERAL ECONOMIC CONDITIONS
The Company believes that its merchandise appeals to consumers in its target
markets. However, there can be no assurance that consumer interest in the
Company's merchandise will continue. In addition, all of the Company's
merchandise is subject to changing consumer preferences. A shift in consumer
preferences away from the merchandise which the Company offers could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's future success depends in part on its
ability to anticipate and respond to changes in consumer preferences and there
can be no assurance that the Company will respond in a timely or commercially
appropriate manner to such changes. In addition, the Company's business is
sensitive to changes in customers' spending and discretionary income patterns
which, in turn, are controlled to a large extent by consumer confidence and
prevailing economic conditions, including movements in the stock market, new
home buying activity and levels of travel, recreational and leisure activity.
Failure to anticipate and respond to changing consumer preferences or adverse
economic conditions in one or more regions could lead to, among other things,
lower sales of the Company's products, significant markdowns or write-offs of
inventory, increased merchandise returns, and lower margins, which would have
a material adverse effect on the Company's business, operating results and
financial condition.
11
<PAGE>
RISKS ASSOCIATED WITH BRANDED MERCHANDISE AND OVERSTOCKS
Many of the products offered by the Cornerstone companies are branded (i.e.,
sold under that Cornerstone company's brand name), and the Company expects
that the percentage of branded merchandise will increase. The Company's use of
branded merchandise requires it to incur costs and risks relating to the
design and purchase of its products, including longer lead times for orders
and higher initial purchase commitments. In addition, the use of branded
merchandise limits the Company's ability to return unsold products to vendors,
which may result in higher markdowns in order to sell excess inventory.
Cornerstone's commitment to customer service typically results in more
emphasis being placed on a high in-stock position (and thus the ability to
fulfill orders immediately) than on minimizing the risk of excess inventory,
which may also contribute to higher markdowns. The Company's failure to
successfully execute its branded merchandise strategy or to achieve
anticipated profit margins on these goods, or a higher than anticipated level
of overstocks, could have a material adverse effect on its business, operating
results and financial condition. See "Business--Merchandising" and
"--Purchasing and Inventory Management."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have fluctuated significantly from quarter
to quarter, and the Company expects to continue to experience fluctuations in
its quarterly operating results. Factors such as timing and expense of catalog
mailings by the various Cornerstone companies, the level of customer response
to catalogs, changes in merchandise mix, the timing of and level of price
reductions in sale catalogs, delays in fulfillment, merchandise returns,
merchandise offerings by competitors, and general economic conditions could
contribute to this quarterly variability. In addition, Cornerstone's expense
levels are based in significant part on expectations of future sales levels,
and therefore a shortfall in expected sales is likely to have a
disproportionate adverse effect on net income. As a result of these and other
factors, it is possible that in some future quarter the Company's operating
results will fall below the expectations of investors, which would likely
result in a significant reduction in the market price of the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH RIGHTS OF OTHER EQUITYHOLDERS OF CORNERSTONE COMPANIES
The Company wholly owns four of the seven Cornerstone companies (Ballard
Designs, Frontgate, Garnet Hill and Smith+Noble). Cornerstone owns
approximately 80% of The Territory Ahead, 61% of TravelSmith and 51% of
Whispering Pines. Because of the fiduciary duties that Cornerstone may owe to
the minority equityholders in these companies, and the contractual protections
that some of these equityholders have, Cornerstone may not always be able to
manage and operate these companies in the manner that is most advantageous to
Cornerstone and its stockholders. In addition, the other stockholders of
TravelSmith have the right, under certain circumstances, to require
Cornerstone to purchase their equity interests, for a purchase price that may
consist of cash, promissory notes or Cornerstone Common Stock. The amount of
the purchase price Cornerstone would be required to pay for the stock of
Charles L. Slaughter or Scott Sklar (who collectively own approximately 36% of
the outstanding TravelSmith stock), if such persons exercised such right, is
likely to be substantial. Moreover, Cornerstone may become obligated to effect
such a purchase at a time when it has little available cash or borrowing
ability or when the market price of its Common Stock is low, and such purchase
obligation could result in a diversion of capital from Cornerstone's business,
a dilutive equity issuance, or a contractual default by Cornerstone. Moreover,
under certain circumstances (such as a default by Cornerstone under its
agreements with such equityholders or the failure of Cornerstone to exercise
its own purchase rights) the other equityholders of these companies may have
the right to purchase Cornerstone's interest in these companies. Although
Cornerstone's preference would normally be to acquire all of the equity
interest in any company that it acquires in the future, Cornerstone may
acquire only a majority of the equity interest in a company, which could
result in some of the problems described above with respect to such company.
See "Certain Transactions--Contractual Arrangements with Other Equityholders
of Cornerstone Companies."
COMPETITION
The markets for the merchandise offered by the Cornerstone companies are
highly competitive. Cornerstone believes that its principal sources of
competition are traditional department stores, such as Neiman Marcus, Saks
12
<PAGE>
Fifth Avenue, Nordstrom and Bloomingdales, and specialty retailers, such as
The Gap, Banana Republic and Pottery Barn. The Cornerstone companies also
compete with a number of other direct marketers, such as Lands' End, L.L.
Bean, Williams Sonoma, Neiman Marcus Direct and Coldwater Creek. In addition,
the Company believes that increased popularity of catalog shopping and the
success of many direct marketing companies is encouraging a number of
traditional retailers, such as The Gap, Nordstrom, Macy's and Dayton Hudson,
to enter the direct marketing business. The emergence of the Internet and the
growing popularity of electronic commerce provides the Company's competitors
with an additional channel for direct marketing to consumers. Many of the
present and potential competitors of the Cornerstone companies are larger and
have substantially greater financial, marketing and other resources than
Cornerstone. The failure of any of the Cornerstone companies to compete
successfully against present and future sources of competition could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Competition."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
Cornerstone's business is largely dependent upon effective information
systems that assist in processing orders, managing inventory, purchasing and
shipping merchandise on a timely basis, responding to customer service
inquiries, and gathering and analyzing data on the operation of the various
Cornerstone businesses. In connection with the opening of the new Cornerstone
operations center, Cornerstone intends to install a warehouse management
system at the operations center and combine the customer databases of all of
the Cornerstone companies into an integrated customer database that will be
stored and managed at this facility. In addition, four different front-end
systems are currently used by the Cornerstone companies, and the Company plans
to standardize on one of these systems and install it over the next several
years at each Cornerstone company (other than Smith+Noble) not currently using
it. It is possible that Cornerstone will experience delays or difficulties in
implementing its new information systems, that the existing information
systems in use at the various Cornerstone companies will not be adequate or
effective pending the implementation of such new systems, or that the
information system installed at the new Cornerstone operations center will not
be adequate to support future acquisitions made by Cornerstone. In addition,
it is possible that year 2000 problems could cause operational problems with
the Company's information systems. Any difficulties experienced by Cornerstone
in implementing or operating its management information systems could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Management Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
GOVERNMENT REGULATION; PENDING PERSONAL PRIVACY LEGISLATION
Cornerstone's business is subject to a number of governmental regulations,
including the Mail or Telephone Order Merchandise Rule and related regulations
promulgated by the Federal Trade Commission and regulations promulgated by the
U.S. Postal Service and various state and local consumer protection agencies
relating to matters such as advertising, order solicitation, shipment
deadlines and customer refunds and returns. In addition, merchandise imported
by the Company is subject to import and customs duties and, in some cases,
import quotas. Moreover, Cornerstone's business could be affected by
regulations promulgated in the future. For example, there are a number of
different bills under consideration by Congress and various state legislatures
that would restrict disclosure of consumers' personal information, which may
make it more difficult for Cornerstone to generate additional names for its
mailing lists, and restrict a company's right to send unsolicited electronic
mail or printed catalogs. Although Cornerstone believes it is generally in
compliance with current laws and regulations and that such laws and
regulations have not had a significant impact on its business to date, it is
possible that existing or future regulatory requirements will impose a
significant burden or have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Regulatory
Matters."
MERCHANDISE RETURNS
All Cornerstone companies (other than Smith+Noble, whose products are made
to order) maintain liberal merchandise return policies. The Company's
financial statements include a reserve for anticipated merchandise returns,
which is based in part on historical return rates. It is possible that
Cornerstone's actual returns will increase as a result of factors such as the
introduction of new merchandise, new catalogs, changes in merchandise
13
<PAGE>
mix (such as a shift to more women's apparel) or other factors, or that actual
returns will exceed Cornerstone's reserve. Any significant increase in
Cornerstone's merchandise returns could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Cornerstone Operations Center--Customer Service."
MANAGEMENT OF GROWTH
Cornerstone and each of the individual Cornerstone companies have
experienced significant growth in recent years and may continue to experience
significant growth in the future. This growth places increased
responsibilities on the management teams of Cornerstone and the Cornerstone
companies, as well as increased demands on Cornerstone's management
information systems and other centralized functions. To manage its growth
effectively, Cornerstone and each Cornerstone company must continue to expand
its management team, attract and retain qualified employees and upgrade its
information systems and other administrative functions, and there can be no
assurance that either Cornerstone or the Cornerstone companies will be
successful in doing so. Any failure to address these issues effectively could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Management--Executive Officers and Directors"
and "Business--Management Information Systems."
COLLECTION OF STATE SALES TAXES
The Cornerstone companies generally collect sales taxes only on sales to
residents of the state in which the company is headquartered, where orders are
fulfilled or where one of the companies has a retail outlet. Many states have
attempted to require that out-of-state direct marketers collect sales and use
taxes on the sale of merchandise shipped to its residents. In 1992, the United
States Supreme Court ruled that a state's imposition of use tax collection
obligations on an out-of-state mail order company, whose only contacts with
the state were the distribution of catalogs and other advertising materials
through the mail and subsequent delivery of purchase goods by parcel post and
interstate carriers, was unconstitutional, but stated that Congress could
enact legislation authorizing states to impose such obligations. However, in
November 1995, the United States Supreme Court let stand a decision of New
York's highest state court requiring an out-of-state catalog company, whose
reported contact with New York included a limited number of visits by sales
employees, to collect use tax (including a retroactive assessment, plus
interest) on its mail order sales in New York. If Congress enacts legislation
permitting states to impose sales or use tax obligations on out-of-state
catalog companies or if the Cornerstone companies are otherwise required to
collect additional sales or use taxes, such obligations would make it more
expensive to purchase that company's products and would increase Cornerstone's
administrative costs and therefore could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
although Cornerstone believes it has complied with all applicable tax laws,
there can be no assurance that state tax authorities will not choose to
conduct a nexus audit of the Company, which could give rise to a retroactive
assessment for tax liabilities. State sales tax laws typically provide for a
lengthy statute of limitations, and if the Company were retroactively assessed
for taxes, such assessment could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Regulatory Matters."
CONTROL BY EXISTING STOCKHOLDERS
Upon the consummation of the offering, the Company's executive officers and
directors and their affiliates will beneficially own approximately % of the
outstanding shares of Common Stock of the Company ( % if the over-allotment
option is exercised in full). As a result, these stockholders, if acting
together, would be able to exert substantial influence over the Company and to
effectively control most matters requiring approval by the stockholders of the
Company, including the election of directors. The voting power of these
stockholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Principal and Selling
Stockholders."
14
<PAGE>
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market for the
Common Stock will develop after this offering or that, if developed, it will
be sustained. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Representatives based on several factors and will not necessarily reflect the
market price of the Common Stock after this offering or the price at which the
Common Stock may be sold in the public market after this offering. See
"Underwriting."
Many factors may cause the market price of the Common Stock to fluctuate
significantly, including factors such as variations in the Company's quarterly
operating results, the hiring or departure of key personnel, the entry of new
competitors into Cornerstone's markets, the financial performance of existing
competitors, changes in general economic conditions, and changes in financial
performance estimates or recommendations by securities analysts. In addition,
the stock market in general has recently experienced extreme price and volume
fluctuations, which could have a material adverse effect on the market price
of the Common Stock irrespective of factors directly concerning Cornerstone.
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of Common Stock to be outstanding after this offering,
approximately shares (including the shares to be sold in this offering)
will be available for resale in the public market immediately following this
offering. In addition, approximately additional shares will become
available for resale in the public market following the expiration of lock-up
agreements with the Representatives of the Underwriters, pursuant to which the
parties signing such agreements have agreed not to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus. Moreover, immediately following the closing of this offering, the
Company intends to register under the Securities Act of 1933, as amended (the
"Securities Act"), approximately shares of Common Stock reserved for
issuance under the Company's stock option and stock purchase plans, which
would permit persons acquiring such shares (other than persons who have
entered into the lock-up agreements referred to above) to immediately sell
such shares in the public market. Sales of a substantial number of shares of
Common Stock in the public market could have a material adverse effect on the
market price of the Common Stock and could impair the Company's ability to
raise capital through a sale of its equity securities. See "Shares Eligible
for Future Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Certificate of Incorporation and By-laws contain provisions
permitting the Board of Directors to issue Preferred Stock with rights
superior to those of the Common Stock, establishing a classified Board of
Directors, limiting the right of stockholders to act by written consent,
requiring that special meetings of stockholders be called only by the Board of
Directors or the President or Chief Executive Officer, and requiring advance
notice regarding proposals brought by a stockholder before a stockholders
meeting. Such provisions could make it more difficult for a third party to
acquire, or discourage a third-party from attempting to acquire, control of
the Company at a price which many stockholders may find attractive. The
existence of such provisions could also limit the price that investors might
be willing to pay in the future for shares of Common Stock. See "Description
of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and
By-law Provisions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of shares of Common Stock
in this offering are estimated to be $ ($ if the Underwriters' over-
allotment option is exercised in full), after deducting the estimated
underwriting discount and offering expenses payable by the Company and
assuming an initial public offering price of $ per share. The Company will
not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
The Company expects to use approximately $ of the net proceeds to repay
outstanding indebtedness under its loan agreement with Fleet National Bank and
certain other participating lenders. As of August 21, 1998, there was $36.3
million of outstanding indebtedness, which bore interest at the rate of 7.645%
per year, matures on July 22, 2002, and was incurred to fund acquisitions by
the Company and for other general corporate purposes. In addition, the Company
may use a portion of the net proceeds to help fund the construction of the
Company's new operations center and to purchase minority interests in certain
Cornerstone companies from their respective owners. The Company may also use a
portion of the net proceeds to acquire complementary businesses; however, the
Company has no commitments or understandings relating to any such acquisition.
The Company expects to use the balance of the net proceeds from this offering
for working capital and other general corporate purposes. Pending these uses,
the Company intends to invest the net proceeds in investment-grade, short-
term, interest-bearing instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support
its growth strategy and does not anticipate paying cash dividends in the
foreseeable future. The Company's bank credit agreement restricts the
Company's ability to declare and pay dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 1, 1998 (i) on an actual basis, (ii) on a pro forma basis giving effect
to the conversion of all outstanding shares of the Convertible Preferred Stock
into an aggregate of 14,148,786 shares of Common Stock and the filing of the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock, eliminate the terms of the Company's
existing series of Convertible Preferred Stock and create a class of
authorized but undesignated Preferred Stock and (iii) on a pro forma basis, as
adjusted to reflect the sale by the Company of shares of Common Stock in
this offering at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discount and offering expenses
payable by the Company. The capitalization information set forth in the table
below should be read in conjunction with the Company's consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 1, 1998
------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and capital leases, less current
portion........................................ $ 313 $ 313 $ 313
Redeemable convertible preferred stock, $.01 par
value; 56,500 shares authorized and 56,385
shares issued and outstanding (actual); no
shares authorized, issued or outstanding (pro
forma and pro forma as adjusted)............... 60,332 -- --
Stockholders' equity:
Preferred stock, $.01 par value; no shares
authorized, issued or outstanding (actual);
5,000,000 shares authorized, no shares issued
or outstanding (pro forma and pro forma as
adjusted).................................... -- -- --
Series B and C convertible preferred stock,
$.01 par value; 11,250 shares authorized,
7,992 shares issued and outstanding (actual),
no shares authorized, issued or outstanding
(pro forma and pro forma adjusted)........... -- -- --
Common stock, $.001 par value; 28,499,400
shares authorized and 14,619,285 shares
issued and outstanding (actual); 150,000,000
shares authorized and 28,768,071 shares
issued and outstanding (pro forma);
150,000,000 shares authorized and shares
issued and outstanding (pro forma as
adjusted)(1)................................. 15 29
Treasury stock, 330,000 shares of common stock.. -- -- --
Additional paid-in-capital...................... 21,401 81,719
Unrealized gains on available for sale securi-
ties........................................... 29 29 29
Retained earnings............................... 8,977 8,977 8,977
------- ------- -----
Total stockholders' equity (deficit).......... 30,422 90,754
------- ------- -----
Total capitalization.......................... $91,067 $91,067 $
======= ======= =====
</TABLE>
- --------
(1) Based on the number of shares of Common Stock outstanding on August 1,
1998. Excludes an aggregate of (i)1,472,192 shares of Common Stock
issuable pursuant to options outstanding as of August 1, 1998 and (ii)
315,000 shares of Common Stock issuable upon the exercise of warrants
outstanding as of August 1, 1998. See "Management--Stock Plans" and Note 9
of Notes to Consolidated Financial Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of August 1, 1998
was $28,612,000 or $0.99 per share of Common Stock. Pro forma net tangible
book value per share is determined by dividing the Company's tangible net
worth (tangible assets less liabilities) by the number of shares of Common
Stock outstanding, after giving effect to the conversion of all outstanding
shares of the Company's Convertible Preferred Stock into an aggregate of
14,148,786 shares of Common Stock. After giving effect to the sale of the
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $ per share, after deducting the estimated
underwriting discount and offering expenses payable by the Company, the pro
forma net tangible book value of the Company as of August 1, 1998 would have
been $ , or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors purchasing shares in this
offering. If the initial public offering price is higher or lower, the
dilution to the new investors will be greater or less, respectively. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of August 1,
1998.......................................................... $0.99
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this
offering(1).....................................................
---
Dilution per share to new investors.............................. $
===
</TABLE>
- --------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value would be approximately $ per share,
resulting in dilution to new investors in this offering of $ per share.
See "Underwriting."
The following table summarizes, on a pro forma basis (giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock into
Common Stock) as of August 1, 1998, the total number of shares of Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by existing stockholders and by new investors at an assumed
initial public offering price of $ per share (before deducting the estimated
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 28,438,071 % $81,748,000 % $2.87
New investors.............. $
---------- ----- ----------- -----
Total.................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to shares or % of the total number
of shares of Common Stock outstanding after this offering, and will increase
the number of shares held by new investors to shares or % of the total
number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Stockholders." The foregoing table does not give effect
to the exercise of any outstanding stock options or warrants or the
Underwriters' over-allotment option.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The selected consolidated statement of operations (other than certain pro
forma data) and balance sheet data set forth below for the years ended January
27, 1996, January 25, 1997 and January 31, 1998, and as of January 25, 1997
and January 31, 1998, are derived from the Company's audited consolidated
financial statements, which appear elsewhere in this Prospectus. The selected
consolidated balance sheet data set forth below as of January 27, 1996 are
derived from the Company's unaudited consolidated financial statements. The
selected consolidated statement of operations and balance sheet data for the
years ended and as of December 31, 1993 and 1994, which consist entirely of
data for Ballard Designs and Smith+Noble, are derived from unaudited financial
statements. The selected consolidated statement of operations and balance
sheet data for the six month periods ended and as of August 2, 1997 and August
1, 1998 are derived from the Company's unaudited consolidated financial
statements, which appear elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on a basis consistent with the audited consolidated financial statements which
appear elsewhere in this Prospectus and include all adjustments, consisting
solely of normal recurring accruals and adjustments, necessary for a fair
presentation of the financial position and results of operations for these
unaudited periods. The operating results for the six months ended August 1,
1998 are not necessarily indicative of the results to be expected for any
other period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements, including the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------- --------------------------
AUG. 2,
DEC. DEC. JAN. JAN. 31, 1997
31, 31, 27, JAN. 25, JAN. 31, 1998 (PRO AUG. 2, (PRO AUG. 1,
1993 1994 1996 1997 1998 FORMA)(1) 1997 FORMA)(1) 1998
------- ------- ------- -------- -------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $22,774 $33,403 $60,536 $106,100 $216,335 $240,129 $80,807 $104,601 $139,269
Cost of sales........... 12,939 19,011 32,817 54,750 112,251 124,657 42,409 54,816 71,016
------- ------- ------- -------- -------- -------- ------- -------- --------
Gross profit............ 9,835 14,392 27,719 51,350 104,084 115,472 38,398 49,785 68,253
------- ------- ------- -------- -------- -------- ------- -------- --------
OPERATING EXPENSES:
Selling, catalog and
fulfillment expenses.. 6,507 11,013 22,873 36,408 75,435 84,552 26,451 35,567 50,084
General and
administrative........ 1,186 1,663 3,509 6,911 13,450 15,695 4,992 7,238 9,168
Amortization and
depreciation.......... 124 264 759 1,735 3,523 4,297 1,404 2,178 2,439
Restructuring charge... -- -- -- -- 943 943 -- -- 2,838
------- ------- ------- -------- -------- -------- ------- -------- --------
Total operating
expenses............... 7,817 12,940 27,141 45,054 93,351 105,487 32,847 44,983 64,529
------- ------- ------- -------- -------- -------- ------- -------- --------
Operating income........ 2,018 1,452 578 6,296 10,733 9,985 5,551 4,802 3,724
Investment income
(expense), net......... (40) (52) (95) 367 (208) (73) 78 213 (199)
Equity in net income
(loss) of affiliate.... -- -- (5) 392 1,809 1,809 995 995 2,208
Minority interest....... -- -- -- -- 275 275 82 82 244
------- ------- ------- -------- -------- -------- ------- -------- --------
Income before income
taxes.................. 1,978 1,400 478 7,055 12,609 11,996 6,706 6,092 5,977
Income taxes............ -- -- 158 985 3,103 2,972 1,723 1,592 324
------- ------- ------- -------- -------- -------- ------- -------- --------
Net income.............. $ 1,978 $ 1,400 $ 320 $ 6,070 $ 9,506 $ 9,024 $ 4,983 $ 4,500 $ 5,653
======= ======= ======= ======== ======== ======== ======= ======== ========
Net income per share,
assuming dilution(2)... $ 0.31 $ 0.22 $ 0.00 $ 0.31 $ 0.38 $ 0.36 $ 0.23 $ 0.20 $ 0.19
Pro forma net
income(3).............. $ 1,187 $ 840 $ 264 $ 4,600 $ 7,381 $ 6,899 $ 3,854 $ 3,371 $ 4,007
Pro forma net income
(loss) per share,
assuming
dilution(2)(3)......... $ 0.19 $ 0.13 $ (0.01) $ 0.23 $ 0.30 $ 0.27 $ 0.17 $ 0.15 $ 0.13
Weighted average shares
outstanding(2)......... 6,383 6,383 12,465 19,789 25,007 25,382 22,094 22,844 29,812(4)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
DEC. 31, DEC. 31, JAN. 27, JAN. 25, JAN. 31, AUG. 1,
1993 1994 1996 1997 1998 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 103 $ 460 $ 9,071 $11,236 $ 4,870 $ 2,014
Working capital......... (244) (228) 15,012 16,806 9,623 1,188
Total assets............ 2,748 6,515 45,412 55,313 133,646 149,314
Long-term debt (net of
current maturities).... 26 56 4,288 2,047 332 313
Stockholders' equity.... 346 1,174 11,129 14,811 30,968 30,422
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
JAN. 25, JAN. 31,
1997 1998
JAN. 25, JAN. 31, (PRO (PRO
1997 1998 FORMA) FORMA)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING DATA(5):
Net sales growth............................ 75% 104% 26% 34%
Total catalogs circulated(000s)............. 41,939 77,144 65,038 84,853
12-month buyers(000s)(6).................... 512 1,032 884 1,128
Average order value......................... $ 160 $ 170 $ 158 $ 169
</TABLE>
- --------
(1) Gives effect to the acquisitions of The Territory Ahead, Garnet Hill and
Whispering Pines as if they had occurred on January 26, 1997. In addition
to combining historical results of operations, the unaudited pro forma
amounts shown include adjustments for the estimated effect of amortization
associated with the acquisitions of these companies. The unaudited pro
forma amounts shown are not indicative of the results of operations that
would have been achieved if such acquisitions had occurred at the
beginning of 1997. See Note 2 of Notes to Consolidated Financial
Statements. The Territory Ahead and Garnet Hill have historically been
more profitable in the second half of the year, so the inclusion of first-
half operating results of such companies in these pro forma operating
results has a negative impact on the Company's net income for the periods
shown.
(2) See Note 16 of Notes to Consolidated Financial Statements.
(3) Pro forma net income and pro forma net income per share, assuming
dilution, have been computed by adjusting net income, as reported, to
record an income tax provision (or benefit) for Ballard Designs and
Smith+Noble, which were not subject to income tax at the entity level
prior to their acquisitions by the Company. See Note 3 of Notes to
Consolidated Financial Statements.
(4) Increase primarily reflects sales of a total of 22,554 shares of
Convertible Preferred Stock (convertible into 4,956,922 shares of Common
Stock) in August 1997 and October 1997 pursuant to previous purchase
commitments.
(5) Pro forma operating data include data for The Territory Ahead, Garnet Hill
and Whispering Pines for all of the periods presented (including periods
prior to their acquisition by Cornerstone). Operating data do not include
data for TravelSmith, as TravelSmith financial results are not
consolidated with those of the Company.
(6) Represents the combined number of buyers who have purchased from the
Cornerstone companies in the preceding 12 months or since date of
acquisition, whichever is less, without deductions for persons who have
purchased from more than one Cornerstone company. Accordingly, the numbers
of individual names in the Cornerstone database are less than the numbers
indicated.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Prospectus. Certain of the statements contained in this section and elsewhere
in this Prospectus that are not purely historical, such as statements
regarding the Company's expectations, beliefs, intentions, plans and
strategies, are forward-looking statements that involve risks and
uncertainties. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by the
forward-looking statements, including those discussed under "Risk Factors" and
elsewhere in this Prospectus. All forward-looking statements are based on
information available to the Company on the date hereof and the Company
assumes no obligation to update any forward-looking statement.
OVERVIEW
Acquisition History
Since its founding in June 1995, Cornerstone has achieved significant scale
through its seven acquisitions and internal growth by these acquired
companies. Although Cornerstone generally seeks to acquire 100% of the equity
interest in companies it acquires, this has not always been practicable and as
a result three of the seven Cornerstone companies are not 100% owned by
Cornerstone.
Two of Cornerstone's acquisitions--Ballard Designs in August 1997 and
Smith+Noble in August 1998--were accounted for as pooling of interests.
Accordingly, the consolidated financial statements of Cornerstone include the
operating results of these companies for all periods presented. Cornerstone's
other five acquisitions, which are described below, were accounted for under
the purchase method of accounting and Cornerstone's consolidated financial
statements therefore include the results of these companies since the date of
acquisition.
On September 12, 1995, Cornerstone acquired an entity which owned securities
representing approximately 48% of the outstanding capital stock of
TravelSmith. In 1996, Cornerstone increased its ownership position to
approximately 61% of the outstanding capital stock of TravelSmith. Cornerstone
accounts for its investment in TravelSmith under the equity method.
Accordingly, TravelSmith's operating results and financial position are not
consolidated with Cornerstone's financial statements, and Cornerstone records
its share of the net income or loss of TravelSmith in the line item entitled
"Equity in net income (loss) of affiliate" on its consolidated financial
statements.
On September 12, 1995, Cornerstone acquired all of the equity interest in
Frontgate for a purchase price consisting of a combination of cash, stock and
promissory notes. On March 31, 1997, Cornerstone purchased, for cash, 80% of
the outstanding capital stock of The Territory Ahead. On July 28, 1997,
Cornerstone acquired all of the outstanding capital stock of Garnet Hill, for
a combination of cash, Cornerstone Common Stock and promissory notes. On
September 4, 1997, Cornerstone acquired, for cash, a 51% interest in
Whispering Pines. For financial reporting purposes, the operating results of
The Territory Ahead and Whispering Pines are consolidated with Cornerstone's
operating results; the portion of the net income or loss of such companies
allocable to the minority interest is deducted from or added to, respectively,
Cornerstone's consolidated operating results through the line item entitled
"Minority interest."
As a result of the acquisitions made by the Company, period-to-period
comparisons of Cornerstone's operating results may not be meaningful. In the
first six months of 1998, each Cornerstone company other than Whispering Pines
(which is a smaller and earlier stage business than the other Cornerstone
companies) generated positive operating income. The Company intends to
continue to pursue attractive strategic acquisitions of direct marketing
companies that meet its focused acquisition criteria.
21
<PAGE>
Selected Operating Principles
The Company's net sales are generated primarily through its catalog
operations. Catalog sales accounted for 98% of net sales for each of 1996,
1997 and the first six months of 1998. The balance of the Company's net sales
is derived from outlet and retail stores. As of August 31, 1998, the
Cornerstone companies operated six outlet stores and one retail store.
Expenses related to the development, production and mailing of a catalog are
capitalized and amortized over the period in which that catalog generates
revenues (generally three months or less) in order to match the recognition of
these expenses with the revenues they generate. As a result, when the Company
recognizes revenues and certain expenses depends largely on the timing of the
mailing of catalogs. The timing of the mailing of a particular catalog may
vary from year to year, and may result in the shifting of certain revenues and
expenses from a particular quarter of one year to a different quarter of the
subsequent year. Additionally, inventory levels may experience fluctuations
due to variability in the timing of catalog mailings and merchandise receipt.
In support of Cornerstone's strategy to reinforce the brand identity of the
Cornerstone companies, a substantial portion of the products that the
Cornerstone companies offer are branded products (i.e., sold under the name of
that company), and Cornerstone expects that the proportion of branded products
will increase in the future. Branded product offerings generally provide
higher profit margins than other merchandise. However, this strategy also
requires Cornerstone to incur higher costs in the design of the products, may
entail larger initial purchase commitments, and may limit the Company's
ability to return unsold merchandise to vendors, thus resulting in more excess
inventory and markdowns.
While many direct marketing companies consider merchandise shipped within 24
hours of receipt of the order as "same-day" shipment, Cornerstone considers
only products shipped on the same day as the order is received to be same-day
shipment, and strives for a high same-day shipment rate. This results in
higher fulfillment costs (as a result of reduced ability to pick and fill
orders for similar products on a batch basis), but Cornerstone believes this
practice lessens the need for customers to incur extra costs for expedited
shipment, enhances customer satisfaction and contributes to a higher order
frequency and repeat business from its customers.
As part of Cornerstone's strategy of providing each Cornerstone company with
both the performance benefits and cost savings that can be realized from the
combined enterprise and in order to support the Company's growth initiatives,
Cornerstone has begun construction of a new 800,000 square foot operations
center outside of Cincinnati, Ohio, which it expects will be operational in
the summer of 1999. Cornerstone's current estimate of the total cost of this
new facility, including land, construction and equipment, is between $60 and
$65 million. Cornerstone is currently evaluating financing proposals for this
project. The Company recorded a restructuring charge of $943,000 in the fourth
quarter of 1997 relating to assets impaired as a result of the decision to
proceed with the construction of the operations center. The Company has
incurred $2,838,000 of restructuring charges in the first six months of 1998
relating to employee termination costs and incremental consulting and other
costs associated with the design and construction of the operations center.
Cornerstone expects that it will incur between $4,000,000 and $6,000,000 of
additional restructuring charges over the next 12 to 18 months relating to the
transition to the new facility. Cornerstone believes that the efficiencies
expected from the consolidation of certain functions at this facility will
help reduce operating expenses as a percentage of net sales, but the Company
does not expect to realize such benefits fully until 2001. In addition, the
use of temporary additional fulfillment facilities pending the transfer of
fulfillment operations to the new facility during 1999 and 2000 is likely to
create certain economic and operational inefficiencies during that period.
As a result of the acquisitions by Cornerstone which have been accounted for
as purchases, Cornerstone has recorded a significant amount of goodwill, which
represents the excess of the purchase price over the fair value of the net
assets acquired. This goodwill is primarily attributable to the acquisitions
of Frontgate, The Territory
22
<PAGE>
Ahead and Garnet Hill, which resulted in goodwill of $12,219,000, $9,997,000
and $23,007,000, respectively. The Company amortizes goodwill over a 40-year
period. Goodwill amortization expense totalled $101,000, $322,000, $1,036,000,
$295,000 and $783,000 in 1995, 1996, 1997, the first six months of 1997 and
the first six months of 1998, respectively, and will continue to represent a
significant expense in the future. The value of mailing lists obtained by
Cornerstone through its business acquisitions is recorded in other assets and
amortized over their economic life (four years). Mailing list amortization
totaled $185,000, $590,000, $855,000, $317,000 and $538,000 in 1995, 1996,
1997, the first six months of 1997 and the first six months of 1998,
respectively.
Key Operating Metrics
There are a number of key operating measures that management uses to analyze
the results of operations of the Company, including the following:
. Response rates, catalog circulation and customer database growth. Because a
significant portion of Cornerstone's expense structure is selling or
catalog printing and mailing costs, response rates (which are measured by
the number of orders for merchandise as a percentage of total catalogs
circulated) are a key indicator of the productivity of these expenses.
Higher response rates typically not only result in higher net sales but
also have a disproportionate positive impact on net income. Concentrating
circulation on recent purchasers results in higher response rates and more
profitable operations (in the short term), but negatively affects the
growth of the customer database. The growth of the business is dependent
upon both keeping current customers active and increasing the overall list
of names in the customer file by converting prospective customers to active
customers.
. Average order value. A higher average order value means that fewer orders
have to be processed and filled to generate each dollar of net sales.
Accordingly, a higher average order value not only generally has a positive
effect on net sales, but also reduces fulfillment and other expenses as a
percentage of net sales.
. In-stock position. This is measured by the percentage of products ordered
for which there is in-stock inventory at the time of order and which can be
shipped at once. A high in-stock rate can have a positive impact on
operating results by reducing order cancellations, by increasing customer
satisfaction and repeat business and by reducing the expenses associated
with having to process and fill a single order multiple times (because
certain items ordered are in-stock while other items are out-of-stock and
must be shipped later at the Company's expense). However, ensuring a high
in-stock rate may result in excess inventory which must be sold at
discounted prices. In striving to balance these two considerations,
Cornerstone's commitment to customer service typically results in more
emphasis being placed on the ability to fulfill orders immediately than on
minimizing the risk of excess inventory, and Cornerstone uses inventory
management techniques to help reduce the risk of overstocks.
. Page productivity. This is measured by dividing net sales for a particular
period by the total number of pages circulated. While growth in net sales
may result simply from an increased number of catalogs circulated or larger
catalogs, comparisons of page productivity eliminate the impact of such
variables. Page productivity measurements help Cornerstone to evaluate its
merchandise and creative presentation and its circulation mix of active
customers and prospective customers for each catalog.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------- -------------------
JAN. 27, JAN. 25, JAN. 31, AUG. 2, AUG. 1,
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales................ 54.2 51.6 51.9 52.5 51.0
----- ----- ----- -------- --------
Gross profit.................. 45.8 48.4 48.1 47.5 49.0
Operating expenses:
Selling, catalog and
fulfillment expenses....... 37.8 34.3 34.9 32.7 36.0
General and administrative.. 5.8 6.5 6.2 6.2 6.6
Amortization and
depreciation............... 1.2 1.7 1.6 1.7 1.8
Restructuring charge........ -- -- 0.4 -- 2.0
----- ----- ----- -------- --------
Total operating expenses...... 44.8 42.5 43.1 40.6 46.4
Operating income.............. 1.0 5.9 5.0 6.9 2.6
Net investment income
(expense).................... (0.2) 0.3 (0.1) 0.1 (0.1)
Equity in net income of
affiliate.................... -- 0.4 0.8 1.2 1.6
Minority interest............. -- -- 0.1 0.1 0.2
----- ----- ----- -------- --------
Income before income taxes.... 0.8 6.6 5.8 8.3 4.3
Income taxes.................. 0.3 0.9 1.4 2.1 0.2
----- ----- ----- -------- --------
Net income.................... 0.5% 5.7% 4.4% 6.2% 4.1%
===== ===== ===== ======== ========
</TABLE>
Six Months Ended August 1, 1998 Compared to Six Months Ended August 2, 1997
Net sales increased 72% from $80,807,000 in the first six months of 1997 to
$139,269,000 in the first six months of 1998. This increase was primarily
attributable to the acquisitions of The Territory Ahead on March 31, 1997 and
Garnet Hill on July 28, 1997. In addition, the net sales of Ballard Designs,
Frontgate and Smith+Noble (which were included in the entire first six months
of both 1997 and 1998) increased 34% between these periods. This increase was
primarily attributable to increased catalog circulation (including the
introduction of new catalogs), higher average order value, higher average page
counts per catalog, changes in the creative presentation and a more successful
merchandise mix.
Gross profit, which consists of net sales less cost of sales (primarily
merchandise acquisition costs, in-bound freight and inventory reserves),
increased 78% from $38,398,000 in the first six months of 1997 to $68,253,000
in the first six months of 1998. As a percentage of net sales, gross profit
increased from 47.5% to 49.0% between these periods. This increase was
primarily attributable to an increase in the percentage of net sales
represented by casual apparel products (comprised largely of branded goods
from Garnet Hill and The Territory Ahead), which generally have higher margins
than the merchandise offerings of Ballard Designs and Frontgate.
Selling, catalog and fulfillment expenses, which consist primarily of the
cost of producing and mailing catalogs, marketing expenses and fulfillment
costs (offset by list rental income), increased 89% from $26,451,000 in the
first six months of 1997 to $50,084,000 in the first six months of 1998. As a
percentage of net sales, selling, catalog and fulfillment expenses increased
from 32.7% to 36.0% between these periods. This increase as a percentage of
net sales was primarily due to increased catalog circulation (including the
introduction of new catalogs), higher average page counts per catalog, and a
lower in-stock position in the first six months of 1998. In addition, because
The Territory Ahead and Garnet Hill generally have higher net sales and net
income in the second half of the year, the inclusion of their operating
results in all of the first six months of 1998 but in only a portion of the
first six months of 1997 has the effect of increasing the Company's expenses
as a percentage of net sales in the first six months of 1998 as compared to
the first six months of 1997. The use of temporary
24
<PAGE>
fulfillment facilities has also resulted in increased costs and inefficiencies
during the first six months of 1998. These factors were partially offset by an
increase in average order value, particularly in the home category, and a
higher response rate for catalogs mailed during the first six months of 1998.
Because selling, catalog and fulfillment expenses are tied so closely to
customers' response to product offerings, Cornerstone cannot predict if these
costs will vary from their current level.
General and administrative expenses increased 84% from $4,992,000 in the
first six months of 1997 to $9,168,000 in the first six months of 1998. As a
percentage of net sales, general and administrative expenses increased from
6.2% to 6.6% between these periods. The overall increase in general and
administrative expenses was due to various initiatives undertaken to prepare
for and support future growth by the Company and to the growth in the
Company's business, through both acquisitions and internal growth. In
addition, the inclusion of the operating results of The Territory Ahead and
Garnet Hill in all of the first six months of 1998 but in only a portion of
the first six months of 1997 has the effect of increasing the Company's
expenses as a percentage of net sales in the first six months of 1998 as
compared to the first six months of 1997.
Amortization and depreciation, which is comprised of amortization of
goodwill and acquired mailing lists (arising from the acquisition of
businesses) and depreciation of fixed assets, increased from $1,404,000 in the
first six months of 1997 to $2,439,000 in the first six months of 1998. This
increase is primarily attributable to increased goodwill and mailing list
amortization resulting from acquisitions made by the Company in 1997.
The Company recorded a restructuring charge of $2,838,000 in the first six
months of 1998 relating to employee termination costs and incremental
consulting and other costs associated with the design and construction of its
new operations center.
Cornerstone recorded net investment income, which is comprised of interest
income, interest expense, dividends received and realized gains and losses on
securities, of $78,000 in the first six months of 1997, as compared to net
investment expense of $199,000 in the first six months of 1998. This change
was primarily attributable to a decrease in available cash balances due to the
use of cash in connection with the acquisitions of The Territory Ahead, Garnet
Hill and Whispering Pines, as well as increased borrowings under its bank
credit agreement to fund the growth and working capital needs of Cornerstone.
Equity in net income of affiliate, which is comprised of Cornerstone's
proportionate share of the net income of TravelSmith, increased 122% from
$995,000 in the first six months of 1997 to $2,208,000 in the first six months
of 1998. This increase was due to the increased profitability of TravelSmith,
which was primarily the result of increased catalog circulation, higher
average order value and growth of the customer database.
Minority interest, which is comprised of the portion of the net income or
loss of The Territory Ahead and Whispering Pines which must be deducted from
or added to the Company's consolidated operating results to account for the
minority interest in such companies, was a $82,000 gain in the first six
months of 1997 and a $244,000 gain in the first six months of 1998. The gain
in the first six months of 1997 is attributable to the net loss of The
Territory Ahead during that period. The gain in the first six months of 1998
was due to the combined net loss of these two companies during that period.
The Company recorded an income tax provision representing 26% of its pre-tax
net income in the first six months of 1997, as compared to an income tax
provision representing 5% of its pre-tax net income in the first six months of
1998. The decrease in the Company's effective tax rate was primarily due to
the increase in the net income of Smith+Noble, which was not subject to income
tax at the entity level prior to its acquisition by the Company.
As a result of the factors described above, Cornerstone's net income
increased from $4,983,000, or 6.2% of net sales, in the first six months of
1997 to $5,653,000, or 4.1% of net sales, in the first six months of 1998.
1997 Compared to 1996
Net sales increased 104% from $106,100,000 in 1996 to $216,335,000 in 1997.
This increase was primarily attributable to the acquisitions of The Territory
Ahead in March 1997 and Garnet Hill in July 1997 and, to a
25
<PAGE>
lesser extent, the acquisition of Whispering Pines in September 1997. In
addition, the net sales of Ballard Designs, Frontgate and Smith+Noble (which
were included for all of both 1997 and 1996) increased 41% between these
periods. This increase was primarily attributable to increased catalog
circulation, higher average order value, higher average page counts per
catalog and a more successful merchandise mix. There were 52 weeks in fiscal
1996 and 53 weeks in fiscal 1997.
Gross profit increased 103% from $51,350,000 in 1996 to $104,084,000 in
1997. As a percentage of net sales, gross profit decreased slightly from 48.4%
to 48.1% between these periods. Gross profit was positively impacted in 1997
by the acquisitions of The Territory Ahead and Garnet Hill, whose gross profit
margins are slightly higher than Cornerstone's historical average. This was
offset by a charge to cost of sales in the amount of $4,909,000 resulting from
inventory adjustments in connection with the The Territory Ahead and Garnet
Hill acquisitions. Excluding that charge, gross profit in 1997 would have been
50.4% of net sales.
Selling, catalog and fulfillment expenses increased 107% from $36,408,000 in
1996 to $75,435,000 in 1997. As a percentage of net sales, selling, catalog
and fulfillment expenses increased slightly from 34.3% to 34.9% between these
periods. This increase as a percentage of net sales was primarily due to the
impact of companies acquired during 1997 and to an increase in catalog
circulation, higher average page counts per catalog. These factors were
partially offset by an increase in the average order value between 1996 and
1997.
General and administrative expenses increased 95% from $6,911,000 in 1996 to
$13,450,000 in 1997. As a percentage of net sales, general and administrative
expenses decreased from 6.5% to 6.2% between these periods. The overall
increase in general and administrative expenses was due to the growth in the
Company's business, through both acquisitions and internal growth. The
decrease in these expenses as a percentage of net sales was the result of
certain economies of scale achieved by Cornerstone as its business has grown.
Amortization and depreciation increased from $1,735,000 in 1996 to
$3,523,000 in 1997. This increase is primarily attributable to acquisitions
made by the Company in 1997.
The Company recorded a restructuring charge of $943,000 in the fourth
quarter of 1997 relating to assets impaired as a result of the decision to
proceed with the construction of the Company's new operations center.
Cornerstone recorded net investment income of $367,000 in 1996, as compared
to net investment expense of $208,000 in 1997. This change was due to the
decrease in available cash balances, resulting primarily from the use of cash
in connection with the acquisitions of The Territory Ahead, Garnet Hill and
Whispering Pines, as well as increased borrowings under the Company's bank
credit agreement to fund the growth and working capital needs of Cornerstone.
Equity in net income of affiliate increased from $392,000 in 1996 to
$1,809,000 in 1997. This increase was due to the increased profitability of
TravelSmith, which was primarily the result of increased product offerings,
increased circulation and increased page counts.
The Company recorded a $275,000 gain for minority interest in 1997. This
gain was the result of the fact that the net loss incurred by Whispering Pines
in 1997 exceeded the net income of The Territory Ahead. No minority interest
was recorded in 1996.
The Company recorded an income tax provision representing 14% of its pre-tax
income in 1996, as compared to an income tax provision representing 25% of its
pre-tax income in 1997. The increase in the Company's effective tax rate was
primarily due to the inclusion of a tax provision for the net income of
Ballard Designs after its acquisition by Cornerstone and the inclusion of an
increased percentage of taxable income of The Territory Ahead and Garnet Hill,
during 1997. These factors were partially offset by the increase in equity in
net income of affiliate as a percentage of pre-tax net income. Smith+Noble was
a non-taxable entity at the corporate level in both years with no reportable
tax expense.
As a result of the factors described above, Cornerstone's net income
increased from $6,070,000, or 5.7% of net sales, in 1996 to $9,506,000, or
4.4% of net sales, in 1997.
26
<PAGE>
1996 Compared to 1995
Net sales increased 75% from $60,536,000 in 1995 to $106,100,000 in 1996.
This increase was primarily attributable to the inclusion of the operating
results of Frontgate for all of 1996, as compared to only a portion of 1995.
In addition, the net sales of Ballard Designs and Smith+Noble (which were
included for all of both 1995 and 1996) increased 20% between these periods,
primarily due to an increase in catalog circulation and higher average page
counts per catalog.
Gross profit increased 85% from $27,719,000 in 1995 to $51,350,000 in 1996.
As a percentage of net sales, gross profit increased from 45.8% to 48.4%
between these periods. This increase was primarily attributable to the
inclusion of a full year of operating results of Frontgate, which has
historically had higher gross profit margins than Ballard Designs, and
improved gross profit margins at Smith+Noble.
Selling, catalog and fulfillment expenses increased 59% from $22,873,000 in
1995 to $36,408,000 in 1996. As a percentage of net sales, selling, catalog
and fulfillment expenses decreased from 37.8% to 34.3% between these periods.
The decrease in these expenses as a percentage of net sales was primarily due
to decreased selling expenses at Ballard Designs, Frontgate and Smith+Noble as
a percentage of net sales.
General and administrative expenses increased 97% from $3,509,000 in 1995 to
$6,911,000 in 1996. As a percentage of net sales, general and administrative
expenses increased from 5.8% to 6.5% between these periods. This increase was
primarily due to the added costs necessary to support the growth of the
business.
Amortization and depreciation increased from $759,000 in 1995 to $1,735,000
in 1996. This increase is primarily attributable to the amortization of the
goodwill from the Frontgate acquisition in September 1995 over all of 1996.
Cornerstone recorded net investment expense of $95,000 in 1995, as compared
to net investment income of $367,000 in 1996. This change was primarily
attributable to the increase in cash balances available for investment as a
result of Cornerstone's preferred stock financings between September 1995 and
January 1996.
Equity in net income of affiliate increased from a $5,000 loss in 1995 to a
$392,000 gain in 1996. This increase was due to the increased profitability of
TravelSmith (resulting primarily from increased net sales and gross profit
margin) and the increase in Cornerstone's stock ownership percentage in
TravelSmith from approximately 48% as of the end of 1995 to approximately 61%
by July 1996.
The Company recorded an income tax provision representing 33% of its pre-tax
net income for 1995, as compared to an income tax provision representing 14%
of its pre-tax net income for 1996. The decrease is primarily attributable to
an increase in the percentage of taxable income represented by Ballard Designs
and Smith+Noble, which were not taxable at the entity level, as a percentage
of overall net income.
As a result of the factors described above, Cornerstone's net income
increased from $320,000, or 0.5% of net sales, in 1995 to $6,070,000, or 5.7%
of net sales, in 1996.
SEASONALITY
The Cornerstone companies have varying degrees of seasonality in their
businesses, and the peak buying seasons tend to vary among the Cornerstone
companies. On an aggregate basis, the majority of Cornerstone's net sales
occur in the third and fourth quarters, and net income is generally higher in
the fourth quarter than the other quarters.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly results of operations of
the Company for each of the quarters in 1997 and the first two quarters of
1998. In management's opinion, this unaudited financial information
27
<PAGE>
has been prepared on a basis consistent with the audited Consolidated
Financial Statements which appear elsewhere in this Prospectus and include all
adjustments, consisting solely of normal recurring accruals and adjustments,
necessary for a fair presentation of the results of operations for the
quarters presented. This financial information should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The results of operations for any
quarter are not necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2, AUG. 1,
1997 1997 1997 1998 1998 1998
------- ------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $35,073 $45,734 $57,796 $77,732 $64,907 $74,362
Gross profit................. 16,737 21,660 26,914 38,773 32,679 35,574
Operating income............. 1,930 3,619 1,208 3,976 2,940 784
Equity in net income of
affiliate................... 561 434 297 517 1,269 939
Net income................... 1,754 3,227 1,072 3,453 3,374 2,279
Pro forma net income(1) ..... 1,377 2,475 807 2,722 2,877 1,130
</TABLE>
(1) Computed by adjusting net income to record an income tax provision for
Ballard Designs and Smith+Noble, which were not subject to income tax at
the entity level prior to their acquisitions by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cornerstone's principal capital needs arise from working capital required to
fund the operation of the Cornerstone businesses, capital expenditures related
to expansions and improvements to the Company's infrastructure, and funds
required in connection with the acquisition of new businesses.
To date, Cornerstone has funded its operations primarily through preferred
stock financings, which have generated net proceeds totaling approximately
$55,000,000, and its bank credit agreement. In addition, Cornerstone has paid
some or all of the purchase price for certain of its acquisitions using
Cornerstone Common Stock and debt instruments.
The Company is party to a credit agreement with Fleet Bank and certain other
participating lenders, which extends through August 2003. The credit agreement
permits borrowings of up to the lesser of $135,000,000 or Cornerstone's
trailing 12 months' EBITDA (as defined in the agreement) multiplied by four
(subject to reduction to 3.25 in August 2000). Up to $35,000,000 of borrowings
may be used for construction of the Company's new operations center.
Borrowings are also permitted for acquisitions, subject to various
limitations. Borrowings under the credit agreement bear interest at the prime
rate of Fleet National Bank or an optional LIBOR-based rate on funded debt.
The credit agreement is secured by a pledge of the capital stock of each of
the Cornerstone companies owned by Cornerstone as well as a mortgage on the
Company's new operations center, and also requires a "negative pledge" by
Cornerstone. The agreement requires an initial commitment fee and an annual
fee and contains various financial covenants. As of August 1, 1998,
Cornerstone had approximately $30,235,000 of outstanding borrowings under this
credit agreement.
The Company's operating activities provided net cash of $7,936,000 and
$8,909,000 in 1996 and 1997 and used cash of $3,992,000 in the first six
months of 1998. Net cash provided by operating activities in 1996 and 1997 was
primarily a result of Cornerstone's net income during such periods, as well as
amortization and depreciation and increases in accounts payable and other
liabilities. These sources of funds were partially offset by equity in net
income of affiliate and increases in accounts receivable and inventory. Net
cash used in operating activities in the first six months of 1998 was
primarily the result of significant increases in inventory and prepaid capital
costs, partially offset by net income and amortization and depreciation during
that period. Cornerstone's operations generally require significant working
capital funding, even if they provide positive cash flow, because the
production and mailing of catalogs and the purchase of inventory involve
significant expenditures in advance of the generation of revenues from such
catalogs.
28
<PAGE>
The Company's investing activities used cash of $4,541,000, $52,567,000 and
$6,886,000 in 1996, 1997 and the first six months of 1998, respectively. The
significant use of cash for investing activities in 1997 was primarily
attributable to the businesses acquired by Cornerstone during that year.
Cornerstone's financing activities used $1,230,000 in 1996 and generated
$37,292,000 and $8,023,000 in 1997 and the first six months of 1998,
respectively. Cash generated by financing activities in 1997 was primarily the
result of the sale of preferred stock (which resulted in net proceeds of
$33,676,000) and borrowings under the Company's bank credit agreement (which
generated $15,450,000).
During the last three quarters of 1998 and in 1999, the Company anticipates
that it will make capital expenditures totaling between $65 million and $75
million. These capital expenditures primarily relate to the Company's new
operations center. Cornerstone currently estimates the total cost of the new
operations center, including land, construction and equipment, is between $60
and $65 million. Cornerstone is currently evaluating financing proposals for
this project.
The Company believes that the proceeds of this offering, together with its
available cash, cash expected to be generated from operations and borrowings
under its bank credit agreement, will be sufficient to fund the operations of
the Company for at least one year. However, the Company's projected cash needs
may change as a result of acquisitions, unforeseen operational difficulties or
other factors. As a result, the Company may be required to seek additional
sources of funding sooner than anticipated, and there can be no assurance that
such funding will be available to the Company on satisfactory terms.
YEAR 2000
The year 2000 issue relates to computer programs and systems which recognize
dates using two digit year data rather than four digit year data. As a result,
such programs and systems may fail or provide incorrect information when using
dates after December 31, 1999.
The Company has conducted a review of its internal computer programs and
operating systems to assess the impact of the year 2000 issue. The Company
believes that its internal computer programs and systems are capable of
addressing the year 2000 issue, and that no remediation or specific
expenditures are required in this regard. The Company is in the process of
assessing year 2000 compliance with its key vendors and other companies doing
business with it. Although the Company is optimistic that it will be able to
timely address any year 2000 problems that it identifies, the failure of the
Company's or such third parties' systems to be year 2000 compliant could
create problems in purchasing and managing inventory, delivering goods and
invoicing customers and could therefore have a material adverse effect on the
Company's business, financial condition or results of operations.
29
<PAGE>
BUSINESS
Cornerstone is a family of seven leading direct marketing companies that
offer high-quality home, leisure and casual apparel products, primarily
through catalogs. Each Cornerstone company is distinguished by a strong brand
image, a clearly focused merchandising concept, high-quality creative
execution and exceptional customer service. The Cornerstone family of
companies currently includes Ballard Designs, Frontgate, Garnet Hill,
Smith+Noble, The Territory Ahead, TravelSmith and Whispering Pines. A
substantial portion of the products that the Cornerstone companies offer is
comprised of branded products (i.e., sold under that Cornerstone company's
brand name), many of which are designed by that company and not available in
other catalogs. All of the Cornerstone companies target the same customer
segment, comprised of affluent and well-educated consumers, generally age 35
to 54. Management believes Cornerstone's focus on providing distinctive, high-
quality merchandise to the same target customer segment has contributed to the
Company's strong sales and earnings growth and to the growth in its customer
database. Cornerstone's highly experienced corporate management team and team
of talented catalog entrepreneurs have a successful track record of operating
and growing leading direct marketing companies. In the four quarters ended
August 1, 1998, the Company's net sales and pro forma net income (adjusted to
include tax provisions for non-taxed companies) were $274.8 million and $7.5
million, respectively.
Cornerstone was founded in 1995 to capitalize on the opportunity to build a
family of leading direct marketing companies targeting affluent and well-
educated consumers and on the growing popularity of purchasing merchandise
through direct channels such as catalog shopping and the Internet. Cornerstone
has achieved significant scale through its seven acquisitions and internal
growth by these companies. The Company has selectively pursued those strategic
acquisitions that satisfy its focused acquisition criteria, which include:
high-quality merchandise offerings in the home, leisure and casual apparel
markets; an affluent target customer base; a strong brand identity;
exceptional customer service; a talented and entrepreneurial management team;
profitable operations, high average order value and high net sales per catalog
mailed; a track record of growth; and substantial opportunity for future
growth and improved profitability. As a result of both acquisitions and
internal growth, Cornerstone's net sales increased 72% between the first six
months of 1997 and the first six months of 1998.
Cornerstone's operating model, which it believes is unique in the direct
marketing industry, enables each Cornerstone company to retain the creativity,
entrepreneurial spirit and responsiveness of a smaller company while also
realizing the benefits and efficiencies offered by a larger enterprise.
Cornerstone recognizes the importance of brand personality and vision in
maintaining differentiated brand images and places great emphasis on the
retention and preservation of the entrepreneurial spirit and management teams
of the individual Cornerstone companies. Rather than totally integrating the
acquired business into Cornerstone's existing operations, Cornerstone
generally leaves the management and headquarters of the acquired company
intact and allows the management team to retain responsibility for critical
front-end business functions such as merchandising, creative presentation,
marketing and catalog circulation. The Company is committed to enhancing the
brand equity, growth and profitability of the Cornerstone companies by:
providing full access to the customer databases and the results of various
marketing initiatives of the other Cornerstone companies; assuming
responsibility for certain back-end services, such as order fulfillment,
certain customer service operations, customer database management and certain
administrative functions, that can be more efficiently performed in a
centralized manner; providing the financial resources necessary to support the
growth of the business; and providing the increased purchasing power and other
economies of scale offered by the combined Cornerstone companies.
INDUSTRY OVERVIEW
In recent years there has been a significant shift of retail market share
from traditional retail sales to direct marketing sales, which include the
sale of merchandise through catalogs, telemarketing, print media, radio and
television advertising and the Internet. Cornerstone believes that the trend
toward non-store retailing, and catalog shopping in particular, is being
driven by a number of factors, including: the ease and convenience of shopping
at home, which is particularly attractive to time-constrained families;
increasing dissatisfaction with the level of customer service from many
retailers; and increasing consumer confidence in and awareness of the
30
<PAGE>
quality of customer service and reliability offered by leading direct
marketers. These alternative forms of non- store retailing, which in 1997
accounted for approximately $382.0 billion in sales, are expected to grow
approximately 8.0% per annum for the next five years. Cornerstone's primary
focus is on catalog retailing to consumers, which represented approximately
$49.7 billion of sales in 1997 and which the Direct Marketing Association
estimates is increasing at an annual rate of 6.1%. The Internet is also
becoming an increasingly significant global medium for communication and
commerce, and direct marketers with the infrastructure to process and fulfill
orders should be well positioned to handle increasing business over the
Internet. An industry source has estimated that the number of households
purchasing goods using e-mail, the Internet or a consumer on-line service will
grow from an estimated 15.2 million households in 1996 to 57.0 million
households, representing over 50% of U.S. households, by the year 2002.
Management believes that international markets also represent a sizeable
consumer base and growth opportunity for direct marketing sales.
Cornerstone's target customer base, which is comprised of affluent and well-
educated consumers, generally age 35 to 54, is also experiencing significant
growth as a result of a number of favorable demographic trends. Due in large
part to the aging of the "baby boomer" generation, Cornerstone's target market
is growing at a faster rate than the population as a whole. The increase in
recent decades in the percentage of people attending college and graduate
school and the increasing number of affluent American households (i.e.,
households with annual income in excess of $75,000) have also contributed to
the growth of Cornerstone's target market. Another favorable demographic trend
has been the increase in the number of dual income families, which has risen
nearly 50% since 1980. Dual income families not only tend to have more
disposable income, but also are generally more time-constrained and therefore
more responsive to catalog shopping. Industry data also indicate that
individuals in the 35 to 54 age group, households with annual income above
$75,000 and persons with college or graduate degrees are more likely than
persons in other age brackets, households in lower income brackets or persons
without college degrees to buy from catalogs.
The overall catalog industry is highly fragmented. Cornerstone estimates
there are currently over 7,000 companies offering between 10,000 and 12,000
titles. Many catalog companies are facing significant challenges as a result
of the increasingly competitive direct marketing environment. In addition, the
capital-intensive nature of the catalog business, which requires significant
expenditures in advance of revenue generation, and the inability of many
smaller companies to achieve economies of scale or to finance the technology
required in a rapidly evolving industry, place additional restraints on the
profitability and growth of many smaller catalog companies. In order to
succeed in this increasingly competitive market, catalog operators require
access to capital and significant management expertise. Moreover, Cornerstone
believes that the owners of many catalog companies are seeking partial or
complete liquidity of their investment through partnering with a larger
catalog retailer. As a result of all these factors, Cornerstone believes that
significant acquisition opportunities exist and that its unique operating
model positions it as a differentiated and attractive partner in a
consolidating industry.
COMPETITIVE STRENGTHS
The Cornerstone family of brands includes some of the leading direct
marketing companies in the home, leisure and casual apparel markets.
Cornerstone believes the following competitive strengths are critical to its
success:
Unique Operating Model. Cornerstone's unique operating model allows the
management teams of the individual Cornerstone companies to retain
responsibility for critical front-end business functions such as
merchandising, creative presentation, marketing and catalog circulation, and
complements the talents of those management teams with the experience,
strategic insights and administrative skills provided by the Cornerstone
management team. This model recognizes the importance of "personality" and
vision in maintaining distinctive brand images and places great emphasis on
the retention and preservation of the founding spirit and management teams of
its acquired companies. Cornerstone has retained the key executives of each
Cornerstone company (who in many cases were the original founder or co-
founders of that company), and Cornerstone believes that the executives of the
Cornerstone companies include some of the top merchandising and creative
talents in the direct
31
<PAGE>
marketing industry. The Company complements the talents and entrepreneurial
spirit of these management teams with Cornerstone's corporate-level
management. The Cornerstone management team, which is one of the most
experienced management teams in the industry, is comprised of five individuals
who have a combined experience of approximately 100 years at direct marketing
companies such as L.L. Bean, Lands' End, Smith & Hawken, Cincinnati Microwave
and Sportsman's Market. Cornerstone's corporate management assumes
responsibility for certain back-end services, thereby permitting the
Cornerstone company management teams to devote their full time and attention
to merchandising, creative presentation and marketing. This model enables each
Cornerstone company to retain the creativity, entrepreneurial spirit and
responsiveness of a smaller company while also realizing the benefits and
efficiencies offered by a larger enterprise.
Well Known and Highly Regarded Brands. Each Cornerstone company emphasizes a
strong brand image with the goal of establishing a leading position in its
market segment. Management believes that the brand identities of the
Cornerstone companies are among the most recognizable and highly regarded in
the direct marketing industry. To enhance their brand awareness, the
Cornerstone companies offer high-quality merchandise with a consistent point-
of-view in distinctive, tasteful catalog presentation formats. A substantial
portion of the products that the Cornerstone companies offer is comprised of
branded products (i.e., sold under that Cornerstone company's brand name),
many of which are designed by that company and not available in other
catalogs. Branded product offerings reinforce a differentiated brand image and
generally provide higher profit margins than other merchandise. The Company
seeks to establish each Cornerstone brand as the authoritative source for its
lifestyle products. Cornerstone believes that its strong brand identities
enhance the performance of its catalogs, provide a competitive advantage by
fostering loyalty and long-term customer relationships, and will position
Cornerstone to capitalize on other market opportunities such as the Internet,
international markets and retail.
Distinctive, High-Quality Products. The Cornerstone companies offer
attractive, high-quality merchandise designed to appeal to the Company's
affluent target customers, at prices that provide them with significant value.
These products are intended to enhance customers' enjoyment of their leisure
time by improving their home decor and comfort and by enhancing their hobbies,
travel and other recreational activities. By offering multiple titles focusing
on various product segments to the same target customer base, Cornerstone is
able to surround its customers with its merchandise offerings and satisfy many
of their purchasing needs. The Cornerstone companies devote substantial
resources to the development, design and sourcing of products which are
consistent with and enhance the brand image of that company and which are not
readily available from other sources. Merchandise is presented in tastefully
designed catalogs, printed on high-quality paper with effective photography
and editorial detail in an appealing setting.
Focus on Attractive Demographic Market. All of the Cornerstone companies
target their merchandise offerings primarily at consumers whose income and
education levels are in the top 15% of the population and who are generally in
the 35 to 54 age bracket. Cornerstone believes that focusing on a single
market segment enables it to understand and serve its customers better and
enhances the benefits that can be derived from sharing customer databases and
the results of various marketing initiatives among the Cornerstone companies.
The market segment targeted by Cornerstone is particularly attractive because
it is expected to increase in size over the next several years and because
Cornerstone believes that the affluence and time-constrained lifestyles of
this group increase the likelihood that they will respond to the convenience
and efficiency offered by home shopping. Cornerstone believes that its
customer demographics contribute significantly to its high average order
value.
Exceptional Customer Service. Each Cornerstone company maintains a customer-
focused approach at all stages of its business which is aimed at building
lifetime customer relationships. Cornerstone devotes significant resources to
ensuring that a substantial majority of in-stock orders are shipped on the day
the order is received; while this practice results in higher costs, the
Company believes that it enhances customer satisfaction and loyalty. Several
Cornerstone companies employ product specialists, who assist customers in
selecting products that meet their particular design or style criteria. The
Cornerstone companies also enhance their customer service through initiatives
such as extensive training of customer service representatives; toll-free
telephone ordering;
32
<PAGE>
and liberal return policies. Cornerstone believes that offering exceptional
customer service encourages repeat purchases by its customers and enhances the
brand identity and reputation of the Cornerstone companies within their target
market.
Synergies and Efficiencies Resulting from Combined Enterprise. Cornerstone's
business structure is designed to enable each Cornerstone company to realize
sales growth, performance benefits and cost savings from the combined
enterprise. Among the benefits enjoyed by Cornerstone companies are the
exchange of customer databases with proprietary purchase histories, the
sharing of "best practices" among Cornerstone companies (such as inventory
management techniques and customer database analyses), and access to the
technology, financial resources and capital-raising ability of Cornerstone.
Cornerstone is in the process of consolidating certain business functions at
the Cornerstone level, including the purchasing of certain goods and services
(such as catalog paper, printing, shipping and telecommunications services),
fulfillment, sourcing and certain other administrative functions, which
provides efficiencies and economies of scale that the individual companies
could not achieve separately. As part of this strategy, Cornerstone plans to
invest between $60 and $65 million in a new operations center, which is
scheduled to open in the summer of 1999. Cornerstone has been successful in
improving the financial results of each Cornerstone company since the time it
was acquired, and Cornerstone expects to realize further improvements as these
initiatives continue.
GROWTH INITIATIVES
Cornerstone's objective is to build the direct marketing industry's leading
family of brands offering high-quality home, leisure and casual apparel
products to affluent and well-educated consumers. Cornerstone's key growth
initiatives are as follows:
Build Existing Catalogs. Cornerstone's primary growth strategy is to build
aggressively the sales and productivity of its existing catalog titles. For
example, the net sales of Frontgate and TravelSmith, which were each acquired
before 1997, increased 51% between the first six months of 1997 and the first
six months of 1998. Cornerstone is focusing on two principal themes in
building its existing catalog titles. First, the Company is striving to
increase the size of each Cornerstone company's customer database (comprised
of both existing customers and prospective customers). Initiatives in support
of this goal include increasing catalog circulation to prospective customers
(using successful mailing lists from other catalogs, subscription lists or
compiled lists), and developing proprietary mailing lists through magazine
advertising and other creative means of identifying likely customers. In 1997
and the first six months of 1998, over 65% of the catalogs circulated by the
Cornerstone companies were mailed to prospective customers. Second,
Cornerstone is committed to increasing the productivity of its customer
database and catalog mailings. To accomplish this objective, Cornerstone is
pursuing initiatives such as increasing the number of editions of certain
catalogs, expanding merchandise offerings by increasing product breadth and
assortment in certain successful categories, increasing the page counts of
certain catalogs, reformatting the creative presentation of certain catalogs
to make it more appealing to customers, and increasing the proportion of
branded products.
Selectively Pursue Strategic Acquisitions. Cornerstone intends to pursue
attractive strategic acquisitions of direct marketing companies that meet its
focused criteria, which include: high-quality merchandise offerings in the
home, leisure and casual apparel markets; an affluent target customer base; a
strong brand identity; exceptional customer service; a talented and
entrepreneurial management team; profitable operations, high average order
value and high net sales per catalog mailed; a track record of growth; and
substantial opportunity for future growth and improved profitability.
Cornerstone may also pursue acquisitions of direct marketing companies that
would be folded into an existing Cornerstone company. Cornerstone believes the
experience gained from the acquisitions it has made to date and its strategy
of allowing the management teams of the acquired companies to retain
significant responsibility make Cornerstone an attractive partner for many
target companies and facilitate the process of integrating acquired companies.
Develop New Titles. The Company may introduce new catalog titles to serve
market niches that it does not currently address. Cornerstone believes that
new titles could capitalize on the brand identity of a Cornerstone company,
Cornerstone's operational infrastructure, the customer databases of the
various Cornerstone companies
33
<PAGE>
and the experience accumulated by Cornerstone management in addressing its
target market. New titles developed by Cornerstone may expand Cornerstone's
offerings in home, leisure and casual apparel products or may serve the
lifestyle interests and leisure activities of Cornerstone's target market
segment. The Company may elect to introduce new titles either as part of an
existing Cornerstone company (which may involve an extension or a spin-off of
an existing catalog) or as a new company within the Cornerstone family of
brands. Examples of titles introduced by Cornerstone companies are Splash and
The Ultimate Grill, offered by Frontgate, and Isabella Bird, introduced by The
Territory Ahead.
Develop Additional Market Opportunities. Cornerstone believes that there are
a number of additional market opportunities available to it. For example,
Cornerstone believes that, due to its strong brand identities and its
expertise in fulfillment, customer service and marketing, it is well
positioned to capitalize on the expected growth in electronic commerce.
Cornerstone is developing a strategic plan for building the Internet business
of each of its companies and is currently making investments to develop this
channel. In addition, Cornerstone believes international markets represent
significant future growth potential for several of the Cornerstone brands, and
is exploring the introduction of certain catalogs in various foreign
countries. Retail stores are another example of an alternative channel that
could promote sales growth for Cornerstone, and Cornerstone may test this
concept further over the next several years.
CORNERSTONE FAMILY OF BRANDS
The Cornerstone family of brands consists of seven acquired companies that
share the following characteristics: high-quality merchandise offerings in the
home, leisure and casual apparel markets; an affluent target customer base; a
strong brand identity; exceptional customer service; a talented and
entrepreneurial management team; and high average order value and high net
sales per catalog mailed. The Company seeks to establish each Cornerstone
brand as the authoritative source for its lifestyle products.
Set forth below is a table summarizing certain key attributes of each
Cornerstone brand.
<TABLE>
<CAPTION>
PRIMARY
COMPANY TITLES OFFERED DATE ACQUIRED MERCHANDISE CATEGORIES
- ----------- ------------------------------- -------------- ------------------------
<S> <C> <C> <C>
Ballard
Designs Ballard Designs August 1997 Home
Frontgate Frontgate September 1995 Home and leisure
The Ultimate Grill
Splash
The Search for the Perfect Gift
Garnet Hill Garnet Hill July 1997 Home and casual apparel
Smith+Noble Windoware August 1998 Home
Window Elements
Windoware Sourcebook
The
Territory The Territory Ahead March 1997 Casual apparel
Ahead Isabella Bird
TravelSmith TravelSmith July 1996* Casual apparel
Whispering
Pines Whispering Pines September 1997 Home, leisure and casual
apparel
</TABLE>
- --------
* represents date on which Cornerstone acquired a majority interest.
34
<PAGE>
Ballard Designs
Ballard Designs provides home decorating solutions for aspiring "do-it-
yourself" interior designers. The company offers interior furnishings,
architectural accents and decorative accessories, with a focus on products
that are "updated traditional," frequently with a European flair. Merchandise
is often developed based on an original antique or architectural designs, and
many of the products offered by Ballard Designs are not available from other
catalogs. Because many of the company's products are designed with a classic,
enduring theme, the company has a core of basic products that are consistently
strong sellers. Basic products are often enhanced by updating fabrics, colors
and accessories. The Ballard Designs brand is positioned to provide high-
quality and originally designed merchandise at more reasonable prices than
exclusive original dealers.
Ballard Designs' catalogs present the company's merchandise in attractive
room settings that enhance its appeal and help build Ballard Designs' brand
identity. The company provides "swatches" of materials to assist customers in
product selection and offers a customer advice program to maximize customer
satisfaction. Ballard Designs targets customers who are homeowners between the
age of 35 and 54 with a high income and education level. The company believes
its customers are attracted to Ballard Designs by its fresh decorating ideas,
its selection of hard-to-find products and its exceptional customer service.
The Ballard Designs management team is led by Helen Ballard Weeks, Chief
Executive Officer and founder, and Stewart W. Tarkington, President. Ms. Weeks
has been Chief Executive Officer of Ballard Designs for 16 years, and Mr.
Tarkington was an executive at Avon Products and Spiegel before joining
Ballard Designs in 1994. Prior industry experience of other top Ballard
Designs executives includes Neiman Marcus Direct, Coldwater Creek, Spiegel, DM
Management and Talbots.
Ballard Designs was founded in 1982. Cornerstone acquired all of the
outstanding capital stock of Ballard Designs in August 1997. Ballard Designs
is located in Atlanta, Georgia. Its toll-free number for product orders is
(800) 367-2775 and its World-Wide Web address is http://www.ballard-
designs.com.
Frontgate
Frontgate offers a wide selection of functional products focused on
enhancing the quality of life at home. The Frontgate catalog is the company's
primary catalog. In addition, the company mails the following three speciality
titles on a seasonal basis: The Ultimate Grill (which offers a full range of
stainless steel grills and other outdoor cooking equipment and accessories),
Splash (which is targeted at owners of in-ground swimming pools or waterfront
homes) and The Search for the Perfect Gift (which offers tasteful, high-
quality gifts). Frontgate focuses on unique products for both the indoor and
outdoor home environment. Major product categories include outdoor furnishings
and accessories, barbecue grills and outdoor cooking equipment, pool products,
bed and bath accessories, indoor cooking and entertainment products,
electronics, and storage and organization products. Many of Frontgate's
products (such as its "hotel quality" showerheads) are difficult to find
through traditional retail channels. Other products, such as stainless steel
outdoor grills, are designed by the company and available exclusively in
Frontgate's catalogs. The company strives to offer the highest quality
merchandise while still providing good value.
Frontgate's catalogs present merchandise in real-life settings and are
designed to appeal to both men and women, particularly home owners between the
age of 35 and 54 with a high income and education level. Due to its
sophisticated customer base and the high-end nature of its product offerings,
Frontgate since its inception has placed an unusually high degree of emphasis
on exceptional customer service and satisfaction.
The Frontgate management team is led by John A. O'Steen, Chairman of the
Board, and Paul D. Tarvin, President and Chief Executive Officer, who co-
founded Frontgate. Mr. O'Steen's prior industry experience includes 17 years
at Procter & Gamble and five years as President and Chief Executive Officer of
Cincinnati Microwave. Mr. Tarvin was previously an executive at Sportsman's
Market, where he spent 12 years. Mr. O'Steen and Mr. Tarvin also serve as
executive officers of Cornerstone. Prior experience of other top Frontgate
executives includes Bear Creek Direct Marketing, Laura Ashley and Saks Fifth
Avenue.
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Frontgate was founded in 1991. Cornerstone acquired all of the outstanding
capital stock of Frontgate in September 1995. Frontgate is located in Lebanon,
Ohio. Its toll-free number for product orders is (800) 626-6488 and its World-
Wide Web address is http://www.frontgate.com.
Garnet Hill
Garnet Hill offers a highly-edited selection of home and casual apparel
products, all of which convey a lifestyle image emphasizing taste, classic
looks and stylish flair. The company offers high-quality, natural-fiber
bedding, bath products and other fine home products, as well as sleepwear,
women's ready-to-wear clothing and children's clothing. Garnet Hill began
operations as an importer of English flannel sheets that were not commercially
available in the United States, and has expanded its business to focus on
other natural-fiber products. The company is committed to supplying hard-to-
find products that help define and differentiate its customers' lifestyles,
from the look of their bedrooms to the clothes they and their children wear.
Most of the company's product offerings are sold under the Garnet Hill brand
name, are designed by the company and are not available elsewhere. The company
believes that its customers view Garnet Hill as a design resource committed to
fresh interpretations, high-quality fabrics, and a viewpoint that provides new
twists on the familiar in home products and women's and children's apparel.
Garnet Hill enhances its brand identity with its sophisticated, high-quality
catalogs characterized by distinctive cover designs, excellent photography,
high-quality paper and fresh, open layouts. The Garnet Hill catalogs are
designed to appeal to female homeowners in the 35 to 54 age group,
particularly those with children, with a high household income and home value.
A typical Garnet Hill customer has tastes that are traditional and classic,
yet sophisticated, and is more attracted to classic merchandise than the
latest fashion trends.
The Garnet Hill management team is led by James B. Hamblin, President and
Chief Executive Officer, and Bradford C. Williams, Executive Vice President
and Chief Operating Officer. Mr. Hamblin and Mr. Williams have a combined 20
years experience at Garnet Hill. The backgrounds of the other top executives
at Garnet Hill include experience at L.L. Bean, Lands' End and Esprit.
Garnet Hill was founded in 1976. Cornerstone acquired all of the outstanding
capital stock of Garnet Hill in July 1997. Garnet Hill is located in
Franconia, New Hampshire. Its toll-free number for product orders is (800)
622-6216.
Smith+Noble
Smith+Noble is a leading source for custom-made window treatments for the
home. The company offers its merchandise through three catalogs: Windoware
(the company's flagship catalog), Window Elements (which offers a simplified
collection of custom window treatments) and Windoware Sourcebook (which offers
a broader selection of products to a more select group of current and
potential customers). Smith+Noble offers a full range of hard and soft window
treatments, including horizontal blinds, pleated shades, fabric treatments and
an assortment of other window products. Most of the company's products are
designed by Smith+Noble's product development team, are sold under the
Smith+Noble name and are available only through the company. Smith+Noble
believes its products are sold at prices which are generally less than prices
of comparable merchandise available in stores. Through its direct
relationships with contract manufacturers, Smith+Noble has products made to
order and shipped directly to the customer, generally within one to six days
after the order is accepted, which enables Smith+Noble to avoid stocking and
distributing inventory.
The company's catalogs present a broad selection of window treatments in a
convenient and easy-to-read format that simplifies the product selection
process. Smith+Noble's catalogs also provide customers with product
information and expert advice. The company's customer service representatives
receive extensive training and are able to guide customers through the product
selection, ordering and installation process. Customer service representatives
also provide customers with decorating ideas and fashion advice, which further
enhances Smith+Noble's reputation as a leading authority on window treatments.
Smith+Noble targets upscale customers with high income and education levels.
The company's target customer is a college-educated home owner with an annual
household income in excess of $60,000.
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The Smith+Noble management team is led by Fred E. Kamgar, President and
Chief Executive Officer and the founder of the company, and Robert M.
Perkowitz, Chief Operating Officer. Prior to founding Smith+Noble, Mr. Kamgar
founded and operated Blinds Plus, a chain of window treatment retail stores.
Mr. Perkowitz previously served in various executive positions, including
chief executive officer, of home furnishings companies such as Home Fashions,
Joanna Window Decor and Artmaster Studios. Prior experience of other top
Smith+Noble executives includes Neiman Marcus Direct, Knight's Ltd. and Ross-
Simons of Warwick.
Smith+Noble was founded in 1993. Cornerstone acquired all of the outstanding
equity interest in Smith+Noble in August 1998. Smith+Noble is located in
Corona, California. Its toll-free number for product information is (800) 248-
8888 and its World-Wide Web address is http://www.smithandnoble.com.
The Territory Ahead
The Territory Ahead offers unique, high-quality men's and women's clothing,
accessories and other products distinguished by a craftsman-like approach to
material and detail and by a practical, rugged American styling. The company's
primary catalog is The Territory Ahead. In the spring of 1998, the company
introduced and tested the Isabella Bird catalog, which offers women's apparel
that is somewhat dressier than the offerings of The Territory Ahead. The
company's clothing is designed by The Territory Ahead sold under The Territory
Ahead brand name and available only from the company. Products are designed
using attractive fabric trims that are incorporated into classic, comfortable
styles. The merchandise is intended to have a distinctive casual style, which
combines elegant with rugged, dressy with casual, and classic with trendy.
Weathered finishes and dynamic colors are hallmarks of The Territory Ahead
products.
This weathered look extends to the company's catalogs, where products are
depicted next to striking outdoor photography accompanied by colorful
narration that suggests an adventuresome and active outdoor lifestyle. These
attractive outdoor settings are also designed to provide a more inviting
environment for men and women to browse for high-quality clothing. Like all
Cornerstone companies, The Territory Ahead targets upscale customers with high
income and education levels. More than half of the company's customers are
women. The Territory Ahead believes that customers are drawn to the company's
catalogs by the outdoor scenery, which evokes a sense of adventure and
freedom.
The Territory Ahead management team is led by Bruce A.L. Willard, the
President, Chief Executive Officer and founder of The Territory Ahead. Mr.
Willard spent eight years at L.L. Bean and two years at Esprit before founding
The Territory Ahead. Other top executives of The Territory Ahead have
backgrounds at companies such as Lands' End, Montgomery Ward and The Millard
Group.
The Territory Ahead was founded in 1988. Cornerstone acquired 80% of the
outstanding capital stock of The Territory Ahead in March 1997; the remaining
20% is owned by Mr. Willard. See "Certain Transactions--Contractual
Arrangements with Other Equityholders of Cornerstone Companies--The Territory
Ahead" for a description of certain rights and obligations of Mr. Willard with
respect to his stock ownership of The Territory Ahead. The Territory Ahead is
located in Santa Barbara, California. Its toll-free number for product orders
is (800) 882-4323 and its World-Wide Web address is
http://www.territoryahead.com.
TravelSmith
TravelSmith is a leading source for its customers' varied travel needs by
offering clothing and accessories designed to make travel more comfortable and
convenient. The concept for the company resulted from the world-wide travels
of the company's founder, Charles L. Slaughter, who recognized the need for
more durable and convenient travel products and who teamed with industry
veteran Scott R. Sklar to found the company. Most merchandise is sold under
the TravelSmith brand name and is specially designed by and available only
from the company. All merchandise serves a travel-related function. The
company designs its products to be strong enough to be completely reliable yet
light enough to be conveniently packable. Apparel is wrinkle- resistant,
washable and suitable for multiple climates. Much of the company's merchandise
mix emphasizes basic functionality and a classic look that makes such
merchandise successful year after year.
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TravelSmith emphasizes its travel theme by displaying products alongside
pictures of adventurous travel destinations, thereby enhancing the appeal of
the merchandise, and by offering practical travel advice. As an added
convenience for its customers, the TravelSmith call center is operated by
trained outfitters and the company offers a free outfitting guide to assist
customers in packing for their trips. TravelSmith has marketing alliances with
a number of adventure travel companies and tour operators. The company targets
both adventure and leisure travelers, particularly in the 35 to 64 age group.
The TravelSmith management team is led by Charles L. Slaughter and Scott R.
Sklar, who serve as Co-Presidents. In addition to extensive international
travel, Mr. Slaughter's prior experience includes management consulting in the
areas of finance, corporate strategy and marketing, and international economic
development. Mr. Sklar's prior experience incudes five years in product
management at L.L. Bean and two years at Smith & Hawken, where he was Vice
President of Merchandising. The backgrounds of the other top executives at
TravelSmith include experience at L.L. Bean, Hanover Direct, Smith & Hawken,
Old Navy and Macy's West.
TravelSmith was founded in 1991. Cornerstone acquired (through a predecessor
company) a minority interest in TravelSmith in July 1993 and in July 1996
increased its ownership position to approximately 61% of the outstanding
common stock (after giving effect to the conversion of all outstanding
convertible preferred stock); the balance is held by Messrs. Slaughter, Sklar
and certain other persons. See "Certain Transactions--Contractual Arrangements
with Other Equityholders of Cornerstone Companies--TravelSmith" for a
description of certain rights and obligations of the other TravelSmith
stockholders with respect to their stock ownership of TravelSmith. TravelSmith
is located in Novato, California. Its toll-free number for product orders is
(800) 950- 1600 and its World-Wide Web address is http://www.travelsmith.com.
Whispering Pines
Whispering Pines, which is a smaller and earlier stage business than the
other Cornerstone companies, offers a selection of high-quality, rustic home
products, casual apparel and accessories targeted at upscale consumers, many
of whom own second homes. The company's product offerings are designed to help
customers achieve the comfortable, nostalgic feeling of family retreats and a
rustic, simpler life. Whispering Pines' merchandise is nostalgic, fun-loving
and designed to withstand the trials of cabin life. A portion of the company's
products are designed by or available exclusively from Whispering Pines. The
company's merchandise selection is consistent with its lifestyle theme and
provides Whispering Pines with a distinctive merchandise assortment and unique
brand identity.
The layout and merchandise presentation of Whispering Pines catalogs
reinforce its brand positioning. Products are presented alongside authentic
photographs of cabin life, such as children carrying fishing poles, playing
board games around a wooden table or jumping into a lake for a swim. The use
of matte paper and subdued lighting adds to the casual, nostalgic feel of the
catalog. While the home products and apparel are designed to appeal to both
men and women, the company finds that the "family feel" of its catalogs is
particularly appealing to women.
The Whispering Pines management team is led by Susan Kelly Panian, President
and Chief Executive Officer, and Margaret Kelly Murray, General Merchandising
Manager, who co-founded the Company.
Whispering Pines was founded (through a predecessor entity) in 1993.
Cornerstone acquired a 51% interest in Whispering Pines in September 1997, at
which time the company was reorganized as a limited liability company; the 49%
interest in Whispering Pines is held by a corporation owned by Ms. Panian, Ms.
Kelly and another executive of Whispering Pines. See "Certain Transactions--
Contractual Arrangements with Other Equityholders of Cornerstone Companies--
Whispering Pines" for a description of Cornerstone's right to increase its
equity interest in Whispering Pines and certain rights and obligations of the
minority member with respect to its interest in Whispering Pines. Whispering
Pines is located in Fairfield, Connecticut. Its toll-free number for product
orders is (800) 836-4662 and its World-Wide Web address is
http://www.whispering-pines.com.
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MERCHANDISING
Each Cornerstone company is responsible for developing and implementing the
merchandising strategy for its catalogs. All Cornerstone companies offer high-
quality home, leisure and/or casual apparel products and emphasize a strong
brand image. The merchandising objective of each Cornerstone brand is to
position itself as the leading authority on the styles and assortment of
merchandise offered within its market segment. Cornerstone believes that the
brand identities of the Cornerstone companies are among the most recognizable
and highly regarded in the direct marketing industry. While the product
offerings and styles of each Cornerstone brand are different, the following
strategies underlie the merchandising programs of all Cornerstone brands:
. offering a high level of branded products (i.e., sold under that
Cornerstone company's brand name), many of which are designed by that
company and not available from other catalogs. Branded offerings are
central to Cornerstone's merchandise strategy both because they help
reinforce the brand identity of each catalog title and because they
generally offer higher profit margins than other merchandise.
. developing a product assortment that is consistently styled and carefully
edited, yet exceptional in its breadth and depth. Cornerstone believes that
such a merchandise assortment is critical in establishing each Cornerstone
brand as the authoritative source within its merchandise categories.
. working directly with vendors to design and develop unique products for the
catalog. For example, Frontgate approached the Viking Range Company with
the idea of jointly developing a stainless steel outdoor grill; this grill
is not available through other catalogs and has been a very successful item
for the company.
. using creative and appealing photographs, high-grade catalog paper and
high-quality printing to create a vibrant, distinctive catalog presentation
that conveys an overall image of the catalog title and the merchandise
offered by it.
. offering products that provide its upscale target customers the best
quality available within that product category. These products may be more
expensive than lesser quality alternatives, but Cornerstone believes its
direct sourcing and other operational efficiencies enable it to offer these
products at prices that represent good value to the customer.
Each Cornerstone company has its own team of experienced merchants that
develops and selects products for its catalogs. Merchandising decisions are
made based upon management's extensive industry knowledge, attending industry
trade shows, visiting vendors and monitoring the merchandise offerings of
competitive direct marketers and traditional retailers. Merchants also have
available to them detailed sales and other data on the merchandise that
appeared in prior catalog editions. The strategy of Cornerstone is to
establish a series of successful "core" products which are repeated in
subsequent editions of a catalog (often in additional colors or with modest
variations) and to complement those products with an assortment of new
merchandise, consistent with that catalog's brand identity, that adds
freshness to the catalog.
CREATIVE PRESENTATION
Cornerstone believes that presenting merchandise in an attractive and
creative catalog setting is critical to reinforcing the brand identity of its
catalog titles and to stimulating interest in its products. Each Cornerstone
company is responsible for designing and producing its own catalogs. The
Cornerstone companies use on-location photography and real-life settings to
present merchandise in an appealing manner and to enhance the life-style theme
of the catalog. Cornerstone strives to balance the dual goals of maximizing
productivity by including a high concentration of merchandise per page, and
displaying merchandise in an attractive and tasteful setting. Cornerstone
catalogs typically contain substantial editorial content, which is targeted at
Cornerstone's upscale customer base and describes the merchandise and depicts
the situations in which it may be used. The Cornerstone companies view
editorial content as critical to developing the personality and lifestyle
theme of the particular brand and title. Catalogs are printed on high-quality
paper to enhance the presentation of the merchandise and the overall image of
the catalog.
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The Cornerstone companies devote substantial resources to the design and
production of their catalogs. Much of this process is handled in-house to
enable the company's creative team to control the process as much as possible.
The merchandising and creative teams design the layout of each catalog and the
presentation of merchandise within the catalog. Photography is done under the
supervision of the company's merchandising and creative teams. Production of
the catalog and some of the color separation is handled by an in-house staff
using sophisticated desktop publishing and other computer systems. Cornerstone
assists the individual Cornerstone companies in the catalog production process
by, in many instances, purchasing catalog paper and contracting for printing
services on a consolidated basis, which typically results in cost savings for
the Cornerstone companies.
CUSTOMER DATABASE MANAGEMENT AND MARKETING
Cornerstone Strategy
Cornerstone's customer database management and marketing strategy seeks to
accomplish three primary goals: generating repeat business from those
customers who have purchased goods from a Cornerstone catalog in the past;
generating sales by a particular Cornerstone company to existing customers of
another Cornerstone company; and attracting new customers to the Cornerstone
family of brands. Cornerstone views each customer as a long-term asset and
devotes significant resources to servicing that individual's shopping needs
and generating repeat business over an extended period of time. Cornerstone's
strategy of acquiring only companies which target the same general demographic
market makes its customer database management and marketing efforts
significantly more efficient and productive.
Customer Databases
Cornerstone considers its customer database to be one of its principal
assets. The Company believes that its database of customers who have purchased
products from one of the Cornerstone companies is one of the largest among
direct marketing companies addressing Cornerstone's affluent target market
segment. In addition, Cornerstone has developed an extensive file of
prospective customers that should enable the Cornerstone companies to continue
to expand their active customer base.
As of August 1, 1998, the combined customer database of the Cornerstone
companies included the names of approximately 2,900,000 customers who had made
purchases within the previous three years and approximately 1,575,000
customers who have purchased goods within the previous 12 months. The number
of one-year buyers as of August 1, 1998 was approximately 24% greater than the
number of one-year buyers as of August 2, 1997. All buyer counts represent the
combined number of buyers at each of the Cornerstone companies, without
deducting the names of persons who appear on the customer lists of more than
one Cornerstone company. Accordingly, the number of individual names in the
Cornerstone database is less than the numbers set forth above.
Database Management Techniques
Cornerstone focuses significant resources on identifying and acquiring new
customers that fit Cornerstone's target customer profile. The best sources for
this prospecting activity are the customer databases of other Cornerstone
companies, all of which target the same customer segment. These customer
databases include not only customer names but also purchasing data (such as
recency, frequency and monetary value of purchases and items purchased) that
may not be available from rented lists. The Cornerstone companies use a
variety of techniques for acquiring mailing lists to supplement the customer
databases available within Cornerstone. Examples of some of the more
traditional list procurement techniques include rentals of mailing lists from
catalog companies addressing similar markets, rentals of compiled lists from
database companies such as Abacus, and rentals of subscription lists from
magazines. Several Cornerstone companies run advertisements in magazines
inviting readers to request a catalog, and persons who respond are then added
to the company's prospect list. The Cornerstone companies also use creative
strategies designed to identify individuals with a greater likelihood of
purchasing from a particular catalog. For example, TravelSmith has alliances
with a number of adventure travel companies and tour operators which provide
it with lists of persons who have recently booked trips, and Frontgate mails
its Splash catalog to lists of recent purchasers of swimming pools which it
obtains from pool companies.
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Each Cornerstone company selects the names of individuals who will receive a
particular catalog mailing by analyzing available purchasing data from both
its existing customer database and acquired mailing lists using sophisticated
computer modeling techniques. The Cornerstone companies typically mail several
different versions of a particular catalog edition, and determine which
persons receive which version based on prior purchasing history and other
data. Cornerstone believes that while concentrating catalog mailings on active
customers rather than prospective customers would result in higher response
rates and more profitable operations, the growth of its business is dependent
on a significant level of prospecting for new customers. In determining the
optimal level of prospecting for new customers, the Cornerstone companies
analyze detailed proprietary data relating to the average cost of generating a
new customer and the average profit realized from each new customer over a
period of years. In 1997 and the first two quarters of 1998, over 65% of the
catalogs circulated by the Cornerstone companies were mailed to prospective
customers.
Currently, most customer database management and marketing activities are
performed separately by the Cornerstone companies. Although the Cornerstone
companies share information such as customer names and data and the results of
various marketing initiatives, Cornerstone has not yet taken full advantage of
the synergies and efficiencies that it believes will result from more
centralized customer database management, such as regression modeling that
utilizes the customer names and purchasing data from all of the Cornerstone
companies.
In connection with the opening of its new operations center, Cornerstone
intends to combine the customer databases of all of the Cornerstone companies
into an integrated customer database that will be stored and managed at the
operations center. The Company currently estimates that this project will be
completed by the beginning of 2000. Cornerstone is currently developing a new
database management system which it will use to perform customer database
management functions on a centralized basis for all Cornerstone companies.
Each Cornerstone company will retain responsibility for decisions relating to
the size and composition of mailing lists and the factors to be considered in
sorting and analyzing available data. Cornerstone believes that, when
implemented, this centralization of database management activities will enable
Cornerstone to take full advantage of each Cornerstone company's customer
information and marketing data and to achieve efficiencies and cost savings in
list maintenance and database analysis, while also permitting the individual
Cornerstone companies to retain control over strategic marketing and
circulation decisions.
Each Cornerstone company currently provides its own customer lists to other
companies, including competitors, in exchange for either rental income or
mailing lists of such other companies. In addition to serving as a source of
revenue, Cornerstone believes that this practice is necessary to ensure that
Cornerstone will have access to rental lists from others in the industry.
CORNERSTONE OPERATIONS CENTER
Cornerstone believes that exceptional customer service at all stages of its
operations is a critical element of its strategy of developing strong brand
identities and growing its customer base. The Company is committed to making
the investments and expenditures necessary to ensure that its goal of high-
quality customer service is achieved throughout its operations.
As part of this commitment, the Company is in the process of building an
800,000 square foot operations center outside of Cincinnati, Ohio. This
facility will house the fulfillment functions of all of the Cornerstone
companies, the order-processing and customer service functions of certain but
not all of the Cornerstone companies, Cornerstone's new customer database
management system, the headquarters facility for Frontgate, and a retail
outlet facility for a number of Cornerstone brands. Cornerstone's current
estimate of the total cost of the operations center, including land,
construction and equipment, is between $60 and $65 million. Cornerstone has
completed the design of the facility (with the assistance of an independent
consultant), has purchased the land, and has commenced construction. The
Company currently expects that the new facility will be operational in the
summer of 1999.
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Customer Service
Each Cornerstone company is responsible for accepting and processing
merchandise orders, which are generally handled by a customer service center
located at or near the company's headquarters. Merchandise orders are accepted
364 days a year (and, in the case of most Cornerstone companies, 24 hours a
day), via a toll- free telephone number, telecopy (which is the sole means by
which Smith+Noble accepts orders) and, in the case of certain Cornerstone
companies, the Internet. Cornerstone customer service representatives are
knowledgeable about merchandise specifications, have access to merchandise
samples, and use computer systems that provides them with up-to-date
information about the customer, his or her purchasing history, merchandise
availability and shipment dates. Several Cornerstone companies use product
specialists to assist customers on matters such as home decorating, outdoor
cooking, fabric care, and packing for specific travel destinations.
Cornerstone intends to relocate the order-processing functions of several,
but not all, of the Cornerstone companies to the new operations center after
its opening in 1999. In addition, back-up order-processing for all the
Cornerstone companies will be located at the operations center.
Most Cornerstone companies maintain a 24-hour, toll-free customer service
number (which in most cases is separate from the telephone number for
merchandise orders) intended to handle inquiries relating to matters such as
scheduled delivery dates, order status and product returns. Cornerstone
expects that the customer service operations of certain of the Cornerstone
companies will be transferred to the new operations center, while others will
maintain this function at their headquarters.
Each Cornerstone company (other than Smith+Noble, whose products are made to
order) permits, with limited exceptions, merchandise returns, for refund or
exchange, if a customer is not satisfied with a purchase for any reason.
Returns are processed using the same high customer service standards that
Cornerstone applies throughout its operations. The Cornerstone companies
closely monitor merchandise returns to determine whether any product quality
issues exist. Returned merchandise is inspected and, unless damaged or worn,
is recycled into inventory.
Fulfillment
Currently, fulfillment operations for Frontgate and TravelSmith are handled
at a 110,000 square foot facility owned by Frontgate and two leased facilities
totalling 124,000 square feet, all of which are located in the greater
Cincinnati, Ohio area. Each of the other Cornerstone companies leases or owns
its own distribution center or centers and handles fulfillment operations
itself, with the exception of Whispering Pines, which uses an independent
contractor, and Smith+Noble, which relies on direct delivery by its contract
manufacturers. Each fulfillment center receives orders through electronic
links to the company's order-processing operations. Cornerstone strives to
maintain high in-stock rates so that it is able to immediately fulfill the
substantial majority of orders. While many direct marketing companies consider
merchandise shipped within 24 hours of receipt of the order as "same day"
shipment, Cornerstone considers only products shipped on the same day as the
order is received to be "same day" shipment, and strives for a high same-day
shipment rate. Although this results in higher fulfillment costs (as a result
of reduced ability to pick and fill orders for similar products on a "batch"
basis), Cornerstone believes this practice enhances customer satisfaction and
contributes to a higher order frequency and repeat business from its
customers. Merchandise is generally delivered two to five business days after
shipping, through the U.S. Postal Service, UPS and other common carriers,
although overnight or expedited delivery is available for an additional
charge. Smith+Noble, which has products made to order and shipped directly to
the customer by the manufacturer, is generally able to ship products within
one to six days after an order is accepted.
Cornerstone is in the process of building a new operations center in the
greater Cincinnati, Ohio area, which is intended to handle the fulfillment
operations of all of the Cornerstone companies. Approximately 675,000 square
feet of the 800,000 square foot "footprint" will be devoted to fulfillment
operations, and a 150,000 square foot mezzanine level will also be used for
fulfillment. The Company currently expects that the new facility will be
operational in the summer of 1999, and that the fulfillment operations of the
Cornerstone companies (other
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than Smith+Noble) will be transitioned to the facility during the balance of
1999 and 2000. This gradual transition, and the continued operation of certain
existing fulfillment centers on an interim basis, should mitigate the risk of
problems in transitioning to the new operations center. The Company estimates
that, if it takes advantage of certain expansion opportunities, the operations
center will have sufficient capacity to handle order fulfillment for up to
approximately $1.2 billion in annual net sales.
Cornerstone expects to realize a number of operational improvements and
efficiencies once the new operations center is fully functional. The facility
is located near the center of the country's population distribution and close
to several major interstate highways, which will result in cost savings on
both out-bound and in-bound merchandise shipments. For example, more than 50%
of the U.S. population can be reached within two days using UPS ground
shipment, which is significantly less expensive than air shipment. Cornerstone
also expects to realize cost savings from the design of the fulfillment
facility; the height of a portion of the facility (65 feet) is greater than a
typical distribution center and therefore enables a smaller "footprint" and
less land. In addition, the semi-automated equipment and conveyor systems and
consolidation of the warehouse management computer systems should result in
more productive and efficient operations.
The Company believes that the fulfillment centers currently used by the
Cornerstone companies will be sufficient to meet their needs until their
fulfillment operations are moved to the new operations center. After the
relocation of such fulfillment operations, Cornerstone intends to either sell
or sublease the fulfillment centers currently used by the Cornerstone
companies.
ADDITIONAL MARKET OPPORTUNITIES
Cornerstone believes that its growth can be facilitated by a number of
additional market opportunities. For example, Cornerstone believes that its
strong brand identities and its expertise in fulfillment, customer service and
marketing will position it well for the expected growth in electronic
commerce. Cornerstone is developing a strategic plan for building the Internet
business of each of its companies and is currently making investments to
develop this channel.
Cornerstone currently generates very little sales outside of the United
States. Garnet Hill has been mailing catalogs in Japan since 1995, and
TravelSmith plans to test a catalog in England later in 1998. Cornerstone
believes international markets represent significant future growth potential
for several of the Cornerstone brands.
Retail stores are another example of an alternative distribution channel
that could promote sales growth for Cornerstone. The Cornerstone companies
currently use retail stores primarily as an outlet for excess inventory.
However, The Territory Ahead operates a full-price retail store in Santa
Barbara, California, and Frontgate operates a store through which both full-
price and overstock merchandise is sold. The Company believes that a limited
number of flagship retail stores may provide an opportunity both to generate
additional sales and to promote the brand identity of the Cornerstone
companies. Cornerstone intends to test this concept further over the next
several years.
PURCHASING AND INVENTORY MANAGEMENT
The Company believes that a majority of the merchandise purchased by the
Cornerstone companies is sourced from foreign suppliers, either directly by
Cornerstone or by domestic vendors who resell the goods to Cornerstone. While
certain Cornerstone companies rely very little on foreign goods, other
Cornerstone companies purchase (directly or indirectly) substantially all of
their merchandise from foreign suppliers. Cornerstone believes that, on an
aggregate basis, the percentage of merchandise that it purchases (directly or
indirectly) from foreign vendors is likely to increase in the future. In 1997
the Cornerstone companies purchased goods from over 2,000 different vendors,
no one of which accounted for more than 4% of the aggregate purchases by
Cornerstone during that year. The Cornerstone companies have few exclusive or
long-term contracts with any vendors, and typically purchase merchandise on a
purchase order basis. Certain vendors are especially important to the
Cornerstone companies and, in particular, Smith+Noble purchases a majority of
its products from a single vendor. Each Cornerstone company strives to develop
long-term and close working relationships with its own vendors, which
Cornerstone believes increases the quality and selection of
43
<PAGE>
merchandise available to it and enables it to develop products which are not
readily available from other sources. Cornerstone believes that as it begins
to purchase certain goods on a consolidated basis on behalf of several
Cornerstone companies, it will obtain more favorable pricing through volume
purchases and an increasing opportunity to deal directly with manufacturers.
The Cornerstone companies use sophisticated inventory management systems to
maintain optimal in-stock positions. While high in-stock rates have a positive
impact on sales and customer satisfaction, they may also result in excess
inventory which must be sold at a markdown. In striving to balance these two
considerations, Cornerstone's commitment to customer service typically results
in more emphasis being placed on the ability to immediately fulfill orders
than on minimizing the risk of excess inventory and Cornerstone uses inventory
management techniques to help reduce the risk of overstocks. Merchandise
purchases are planned based upon historical sales rates, internal sales
forecasts and manufacturing and delivery lead times. Within two to three weeks
after the mailing of a catalog, the company can update sales forecasts based
on response to the catalog and adjust additional inventory purchases
accordingly. Excess inventory is disposed of primarily through sales catalogs,
sales inserts in both catalogs and outgoing packages, and its outlet stores.
The Cornerstone companies generally offer sales prices only to dispose of
excess inventory, and not as a promotional strategy. Cost recovery efforts for
excess inventory are continually monitored, and balance sheet reserves are
adjusted accordingly. Because only a small portion of the apparel offerings of
the Cornerstone companies is considered "fashion" apparel, Cornerstone has
less risk than many companies of inventory over-stocks due to changing fashion
trends. However, the Company's use of branded merchandise requires it to incur
costs and risks relating to the design and purchase of its products, including
longer lead times for orders and higher initial purchase commitments. In
addition, the use of branded merchandise limits the Company's ability to
return unsold products to vendors, which may result in higher markdowns in
order to sell excess inventory.
MANAGEMENT INFORMATION SYSTEMS
Cornerstone uses management information systems to support virtually all
segments of its business, including merchandising, customer database
management and marketing, order-processing, fulfillment, inventory management,
customer service and financial reporting. The Company believes that the
ability to efficiently access and analyze information about its business,
products and customers can improve performance and customer service and can
also result in cost savings.
Each Cornerstone company utilizes a "front-end" system that automates and
manages business functions such as order-taking and order-processing,
inventory management and financial reporting. The front-end system of each
Cornerstone company (other than Smith+Noble, whose products are made to order
and delivered directly by the manufacturer to the customer) is linked with
inventory receipts and provides real-time information on product availability.
This system also facilitates the updating of the customer database to reflect
purchase transactions. There are four different commercially available front-
end systems currently in use by the Cornerstone companies. Cornerstone has
completed an evaluation of these systems, and has selected one system as best
suited to manage Cornerstone's business and accommodate its growth.
Cornerstone plans to implement that system over the next several years at each
Cornerstone company (other than Smith+Noble) not currently using it.
Cornerstone believes the front-end systems currently in use by the Cornerstone
companies will be sufficient to meet their needs until the new system is
implemented.
The Company plans to introduce a commercially available warehouse management
system at the new operations center which will be used for managing and
automating its fulfillment operations. This system will operate on an IBM
AS/400. An interface between the new warehouse management system and the
front-end system on which Cornerstone will standardize is commercially
available.
As described above under "--Customer Database Management and Marketing,"
Cornerstone intends to implement a new customer database management system at
the operations center and to consolidate the storage and analysis of its
customer data at this facility.
44
<PAGE>
COMPETITION
The markets for the merchandise offered by the Cornerstone companies are
highly competitive. Cornerstone believes that, because over 90% of consumer
goods are sold in retail stores, its principal sources of competition are
traditional department stores, such as Neiman Marcus, Saks Fifth Avenue,
Nordstrom and Bloomingdale's, and speciality retailers, such as The Gap,
Banana Republic and Pottery Barn. The Cornerstone companies also compete with
a number of other direct marketers, such as Lands' End, L.L. Bean, Williams-
Sonoma, Neiman Marcus Direct and Coldwater Creek. In addition, the Company
believes that the increased popularity of catalog shopping and the success of
many direct marketing companies is encouraging a number of traditional
retailers, such as The Gap, Nordstrom, Macy's and Dayton Hudson, to enter the
direct marketing business.
The Company believes that the Cornerstone companies compete primarily on the
basis of the distinctiveness and quality of their merchandise, product
selection and style, brand name recognition, price and customer service. Many
of the present and potential competitors of the Cornerstone companies are
larger and have substantially greater financial, marketing and other resources
than Cornerstone.
REGULATORY MATTERS
The Cornerstone companies generally collect sales taxes only on sales to
residents of the state in which the company is headquartered, where orders are
fulfilled or where one of the companies has a retail outlet. Many states have
attempted to require that out-of-state direct marketers collect sales and use
taxes on the sale of merchandise shipped to its residents. In 1992, the United
States Supreme Court ruled that a state's imposition of use tax collection
obligations on an out-of-state mail order company, whose only contacts with
the state were the distribution of catalogs and other advertising materials
through the mail and subsequent delivery of purchase goods by parcel post and
interstate carriers, was unconstitutional, but stated that Congress could
enact legislation authorizing states to impose such obligations. However, in
November 1995, the United States Supreme Court let stand a decision of New
York's highest state court requiring an out-of-state catalog company, whose
reported contact with New York included a limited number of visits by sales
employees, to collect use tax (including a retroactive assessment, plus
interest) on its mail order sales in New York. If Congress enacts legislation
permitting states to impose sales or use tax obligations on out-of-state
catalog companies or if the Cornerstone companies are otherwise required to
collect additional sales or use taxes, such obligations would make it more
expensive to purchase that company's products and would increase Cornerstone's
administrative costs and therefore could have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
although Cornerstone believes it has complied with all applicable tax laws,
there can be no assurance that state tax authorities will not choose to
conduct a nexus audit of the Company, which could give rise to a retroactive
assessment for tax liabilities. State sales tax laws typically provide for a
lengthy statute of limitations, and if the Company were retroactively assessed
for taxes, such assessment could have a material adverse effect on the
Company's business, operating results and financial condition.
Cornerstone's business is subject to a number of governmental regulations,
including the Mail or Telephone Order Merchandise Rule and related regulations
promulgated by the Federal Trade Commission (which prohibit unfair methods of
competition and unfair or deceptive acts or practices in connection with mail
and telephone order sales and require sellers of mail and telephone order
merchandise to conform to certain rules of conduct with respect to shipping
dates and shipping delays) and regulations promulgated by the U.S. Postal
Service and various state and local consumer protection agencies relating to
matters such as advertising, order solicitation, shipment deadlines and
customer refunds and returns. In addition, merchandise imported by the Company
is subject to import and customs duties and, in some cases, import quotas.
Moreover, Cornerstone's business could be affected by regulations promulgated
in the future. For example, there are a number of different bills under
consideration by Congress and various state legislatures that would restrict
disclosure of consumers' personal information, which may make it more
difficult for Cornerstone to generate additional names for its mailing lists,
and restrict a company's right to send unsolicited electronic mail or printed
catalogs. Although Cornerstone believes it is generally in compliance with
current laws and regulations and that such laws and regulations have
45
<PAGE>
not had a significant impact on its business to date, it is possible that
existing or future regulatory requirements will impose a significant burden on
Cornerstone.
TRADEMARKS
Frontgate, Splash, The Search for the Perfect Gift, Garnet Hill,
Smith+Noble, Windoware, The Territory Ahead and TravelSmith are registered
trademarks, and Ballard Designs, Isabella Bird, The Ultimate Grill, Window
Elements, Whispering Pines and various product names are subject to pending
trademark applications, of Cornerstone or a Cornerstone company in the United
States and, for certain of such trademarks, in various foreign countries.
Cornerstone believes that its trademark rights are of significant value.
EMPLOYEES
As of July 31, 1998, Cornerstone and the Cornerstone companies employed
approximately 860 persons on a full-time basis and approximately 520 persons
on a part-time basis. The number of employees fluctuates on a seasonal basis.
None of these employees is currently covered by a collective bargaining
agreement.
PROPERTIES
The principal executive offices of the Company are located in a leased
facility in Portland, Maine. Cornerstone leases additional headquarters space
in Boston, Massachusetts. Cornerstone also owns approximately 57 acres of land
in the Cincinnati, Ohio area, which site will house the new operations center,
the headquarters facility for Frontgate and a retail outlet facility for a
number of Cornerstone brands.
46
<PAGE>
The following table sets forth certain information relating to the
facilities of the Cornerstone companies:
<TABLE>
<CAPTION>
COMPANY LOCATION SIZE USE OWNED/LEASED
- ------- ----------------- -------------- ------------------------- ------------
<S> <C> <C> <C> <C>
Ballard Designs Atlanta, GA 41,600 sq.ft. Headquarters/ Leased
outlet store
Kennesaw, GA 54,000 sq.ft. Fulfillment center Leased
Kennesaw, GA 16,000 sq.ft. Temporary fulfillment Leased
center
Kennesaw, GA 42,200 sq.ft. Temporary fulfillment Leased
center
Roswell, GA 18,000 sq.ft. Outlet store Leased
Frontgate Lebanon, OH 129,000 sq.ft. Headquarters/ fulfillment Owned
center
Lebanon, OH 45,000 sq.ft. Temporary fulfillment Leased
center
Lebanon, OH 82,500 sq.ft. Temporary fulfillment Leased
center
Cincinnati, OH 33,600 sq.ft. Store/phone center Leased
Garnet Hill Franconia, NH 25,000 sq.ft. Headquarters Owned
Bethlehem, NH 84,000 sq.ft. Fulfillment center Owned
Franconia, NH 6,000 sq.ft. Storage facility Owned
Manchester, VT 4,100 sq.ft. Outlet store Leased
Smith+Noble Corona, CA 12,600 sq.ft. Headquarters Leased
The Territory Ahead Santa Barbara, CA 24,000 sq.ft. Headquarters Leased
Santa Barbara, CA 31,800 sq.ft. Fulfillment center Leased
Santa Barbara, CA 3,700 sq.ft. Photo studio Leased
Santa Barbara, CA 4,300 sq.ft. Retail store Leased
Santa Barbara, CA 5,000 sq.ft. Outlet store Leased
San Leandro, CA 2,100 sq.ft. Outlet store Leased
Carlsbad, CA 2,500 sq.ft. Outlet store Leased
TravelSmith Novato, CA 15,700 sq.ft. Headquarters Leased
Whispering Pines Fairfield, CT 4,500 sq.ft. Headquarters Leased
</TABLE>
The Company believes its facilities are adequate to meet its current needs,
and that suitable additional facilities will be available for lease or
purchase when and as needed by the Company.
LEGAL PROCEEDINGS
While Cornerstone and the Cornerstone companies are party to various claims
and legal proceedings that arise in the normal course of business, Cornerstone
management does not believe that any such matters will have a material adverse
effect on the business, operating results or financial condition of the
Company.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their respective ages
as of August 31, 1998 and their positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William T. End....................... 50 Chief Executive Officer, Chairman of
the Board and Director
Donald J. Steiner.................... 54 Founder, Vice Chairman of the Board
and Director
John A. O'Steen...................... 54 Executive Vice President, Operations
and Director
Mark Fasold.......................... 46 Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
Paul D. Tarvin....................... 41 Executive Vice President and President
and Chief Executive Officer of
Frontgate
Benjamin D. Chereskin(2)............. 39 Director
William J. Hunckler, III(1).......... 45 Director
Stephen P. Murray(2)................. 36 Director
Thomas G. Stemberg(1)................ 49 Director
H.J. von der Goltz(2)................ 61 Director
John Walter(1)....................... 51 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MR. END joined the Company in June 1995 as Executive Officer, Managing
Director and a member of the Board of Directors and has served as Chief
Executive Officer and Chairman of the Board of the Company since February
1998. Prior to joining the Company, Mr. End served as President, Chief
Executive Officer and a director of Lands' End, Inc., a direct marketing
company, from 1991 to 1995. Mr. End served as Executive Vice President, Chief
Marketing Officer and a director of L.L. Bean, Inc., a direct marketing
company, from 1975 to 1991. Mr. End started his career as an executive at The
Gillette Company from 1971 to 1975 in the marketing area. Mr. End currently
serves on the Board of Directors of Hannaford Bros. Co.
MR. STEINER founded the predecessor entity to the Company in March 1993,
joined the Company in June 1995 as Executive Officer, Managing Director and a
member of the Board of Directors and has served as Vice Chairman of the Board
of the Company since February 1998. Prior to founding Cornerstone, from 1983
to 1993 Mr. Steiner was a General Partner of Boston Capital Ventures, a
venture capital firm, which he co-founded in 1983. Mr. Steiner was previously
Vice President of Business Development at The Gillette Company, where he was
employed from 1973 to 1982.
MR. O'STEEN has been an executive officer and a director of the Company
since September 1995 and has served as Executive Vice President, Operations
(with responsibility for the new Cornerstone operations center), since August
1998. Mr. O'Steen co-founded Frontgate and was Chairman and Chief Executive
Officer of Frontgate from 1991 to 1998. Currently, Mr. O'Steen is devoting the
substantial majority of his time to matters relating to the Company's
operations center currently under construction while continuing to serve as
Chairman of Frontgate. From 1984 to 1990, Mr. O'Steen was the President and
Chief Executive Officer and a director of Cincinnati Microwave, Inc., a direct
marketer and manufacturer of radar warning receivers and other electronic
products and services. From 1967 to 1984, Mr. O'Steen served in various
management positions at The Procter & Gamble Company. Mr. O'Steen also serves
on the Board of Kulicke and Soffa Industries, Inc. and Bill's Dollar Stores,
Inc.
48
<PAGE>
MR. FASOLD has served as Executive Vice President and Chief Financial
Officer of the Company since its inception and as Treasurer and Secretary of
the Company since August 1998. From 1993 to June 1995, Mr. Fasold was Vice
President of Cole Haan, Inc., a wholesaler and retailer of footwear and
accessories. From 1991 to 1993, Mr. Fasold was President of Smith & Hawken,
Ltd., a catalog marketer and retailer of home and garden products. From 1977
to 1991, Mr. Fasold was Vice President of L.L. Bean, Inc., serving in various
positions in merchandising and finance, with particular emphasis on strategic
planning and inventory management.
MR. TARVIN has been an executive officer of the Company since September 1995
and has served as Executive Vice President since August 1998. Mr. Tarvin co-
founded Frontgate and has been the President of Frontgate since 1991. In July
1998 Mr. Tarvin became President and Chief Executive Officer of Frontgate.
Currently, Mr. Tarvin is devoting the majority of his time to Frontgate while
contributing to the marketing efforts within Cornerstone. Mr. Tarvin was Vice
President, Marketing, of Sportsman's Market, Inc., a catalog company, from
1978 to 1990.
MR. CHERESKIN has served as a director of the Company since September 1995.
Mr. Chereskin is a Managing Director of Madison Dearborn Partners, Inc., which
he joined in January 1993 and where his responsibilities are related to
private equity investment. Mr. Chereskin is also a director of Carrols
Corporation and Tuesday Morning Corporation.
MR. HUNCKLER has served as a director of the Company since September 1995.
Mr. Hunckler is a Managing Director of Madison Dearborn Partners, Inc., which
he joined in January 1993 and where his responsibilities are related to
private equity investment. Mr. Hunckler is also a director of Tuesday Morning
Corporation.
MR. MURRAY has served as a director of the Company since November 1995.
Since June 1984, Mr. Murray has been an investment professional at Chase
Venture Capital Associates, L.P., where his responsibilities are related to
private equity investment. Mr. Murray is also a director of Home Products
International, Inc. and La Petite Academy, Inc.
MR. STEMBERG has served as a director of the Company since September 1995.
Since February 1988, Mr. Stemberg has been Chairman of the Board and Chief
Executive Officer of Staples, Inc., an office products retailer that he
founded in 1986. He is also a director of PETsMART, Inc.
MR. VON DER GOLTZ has served as a director of the Company since June 1995.
Mr. von der Goltz has been an Executive Officer of Boston Capital Ventures
Management, a venture capital firm that he co-founded, since September 1983.
MR. WALTER has served as a director of the Company since May 1998. From
October 1996 to July 1997, Mr. Walter served as President and Chief Operating
Officer of AT&T Corp. From May 1969 to October 1996, Mr. Walter served in
various capacities including Chairman and Chief Executive Officer at RR
Donnelley & Sons Co. Mr. Walter is also a director of Deere & Company, Abbott
Laboratories, LaSalle Partners Incorporated and Celestica Inc.
The Board of Directors of the Company is divided into three classes, each of
whose members serve for staggered three-year terms. The Board consists of
three Class I Directors (Messrs. Chereskin, End and Murray), three Class II
Directors (Messrs. Hunckler, O'Steen and Stemberg) and three Class III
Directors (Messrs. Steiner, Walter and von der Goltz). At each annual meeting
of stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The
initial terms of the Class I Directors, Class II Director and Class III
Directors expire upon the election and qualification of successor directors at
the annual meeting of stockholders held during the calendar years 1999, 2000
and 2001, respectively.
49
<PAGE>
Each officer serves at the discretion of the Board of Directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal. There are no family relationships among any of
the directors or executive officers of the Company.
Messrs. End and Steiner were elected as directors upon the designation of
the Company's executive management team, Messrs. Chereskin and Hunckler were
elected as directors upon the designation of Madison Dearborn Capital
Partners, Mr. Murray was elected as a director upon the designation of Chase
Venture Capital Associates, Mr. von der Goltz was elected as a director upon
the designation of Boston Capital Ventures, Mr. O'Steen was elected as a
director upon the designation of certain former stockholders of Frontgate and
Messrs. Stemberg and Walter were elected as directors upon the designation of
certain other stockholder constituencies, respectively, pursuant to the terms
of a voting agreement among the Company and certain stockholders of the
Company, which agreement will terminate upon the closing of this offering.
DIRECTOR COMPENSATION
All of the directors are reimbursed for expenses incurred in connection with
their attendance at Board of Directors and committee meetings. Mr. Stemberg
and Mr. Walter, two of the Company's non-employee directors, also receive
$1,000 in compensation for each Board meeting and Committee meeting they
attend. In addition, certain directors of the Company are eligible to receive
stock options under the Company's 1998 Director Stock Option Plan. See "--
Stock Plans--1998 Director Stock Option Plan."
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth certain information regarding the
compensation for the fiscal year ended January 31, 1998 of the Company's
executive officers as of January 31, 1998 ("Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(2)
---------------
ANNUAL
COMPENSATION(1) AWARDS
----------------- ---------------
NUMBER OF
SHARES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
--------------------------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C>
William T. End.................. $266,500 $120,000 -- $3,153
Chief Executive Officer and
Chairman of the Board
Donald J. Steiner............... 266,500 120,000 -- 740
Vice Chairman of the Board
John A. O'Steen................. 226,666 99,411 8,000 6,423
Executive Vice President,
Operations and Director
Mark Fasold..................... 175,900 80,000 -- 1,192
Executive Vice President, Chief
Financial Officer, Treasurer
and Secretary
Paul D. Tarvin.................. 226,666 109,411 8,000 4,366
Executive Vice President and
President and
Chief Executive Officer of
Frontgate
</TABLE>
50
<PAGE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted, as such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total of annual
salary and bonus for each executive officer.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive plan payouts during
the fiscal year ended January 31, 1998. As of January 31, 1998, Mr. End,
Mr. Steiner and Mr. Fasold held 1,300,000, 1,220,000 and 400,000 shares of
restricted Common Stock, respectively. Based upon an assumed initial
public offering price of $ per share, the aggregate value of such
shares at January 31, 1998, net of their aggregate original purchase
price, was $ .
Option Grants
The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during the fiscal year
ended January 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
-------------------------------------------- -----------------
EXERCISE
NUMBER OF PERCENT OF OR BASE
SHARES TOTAL OPTIONS PRICE
UNDERLYING GRANTED TO PER
OPTIONS EMPLOYEES IN SHARE EXPIRATION
NAME GRANTED FISCAL YEAR ($)(1) DATE 5% 10%
- ---- ---------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William T. End.......... -- -- -- -- -- --
Donald J. Steiner....... -- -- -- -- -- --
John A. O'Steen......... 8,000 1.7 6.00 3/26/04 $ 13,262 $ 29,304
Mark Fasold............. -- -- -- -- -- --
Paul D. Tarvin.......... 8,000 1.7 6.00 3/26/04 $ 13,262 $ 29,304
</TABLE>
- --------
(1) Options are incentive stock options, become exercisable over a four-year
period and generally terminate three months following termination of the
executive officer's employment with the Company or seven years after the
date of grant, whichever occurs earlier. The exercise price of each option
was determined to be equal to the fair market value per share of Common
Stock on the date of grant.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compound rates of appreciation (5% and 10%) in
the market value of the Common Stock on the date of option grant over the
term of the options. These numbers are calculated based on rules
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth. The gains shown are
net of the option exercise price, but do not include deductions for taxes
or other expenses associated with the exercise of the option or the sale
of the underlying shares. The actual gains, if any, on the exercises of
stock options will depend on the future performance of the Common Stock,
the optionholder's continued employment through the option period, and the
date on which the options are exercised. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the individuals.
51
<PAGE>
Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by each of the executive officers of the
Company on January 31, 1998. None of the Named Executive Officers exercised
any stock options during the fiscal year ended January 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
NUMBER OF SHARES UNDERLYING MONEY
UNEXERCISED OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END YEAR-END
----------------------------- ----------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------------------------- ----------------------------
<S> <C> <C>
William T. End.......... -- --
Donald J. Steiner....... -- --
Mark Fasold............. 106,250/168,750
John A. O'Steen......... 103,125/92,375
Paul D. Tarvin.......... 103,125/92,375
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of January 31,
1998. Accordingly, these values have been calculated on the basis of an
assumed initial public offering price of per share, less the
applicable exercise price.
EMPLOYMENT AGREEMENTS
Each of Messrs. End, Steiner, Fasold, O'Steen and Tarvin is party to an
employment agreement with Cornerstone. The terms of the agreements of Messrs.
End, Steiner and Fasold extend through July 31, 2000 and the terms of the
agreements of Messrs. O'Steen and Tarvin extend through September 13, 2000.
Under these agreements, Mr. End and Mr. Steiner are entitled to an annual
salary of at least $250,000, subject to increase based on a consumer price
index, as well as an annual bonus in an amount determined by the Board of
Directors; Mr. Fasold is entitled to an annual salary of at least $150,000,
subject to increase based on a consumer price index, as well as an annual
bonus in an amount not less than 10% of his base salary; and Messrs. O'Steen
and Tarvin are entitled to an annual base salary of not less than $175,000.
Cornerstone may terminate the employment of any such executive only by the
vote of two-thirds of the members of the Board of Directors of Cornerstone
(excluding the employee, if he is a director). If the executive's employment
is terminated by the Company without cause (as defined in the agreements),
such executive shall receive a termination payment equal to one and one-half
times the greater of (i) the aggregate of his base salary, benefits and
bonuses due during the calendar year in which the termination occurs or (ii)
the aggregate of his compensation, benefits and bonuses actually received
during the preceding calendar year. The agreements of Messrs. O'Steen and
Tarvin provide that such executive shall serve as executive officers of both
Cornerstone and Frontgate.
Each of Messrs. End, Steiner, Fasold, O'Steen and Tarvin is party to an
agreement under which he is prohibited (subject to certain exceptions), for a
period of 18 months following the termination of his employment with the
Company, from engaging, directly or indirectly, in any business activity which
is directly competitive with and detrimental to the business of Cornerstone. A
catalog company with whose merchandise or target audience is substantially
different from those of any catalog company than operated by Cornerstone shall
not be considered directly competitive.
STOCK PLANS
1998 Director Stock Option Plan
In August 1998 the Company's Board of Directors adopted, and in September
1998 the Company's stockholders approved, the 1998 Director Stock Option Plan
(the "Director Plan"), which provides for the grant of options to purchase a
maximum of 200,000 shares of Common Stock of the Company to non-employee
directors of the Company. The Director Plan is administered by the Board of
Directors.
52
<PAGE>
Under the Director Plan, each non-employee director of the Company will be
granted a nonstatutory stock option to purchase shares of Common Stock on
the date such person is first elected to the Board of Directors, and each non-
employee director will be granted a nonstatutory stock option to purchase
shares of Common Stock on the date of each Annual Meeting of the Stockholders
of the Company commencing with the 1999 Annual Meeting of Stockholders (other
than (i) any director who is first elected to the Board of Directors at such
annual meeting or at any time subsequent to the prior year's annual meeting
and (ii) any director who did not attend in the preceding fiscal year at least
75% of all the regularly scheduled meetings of the Board of Directors and of
any committee of the Board of Directors on which the director served). The
exercise price per share for all options granted under the Director Plan will
be equal to the fair market value of the Common Stock on the date of grant.
The options granted will become exercisable in three equal annual installments
on each of the first three anniversaries of the date of grant, provided that
the optionee remains a director at such time, and will become exercisable in
full upon an acquisition of the Company. Each option will expire on the
earlier of seven years from the date of grant and 90 days after the optionee
ceases to be a director of the Company. No options to purchase shares have
been granted to date under the Director Plan.
1995 STOCK OPTION PLAN AND 1998 STOCK INCENTIVE PLAN
The Company has a 1995 Stock Option Plan (the "1995 Plan") under which an
aggregate of 1,463,534 shares of Common Stock were reserved for issuance to
officers, key employees and consultants of the Company and its subsidiaries.
No further options may be granted under the 1995 Plan after the date of this
Prospectus. As of August 31, 1998, options to purchase 1,259,315 shares of
Common Stock were outstanding under the 1995 Plan. The 1995 Plan is
administered by the Board of Directors. Options for an additional 280,000
shares of Common Stock, granted outside the 1995 Stock Option Plan, are also
outstanding.
The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors in August 1998 and approved by the stockholders of
the Company in September 1998. The Incentive Plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted stock awards
and other stock-based awards (collectively "Awards"). The Incentive Plan
provides for the issuance of a maximum of 3,200,000 shares of Common Stock of
the Company in respect of Awards granted under the plan. The Incentive Plan is
administered by the Board of Directors.
Incentive Stock Options and Nonstatutory Stock Options. Optionees receive
the right to purchase a specified number of shares of Common Stock at a
specified option price and subject to such other terms and conditions as are
specified in connection with the option grant. Options may be granted at an
exercise price which may be equal to or greater than, but not less than, the
fair market value of the Common Stock on the date of grant. Under present law,
however, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code of 1986, as amended, may not be granted at an exercise price less than
the fair market value of the Common Stock on the date of grant (or less than
110% of the fair market value in the case of incentive stock options granted
to optionees holding more than 10% of the voting power of the Company).
Options may not be granted for a term in excess of ten years. The Incentive
Plan permits the Board to determine the number of shares subject to each
option granted, the exercise price of the option, the vesting schedule of the
option, and the manner of payment of the exercise price of the option
(including through payment by cash, check or in connection with a "cashless
exercise" through a broker, by surrender to the Company of shares of Common
Stock, by delivery to the Company of a promissory note, or by any other lawful
means).
Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable Award are not satisfied prior to the
end of the applicable restriction period established for such Award.
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<PAGE>
Other Stock-Based Awards. Under the Incentive Plan, the Board has the right
to grant other Awards based upon the Common Stock having such terms and
conditions as the Board may determine, including the grant of shares based
upon certain conditions and, the grant of securities convertible into Common
Stock.
Eligibility to Receive Awards. Officers, employees, directors, consultants
and advisors of the Company and its subsidiaries are eligible to be granted
Awards under the Incentive Plan. Under present law, however, incentive stock
options may only be granted to employees. The maximum number of shares with
respect to which an Award may be granted to any participant under the
Incentive Plan may not exceed 500,000 shares per calendar year. No Awards have
been granted to date to any participant under the Incentive Plan.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in August 1998 and approved by the
stockholders in September 1998. The Purchase Plan authorizes the issuance of
up to a total of 600,000 shares of Common Stock to participating employees.
The Purchase Plan is administered by the Board of Directors.
All full-time employees and certain part-time employees of the Company and
designated subsidiaries are eligible to participate in the Purchase Plan.
Employees who would immediately after the grant own 5% or more of the total
combined voting power or value of the stock of the Company are not eligible to
participate.
Common Stock will be offered under the Purchase Plan through a series of
offerings, generally six months in length. The first offering period will
commence upon the date of this Prospectus and terminate on June 30, 1999;
future offering periods will begin on each January 1 and July 1 and terminate
on the following June 30 and December 31, respectively. On the first day of an
offering period, the Company will grant to each eligible employee who has
elected to participate in that offering an option to purchase shares through
payroll deductions at a purchase price of 85% of the lesser of the market
value of a share of the Company's Common Stock on the first day of such
offering period and on the last day of such offering period. The employee may
authorize an amount to be deducted by the Company from his or her pay for the
purpose of purchasing such shares of up to 10% (or such lesser percentage as
the Compensation Committee may fix for a particular offering) of his or her
qualifying compensation. On the last day of the offering period, the employee
is deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1997, the Compensation Committee was comprised of Mr. Hunckler and
Mr. Stemberg, non-employee directors, and Mr. Steiner, an executive officer of
the Company. In May 1998, the Compensation Committee was reconstituted and is
now comprised of Messrs. Hunckler, Stemberg and Walter, three of the Company's
non-employee directors.
CERTAIN TRANSACTIONS
RELATED-PARTY TRANSACTIONS
On June 9, 1995, the Company sold 1,425,000, 1,425,000, 400,000, 200,000,
200,000 and 100,000 shares of its Common Stock, respectively, to Donald J.
Steiner, William T. End, Mark Fasold, John A. O'Steen, Paul D. Tarvin and H.
Johan von der Goltz, respectively, for a purchase price of $.01 per share, all
in connection with the founding of the Company. Also on June 9, 1995, the
Company granted warrants to purchase 80,000 and 30,000 shares of its Common
Stock at an exercise price of $.01 per share, respectively, to Mr. von der
Goltz and Thomas G. Stemberg, respectively, all in connection with the
founding of the Company.
Pursuant to a stock purchase agreement entered into on September 13, 1995,
and amended on November 15, 1995 and on January 31, 1996, among the Company
and certain other parties named therein, the Company
54
<PAGE>
issued an aggregate of 35,000 shares of its Series A-1 Preferred Stock to
Madison Dearborn Capital Partners, L.P. for an aggregate purchase price of
$35,000,000, an aggregate of 20,000 shares of its Series A-2 Preferred Stock
to Chase Venture Capital Associates, L.P. for an aggregate purchase price of
$20,000,000 and an aggregate of 500 shares of its Series A-3 Preferred Stock
to Boston Capital Ventures III, L.P. for an aggregate purchase price of
$500,000. Upon the closing of this offering, the Series A-1 Preferred Stock
sold to Madison Dearborn Capital Partners, L.P., the Series A-2 Preferred
Stock sold to Chase Venture Capital Associates, L.P. and the Series A-3
Preferred Stock sold to Boston Capital Ventures III, L.P. will convert into
7,692,308, 4,395,604 and 109,890 shares of the Company's Common Stock,
respectively.
Pursuant to an exchange agreement dated September 13, 1995, among the
Company and certain other parties named therein, the Company issued 1,000,000
shares of its Common Stock to Boston Capital Ventures II, L.P., 737,500 shares
of its Common Stock to Boston Capital Ventures III, L.P., 232,030 shares of
its Common Stock to Mr. Steiner, 200,000 shares of its Common Stock to the
W.T.E. Family Limited Partnership (of which Mr. End is a general partner),
25,000 shares of its Common Stock to Mr. Fasold, 125,000 shares of its Common
Stock to Mr. Stemberg and 12,500 shares of its Common Stock to Ned Levine (a
former director of the Company), in exchange for certain shares of common
stock of The Cornerstone Holdings Group, Inc. held by such entities and
persons. Also pursuant to this exchange agreement, the Company granted options
to purchase 20,000 shares of its Common Stock at an exercise price of $1.00
per share to each of Mr. Stemberg, Mr. Levine and Mr. von der Goltz in
exchange for certain options to purchase shares of common stock of The
Cornerstone Holdings Group, Inc. held by such persons.
Pursuant to a purchase agreement entered into on September 13, 1995 among
the Company, Frontgate, John A. O'Steen, Paul D. Tarvin, and certain other
parties named therein, the Company issued 1,901 shares of its Series B
Convertible Preferred Stock, 744 shares of its Series C Convertible Preferred
Stock and 288 shares of its Tracking Stock--Series I, and paid $1,771,378, to
Mr. O'Steen, an executive officer and director of the Company, and issued
1,800 shares of its Series B Convertible Preferred Stock, 704 shares of its
Series C Convertible Preferred Stock and 278 shares of its Tracking Stock--
Series I, and paid $1,771,378, to Mr. Tarvin, an executive officer of the
Company, in exchange for their interests in Frontgate. The preferred and
tracking stock issued to Mr. O'Steen has been converted into an aggregate of
1,216,628 shares of Common Stock of the Company and the tracking stock was
redeemed for additional payments totalling $3,622,731 and the preferred and
tracking stock issued to Mr. Tarvin has been converted into an aggregate of
1,162,722 shares of Common Stock of the Company and the tracking stock was
redeemed for additional payments totalling $3,490,811. All of the tracking
stock formerly held by Mr. O'Steen and Mr. Tarvin that remained outstanding on
January 15, 1998 was converted on that date pursuant to an agreement with the
Company to accelerate such conversion.
On June 18, 1998, the Company sold 55,555 shares of its Common Stock to John
Walter, a director of the Company, for an aggregate purchase price of
$500,000, or $9.00 per share.
The Company has adopted a policy providing that all material transactions
between the Company and its officers, directors and other affiliates must be
approved by a majority of the members of the Company's Board of Directors and
by a majority of the disinterested members of the Company's Board of
Directors.
CONTRACTUAL ARRANGEMENTS WITH OTHER EQUITYHOLDERS OF CORNERSTONE COMPANIES
Cornerstone is party to certain agreements with the other parties that hold
equity interests in TravelSmith, The Territory Ahead and Whispering Pines,
which establish rights and obligations of Cornerstone and such other parties
with respect to their equity interest in such companies. The principal
provisions of such agreements are summarized below. These summaries are not
intended to be complete descriptions of such agreements and are qualified by
reference to such agreements, copies of which are included as Exhibits to the
Registration Statement of which this Prospectus is a part.
55
<PAGE>
TravelSmith
Cornerstone acquired (through its predecessor company) a minority interest
in TravelSmith, a California corporation, in July 1993. In July 1996
Cornerstone increased its ownership position to approximately 61% of the
outstanding common stock (after giving effect to the conversion of all
outstanding Convertible Preferred Stock), which it holds in the form of common
stock and Convertible Preferred Stock. The balance of the outstanding common
stock of TravelSmith is held by Charles L. Slaughter, Scott Sklar (who
together own approximately 36% of the outstanding common stock on an as-
converted basis) and certain other persons.
Cornerstone and Mr. Slaughter, Mr. Sklar and another stockholder
(collectively, the "TravelSmith Stockholders") have agreed to elect the
following persons as directors of TravelSmith: Donald J. Steiner, William T.
End, a third individual designated by Cornerstone (together, the "Cornerstone
Directors"), Charles L. Slaughter, Scott Sklar, a third individual designated
by Messrs. Slaughter and Sklar (together, the "Management Directors"), and an
additional director mutually acceptable to the other directors. This agreement
regarding the election of directors would terminate in the event Cornerstone
owns less than 20% of the outstanding capital stock (including capital stock
issuable upon conversion of any securities convertible into capital stock) of
TravelSmith, the TravelSmith Stockholders collectively own less than 20% of
the outstanding capital stock (including capital stock issuable upon
conversion of any securities convertible into capital stock) of TravelSmith,
or neither Mr. Slaughter nor Mr. Sklar is employed by TravelSmith.
The consent of at least two-thirds of the members of the Board of Directors
then in office, including the consent of at least one Cornerstone Director and
one Management Director (a "Super-Majority Vote"), is required for certain
corporate actions by TravelSmith, including a merger, consolidation or sale of
substantially all of its assets, the issuance of capital stock (subject to
certain exceptions), and the relocation of TravelSmith's operations. In
addition, TravelSmith is prohibited from terminating the employment of Mr.
Slaughter or Mr. Sklar, reducing his compensation or benefits or otherwise
adversely affecting his employment terms and conditions without the consent of
two-thirds of the members of the Board of Directors (excluding Mr. Slaughter
or Mr. Sklar, as the case may be). Moreover, TravelSmith may not terminate
(other than for "cause", as defined) the employment of both Mr. Slaughter and
Mr. Sklar prior to February 1, 2000.
During the period between February 1, 2000 and February 1, 2003, each of the
TravelSmith Stockholders has the right (exercisable not more than once), upon
60 days notice to Cornerstone, to require Cornerstone to purchase any or all
of his shares of capital stock of TravelSmith, at a purchase price equal to
the fair market value of such shares. The fair market value shall be
determined by a Super-Majority Vote of the Board of Directors of TravelSmith
or, absent such a determination, by an independent appraiser jointly selected
by Cornerstone and Messrs. Slaughter and Sklar. Cornerstone may pay up to 25%
of the purchase price in the form of Common Stock (provided the Common Stock
is then listed on the Nasdaq National Market or a national securities exchange
and is registered under the Securities Act) and up to 50% of the purchase
price in the form of a promissory note (which shall be payable no later than
one year from the date of such purchase, shall bear interest at the "prime"
rate of BankBoston plus 2%, and shall be secured by 50% of the shares of
TravelSmith purchased). If TravelSmith terminates the employment of either Mr.
Slaughter or Mr. Sklar without "cause" or if Mr. Slaughter or Mr. Sklar
terminates his employment with TravelSmith for "good reason" (each as defined
in such person's employment agreement), this put right would become
exercisable by such person for a period of 90 days after such employment
termination, and Cornerstone would be obligated to pay the entire purchase
price in cash. In addition, from and after the date of this Prospectus, any
stockholder of TravelSmith (other than the TravelSmith Stockholders) shall
have the right to exchange their shares of capital stock of TravelSmith for
shares of Common Stock of Cornerstone, with the exchange ratio to be based
upon the fair market value of the TravelSmith stock, as determined by a
majority of the Board of Directors of TravelSmith, and the fair market value
of the Common Stock of Cornerstone, based upon its public trading price. If
Cornerstone were to breach its obligation to purchase or exchange shares of
TravelSmith stock, as described in this paragraph, Cornerstone would be
obligated to consent to and otherwise cooperate with a sale of, or an initial
public offering by, TravelSmith, if Messrs. Slaughter and Sklar so elected,
and would forfeit its entitlement to representation on the Board of Directors
of TravelSmith.
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<PAGE>
Cornerstone and each of the TravelSmith Stockholders have certain rights
with respect to the registration of their shares of TravelSmith common stock
under the Securities Act for sale to the public. In particular, at any time
after the earlier of February 1, 2000 or six months after an initial public
offering by TravelSmith, Cornerstone or TravelSmith Stockholders holding at
least 20% of the outstanding common stock of TravelSmith (after giving effect
to the conversion of Convertible Preferred Stock into common stock) may
require TravelSmith to register such shares under the Securities Act.
Cornerstone and the TravelSmith Stockholders also have "piggyback" rights with
respect to certain registrations effected by TravelSmith. Cornerstone does not
intend to exercise any such registration rights.
Cornerstone has a right of first refusal with respect to future issuances of
capital stock by TravelSmith (subject to certain exceptions) until such time
as Cornerstone owns 80% of the outstanding capital stock of TravelSmith
(including capital stock issuable upon conversion of any securities
convertible into capital stock); thereafter, both Cornerstone and the
TravelSmith Stockholders have pro rata preemptive rights with respect to
capital stock issuances (subject to certain exceptions) by TravelSmith at a
price below fair market value. Both Cornerstone and the TravelSmith
Stockholders have rights of first refusal and co-sale rights with respect to
sales or transfers of TravelSmith capital stock by each other (subject to
certain exceptions).
Cornerstone's intention is to either acquire additional shares of capital
stock of TravelSmith (through the exercise of the rights described above or
otherwise) or restructure certain of its contractual obligations to the extent
required to permit Cornerstone to report the results of operations of
TravelSmith on a consolidated basis. However, no assurance can be given that
this will be achieved.
The Territory Ahead
Cornerstone acquired 80% of the outstanding stock of The Territory Ahead, a
Delaware corporation, in March 1997. The remaining 20% is beneficially owned
by Bruce A.L. Willard.
Until March 31, 2000, neither Cornerstone nor Mr. Willard may sell or
transfer any shares of stock of The Territory Ahead without the prior written
consent of the other party. In addition, Cornerstone and Mr. Willard each have
a right of first refusal and a co-sale right with respect to any sale or
transfer of The Territory Ahead stock by the other party (subject to certain
exceptions).
Beginning two years after the date of this Prospectus, Mr. Willard will have
the one-time right to require The Territory Ahead to register his shares of
capital stock under the Securities Act for the purpose of making a firmly
underwritten public offering of such shares. Mr. Willard also has "piggyback"
rights with respect to certain registrations effected by The Territory Ahead.
Whispering Pines
Cornerstone acquired a 51% interest in Whispering Pines, a Delaware limited
liability company, in September 1997. Cabin Life Studies, Inc. ("CLI"), a
corporation owned by Susan Kelly Panian, Margaret Kelly Murray and Edward R.
Panian, holds the remaining 49% interest in Whispering Pines.
As a limited liability company, the business of Whispering Pines is operated
under the direction of a Board of Managers (rather than a Board of Directors).
The number of members of the Board of Managers shall be determined from time
to time by the Board of Managers and is currently five. CLI has the right to
elect two of the members of the Board of Managers; the remaining members are
elected by Cornerstone.
Cornerstone has the option, exercisable during the 90 day period beginning
upon the closing of this offering, to purchase from CLI a 29% membership
interest in Whispering Pines (bringing Cornerstone's total membership interest
in Whispering Pines to 80%). If Cornerstone does not exercise its option
during such period, it may exercise it during the 90 day period beginning
February 1, 2000. The purchase price for such interest would be 29% of the
greater of (i) Whispering Pines' earnings, before deducting interest expense,
taxes and amortization of goodwill ("EBIT"), for fiscal 1999 multiplied by
seven or (ii) the sum of (A) fiscal 1999 EBIT multiplied by
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<PAGE>
three and (B) 25% of Whispering Pines' net sales for fiscal 1999. If such
purchase option is exercised during the first 90 day period, $1,000,000 of the
purchase price would be paid at the closing and the balance would be paid
within three months after the completion of fiscal 1999. The purchase price
would be paid in the form of cash, Common Stock or a combination of the two,
at CLI's election. Any shares of Common Stock issued in payment of such
purchase price shall be listed on the Nasdaq National Market or such other
national securities exchange on which the Common Stock is then listed, and
Cornerstone would be required to either register such shares of Common Stock
under the Securities Act or grant CLI registration rights with respect to such
shares substantially equivalent to those described under "Shares Eligible for
Future Sales-Registration Rights."
If Cornerstone exercises the foregoing purchase option, it would have an
additional option, exercisable during the 90 day period beginning February 1,
2003, to purchase the remaining 20% interest in Whispering Pines held by CLI.
The purchase price for such interest would be 20% of the greater of (i)
Whispering Pines' fiscal 2002 EBIT multiplied by seven or (ii) the sum of (A)
fiscal 2002 EBIT multiplied by three and (B) 25% of Whispering Pines' net
sales for fiscal 2002. The purchase price would be paid in the form of cash,
Common Stock or a combination of the two, at CLI's election. Any shares of
Common Stock issued in payment of such purchase price shall be listed on the
Nasdaq National Market or such other national securities exchange on which the
Common Stock is then listed, and Cornerstone would be required to either
register such shares of Common Stock under the Securities Act or grant CLI
registration rights with respect to such shares substantially equivalent to
those described under "Shares Eligible for Future Sales--Registration Rights."
If Cornerstone fails to exercise either of the foregoing options to acquire
additional interests in Whispering Pines, CLI would have the right, during the
90 day period following the expiration of such option, to purchase all (but
not less than all) of Cornerstone's membership interest in Whispering Pines,
for a cash purchase price equal to the fair market value of such interest, as
determined by an appraiser jointly selected by Cornerstone and CLI.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of August 31, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the directors of the Company,
(iii) each of the Named Executive Officers, (iv) all Selling Stockholders, and
(v) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(1)(2)
----------------------- --------------------
NUMBER OF
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE(3) SHARES OFFERED NUMBER PERCENTAGE(3)
- ------------------------ --------- ------------- -------------- ------ -------------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Madison Dearborn Capital
Partners, L.P.......... 7,692,308 27.0%
Suite 3800
Three First National
Plaza
Chicago, Illinois 60602
Stephen P. Murray (4)... 4,395,604 15.5%
c/o Chase Venture
Capital Associates,
L.P.
380 Madison Avenue,
12th Floor
New York, New York
10017
Chase Venture Capital
Associates, L.P........ 4,395,604 15.5%
380 Madison Avenue,
12th Floor
New York, New York
10017
Fred E. and Moira E.
Kamgar (5)............. 2,916,277 10.3%
c/o Smith & Noble LLC
1750 California Avenue
#201
Corona, California
91719
Boston Capital Ventures
(6).................... 2,047,390 7.2%
Old City Hall
45 School Street
Boston, Massachusetts
02108
A. Ray Weeks, Jr. and
Helen Ballard
Weeks (7).............. 1,777,084 6.2%
c/o Weeks Corporation
4497 Park Drive
Norcross, Georgia 30093
John A. O'Steen (8)..... 1,549,878 5.4%
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
William T. End (9)...... 1,501,015 5.3%
c/o Cornerstone Brands,
Inc.
415 Congress Street,
Suite 600
Portland, Maine 04101
Paul D. Tarvin (10)..... 1,495,972 5.2%
c/o Cinmar, Inc.
2800 Henkle Drive
Lebanon, Ohio 45036
Donald J. Steiner (11).. 1,451,015 5.1%
c/o Cornerstone Brands,
Inc.
600 Atlantic Avenue,
Suite 2800
Boston, Massachusetts
02210
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING(1) AFTER OFFERING(1)(2)
------------------------ --------------------
NUMBER OF
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE(3) SHARES OFFERED NUMBER PERCENTAGE(3)
- ------------------------ ---------- ------------- -------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Other Directors
Benjamin D. Chereskin
(12)................... 0 *
William J. Hunckler, III
(13)................... 0 *
Thomas G. Stemberg(14).. 175,000 *
H.J. von der Goltz(15).. 0 *
John Walter............. 55,555 *
Other Named Executive
Officers
Mark Fasold(16)......... 587,500 2.1%
Other Selling
Stockholders
Robert M.
Perkowitz(17).......... 1,249,834 4.4%
Estate of Gladney
Heazel(18)............. 443,333 1.6%
All executive officers
and directors as a
group (11
persons)(19)........... 11,211,539 38.8%
</TABLE>
- --------
*Less than 1%
(1) Each stockholder possesses sole voting and investment power with respect
to the shares listed, except as otherwise indicated. In accordance with
the rules of the Securities and Exchange Commission, each stockholder is
deemed to beneficially own any shares subject to stock options or
warrants which are currently exercisable or which become exercisable
within 60 days after August 31, 1998, and any reference in these
footnotes to shares subject to stock options or warrants held by the
person or entity in question refers to stock options or warrants which
are currently exercisable or which become exercisable within 60 days
after August 31, 1998. The inclusion herein of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership. The number and percentage of shares owned after this offering
assumes none of the listed stockholders will purchase additional shares
in this offering.
(2) The above table assumes no exercise of the over-allotment option to
purchase up to an aggregate of shares of Common Stock from the
Company.
(3) Number of shares deemed outstanding includes 28,438,071 shares
outstanding as of August 31, 1998 and any shares subject to stock options
or warrants held by the person or entity in question. Number of shares
deemed outstanding after this offering includes the additional shares
of Common Stock which are being offered by the Company hereby.
(4) Consists of 4,395,604 shares held by Chase Venture Capital Associates,
L.P., of which Mr. Murray is a general partner.
(5) Consists of shares issued to the Kamgars in connection with the Company's
acquisition of Smith+Noble in August 1998. Mr. Kamgar is President and
Chief Executive Officer of Smith+Noble.
(6) Consists of shares held by two related entities, Boston Capital Ventures
II, L.P. and Boston Capital Ventures III, L.P. Boston Capital Ventures
II, L.P. holds 1,057,550 shares of Common Stock, 46,040 shares issuable
pursuant to warrants and 11,510 shares issuable pursuant to options.
Boston Capital Ventures III, L.P. holds 889,840 shares of Common Stock,
33,960 shares issuable pursuant to warrants and 8,490 shares issuable
pursuant to options.
(7) Includes 3,750 shares issuable pursuant to options held by Ms. Weeks, the
founder and Chief Executive officer of Ballard Designs, and 199,500
shares held in trust for certain family members.
(8) Includes 133,250 shares issuable pursuant to options held by Mr. O'Steen.
(9) Includes 750,000 shares held in trust for certain family members.
(10) Includes 133,250 shares issuable pursuant to options held by Mr. Tarvin.
(11) Includes 750,000 shares held in trust for certain family members.
(12) Excludes 7,692,307 shares held by Madison Dearborn Capital Partners, L.P.
Mr. Chereskin is a Managing Director and stockholder of Madison Dearborn,
Inc., the general partner of the general partner of Madison
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<PAGE>
Dearborn Capital Partners, L.P. Mr. Chereskin disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest in
Madison Dearborn Capital Partners, L.P.
(13) Excludes 7,692,307 shares held by Madison Dearborn Capital Partners, L.P.
Mr. Hunckler is a Managing Director and stockholder of Madison Dearborn,
Inc., the general partner of the general partner of Madison Dearborn
Capital Partners, L.P. Mr. Hunckler disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest in Madison
Dearborn Capital Partners, L.P.
(14) Includes 30,000 shares issuable pursuant to warrants and 20,000 shares
issuable pursuant to options held by Mr. Stemberg.
(15) Excludes 2,047,390 shares held by Boston Capital Ventures, of which Mr.
von der Goltz is a general partner. Mr. von der Goltz disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest in Boston Capital Ventures.
(16) Includes 162,500 shares issuable pursuant to options held by Mr. Fasold.
(17) Consists of shares issued to Mr. Perkowitz, the Chief Operating Officer
of Smith+Noble, in connection with the Company's acquisition of
Smith+Noble in August 1998.
(18) Ms. Heazel was an employee of Ballard Designs.
(19) Includes 449,000 shares issuable pursuant to options and 30,000 shares
issuable pursuant to warrants.
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DESCRIPTION OF CAPITAL STOCK
After the filing of the Company's Restated Certificate of Incorporation
immediately following the closing of this offering, the authorized capital
stock of the Company will consist of 150,000,000 shares of Common Stock, $.001
par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value
per share. As of August 31, 1998, there were outstanding (i) 28,438,071 shares
of Common Stock held by 44 stockholders of record, (ii) options to purchase an
aggregate of 1,539,315 shares of Common Stock and (iii) warrants to purchase
an aggregate of 315,000 shares of Common Stock.
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, warrants, Restated Certificate of Incorporation and Amended
and Restated By-laws (the "By-laws") is not intended to be complete and is
qualified by reference to the provisions of applicable law and to the
Company's Restated Certificate of Incorporation and By-laws included as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.
PREFERRED STOCK
Under the terms of the Restated Certificate of Incorporation, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
stockholder approval, to issue from time to time up to an aggregate of
5,000,000 shares of Preferred Stock, in one or more series. Each such series
of Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated
with a stockholder vote on specific issuances. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the rights
of the holders of Common Stock and could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
As of August 31, 1998, there were outstanding (i) warrants for the purchase
of an aggregate of 115,000 shares of Common Stock, at an exercise price of
$.01 per share, and (ii) a warrant for the purchase of 200,000 shares of
Common Stock, at an exercise price of $1.50 per share. The warrants for
115,000 shares of Common Stock were issued in June 1995 to certain of the
initial investors in the Company and expire in June 2005. The
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warrant for 200,000 shares of Common Stock was issued to Bruce A.L. Willard in
March 1997 in connection with the Company's acquisition of The Territory Ahead
and expires in March 2004.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to such
date, the Board of Directors approved the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction resulting in the
stockholder becoming an interested stockholder, the interested stockholder
owned not less than 85% of the corporation's voting stock outstanding at the
time such transaction commenced (excluding shares held by certain affiliates
of the corporation) or (iii) at or subsequent to the time the stockholder
became an interested stockholder, the business combination is approved both by
the Board of Directors and, at a meeting and not by written consent, by
holders of at least 66% of the outstanding voting stock not owned by the
interested stockholder. A "business combination" includes mergers, asset sales
and other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes, as nearly equal in size as possible,
with staggered three-year terms of office. See "Management." In addition, the
Restated Certificate of Incorporation provides that, so long as the Board of
Directors remains so classified, directors may be removed only for cause. Any
vacancy on the Board of Directors, however occurring, including a vacancy
resulting from an enlargement of the Board of Directors, may be filled by vote
of a majority of the directors then in office. The classification of the Board
of Directors and the provisions governing the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company.
The Restated Certificate of Incorporation and By-laws also provide that any
action required or permitted to be taken by the stockholders of the Company at
an annual meeting or special meeting of stockholders may be taken by written
consent in lieu of a meeting only if such written consent is executed by all
stockholders of the Company, and that special meetings of stockholders may be
called only by the President, Chief Executive Officer or Board of Directors of
the Company. The foregoing provisions could have the effect of delaying until
the next stockholders meeting stockholder actions which are favored by the
holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Common Stock, because such person or entity, even if it
acquired a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders' meeting, and not by
written consent.
The By-laws provide that nominations for directors may not be made by
stockholders at any annual or special meeting thereof unless the stockholder
intending to make a nomination notifies the Company of the nomination a
specified number of days in advance of the meeting and furnishes to the
Company certain information regarding such stockholder and the intended
nominee. The By-laws also require advance notice of any proposal to be brought
by a stockholder before any annual or special meeting of stockholders and the
provision of certain information to the Company regarding such stockholder and
any material interest such stockholder may have in the proposal. These
provisions could inhibit or prevent certain stockholder proposals, including
ones related to a possible acquisition of the Company, from being brought
before a meeting of stockholders.
The Restated Certificate of Incorporation and the By-laws require the
affirmative vote of the holders of at least 75% of the shares of capital stock
of the Company issued and outstanding and entitled to vote to amend or repeal
any of the provisions described in the prior two paragraphs.
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The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability to
stockholders for monetary damages for a breach of fiduciary duty, except in
certain circumstances, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation
of law. Further, the Restated Certificate of Incorporation contains provisions
requiring that the Company indemnify the Company's directors and officers to
the fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the securities
of the Company. Upon the closing of this offering, based upon the number of
shares outstanding at August 31, 1998, there will be shares of Common Stock
of the Company outstanding. Of these shares, the shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
The remaining shares (the "Restricted Shares") were issued and sold by
the Company in private transactions in reliance upon exemptions under the
Securities Act. Restricted Shares generally may be sold in the public market
only if registered under the Securities Act or sold in compliance with Rule
144.
SALES OF RESTRICTED SHARES
Of the Restricted Shares, shares will be eligible for sale in the public
market in reliance on Rule 144(k) as of the date of this Prospectus; all of
these shares are subject to the lock-up agreements described below. An
additional Restricted Shares will be eligible for sale in the public market
pursuant to Rule 144 and Rule 701 under the Securities Act beginning
approximately 90 days after the date of this Prospectus; of these shares are
subject to the lock-up agreements described below. The remaining Restricted
Shares become eligible for sale in the public market under Rule 144 at various
dates thereafter; of these shares are subject to the lock-up agreements
described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates of the
Company, whose Restricted Shares have been fully paid for and held for at
least one year from the later of the date of issuance by the Company or
acquisition from an affiliate of the Company, may sell such shares in brokers'
transactions or directly to market makers beginning approximately 90 days
after the date of this Prospectus, provided the number of shares sold in any
three-month period does not exceed the greater of 1% of the then outstanding
shares of the Common Stock (approximately shares, based on the number of
shares to be outstanding after this offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the
filing of the seller's Form 144. Sales under Rule 144 are also subject to
certain notice of sale requirements and the availability of current public
information concerning the Company. After two years have elapsed from the
later of the issuance of Restricted Shares by the Company or their acquisition
from an affiliate of the Company, such shares may be sold without limitation,
pursuant to Rule 144(k), by persons who have not been affiliates of the
Company for at least three months. Rule 144 also provides that affiliates who
are selling shares that are not Restricted Shares must nonetheless comply with
the same restrictions applicable to Restricted Shares with the exception of
the holding period requirement.
Restricted Shares that have been issued in reliance on Rule 701 (such as
shares of Common Stock issued under the Company's stock option plans) may be
resold by persons other than affiliates of the Company, beginning
approximately 90 days after the date of this Prospectus, subject only to the
manner of sale provisions of Rule 144, and may be resold by affiliates of the
Company under Rule 144 without compliance with its one-year holding period
requirement.
Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of such shares to certain "qualified institutional buyers," as defined
in Rule 144A under the Securities Act.
The Company intends to file, shortly following the closing of this offering,
Form S-8 registration statements under the Securities Act to register all
shares of Common Stock issuable under its employee and director stock plans.
See "Management--Stock Plans." Those registration statements will become
effective immediately upon
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filing. Shares issued pursuant to those registration statements will be
eligible for resale in the public market, subject to the Rule 144 limitations
applicable to affiliates of the Company and to the lock-up agreements
described below, if applicable.
LOCK-UP AGREEMENTS
Each current stockholder of the Company has agreed that, subject to certain
exceptions, for a period of 180 days after the date of this Prospectus, he,
she or it will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or securities
exercisable for or convertible into Common Stock.
REGISTRATION RIGHTS
Pursuant to the terms of an Amended and Restated Registration Agreement,
(the "Registration Agreement") by and among the Company and certain
stockholders of the Company (the "Rightsholders"), the Rightsholders are
entitled to certain rights with respect to the registration under the
Securities Act of a total of approximately 28,413,071 shares of Common Stock
(the "Registrable Shares"). Rightsholders holding 12,392,307 shares of Common
Stock have the right under the Registration Agreement to require the Company
to prepare and file from time to time after this offering, up to four
registration statements on Form S-1, provided that the gross proceeds to the
Rightsholders requesting such registration equals at least $10,000,000 or the
registration covers at least one-third of the requesting Rightsholders'
Registrable Shares. Rightsholders holding 16,558,418 shares of Common Stock
have the right to request an unlimited number of registration statements on
Form S-2 or Form S-3, provided that the gross proceeds from such offering
equals at least $1,000,000. The Company is not required to file more than two
registration statements on behalf of the Rightsholders in any twelve month
period. The Registration Agreement also provides that in the event the Company
proposes to file a registration statement under the Securities Act with
respect to an offering by the Company for its own account or the account of
another person, or both, the Rightsholders shall be entitled to include
Registrable Shares in such registration. In the event that the former owners
of Smith+Noble (the "S+N Holders") sell shares of Common Stock in this
offering which results in gross proceeds of less than $25,000,000, the S+N
Holders will have a priority, before other holders of Registrable Securities,
to include shares in registrations for the Company's account, such that the
gross proceeds to the S+N Holders from the sale of shares of Common Stock in
this offering and any such subsequent offerings, equals $25,000,000 (the "S+N
Priority"). The ability of the Rightsholders to include shares in subsequent
offerings is subject to the right of the managing underwriter of any such
offering to exclude some or all of such Registrable Shares from such
registration if in the opinion of the underwriter the number of shares
requested to be included in such registration exceeds the number which may be
sold in an orderly manner within the applicable price range. In the event of
registrations for the account of the Company, where the S+N Priority is
applicable, the amount of Registrable Securities to be offered for the account
of the S+N Holders (up to the number of shares determined by the S+N Priority)
is subject to reduction, pro rata with the shares offered by the Company,
before other shares may be included in the registration. In the event of
registrations for the account of (i) a person other than the Company or (ii)
the Company, where the S+N Priority is not applicable, the amount of
Registrable Shares to be offered for the accounts of the Rightsholders shall
be reduced pro rata among all of the requesting Rightsholders based upon the
number of shares held by all requesting Rightsholders.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares for sale will
have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of significant numbers of shares of the Common Stock in
the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Goldman, Sachs & Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Representatives"), have severally
agreed, subject to the terms and conditions set forth in the Underwriting
Agreement, to purchase from the Company and the Selling Stockholders the
aggregate number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to
purchase all of the shares of Common Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities LLC................................
Goldman, Sachs & Co. ................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...................
-------
Total..........................................................
=======
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow selected dealers
a concession of not more than $ per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After this offering, the offering price and other
selling terms may be changed by the Representatives. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of additional shares of Common
Stock, respectively, to cover over-allotments, if any, at the same price per
share as the initial shares to be purchased by the Underwriters. To the extent
the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
At the request of the Company, the Underwriters have reserved for sale to
certain employees of the Company and certain other persons, at the initial
public offering price, up to of the shares of Common Stock offered hereby.
The number of shares available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
All of the Company's current stockholders have agreed that, subject to
certain exceptions, for a period of 180 days after the date of this
Prospectus, they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock. In addition,
subject to certain exceptions (including without limitation grants and
issuances under employee and director stock plans), the Company has agreed
that, for a period of 180 days after the date of this Prospectus, it will not,
without the prior written consent of NationsBanc Montgomery Securities LLC,
directly or indirectly, sell, offer, contract or grant any option to sell,
pledge, transfer, establish an open put
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equivalent position or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock.
The Underwriters are permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock
in connection with this offering, i.e., if they sell more shares of Common
Stock than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. In
addition, the Representatives may impose "penalty bids" under contractual
arrangements with the Underwriters whereby they may reclaim from an
Underwriter (or dealer participating in this offering) for the account of the
other Underwriters, the selling concession with respect to the Common Stock
that is distributed in this offering but subsequently purchased for the
account of the Underwriters in the open market.
In general, purchases of Common Stock for the purpose of stabilization or to
reduce a short position could cause the price of the Common Stock to be higher
than it might be in the absence of such purchases. None of the Company, the
Selling Stockholders and the Underwriters makes any representation or
predictions as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, none of the Company, the Selling Stockholders and the Underwriters
makes any representation that the Representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such negotiations will be the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the present state of the Company's business, the general
condition of the securities markets at the time of this offering and the
market prices of publicly traded stock of comparable companies in recent
periods.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston,
Massachusetts. Certain legal matters will be passed upon for the Underwriters
by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Cornerstone at January 31, 1998 and
January 25, 1997 and for each of the three years in the period ended January
31, 1998 appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, which is based in part on the reports of BDO Seidman, LLP and Arthur
Andersen LLP, independent auditors. The financial statements referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
The financial statements of Garnet Hill and for each of the three years in
the period ended July 31, 1997, and of Frontgate for the interim period ended
September 12, 1995, appearing in this Prospectus have been audited
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by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits, schedules and supplements thereto) on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission, to which Registration Statement reference is
hereby made. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, the
Company is required to file electronic versions to these documents with the
Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements. The Company also intends
to make available to its stockholders, within 45 days after the end of each
fiscal quarter, reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CORNERSTONE BRANDS, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Report of BDO Seidman, LLP, Independent Certified Public Accountants..... F-3
Report of Arthur Andersen LLP, Independent Auditors...................... F-4
Consolidated Balance Sheets as of January 25, 1997 and January 31, 1998
and August 1, 1998 (unaudited).......................................... F-5
Consolidated Statements of Operations for the years ended January 27,
1996, January 25, 1997 and January 31, 1998 and for the six months ended
August 2, 1997 (unaudited) and August 1, 1998 (unaudited)............... F-6
Consolidated Statements of Cash Flows for the years ended January 27,
1996, January 25, 1997 and January 31, 1998 and for the six months ended
August 2, 1997 (unaudited) and August 1, 1998 (unaudited)............... F-7
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity for the years ended January 27, 1996, January 25,
1997 and January 31, 1998 and for the six months ended August 1, 1998
(unaudited)............................................................. F-8
Notes to Consolidated Financial Statements............................... F-9
GARNET HILL, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-24
Statements of Income for the years ended July 29, 1995, July 26, 1996 and
July 25, 1997........................................................... F-25
Statements of Cash Flows for the years ended July 29, 1995, July 26, 1996
and July 25, 1997....................................................... F-26
Notes to Financial Statements............................................ F-27
CINMAR L.P.
Report of Ernst & Young LLP, Independent Auditors........................ F-30
Statement of Income for the period from January 1, 1995 to September 12,
1995.................................................................... F-31
Statement of Cash Flows for the period from January 1, 1995 to September
12, 1995................................................................ F-32
Notes to Financial Statements............................................ F-33
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Cornerstone Brands, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone
Brands, Inc. (formerly The International Cornerstone Group, Inc.) (the
Company) as of January 25, 1997 and January 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Ballard Designs, Inc. (Ballard), a wholly-owned subsidiary,
included in the consolidated financial statements as of January 25, 1997 and
for the years ended January 27, 1996 and January 25, 1997, which statements
reflect total assets constituting approximately 9% at January 25, 1997 and
revenues constituting approximately 44% and 29% for the years ended January
27, 1996 and January 25, 1997, respectively, of the related consolidated
totals and Smith & Noble LLC (Smith & Noble), a wholly owned subsidiary,
included in the consolidated financial statements as of January 25, 1997 and
January 31, 1998 and for each of the three years in the period ended January
31, 1998, which statements reflect total assets constituting approximately 5%
and 4% at January 25, 1997 and January 31, 1998, respectively, and revenues
constituting approximately 26%, 20% and 13% for fiscal years ended January 27,
1996, January 25, 1997 and January 31, 1998, respectively, of the related
consolidated totals. Those statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Ballard in the January 27, 1996 and January 25, 1997
financial statements and Smith & Noble in the January 27, 1996, January 25,
1997 and January 31, 1998 financial statements, is based solely on the reports
of the other auditors.
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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
January 25, 1997 and January 31, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended January 31,
1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
April 17, 1998, except as to Note 3, as to which the date is August 25, 1998
The foregoing report is in the form that will be signed to reflect the
merger of the Company and Smith & Noble LLC as described in Note 3 to the
financial statements and the inclusion, in an amendment to the Registration
Statement, of financial statements of the Company including the date of
consummation of the merger.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 25, 1998
F-2
<PAGE>
REPORT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Ballard Designs, Inc.
We have audited the balance sheet of Ballard Designs, Inc. as of December
31, 1996, and the related statements of operations and retained earnings, and
cash flows for the years ended December 31, 1996 and 1995 (not presented
separately herein). 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 Ballard Designs, Inc. as
of December 31, 1996, and the results of its operations and cash flows for the
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
December 18, 1997
F-3
<PAGE>
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS
To the Members of Smith & Noble LLC:
We have audited the accompanying balance sheets of Smith & Noble LLC (a
California Limited Liability Company) as of December 31, 1996 and 1997, and
the related statements of operations, proprietors'/members' capital and cash
flows for each of the three years in the period ended December 31, 1997 (not
included herein). 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 standard 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 Smith & Noble LLC as of
December 31, 1996 and 1997, the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orange County, California
February 5, 1998
F-4
<PAGE>
CORNERSTONE BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 25 JANUARY 31 AUGUST 1
1997 1998 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $11,235,821 $ 4,869,505 $ 2,014,326
Investments.......................... 9,141,449 4,095,887 2,403,334
Accounts receivable.................. 1,129,478 3,787,044 4,682,432
Inventory............................ 6,214,876 30,563,209 35,224,199
Deferred income taxes................ -- 953,842 2,518,643
Prepaid expenses and other current
assets.............................. 3,157,764 7,629,451 11,580,761
----------- ------------ ------------
Total current assets.................. 30,879,388 51,898,938 58,423,695
Property and equipment, net........... 5,992,723 12,480,579 19,799,078
Investment in affiliate............... 2,033,469 3,842,411 6,050,187
Goodwill.............................. 14,831,010 59,897,954 59,136,375
Deferred income taxes................. 117,296 -- --
Other assets.......................... 1,458,691 5,525,984 5,904,881
----------- ------------ ------------
Total assets.......................... $55,312,577 $133,645,866 $149,314,216
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit...... $ -- $ 15,450,000 $ 30,235,000
Accounts payable..................... 6,153,632 15,943,805 16,722,813
Accrued expenses and other current
liabilities......................... 3,850,222 8,032,591 9,628,915
Payable to related parties........... 3,226,600 2,772,530 573,821
Deferred income taxes................ 339,207 -- --
Debt and capital leases maturing
within one year..................... 503,701 77,483 75,000
----------- ------------ ------------
Total current liabilities............. 14,073,362 42,276,409 57,235,549
Long term debt and capital leases..... 2,046,544 331,860 313,364
Deferred income taxes................. -- 735,781 735,781
Payable to related parties, less
current portion...................... 1,543,821 -- --
Minority interest..................... -- 518,760 275,042
Commitments and contingencies
Redeemable convertible preferred
stock:
Series A, $0.01 par value, 56,500
shares authorized; 22,554 shares
issued and outstanding at January
25, 1997 and 56,385 issued and
outstanding at January 31, 1998
($59,897,245 and $61,306,871
liquidation value at January 31,
1998 and August 1, 1998,
respectively)....................... 22,838,198 58,815,151 60,332,299
Stockholders' equity:
Series B convertible preferred stock,
$0.01 par value, 9,000 shares
authorized; 6,500 shares issued and
outstanding at January 25, 1997 and
7,242 issued and outstanding at
January 31, 1998 and August 1, 1998
($7,242,000 liquidation value at
January 31, 1998 and August 1,
1998)............................... 65 72 72
Series C convertible preferred stock,
$0.01 par value, 2,250 shares
authorized; 1,500 shares issued and
outstanding at January 25, 1997 and
750 issued and outstanding at
January 31, 1998 and August 1, 1998
($750,000 liquidation value at
January 31, 1998 and August 1,
1998)............................... 15 8 8
Common stock, $0.001 par value,
28,499,400 shares authorized;
12,465,408 shares issued and
outstanding at January 25,1997,
14,538,730 issued and outstanding at
January 31, 1998 and 14,619,266
issued and outstanding at August 1,
1998................................ 12,466 14,539 14,619
Additional paid-in capital............ 11,182,761 22,418,502 21,401,519
Retained earnings..................... 3,524,341 8,367,178 8,977,249
Unrealized gains on available for sale
securities........................... 91,334 167,936 29,044
Less: treasury stock--330,000 shares.. (330) (330) (330)
----------- ------------ ------------
Total stockholders' equity............ 14,810,652 30,967,905 30,422,181
----------- ------------ ------------
Total liabilities and stockholders'
equity............................... $55,312,577 $133,645,866 $149,314,216
=========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CORNERSTONE BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
--------------------------------------- -------------------------
JANUARY 27 JANUARY 25 JANUARY 31 AUGUST 2 AUGUST 1
1996 1997 1998 1997 1998
----------- ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $60,535,799 $106,100,377 $216,334,704 $80,807,393 $139,268,557
Cost of sales........... 32,817,120 54,750,794 112,250,872 42,409,598 71,015,829
----------- ------------ ------------ ----------- ------------
Gross profit............ 27,718,679 51,349,583 104,083,832 38,397,795 68,252,728
----------- ------------ ------------ ----------- ------------
Operating expenses:
Selling, catalog and
fulfillment expenses.. 22,872,664 36,407,948 75,435,147 26,450,704 50,083,636
General and
administrative........ 3,508,435 6,910,994 13,450,158 4,992,542 9,168,185
Amortization and
depreciation.......... 759,195 1,734,953 3,522,884 1,403,794 2,438,867
Restructuring charge... -- -- 943,000 -- 2,837,781
----------- ------------ ------------ ----------- ------------
Total operating
expenses............... 27,140,294 45,053,895 93,351,189 32,847,040 64,528,469
----------- ------------ ------------ ----------- ------------
Operating income........ 578,385 6,295,688 10,732,643 5,550,755 3,724,259
Investment income
(expense), net......... (95,148) 367,141 (207,883) 78,588 (198,760)
----------- ------------ ------------ ----------- ------------
Income before equity in
net income (loss) of
affiliates, minority
interest and income
taxes.................. 483,237 6,662,829 10,524,760 5,629,343 3,525,499
Equity in net income
(loss) of affiliate.... (5,001) 391,825 1,808,942 995,000 2,207,776
Minority interest....... -- -- 275,199 81,882 243,718
----------- ------------ ------------ ----------- ------------
Income before income
taxes.................. 478,236 7,054,654 12,608,901 6,706,225 5,976,993
Income taxes............ 157,794 984,999 3,103,038 1,723,632 324,295
----------- ------------ ------------ ----------- ------------
Net income.............. 320,442 6,069,655 9,505,863 4,982,593 5,652,698
Accretion of redeemable
convertible preferred
stock.................. (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
----------- ------------ ------------ ----------- ------------
Net income (loss)
applicable to common
stock.................. $ (39,623) $ 4,760,970 $ 7,205,349 $ 4,044,081 $ 4,135,550
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock.. $ (0.003) $ 0.39 $ 0.56 $ 0.33 $ 0.29
=========== ============ ============ =========== ============
Net income (loss) per
share of common stock,
assuming dilution...... $ (0.003) $ 0.31 $ 0.38 $ 0.23 $ 0.19
=========== ============ ============ =========== ============
Pro forma:
Historical net income.. $ 320,442 $ 6,069,655 $ 9,505,863 $ 4,982,593 $ 5,652,698
Provision (benefit) for
income taxes on
previously untaxed
earnings of pooled S-
Corporation........... (326,641) 500,067 151,551 151,551 --
Provision for income
taxes on previously
untaxed earnings of
pooled limited
liability company..... 383,054 969,228 1,973,544 977,200 1,646,007
----------- ------------ ------------ ----------- ------------
Pro forma net income... $ 264,029 $ 4,600,360 $ 7,380,768 $ 3,853,842 $ 4,006,691
=========== ============ ============ =========== ============
Pro forma net income
per common share...... $ (0.01) $ 0.27 $ 0.39 $ 0.23 $ 0.18
=========== ============ ============ =========== ============
Pro forma net income
per common share,
assuming dilution..... $ (0.01) $ 0.23 $ 0.30 $ 0.17 $ 0.13
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CORNERSTONE BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------
JANUARY 27 JANUARY 25 JANUARY 31 AUGUST 2 AUGUST 1
1996 1997 1998 1997 1998
----------- ----------- ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 320,442 $ 6,069,655 $ 9,505,863 $ 4,982,593 $ 5,652,698
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Amortization and
depreciation.......... 759,195 1,734,953 3,522,884 1,403,794 2,438,867
Minority interest...... -- -- (275,199) (81,882) (243,718)
Equity in net (income)
loss of affiliates.... 5,001 (391,825) (1,808,942) (995,000) (2,207,776)
Deferred income taxes.. (100,000) (100,000) (1,696,940) (857,538) (1,564,801)
Restructuring charge... -- -- 943,000 -- 2,837,781
Loss (gain) on disposal
of equipment.......... (3,494) 1,082 -- -- --
Changes in working
capital:
Receivables............ 213,885 (412,015) (2,174,875) (3,491,186) (895,388)
Inventory.............. (484,195) (658,530) (2,952,456) (1,628,268) (4,660,990)
Other assets........... 338,263 (1,128,699) 2,582,311 1,188,665 (4,886,447)
Accounts payable,
accruals and other
liabilities........... 1,737,331 2,821,562 1,263,199 1,239,224 (462,449)
----------- ----------- ------------ ------------ -----------
Net cash provided (used)
by operating
activities............. 2,786,428 7,936,183 8,908,845 1,760,402 (3,992,223)
INVESTING ACTIVITIES
Sale (purchase) of
investments, net....... (4,852,048) (1,848,067) (334,684) (130,500) 1,553,661
Purchases of property
and equipment.......... (1,441,443) (1,646,660) (3,497,693) (1,097,382) (8,439,547)
Proceeds from sale of
equipment.............. 14,318 873 -- -- --
Acquisitions, net of
cash of acquired
companies.............. -- (1,047,000) (48,734,748) (41,196,420) --
----------- ----------- ------------ ------------ -----------
Net cash used in
investing activities... (6,279,173) (4,540,854) (52,567,125) (42,424,302) (6,885,886)
FINANCING ACTIVITIES
Cash received from
issuance of Series A
preferred stock, net of
issuance costs......... 7,735,574 2,459,298 33,676,439 22,222,076 --
Cash from sale of common
stock.................. -- -- -- -- 500,245
Contributions from
shareholders........... 265 870,325 -- -- --
Distributions to
shareholders........... (903,578) (2,040,561) (4,663,026) (2,858,552) (5,042,627)
Borrowings (repayments)
on line of credit...... (104,999) (1,070,000) 15,450,000 20,620,811 14,785,000
Payment of liabilities
to related parties..... -- (583,141) (3,731,891) (2,693,931) (2,198,709)
Payment of other
liabilities............ 272,359 (866,410) (3,439,558) (2,176,371) (20,979)
----------- ----------- ------------ ------------ -----------
Net cash provided (used)
by financing
activities............. 6,999,621 (1,230,489) 37,291,964 35,114,033 8,022,930
----------- ----------- ------------ ------------ -----------
Net increase (decrease)
in cash................ 3,506,876 2,164,840 (6,366,316) (5,549,867) (2,855,179)
Cash and cash
equivalents at
beginning of the
period................. 5,564,105 9,070,981 11,235,821 11,235,821 4,869,505
----------- ----------- ------------ ------------ -----------
Cash and cash
equivalents at end of
period................. $ 9,070,981 $11,235,821 $ 4,869,505 $ 5,685,954 $ 2,014,326
=========== =========== ============ ============ ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION
Cash paid for
interest.............. $ 353,360 $ 390,980 $ 1,473,957 $ 175,162 $ 848,829
=========== =========== ============ ============ ===========
Cash paid for income
taxes................. $ -- $ 920,000 $ 3,458,530 $ 654,500 $ 3,609,541
=========== =========== ============ ============ ===========
</TABLE>
F-7
<PAGE>
CORNERSTONE BRANDS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE ADDITIONAL
PREFERRED COMMON PREFERRED PAID-IN RETAINED TREASURY UNREALIZED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS STOCK GAINS EQUITY
----------- ------- --------- ----------- ----------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28,
1995................... $ -- $ 6,383 $-- $ 7,283 $ 949,189 $ -- $ -- $ 962,855
Formation of the
Company................ 10,974,576 6,083 80 12,466,725 (1,364,223) 11,108,665
Issuance of Series A
preferred stock, net of
issuance costs of
$264,426............... 7,735,574 -- -- -- -- -- -- --
Contributions by owners
of Smith & Noble LLC... -- -- -- 265 -- -- -- 265
Distributions to owners
of Smith & Noble LLC... -- -- -- -- (903,578) -- -- (903,578)
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 360,065 -- -- (360,065) -- -- -- (360,065)
Net income.............. -- -- -- -- 320,442 -- -- 320,442
----------- ------- ---- ----------- ----------- ----- --------- -----------
Balances at January 27,
1996................... 19,070,215 12,466 80 12,114,208 (998,170) -- -- 11,128,584
Issuance of Series A
preferred stock, net of
issuance costs of
$94,703................ 2,459,298 -- -- -- -- -- -- --
Contributions by owners
of Smith & Noble LLC... -- -- -- 870,325 -- -- -- 870,325
Distributions to
shareholders of the
Company................ -- -- -- (200,675) -- -- -- (200,675)
Distributions to
shareholders of Ballard
Designs, Inc........... -- -- -- (292,742) -- -- -- (292,742)
Distributions to owners
of Smith & Noble LLC... -- -- -- -- (1,547,144) -- -- (1,547,144)
Shares returned to
Company for no
consideration.......... -- -- -- 330 -- (330) -- --
Unrealized gain on
available for sale
securities............. -- -- -- -- -- -- 91,334 91,334
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 1,308,685 -- -- (1,308,685) -- -- -- (1,308,685)
Net income.............. -- -- -- -- 6,069,655 -- -- 6,069,655
----------- ------- ---- ----------- ----------- ----- --------- -----------
Balances at January 25,
1997................... 22,838,198 12,466 80 11,182,761 3,524,341 (330) 91,334 14,810,652
Tracking stock
transactions........... -- 1,323 -- 7,537,005 -- -- -- 7,538,328
Shares issued in
conjunction with
purchase acquisitions.. -- 750 -- 5,999,250 -- -- -- 6,000,000
Issuance of Series A
preferred stock, net of
issuance costs of
$154,924............... 33,676,439 -- -- -- -- -- -- --
Distributions to
shareholders of Ballard
Designs, Inc........... -- -- -- -- (1,050,549) -- -- (1,050,549)
Distributions to members
of Smith & Noble LLC... -- -- -- -- (3,612,477) -- -- (3,612,477)
Unrealized gain on
available for sale
securities............. -- -- -- -- -- -- 76,602 76,602
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 2,300,514 -- -- (2,300,514) -- -- -- (2,300,514)
Net income.............. -- -- -- -- 9,505,863 -- -- 9,505,863
----------- ------- ---- ----------- ----------- ----- --------- -----------
Balances at January 31,
1998................... 58,815,151 14,539 80 22,418,502 8,367,178 (330) 167,936 30,967,905
Issuance of common stock
upon exercise of stock
options................ -- 25 -- 225 -- -- -- 250
Sale of common stock.... -- 55 -- 499,940 -- -- -- 499,995
Distributions to members
of Smith & Noble LLC... -- -- -- -- (5,042,627) -- -- (5,042,627)
Unrealized (loss) on
available for sale
securities............. -- -- -- -- -- -- (138,892) (138,892)
Accretion of redeemable
convertible preferred
stock to redemption
value.................. 1,517,148 -- -- (1,517,148) -- -- -- (1,517,148)
Net income (unaudited).. -- -- -- -- 5,652,698 -- -- 5,652,698
----------- ------- ---- ----------- ----------- ----- --------- -----------
Balances at August 1,
1998 (unaudited)....... $60,332,299 $14,619 $ 80 $21,401,519 $ 8,977,249 $(330) $ 29,044 $30,422,181
=========== ======= ==== =========== =========== ===== ========= ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AUGUST 1, 1998 AND FOR THE SIX MONTHS ENDED AUGUST 2, 1997
AND AUGUST 1, 1998 ARE UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
Cornerstone Brands, Inc. (the Company) was organized in August 1998 under
the laws of the State of Delaware to serve as a holding company for The
Cornerstone Brands Group, Inc., formerly The International Cornerstone Group,
Inc., which was organized in June 1995. In 1995, the Company acquired Cinmar,
Inc., Cinmar L.P. and related assets (collectively referred to as Frontgate).
In 1996, the Company acquired a majority interest in TravelSmith Outfitters,
Inc. (TravelSmith). In 1997, the Company acquired a majority ownership in The
Territory Ahead, Inc. (March 1997), and Whispering Pines LLC (September 1997),
and 100% ownership of Garnet Hill, Inc. (July 1997) and Ballard Designs, Inc.
(Ballard). Additionally, in August 1998, the Company acquired Smith & Noble
LLC (Smith & Noble).
The Company's primary business is direct mail specialty catalog retail, with
sales throughout the United States.
Fiscal Year End
Prior to the year ended January 31, 1998, the Company's fiscal year ended
the last Saturday in January. Beginning in the year ended January 31, 1998,
the Company adopted a fiscal year of 52- or 53-week periods that end on the
Saturday closest to January 31 of each year. For the purposes of these notes
to the consolidated financial statements, the fiscal years ended January 27,
1996, January 25, 1997 and January 31, 1998 are referred to as fiscal 1995,
1996 and 1997, respectively. Each of the fiscal years presented contains 52
weeks, except for 1997, which contains 53 weeks
Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, except TravelSmith, which is accounted for on the equity
method (see Note 4). All significant intercompany transactions are eliminated.
Unaudited Interim Information
In the opinion of management, the consolidated financial statements for the
unaudited periods presented include all adjustments necessary for a fair
presentation in accordance with generally accepted accounting principles,
consisting solely of normal recurring accruals and adjustments. The results of
operations for the six months ended August 1, 1998 are not necessarily
indicative of results which would be expected for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-9
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Investments
The Company accounts for its investment securities under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Debt and Equity Securities. The Company's marketable debt and equity
securities are classified as "available for sale" and are reported at fair
market value with unrealized gains and losses included as a separate component
of stockholders' equity.
Smith & Noble has held options to purchase equity securities, which are
considered to be derivatives. Smith & Noble's objective for holding these
derivatives is current and future income. The derivatives are reported in the
financial statements as equity securities available for sale. Accordingly, the
options are reported at fair market value with unrealized gains and losses
included as a separate component of stockholders' equity.
Realized gains and losses, interest and dividends on all securities are
included in investment income.
Inventory
Inventories, which consist principally of goods available for sale, are
stated at the lower of cost or market, including provisions for obsolescence
commensurate with known or estimated exposures. The reserve for obsolescence
was $496,000 and $2,235,000 as of January 25, 1997 and January 31, 1998,
respectively. The principal basis of determining cost is the first-in, first-
out (FIFO) method.
Catalog Costs
Prepaid expenses consist primarily of costs associated with the production
and mailing of the Company's direct mail catalogs. These costs are amortized
over the estimated periods in which the related revenues are generated,
generally three months or less.
Property and Equipment
Property and equipment are stated at cost or, for assets acquired through
business combinations, at fair value at the dates of the respective
acquisitions. For financial reporting purposes, depreciation is generally
determined on the straight-line method using estimated useful lives of the
assets. Depreciation expense was $473,000, $852,000 and $1,567,000 for fiscal
1995, 1996 and 1997, respectively. Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building........................................................... 40
Equipment.......................................................... 3-7
Furniture and fixtures............................................. 5-10
</TABLE>
Other Assets
Other assets consist primarily of mailing lists acquired through business
combinations and are recorded at fair market value at date of acquisition and
amortized on a straight-line basis over their economic life. The total amount
of mailing list amortization charged to expense for fiscal 1995, 1996 and 1997
was approximately $185,000, $590,000, and $855,000 respectively. Accumulated
amortization on the Company's mailing lists was $1,625,000 as of January 31,
1998.
Other assets at January 31, 1998 also include a $1,728,000 loan receivable
from a former stockholder of The Territory Ahead (see Note 14--Related-Party
Transactions).
F-10
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill arises from the excess of the cost of the purchase of a business
over the value of the underlying net assets and is being amortized by the
straight-line method over 40 years. The amount of amortization charged to
expense for fiscal 1995, 1996 and 1997 was $101,000, $322,000 and $1,036,000,
respectively. Accumulated amortization was $423,000 at January 25, 1997 and
$1,459,000 at January 31, 1998. At each balance sheet date, management
assesses whether there has been a permanent impairment in the value of
goodwill by comparing anticipated undiscounted future cash flows from
operating activities with the carrying value of the goodwill. The amount of
any resulting impairment is calculated using the same undiscounted cash flows
from operating activities. The factors considered by management in this
assessment include operating and economic factors. If this review indicates
that goodwill will not be recoverable, as determined based on the undiscounted
cash flows of the acquired businesses over the remaining amortization period,
the carrying value of goodwill would be reduced by the estimated shortfall of
cash flows.
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Tax provisions and credits are recorded at statutory rates for taxable items
included in the consolidated statements of income regardless of the period in
which such items are reported for tax purposes. Deferred income taxes are
recognized for temporary differences between financial statement and income
tax bases of assets and liabilities.
Revenue Recognition
Inventory sales are recorded as revenue when products are shipped. For
inventory drop shipped by vendors, the Company records prepayments by
customers as customer deposits, which are included in accrued expenses on the
accompanying consolidated balance sheets. Revenue is recognized for drop
shipped sales when the goods are shipped by the vendor to the customer.
Customer Returns
The Company provides a reserve for customer returns, which approximates the
gross profit on projected merchandise returns. The reserve balance at January
25, 1997 and January 31, 1998 was $487,000 and $2,453,000, respectively, and
is included in accrued liabilities.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-
Based Compensation" (FAS 123). As permitted by Statement 123, the Company
continues to account for its stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and provides pro forma disclosures of the compensation expense
determined under the fair value provisions of FAS 123. No stock-based
compensation expense has been recognized in the consolidated financial
statements.
Earnings per Share
The Company has presented earnings per share for all periods under Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" (FAS 128).
Basic earnings per share is computed using net income (loss) applicable to
common stock and the weighted average number of common shares outstanding and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is computed using net income (loss) applicable to
common stock and the weighted average number of outstanding shares of
F-11
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock and common stock equivalents, assuming the conversion of
preferred stock and the exercise of stock options and warrants (using the
treasury stock method). Common stock equivalents are excluded from the
computation when their effect is anti-dilutive.
Defined Contribution Plans
Most of the Company's subsidiaries sponsor defined contribution retirement
plans covering most employees. Expenses related to these plans were $0,
$75,000 and $112,000 for fiscal 1995, 1996 and 1997, respectively.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement 130,
"Reporting Comprehensive Income" (FAS 130). FAS 130 establishes new rules for
the reporting and display of comprehensive income and its components. Adoption
in 1998 has not had a material impact on the Company's financial statements.
Segment Reporting
The Company reports segment information under Financial Accounting Standards
Board issued Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (FAS 131). This statement, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the major countries in which
the Company holds assets and reports revenues. The Company holds assets and
reports revenues in one operating segment.
2. ACQUISITIONS
In conjunction with its 1995 acquisition of Cinmar L.P. (Frontgate), the
Company issued 600 shares of Tracking Stock to the former owners of Frontgate,
entitling them to additional consideration contingent on the earnings of
Frontgate. During fiscal 1997, the Company bought the Tracking Stock for
approximately $15 million of cash and common stock of the Company, which
resulted in an increase to goodwill.
On March 31, 1997, the Company purchased 80% of the outstanding shares of
The Territory Ahead, Inc. (Territory Ahead) located in Santa Barbara,
California. Territory Ahead is a catalog company that specializes in casual
apparel. The Company's share of the assets and business of Territory Ahead was
acquired for an aggregate purchase price of $12,350,000 in the form of cash
payments, including related fees and expenses.
On July 28, 1997, the Company acquired 100% of the outstanding shares of
Garnet Hill, Inc. (Garnet Hill). Garnet Hill is a catalog company that
specializes in home and casual apparel products. The assets and business were
acquired for an aggregate purchase price of approximately $38 million,
including related fees and expenses. The total consideration includes cash
payments aggregating $30 million, issuance of 750,000 shares of Company common
stock valued at $6 million and issuance of notes to the shareholders of
approximately $1,700,000.
On September 4, 1997, the Company acquired a 51% ownership interest in
Whispering Pines LLC (Whispering Pines). Whispering Pines is a catalog company
that specializes in home, leisure and casual apparel products. The Company
paid $1 million in cash for its share of Whispering Pines.
F-12
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For financial reporting purposes, these acquisitions were accounted for
under the purchase method. The operating results of the acquired businesses
have been included in consolidated operating results since the dates of
acquisition. The acquisitions, which resulted in a new basis of accounting
reflecting the fair values of the assets at the acquisition date, have been
summarized as follows:
<TABLE>
<CAPTION>
THE
TERRITORY WHISPERING
GARNET HILL AHEAD PINES
----------- ----------- ----------
<S> <C> <C> <C>
Historical basis of net assets ac-
quired............................. $12,024,474 $ 893,296 $1,010,000
Fair value and other adjustments:
Customer master file.............. 921,000 612,000 --
Inventory valuation adjustment.... 1,510,737 1,435,460 --
Fixed asset valuation adjustment.. 266,312 -- --
----------- ----------- ----------
Fair value of net assets............ 14,722,523 2,940,756 1,010,000
Ownership percentage................ 100% 80% 51%
Fair value of net assets purchased.. 14,722,523 2,352,605 515,100
Goodwill............................ 23,007,281 9,997,395 484,900
----------- ----------- ----------
Total purchase price................ $37,729,804 $12,350,000 $1,000,000
=========== =========== ==========
</TABLE>
The following unaudited pro forma results of operations assume that the
fiscal 1997 purchase transactions described above occurred on January 26,
1997. In addition to combining historical results of operations, the unaudited
pro forma amounts shown include adjustments for the estimated effect of
amortization associated with such transactions. The unaudited pro forma
information below does not purport to be indicative of the results of
operations that would have been achieved if the transactions described above
had been consummated as of the beginning of fiscal 1997. In addition, the
unaudited pro forma information below does not purport to be indicative of the
results of operations which may be achieved in the future.
<TABLE>
<S> <C>
Revenues.................................................... $240,129,274
============
Net income.................................................. $ 9,024,028
============
Pro forma net income per common share....................... $ 0.51
============
Pro forma net income per common share, assuming dilution.... $ 0.36
============
</TABLE>
3. POOLINGS OF INTERESTS
In fiscal 1997, the Company acquired Ballard Designs, Inc. (Ballard).
Ballard is a catalog company that specializes in home products. The Company
exchanged 2,216,667 shares of common stock for all outstanding shares of
Ballard's common stock. On August 25, 1998, the Company acquired Smith & Noble
LLC (Smith & Noble). Smith & Noble is a catalog company that specializes in
home products. The Company exchanged 4,166,111 shares of common stock for all
outstanding membership interests of Smith & Noble. These acquisitions were
accounted for as poolings of interests, and, accordingly, the accompanying
consolidated financial statements include the financial position, results of
operations and cash flows of Ballard and Smith & Noble for all periods.
The statements of income combine Cornerstone's historical operating results
for the fiscal years ended January 27, 1996, January 25, 1997 and January 31,
1998 with the corresponding Ballard operating results for the years ended
December 31, 1995, 1996 and thirteen months ended January 31, 1998,
respectively and Smith & Noble operating results for the years ended December
31, 1995, 1996 and 1997, respectively. The inclusion
F-13
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the extra month (January 1997) in the fiscal year ended January 31, 1998
for Ballard did not have a significant effect on reported results of
operations. Prior to the acquisitions, Ballard and Smith & Noble elected to be
taxed as an S Corporation and limited liability company taxed as a
partnership, respectively, under the Internal Revenue Code. Accordingly, the
current taxable income of Ballard and Smith & Noble was taxable to its
shareholders, who were responsible for the payment of taxes thereon. Ballard
and Smith & Noble are included in the Company's U.S. federal income tax return
subsequent to the date of the acquisition. Pro forma adjustments have been
made to the consolidated statements of operations to reflect the income taxes
that would have been provided had Ballard and Smith & Noble been subject to
income taxes.
Separate net sales and net income of the merged entities are presented in
the following table:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
------------------------------------- ------------------------
JANUARY 27, JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
1996 1997 1998 1997 1998
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales:
Net sales of
Cornerstone(1)....... $18,006,434 $ 54,853,505 $147,282,844 $48,720,986 $119,822,002
Net sales of Smith &
Noble................ 15,690,384 20,927,758 27,996,960 13,011,000 19,446,555
Net sales of Ballard.. 26,838,981 30,319,114 41,054,900 19,075,407 --
----------- ------------ ------------ ----------- ------------
Net sales as
reported........... $60,535,799 $106,100,377 $216,334,704 $80,807,393 $139,268,557
=========== ============ ============ =========== ============
</TABLE>
- --------
(1) Net sales of Cornerstone for the six months ended August 1, 1998 includes
the results of Ballard.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------- ---------------------
JANUARY JANUARY JANUARY AUGUST 2, AUGUST 1,
27, 1996 25, 1997 31, 1998 1997 1998
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income:
Net income of Corner-
stone(1)............. $ 179,410 $2,396,417 $3,924,188 $1,739,795 $1,537,197
Net income of Smith &
Noble................ 957,635 2,423,070 4,933,857 2,443,000 4,115,501
Net income (loss) of
Ballard.............. (816,603) 1,250,168 647,818 799,798 --
--------- ---------- ---------- ---------- ----------
Net income as re-
ported............. $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
========= ========== ========== ========== ==========
Pro forma net income:
Net income as report-
ed(2)................ $ 320,442 $6,069,655 $9,505,863 $4,982,593 $5,652,698
Pro forma tax provi-
sion of
Smith & Noble........ 383,054 969,228 1,973,544 977,200 1,646,007
Pro forma tax provi-
sion (benefit)
of Ballard........... (326,641) 500,067 151,551 151,551 --
--------- ---------- ---------- ---------- ----------
Pro forma net in-
come............... $ 264,029 $4,600,360 $7,380,768 $3,853,842 $4,006,691
========= ========== ========== ========== ==========
</TABLE>
- --------
(1) Net income of Cornerstone for the six months ended August 1, 1998 includes
the results of Ballard.
(2) Net income as reported for the six months ended August 1, 1998 includes
net income and tax provision of Ballard.
4. TRAVELSMITH
On July 17, 1996, the Company increased its ownership in TravelSmith to
60.8% in a transaction accounted for as a purchase. The Company reflects its
investment in TravelSmith under the equity method of accounting in
F-14
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
order to comply with EITF Issue 96-16, Investor's Accounting for an Investee
When the Shareholder Has a Majority Voting Interest but the Minority
Shareholder or Shareholders Have Certain Approval or Veto Rights.
The table below represents a summary of TravelSmith's financial position as
of, and results of operations for the years ended, January 25, 1997 and
January 31, 1998 and the six months ended August 1, 1998:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 31, AUGUST 1,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Total assets........................... $ 5,031,000 $14,186,000 $15,562,000
Total liabilities...................... 2,926,000 8,819,000 6,436,000
Net sales.............................. 18,054,000 35,995,000 33,546,000
Net income............................. 707,000 3,140,000 3,713,000
</TABLE>
The January 31, 1998 investment in affiliate balance shown in the
consolidated balance sheet includes approximately $580,000 of costs that
represent the excess of the recorded investment over the amount of underlying
equity in TravelSmith's net assets at date of acquisition. The difference is
subject to amortization, consistent with the goodwill and mailing list
amortization policies outlined in Note 1.
5. SHORT-TERM INVESTMENTS
The composition of short-term investments is as follows:
<TABLE>
<CAPTION>
JANUARY 25, 1997
-----------------------
COST MARKET VALUE
---------- ------------
<S> <C> <C>
Equity investments................................. $ 345,177 $ 378,050
Bond investments................................... 188,301 187,919
Certificate of Deposit............................. 6,219,213 6,219,213
U.S. Government securities......................... 497,424 497,097
Mutual funds....................................... 1,800,000 1,859,170
---------- ----------
$9,050,115 $9,141,449
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
-----------------------
COST MARKET VALUE
---------- ------------
<S> <C> <C>
Equity investments................................. $ 922,319 $ 958,598
Bond investments................................... 192,255 193,326
Certificate of Deposit............................. 1,250,000 1,250,000
U.S. Government securities......................... 9,789 9,887
Mutual funds....................................... 1,424,999 1,538,276
Options to buy equity securities................... 135,000 145,800
---------- ----------
$3,934,362 $4,095,887
========== ==========
</TABLE>
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock is included as a separate caption in
the consolidated balance sheets and was recorded upon issuance at fair value,
net of issuance costs. It is periodically accreted to redemption value
principally as a result of accrued and unpaid preferred stock dividends.
Redeemable convertible preferred shareholders are entitled to certain voting
rights.
F-15
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Of the 56,500 shares of Series A preferred stock, 35,000 shares are
designated as Series A-1 (all of which are outstanding), 20,000 shares are
designated as Series A-2 (all of which are outstanding) and 1,500 as A-3
(1,385 shares of which are outstanding). The Series A-1 shares are convertible
at any time into a total of 7,692,308 shares of common stock. The Series A-2
shares are convertible into a total of 4,395,604 shares of common stock, and
Series A-3 shares are convertible into a total of 304,395 shares of common
stock. The Series A shares have a liquidation value of $1,000 per share
(aggregate of $56,385,000 as of January 31, 1998) and have liquidation
preference to all other securities. The Series A shares accrue dividends at 5%
per annum of the liquidation value from the date of issuance to the date of
liquidation or redemption. The 5% dividends accrue, for liquidation or
redemption, whether or not declared, provided, however, all such accrued and
unpaid 5% dividends are canceled as of any conversion of the Series A
preferred stock into common stock. At any time after June 30, 2002, the
holders of the majority of the outstanding Series A-1 preferred or a majority
of the outstanding Series A-2 preferred may request redemption, and the
Company is required to redeem all such requesting preferred shares at a price
equal to the liquidation value plus accrued and unpaid dividends. The
redemption payments would be made in four annual installment payments starting
30 days from the date of the redemption request. Upon a change in ownership of
more than 50% or other "fundamental change," as defined, the holders of the
majority of the outstanding Series A-1 preferred or a majority of the
outstanding Series A-2 preferred may request redemption sooner than June 30,
2002.
In accordance with the provisions of the Series A preferred stock, upon
liquidation or redemption of the Series A preferred stock, accrued 5%
dividends would be payable, whether or not declared by the Company. As of
January 25, 1997 and January 31, 1998, the accrued unpaid dividends on Series
A preferred stock amounted to $1,426,773 and $3,512,245, respectively.
7. CONVERTIBLE PREFERRED STOCK
All convertible preferred shareholders are entitled to certain voting
rights. Each share of Series B preferred stock is convertible into 219.78021
shares of common stock (1,591,646 shares as of January 31, 1998). In addition,
all Series B stock is required to be converted into common stock if the
Company requires the Series A stock to convert upon a qualified public
offering. The Series B shareholders are entitled to dividend rights based upon
those afforded common stockholders. The Series B stock has a liquidation value
of $1,000 per share (aggregate of $7,242,000 as of January 31, 1998) and a
liquidation preference over the common shareholders and the Series C
shareholders.
Each share of Series C preferred stock is convertible into one share of
Series B stock, which can then be converted into 219.78021 shares of common
stock (164,833 shares at January 31, 1998). One-third of the Series C stock
was converted to Series B on each of September 7, 1996 and 1997, and the
remaining one-third will convert automatically on September 7, 1998. All of
the shares of Series C stock are convertible into common stock prior to any
public offering, a change of ownership of more than 50% of the outstanding
common stock, or upon liquidation or dissolution. In addition, all Series C
stock is required to be converted into Series B stock upon a qualified public
offering. Shareholders of Series C stock are entitled to dividend rights based
upon those afforded common stockholders. The Series C stock has a liquidation
value of $1,000 per share (aggregate of $750,000 as of January 31, 1998) and
does not have any preferences as to dividends or liquidation rights over any
other shareholders.
8. COMMON STOCK
The Company has reserved 14,148,786 shares of common stock for the
conversion of the preferred stock.
On issuance in 1995, 600 shares of common stock were designated as Tracking
Stock--Series I (Tracking Stock). Owners of Tracking Stock were entitled to
dividend rights based upon those afforded common
F-16
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stockholders. Each share of Tracking Stock was entitled to 1,300 votes per
share. During the year ended January 31, 1998, the holders of the Tracking
Stock received $2,476,600 (included in payable to related parties at January
25, 1997), consisting of cash and 272,160 shares of common stock, as a result
of Frontgate's 1997 operating earnings, reducing the Tracking Stock shares to
400. Also during the year ended January 31, 1998, the remaining shares of
Tracking Stock were redeemed for cash and 1,050,000 shares of common stock.
9. STOCK WARRANTS AND OPTIONS
The Company's 1995 Stock Option Plan permits the Company to grant options to
purchase common stock to certain officers and employees of the Company and its
subsidiaries. The options vest at such times as determined by the Board of
Directors at the time of grant. All options expire within ten years of the
grant date. The number of shares authorized for grants of options was
1,743,534, as of January 31, 1998.
The following table summarizes stock options and warrants issued under the
Company's Stock Option Plan.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Outstanding at January 28, 1995........................ --
Granted during the year................................ 420,000 $ .67
--------- -----
Outstanding at January 27, 1996........................ 420,000 .67
Granted during the year................................ 575,000 1.50
--------- -----
Outstanding at January 25, 1997........................ 995,000 1.15
Granted during the year................................ 657,342 5.02
--------- -----
Outstanding at January 31, 1998........................ 1,652,342 $2.61
========= =====
Exercisable stock options at year end:
January 27, 1996..................................... 420,000
January 25, 1997..................................... 420,000
January 31, 1998..................................... 763,750
</TABLE>
Pro forma information regarding net income is required by Financial
Accounting Standards Board Statement No. 123, which also requires that the
information be determined as if the Company has accounted for its employee
stock options granted subsequent to January 27, 1995 under the fair value
method of that Statement. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1995, 1996 and 1997: weighted
average risk free interest rate of 5%; no dividends; a near-zero volatility
factor of the expected market price of common stock; and an expected life of 5
to 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For the purposes of pro forma disclosure, the fair value of the option is
amortized to expense over the option's vesting period. Options that vest upon
the date of grant are expensed immediately. Pro forma information regarding
net income and earnings per share is required by FAS 123.
F-17
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the Company's pro forma earnings information:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Net income.............................. $ 320,442 $6,069,655 $9,505,863
Amortization of stock options........... (201,000) (23,000) (720,528)
--------- ---------- ----------
Pro forma net income.................... $ 119,442 $6,046,655 $8,785,335
========= ========== ==========
Pro forma net income per common share... $ (0.02) $ 0.38 $ 0.50
========= ========== ==========
Pro forma net income per common share,
assuming dilution...................... $ (0.02) $ 0.31 $ 0.35
========= ========== ==========
</TABLE>
The weighted-average fair market value per share of the options granted in
fiscal 1995, 1996 and 1997 was $0.48, $0.31 and $2.96, respectively.
The pro forma effects of applying Statement of Financial Accounting
Standards No. 123 presented above are not indicative of future amounts since
additional future awards are anticipated.
10. LEASES
The Company leases certain administrative office space, equipment and land
under lease agreements. Future minimum lease payments of all capital leases
(including principal and interest) and noncancelable operating leases for the
next five fiscal years are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
1998.................................................. $ 81,025 $1,921,422
1999.................................................. 33,722 1,126,605
2000.................................................. 33,722 718,370
2001.................................................. 33,722 148,313
2002.................................................. 33,722 78,248
Thereafter............................................ 742,694 78,247
--------- ----------
958,607 4,071,205
Amount representing interest.......................... (549,264) --
--------- ----------
$ 409,343 $4,071,205
========= ==========
</TABLE>
Rent expense for fiscal 1995, 1996 and 1997 was approximately $439,000,
$492,000 and $1,594,000, respectively.
11. LONG-TERM DEBT AND CREDIT AGREEMENTS
At January 31, 1998, the Company had outstanding borrowings of $15,450,000
under a revolving line of credit agreement with a bank. Borrowings under the
line of credit are limited to the lesser of $40 million or three times the
trailing 12 months' EBITDA, as defined. Borrowings under the line bear
interest at the bank's prime rate or an optional LIBOR-based rate on funded
debt (the bank's prime rate was 8.5% at January 31, 1998, and the LIBOR-based
rate averaged 6.6% at January 31, 1998). The line is secured by the capital
stock of the Company's subsidiaries and contains financial covenants.
Additional borrowings of approximately $23 million were permitted under the
line at January 31, 1998.
F-18
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consisted of the following at January 25, 1997 and January
31, 1998:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Notes payable in monthly installments through March
2000, secured by assets of Frontgate (repaid in year
ended January 31, 1998)............................. $ 682,705 $ --
Mortgage note, payable in monthly installments until
June 2005. Secured by first mortgage on land and
building of Frontgate (repaid in year ended January
31, 1998)........................................... 1,250,740 --
Note payable to bank for equipment, payable in
monthly installments through August 1997............ 65,985 --
Capital lease obligation for land, implicit interest
rate of 8.1%, payable in annual installments through
January 2025........................................ 369,264 365,455
Capital lease obligation for equipment, implicit
interest rate of 7%, payable in monthly installments
through January 1999................................ 151,021 41,405
Capital lease obligation for computer equipment,
implicit interest rate of 11.12%, payable in monthly
installments through January 1998................... 30,530 2,483
---------- --------
2,550,245 409,343
Less current portion................................. (503,701) (77,483)
---------- --------
$2,046,544 $331,860
========== ========
</TABLE>
The carrying amount of the Company's notes payables approximate fair value,
which is determined using discounted cash flows based on the Company's
incremental borrowing rate for similar types of financing arrangements.
The assets recorded under capital leases ($376,083 of land, $50,000 of
equipment and $27,744 of computer equipment) are included with property and
equipment.
12. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JANUARY 25, JANUARY 31,
1997 1998
----------- -----------
<S> <C> <C>
Land............................................... $ 376,083 $ 548,983
Building........................................... 3,375,404 8,625,034
Equipment.......................................... 2,932,920 8,107,520
Furniture and fixtures............................. 634,820 1,497,916
Construction in progress........................... 499,620 94,771
----------- -----------
7,818,847 18,874,224
Accumulated depreciation........................... (1,826,124) (5,541,645)
Provision for loss on disposal..................... -- (852,000)
----------- -----------
Net property and equipment......................... $ 5,992,723 $12,480,579
=========== ===========
</TABLE>
F-19
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
The provision for income taxes consisted of the following for fiscal 1995,
1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................ $ 224,794 $ 954,999 $ 4,064,387
State.................................. 33,000 130,000 735,591
--------- ---------- -----------
257,794 1,084,999 4,799,978
Deferred:
Federal................................ (95,000) (95,000) (1,498,949)
State.................................. (5,000) (5,000) (197,991)
--------- ---------- -----------
(100,000) (100,000) (1,696,940)
--------- ---------- -----------
Total................................ $ 157,794 $ 984,999 $ 3,103,038
========= ========== ===========
</TABLE>
The Company has net operating loss carryforwards of approximately $750,000
for income tax purposes that expire in 2008. These carryforwards resulted
primarily from the Company's acquisition of Cornerstone Holdings in 1995.
Utilization of net operating loss carryforwards are subject to limitations
under provisions of the Internal Revenue Code.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial statement
reporting purposes and the amounts used for income tax purposes.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY JANUARY
25, 1997 31, 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Inventory reserve................................... $ 132,745 $1,134,197
Warranty reserve.................................... 107,250 771,783
Accounts receivable allowance....................... 33,726 76,562
Restructuring charge................................ -- 377,000
Net operating loss and other items.................. 454,943 371,261
--------- ----------
Total............................................. 728,664 2,730,803
Deferred tax liabilities:
Depreciation costs.................................. 57,170 348,208
Catalog costs....................................... 612,928 1,028,700
Master file and other items......................... 280,477 1,135,834
--------- ----------
Total............................................. 950,575 2,512,742
--------- ----------
Net deferred tax asset (liability)................ $(221,911) $ 218,061
========= ==========
</TABLE>
F-20
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Federal statutory rate.................. $ 163,000 $2,399,000 $ 4,287,000
State taxes, net of federal benefit..... 20,000 203,000 438,000
Equity (net income) loss of affiliate... 2,000 (133,000) (615,000)
Nondeductible goodwill.................. 43,000 143,000 543,000
Untaxed earnings of LLC................. (326,000) (824,000) (1,678,000)
Untaxed earnings of S-Corporation....... 278,000 (425,000) (125,000)
Change in valuation allowance........... -- (370,000) --
Other................................... (22,000) (8,000) 253,000
--------- ---------- -----------
Effective tax rate...................... $ 158,000 $ 985,000 $ 3,103,000
========= ========== ===========
</TABLE>
The low effective tax rate for the six months ended August 1, 1998 is due
principally to the untaxed earnings of Smith & Noble and the equity in net
income of affiliates.
14. RELATED-PARTY TRANSACTIONS
Included in other assets is a $1,728,000 loan receivable due from Bruce A.
L. Willard, the beneficial owner of the minority interest in The Territory
Ahead. The promissory note is payable on March 31, 2002.
The Company provides fulfillment services to TravelSmith, an affiliate that
is accounted for on the equity method. The billing for these services, which
amounted to $471,000 and $1,387,000 in 1996 and 1997, respectively, is offset
against the Company's operating expenses. Accounts receivable include amounts
due from the affiliate of $127,000 and $186,000 at January 25, 1997 and
January 31, 1998, respectively.
The Company has a $1,734,000 note payable to the former owners of Garnet
Hill due in July 1998 with a 6.07% interest rate. The Company has a $573,831
note payable to the former owners of Frontgate due in September 1998. At
January 25, 1997, the balance of this note was $1,323,821. The note bears
interest of 8.75%. The Company has a $450,000 note payable to an affiliate of
a former stockholder of Ballard, due on demand, with interest at the prime
rate plus 1/2%.
15. RESTRUCTURING
In January 1998, the Company formalized plans to build a centralized phone
and distribution center. The Company recorded a fourth quarter charge of
$943,000, consisting of the reduction in the net carrying value of certain
equipment that will be sold or disposed, as it was determined to be impaired,
and for the lease termination costs. The impairment loss is measured as the
amount by which the carrying amount of the assets exceed its fair value. The
Company generally measures fair value by obtaining market rates. Considerable
management judgment is necessary to estimate market rates and, accordingly,
actual results could vary significantly from such estimates. The charge is
included in operating expenses in the consolidated statement of income for the
year ended January 31, 1998.
During the six months ended August 1, 1998, the Company finalized plans for
the termination of certain employees and incurred other incremental costs in
connection with the centralized phone and distribution center. The
restructuring charge for the six months ended August 1, 1998 consisted of:
<TABLE>
<S> <C>
Severance benefits............................................ $1,485,000
Consulting on new center warehouse management system.......... 1,257,000
Additional provisions for expected losses on disposal of as-
sets and
other........................................................ 96,000
----------
$2,838,000
==========
</TABLE>
F-21
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. COMPUTATION OF EARNINGS PER COMMON SHARE
The computation of earnings per common share and earnings per common share--
assuming dilution shown for both historical and pro forma results, for the
fiscal years ended January 27, 1996, January 25, 1997 and January 31, 1998 is
as follows:
<TABLE>
<CAPTION>
JANUARY JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
27, 1996 1997 1998 1997 1998
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
HISTORICAL EARNINGS PER
SHARE
Numerator:
Historical net
income............... $ 320,442 $ 6,069,655 $ 9,505,863 $4,982,593 $ 5,652,698
Accretion of
redeemable
convertible preferred
stock................ (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
---------- ----------- ----------- ---------- -----------
Numerator for earnings
per common share--
income available to
common stockholders.. (39,623) 4,760,970 7,205,349 4,044,081 4,135,550
Accretion of
redeemable
convertible preferred
stock................ -- 1,308,685 2,300,514 938,512 1,517,148
---------- ----------- ----------- ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (39,623) $ 6,069,655 $ 9,505,863 $4,982,593 $ 5,652,698
========== =========== =========== ========== ===========
Denominator:
Weighted-average
shares............... 12,465,408 12,341,658 12,825,676 12,317,623 14,221,153
Tracking stock........ -- 756 45,360 90,720 --
---------- ----------- ----------- ---------- -----------
Denominator for
earnings per common
share--weighted-
average shares....... 12,465,408 12,342,414 12,871,036 12,408,343 14,221,153
Effect of dilutive
securities(1)
Incremental shares.... -- 665,578 1,247,621 1,154,557 1,442,388
Convertible preferred
stock................ -- 6,713,406 10,713,367 8,530,944 14,148,786
Tracking stock........ -- 67,284 175,000 -- --
---------- ----------- ----------- ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 25,007,024 22,093,844 29,812,327
========== =========== =========== ========== ===========
Earnings per common
share.................. $(0.003) $0.39 $0.56 $0.33 $0.29
========== =========== =========== ========== ===========
Earnings per common
share--assuming
dilution............... $(0.003) $0.31 $0.38 $0.23 $0.19
========== =========== =========== ========== ===========
</TABLE>
- --------
(1) The impact of dilutive securities have been excluded from the calculation
of earnings per common share, assuming dilution for the year ended January
27, 1996 as the impact is anti-dilutive.
F-22
<PAGE>
CORNERSTONE BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY JANUARY 25, JANUARY 31, AUGUST 2, AUGUST 1,
27, 1996 1997 1998 1997 1998
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PRO FORMA EARNINGS PER
SHARE
Numerator:
Pro forma net
income(1)............ $ 264,029 $ 4,600,360 $ 7,380,768 $3,853,842 $ 4,006,691
Accretion of
redeemable
convertible preferred
stock................ (360,065) (1,308,685) (2,300,514) (938,512) (1,517,148)
---------- ----------- ----------- ---------- -----------
Numerator for earnings
per common share--
income available to
common stockholders.. (96,036) 3,291,675 5,080,254 2,915,330 2,489,543
Accretion of
redeemable
convertible preferred
stock................ -- 1,308,685 2,300,514 938,512 1,517,148
---------- ----------- ----------- ---------- -----------
Numerator for earnings
per common share,
assuming dilution--
income available to
common stockholders.. $ (96,036) $ 4,600,360 $ 7,380,768 $3,853,842 $ 4,006,691
========== =========== =========== ========== ===========
Denominator:
Weighted-average
shares............... 12,465,408 12,341,658 12,825,676 12,317,623 14,221,153
Tracking stock........ -- 756 45,360 90,720 --
---------- ----------- ----------- ---------- -----------
Denominator for
earnings per common
share--weighted-
average shares....... 12,465,408 12,342,414 12,871,036 12,408,343 14,221,153
Effect of dilutive
securities:(2)
Incremental shares.... -- 665,578 1,247,621 1,154,557 1,442,388
Convertible preferred
stock................ -- 6,713,406 10,713,367 8,530,944 14,148,786
Tracking stock........ -- 67,284 175,000 -- --
---------- ----------- ----------- ---------- -----------
Denominator for
earnings per common
share assuming
dilution--adjusted
weighted-average
shares and assumed
conversions.......... 12,465,408 19,788,682 25,007,024 22,093,844 29,812,327
========== =========== =========== ========== ===========
Pro forma earnings per
common share........... $(0.01) $0.27 $0.39 $0.23 $0.18
========== =========== =========== ========== ===========
Pro forma earnings per
common share--assuming
dilution............... $(0.01) $0.23 $0.30 $0.17 $0.13
========== =========== =========== ========== ===========
</TABLE>
- --------
(1) Pro forma earnings reflect provision for income taxes on previously
untaxed earnings of Ballard and Smith & Noble.
(2) The impact of dilutive securities have been excluded from the calculation
of earnings per common share, assuming dilution for the year ended January
27, 1996 as the impact is anti-dilutive.
F-23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders
Garnet Hill, Inc.
We have audited the accompanying statements of income, and cash flows for
each of the three years in the period ended July 25, 1997. These financial
statements are the responsibility of the Companys 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 results of operations and cash flows of Garnet
Hill, Inc. for each of the three years in the period ended July 25, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
September 12, 1997
F-24
<PAGE>
GARNET HILL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JULY 29 JULY 26 JULY 25
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................ $33,292,753 $37,646,448 $45,394,585
Cost of goods sold....................... 18,152,189 19,300,793 23,394,949
----------- ----------- -----------
Gross profit............................. 15,140,564 18,345,655 21,999,636
Marketing expenses....................... 7,569,399 10,396,349 10,368,510
Other operating expenses................. 6,466,824 7,205,667 8,326,130
----------- ----------- -----------
Operating Income......................... 1,104,341 743,639 3,304,996
Other income (expense):
Interest income, net................... 126,345 198,619 250,724
Loss on disposal of equipment.......... (19,810) -- --
----------- ----------- -----------
Income before provision for income tax-
es...................................... 1,210,876 942,258 3,555,720
Provision for income taxes:
Federal................................ 385,000 318,000 1,148,500
State.................................. 75,000 74,000 250,500
----------- ----------- -----------
460,000 392,000 1,399,000
----------- ----------- -----------
Net income............................... $ 750,876 $ 550,258 $ 2,156,720
=========== =========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
GARNET HILL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
JULY 29 JULY 26 JULY 25
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income............................ $ 750,876 $ 550,258 $ 2,156,720
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... 282,791 302,243 319,644
Deferred income taxes............... (1,000) (25,700) (206,000)
Loss on disposal of assets.......... 19,810 -- --
Changes in operating assets and lia-
bilities:
Inventory......................... 1,679,200 (1,526,985) (2,779,583)
Prepaid expenses and other as-
sets............................. (127,721) (460,687) (934,471)
Income taxes receivable........... (287,216) 278,068 46,092
Accounts payable and accrued ex-
penses........................... (358,856) (640,667) 3,108,714
Deferred revenue.................. (40,064) 33,689 10,799
Income taxes payable.............. -- -- 395,050
----------- ----------- -----------
Net cash provided (used) by operating
activities............................. 1,917,820 (1,489,781) 2,116,965
Investing activities
Purchases of property and equipment... (280,200) (108,861) (652,779)
Issuance of note receivable........... (20,200) -- (273,947)
Payments on note receivable........... 501,082 61,066 68,372
----------- ----------- -----------
Net cash provided (used) by investing
activities............................. 200,682 (47,795) (858,354)
Financing activities
Principal payments on obligation under
capital lease........................ (64,444) (71,588) (72,573)
Borrowings line of credit............. 5,670,000 830,000 680,000
Repayments on line of credit.......... (5,670,000) (830,000) (680,000)
----------- ----------- -----------
Net cash used by financing activities... (64,444) (71,588) (72,573)
----------- ----------- -----------
Net increase (decrease) in cash......... 2,054,058 (1,609,164) 1,186,038
Cash and cash equivalents at beginning
of year................................ 93,406 2,147,464 538,300
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 2,147,464 $ 538,300 $ 1,724,338
=========== =========== ===========
Supplemental disclosures of cash flow
information
Cash paid for:
Interest............................ $ 58,812 $ 24,990 $ 19,759
Income taxes........................ 503,514 208,000 1,159,631
</TABLE>
See accompanying notes.
F-26
<PAGE>
GARNET HILL, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Garnet Hill, Inc. (the Company) is a catalog company that sells natural
fiber products throughout the United States. The Company has operated on a
52/53 week fiscal year. The years ended July 25, 1997, July 26, 1996 and July
29, 1995 each contained 52 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory which consists principally of goods available for sale, is valued
at the lower of cost or market. Cost has been determined using the weighted
average method.
Leasehold improvements and Equipment
Depreciation and amortization has been computed using both straight-line and
accelerated methods over the estimated useful lives of the related assets.
Estimated useful lives are as follows:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Leasehold improvements........................................... 7-31.5
Equipment........................................................ 3-7
</TABLE>
Revenue Recognition and Customer Returns
Revenue is recognized when products are shipped. The Company accrues for
estimated customer returns based on actual information and historical trends
in returns by customers.
Foreign Exchange Contracts
The Company has entered into certain forward foreign exchange contracts to
hedge against firm foreign currency obligations. The gains and losses on these
forward contracts are included in the measurement of the gain and losses of
the related foreign currency transaction.
Income Taxes
The Company provides deferred taxes for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and income tax purposes. The principal temporary differences are related to
inventory, customer returns, accrued liabilities and depreciation on
equipment.
F-27
<PAGE>
GARNET HILL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. DEFINED CONTRIBUTION PLAN
The Company established a 401(k) retirement plan as of August 1, 1993. The
plan covers substantially all full-time employees who have completed one year
of service and are at least 21 years old. Contributions to the plan are
through salary reductions, which are considered tax deferred. The Company
matches 25% of the employee's contributions up to an annual maximum of $500
per employee. The Company match amount was $33,491, $29,175 and $29,400 for
the three years ended July 25, 1997, July 26, 1996 and July 29, 1995,
respectively.
3. INCOME TAXES
The provision for income taxes for the years ended July 25, 1997, July 26,
1996 and July 29, 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Current...................................... $1,605,000 $417,700 $461,000
Deferred..................................... (206,000) (25,700) (1,000)
---------- -------- --------
$1,399,000 $392,000 $460,000
========== ======== ========
</TABLE>
Reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate for the years ended July 25, 1997, July 26, 1996 and
July 29, 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Federal statutory
income tax expense........ $1,208,945 34.0% $320,368 34.0% $411,698 34.0%
State income taxes, net of
federal income tax
benefit................... 165,330 4.6 48,840 5.2 49,500 4.1
Other...................... 24,725 .7 22,792 2.4 (1,198) (.1)
---------- ---- -------- ---- -------- ----
$1,399,000 39.3% $392,000 41.6% $460,000 38.0%
========== ==== ======== ==== ======== ====
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
As of July 25, 1997, The Company leased its primary facilities under two
operating leases from two real estate companies controlled by officers of the
Company. The first lease expires August 31, 1999 and includes two five-year
renewal options. The second lease expires June 30, 1998 and also includes two
five-year renewal options. Rent expense under the two properties was $524,320,
$503,120 and $523,684 for the three years ended July 25, 1997, July 26, 1996
and July 29, 1995, respectively.
The Company was also obligated under operating leases for certain equipment
through July 2000.
Future minimum lease payments under all noncancelable operating leases at
July 25, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................. $615,829
1999............................................................. 595,204
2000............................................................. 96,320
</TABLE>
F-28
<PAGE>
GARNET HILL, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SUBSEQUENT EVENTS
On July 28, 1997, the stockholders of the Company sold all outstanding
shares of common stock to a subsidiary of Cornerstone Brands, Inc.
("Cornerstone") for cash and common stock of Cornerstone. As a result of this
transaction, the Company is now a wholly-owned subsidiary of Cornerstone.
Also, as part of this transaction, notes receivable from the related party
were settled, the real estate and facilities owned by the related party were
transferred to the Company and the Company assumed certain debt related to the
real estate.
F-29
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cornerstone Brands, Inc.
We have audited the statements of income and of cash flows of Cinmar L.P.
(the Partnership) for the period from January 1, 1995 to September 12, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Cinmar
L.P. for the period from January 1, 1995 to September 12, 1995, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 20, 1998
F-30
<PAGE>
CINMAR L.P.
STATEMENT OF INCOME
PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 12, 1995
<TABLE>
<S> <C>
Net sales.......................................................... $21,876,146
Cost of sales...................................................... 10,873,759
-----------
Gross profit....................................................... 11,002,387
Operating expenses:
Selling, catalog and fullfillment................................ 8,751,227
General and administrative....................................... 1,400,440
Depreciation..................................................... 179,000
-----------
Total operating expenses........................................... 10,330,667
Operating income................................................... 671,720
Interest expense................................................... 157,198
-----------
Net income......................................................... $ 514,522
===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
CINMAR L.P.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1995 TO SEPTEMBER 12, 1995
<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $ 514,522
Depreciation..................................................... 179,000
Changes in working capital:
Accounts receivable............................................ (80,327)
Inventory...................................................... 295,954
Prepaid expenses and other..................................... (234,894)
Accounts payable............................................... (29,566)
Accrued liabilities and other, net............................. (46,958)
-----------
Net cash provided by operating activities.......................... 597,731
-----------
Cash flows from investing activities
Property and equipment purchases, net............................ (788,890)
-----------
Net cash used in investing activities.............................. (788,890)
-----------
Cash flows from financing activities
Borrowings under line of credit.................................. 455,000
Borrowings under long-term obligations, net...................... 827,674
Distributions to partners........................................ (1,284,961)
-----------
Net cash used in financing activities.............................. (2,287)
-----------
Net decrease in cash............................................... (193,446)
Cash at beginning of the period.................................... 193,446
-----------
Cash at end of the period.......................................... $ --
===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
CINMAR L.P.
NOTES TO STATEMENTS OF INCOME AND CASH FLOWS
1. ORGANIZATION
Cinmar L.P. (the Partnership) was formed in September 1991, under the
Uniform Limited Partnership Act of the State of Delaware. Upon commencing
operations, the Partnership assumed the operating results of Cinmar, Inc. (an
Ohio corporation). Cinmar, Inc. was the general partner of the Partnership.
The Partnership is a direct merchant of high quality home and specialty
products offered through catalog mailings throughout the United States.
On September 12, 1995, the assets and liabilities of the Partnership were
acquired by a subsidiary of Cornerstone Brands, Inc. (Cornerstone).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Sales are recorded when products are shipped.
Depreciation Expense
Depreciation is determined using accelerated methods over the following
useful lives:
<TABLE>
<S> <C>
Building....................................................... 31.5 years
Furniture and Equipment........................................ 5-7 years
</TABLE>
Income Taxes
For income tax purposes, the profit/loss of the Partnership was allocated to
the Partners. Accordingly, no provision for income taxes has been reflected in
the accompanying financial statements.
Inventories
Inventories, which consist primarily of goods available for sale, are stated
at the lower of cost, determined on a first-in, first-out (FIFO) method, or
market.
3. LEASE EXPENSE
The Partnership leased certain office equipment and aircraft use under
operating lease agreements. Lease expense for the period from January 1, 1995
to September 12, 1995 was approximately $22,000.
4. ADVERTISING EXPENSE
Costs associated with the production and mailing of the Partnership's direct
mail catalogs (advertising expense) are amortized over the estimated periods
in which the related revenues are generated, generally three months or less.
Advertising expense for the period from January 1, 1995 to September 12, 1995
was approximately $7,550,000.
F-33
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company, any Selling Stockholder or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 48
Certain Transactions..................................................... 54
Principal and Selling Stockholders....................................... 59
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 69
Index to Consolidated Financial Statements............................... F-1
</TABLE>
--------------------
Until , 1998 (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 underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
CORNERSTONE BRANDS, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc Montgomery Securities LLC
Goldman, Sachs & Co.
Merrill Lynch & Co.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................. $ *
NASD filing fee...................................................... *
listing fee...................................................... *
Blue Sky fees and expenses........................................... *
Transfer agent and registrar fees.................................... *
Accounting fees and expenses......................................... *
Legal fees and expenses.............................................. *
Director and officer liability insurance............................. *
Printing and mailing expenses........................................ *
Miscellaneous........................................................ *
-----
Total............................................................ $ *
=====
</TABLE>
- --------
* to be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article SEVENTH of the Registrant's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable to stockholders for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article EIGHTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any
litigation or other legal proceeding (other than an action by or in the right
of the Registrant) brought against him by virtue of his position as a director
or officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests
of the Registrant, except that no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged to be liable to
the Registrant, unless a court determines that, despite such adjudication but
in view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the
II-1
<PAGE>
director or officer did not meet the applicable standard of conduct required
for indemnification, or if the Registrant fails to make an indemnification
payment within 60 days after such payment is claimed by such person, such
person is permitted to petition the court to make an independent determination
as to whether such person is entitled to indemnification. As a condition
precedent to the right of indemnification, the director or officer must give
the Registrant notice of the action for which indemnity is sought and the
Registrant has the right to participate in such action or assume the defense
thereof.
Article EIGHTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive,
and provides that in the event that the Delaware General Corporation Law is
amended to expand the indemnification permitted to directors or officers the
Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides a detailed
statutory framework covering indemnification of directors and officers of
liabilities and expenses arising out of legal proceedings brought against them
by reason of their status or service as directors or officers. This section
provides that a director or officer of a corporation (i) shall be indemnified
by the corporation for all expenses of such legal proceedings when he is
successful on the merits, (ii) may be indemnified by the corporation for the
expenses, judgments, fines and amounts paid in settlement of such proceedings
(other than a derivative suit), even if he is not successful on the merits, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation (and, in the case of a
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful), and (iii) may be indemnified by the corporation for expenses of a
derivative suit (a suit by a shareholder alleging a breach by a director or
officer of a duty owed to the corporation), even if he is not successful on
the merits, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation. No
indemnification may be made under clause (iii) above, however, if the director
or officer is adjudged liable for negligence or misconduct in the performance
of his duties to the corporation, unless a court determines that, despite such
adjudication and in view of all of the circumstances, he is entitled to
indemnification. The indemnification described in clauses (ii) and (iii) above
may be made only upon a determination that indemnification is proper because
the applicable standard of conduct has been met. Such a determination may be
made by a majority of a quorum of disinterested directors, independent legal
counsel or the stockholders. The board of directors may authorize advancing
litigation expenses to a director or officer upon receipt of an undertaking by
such director or officer to repay such expenses if it is ultimately determined
that he is not entitled to be indemnified for them.
As permitted by Section 145, the Company has purchased a general liability
insurance policy which covers certain liabilities of directors and officers of
the Company arising out of claims based on acts or omissions in their capacity
as directors or officers and for which they are not indemnified by the
Company.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed
as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities sold by
the Registrant since September 30, 1995 which were not registered under the
Securities Act.
(a) Issuance of Capital Stock
(i) Common Stock
On July 28, 1997, the Company issued an aggregate of 750,000 shares of its
Common Stock to two stockholders as partial consideration for its purchase of
all the outstanding stock of Garnet Hill. The shares were valued at a price of
$8.00 per share for purposes of allocating the purchase price of the
acquisition.
II-2
<PAGE>
On August 13, 1997, the Company issued 2,216,667 shares of its Common Stock
to four stockholders in connection with the acquisition of Ballard Designs by
stock merger.
On January 12, 1998, the Company issued an aggregate of 1,050,000 shares of
its Common Stock and paid an aggregate of $6,300,000 to four stockholders in
exchange for certain securities previously issued to such stockholders by the
Company in a private placement transaction.
On May 19, 1998, the Company issued 25,000 shares of its Common Stock to
Nicolas A. Kensington for an aggregate purchase price of $250 upon the
exercise of a warrant granted in June 1995.
On July 6, 1998, the Company issued 55,555 shares of its Common Stock to
John Walter for an aggregate purchase price of $500,000.
On August 25, 1998, the Company issued 4,166,111 shares of its Common Stock
to two stockholders as consideration for its acquisition of all the
outstanding equity interests of Smith+Noble.
(ii) Series A-1 Convertible Preferred Stock
On January 31, 1996, pursuant to commitments entered into in September 1995,
the Company issued 2,000 shares of its Series A-1 Preferred Stock (convertible
into 439,560 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $2,000,000 in connection with a
private placement transaction.
On March 20, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,461 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.
On August 18, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,461 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.
On October 16, 1997, pursuant to commitments entered into in September 1995,
the Company issued 7,000 shares of its Series A-1 Preferred Stock (convertible
into 1,538,461 shares of Common Stock) to Madison Dearborn Capital Partners,
L.P. for an aggregate purchase price of $7,000,000 in connection with a
private placement transaction.
(iii) Series A-2 Convertible Preferred Stock
On November 15, 1995, the Company issued 8,000 shares of its Series A-2
Convertible Preferred Stock (convertible into 1,758,241 shares of Common
Stock) to Chemical Venture Capital Associates for an aggregate purchase price
of $8,000,000 in connection with a private placement transaction.
On March 20, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,120 shares of Common Stock) to Chase Venture Capital Associates, L.P.
for an aggregate purchase price of $4,000,000 in connection with a private
placement transaction.
On August 18, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,120 shares of Common Stock) to Chase Venture Capital Associates, L.P.
for an aggregate purchase price of $4,000,000 in connection with a private
placement transaction.
On October 20, 1997, pursuant to commitments entered into in November 1995,
the Company issued 4,000 shares of its Series A-2 Preferred Stock (convertible
into 879,120 shares of Common Stock) to Chase Venture Capital Associates, L.P.
for an aggregate purchase price of $4,000,000 in connection with a private
placement transaction.
II-3
<PAGE>
(iv) Series A-3 Convertible Preferred Stock
On January 31, 1996, the Company issued an aggregate of 554 shares of its
Series A-3 Preferred Stock (convertible into an aggregate of 121,758 shares of
Common Stock) to five stockholders for an aggregate purchase price of $476,000
in connection with a private placement transaction.
On March 20, 1997, pursuant to commitments entered into in January 1996, the
Company issued an aggregate of 277 shares of its Series A-3 Preferred Stock
(convertible into an aggregate of 60,879 shares of Common Stock) to five
stockholders for an aggregate purchase price of $277,000 in connection with a
private placement transaction.
On August 18, 1997, pursuant to commitments entered into in January 1996,
the Company issued an aggregate of 277 shares of its Series A-3 Preferred
Stock (convertible into an aggregate of 60,879 shares of Common Stock) to five
stockholders for an aggregate purchase price of $277,000 in connection with a
private placement transaction.
On October 16, 1997, pursuant to commitments entered into in January 1996,
the Company issued an aggregate of 277 shares of its Series A-3 Preferred
Stock (convertible into an aggregate of 60,879 shares of Common Stock) to five
stockholders for an aggregate purchase price of $277,000 in connection with a
private placement transaction.
(b) Certain Issuances of Warrants
On March 31, 1997, the Company issued a warrant to purchase 200,000 shares
of its Common Stock at an exercise price of $1.50 per share to Bruce A. L.
Willard as part of the acquisition of The Territory Ahead.
The securities issued in the foregoing transactions were offered and sold in
reliance upon exemptions from Securities Act registration set forth in
Sections 3(b) and 4(2) of the Securities Act, or any regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering.
No underwriters were involved in the foregoing sales of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of August 25, 1998
by and among the Registrant, Smith+Noble LLC, the Members of
Smith+Noble LLC and certain other parties named therein.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2* Certificate of Amendment to Certificate of Incorporation of the
Registrant, to be filed prior to the effectiveness of this
Registration Statement.
3.3* Amended and Restated Certificate of Incorporation of the
Registrant, to be filed immediately following this offering.
3.4* By-Laws of the Registrant.
4.1* Specimen certificate for shares of Common Stock.
5.1* Opinion of Hale and Dorr LLP.
10.1 1995 Stock Option Plan, as amended.
10.2* 1998 Stock Incentive Plan.
10.3* 1998 Director Stock Option Plan.
10.4 Executive Agreement dated August 1, 1995 between The Cornerstone
Brands Group, Inc. (the "Brands Group") and William T. End.
10.5 Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and William T. End.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and William T. End.
10.7 Executive Agreement dated August 1, 1995 between the Brands Group
and Donald J. Steiner.
10.8 Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and Donald J. Steiner.
10.9 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Donald J. Steiner.
10.10 Executive Agreement dated August 1, 1995 between the Brands Group
and Mark Fasold.
10.11 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Mark Fasold.
10.12 Executive Agreement dated September 13, 1995 between the Brands
Group and John A. O'Steen.
10.13 Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and John A. O'Steen.
10.14 Executive Agreement dated September 13, 1995 between the Brands
Group and Paul D. Tarvin.
10.15 Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and Paul D. Tarvin.
10.16* Amended and Restated Registration Agreement among the Registrant
and certain stockholders of the Registrant named therein.
10.17 Common Stock Purchase Agreement dated as of June 30, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar
and the Registrant.
10.18 Stockholder Rights Agreement dated as of July 17, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar,
Robert James Slaughter and the Brands Group.
10.19 Stockholders Agreement dated as of March 31, 1997 among the Brands
Group, The Bruce A. L. Willard Living Trust U/A dated November 11,
1993 and The Territory Ahead, Inc.
10.20 Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
10.21* $135,000,000 Third Amended and Restated Reducing Revolving Credit
Facility Including a $35,000,000 Construction Loan dated August
25, 1998 from Fleet National Bank, as agent and a Lender and the
Financial Institutions Realty Trust to the Brands Group and its
subsidiaries.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of BDO Seidman, LLP.
23.4* Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-7).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because the
required information is given in the Registrant's Consolidated Financial
Statements or Notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation of the Registrant and the laws of the State of Delaware, 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 Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN PORTLAND, MAINE, ON THIS 25TH DAY
OF AUGUST, 1998.
Cornerstone Brands, Inc.
/s/ William T. End
By:__________________________________
WILLIAM T. END
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of the Registrant, hereby
severally constitute and appoint William T. End, Donald J. Steiner and Patrick
J. Rondeau, and each of them singly, our true and lawful attorneys with full
power to them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable the Registrant to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Registration
Statement and any and all amendments thereto or to any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b).
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ William T. End Chief Executive Officer August 25, 1998
___________________________________________ and Chairman of the
WILLIAM T. END Board (Principal Executive
Officer)
/s/ Mark Fasold Executive Vice President August 25, 1998
___________________________________________ and Chief Financial
MARK FASOLD Officer (Principal
Financial and
Accounting Officer)
/s/ Benjamin D. Chereskin Director August 25, 1998
___________________________________________
BENJAMIN D. CHERESKIN
/s/ William J. Hunckler, III Director August 25, 1998
___________________________________________
WILLIAM J. HUNCKLER, III
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Stephen P. Murray Director August 25, 1998
___________________________________________
STEPHEN P. MURRAY
/s/ John A. O'Steen Director August 25, 1998
___________________________________________
JOHN A. O'STEEN
/s/ Donald J. Steiner Director August 25, 1998
___________________________________________
DONALD J. STEINER
/s/ Thomas G. Stemberg Director August 25, 1998
___________________________________________
THOMAS G. STEMBERG
/s/ H.J. von der Goltz Director August 25, 1998
___________________________________________
H.J. VON DER GOLTZ
/s/ John Walter Director August 25, 1998
___________________________________________
JOHN WALTER
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of August 25, 1998
by and among the Registrant, Smith+Noble LLC, the Members of
Smith+Noble LLC and certain other parties named therein.
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2* Certificate of Amendment to Certificate of Incorporation of the
Registrant, to be filed prior to the effectiveness of this
Registration Statement.
3.3* Amended and Restated Certificate of Incorporation of the
Registrant, to be filed immediately following this offering.
3.4* By-Laws of the Registrant.
4.1* Specimen certificate for shares of Common Stock.
5.1* Opinion of Hale and Dorr LLP.
10.1 1995 Stock Option Plan, as amended.
10.2* 1998 Stock Incentive Plan.
10.3* 1998 Director Stock Option Plan.
10.4 Executive Agreement dated August 1, 1995 between The Cornerstone
Brands Group, Inc. (the "Brands Group") and William T. End.
10.5 Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and William T. End.
10.6 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and William T. End.
10.7 Executive Agreement dated August 1, 1995 between the Brands Group
and Donald J. Steiner.
10.8 Amendment dated February 28, 1998 to Executive Agreement dated
August 1, 1995 between the Brands Group and Donald J. Steiner.
10.9 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Donald J. Steiner.
10.10 Executive Agreement dated August 1, 1995 between the Brands Group
and Mark Fasold.
10.11 Noncompetition and Nondisclosure Agreement dated August 1, 1995
between the Brands Group and Mark Fasold.
10.12 Executive Agreement dated September 13, 1995 between the Brands
Group and John A. O'Steen.
10.13 Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and John A. O'Steen.
10.14 Executive Agreement dated September 13, 1995 between the Brands
Group and Paul D. Tarvin.
10.15 Noncompetition and Nondisclosure Agreement dated September 13,
1995 between the Brands Group and Paul D. Tarvin.
10.16* Amended and Restated Registration Agreement among the Registrant
and certain stockholders of the Registrant named therein.
10.17 Common Stock Purchase Agreement dated as of June 30, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar
and the Registrant.
10.18 Stockholder Rights Agreement dated as of July 17, 1996 among
TravelSmith Outfitters, Inc., Charles L. Slaughter, Scott Sklar,
Robert James Slaughter and the Brands Group.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.19 Stockholders Agreement dated as of March 31, 1997 among the Brands
Group, The Bruce A. L. Willard Living Trust U/A dated November 11,
1993 and The Territory Ahead, Inc.
10.20 Limited Liability Company Agreement dated as of September 4, 1997
between the Brands Group and Cabin Life Studios, Inc.
10.21* $135,000,000 Third Amended and Restated Reducing Revolving Credit
Facility Including a $35,000,000 Construction Loan dated August
25, 1998 from Fleet National Bank, as agent and a Lender and the
Financial Institutions Realty Trust to the Brands Group and its
subsidiaries.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of BDO Seidman, LLP.
23.4* Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-7).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
-------------------------------------------
CORNERSTONE BRANDS, INC.
__________ SHARES
COMMON STOCK
UNDERWRITING AGREEMENT
DATED [____________,] 1998
-------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................................. 2
A. Representations and Warranties of the Company ........................................ 2
Compliance with Registration Requirements ............................................ 2
Offering Materials Furnished to Underwriters ......................................... 3
Distribution of Offering Material By the Company ..................................... 3
The Underwriting Agreement ........................................................... 3
Authorization of the Common Shares ................................................... 3
No Applicable Registration or Other Similar Rights ................................... 3
No Material Adverse Change ........................................................... 3
Independent Accountants .............................................................. 4
Preparation of the Financial Statements .............................................. 4
Incorporation and Good Standing of the Company and the Affiliated Companies .......... 4
Capitalization and Other Capital Stock Matters ....................................... 5
Stock Exchange Listing ............................................................... 5
Non-Contravention of Existing Instruments; No Further Authorizations or Approvals
Required ........................................................................... 5
No Material Actions or Proceedings ................................................... 6
Intellectual Property Rights ......................................................... 6
All Necessary Permits, etc. .......................................................... 6
Title to Properties .................................................................. 6
Tax Law Compliance ................................................................... 6
Company Not an "Investment Company" .................................................. 7
Insurance ............................................................................ 7
No Price Stabilization or Manipulation ............................................... 7
Related Party Transactions ........................................................... 7
No Unlawful Contributions or Other Payments .......................................... 7
Company's Accounting System .......................................................... 7
Compliance with Environmental Laws ................................................... 8
Periodic Review of Costs of Environmental Compliance ................................. 8
ERISA Compliance ..................................................................... 8
B. Representations and Warranties of the Selling Stockholders ........................... 9
The Underwriting Agreement ........................................................... 9
The Custody Agreement and Power of Attorney .......................................... 9
Title to Common Shares to be Sold; All Authorizations Obtained ....................... 9
Delivery of the Common Shares to be Sold ............................................. 10
Non-Contravention; No Further Authorizations or Approvals Required ................... 10
No Registration or Other Similar Rights .............................................. 10
No Further Consents, etc. ............................................................ 10
Disclosure Made by Such Selling Stockholder in the Prospectus ........................ 10
No Price Stabilization or Manipulation ............................................... 11
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES .............................. 11
The Firm Common Shares .................................................................. 11
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
The First Closing Date .................................................................. 11
The Optional Common Shares; the Second Closing Date ..................................... 11
Public Offering of the Common Shares .................................................... 12
Payment for the Common Shares ........................................................... 12
Delivery of the Common Shares ........................................................... 13
Delivery of Prospectus to the Underwriters .............................................. 13
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS .............. 13
A. Covenants of the Company ............................................................. 13
Representatives' Review of Proposed Amendments and Supplements ....................... 13
Securities Act Compliance ............................................................ 14
Amendments and Supplements to the Prospectus and Other Securities Act
Matters ............................................................................ 14
Copies of any Amendments and Supplements to the Prospectus ........................... 14
Blue Sky Compliance .................................................................. 14
Use of Proceeds ...................................................................... 15
Transfer Agent ....................................................................... 15
Earnings Statement ................................................................... 15
Periodic Reporting Obligations ....................................................... 15
Agreement Not To Offer or Sell Additional Securities ................................. 15
Future Reports to the Representatives ................................................ 15
B. Covenants of the Selling Stockholders ................................................ 16
Agreement Not to Offer or Sell Additional Securities ................................. 16
Delivery of Forms W-8 and W-9 ........................................................ 16
SECTION 4. PAYMENT OF EXPENSES ........................................................... 16
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS ............................. 17
Accountants' Comfort Letter ............................................................. 17
Compliance with Registration Requirements; No Stop Order; No Objection from NASD ........ 17
No Material Adverse Change or Ratings Agency Change ..................................... 18
Opinion of Counsel for the Company ...................................................... 18
Opinion of Counsel for the Underwriters ................................................. 18
Officers' Certificate ................................................................... 18
Bring-down Comfort Letter ............................................................... 19
Opinion of Counsel for the Selling Stockholders ......................................... 19
Selling Stockholders' Certificate ....................................................... 19
Selling Stockholders' Documents ......................................................... 19
Lock-Up Agreement from Securityholders of the Company ................................... 19
Additional Documents .................................................................... 19
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES ....................................... 20
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT ............................................... 20
SECTION 8. INDEMNIFICATION ............................................................... 20
Indemnification of the Underwriters ..................................................... 20
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Indemnification of the Company, its Directors and Officers and the Selling Stockholders . 22
Notifications and Other Indemnification Procedures ...................................... 22
Settlements ............................................................................. 23
SECTION 9. CONTRIBUTION ................................................................. 23
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS .......................... 25
SECTION 11. TERMINATION OF THIS AGREEMENT ................................................ 25
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY .......................... 26
SECTION 13 NOTICES ........................................................................ 26
SECTION 14. SUCCESSORS ................................................................... 27
SECTION 15. PARTIAL UNENFORCEABILITY ..................................................... 27
SECTION 16. GOVERNING LAW PROVISIONS ..................................................... 27
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER
COMMON SHARES ................................................................ 28
SECTION 18. GENERAL PROVISIONS ........................................................... 28
SCHEDULE A ................................................................................ A-1
SCHEDULE B ................................................................................ B-1
EXHIBIT A ................................................................................. AA-1
EXHIBIT B ................................................................................. BB-1
EXHIBIT C ................................................................................. CC-1
</TABLE>
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<PAGE>
UNDERWRITING AGREEMENT
[___________, 1998]
NATIONSBANC MONTGOMERY SECURITIES LLC
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Cornerstone Brands, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of [___] shares of its Common
- ----------
Stock, par value $.001 per share (the "Common Stock"); and the stockholders of
the Company named in Schedule B (collectively, the "Selling Stockholders")
----------
severally propose to sell to the Underwriters an aggregate of [___] shares of
Common Stock. The [___] shares of Common Stock to be sold by the Company and
the [___] shares of Common Stock to be sold by the Selling Stockholders are
collectively called the "Firm Common Shares." In addition, (i) the S&N Selling
Stockholders (as defined below) have severally granted to the Underwriters an
option to purchase up to an additional [___] [number of shares such that
aggregate offering price equals $10 million] shares of Common Stock (the "S&N
Optional Common Shares"), each S&N Selling Stockholder selling up to the amount
set forth opposite his name in Schedule B, and (ii) the Company has granted to
----------
the Underwriters an option to purchase up to an additional [___] [the balance of
the over-allotment shares] shares of Common Stock (the "Company Optional Common
Shares"), in each case as provided in Section 2. The Company Optional Common
Shares and the S&N Optional Common Shares are collectively called the "Optional
Common Shares." The Firm Common Shares and, if and to the extent such option is
exercised, the Optional Common Shares are collectively called the "Common
Shares." NationsBanc Montgomery Securities LLC ("NMS"), Goldman, Sachs & Co.,
and Merrill Lynch, Pierce, Fenner & Smith Incorporated have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-____), which contains a form of prospectus to be used in connection with the
public offering and sale of the Common Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (collectively, the "Securities Act"), including any information
deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A
or Rule 434 under the Securities Act, is called the "Registration Statement."
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b)
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<PAGE>
Registration Statement," and from and after the date and time of filing of the
Rule 462(b) Registration Statement the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. Such prospectus, in the form
first used by the Underwriters to confirm sales of the Common Shares, is called
the "Prospectus"; provided, however, if the Company has, with the consent of
NMS, elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated [___] (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"),together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All references
in this Agreement to the Registration Statement, the Rule 462(b) Registration
Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any
amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been
instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common
Shares. Each of the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto, at the time it became
effective and at all subsequent times, complied and will comply in all
material respects with the Securities Act and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. The Prospectus, as amended or supplemented, as of its date and at
all subsequent times, did not and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The representations and warranties set forth in the two
immediately preceding sentences do not apply to statements in or omissions
from the Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment thereto, or the Prospectus, or any amendments or
supplements thereto, made in reliance upon and in conformity with information
relating to any Underwriter furnished to the Company in writing by the
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<PAGE>
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or filed
as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete manually signed copies of the
Registration Statement and of each consent and certificate of experts filed as
a part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives
have reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with
the offering and sale of the Common Shares other than a preliminary
prospectus, the Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, other than the Selling
Stockholders with respect to the Common Shares included in the Registration
Statement, except for such rights as have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the earnings,
business, operations or prospects, whether or not arising from transactions in
the ordinary course of business, of the Company and its affiliated companies
(as that term is defined in paragraph 1A(m) below, considered as one entity
(any such change is called a "Material Adverse Change"); (ii) the Company and
its affiliated companies, considered as one entity, have not incurred any
material liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been no
dividend or distribution of any kind declared, paid or made by the Company or,
except for dividends
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<PAGE>
paid to the Company or other subsidiaries, any of its subsidiaries on any
class of capital stock or repurchase or redemption by the Company or any of
its subsidiaries of any class of capital stock.
(h) Independent Accountants. Ernst & Young LLP, which has have
expressed its opinion with respect to the financial statements (which term as
used in this Agreement includes the related notes thereto) and financial
statement schedules filed with the Commission as a part of the Registration
Statement and included in the Prospectus, are independent public or certified
public accountants as required by the Securities Act .
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results
of their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the
information required to be stated therein. Such financial statements and
financial statement schedules have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related notes
thereto. No other financial statements or financial statement schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Consolidated Financial Data," "Selected Consolidated Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement. The pro forma consolidated financial data and the
related notes thereto included under the captions "Prospectus Summary--
Summary Consolidated Financial Data," "Selected Consolidated Financial Data"
and "Capitalization" and elsewhere in the Prospectus and in the Registration
Statement fairly present the information set forth therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to pro
forma financial information and have been properly presented on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect to
the transactions and circumstances referred to therein.
(j) Incorporation and Good Standing of the Company and the Affiliated
Companies. Each of the Company and its subsidiaries has been duly organized,
and is validly existing and in good standing under the laws of the
jurisdiction of its formation and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Prospectus and, in the case of the Company, to enter into and perform its
obligations under this Agreement. Each of the Company and each affiliated
company is duly qualified as a foreign corporation to transact business and is
in good standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change. All of the issued and outstanding
capital stock or membership interests of each affiliated company has been duly
authorized and validly issued, is fully paid and nonassessable and is owned by
the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance or claim. The Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than the subsidiaries listed in Exhibit 21.1 to the Registration
Statement. [Include representation on TravelSmith stock.] The subsidiaries
and TravelSmith are referred to in this agreement as the "affiliated
companies."
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<PAGE>
(k) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants described in
the Prospectus). The Common Stock (including the Common Shares) conforms in
all material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding shares of Common Stock (including the shares
of Common Stock owned by Selling Stockholders) have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or purchase
securities of the Company. There are no authorized or outstanding options,
warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company or any of its subsidiaries
other than those accurately described in the Prospectus. The description of
the Company's stock option, stock bonus and other stock plans or arrangements,
and the options or other rights granted thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved for
listing on [the New York Stock Exchange], subject only to official notice of
issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
affiliated companies is in violation of its charter or by-laws or is in
default (or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any of
its affiliated companies is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any of its
affiliated companies is subject (each, an "Existing Instrument"), except for
such Defaults as would not, individually or in the aggregate, result in a
Material Adverse Change. The Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby and by
the Prospectus (i) have been duly authorized by all necessary corporate action
and will not result in any violation of the provisions of the charter, by-laws
or other organizational or governing documents of the Company or any
affiliated company, (ii) will not conflict with or constitute a breach of, or
Default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
affiliated companies pursuant to, or require the consent of any other part to,
any Existing Instrument, except for such conflicts, breaches, Defaults, liens,
charges or encumbrances as would not, individually or in the aggregate, result
in a Material Adverse Change and (iii) will not result in any violation of any
law, administrative regulation or administrative or court decree applicable to
the Company or any affiliated company. No consent, approval, authorization or
other order of, or registration or filing with, any court or other
governmental or regulatory authority or agency, is required for the Company's
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus, except such as have
been obtained or made by the Company and are in full force and effect under
the Securities Act, applicable state securities or blue sky laws and from the
National Association of Securities Dealers, Inc. (the "NASD").
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<PAGE>
(n) No Material Actions or Proceedings. Except as otherwise disclosed
in the Prospectus, there are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened (i)
against or affecting the Company or any of its subsidiaries, (ii) which has as
the subject thereof any officer or director of, or property owned or leased
by, the Company or any of its affiliated companies or (iii) relating to
environmental or discrimination matters, where in any such case (A) there is a
reasonable possibility that such action, suit or proceeding might be
determined adversely to the Company or such affiliated company and (B) any
such action, suit or proceeding, if so determined adversely, would reasonably
be expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No material
labor dispute with the employees of the Company or any of its affiliated
companies, or with the employees of any principal supplier of the Company or
any affiliated company, exists or, to the best of the Company's knowledge, is
threatened or imminent.
(o) Intellectual Property Rights. Except as otherwise disclosed in
the Prospectus, the Company and its affiliated companies own or possess
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their businesses as now
conducted; and the expected expiration of any of such Intellectual Property
Rights would not result in a Material Adverse Change. Neither the Company nor
any of its affiliated companies has received any notice of infringement or
conflict with asserted Intellectual Property Rights of others, which
infringement or conflict, if the subject of an unfavorable decision, would
result in a Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each affiliated
company possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, and neither the
Company nor any affiliated company has received any notice of proceedings
relating to the revocation or modification of, or non-compliance with, any
such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(q) Title to Properties. Except as otherwise disclosed in the
Prospectus, the Company and each of its affiliated company has good and
marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(A) (i) above (or elsewhere in
the Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except
such as do not materially and adversely affect the value of such property and
do not materially interfere with the use made or proposed to be made of such
property by the Company or such affiliated company. The real property,
improvements, equipment and personal property held under lease by the Company
or any affiliated company are held under valid and enforceable leases, with
such exceptions as are not material and do not materially interfere with the
use made or proposed to be made of such real property, improvements, equipment
or personal property by the Company or such affiliated company.
(r) Tax Law Compliance. The Company and its affiliated companies
have filed all necessary federal, state and foreign income, franchise sales
and use tax returns or have properly requested extensions thereof and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them.
The Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in
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<PAGE>
Section 1 (A) (i) above in respect of all federal, state and foreign income,
franchise sales and use taxes for all periods as to which the tax liability of
the Company or any of its affiliated companies has not been finally
determined.
(s) Company Not an "Investment Company." The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt
of payment for the Common Shares will not be, an "investment company" within
the meaning of Investment Company Act and will conduct its business in a
manner so that it will not become subject to the Investment Company Act.
(t) Insurance. Each of the Company and its affiliated companies are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its affiliated companies against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason to
believe that it or any affiliated company will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
affiliated company has been denied any insurance coverage which it has sought
or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
(v) Related Party Transactions. There are no business relationships
or related-party transactions involving the Company or any affiliated company
or any other person required to be described in the Prospectus which have not
been described as required.
(w) No Unlawful Contributions or Other Payments. Neither the Company
nor any of its affiliated companies nor, to the best of the Company's
knowledge, any employee or agent of the Company or any affiliated company, has
made any contribution or other payment to any official of, or candidate for,
any federal, state or foreign office in violation of any law or of the
character required to be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
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<PAGE>
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its affiliated companies is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including without limitation, laws and regulations relating to
emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum and petroleum products (collectively, "Materials of Environmental
Concern"), or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environment Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with any permits or other
governmental authorizations required for the operation of the business of the
Company or its affiliated companies under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, nor has the Company or
any of its affiliated companies received any written communication, whether
from a governmental authority, citizens group, employee or otherwise, that
alleges that the Company or any of its affiliated companies is in violation of
any Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to which
the Company has received written notice, and no written notice by any person
or entity alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorneys' fees or penalties arising out of, based on or
resulting from the presence, or release into the environment, of any Material
of Environmental Concern at any location owned, leased or operated by the
Company or any of its affiliated companies, now or in the past (collectively,
"Environmental Claims"), pending or, to the best of the Company's knowledge,
threatened against the Company or any of its affiliated companies or any
person or entity whose liability for any Environmental Claim the Company or
any of its affiliated companies has retained or assumed either contractually
or by operation of law; and (iii) to the best of the Company's knowledge,
there are no past or present actions, activities, circumstances, conditions,
events or incidents, including, without limitation, the release, emission,
discharge, presence or disposal of any Material of Environmental Concern, that
reasonably could result in a violation of any Environmental Law or form the
basis of a potential Environmental Claim against the Company or any of its
affiliated companies or against any person or entity whose liability for any
Environmental Claim the Company or any of its affiliated companies has
retained or assumed either contractually or by operation of law.
(z) Periodic Review of Costs of Environmental Compliance. In the
ordinary course of its business, the Company conducts a periodic review of the
effect of Environmental Laws on the business, operations and properties of the
Company and its affiliated companies, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review and the amount of its established
reserves, the Company has reasonably concluded that such associated costs and
liabilities would not, individually or in the aggregate, result in a Material
Adverse Change.
(aa) ERISA Compliance. The Company and its affiliated companies and
any "employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained
by the Company, its affiliated companies or their "ERISA Affiliates" (as
defined below)
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<PAGE>
are in compliance in all material respects with ERISA. "ERISA Affiliate"
means, with respect to the Company or a subsidiary, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
affiliated company is a member. No "reportable event" (as defined under ERISA)
has occurred or is reasonably expected to occur with respect to any "employee
benefit plan" established or maintained by the Company, its affiliated
companies or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its affiliated companies or any of
their ERISA Affiliates, if such "employee benefit plan" were terminated, would
have any "amount of unfunded benefit liabilities" (as defined under ERISA).
Neither the Company, its affiliated companies nor any of their ERISA
Affiliates has incurred or reasonably expects to incur any liability under (i)
Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company, its
affiliated companies or any of their ERISA Affiliates that is intended to be
qualified under Section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable
in accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and [___], as custodian
(the "Custodian"), relating to the deposit of the Common Shares to be sold by
such Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney
appointing certain individuals named therein as such Selling Stockholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth
therein relating to the transactions contemplated hereby and by the Prospectus
(the "Power of Attorney"), of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be limited
by applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations Obtained.
Such Selling Stockholder has, and on the First Closing Date and the Second
Closing Date (as defined below) will have, good and valid title to all of the
Common Shares which may be sold by such Selling Stockholder
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pursuant to this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law to enter into this Agreement and
its Custody Agreement and Power of Attorney, to sell, transfer and deliver all
of the Common Shares which may be sold by such Selling Stockholder pursuant to
this Agreement and to comply with its other obligations hereunder and
thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the Common
Shares which are sold by such Selling Stockholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
(e) Non-Contravention; No Further Authorizations or Approvals Required.
The execution and delivery by such Selling Stockholder of, and the performance
by such Selling Stockholder of its obligations under, this Agreement, the
Custody Agreement and the Power of Attorney will not contravene or conflict
with, result in a breach of, or constitute a Default under, or require the
consent of any other party to, any agreement or instrument to which such
Selling Stockholder is a party or by which it is bound or under which it is
entitled to any right or benefit, any provision of applicable law or any
judgment, order, decree or regulation applicable to such Selling Stockholder
of any court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over such Selling Stockholder. No consent,
approval, authorization or other order of, or registration or filing with, any
court or other governmental authority or agency, is required for the
consummation by such Selling Stockholder of the transactions contemplated in
this Agreement, except such as have been obtained or made and are in full
force and effect under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Except for (i) certain
registration rights pursuant to the Registration Rights Agreement dated as of
September 13, 1995, and amended on November 15, 1995, January 31, 1996, July
28, 1997, and August 13, 1997 (as so amended, the "Registration Rights
Agreement"), which registration rights have been duly waived with respect to
shares of capital stock of the Company other than the Firm Common Shares, and
(ii) such other rights as are described in the Prospectus under "Shares
Eligible for Future Sale," such Selling Stockholder does not have any
registration or other similar rights to have any equity or debt securities
registered for sale by the Company under the Registration Statement or
included in the offering contemplated by this Agreement.
(g) No Further Consents, etc. Except for certain registration rights
pursuant to the Registration Rights Agreement, which registration rights have
been duly waived with respect to shares of capital stock of the Company other
than the Firm Common Shares, no consent, approval or waiver is required under
any instrument or agreement to which such Selling Stockholder is a party or by
which it is bound or under which it is entitled to any right or benefit, in
connection with the offering, sale or purchase by the Underwriters of any of
the Common Shares which may be sold by such Selling Stockholder under this
Agreement or the consummation by such Selling Stockholder of any of the other
transactions contemplated hereby.
(h) Disclosure Made by Such Selling Stockholder in the Prospectus.
All information furnished in writing by or on behalf of such Selling
Stockholder for use in the Registration Statement and Prospectus is, and on
the First Closing Date and the Second Closing Date will be, true, correct, and
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complete in all material respects, and does not, and on the First Closing Date
and the Second Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading. Such Selling Stockholder confirms as accurate the
number of shares of Common Stock set forth opposite such Selling Stockholder's
name in the Prospectus under the caption "Principal and Selling Stockholders"
(both prior to and after giving effect to the sale of the Common Shares). For
each Selling Stockholder that is a former member of Smith & Noble LLC (a "S&N
Selling Stockholder"), the representations and warranties contained in this
paragraph (h) shall be deemed to refer only to information relating to Smith &
Noble LLC or to such S&N Selling Stockholder.
(i) No Price Stabilization or Manipulation. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action designed
to or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Common Shares.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of [___] Firm
Common Shares and (ii) the Selling Stockholders agree to sell to the several
Underwriters an aggregate of [___] Firm Common Shares, each Selling Stockholder
selling the number of Firm Common Shares set forth opposite such Selling
Stockholder's name on Schedule B. On the basis of the representations,
----------
warranties and agreements herein contained, and upon the terms but subject to
the conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Stockholders the
respective number of Firm Common Shares set forth opposite their names on
Schedule A. The purchase price per Firm Common Share to be paid by the several
- ----------
Underwriters to the Company and the Selling Stockholders shall be $[___] per
share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NMS, 600 Montgomery Street, San Francisco, California (or such
other place as may be agreed to by the Company and the Representatives) at 6:00
a.m. San Francisco time, on [___], or such other time and date not later than
10:30 a.m. San Francisco time, on [___] as the Representatives shall designate
by notice to the Company (the time and date of such closing are called the
"First Closing Date"). The Company and the Selling Stockholders hereby
acknowledge that circumstances under which the Representatives may provide
notice to postpone the First Closing Date as originally scheduled include, but
are in no way limited to, any determination by the Company, the Selling
Stockholders or the Representatives to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, (i) the S&N
Selling Stockholders hereby grant an option to the several
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<PAGE>
Underwriters to purchase, severally and not jointly, up to a maximum of the
number of Optional Common Shares set forth in Schedule B opposite the name of
----------
such S&N Selling Stockholder, and (ii) the Company hereby grants an option to
the several Underwriters to purchase the number of Optional Common Shares set
forth in the paragraph "Introductory" of this Agreement, in each case at the
purchase price per share to be paid by the Underwriters for the Firm Common
Shares; provided, however, that the Underwriters may not exercise their option
to purchase any Company Optional Common Shares unless and until the Underwriters
have purchased all of the S&N Optional Shares. The options granted hereunder are
for use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Common Shares. The options granted
hereunder may be exercised at any time (but not more than once) upon notice by
the Representatives to the Selling Stockholders (and to the Company, if the
Company Optional Common Shares are being purchased), which notice may be given
at any time within 30 days from the date of this Agreement. Such notice shall
set forth (i) the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Common Shares are to be registered and
(iii) the time, date and place at which such certificates will be delivered
(which time and date may be simultaneous with, but not earlier than, the First
Closing Date; and in such case the term "First Closing Date" shall refer to the
time and date of delivery of certificates for the Firm Common Shares and the
Optional Common Shares). Such time and date of delivery, if subsequent to the
First Closing Date, is called the "Second Closing Date" and shall be determined
by the Representatives and shall not be earlier than three nor later than five
full business days after delivery of such notice of exercise. If any Optional
Common Shares are to be purchased, (a) each Underwriter agrees, severally and
not jointly, to purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may determine)
that bears the same proportion to the total number of Optional Common Shares to
be purchased as the number of Firm Common Shares set forth on Schedule A
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opposite the name of such Underwriter bears to the total number of Firm Common
Shares, (b) each S&N Selling Stockholder agrees, severally and not jointly, to
sell the number of Optional Common Shares requested by the Representatives
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine), up to a maximum of the number of Optional Common
Shares set forth in Schedule B opposite the name of such S&N Selling
----------
Stockholder, and (c) the Company agrees to sell the number of Company Optional
Shares requested by the Representatives (subject to such adjustments to
eliminate fractional shares as the Representatives may determine), up to a
maximum of the number set forth in the paragraph "Introductory" of this
Agreement. The Representatives may cancel the options at any time prior to its
expiration by giving written notice of such cancellation to the Company or the
S&N Selling Stockholders, as the case may be.
Public Offering of the Common Shares. The Representatives hereby advise
the Company and the Selling Stockholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Representatives,
in its sole judgment, has determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be sold
by the Company shall be made at the First Closing Date (and, if applicable, at
the Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Common Shares to be sold by the Selling
Stockholders shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Custodian.
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<PAGE>
It is understood that the Representatives have been authorized, for their
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
NMS, individually and not as Representatives of the Underwriters, may (but shall
not be obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by the Representatives by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Stockholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Stockholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Stockholder hereunder and to hold such amounts for the account of such
Selling Stockholder with the Custodian under the Custody Agreement.
Delivery of the Common Shares. The Company and the Selling Stockholders
shall deliver, or cause to be delivered, to the Representatives for the accounts
of the several Underwriters certificates for the Firm Common Shares to be sold
by them at the First Closing Date, against the irrevocable release of a wire
transfer of immediately available funds for the amount of the purchase price
therefor. The Company and the Selling Stockholders shall also deliver, or cause
to be delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase from them at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered in
such names and denominations as the Representatives shall have requested at
least two full business days prior to the First Closing Date (or the Second
Closing Date, as the case may be) and shall be made available for inspection on
the business day preceding the First Closing Date (or the Second Closing Date,
as the case may be) at a location in New York City as the Representatives may
designate. Time shall be of the essence, and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on
the second business day following the date the Common Shares are first released
by the Underwriters for sale to the public, the Company shall deliver or cause
to be delivered, copies of the Prospectus in such quantities and at such places
as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
A. COVENANTS OF THE COMPANY. The Company further covenants and
agrees with each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and Supplements.
During such period beginning on the date hereof and ending on the later of the
First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement
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<PAGE>
filed under Rule 462(b) under the Securities Act) or the Prospectus, the
Company shall furnish to the Representatives for review a copy of each such
proposed amendment or supplement, and the Company shall not file any such
proposed amendment or supplement to which the Representatives reasonably
object.
(b) Securities Act Compliance. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing of
any post-effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of the time
and date that any post-effective amendment to the Registration Statement
becomes effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of any order preventing or suspending the use
of any preliminary prospectus or the Prospectus, or of any proceedings to
remove, suspend or terminate from listing or quotation the Common Stock from
any securities exchange upon which the it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. Additionally, the
Company agrees that it shall comply with the provisions of Rules 424(b), 430A
and 434, as applicable, under the Securities Act and will use its reasonable
efforts to confirm that any filings made by the Company under such Rule 424(b)
were received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters. If, during the Prospectus Delivery Period, any event shall occur
or condition exist as a result of which it is necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the opinion of the Representatives or counsel for the Underwriters it
is otherwise necessary to amend or supplement the Prospectus to comply with
law, the Company agrees to promptly prepare (subject to Section 3(A)(a)
hereof), file with the Commission and furnish at its own expense to the
Underwriters and to dealers, amendments or supplements to the Prospectus so
that the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial Securities laws
of those jurisdictions designated by the Representatives, shall comply with
such laws and shall continue such qualifications, registrations and exemptions
in effect so long as required for the distribution of the Common Shares. The
Company shall not be required to qualify as a foreign corporation or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be subject
to taxation as a foreign
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<PAGE>
corporation. The Company will advise the Representatives promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its best
efforts to obtain the withdrawal thereof at the earliest possible moment.
(g) Use of Proceeds. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(h) Transfer Agent. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(i) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending October 31, 1999 that satisfies the provisions of Section 11(a)
of the Securities Act.
(j) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
New York Stock Exchange all reports and documents required to be filed under
the Exchange Act. Additionally, the Company shall file with the Commission
all reports on Form SR as may be required under Rule 463 under the Securities
Act.
(k) Agreement Not To Offer or Sell Additional Securities During the
period of 180 days following the date of the Prospectus, the Company will not,
without the prior written consent of NMS (which consent may be withheld at the
sole discretion of NMS), directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, or otherwise dispose of or transfer, or announce the offering of, or file
any registration statement under the Securities Act in respect of, any shares
of Common Stock, options or warrants to acquire shares of the Common Stock or
securities exchangeable or exercisable for or convertible into shares of
Common Stock (other than as contemplated by this Agreement with respect to the
Common Shares); provided, however, that the Company may issue shares of its
Common Stock or options to purchase its Common Stock, or Common Stock upon
exercise of options, pursuant to any stock option, stock bonus or other stock
plan or arrangement described in the Prospectus, but only if the holders of
such shares, options, or shares issued upon exercise of such options, agree in
writing not to sell, offer, dispose of or otherwise transfer any such shares
or options during such 180 day period without the prior written consent of NMS
(which consent may be withheld at the sole discretion of the NMS).
(l) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111 Attention:[ ]: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of
such fiscal year and statements of income, stockholders' equity and cash flows
for the year then ended and the opinion thereon of the Company's independent
public or certified public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report
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<PAGE>
on Form 10-Q, Current Report on Form 8-K or other report filed by the Company
with the Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its capital stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such Selling
Stockholder will not, without the prior written consent of NMS (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934,
as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date
hereof and continuing through the close of trading on the date 180 days after
the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9 . To deliver to the Representatives
prior to the First Closing Date a properly completed and executed United
States Treasury Department Form W-8 (if the Selling Stockholder is a non-
United States person) or Form W-9 (if the Selling Stockholder is a United
States Person).
NMS, on behalf of the several Underwriters, may, in its sole discretion,
waive in writing the performance by the Company or any Selling Stockholder of
any one or more of the foregoing covenants or extend the time for their
performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of their
obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (i) all expenses incident to the issuance
and delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the Common
Stock, (iii) all necessary issue, transfer and other stamp taxes in connection
with the issuance and sale of the Common Shares to the Underwriters, (iv) all
fees and expenses of the Company's counsel, independent public or certified
public accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits, schedules,
consents and certificates of experts), each preliminary prospectus and the
Prospectus, and all amendments and supplements thereto, and this Agreement, (vi)
all filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada, and, if requested by the
Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to, and the
reasonable fees and expenses of counsel for the Underwriters in connection with,
the NASD's review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares, (viii) the fees and expenses
associated with listing the Common Shares on the New York Stock Exchange, (ix)
all expenses incurred in connection with the sale of Common Shares by the
Selling
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<PAGE>
Stockholders (including fees and expenses of counsel, custodians, and attorneys-
in-fact) except that each Selling Stockholder shall be responsible for its pro
rata portion of the underwriting discount, as set forth on the front cover page
of the Prospectus, and (x) all other fees, costs and expenses referred to in
Item 13 of Part II of the Registration Statement. Except as provided in this
Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay
their own expenses, including the fees and disbursements of their counsel.
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Stockholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof,
respectively, as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Optional Common Shares, as of the Second
Closing Date as though then made, to the timely performance by the Company and
the Selling Stockholders of their respective covenants and other obligations
hereunder, and to each of the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the Representatives
shall have received from Ernst & Young LLP, independent public or certified
public accountants for the Company, a letter dated the date hereof addressed
to the Underwriters, in form and substance satisfactory to the
Representatives, containing statements and information of the type ordinarily
included in accountant's "comfort letters" to underwriters, delivered
according to Statement of Auditing Standards No. 72 (including any bulletins
amending or replacing such Statement) with respect to the audited and
unaudited financial statements and certain financial information contained in
the Registration Statement and the Prospectus (and the Representatives shall
have received an additional [___] conformed copies of such accountants' letter
for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act)
in the manner and within the time period required by Rule 424(b) under the
Securities Act; or the Company shall have filed a post-effective amendment
to the Registration Statement containing the information required by such
Rule 430A, and such post-effective amendment shall have become effective;
or, if the Company elected to rely upon Rule 434 under the Securities Act
and obtained the Representatives' consent thereto, the Company shall have
filed a Term Sheet with the Commission in the manner and within the time
period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration
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<PAGE>
Statement, shall be in effect and no proceedings for such purpose shall
have been instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any securities of the Company or
any of its subsidiaries by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under
the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received the
favorable opinion of Hale and Dorr LLP, counsel for the Company, dated as of
such Closing Date, the form of which is attached as Exhibit A (and the
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Representatives shall have received an additional [___] conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Ropes & Gray, counsel for the Underwriters,
dated as of such Closing Date, with respect to the matters set forth in
paragraphs (viii), (ix), (x), (xi) and the next-to-last paragraph of Exhibit A
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(and the Representatives shall have received an additional [___] conformed
copies of such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer or
President of the Company and the Chief Financial Officer or Chief Accounting
Officer of the Company, dated as of such Closing Date, to the effect set forth
in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the
effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1(A) of this Agreement are true and correct with the
same force and effect as though expressly made on and as of such Closing
Date; and
(iii) the Company has complied with all the agreements hereunder and
satisfied all the conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date.
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(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from Ernst &
Young LLP, independent public or certified public accountants for the Company,
a letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection (a) of this Section 5, except
that the specified date referred to therein for the carrying out of procedures
shall be no more than three business days prior to the First Closing Date or
Second Closing Date, as the case may be (and the Representatives shall have
received an additional [___] conformed copies of such accountants' letter for
each of the several Underwriters).
(h) Opinion of Counsel for the Selling Stockholders. On each of the
First Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of [___], counsel for the Selling Stockholders,
dated as of such Closing Date, the form of which is attached as Exhibit B (and
---------
the Representatives shall have received an additional [___] conformed copies
of such counsel's legal opinion for each of the several Underwriters).
(i) Selling Stockholders' Certificate. On each of the First Closing
Date and the Second Closing Date the Representatives shall received a
written certificate executed by [the Attorney-in-Fact of] each Selling
Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date.
(j) Selling Stockholders' Documents. On the date hereof, the Company
and the Selling Stockholders shall have furnished for review by the
Representatives copies of the Powers of Attorney and Custody Agreements
executed by each of the Selling Stockholders and such further information,
certificates and documents as the Representatives may reasonably request.
(k) Lock-Up Agreement from Securityholders of the Company. On the
date hereof, the Company shall have furnished to the Representatives an
agreement in the form of Exhibit C hereto from each director, officer, and
---------
each beneficial owner of Common Stock (as defined and determined according to
Rule 13d-3 under the Exchange Act, except that a one hundred eighty day period
shall be used rather than the sixty day period set forth therein) and such
agreement shall be in full force and effect on each of the First Closing Date
and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling
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Stockholders at any time on or prior to the First Closing Date and, with respect
to the Optional Common Shares, at any time prior to the Second Closing Date,
which termination shall be without liability on the part of any party to any
other party, except that Section 4, Section 6, Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5, Section 7, Section 10
or Section 11 or Section 17, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company or the Selling Stockholders to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse the Representatives and the other Underwriters (or such
Underwriters as have terminated this Agreement with respect to themselves),
severally, upon demand for all out-of-pocket expenses that shall have been
reasonably incurred by the Representatives and the Underwriters in connection
with the proposed purchase and the offering and sale of the Common Shares,
including but not limited to fees and disbursements of counsel, printing
expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any party
by notice to each of the other parties hereto, and any such termination shall be
without liability on the part of (a) the Company or the Selling Stockholders to
any Underwriter, except that the Company and the Selling Stockholders shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company or
the Selling Stockholders, or (c) of any party hereto to any other party except
that the provisions of Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. Each of the Company, the
affiliated companies and the Selling Stockholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or
the omission or alleged omission therefrom of a material fact
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required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company or the Selling Stockholders
contained herein; or (iv) in whole or in part upon any failure of the Company
or the Selling Stockholders to perform their respective obligations hereunder
or under law; or (v) any act or failure to act or any alleged act or failure
to act by any Underwriter in connection with, or relating in any manner to,
the Common Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action arising
out of or based upon any matter covered by clause (i) or (ii) above, provided
that the Company shall not be liable under this clause (v) to the extent that
a court of competent jurisdiction shall have determined by a final judgment
that such loss, claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by NMS) as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company and the Selling Stockholders by
the Representatives expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit
of any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to
the written confirmation of the sale of the Common Shares to such person, and
if the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense; and provided,
further, that the liability under this Section 8(a) of each S&N Selling
Stockholder shall be limited to any loss, claim, damage, liability or expense
(or actions in respect thereof as contemplated below) which arises out of or
is based upon any information relating to Smith & Noble, LLC or such S&N
Selling Stockholder; and provided, further, that the liability of each Selling
Stockholder under the foregoing indemnity agreement shall be limited to an
amount equal to the initial public offering price of the Common Shares sold by
such Selling Stockholder, less the underwriting discount, as set forth on the
front cover page of the Prospectus; and provided, further, that the Company
and the Selling Stockholders may further agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to
the respective amounts of such liability for which they each shall be
responsible. The indemnity agreement set forth in this Section 8(a) shall be
in addition to any liabilities that the Company and the Selling Stockholders
may otherwise have.
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(b) Indemnification of the Company, its Directors and Officers and the
Selling Stockholders. Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, the Selling Stockholders and
each person, if any, who controls the Company or any Selling Stockholder
within the meaning of the Securities Act or the Exchange Act, against any
loss, claim, damage, liability or expense, as incurred, to which the Company,
or any such director, officer, Selling Stockholder or controlling person may
become subject, under the Securities Act, the Exchange Act, or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the
written consent of such Underwriter), insofar as such loss, claim, damage,
liability or expense (or actions in respect thereof as contemplated below)
arises out of or is based upon any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or
arises out of or is based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company and the Selling Stockholders by the Representatives expressly for use
therein; and to reimburse the Company, or any such director, officer, Selling
Stockholder or controlling person for any legal and other expense reasonably
incurred by the Company, or any such director, officer, Selling Stockholder or
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action. Each of the Company and the Selling Stockholders hereby acknowledges
that the only information that the Underwriters have furnished to the Company
and the Selling Stockholders expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) in the last paragraph on the inside
front cover page of the Prospectus concerning stabilization by the
Underwriters and (B) in the [second and __ paragraphs] under the caption
"Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct. The indemnity agreement set forth in this Section 8(b)
shall be in addition to any liabilities that each Underwriter may otherwise
have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8,
notify the indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section 8 or to
the extent it is not prejudiced as a proximate result of such failure. In
case any such action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that a conflict may arise
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
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<PAGE>
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of such indemnifying party's
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with local counsel),
approved by the indemnifying party (NMS in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action, in each
of which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement, compromise or consent to the
entry of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent (a) includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding, and (b) does not include a
statement as to, or an admission of, fault, culpability or failure to act by,
or on behalf of, any indemnified party.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the
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allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders, on the one hand, and the Underwriters, on the other
hand, in connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, in
connection with the offering of the Common Shares pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company and the Selling
Stockholders, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Selling Stockholders, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company, the Selling Stockholders 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 considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company. The aggregate
liability of any Selling Stockholder under this Section 9 shall not exceed the
amount equal to the
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initial public offering price of the Common Shares sold by such Selling
Stockholder, less the underwriting discount as set forth on the front cover page
of the Prospectus.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
In any such case either the Representatives or the Company shall have the right
to postpone the First Closing Date or the Second Closing Date, as the case may
be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement maybe terminated by the Representatives by notice given to
the Company and the Selling Stockholders if at any time (i) trading or quotation
in any of the Company's securities shall have been suspended or limited by the
Commission or by the New York Stock Exchange, or trading in securities generally
on either the Nasdaq Stock Market or the New York Stock Exchange shall have been
suspended or limited, or minimum or maximum prices shall have been generally
established on any of such stock exchanges by the Commission or the NASD; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective substantial
change in United States' or international political, financial or economic
conditions, as in the judgment of the Representatives is material and adverse
and makes it impracticable or inadvisable to market the Common Shares in the
manner and on the terms described in the Prospectus or to enforce contracts for
the sale of securities; (iv) in the judgment of the Representatives there shall
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood,
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earthquake, accident or other calamity of such character as in the judgment of
the Representatives may interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured. Any termination pursuant to this Section 11 shall be without
liability on the part of (a) the Company or the Selling Stockholders to any
Underwriter, except that the Company and the Selling Stockholders shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the
Selling Stockholders, or (c) of any party hereto to any other party except that
the provisions of Section 8 and Section 9 shall at all times be effective and
shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholders and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter or the Company or any of its or their partners,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 13 NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives, to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company, to:
Cornerstone Holdings, Inc.
415 Congress Street, Suite 600
Portland, Maine 04101
Facsimile: (207) 788-1940
Attention: William T. End, CEO
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with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) 526-5000
Attention: Patrick J. Rondeau, Esq.
If to the Selling Stockholders:
[Custodian]
[address]
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. (A) THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or
the courts of the State of California in each case located in the City and
County of San Francisco (collectively, the "Specified Courts"), and each party
irrevocably submits to the non-exclusive jurisdiction of such courts in any
such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any
such court. The parties irrevocably and unconditionally waive any objection to
the laying of venue of any suit,
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action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that
any such suit, action or other proceeding brought in any such court has been
brought in an inconvenient forum.
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL
AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall
fail to sell and deliver to the Underwriters the Common Shares to be sold and
delivered by such Selling Stockholders at the First Closing Date pursuant to
this Agreement, then the Underwriters may at their option, by written notice
from the Representatives to the Company and the Selling Stockholders, either (i)
terminate this Agreement without any liability on the part of any Underwriter
or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the
Selling Stockholders, or (ii) purchase the shares which the Company and other
Selling Stockholders have agreed to sell and deliver in accordance with the
terms hereof. If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Common Shares to be sold and delivered by such
Selling Stockholders pursuant to this Agreement at the First Closing Date or the
Second Closing Date, then the Underwriters shall have the right, by written
notice from the Representatives to the Company and the Selling Stockholders, to
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
SECTION 18. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business
person who was adequately represented by counsel during negotiations regarding
the provisions hereof, including, without limitation, the indemnification
provisions of Section 8 and the contribution provisions of Section 9, and is
fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the
risks in light of the ability of the parties to investigate the Company, its
affairs and its business in order to assure that adequate disclosure has been
made in the Registration Statement, any preliminary prospectus and the
Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
-28-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to the Company [and the Custodian] the enclosed copies
hereof, whereupon this instrument, along with all counterparts hereof, shall
become a binding agreement in accordance with its terms.
Very truly yours,
CORNERSTONE BRANDS, INC.
By:__________________________
[SUBSIDIARIES]
By:__________________________
[SELLING STOCKHOLDERS]
By:__________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
BY NATIONSBANC MONTGOMERY SECURITIES LLC
By:________________________________________
-29-
<PAGE>
SCHEDULE A
UNDERWRITERS NUMBER OF FIRM COMMON SHARES
TO BE PURCHASED
NationsBanc Montgomery Securities LLC [_____]
Goldman, Sachs & Co. [_____]
Merrill Lynch, Pierce, Fenner &
Smith Incorporated [_____]
[______] [_____]
[______] [______]
TOTAL [______]
A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF MAXIMUM
FIRM NUMBER
COMMON OF OPTIONAL
SHARES COMMON SHARES
SELLING STOCKHOLDER TO BE SOLD TO BE SOLD
<S> <C> <C>
Selling Stockholder #1
[address]
Attention: [___] ....... [___] [___]
Selling Stockholder #2
[address]
Attention: [___] ....... [___] [___]
TOTAL:
============ ============
</TABLE>
B-1
<PAGE>
EXHIBIT A
---------
Opinion of counsel for the Company to be delivered pursuant to Section 5(e)
of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
---------
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each significant subsidiary of the Company (as defined in Rule
405 under the Securities Act) has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Prospectus and, to the best knowledge of such counsel, is duly qualified
as a foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except
for such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material
Adverse Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary of the Company has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or, to the best knowledge of such
counsel, any pending or threatened claim.
(vi) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions thereof set
forth in the Prospectus. All of the outstanding shares of Common Stock
(including the shares of Common Stock owned by Selling Stockholders) have
been duly authorized and validly issued, are fully paid and nonassessable
and, to the best of such counsel's knowledge, have been issued in compliance
with the registration and qualification requirements of federal and state
securities laws. The form of certificate used to evidence the Common Stock
is in due and proper form and complies with all applicable requirements of
the charter and by-laws of the Company and the General Corporation Law of
the State of Delaware. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth
AA-1
<PAGE>
in the Prospectus accurately and fairly presents the information required to
be shown with respect to such plans, arrangements, options and rights.
(vii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company arising (i) by operation of the
charter or by-laws of the Company or the General Corporation Law of the
State of Delaware or (ii) to the best knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable.
(x) [Each of] The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such counsel,
no stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been issued
under the Securities Act and no proceedings for such purpose have been
instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus [including any document incorporated
by reference therein], and each amendment or supplement to the Registration
Statement and the Prospectus, as of their respective effective or issue
dates (other than the financial statements and supporting schedules included
therein or in exhibits to or excluded from the Registration Statement, as to
which no opinion need be rendered) comply as to form in all material
respects with the applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for listing on the New
York Stock Exchange.
(xiii) The statements (i) in the Prospectus under the captions "Risk
Factors--[___]," "Description of Capital Stock," "Certain Relationships and
Related Transactions," "Shares Eligible for Future Sale" and "Underwriting"
and (ii) in Item 14 and Item 15 of the Registration Statement, insofar as
such statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings, or
legal conclusions, has been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(xiv) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
AA-2
<PAGE>
(xv) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto; and the descriptions thereof and references thereto are correct in
all material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of
the Underwriting Agreement and consummation of the transactions contemplated
thereby and by the Prospectus, except as required under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no
opinion need be rendered) (i) have been duly authorized by all necessary
corporate action on the part of the Company; (ii) will not result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary; (iii) will not constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries pursuant to
the best knowledge of such counsel, any other material Existing Instrument;
or (iv) to the best knowledge of such counsel, will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xix) Except as disclosed in the Prospectus under the caption "Shares
Eligible for Future Sale," to the best knowledge of such counsel, there are
no persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by the Underwriting Agreement [, other
than the Selling Stockholders], except for such rights as have been duly
waived.
(xx) To the best knowledge of such counsel, neither the Company nor
any subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to
the Company or any subsidiary or is in Default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any material Existing Instrument, except in each such case for such
violations or Defaults as would not, individually or in the aggregate,
result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any
AA-3
<PAGE>
supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial data, included in the
Registration Statement or the Prospectus or any amendments or supplements
thereto).
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the General Corporation
Law of the State of Delaware, or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion (which
shall be dated the First Closing Date or the Second Closing Date, as the case
may be, shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it were
addressed to them and shall be furnished to the Representatives) of other
counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; provided, however, that such
counsel shall further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to matters
of fact, to the extent they deem proper, on certificates of responsible officers
of the Company and public officials.
AA-4
<PAGE>
EXHIBIT B
----------
The opinion of such counsel pursuant to Section 5h shall be rendered to the
Representatives at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
---------
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of, and is a valid and binding agreement of, such
Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such Selling Stockholder of, and
the performance by such Selling Stockholder of its obligations under, the
Underwriting Agreement and its Custody Agreement and its Power of Attorney
will not contravene or conflict with, result in a breach of, or constitute
a default under, the charter or by-laws, partnership agreement, trust
agreement or other organizational documents, as the case may be, of such
Selling Stockholder, or, to the best of such counsel's knowledge, violate
or contravene any provision of applicable law or regulation, or violate,
result in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Stockholder is a party or by
which it is bound, or any judgment, order or decree applicable to such
Selling Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.
(iii) Such Selling Stockholder has good and valid title to all of the
Common Shares which may be sold by such Selling Stockholder under the
Underwriting Agreement and has the legal right and power, and all
authorizations and approvals required [under its charter and by-laws,]
[partnership agreement,] [trust agreement] [or other organizational
documents, as the case may be,] to enter into the Underwriting Agreement
and its Custody Agreement and its Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may sold by such Selling Stockholder
under the Underwriting Agreement and to comply with its other obligations
under the Underwriting Agreement, its Custody Agreement and its Power of
Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such
Selling Stockholder has been duly authorized, executed and delivered by
such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms, except as
[rights to indemnification thereunder may be limited by applicable law and
except as] the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(v) Assuming that the Underwriters purchase the Common Shares which
are sold by such Selling Stockholder pursuant to the Underwriting Agreement
for value, in good faith and without notice of any adverse claim, the
delivery of such Common Shares pursuant to the Underwriting Agreement will
pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lieu encumbrance or other claim.
BB-1
<PAGE>
(vi) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court
or governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in the
Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than
the General Corporation Law of the State of Delaware, or the federal law of
the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or
the Second Closing Date, as the case may be, shall be satisfactory in form
and substance to the Underwriters, shall expressly state that the
Underwriters may rely on such opinion as if it were addressed to them and
shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters; provided, however, that such counsel shall
further state that they believe that they and the Underwriters are
justified in relying upon such opinion of other counsel, and (B) as to
matters of fact, to the extent they deem proper, on certificates of the
Selling Stockholders and public officials
BB-2
<PAGE>
EXHIBIT C
---------
NationsBanc Montgomery Securities LLC
Goldman, Sachs & Co.
Merrill Lynch & Co.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Cornerstone Brands, Inc. (the "Company")
----------------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NationsBanc
Montgomery Securities LLC ("NMS") (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any option
to sell (including without limitation any short sale), pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-l(h)
under the Securities Exchange Act of 1934, or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock, or
securities exchangeable or exercisable for or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned or publicly announce the undersigned's intention to do any of the
foregoing, for a period commencing on the date hereof and continuing through the
close of trading on the date one hundred eighty days after the date of the
Prospectus relating to the Offering, otherwise than (i) in the Offering, (ii) as
a gift or gifts, provided the donee or donees thereof agrees in writing as a
condition precedent to such gift or gifts to be bound by the terms hereof, or
(iii) by transfer to the transferor's affiliates, as such term is defined in
Rule 405 promulgated under the Securities Act of 1933, provided that each
transferee agrees in writing as a condition precedent to such transfer to be
bound by the terms hereof. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
CC-1
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
This agreement will terminate automatically on December 31, 1998 if the closing
of the Offering has not occurred before such date.
______________________________
Printed Name of Holder(s)
By:___________________________
Signature
By:___________________________
Signature
______________________________
Printed Name(s) of Person(s) Signing
(and indicate capacity of person signing
if signing as custodian, trustee, or on
behalf of an entity)
CC-2
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
CORNERSTONE HOLDINGS, INC.
ARTICLE I
The name of the Corporation is: Cornerstone Holdings, Inc. (hereinafter
called the "Corporation").
ARTICLE II
The address, including street, number, city and county, of the registered
office of the Corporation in the State of Delaware is: 1209 Orange Street, City
of Wilmington, County of Newcastle (zip code 19801); and the name of the
registered agent of the Corporation in the State of Delaware at such address is:
The Corporation Trust Company.
ARTICLE III
The nature of the business and of the purposes to be conducted and promoted
by the Corporation are to conduct any lawful business, to promote any lawful
purpose and to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware,
including but not limited to the business of investing in or acquiring companies
or activities in the catalog industry and related to the catalog industry and/or
engaged in marketing directly to consumers and/or to provide management
assistance, marketing studies, advisory and other services to companies in the
catalog industry.
ARTICLE IV
AUTHORIZED SHARES
The total number of shares of capital stock which the corporation has
authority to issue is 40,067,750 shares, consisting of (i) 40,000,000 shares of
Common Stock, par value $.001 per share (the "Common Stock"), and (ii) 67,750
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
The designations and powers, preferences and rights, and the
qualifications, limitations or restrictions of such stock shall be as follows:
<PAGE>
COMMON STOCK. The Common Stock shall have the following designations and
------------
powers, preferences and rights, and qualifications, limitations or restrictions:
1. Dividend Rights. Subject to the prior rights of holders of any other
----------------
classes or series of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, whether in cash, property, or securities of the
Corporation, such dividends as may be declared from time to time by the Board of
Directors, ratably on a per share basis.
2. Voting Rights. The record holder of each share of Common Stock shall
--------------
have the right to one vote, shall be entitled to notice of any stockholders'
meeting in accordance with the By-Laws of this Corporation and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
3. Liquidation. Subject to the prior rights of holders of any other
------------
classes of stock at any time outstanding having prior rights, the holders of
Common Stock shall be entitled to participate ratably on a per share basis in
all distributions to the holders of Common Stock in any liquidation,
dissolution, or winding up of the Corporation.
4. Amendment and Waiver. No amendment or waiver of any of the provisions
---------------------
above under the heading "Common Stock" shall be effective without the prior
approval of the holders of a majority of the then outstanding Common Stock
voting as a separate class.
PREFERRED STOCK. The Preferred Stock shall have the designations and
----------------
powers, preferences and rights, and the qualifications, limitations or
restrictions as follows:
(A) SERIES A PREFERRED STOCK. 56,500 shares of Preferred Stock shall
------------------------
be designated "Series A Convertible Preferred Stock" and shall have the
designations and powers, preferences and rights, and the qualifications,
limitations or restrictions thereof set forth in Attachment II hereto.
-------------
(B) SERIES B CONVERTIBLE PREFERRED STOCK. 9,000 shares of Preferred Stock
-------------------------------------
shall be designated "Series B Convertible Preferred Stock" and shall have the
designations and powers, preferences and rights, and the qualifications,
limitations or restrictions thereof set forth in Attachment III hereto.
--------------
(C) SERIES C CONVERTIBLE PREFERRED STOCK. 2,250 shares of Preferred Stock
------------------------------------
shall be designated "Series C Convertible Preferred Stock" and shall have the
designations and powers, preferences and rights, and the qualifications,
limitations or restrictions thereof set forth in Attachment IV hereto.
-------------
-2-
<PAGE>
ARTICLE V
The name and mailing address of the sole incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Donald J. Steiner c/o The International
Cornerstone Group, Inc.
Suite 2800
Boston, MA 02210
ARTICLE VI
The original By-Laws of the Corporations shall be adopted by the
incorporator. Thereafter, the By-Laws of the Corporation may be altered, amended
or replaced and new By-Laws may be adopted solely as set forth in the By-Laws.
ARTICLE VII
The business and affairs of the Corporation shall be managed by or under
the director of its Board of Directors. The number of directors which shall
constitute the whole Board of Directors shall be fixed in the manner provided in
the By-Laws. The qualifications of directors shall be determined in accordance
with the By-Laws. Election of directors need not be by ballot.
ARTICLE VIII
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a director of this Corporation
shall not be liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director.
ARTICLE IX
(A) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he or she is or
-3-
<PAGE>
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such actions, suit or proceeding if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interest of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---------------
its equivalent, shall not, of itself, create a presumption that the person
seeking indemnification did not act in good faith and in a manner which he or
she 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
reasonable cause to believe that his or her conduct was unlawful.
(B) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
(C) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (A) and (B) of this Article
IX, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
(D) Any indemnification under paragraphs (A) and (B) of this Article IX
(unless ordered by a court) shall be made by the corporation only as authorized
in
-4-
<PAGE>
the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in such paragraphs (A) and (B).
Such determination shall be made: (i) by the board of directors of the
Corporation by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable, and a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders of the Corporation.
(E) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he or she is not entitled to be indemnified by the
Corporation as authorized in this Article IX. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors of the Corporation deems
appropriate.
(F) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(G) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of Section 145 of the General
Corporation Law.
(H) For purposes of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents so that any
person who is or was a director, officer employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article IX with respect to
-5-
<PAGE>
the resulting or surviving corporation as he or she would have with respect to
such constituent corporation if its separate existence had continued.
(I) For purposes of this Article IX, references to "other enterprises"
shall include employee benefit plans, references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article IX.
(J) The indemnification and advancement of expenses provided by this
article shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
ARTICLE X
The Corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
ARTICLE XI
The Corporation may be a partner in any business enterprise which it would
have power to conduct by itself.
ARTICLE XII
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
directors of the Corporation are in any way interested in or connected with any
other party to such contract or transaction or are themselves parties to such
contract or transaction, provided that the interest in any such contract or
transaction of any such director shall at the time be fully disclosed or
otherwise known to the Board of Directors. Subject to the provisions of an
Agreement between the stockholders, any director of the Corporation may be
counted in determining the existence of a quorum at any meeting of the Board of
Directors which shall authorize such contract or transaction and may vote and
act upon any matter, contract or transaction between the Corporation and any
other person without regard to the fact that he or she is also a stockholder,
director or officer of, or has any interest in, such other person with the
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<PAGE>
same force and effect as if he or she were not such stockholder, director or
officer or not so interested. Any contract or other transaction of the
Corporation or of the Board of Directors or of any committee thereof which shall
be ratified by a majority of the holders of the issued and outstanding stock
entitled to vote at any annual meeting or any special meeting called for that
purpose shall be as valid and as binding as though ratified by every stockholder
of the Corporation, provided, however, that any failure of the stockholders to
approve or ratify such contract or other transaction, when and if submitted,
shall not be deemed in any way to render the same invalid or deprive the
directors and officers of their right to proceed with such contract or other
transactions.
EXECUTED at Boston, Massachusetts, on August 19, 1998.
/s/ Donald J. Steiner
---------------------
Incorporator
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<PAGE>
CORNERSTONE HOLDINGS, INC.
Attachment II - Series A Convertible Preferred Stock.
------------------------------------
35,000 shares of the Corporation's Preferred Stock shall be designated
as Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred"), 20,000
--------------------
shares of the Corporation's Preferred Stock shall be designated as Series A-2
Convertible Preferred Stock (the "Series A-2 Preferred"), and 1,500 shares of
--------------------
the Corporation's Preferred Stock shall be designated as Series A-3 Convertible
Preferred Stock (the "Series A-3 Preferred" and collectively with the Series A-1
--------------------
Preferred and the Series A-2 Preferred, the "Series A Preferred").
------------------
The Series A-1 Preferred, the Series A-2 Preferred and the Series A-3
Preferred shall have the following rights, preferences and privileges, subject
to the following restrictions, limitations and qualifications, and except as
otherwise provided herein or as otherwise required by applicable law, the Series
A-1 Preferred, the Series A-2 Preferred and Series A-3 Preferred shall have the
same rights, preferences and privileges, subject to the same restrictions,
liquidations and qualifications.
Section 1. Dividends.
---------
1A. General Obligation. When and as declared by the Corporation's
------------------
Board of Directors and to the extent permitted under the General Corporation Law
of Delaware, the Corporation shall pay preferential dividends in cash to the
holders of the Series A Preferred as provided in this Section 1. Except as
otherwise provided in Section 8 hereof, dividends on each share of the Series A
Preferred (a "Share") shall accrue on a daily basis at the rate of 5% per annum
-----
of the Liquidation Value thereof from and including the date of issuance of such
Share to and including the first to occur of (i) the date on which the Series A
Preference Amount with respect to such Share is paid to the holder thereof in
connection with the liquidation of the Corporation, (ii) the date on which the
Liquidation Value of such Share (plus all accrued but unpaid dividends under
this paragraph 1A and all declared but unpaid dividends pursuant to paragraph
1D) is paid to the holder thereof in connection with the redemption of such
Share by the Corporation, (iii) the date on which such Share is converted into
shares of Conversion Stock hereunder or (iv) the date on which such Share is
otherwise acquired by the Corporation. Such dividends shall accrue whether or
not they have been declared and whether or not there are profits, surplus or
other funds of the Corporation legally available for the payment of dividends,
and such dividends shall be cumulative such that all accrued and unpaid
dividends shall be fully paid or declared with funds irrevocably set apart for
payment before any dividends, distributions, redemptions or other payments may
be made with respect to any Junior Securities. The date on which the
Corporation initially issues any Share shall be deemed to be its "date of
-------
issuance" regardless of the number of times transfer of such Share is made on
- --------
the stock records
-8-
<PAGE>
maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such Share.
1B. Dividend Payments. Subject to paragraph 6A(v)(b) hereof, all
-----------------
dividends which have accrued on the Series A Preferred shall be payable as and
when declared by the Corporation's Board of Directors.
1C. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to the Series A Preferred, such payment
shall be distributed pro rata among the holders thereof based upon the aggregate
accrued but unpaid dividends on the Shares held by each such holder.
1D. Participating Dividends. In addition to the dividends accruing
-----------------------
on the Series A Preferred under paragraph 1A above, if the Corporation declares
or pays any dividends upon the Common Stock (whether payable in cash, securities
or other property) other than dividends payable solely in shares of Common
Stock, the Corporation shall also declare and pay to the holders of the Series A
Preferred at the same time that it declares and pays such dividends to the
holders of the Common Stock, the dividends which would have been declared and
paid with respect to the Common Stock issuable upon conversion of the Series A
Preferred had all of the outstanding Series A Preferred been converted
immediately prior to the record date for such dividend, or if no record date is
fixed, the date as of which the record holders of Common Stock entitled to such
dividends are to be determined.
Section 2. Liquidation.
-----------
Upon any liquidation, dissolution or winding up of the Corporation
(whether voluntary or involuntary), each holder of Series A Preferred shall be
entitled to be paid, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the greater of either (i) the aggregate
Liquidation Value of all Shares held by such holder (plus all accrued but unpaid
dividends pursuant to paragraph 1A and all declared but unpaid dividends
pursuant to paragraph 1D) or (ii) such holder's pro rata share (based upon the
aggregate number of Shares then outstanding) of the Participating Liquidation
Amount (the "Series A Preference Amount"), and the holders of Series A Preferred
--------------------------
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation the Corporation's assets to be
distributed among the holders of the Series A Preferred hereunder are
insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid upon any liquidation, dissolution or winding up of
the Corporation, then the entire assets available to be distributed to the
Corporation's stockholders shall be distributed pro rata among such holders
based upon the aggregate Series A Preference Amount of the outstanding Series A
Preferred held by each such holder. Prior to the liquidation, dissolution or
winding up of the Corporation, the
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<PAGE>
Corporation shall declare for payment all accrued and unpaid dividends with
respect to the Series A Preferred, but only to the extent of funds of the
Corporation legally available for the payment of dividends. Not less than 30
days prior to the payment date stated therein, the Corporation shall mail
written notice of the liquidation, dissolution or winding up to each record
holder of Series A Preferred, setting forth in reasonable detail the amount of
proceeds to be paid with respect to each Share and each share of Common Stock in
connection with such liquidation, dissolution or winding up. Neither the
consolidation or merger of the Corporation into or with any other entity or
entities (whether or not the Corporation is the surviving entity), nor the sale
or transfer by the Corporation of all or any part of its assets, nor the
reduction of the capital stock of the Corporation nor any other form of
recapitalization or reorganization affecting the Corporation shall be deemed to
be a liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 2.
Section 3. Priority of Series A Preferred on Dividends and
-----------------------------------------------
Redemptions.
- -----------
So long as any Series A Preferred remains outstanding, without the
prior written consent of the holders of at least 75% of the outstanding Shares,
the Corporation shall not, nor shall it permit any Subsidiary to, redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities
(except as provided in paragraph 4I hereof), nor shall the Corporation directly
or indirectly pay or declare any dividend or make any distribution upon any
Junior Securities (other than dividends on the Common Stock payable in shares of
Common Stock); provided that the Corporation may repurchase shares of Common
Stock from employees of the Corporation and its Subsidiaries upon termination of
employment pursuant to arrangements approved by the Corporation's Board of
Directors as in effect as of the date of the Purchase Agreement.
Section 4. Redemptions.
-----------
4A. Redemptions upon Request.
------------------------
(i) At any time after June 30, 2002, the holders of either a majority
of the outstanding Series A-1 Preferred or a majority of the outstanding Series
A-2 Preferred (each, an "Electing Series Preferred") may request redemption of
all of the outstanding Electing Series Preferred by delivering written notice of
such request to the Corporation. Within five days after receipt of such
request, the Corporation shall give written notice of such request to all other
holders of Series A Preferred. If, within ten days following receipt of such
notice, a majority of the outstanding Shares of any other series of Series A
Preferred shall deliver a written notice requesting redemption of all of the
outstanding Shares of such other series, then such other series shall be an
Electing Series Preferred as of the date of the redemption request by the first
series requesting redemption and shall be entitled to redemption on the same
date as such first series. The Corporation shall be required to redeem all
outstanding Electing Series Preferred at a price per Share equal to the
Liquidation Value thereof (plus all accrued but unpaid
-10-
<PAGE>
dividends pursuant to paragraph 1A and all declared but unpaid dividends
pursuant to paragraph 1D) in four installments according to the following
schedule beginning within 30 days after receipt of the redemption request:
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares of
Electing Series
---------------------
<S> <C>
First Redemption Date 25%
First Anniversary thereof 33-1/3%
Second Anniversary thereof 50%
Third Anniversary thereof 100%
</TABLE>
(ii) The Corporation's obligation to redeem all of the outstanding
Shares of Series A Preferred at any time after June 30, 2002 shall accrue and
cumulate such that the holders of either a majority of the outstanding Series
A-1 Preferred or a majority of the outstanding Series A-2 Preferred may request
that at any time after: (a) June 30, 2003, the Corporation redeem 50% of the
outstanding Shares of such Electing Series Preferred within 30 days after
receipt of the redemption request, an additional 50% of the remaining
outstanding Shares on the first anniversary of such redemption and 100% of the
remaining outstanding Shares on the second anniversary of such redemption; (b)
June 30, 2004, the Corporation redeem 75% of the outstanding Shares of such
Electing Series Preferred within 30 days after receipt of the redemption request
and 100% of the remaining outstanding Shares upon the first anniversary of such
redemption; and (c) June 30, 2005, the Corporation redeem 100% of the
outstanding Shares of such Electing Series Preferred within 30 days after
receipt of the redemption request. Within five days after any such redemption
request, the Corporation shall give written notice of such request to the
holders of all other Series A Preferred, and the holders of all other Series A
Preferred shall be entitled to request redemption as provided in subparagraphs
(i) and (ii) hereof.
(iii) Notwithstanding any provision contained herein to the
contrary, within 30 days prior to any of the foregoing requested redemptions (or
any scheduled installment thereof), the holders of a majority of any Electing
Series Preferred may request that the Corporation discontinue the requested
redemption (or any scheduled installment thereof) of such Electing Series
Preferred by delivering written notice of such request to the Corporation.
Within ten days of such request, the Corporation shall give written notice
thereof to all other holders of Series A Preferred. Such a request for a
discontinuance of a requested redemption (or any scheduled installment thereof)
shall not prevent the required percentage of holders of outstanding shares of
such Electing
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<PAGE>
Series Preferred from subsequently requesting redemption of all or any portion
of the remaining outstanding shares of such Electing Series Preferred.
4B. Redemption Payments. For each Share which is to be redeemed
-------------------
hereunder, the Corporation shall be obligated on the Redemption Date to pay to
the holder thereof (upon surrender by such holder at the Corporation's principal
office of the certificate representing such Share) an amount in cash equal to
the Liquidation Value of such Share, (plus all accrued but unpaid dividends
pursuant to paragraph 1A and all declared but unpaid dividends pursuant to
paragraph 1D). If the funds of the Corporation legally available under Delaware
law for redemption of Shares on any Redemption Date are insufficient to redeem
the total number of Shares to be redeemed on such date, those funds which are
legally available shall be used to redeem the maximum possible number of Shares
pro rata among the holders of the Shares to be redeemed based upon the aggregate
Liquidation Value of such Shares held by each such holder (plus all accrued but
unpaid dividends pursuant to paragraph 1A and all declared but unpaid dividends
pursuant to paragraph 1D). At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Shares, such funds shall
immediately be used to redeem the balance of the Shares which the Corporation
has become obligated to redeem on any Redemption Date but which it had not
redeemed. Prior to any redemption of Series A Preferred, the Corporation shall
declare for payment all accrued and unpaid dividends with respect to the Shares
which are to be redeemed, but only to the extent of funds of the Corporation
legally available for the payment of dividends.
4C. Notice of Redemption. Except as otherwise provided herein, the
--------------------
Corporation shall mail written notice of each redemption of any Series A
Preferred to each record holder thereof not more than 30 nor less than 15 days
prior to the date on which such redemption is to be made. In case fewer than
the total number of Shares represented by any certificate are redeemed, a new
certificate representing the number of unredeemed Shares shall be issued to the
holder thereof without cost to such holder within five business days after
surrender of the certificate representing the redeemed Shares.
4D. Determination of the Number of Each Holder's Shares to be
---------------------------------------------------------
Redeemed. Except as otherwise provided herein, the number of Shares of Series A
- --------
Preferred to be redeemed from each holder thereof in redemptions hereunder shall
be the number of Shares determined by multiplying the total number of Shares to
be redeemed times a fraction, the numerator of which shall be the total number
of Shares then held by such holder and the denominator of which shall be the
total number of Shares then outstanding.
4E. Dividends After Redemption Date. No Share shall be entitled to
-------------------------------
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued but unpaid dividends pursuant to paragraph 1A and all
declared but unpaid
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<PAGE>
dividends pursuant to paragraph 1D) is paid to the holder of such Share. On such
date, all rights of the holder of such Share shall cease, and such Share shall
no longer be deemed to be issued and outstanding.
4F. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise accrued by the Corporation shall be canceled and retired
to authorized but unissued shares and shall not be reissued, sold or
transferred.
4G. Other Redemptions or Acquisitions. The Corporation shall not,
---------------------------------
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Series A Preferred, except as expressly authorized herein or pursuant to a
purchase offer made pro rata to all holders of Series A Preferred on the basis
of the aggregate Liquidation Value (plus all accrued but unpaid dividends
pursuant to paragraph 1A and all declared but unpaid dividends pursuant to
paragraph 1D) of the Shares owned by each such holder.
4H. Special Redemptions.
-------------------
(i) If a Change in Ownership has occurred or the Corporation obtains
knowledge that a Change in Ownership is proposed to occur, the Corporation shall
give prompt written notice of such Change in Ownership describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Series A Preferred, but in any event shall notice shall be given not later than
the earlier of (i) five days before the occurrence of such Change in Ownership
and (ii) the date the Corporation obtains knowledge that such Change in
Ownership is proposed to occur, and the Corporation shall give each holder of
Series A Preferred prompt written notice of any material change in the terms or
timing of such transaction. The holders of either a majority of the outstanding
Series A-1 Preferred or a majority of the outstanding Series A-2 Preferred
(each, an "Electing Series Preferred") may require the Corporation to redeem all
of the outstanding Electing Series Preferred at a price per Share equal to the
Liquidation Value thereof (plus all accrued but unpaid dividends pursuant to
paragraph 1A and all declared but unpaid dividends pursuant to paragraph 1D) by
giving written notice to the Corporation of such election prior to the later of
(a) 30 days after receipt of the Corporation's notice and (b) ten days prior to
the consummation of the Change in Ownership (the "Expiration Date"). The
---------------
Corporation shall give prompt written notice of any such election to all other
holders of Series A Preferred within five days after the receipt thereof. If
within ten days following receipt of such notice, a majority of the outstanding
Shares of any other series of Series A Preferred shall deliver a written notice
requesting redemption of all of the outstanding Shares of such other series,
then such other series shall be an Electing Series Preferred as of the date of
the redemption request by the first series requesting redemption and shall be
entitled to redemption on the same date as such first series.
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<PAGE>
Upon receipt of each such election, the Corporation shall be obligated
to redeem all outstanding Shares of such Electing Series Preferred on the later
of (a) the occurrence of the Change in Ownership or (b) five days after the
Corporation's receipt of such election(s). If any proposed Change in Ownership
does not occur, all requests for redemption in connection therewith shall be
automatically rescinded, or if there has been a material change in the terms or
the timing of the transaction, the holders of a majority of the outstanding
Shares of any Electing Series Preferred may rescind such request for redemption
by giving written notice of such rescission to the Corporation.
The term "Change in Ownership" means any sale, transfer or issuance or
-------------------
series of sales, transfers and/or issuances of Common Stock (including any
securities convertible or exercisable into shares of Common Stock) by the
Corporation or any holders thereof which results in any Person or group of
Persons (as the term "group" is used under the Securities Exchange Act of 1934),
other than the holders of Common Stock and Series A Preferred as of the date of
the Purchase Agreement, owning (a) more than 50% of the Common Stock (assuming
conversion and exercise of all outstanding securities convertible or exercisable
into shares of Common Stock) outstanding at the time of such sale, transfer or
issuance or series of sales, transfers and/or issuances or (b) capital stock of
the Corporation possessing the voting power (under ordinary circumstances) to
elect a majority of the Corporation's Board of Directors; provided that a Change
of Ownership may not be accomplished solely by the sale of Series A Preferred.
(ii) If a Fundamental Change is proposed to occur, the Corporation
shall give written notice of such Fundamental Change describing in reasonable
detail the material terms and date of consummation thereof to each holder of
Series A Preferred not more than 45 days nor less than 20 days prior to the
consummation of such Fundamental Change, and the Corporation shall give each
holder of Series A Preferred prompt written notice of any material change in
the terms or timing of such transaction. The holders of either a majority of the
outstanding Series A-1 Preferred or a majority of the outstanding Series A-2
Preferred (each, an "Electing Series Preferred") may require the Corporation to
redeem all of the outstanding Electing Series Preferred at a price per Share
equal to the Liquidation Value thereof (plus all accrued but unpaid dividends
pursuant to paragraph 1A and all declared but unpaid dividends pursuant to
paragraph 1D) by giving written notice to the Corporation of such election prior
to the later of (a) ten days prior to the consummation of the Fundamental Change
or (b) ten days after receipt of notice from the Corporation. The Corporation
shall give prompt written notice of such election to all other holders of Series
A Preferred (but in any event within five days prior to the consummation of the
Fundamental Change). If, within ten days following receipt of such notice, a
majority of the outstanding Shares of any other series of Series A Preferred
shall deliver a written notice requesting redemption of all of the outstanding
Shares of such other series, then such other series shall be an Electing Series
Preferred as of the date of the redemption request by the first series
requesting redemption and shall be entitled to redemption on the same date as
such first series.
-14-
<PAGE>
Upon receipt of such election, the Corporation shall be obligated to
redeem all outstanding Electing Series Preferred upon the consummation of such
Fundamental Change. If any proposed Fundamental Change does not occur, all
requests for redemption in connection therewith shall be automatically
rescinded, or if there has been a material change in the terms or the timing of
the transaction, the holders of a majority of all outstanding Shares of any
Electing Series Preferred may rescind such request for redemption by delivering
written notice thereof the Corporation prior to the consummation of the
transaction.
The term "Fundamental Change" means (a) any sale or transfer of all or
------------------
substantially all of the assets of the Corporation and its Subsidiaries on a
consolidated basis in any transaction or series of transactions (other than
sales in the ordinary course of business) and (b) any merger or consolidating to
which the Corporation is a party, except for a merger in which the Corporation
is the surviving corporation, the terms of the Series A Preferred are not
changed and the Series A Preferred is not exchange for cash, securities or other
property, and after giving effect to such merger, no Person or group of Persons
(as the term "group" is used under the Securities Exchange Act of 1934), other
than the holders of the Common Stock and Series A Preferred as of the date of
the Purchase Agreement, owns more than 50% of the Outstanding Common Stock
(assuming conversion and exercise of all outstanding securities convertible or
exercisable into shares of Common Stock) or capital stock of the Corporation
possessing the voting power (under ordinary circumstances) to elect a majority
of the Corporation's Board of Directors.
4I. Redemptions at the Option of the Company. In the event that any
----------------------------------------
holder's Series A Preferred has been automatically converted into Common Stock
pursuant to paragraph 6I hereof, at any time during the 120-day period
commencing on the date of such automatic conversion, the Corporation may redeem
all of the outstanding Common Stock issued upon such automatic conversion by
delivering written notice to all of the holders of such Common Stock. Within ten
days after the delivery of such redemption notice, but in no event after the
expiration of the 120-day period commencing on the date of such automatic
conversion, the Corporation shall redeem all the shares of Common Stock issued
upon such automatic conversion at an aggregate price equal to the Liquidation
Value (plus all accrued but unpaid dividends pursuant to paragraph 1A and all
declared but unpaid dividends pursuant to paragraph 1D) of the Series A
Preferred which was so converted as of the date of such automatic conversion.
Section 5. Voting Rights
-------------
The record holders of the Series A Preferred shall be entitled to
notice of all stockholders meetings in accordance with the Corporation's bylaws,
and the record holders of the Series A Preferred shall be entitled to vote on
all matters submitted to the
-15-
<PAGE>
stockholders for a vote together with the holders of the Common Stock and any
other classes of capital stock voting with the Common Stock as a single class,
with each Share entitled to the number of votes of all of the shares of Common
Stock issuable upon conversion of such Share. Notwithstanding the foregoing, so
long as at least 50% of the Series A Preferred issued pursuant to the Purchase
Agreement remains outstanding, the Corporation shall not merge or consolidate
with another entity or entities, sell all or substantially all of its assets or
dissolve or liquidate without the prior approval of the holders of at least 75%
of the Series A Preferred then outstanding; provided that the Corporation may,
without obtaining such approval, merge with any wholly-owned Subsidiary so long
as (i) the Corporation is the surviving corporation, (ii) the terms of the
Series A Preferred are not changed, (iii) the Series A Preferred is not
exchanged for cash, securities or other property and (iv) no Fundamental Change
(as defined in paragraph 4H hereof) results from such merger.
Section 6. Conversion.
----------
6A. Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Series A
Preferred may convert all or any portion of the Series A Preferred (including
any fraction of a Share) held by such holder into shares of Conversion Stock.
(ii) Except as otherwise provided in this Section 6, the Series A-1
Preferred shall be convertible into a total of 7,692,308 shares of Conversion
Stock (subject to adjustment pursuant to this Section 6), and except as
otherwise provided in this Section 6, the Series A-2 Preferred shall be
convertible into a total of 4,395,604 shares of Conversion Stock (subject to
adjustment pursuant to this Section 6). The number of shares of Conversion
Stock issuable upon conversion of each Share of Series A-1 Preferred shall be
equal to (i) 7,692,308 (as such number of shares of Conversion Stock is adjusted
hereunder) minus the number of shares of Conversion Stock previously issued upon
conversion of any Series A-1 Preferred, divided by (ii) the total number of
Shares of Series A-1 Preferred then outstanding, and the number of shares of
Conversion Stock issuable upon conversion of any Share of Series A-2 Preferred
shall be equal to (i) 4,395,604 (as such number of shares of Conversion Stock is
adjusted hereunder) minus the number of shares of Conversion Stock previously
issued upon conversion of any Series A-2 Preferred, divided by (ii) the total
number of Shares of Series A-2 Preferred then outstanding. The number of shares
of Conversion Stock issuable upon conversion of the Series A -1 Preferred or the
Series A-2 Preferred (as the case may be) shall be reduced upon each redemption
of any Shares of such series under paragraph 4A, 8B(ii) or 8B(iii) by a portion
of such number equal to the number of shares redeemed at such time divided by
35,000 in the case of Series A-1 Preferred and 20,000 in the case of Series A-2
Preferred.
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<PAGE>
(iii) The Series A-3 Preferred shall be convertible into a number
of shares of Conversion Stock computed by multiplying the number of Shares of
Series A-3 Preferred to be converted by $1,000 and dividing the result by the
Base Price then in effect.
(iv) Except as otherwise provided herein, each conversion of Series A
Preferred shall be deemed to have been effected as of the close of business on
the date on which the certificate or certificates representing the Series A
Preferred to be converted have been surrendered for conversion at the principal
office of the Corporation. At the time any such conversion has been effected,
the rights of the holder of the Shares converted as a holder of Series A
Preferred shall cease and the Person or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.
(v) The conversion rights of any Share subject to redemption hereunder
shall terminate on the Redemption Date for such Share unless the Corporation has
failed to pay to the holder thereof the full amount payable with respect to such
Share.
(vi) Notwithstanding any other provision hereof, if a conversion of
Series A Preferred is to be made in connection with a Public Offering, a Change
in Ownership, a Fundamental Change or other transaction affecting the
Corporation, the conversion of any Shares may, at the election of the holder
thereof, be conditioned upon the consummation of such transaction, in which case
such conversion shall not be deemed to be effective until such transaction has
been consummated.
(vii) As soon as possible after a conversion has been effected
(but in any event within five business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
(a) a certificate or certificates representing the number of
shares of Conversion Stock issuable by reason of such conversion in such
name or names and such denomination or denominations as the converting
holder has specified;
(b) the amount of all dividends declared pursuant to paragraph 1D
remaining unpaid with respect to the Shares to be converted, the amount of
all incremental dividends remaining unpaid pursuant to paragraph 8B(i) with
respect to the Shares to be converted and the amount payable under
subparagraph (xi) below with respect to such conversion (provided that no
dividends other than as expressly set forth in this paragraph 6A(vii)(b),
including without limitation the 5% per annum dividend described in
paragraph 1A hereof, shall be payable with respect to any Share upon
conversion and shall be cancelled without payment); and
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<PAGE>
(c) a certificate representing any Shares which were represented
by the certificate or certificates delivered to the Corporation in
connection with such conversion but which were not converted.
(viii) The issuance of certificates for shares of Conversion Stock
upon conversion of Series A Preferred shall be made without charge to the
holders of such Series A Preferred for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion and
the related issuance of shares of Conversion Stock. Upon conversion of each
Share of Series A Preferred, the Corporation shall take all such actions as are
necessary in order to insure that the Conversion Stock issuable with respect to
such conversion shall be validly issued, fully paid and nonassessable, free and
clear of all taxes, liens, charges and encumbrances with respect to the issuance
thereof.
(ix) The Corporation shall not close its books against the transfer of
Series A Preferred or of Conversion Stock issued or issuable upon conversion of
Series A Preferred in any manner which interferes with the timely conversion of
Series A Preferred. The Corporation shall assist and cooperate with any holder
of Shares required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of Shares hereunder
(including, without limitation, making any filings required to be made by the
Corporation).
(x) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Series A Preferred, such number
of shares of Conversion Stock issuable upon the conversion of all outstanding
Series A Preferred. All shares of Conversion Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Corporation shall take all such actions
as may be necessary to assure that all such shares of Conversion Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Conversion
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Conversion Stock to be less than the number of such
shares required to be reserved hereunder for issuance upon conversion of the
Series A Preferred.
(xi) If any fractional interest in a share of Conversion Stock would,
except for the provisions of this subparagraph, be delivered upon any conversion
of the Series A Preferred, the Corporation, in lieu of delivering the fractional
share therefor, shall pay an amount to the holder thereof equal to the Market
Price of such fractional interest as of the date of conversion.
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<PAGE>
6B. Adjustments.
-----------
(i) In order to prevent dilution of the conversion rights granted
under this Section 6, the number of shares of Conversion Stock issuable upon
conversion of the Series A Preferred shall be subject to adjustment from time to
time pursuant to this paragraph 6B. The initial number of shares of Conversion
Stock issuable upon conversion of the Series A-1 Preferred shall be 7,692,308,
the initial number of shares of Conversion Stock issuable upon conversion of the
Series A-2 Preferred shall be 4,395,604, and the initial number of shares of
Conversion Stock issuable upon conversion of the Series A-3 Preferred shall be
determined under paragraph 6A(iii) above. The initial "Base Price" of the
----------
Series A Preferred shall be $4.55.
(ii) If and whenever the Corporation issues or sells, or in accordance
with paragraph 6C is deemed to have issued or sold, any shares of its Common
Stock for a consideration per share less than the Base Price in effect
immediately prior to the time of such issue or sale, then immediately upon such
issue or sale or deemed issue or sale the Base Price shall be reduced to the
Base Price determined by dividing (a) the sum of (1) the product derived by
multiplying the Base Price in effect immediately prior to such issue or sale by
the number of shares of Common Stock Deemed Outstanding immediately prior to
such issue or sale, plus (2) the consideration, if any, received by the
Corporation upon such issue or sale, by (b) the number of shares of Common Stock
Deemed Outstanding immediately after such issue or sale.
(iii) Immediately upon any adjustment of the Base Price under this
Attachment II (including, without limitation, under paragraph 6D, paragraph 6E
or paragraph 8B(iv) hereof), the number of shares of Conversion Stock issuable
upon conversion of the Series A Preferred shall be adjusted as follows:
(a) The adjusted number of shares of Conversion Stock issuable
upon conversion of the Series A-1 Preferred shall be equal to (1)
$35,000,000 minus the Liquidation Value of all Shares of Series A-1
Preferred previously converted or redeemed hereunder, divided by (2) the
new adjusted Base Price, and
(b) The adjusted number of shares of Conversion Stock issuable
upon conversion of the Series A-2 Preferred shall be equal to (1)
$20,000,000 minus the Liquidation Value of all Shares of Series A-2
Preferred previously converted or redeemed hereunder, divided by (2) the
new adjusted Base Price.
(iv) Notwithstanding the foregoing, there shall be no adjustment in
the Base Price or the number of shares of Conversion Stock issuable upon
conversion of the Series A Preferred as a result of any issue or sale (or deemed
issue or sale) of up to an aggregate of 1,195,000 shares of Common Stock to
employees or directors of the Corporation and its Subsidiaries pursuant to stock
option plans, stock ownership plans or stock purchase warrants approved by the
Corporation's Board of Directors (as such number of shares is proportionately
adjusted for subsequent stock splits, combinations
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<PAGE>
and dividends affecting the Common Stock and as such number includes all such
stock options and other purchase rights outstanding at the time of the initial
issuance of the Series A Preferred).
6C. Effect on Base Price of Certain Events. For purposes of
--------------------------------------
determining the adjusted Base Price under paragraph 6B, the following shall be
applicable:
(i) Issuance of Rights or Options. If the Corporation in any manner
-----------------------------
grants or sells any Options and the price per share for which Common Stock is
issuable upon the exercise of such Options, or upon conversion or exchange of
any Convertible Securities issuable upon exercise of such Options, is less than
the Base Price in effect immediately prior to the time of the granting or sale
of such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the exercise
of such Options shall be deemed to be outstanding and to have been issued and
sold by the Corporation at the time of the granting or sale of such Options for
such price per share. For purposes of this paragraph, the "price per share for
which Common Stock is issuable" shall be determined by dividing (A) the total
amount, if any, received or receivable by the Corporation as consideration for
the granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Base Price shall be
made when Convertible Securities are actually issued upon the exercise of such
Options or when Common Stock is actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Base Price in effect immediately prior to the time of such issue or sale,
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding and to
have been issued and sold by the Corporation at the time of the issuance or sale
of such Convertible Securities for such price per share. For the purposes of
this paragraph, the "price per share for which Common Stock is issuable" shall
be determined by dividing (A) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (B)
the total maximum number
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<PAGE>
of shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment of the Conversion Price shall be
made when Common Stock is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustments of the
Base Price had been or are to be made pursuant to other provisions of this
Section 6, no further adjustment of the Base Price shall be made by reason of
such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Base Price in effect at the time of such change
shall be immediately adjusted to the Base Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold. For
purposes of paragraph 6C, if the terms of any Option or Convertible Security
which was outstanding as of the date of the initial issuance of the Series A
Preferred (including, without limitation, the Corporation's Series B Preferred
Stock and Series C Preferred Stock) are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and the
Common Stock deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change; provided that no
such change shall at any time cause the Base Price hereunder to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right
- ----------
to convert or exchange any Convertible Security without the exercise of any such
Option or right, the Base Price then in effect hereunder shall be adjusted
immediately to the Base Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Security, to the
extent outstanding immediately prior to such expiration or termination, never
been issued. For purposes of paragraph 6C, the expiration or termination of any
Option or Convertible Security which was outstanding as of the date of the
initial issuance of the Series A Preferred shall not cause the Base Price
hereunder to be adjusted unless, and only to the extent that, a change in the
terms of such Option or Convertible Security caused it to be deemed to have been
issued after the date of issuance of the Series A Preferred.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (net of discounts, commissions and
related expenses). If any Common Stock, Option or Convertible Security is
issued of sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation
-21-
<PAGE>
shall be the fair value of such consideration, except where such consideration
consists of securities, in which case the amount of consideration received by
the Corporation shall be the Market Price thereof as of the date of receipt. If
any Common Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the Corporation is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair value of such portion of the assets and business of the non-
surviving entity as is attributable to such Common Stock, Option or Convertible
Security, as the case may be. The fair value of any consideration other than
cash and securities shall be determined jointly by the Corporation and the
holders of a majority of the outstanding Series A Preferred. If such parties are
unable to reach agreement within a reasonable period of time, the fair value of
such consideration shall be determined by an independent appraiser experienced
in valuing such type of consideration jointly selected by the Corporation and
the holders of a majority of the outstanding Series A Preferred. The
determination of such appraiser shall be final and binding upon the parties, and
the fees and expenses of such appraiser shall be borne by the Corporation.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for a consideration of $.01.
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Corporation takes a record of the
-----------
holders of Common Stock for the purpose of entitling them (a) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (b) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or upon the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D. Subdivision or Combination of Common Stock. If the Corporation
------------------------------------------
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Base Price in effect immediately prior to such
subdivision shall be proportionately reduced, and if the Corporation at any time
combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Base
Price in effect immediately prior to such
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<PAGE>
combination shall be proportionately increased. In each such case the number of
shares of Conversion Stock issuable upon conversion of the Series A Preferred
shall be adjusted as provided in paragraph 6B hereof.
6E. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Corporation's assets or other
transaction, in each case which is effected in such a manner that the holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock, is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance satisfactory to the holders of a majority of
the Series A Preferred then outstanding) to insure that each of the holders of
Series A Preferred shall thereafter have the right to acquire and receive, in
lieu of or in addition to (as the case may be) the shares of Conversion Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A Preferred, such shares of stock, securities or assets as such
holder would have received in connection with such Organic Change if such holder
had converted its Series A Preferred immediately prior to such Organic Change.
In each such case, the Corporation shall also make appropriate provisions (in
form and substance satisfactory to the holders of a majority of the Series A
Preferred then outstanding) to insure that the provisions of this Section 6 and
Section 7 hereof shall thereafter be applicable to the Series A Preferred
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Corporation, an
immediate adjustment of the Base Price to the value for the Common Stock
reflected by the terms of such consolidation, merger of sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Series A Preferred, if the value so
reflected is less than the Base Price in effect immediately prior to such
consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Corporation) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance satisfactory to the holders of a majority of the Series A
Preferred then outstanding), the obligation to deliver to each such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
6F. Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 6 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Base Price and the number of shares of Conversion Stock issuable upon conversion
of the Series A Preferred so as to protect the rights of the holders of Series A
Preferred; provided that no such adjustment shall increase the Base Price as
otherwise determined pursuant to this Section 6 or decrease the number
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<PAGE>
of shares of Conversion Stock issuable upon conversion of each Share of
Series A Preferred.
6G. Notices.
-------
(i) Immediately upon any adjustment of the Base Price, the Corporation
shall give written notice thereof to all holders of Series A Preferred, setting
forth in reasonable detail and certifying the calculation of such adjustment.
(ii) The Corporation shall give written notice to all holders of
Series A Preferred at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the holders of
Series A Preferred at least 20 days prior to the date on which any Organic
Change shall take place.
6H. Qualified Public Offering. The Corporation may at any time
-------------------------
require the conversion of all of the outstanding Series A Preferred if the
Corporation is at such time effecting a firm commitment underwritten Public
Offering of shares of its Common Stock in which
(a) the price per share paid by the public for such shares shall be at
least (1) $10 if such offering is consummated on or prior to the third
anniversary of the date of the Purchase Agreement, (2) $12.50 if such
offering is consummated after the third anniversary thereof but on or prior
to the fourth anniversary thereof or (3) $15 thereafter (in each case as
such share prices are adjusted for subsequent stock splits, stock dividends
and recapitalizations affecting the Common Stock), and
(b) the number of shares of Common Stock issued in such offering is
greater than 15% of the number of shares of Common Stock outstanding
immediately prior to such offering (assuming conversion and exercise of all
outstanding rights to acquire Common Stock) (a "Qualified Public
----------------
Offering").
--------
Any such mandatory conversion shall be conditioned upon the simultaneous
conversion of all outstanding shares of Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock into shares of Common Stock at such time
and shall only be effected at the time of and subject to the closing of the sale
of such shares pursuant to such Public Offering and upon written notice of such
mandatory conversion delivered to all holders of Series A Preferred at least
five days prior to such closing. If the
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<PAGE>
Qualified Public Offering results in an Accelerated Closing, each holder of
Series A-1 Preferred or Series A-2 Preferred may, at its option by delivering
written notice to the Corporation prior to the Accelerated Closing, elect not to
make its required purchase of additional Shares of Series A Preferred pursuant
to the Purchase Agreement, but rather reduce the number of shares of Conversion
Stock issuable upon conversion of such holder's Series A Preferred equal to the
aggregate purchase price of the Shares of Series A Preferred to be purchased by
such holder at the Accelerated Closing, divided by the per share offering price
of the Common Stock in such public offering. If the Qualified Public Offering
occurs other than in connection with an Accelerated Closing and all of the
Series A Preferred has not been issued pursuant to the Purchase Agreement, the
number of shares of Conversion Stock issuable upon conversion of the Series A-1
Preferred or the Series A-2 Preferred (as the case may be) outstanding
immediately prior to the Qualified Public Offering shall be reduced to a number
of Shares equal to the total number of shares of Conversion Stock issuable upon
conversion of such series multiplied by a fraction, the numerator of which is
the total number of shares of such series outstanding and the denominator of
which is the total number of shares of such series to be issued under the
Purchase Agreement.
6I. Conversion if Closing Conditions Satisfied. If within 20 days
------------------------------------------
after a final determination (such determination to be made either by the mutual
agreement of the Corporation and any holder of Series A-1 Preferred or Series A-
2 Preferred or pursuant to the arbitration procedures set forth in paragraph 8O
of the Purchase Agreement) that all of the conditions set forth in Section 3 of
the Purchase Agreement have been satisfied with respect to any Closing
thereunder (other than the First Closing), such holder of Series A-1 Preferred
or Series A-2 Preferred or any other holder of Series A-3 Preferred does not
purchase all of the Shares of Series A Preferred such holder is required to
purchase under the Purchase Agreement at such closing, (i) all Shares of Series
A-1 Preferred or Series A-2 Preferred (as the case may be) held by any such
holder shall be automatically converted into a number of shares of Conversion
Stock equal to the number of shares of Conversion Stock issuable upon conversion
of all Shares of such series of Series A Preferred immediately prior to such
conversion multiplied by a fraction, the numerator of which is the number of
Shares of such series of Series A Preferred held by such holder and the
denominator of which is the total number of Shares of such series of Series A
Preferred to be issued under the Purchase Agreement to such holder assuming all
closings thereunder had occurred, and (ii) all Shares of Series A-3 Preferred
held by any such holder shall be automatically converted into shares of
Conversion Stock as provided hereunder.
6J. Conversion if Closing Conditions Not Satisfied. If upon a final
----------------------------------------------
determination (such determination to be made either by the mutual agreement of
the Corporation and any holder of Series A-1 Preferred or Series A-2 Preferred
or pursuant to the arbitration procedures set forth in paragraph 8O of the
Purchase Agreement) that any condition set forth in Section 3 of the Purchase
Agreement (other than those conditions set forth in paragraph 3C of the Purchase
Agreement relating to an Event of
-25-
<PAGE>
Noncompliance set forth in paragraph 8A(ii) hereof (covenants), paragraph 3D of
the Purchase Agreement (use of proceeds) or paragraph 3E of the Purchase
Agreement (continuity of senior management)) has not been satisfied with respect
to any closing thereunder (other than the First Closing), such holder of Series
A-1 Preferred or Series A-2 Preferred, any other holder of Series A-3 Preferred
or a third party financing source purchases the Series A Preferred offered by
the Corporation pursuant to paragraph 8Q of the Purchase Agreement with a Base
Price different than the Base Price for the Series A-1 Preferred; the Series A-2
Preferred and Series A-3 Preferred in effect immediately prior to such sale, the
Certificate of Incorporation shall be amended to (i) reclassify the Shares of
Series A-1 Preferred, Series A-2 Preferred or Series A-3 Preferred to be
purchased at such time to Shares of a new series of preferred stock to be
designed Series A-4 Convertible Preferred Stock or the next Series A in sequence
with the same terms and conditions as the Series A-1 Preferred, the Series A-2
Preferred or Series A-3 Preferred (as the case may be), except for the Base
Price thereof, (ii) reduce the number of authorized Series A-1 Preferred, Series
A-2 Preferred or Series A-3 Preferred (as the case may be) by the number of
Shares of the new series to be issued and (iii) reduce the number of shares of
Conversion Stock issuable upon conversion of the Series A-1 Preferred or the
Series A-2 Preferred (as the case may be) by the number of shares of Conversion
Stock determined by multiplying the total number of shares of Conversion Stock
issuable upon conversion of all Series A-1 Preferred or Series A-2 Preferred (as
the case may be) by a fraction, the numerator of which is the number of Shares
of Series A-1 Preferred or Series A-2 Preferred (as the case may be) to be
purchased at such time and the denominator of which is the total number of
Shares of Series A-1 Preferred or Series A-2 Preferred to be issued under the
Purchase Agreement. Any new series of preferred stock created hereunder shall be
included in the term "Series A Preferred."
6K. Liquidity Event. If a Change in Ownership or a Fundamental Change
---------------
occurs other than in connection with an Accelerated Closing under the Purchase
Agreement and all of the Series A Preferred has not been issued pursuant to the
Purchase Agreement, the number of shares of Conversion Stock issuable upon
conversion of the Series A-1 Preferred or the Series A-2 Preferred (as the case
may be) outstanding immediately prior to such event shall be reduced to a number
of shares equal to the total number of shares of Conversion Stock issuable upon
conversion of such series multiplied by a fraction, the numerator of which is
the total number of Shares of such series then outstanding and the denominator
of which is the total number of Shares of such series initially issuable under
the Purchase Agreement.
Section 7. Purchase Rights.
---------------
If at any time the Corporation grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then each holder of Series A Preferred shall be entitled to
---------------
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have
-26-
<PAGE>
acquired if such holder had held the number of shares of Conversion Stock
acquirable upon conversion of such holder's Series A Preferred immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.
Section 8. Events of Noncompliance.
-----------------------
8A. Definition. An Event of Noncompliance shall have occurred if:
----------
(i) the Corporation fails to make the full amount of any redemption
payment with respect to the Series A Preferred which it is required to make
hereunder, whether or not such payment is legally permissible under Delaware law
or is prohibited by any agreement to which the Corporation is subject;
(ii) the Corporation breaches or otherwise fails to perform or observe any
other covenant set forth herein or in any covenant in Section 4 (other than
paragraph 4I and paragraph 4J) or paragraph 8A or 8D of the Purchase Agreement,
provided that no Event of Noncompliance shall have occurred under this
subparagraph (ii) if (a) the Event of Noncompliance has not had and would not
have a material adverse effect on the financial condition, operating results,
operations, assets or business prospects of the Corporation and its
Subsidiaries, taken as a whole, and (b) the Event of Noncompliance is not
material to the holders' investment in the Series A Preferred;
(iii) any representation or warranty contained in Section 6 (other than
paragraph 6-1) of the Purchase Agreement or required to be furnished to any
holder of Series A Preferred pursuant to the Purchase Agreement, or any
information contained in writing required to be furnished by the Corporation or
any Subsidiary to any holder of Series A Preferred, is false or misleading on
the date made or furnished; provided that no Event of Noncompliance shall have
occurred under this subparagraph (iii) if (a) the Event of Noncompliance has not
had and would not have or does not reflect a material adverse effect on the
financial condition, operating results, operations, assets or business prospects
of the Corporation and its Subsidiaries, taken as a whole, and (b) the Event of
Noncompliance is not material to the holders' investment in the Series A
Preferred; or
(iv) the Corporation or any material Subsidiary makes an assignment for the
benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Corporation or any material Subsidiary bankrupt or insolvent;
or any order for relief with respect to the Corporation or any material
Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or
any material Subsidiary petitions or applies to any tribunal for the appointment
of a custodian, trustee, receiver or liquidator of the Corporation or any
material Subsidiary or of any substantial part of the assets of the Corporation
or any
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<PAGE>
material Subsidiary, or commences any proceeding (other than a proceeding for
the voluntary liquidation and dissolution of a Subsidiary) relating to the
Corporation or any material Subsidiary under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the Corporation or any material Subsidiary and
either (a) the Corporation or any such Subsidiary by any act indicates its
approval thereof, consent thereto or acquiescence therein or (b) such petition,
application or proceeding is not dismissed within 60 days.
8B. Consequences of Events of Noncompliance.
---------------------------------------
(i) If an Event of Noncompliance of the type described in subparagraph
8A(ii) or 8A(iii) (other than an Event of Noncompliance of the type described in
subparagraph 8A(iii) as to which the provisions of this subparagraph are first
invoked on or after the third anniversary of the Purchase Agreement) has
occurred and continues for a period of 30 days, or any other Event of
Noncompliance (except for an Event of Noncompliance of the type described in
subparagraph 8A(iv)) has occurred and continues for a period of ten days, in
each case after the holders of a majority of the outstanding Series A Preferred
have given written notice to the Corporation invoking the provisions of this
subparagraph, the dividend rate under paragraph 1A hereof on the Series A
Preferred shall increase immediately by an increment of one percentage point.
Thereafter, until such time as no Event of Noncompliance exists, the dividend
rate shall increase automatically at the end of each succeeding 90-day period by
an additional increment of one percentage point (but in no event shall the
dividend rate exceed 12%). Any increase of the dividend rate resulting from the
operation of this subparagraph shall terminate as of the close of business on
the date on which no Event of Noncompliance exists, subject to subsequent
increases pursuant to this paragraph.
(ii) If an Event of Noncompliance of the type described in subparagraph
8A(ii) or 8A(iii) (other than an Event of Noncompliance of the type described in
subparagraph 8A(iii) which was not the result of a false or misleading statement
which the Corporation knew or should have known was false or misleading or an
Event of Noncompliance of the type described in subparagraph 8A(iii) as to which
the provisions of this subparagraph are first invoked on or after the third
anniversary of the Purchase Agreement) has occurred and continued for a period
of 120 days, or any other Event of Noncompliance (except for an Event of
Noncompliance of the type described in subparagraph 8A(iv)) has occurred and
continues for a period of ten days, in each case after the holders of a majority
of the outstanding Series A Preferred have given written notice to the
Corporation invoking the provisions of this subparagraph, the holder or holders
of a majority of the Series A Preferred then outstanding may demand (by written
notice delivered to the Corporation) immediate redemption of all or any portion
of the Series A Preferred owned by such holder or holders at a price per Share
equal to the Liquidation Value thereof (plus all accrued but unpaid dividends
pursuant to paragraph 1A and all declared but unpaid dividends pursuant to
paragraph 1D). The
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Corporation shall give prompt written notice of such election to the other
holders of Series A Preferred (but in any event within five days after receipt
of the initial demand for redemption), and each such other holder may demand
immediate redemption of all or any portion of such holder's Series A Preferred
by giving written notice thereof to the Corporation within seven days after
receipt of the Corporation's notice. The Corporation shall redeem all Series A
Preferred as to which rights under this paragraph have been exercised within 15
days after receipt of the initial demand for redemption.
(iii) If an Event of Noncompliance of the type described in subparagraph
8A(iv) has occurred, all of the Series A Preferred then outstanding shall be
subject to immediate redemption by the Corporation (without any action on the
part of the holders of the Class A Preferred) at a price per Share equal to the
Liquidation Value thereof (plus all accrued but unpaid dividends pursuant to
paragraph 1A and all declared but unpaid dividends pursuant to paragraph 1D),
and all further funding obligations (if any) of the holders of the Series A
Preferred pursuant to the Purchase Agreement shall immediately cease and be of
no further force and effect upon the occurrence of such Event of Noncompliance
(without giving effect to any cure period in subparagraph 8A(iv)). The
Corporation shall immediately redeem all Series A Preferred upon the occurrence
of such Event of Noncompliance.
(iv) If any Event of Noncompliance (except for an Event of
Noncompliance of the type described under subparagraph 8A(i) or 8A(iv) or an
Event of Noncompliance of the type described in subparagraph 8A(ii) which
relates to a breach of any covenant contained in paragraph 4A(iv), 4A(vii),
4A(viii), 4B(i), 4C(ix), 4C(x), 4D(ii), 4D(vi), 4D(vii), 4D(ix), 4D(x), 4E, 4F
or Section 8 of the Purchase Agreement or an Event of Noncompliance of the type
described in subparagraph 8A(iii) as to which the provisions of this
subparagraph are first invoked on or after the third anniversary of the Purchase
Agreement or, regardless of when the provisions of this subparagraph are first
invoked, relates to a breach of any representation or warranty contained in
paragraph 6A, 6C, 6E, 6I, 6L, 6N, 6P, 6Q, 6R or 6V of the Purchase Agreement)
exists for, in the case of any Event of Noncompliance of the type described in
subparagraph 8A(iii) (which is not otherwise excluded from the provisions of
this subparagraph 8B(iv)), an aggregate of 60 days, and, in the case of any
other Event of Noncompliance which is not otherwise excluded from the provisions
of this subparagraph 8B(iv), an aggregate of 180 days, in each case after the
holders of a majority of the outstanding Series A Preferred have given written
notice to the Corporation invoking the provisions of this subparagraph (whether
or not such days are consecutive), the Base Price of the Series A Preferred
shall be reduced immediately by 10% of the Base Price in effect immediately
prior to such adjustment (the "First Adjustment"). If such Event of
----------------
Noncompliance (except for an Event of Noncompliance of the type described in
subparagraph 8A(iii)) exists for an aggregate of 180 days after the First
Adjustment (whether or not such days are consecutive and whether or not such
days immediately follow the First Adjustment), the Base Price shall be reduced
immediately by 10% of what the Base Price would have been immediately prior to
such adjustment if the First Adjustment had not been made
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(the "Second Adjustment"). If such Event of Noncompliance (except for an
-----------------
Event of Noncompliance of the type described in subparagraph 8A(iii)) exists for
an aggregate of 180 days after the Second Adjustment (whether or not such days
are consecutive and whether or not such days immediately follow the Second
Adjustment), the Base Price shall be reduced immediately by 10% of what the Base
Price would have been immediately prior to such adjustment if the First and
Second Adjustments had not been made. In no event shall any Base Price
adjustment be rescinded, and in no event shall there be more than three Base
Price adjustments pursuant to this subparagraph; provided that with respect to
any Events of Noncompliance of the type described in subparagraph 8A(iii), there
shall not be more than one Base Price adjustment.
For example, assume that the Base Price of the Series A Preferred is $4.00.
If an Event of Noncompliance exists for an aggregate of 180 days, the Base
Price would be reduced immediately by 10% of $4.00, or $.40, for a new Base
Price of $3.60. If such Event of Noncompliance (except for an Event of
Noncompliance of the type described in subparagraph 8A(iii)) exists for an
additional 180 days, the existing Base Price would be reduced by 10% of
what the Base Price would have been if there had been no previous
adjustment pursuant to this paragraph (i.e., $4.00), or $.40, for a new
Base Price of $3.20. Then assume that there is a two-for-one stock split,
in which case the Base Price would be decreased hereunder from $3.20 to
$1.60, and assume that such Event of Noncompliance (except for an Event of
Noncompliance of the type described in subparagraph 8A(iii)) exists for an
additional 180 days. In this case, the Base Price would be reduced by 10%
of what the Base Price would have been immediately prior to such adjustment
if there had been no previous adjustments pursuant to this paragraph (i.e.
$2.00), or $.20, for a new Base Price of $1.40.
(v) If any Event of Noncompliance of the type described in
subparagraph 8A(ii) has occurred and continues for 30 days, any Event of
Noncompliance of the type described in subparagraph 8A(iii) (except for any such
Event of Noncompliance which was not the result of a false or misleading
statement which the corporation knew or should have known was false or
misleading or any such Event of Noncompliance as to which the provisions of this
subparagraph are first invoked on or after the third anniversary of the Purchase
Agreement) has occurred and continues for 90 days or any other Event of
Noncompliance has occurred and continues for a period of ten days, in each case
after the holders of a majority of the outstanding Series A Preferred have given
written notice to the Corporation invoking the provisions of this subparagraph,
the number of directors constituting the Corporation's Board of Directors shall,
at the request of a majority of the Series A Preferred then outstanding, be
increased by two members, and the holders of Series A Preferred shall have the
special right, voting separately as a single class (with each Share being
entitled to one vote) and to the exclusion of all other classes of the
Corporation's stock, to elect two individuals to fill such newly created
directorships, to fill any vacancy of such directorships and to remove any
individual elected to such directorships. The special right of the holders of
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<PAGE>
Series A Preferred to elect members of the Board of Directors may be exercised
at the special meeting called pursuant to this subparagraph (v), at any annual
or other special meeting of stockholders and, to the extent and in the manner
permitted by applicable law, pursuant to a written consent in lieu of a
stockholders meeting. Such special right shall continue until such time as
there is no longer any Event of Noncompliance in existence, at which time such
special right shall terminate subject to revesting upon the occurrence and
continuation of any Event of Noncompliance which gives rise to such special
right hereunder.
At any time when such special right has been invoked by the holders of
Series A Preferred, a proper officer of the Corporation shall, upon the written
request of the holder of at least 10% of the Series A Preferred then
outstanding, addressed to the secretary of the Corporation, call a special
meeting of the holders of Series A Preferred for the purpose of electing a
director pursuant to this subparagraph. Such meeting shall be held at the
earliest legally permissible date at the principal office of the Corporation, or
at such other place designated by the holders of at least 10% of the Series A
Preferred then outstanding. If such meeting has not been called by a proper
officer of the Corporation within 10 days after personal service of such written
request upon the secretary of the Corporation or within 20 days after mailing
the same to the secretary of the Corporation at its principal office, then the
holders of at least 10% of the Series A Preferred then outstanding may designate
in writing one of their number to call such meeting at the expense of the
Corporation, and such meeting may be called by such Person so designated upon
the notice required for annual meetings of stockholders and shall be held at the
Corporation's principal office, or at such other place designated by the holders
of at least 10% of the Series A Preferred then outstanding. Any holder of
Series A Preferred so designated shall be given access to the stock record books
of the Corporation for the purpose of causing a meeting of stockholders to be
called pursuant to this subparagraph.
At any meeting or at any adjournment thereof at which the holders of Series
A Preferred have the special right to elect directors, the presence, in person
or by proxy, of the holders of a majority of the Series A Preferred then
outstanding shall be required to constitute a quorum for the election or removal
of any director by the holders of the Series A Preferred exercising such special
right. The vote of a majority of such quorum shall be required to elect or
remove any such director.
Any director so elected by the holders of Series A Preferred shall continue
to serve as a director until the expiration of the lesser of (a) a period of six
months following the date on which there is no longer any Event of Noncompliance
in existence or (b) the remaining period of the full term for which such
director has been elected. After the expiration of such six-month period or when
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the full term for which such director has been elected ceases (provided that the
special right to elect directors has terminated), as the case may be, the number
of directors constituting the board of directors of the Corporation shall
decrease to such number as constituted the whole board of directors of the
Corporation immediately prior to the occurrence of the Event or Events of
Noncompliance giving rise to the special right to elect directors.
(vi) Notwithstanding anything to the contrary contained in this paragraph
8B, the holders of the Series A Preferred shall not be required to deliver
written notice a minimum number of days in advance to the Corporation in order
to invoke any of the provisions of paragraph 8B(a) which are triggered by an
Event of Noncompliance of the type described in paragraph 8A(ii) with respect to
paragraph 4A(vi) of the Purchase Agreement or (b) if the Corporation has
breached paragraph 4A(vi) of the Purchase Agreement with respect to any Event of
Noncompliance triggering the provisions of this paragraph 8B.
(vii) If any Event of Noncompliance exists, each holder of Series A
Preferred shall also have any other rights which such holder is entitled to
under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 9. Registration of Transfer.
------------------------
The Corporation shall keep at its principal office a register for the
registration of Series A Preferred. Upon the surrender of any certificate
representing Series A Preferred at such place, the Corporation shall, at the
request of the record holder of such certificate, execute and deliver (at the
Corporation's expense) a new certificate or certificates in exchange therefor
representing in the aggregate the number of Shares represented by the
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of Shares as is requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Series A Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such Series A Preferred represented by the surrendered
certificate.
Section 10. Replacement.
-----------
Upon receipt of evidence reasonably satisfactory to the Corporation (an
affidavit of the registered holder shall be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of any certificate evidencing Shares
of Series A Preferred, and in the case of any such loss, theft or destruction,
upon receipt of indemnity reasonably satisfactory to the Corporation (provided
that if the holder is a financial institute or other institutional investor its
own agreement shall be satisfactory), or, in the case of any such mutilation
upon surrender of such certificate, the Corporation shall (at its expense)
execute and deliver in lieu of such certificate a new certificate of like kind
representing the number of shares of such class represented by such lost,
stolen, destroyed or mutilated certificate and dated the date of such lost,
stolen, destroyed or mutilated certificate, and dividends shall accrue on the
Series A Preferred represented by such new
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<PAGE>
certificate from the date to which dividends have been fully paid on such lost,
stolen, destroyed or mutilated certificate.
Section 11. Definitions.
-----------
"Accelerated Closing" has the meaning set forth in paragraph 1E of the
-------------------
Purchase Agreement.
"Base Price" means, the Initial Base Price as set forth in paragraph 6B(i)
----------
hereof, as adjusted pursuant to Section 6 and Section 8 hereof.
"Change in Ownership" has the meaning set forth in paragraph 4H hereof.
-------------------
"Common Stock" means, collectively, the Corporation's Common Stock and any
------------
capital stock of any class of the Corporation hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time without
-------------------------------
duplication, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to subparagraphs 6C(i) and 6C(ii) hereof whether or not the Options or
Convertible Securities are actually exercisable at such time, plus the number of
shares of Common Stock issuable upon conversion of the outstanding Series A
Preferred, Series B Preferred Stock and Series C Preferred Stock, plus the
number of shares of Common Stock issuable upon exercise of options or warrants
granted to employees and directors of the Corporation and its Subsidiaries up to
an aggregate of 1,117,142 shares (including any options or warrants outstanding
as of the date of the Purchase Agreement) as such number of shares is
proportionately adjusted for stock splits, stock dividends, stock combinations
and other recapitalizations.
"Conversion Stock" means shares of the Corporation's Common Stock, par
----------------
value $0.001 per share; provided that if there is a change such that the
securities issuable upon conversion of the Series A Preferred are issued by an
entity other than the Corporation or there is a change in the type or class of
securities so issuable, then the term "Conversion Stock" shall mean one share of
the security issuable upon conversion of the Series A Preferred if such security
is issuable in shares, or shall mean the smallest unit in which such security is
issuable if such security is not issuable in shares.
"Convertible Securities" means any stock or securities directly or
----------------------
indirectly convertible into or exchangeable for Common Stock.
"Fundamental Change" has the meaning set forth in paragraph 4H hereof.
------------------
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"Junior Securities" means any capital stock or other equity securities of
-----------------
the Corporation, except for the Series A Preferred.
"Liquidation Value" of any Share as of any particular date shall be equal
-----------------
to $1,000.
"Market Price" of any security means the average of the closing prices of
------------
such security's sales on all securities exchanges on which such security may at
the time be listed, or, if there has been no sales on any such exchange on any
day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which "Market Price" is being determined and the 20 consecutive business days
prior to such day. If at any time such security is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
"Market Price" shall be the fair value thereof determined jointly by the
Corporation and the holders of a majority of the Series A Preferred. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an independent appraiser experienced in
valuing securities jointly selected by the Corporation and the holders of a
majority of the Series A Preferred. The determination of such appraiser shall
be final and binding upon the parties, and the Corporation shall pay the fees
and expenses of such appraiser.
"Options" means any rights, warrants or options to subscribe for or
-------
purchase Common Stock or Convertible Securities.
"Participating Liquidation Amount" means the portion of all liquidation
--------------------------------
proceeds payable to the holders of Common Stock, after all required payments of
liquidation proceeds to the holders of the Corporation's outstanding preferred
stock (other than the Series A Preferred) in preference to the Common Stock,
equal to a fraction, the numerator of which is the number of shares of Common
Stock issuable upon conversion under paragraph 6A of all Series A Preferred
outstanding immediately prior to such event and the denominator of which is the
number of shares of Common Stock outstanding immediately prior to such event
plus all shares of Common Stock issuable upon conversion under paragraph 6A of
all Series A Preferred outstanding immediately prior to such event.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, a limited liability, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
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"Public Offering" means any offering by the Corporation of its capital
---------------
stock or equity securities to the public pursuant to an effective registration
statement under the Securities Act of 1933, as then in effect, or any comparable
statement under any similar federal statute then in force; provided that for
purposes of paragraph 6H hereof, a Public Offering shall not include an offering
made in connection with a business acquisition or combination or an employee
benefit plan.
"Purchase Agreement" means the Series A Preferred Stock Purchase Agreement,
------------------
dated as of September 13, 1995, by and among The International Cornerstone
Group, Inc. and certain investors, as such agreement may from time to time be
amended in accordance with its terms.
"Redemption Date" as to any Share means the date specified in the notice of
---------------
any redemption or the applicable date specified herein in the case of any other
redemption; provided that no such date shall be a Redemption Date unless the
full amount payable with respect thereto is actually paid in full on such date,
and if not so paid in full, the Redemption Date shall be the date on which such
amount is fully paid.
"Series A Preference Amount" has the meaning set forth in Section 2 of this
--------------------------
Attachment II to this Article IV.
"Subsidiary" means, with respect to any Person, any corporation, limited
----------
liability company, partnership, association or other business entity of which
(i) if a corporation, a majority of the total voting power of shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.
Section 12. Amendment and Waiver.
--------------------
No amendment, modification or waiver shall be binding or effective with
respect to any provision of Sections 1 to 13 hereof without the prior written
consent of the holders of at least 75% of the Series A Preferred outstanding at
the time such action is taken; provided that no change in the terms hereof may
be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the
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<PAGE>
Corporation has obtained the prior written consent of the holders of the
applicable percentage of the Series A Preferred then outstanding.
Section 13. Notices.
-------
Except as otherwise expressly provided hereunder, all notices referred to
herein shall be in writing and shall be delivered by registered or certified
mail, return receipt requested and postage prepaid, or by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (i) to the Corporation, at its principal executive offices and
(ii) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
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ATTACHMENT III - SERIES B CONVERTIBLE PREFERRED STOCK
1. Designation and Amount. This series of capital stock is designated
----------------------
"Series B Convertible Preferred Stock" and the number of shares which shall
constitute such class shall be not more than 9,000 shares, par value $0.01 per
share, which number may be decreased (but not below the number thereof then
outstanding or reserved for issuance) from time to time by the Board of
Directors.
2. Dividends. (a) The holders of the Series B Convertible Preferred
---------
Stock shall be entitled to receive cash dividends as and when the same may be
declared and paid on Common Stock by the Board of Directors in an amount per
share equal to the amount of such dividend per share of Common Stock multiplied
by the Conversion Rate (as defined in Section 4 below) then in effect assuming
conversion of all Series B Convertible Preferred Stock on the date of
declaration of such dividend. No cash dividend shall be declared or paid on the
Common Stock unless such dividend is simultaneously declared and paid on the
Series B Convertible Preferred Stock. The holders of the Series B Convertible
Preferred Stock shall not be entitled to any preferential dividends.
(b) So long as any share of Series B Convertible Preferred Stock
remains outstanding, without the prior written consent of the holders of a
majority of the outstanding shares of Series B Convertible Preferred Stock, the
Corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase
or otherwise acquire directly or indirectly any shares of stock ranking junior
to the Series B Preferred Stock as to dividends or liquidation ("Junior
Securities"), nor shall the Corporation directly or indirectly pay or declare
any dividend or make any distribution upon any Junior Securities (other than
dividends on the Common Stock payable in cash or shares of Common Stock);
provided that the Corporation may repurchase shares of Common Stock from
employees of the Corporation and its Subsidiaries upon termination of employment
pursuant to arrangements approved by the Corporation's Board of Directors as in
effect as of the date of the first issuance of shares of Series B Convertible
Preferred Stock.
3. Liquidation Preference.
----------------------
(a) General. The Series B Convertible Preferred Stock shall be
-------
preferred over the Common Stock and any other class or series of stock ranking
junior to the Series B Convertible Preferred Stock and shall rank junior to the
Series A Convertible Preferred Stock as to distribution of assets in the event
of any liquidation or dissolution or winding up of the Corporation, and in such
event the holders of the Series B Convertible Preferred Stock shall be entitled
to receive, after payment or provision for payment of the debts and other
liabilities of the Corporation and the Series A Preference Amount (as defined in
Attachment II above), out of the assets of the Corporation available for
distribution to its shareholders, $1,000 per share (the "Stated Value"), and
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no more, for every share of the Series B Convertible Preferred Stock held by
them before any distribution of the assets shall be made to the holders of the
Common Stock or any other class or series of stock ranking junior to the Series
B Convertible Preferred Stock as to distribution of assets. Upon any
liquidation, dissolution or winding up of the Corporation, after payment shall
have been made in full on the Series B Convertible Preferred Stock as provided
in the preceding sentence, but not prior thereto, the Common Stock or any other
series or class of stock ranking junior to the Series B Convertible Preferred
Stock as to distribution for assets shall, subject to the respective terms and
provisions, if any, applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed and the Series B Convertible Preferred Stock
shall not be entitled to share therein.
(b) Distributions Pro Rata. If upon any liquidation or dissolution or
----------------------
winding up of the Corporation the amounts payable on or with respect to the
Series B Convertible Preferred Stock together with the amounts payable on or
with respect to all classes or series of stock ranking on a parity with the
Series B Convertible Preferred Stock as to distribution of assets are not paid
in full, the holders of shares of Series B Convertible Preferred Stock together
with all classes or series of stock ranking on a parity with the Series B
Convertible Preferred Stock as to distribution of assets shall share pro rata in
any distribution of assets in respect of the shares held by them upon such
distribution in proportion to the amounts that would have been distributable to
each such class or series if all amounts payable on or with respect to the
Series B Convertible Preferred Stock and any other class or series of stock that
so ranks on a parity with the Series B Convertible Preferred Stock had been paid
in full.
(c) Notice Required. Written notice of any voluntary or involuntary
---------------
liquidation, dissolution or winding up of the affairs of the Corporation,
stating the payment date and the place where the distributable amount shall be
payable and stating the anticipated amount of any such distributable amount,
shall be given by mail, postage prepaid, not less than thirty (30) days prior to
the payment date stated therein, to the holders of record of the Series B
Convertible Preferred Stock at their respective addresses as the same shall then
appear on the books of the Corporation.
(d) Neither the consolidation or merger of the Corporation into or
with any other entity or entities (whether or not the Corporation is the
surviving entity), nor the sale or transfer by the Corporation of all or any
part of its assets, nor the reduction of the capital stock of the Corporation
nor any other form of recapitalization or reorganization affecting the
Corporation shall be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of this Section 3.
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4. Conversion.
----------
(a) General. (i) Shares of the Series B Convertible Preferred Stock
-------
may be converted at any time at the option of the holder thereof into fully paid
nonassessable shares of Common Stock at a rate of 219.78021 shares of Common
Stock for each share of Series B Convertible Preferred Stock (the "Conversion
Rate"), subject to adjustment as provided below.
(ii) All outstanding shares of Series B Convertible Preferred
Stock shall be mandatorily and automatically converted into fully paid
nonassessable shares of Common Stock at the Conversion Rate then in effect if
the Corporation simultaneously requires the conversion of all outstanding shares
of Series A Preferred upon a "Qualified Public Offering" pursuant to Section 6H
of Attachment II above.
(b) Adjustments. The Conversion Rate and the kind and amounts of
-----------
securities and property for which the shares of Series B Convertible Preferred
Stock may be converted shall be subject to adjustment from time to time as
follows:
(i) If, at any time the Corporation shall (a) declare or pay a
dividend, or make a distribution, to all holders of its Common Stock in shares
of Common Stock, (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock (other than a subdivision or combination thereof or a change in
par value) any securities (collectively, an "Adjustment Event"), the Conversion
Rate and other terms of conversion in effect immediately prior to such action
shall be adjusted so that the holder of any share of Series B Convertible
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the kind and number of shares of Common Stock of the Corporation and/or
other securities which he, she or it would have owned or been entitled to
receive immediately following such action had such share or Series B Convertible
Preferred Stock been converted immediately prior thereto. Any adjustment made
pursuant to this Paragraph (b)(i) shall become effective immediately after the
record date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification.
(ii) If at any time the Corporation shall distribute to all or
substantially all holders of its Common Stock either (a) evidences of
indebtedness or any other securities of the Corporation or any rights, warrants,
options to subscribe for, purchase or otherwise acquire securities of the
Corporation (any of which are referred to herein as "Other Securities"), or (b)
any other assets (excluding cash dividends) (any of which are referred to herein
as "Distributed Assets"), or (c) holders of Common Stock became entitled to
receive any Other Securities or Distributed Assets, by virtue of a distribution
or any other shares of capital stock of the Corporation or otherwise
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<PAGE>
(collectively, a "Distribution Event"), then and in any such case the
Corporation shall either distribute such Other Securities or Distributed Assets
to the holders of the Series B Convertible Preferred Stock and any securities
convertible into Series B Convertible Preferred Stock, or reserve for the
benefit of the holders of the Series B Convertible Preferred Stock and any
securities convertible into Series B Convertible Preferred Stock, such amount of
such Other Securities or Distributed Assets as the holders of Series B
Convertible Preferred Stock and any securities convertible into Series B
Convertible Preferred Stock then outstanding would have owned or been entitled
to receive immediately following such action had the shares of Series B
Convertible Preferred Stock and any securities convertible into Series B
Convertible Preferred Stock been converted into shares of Common Stock
immediately prior thereto. In addition, the Corporation shall either distribute
to, or reserve for the benefit of, the holders of the Series B Convertible
Preferred Stock and any securities convertible into Series B Convertible
Preferred Stock any principal, interest, dividends or other property payable
with respect to such Other Securities as and when such interest, dividends or
other property is distributed to the holders of Common Stock. If such a reserve
is made, as and when each such share of Series B Convertible Preferred Stock is
converted, the holder of such share shall be entitled to receive from the
Corporation his, her or its share of such Other Securities, together with the
principal, interest, dividends or other property payable with respect thereto,
or Distributed Assets.
(iii) All calculations under this Section (4) shall be made
to the nearest one-hundredth of a cent or to the nearest one thousandth of a
share, as the case may be. No adjustment in the Conversion Rate shall be
required unless such adjustment would result in an increase or decrease of at
least one percent (1%) of the Conversion Rate; provided, however, that any
adjustments which by reason of this subparagraph (iii) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment.
(iv) Whenever the Conversion Rate is adjusted or Other Securities
or Distributed Assets are reserved as herein provided, the Corporation shall
mail or cause to be mailed a copy of a statement, verified by its independent
certified public accountants, setting forth the adjusted Conversion Rate or the
nature and amount of Other Securities or Distributed Assets, as the case may be,
to each person who is a registered holder of Series B Convertible Preferred
Stock at such person's last address as the same appears on the books of the
Corporation. Each adjustment shall remain in effect until a subsequent
adjustment is required hereunder. Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of any action taken.
Following any adjustment to the Conversion Rate and Conversion Price, the
holders of the Series B Convertible Preferred Stock shall be entitled, by
themselves or through attorneys or accountants retained by them, to inspect the
books and records of the Corporation in order to verify such adjustment. Such
inspection shall be at the expense of the holders of the Series B Convertible
Preferred Stock unless such inspection
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<PAGE>
reveals an error of 5% or more in the adjustment, in which case the Corporation
shall promptly reimburse the holders for all expenses incurred in connection
therewith.
(v) If at any time, as a result of an adjustment made pursuant to
Paragraph (iii) above, the holders of Series B Convertible Preferred Stock shall
become entitled to any Other Securities, thereafter the number of such Other
Securities to be received upon conversion of the Series B Convertible Preferred
Stock shall be subject to adjustment from time to time and in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
Series B Convertible Preferred Stock contained in Paragraphs (i) and (ii) above.
(c) Notices. If, at any time while shares of Series B Convertible
-------
Preferred Stock are outstanding, the Corporation shall determine to effect (i)
an Adjustment Event or Distribution Event, (ii) the sale, lease, exchange or
transfer of all or substantially all of the assets of the Corporation, (iii) any
merger or consolidation to which the Corporation is a party, (iv) the
liquidation, dissolution or winding up of the Corporation, or (v) a public
offering of shares of Common Stock registered under the federal Securities Act
of 1933 (collectively, an "Event"), then the Corporation shall cause to be
mailed to holders of Series B Convertible Preferred Stock, at their last
addresses as they shall appear on the books of the Corporation, at least thirty
(30) days prior to the applicable record or effective date, a notice stating (x)
the date on which a record is to be taken for the purpose of such Event, or, if
a record is not to be taken, the date as of which holders of Common Stock of
record to be entitled to any dividend or distribution are to be determined, or
(y) the date on which any such Event transfer is expected to become effective,
and the date as of which it is expected that holders of record of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property, if any, deliverable upon such Event.
(d) Exercise of Conversion Rights. The holder of any shares of Series
-----------------------------
B Convertible Preferred Stock may exercise his, her or its right to convert such
shares to shares of Common Stock by surrendering to the Corporation the
certificates representing the shares to be converted, accompanied by written
notice that such holder elects to convert such shares. The holder shall also
state the name or names (with addresses) in which the certificates or
certificates for shares of Common Stock which shall be issuable on such
conversion shall be issued. Each certificate or certificates surrendered for
conversion shall, unless the shares issuable on conversion are to be issued in
the same name as that in which such certificate or certificates are held, be
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder or his, her or its duly authorized attorney. Each
conversion shall be deemed to have been effected on the date on which such
certificate or certificates shall have been surrendered to the Corporation as
aforesaid, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become on said date the holder or holders of record of
the shares represented thereby notwithstanding that the
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<PAGE>
transfer books of the Corporation may then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
such person. As promptly as practicable on or after the surrender of such
certificates, the Corporation shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates representing the
number of shares of Common Stock issuable upon such conversion and shall pay or
cause the payment of such Other Securities or Distributed Assets as may be
payable upon conversion pursuant to Paragraph (b)(ii) of this Section (4).
(e) Effect of Unpaid Dividends. Upon any conversion of shares of
--------------------------
Series B Convertible Preferred Stock at a time when there are dividends or
distributions unpaid (whether as to the Common Stock or Other Securities or
other property payable with respect thereto) and as to which the dividend date
or other date fixed for payment has passed, then, (i) to the fullest extent
permitted by law, such unpaid dividends or distributions shall be paid by the
Corporation contemporaneously with the conversion of such shares of Series B
Convertible Preferred Stock and, (ii) to the extent payment of such unpaid
dividends or distributions is not legally permitted, then the Conversion Rate
shall be further adjusted by increasing the number of shares of Common Stock or
Other Securities or property issuable upon conversion to take into account the
value of such unpaid dividends or other distributions in determining the amount
of Common Stock or Other Securities into which the Series B Convertible
Preferred Stock will be converted.
(f) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued in connection with the conversion of shares of Series B Convertible
Preferred Stock into Common Stock. Instead of any fractional share of Common
Stock which would otherwise be issuable on conversion, the Company shall pay a
cash adjustment with respect to such fractional share computed on the basis of
the then current value of Common Stock.
(g) Tax on Conversion. The issuance of stock certificates on
-----------------
conversions of shares of Series B Convertible Preferred Stock shall be made
without charge to converting shareholders for any tax in respect of the issuance
thereof except any tax on the income or gain derived by the converting
shareholders as a result of the issuance thereof. The Corporation shall not,
however, be required to pay any tax which may be payable in respect to any
registration of transfer involved in the issue and delivery of stock in any name
other than that of the holder of the shares of Series B Convertible Preferred
Stock converted, and the Corporation shall not be required to so issue or
deliver any stock certificate unless and until the person or persons requesting
the registration of transfer shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.
(h) Securities Reserved. The Corporation shall at all times reserve
-------------------
and keep available out of its authorized Common Stock (and any Other Securities)
the full
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<PAGE>
number of shares of Common Stock (and any Other Securities) deliverable upon the
conversion of all outstanding shares of Series B Convertible Preferred Stock and
any shares convertible into Series B Convertible Preferred Stock. The
Corporation shall not enter into any agreement or take any action which would
impair or restrict its legal authority to issue such shares of Common Stock or
Other Securities upon conversion or to defeat in any way the right of the
holders of the Series B Convertible Preferred Stock to receive such
consideration upon conversion. In addition, whenever the Corporation is required
to reserve any interest, dividends or other property payable upon conversion of
the Series B Convertible Preferred Stock, the Corporation shall, as to cash,
deposit such amounts in one or more separate accounts for the sole benefit of
the holders of the Series B Convertible Preferred Stock upon conversion and, as
to other property, physically segregate or otherwise set such property aside in
such a manner as to protect the rights of the holders of the Series B
Convertible Preferred Stock to the receipt of such property upon conversion.
(i) Effect of Conversion. Any shares of Series B Convertible
--------------------
Preferred Stock converted shall be retired and may not be reissued.
5. Voting Rights. (a) The record holders of the Series B Convertible
-------------
Preferred Stock shall be entitled to notice of all stockholders meetings in
accordance with the Corporation's bylaws, and the record holders of the Series B
Convertible Preferred Stock shall be entitled to vote on all matters submitted
to the stockholders for a vote together with the holders of the Common Stock and
any other classes of capital stock voting with the Common Stock as a single
class, with each share of Series B Convertible Preferred Stock entitled to the
number of votes of all the shares of Common Stock issuable upon conversion of
such share.
(b) In addition, so long as any share of Series B Convertible
Preferred Stock is outstanding the Corporation shall not:
(i) amend the Certificate of Incorporation of the Corporation in
any manner which would materially alter or change the powers, preferences or
rights of Series B Convertible Preferred Stock so as to affect such stock
adversely without the affirmative vote of the holders of a majority of the
outstanding shares of Series B Convertible Preferred Stock voting separately as
a class;
(ii) amend the Certificate of Incorporation of the Corporation in
any manner which would materially alter or change the powers, preferences or
rights of Common Stock so as to affect such stock adversely without the
affirmative vote of the holders of a majority of the outstanding shares of
Series B Convertible Preferred Stock and Common Stock voting together as a
separate class (and for purposes of such vote each share of Series B Convertible
Preferred Stock shall have a number of votes equal to the Conversion Rate then
in effect); or
(iii) Issue any shares of capital stock ranking senior to, or
equally with, the Series B Convertible Preferred Stock as to either dividends or
liquidation preference, except for up to 50,000 shares of Series A Convertible
Preferred Stock and 2,250 shares of Series C Convertible Preferred Stock,
without the affirmative vote of the holders of a majority of the outstanding
shares of Series B Convertible Preferred Stock voting separately as a class.
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<PAGE>
ATTACHMENT IV - SERIES C CONVERTIBLE PREFERRED STOCK
1. Designation and Amount. This series of capital stock is designated
----------------------
"Series C Convertible Preferred Stock" and the number of shares which shall
constitute such series shall be not more than 2,250 shares, par value $0.01 per
share, which number may be decreased (but not below the number thereof then
outstanding) from time to time by the Board of Directors.
2. Dividends. The holders of the Series C Convertible Preferred Stock
---------
shall be entitled to receive cash dividends as and when the same may be declared
and paid on the Series B Convertible Preferred Stock by the Board of Directors
in an amount per share equal to the amount of such dividend per share of Series
B Convertible Preferred Stock multiplied by the Conversion Rate (as defined in
Section 3 below) then in effect assuming conversion of all Series C Convertible
Preferred Stock on the date of declaration of such dividend. No cash dividend
shall be declared or paid on the Series B Convertible Preferred Stock unless
such dividend is simultaneously declared and paid on the Series C Convertible
Preferred Stock. The holders of the Series C Convertible Preferred Stock shall
not be entitled to any preferential dividends.
3. Conversion.
----------
(a) General. One-third (1/3) of the authorized shares of the Series C
-------
Convertible Preferred Stock (pro rata as to the holders thereof) shall be
converted automatically into fully paid nonassessable shares of Series B
Convertible Preferred Stock at a rate per share of Series C Convertible
Preferred Stock (the "Conversion Rate") equal to one multiplied by $4.55 and
divided by the Conversion Value of Common Stock (as defined below) on the first,
second, and third anniversaries of September 7, 1995 (each a "Regular Conversion
Date"). In addition, all shares of Series C Convertible Preferred Stock shall
be converted into fully paid nonassessable shares of Series B Convertible
Preferred Stock at the Conversion Rate immediately prior to any of the following
(a "Special Conversion Date" and, together with a Regular Conversion Date, a
"Conversion Date"): (i) at the option of a majority of the holders upon any
public offering of equity securities by the Corporation registered under the
Federal Securities Act of 1933, provided such conversion shall be mandatory and
automatic if the Corporation also requires conversion of all outstanding shares
of Series A Preferred Stock upon a "Qualified Public Offering" pursuant to
Section 6H of Attachment II above, (ii) at the option of a majority of the
holders upon a "Change in Ownership" or "Fundamental Change" (as such terms are
defined in Section 4H of Attachment II above, or (iii) automatically upon the
liquidation, dissolution or winding up of the Corporation. The Conversion Value
shall be (x) the price paid per share for Common Stock by an accredited
unaffiliated investor in the Corporation in an arms-length transaction involving
the purchase for cash of at least one million dollars ($1,000,000) of Common
Stock in the most recent such issuance prior to the Conversion Date, or (y) the
price paid per share by an accredited unaffiliated investor in the Corporation
in an arms-length
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<PAGE>
transaction involving the purchase for cash of at least one million dollars
($1,000,000) of stock convertible into Common Stock in the most recent
transaction prior to the Conversion Date divided by the rate at which such
convertible stock is convertible into Common Stock (as adjusted therein),
whichever of (x) or (y) occurs more recently prior to the Conversion Date (an
"Investment") (with the September 1995 purchase of Series A Preferred Stock by
Madison Dearborn Capital Partners being an "Investment" at an initial Conversion
Value per share of Common Stock of $4.55), subject to adjustment as provided
below. As used herein, the term "affiliate" shall mean (i) any entity which,
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the Corporation or an affiliate
of the Corporation; for purposes hereof any executive officer (as defined under
federal securities laws), director or holder of securities entitling such holder
to exercise ten percent (10%) or more of the voting power of an entity
(collectively, a "Control Person") shall be deemed to control an entity, or (ii)
any Control Person, spouse of a Control Person, or relative of a Control Person
or such Control Person's spouse by adoption or blood not more remote than first
cousin or the spouse of any such relative.
(b) Adjustments. The Conversion Rate and the kind and amounts of
-----------
securities and property for which the shares of Series C Convertible Preferred
Stock may be converted shall be subject to adjustment from time to time as
follows:
(i) If at any time prior to an Investment, the Corporation shall (a)
declare or pay a dividend, or make a distribution, to all holders of its Series
B Convertible Preferred Stock in shares of Series B Convertible Preferred Stock,
(b) subdivide its outstanding shares of Series B Convertible Preferred Stock
into a greater number of shares, or (c) combine its outstanding shares of Series
B Convertible Preferred Stock into a smaller number of shares (any of (a), (b),
or (c) being referred to as a "Split"), then the Conversion Rate determined
above shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Series B Convertible Preferred Stock outstanding immediately
following such Split and the denominator of which shall be the number of shares
of Series B Convertible Preferred Stock outstanding immediately prior to such
Split.
(ii) [Intentionally omitted.]
(iii) If the Corporation shall distribute to all or substantially
all holders of its Series B Convertible Preferred Stock either (a) evidences of
indebtedness or any other securities of the Corporation or any rights, warrants,
options to subscribe for, purchase or otherwise acquire securities of the
Corporation (any of which are referred to herein as "Other Securities"), or (b)
any other assets (excluding cash dividends) (any of which are referred to herein
as "Distributed Assets"), or (c) holders of Series B Convertible Preferred Stock
became entitled to receive any Other Securities or Distributed Assets, by virtue
of a distribution or any other shares of capital stock of the Corporation or
otherwise (collectively, a "Distribution Event"), then and in any such case
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<PAGE>
the Corporation shall either distribute such Other Securities or Distributed
Assets to the holders of the Series C Convertible Preferred Stock, or reserve
for the benefit of the holders of the Series C Convertible Preferred Stock, such
amount of such Other Securities or Distributed Assets as the holders of Series C
Convertible Preferred Stock then outstanding would have owned or been entitled
to receive immediately following such action had the shares of Series C
Convertible Preferred Stock been converted into shares of Series B Convertible
Preferred Stock immediately prior thereto (without duplication by reason of any
adjustment under Attachment III above). In addition, the Corporation shall
either distribute to, or reserve for the benefit of, the holders of the Series C
Convertible Preferred Stock any principal, interest, dividends or other property
payable with respect to such Other Securities as and when such interest,
dividends or other property is distributed to the holders of Series B
Convertible Preferred Stock. If such a reserve is made, as and when each such
share of Series C Convertible Preferred Stock is converted, the holder of such
share shall be entitled to receive from the Corporation his, her or its share of
such Other Securities, together with the principal, interest, dividends or other
property payable with respect thereto, or Distributed Assets.
(iv) All calculations under this Section (3) shall be made to the
nearest one-hundredth of a cent or to the nearest one thousandth of a share, as
the case may be. No adjustment in the Conversion Rate shall be required unless
such adjustment would result in an increase or decrease of at least one percent
(1%) of the Conversion Rate; provided, however, that any adjustments which by
reason of this subparagraph (iv) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
(v) Whenever the Conversion Rate is adjusted or Other Securities or
Distributed Assets are reserved as herein provided, the Corporation shall mail
or cause to be mailed a copy of a statement, verified by its independent
certified public accountants, setting forth the adjusted Conversion Rate or the
nature and amount of Other Securities or Distributed Assets, as the case may be,
to each person who is a registered holder of Series C Convertible Preferred
Stock at such person's last address as the same appears on the books of the
Corporation. Each adjustment shall remain in effect until a subsequent
adjustment is required hereunder. Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of any action taken.
Following any adjustment to the Conversion Rate, the holders of the Series C
Convertible Preferred Stock shall be entitled, by themselves or through
attorneys or accountants retained by them, to inspect the books and records of
the Corporation in order to verify such adjustment. Such inspection shall be at
the expense of the holders of the Series C Convertible Preferred Stock unless
such inspection reveals an error of 5% or more in the adjustment, in which case
the Corporation shall promptly reimburse the holders for all expenses incurred
in connection therewith.
(vi) If any time, as a result of a distribution made pursuant to
Paragraph (iii) above, the holders of Series C Convertible Preferred Stock shall
become entitled to
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<PAGE>
any Other Securities, thereafter the number of such Other Securities to be
received upon conversion of the Series C Convertible Preferred Stock shall be
subject to adjustment from time to time and in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Series C Convertible
Preferred Stock contained in Paragraphs (i) and (iii) above.
(c) Notices. If, at any time while shares of Series C Convertible
-------
Preferred Stock are outstanding, the Corporation shall determine to effect a
Special Conversion Event, Adjustment Event or Distribution Event (collectively,
an "Event"), then the Corporation shall cause to be mailed to holders of Series
C Convertible Preferred Stock, at their last addresses as they shall appear on
the books of the Corporation, at least thirty (30) days prior to the applicable
record or effective date, a notice stating (x) the date on which a record is to
be taken for the purpose of such Event, or, if a record is not to be taken for
the purpose of such Event, or, if a record if not to be taken, the date as of
which holders of Series B Convertible Preferred Stock of record to be entitled
to any dividend or distribution are to be determined, (y) the date on which any
such Event is expected to become effective, and the date as of which it is
expected that holders of record of Series B Convertible Preferred Stock shall be
entitled to exchange their Series B Convertible Preferred Stock for securities
or other property, if any, deliverable upon such Event, or (z) the date on which
shares of Series C Convertible Preferred Stock will be converted into shares of
Series B Convertible Preferred Stock.
(d) Exercise of Conversion Rights. Upon the occurrence of a Regular
-----------------------------
Conversion Event or a Special Conversion Event, the holder of any shares of
Series C Convertible Preferred Stock shall surrender to the Corporation the
certificates representing the shares to be converted. The holder shall also
state the name or names (with addresses) in which the certificate or
certificates for shares of Series B Convertible Preferred Stock which shall be
issuable on such conversion shall be issued. Each certificate or certificates
surrendered for conversion shall, unless the shares issuable on conversion are
to be issued in the same name as that in which such certificate or certificates
are held, be accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder or his, her or its duly authorized
attorney. Each conversion shall be deemed to have been effected on the date on
which such certificate or certificates shall have been surrendered to the
Corporation as aforesaid, and the person or persons in whose name or names any
certificate or certificates for shares of Series B Convertible Preferred Stock
shall be issuable upon such conversion shall be deemed to have become on said
date the holder or holders of record of the shares represented thereby
notwithstanding that the transfer books of the Corporation may then be closed or
that certificates representing such shares of Series B Convertible Preferred
Stock shall not then be actually delivered to such person. As promptly as
practicable on or after the surrender of such certificates, the Corporation
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates representing the number of shares of Series B
Convertible Preferred Stock issuable upon such conversion and shall pay or cause
the payment of such Other Securities
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<PAGE>
or Distributed Assets as may be payable upon conversion pursuant to Paragraph
B(ii) of this Section (3).
(e) Effect of Unpaid Dividends. Upon any conversion of shares of
--------------------------
Series C Convertible Preferred Stock at a time when there are dividends or
distributions unpaid (whether as to the Series B Convertible Preferred Stock or
Other Securities or other property payable with respect thereto) and as to which
the dividend date or other date fixed for payment has passed, then, (i) to the
fullest extent permitted by law, such unpaid dividends or distributions shall be
paid by the Corporation contemporaneously with the conversion of such shares of
Series C Convertible Preferred Stock and, (ii) to the extent payment of such
unpaid dividends or distributions is not legally permitted, then the Conversion
Rate shall be further adjusted by increasing the number of shares of Series B
Convertible Preferred Stock or Other Securities or property issuable upon
conversion to take into account the value of such unpaid dividends or other
distributions in determining the amount of Series B Convertible Preferred Stock
or Other Securities into which the Series C Convertible Preferred Stock will be
converted.
(f) Fractional Shares. No fractional shares of Series B Convertible
-----------------
Preferred Stock shall be issued in connection with the conversion of shares of
Series C Convertible Preferred Stock into Series B Convertible Preferred Stock.
Instead of any fractional share of Series B Convertible Preferred Stock which
would otherwise be issuable on conversion, the Company shall pay a cash
adjustment with respect to such fractional share computed on the basis of the
then current value of Series B Convertible Preferred Stock used for determining
the Conversion Rate.
(g) Tax on Conversion. The issuance of stock certificates on
-----------------
conversions of shares of Series C Convertible Preferred Stock shall be made
without charge to converting shareholders for any tax in respect of the issuance
thereof except any tax on the income or gain derived by the converting
shareholders as a result of the issuance thereof. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
registration of transfer involved in the issue and delivery of stock in any name
other than that of the holder of the shares of Series C Convertible Preferred
Stock converted, and the Corporation shall not be required to so issue or
deliver any stock certificate unless and until the person or persons requesting
the registration of transfer shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid.
(h) Securities Reserved. The Corporation shall at all times reserve
-------------------
and keep available out of its authorized Series B Convertible Preferred Stock
(and any Other Securities) the full number of shares of Series B Convertible
Preferred Stock (and any Other Securities) deliverable upon the conversion of
all outstanding shares of Series C Convertible Preferred Stock. The Corporation
shall not enter into any agreement or take any action which would impair or
restrict its legal authority to issue such shares of Series B Convertible
Preferred Stock or Other Securities upon conversion or to defeat in any way the
right of the holders of the Series C Convertible Preferred Stock to receive such
consideration upon conversion. In addition, whenever the Corporation is
required to reserve any interest, dividends or other property payable upon
conversion of the Series C
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<PAGE>
Convertible Preferred Stock, the Corporation shall, as to cash, deposit such
amounts in one or more separate accounts for the sole benefit of the holders of
the Series C Convertible Preferred Stock upon conversion and, as to other
property, physically segregate or otherwise set such property aside in such a
manner as to protect the rights of the holders of the Series C Convertible
Preferred Stock to the receipt of such property upon conversion.
(i) Effect of Conversion. Any shares of Series C Convertible
--------------------
Preferred Stock converted shall be retired and may not be reissued.
4. Voting Rights. (a) The record holders of the Series C Convertible
-------------
Preferred Stock shall be entitled to notice of all stockholders meetings in
accordance with the Corporation's bylaws, and the record holders of the Series C
Convertible Preferred Stock shall be entitled to vote on all matters submitted
to the stockholders for a vote together with the holders of the Common Stock and
any other classes of capital stock voting with the Common Stock as a single
class, with each share of Series C Convertible Preferred Stock entitled to the
number of votes equal to 219.78021 multiplied by the Conversion Rate then in
effect assuming a special Conversion Event immediately prior to such stockholder
meeting.
(b) In addition to the foregoing, so long as any share of Series C
Convertible Preferred Stock is outstanding, the Corporation shall not amend the
Certificate of Incorporation of the Corporation in any manner which would
materially alter or change the powers, preferences or rights of Series C
Convertible Preferred Stock so as to affect such stock adversely without the
affirmative vote of the holders of a majority of the outstanding shares of
Series C Convertible Preferred Stock voting separately as a series. In
addition, so long as any share of Series C Convertible Preferred Stock is
outstanding, the Certificate of Incorporation of the Corporation shall not be
amended in any manner which would materially alter or change the powers,
preferences or rights of Series B Convertible Preferred Stock or any stock into
which Series B Convertible Preferred Stock is convertible, including without
limitation Common Stock, so as to affect such stock adversely without the
affirmative vote of the holders of a majority of the outstanding shares of
Series C Convertible Preferred Stock and Series B Convertible Preferred Stock
voting together as a separate class.
5. Offset Rights. Notwithstanding any other term or provision hereof,
-------------
the Corporation shall be entitled to reduce the number of shares of Series B
Convertible Preferred Stock deliverable on conversion of Series C Convertible
Preferred Stock pursuant to Offset Rights and/or Additional Offset Rights
pursuant to Section 8 of the First Amended and Restated Purchase Agreement dated
as of September 7, 1995 by and
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<PAGE>
between The International Cornerstone Group, Inc., Cornerstone Holdings Group,
Inc., Cinmar, L.P., Cinmar, Inc. and certain other parties.
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<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION OF
CORNERSTONE HOLDINGS, INC.
Cornerstone Holdings, Inc. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), does hereby certify as follows:
That the Board of Directors of the Corporation duly adopted, pursuant to
Section 242 of the DGCL, a resolution declaring the advisability of the
amendment to the Certificate of Incorporation of the Corporation (the
"Certificate"), set forth in this Certificate of Amendment. The sole stockholder
of the Corporation duly approved said proposed amendment by written consent in
accordance with Sections 228 and 242 of the DGCL. The Amendment so approved by
the Board of Directors and the stockholders of the Corporation is:
1. ARTICLE I of the Certificate is hereby deleted in its entirety and the
following ARTICLE I is inserted in lieu thereof:
"ARTICLE I
The name of the Corporation is: Cornerstone Brands, Inc. (hereinafter
called the "Corporation")."
<PAGE>
IN WITNESS WHEREOF, Cornerstone Holdings, Inc. has caused this Certificate
of Amendment to be executed as of this 21st day of August, 1998.
CORNERSTONE HOLDINGS, INC.
By: /s/ Mark Fasold
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Mark Fasold
Vice President
<PAGE>
Exhibit 10.1
THE INTERNATIONAL CORNERSTONE GROUP, INC.
1995 STOCK OPTION PLAN
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Section 1. Establishment; Purpose; Effective Date; Definition.
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1.1 Establishment of Plan. The International Cornerstone Group,
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Inc., a Delaware corporation formerly known as The Cornerstone Investments
Group, Inc. ("Cornerstone"), hereby establishes a stock option plan for certain
officers and key Employees and Consultants of Cornerstone or any of its
Subsidiaries, as described herein, which shall be known as The International
Cornerstone Group, Inc. 1995 Stock Option Plan (the "Plan").
1.2 Purposes. The purposes of the Plan are to enable Cornerstone to
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attract and retain officers, key employees and Consultants of Cornerstone or any
of its subsidiaries, to stimulate the efforts of such individuals toward the
achievement of the objectives of Cornerstone and to encourage the identification
of the interests of such individuals with those of the stockholders of
Cornerstone.
1.3 Effective Date of the Plan. Subject to approval by the
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stockholders of Cornerstone, the effective date of the Plan is the day on which
it was adopted by the Board of Directors of Cornerstone. The Plan shall remain
in effect until it shall expire or be terminated as provided in Section 9
hereof.
Any option granted pursuant to the Plan after the adoption by the
Board of Directors of Cornerstone of any amendment to the Plan which is required
by the provisions of Section 10 hereof to be approved by the stockholders of
Cornerstone and which could not have been granted but for such amendment shall,
if granted before such stockholder approval is obtained, be granted subject to
the obtaining of such approval, and if such approval is not obtained within one
(1) year after the adoption of such amendment by the Board of Directors, such
option shall become null and void.
1.4 Definitions. As used herein, the following definitions shall
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apply:
(a) "Code" means the Internal Revenue Code of 1986, as amended.
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(b) "Committee" means the Compensation Committee of the Board
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of Directors of Cornerstone.
(c) "Common Stock" means the Common Stock of Cornerstone, par
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<PAGE>
value $0.001 per share.
(d) "Consultant" means any person, including an advisor, who is
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engaged by Cornerstone or any Subsidiary to render services and is compensated
for such services, and any director of the Cornerstone whether compensated for
such services or not, provided that if and in the event the Cornerstone
registers any class of any equity security pursuant to the Exchange Act, the
term Consultant shall thereafter not include directors who are not compensated
for their services or are paid only a director's fee by Cornerstone.
(e) "Continuous Status as an Employee or Consultant" means that
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the employment or consulting relationship is not interrupted or terminated by
Cornerstone or any Subsidiary. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of: (i) any leave of absence
approved by Cornerstone, including sick leave, military leave, or any other
personal leave; provided, however, that for purposes of Incentive Stock Options,
any such leave may not exceed ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract (including certain
Cornerstone policies) or statute, provided, further, that on the ninety-first
day of any such leave (where reemployment is not guaranteed by contract or
statute) the Optionee's Incentive Stock Option shall automatically convert to a
Nonstatutory Stock Option; or (ii) transfers between locations of Cornerstone or
between Cornerstone, its Subsidiaries or its successor.
(f) "Employee" means any person, including officers and
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directors, employed by Cornerstone or any Subsidiary of Cornerstone. The payment
of a director's fee by Cornerstone shall not be sufficient to constitute
"employment" by Cornerstone.
(g) "Fair Market Value" means, as of any date, the value of
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Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
Stock Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported, as quoted on such exchange
or system for the last market trading day prior to the time of determination) as
reported in The Wall Street Journal or such other source as the Committee deems
reliable;
(ii) If the Common Stock is quoted on the National
Association of
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Securities Dealers, Inc. Automated Quotation ("NASDAQ") System (but not on the
Nasdaq Stock Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Committee or by the Directors of Cornerstone.
(h) "Incentive Stock Option" means an Option intended to qualify
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as an incentive stock option within the meaning of Section 422 of the Code.
(i) "Nonstatutory Stock Option" means an Option not intended to
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qualify as an Incentive Stock Option.
(j) "Option" means a stock option granted pursuant to the Plan.
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(k) "Optioned Stock" means the Common Stock subject to an Option.
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(l) "Optionee" means an Employee or Consultant who receives an
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Option.
(m) "Share" means a share of the Common Stock, as may be adjusted
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in accordance with Section 4 below.
(n) "Subsidiary" means a "subsidiary corporation", whether now or
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hereafter existing, as defined in Section 424(f) of the Code.
Section 2. Plan Administration.
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2.1 Administration. The Plan shall be administered by the
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Committee, subject to the authorization and ratification of the Board of
Directors of Cornerstone.
Options covering up to 1,458,534 shares of the Common Stock, may be
granted pursuant to the Plan. The Committee, in its discretion, may recommend to
the Board of Directors of Cornerstone that the Optionee pay consideration to
Cornerstone for an option. As used in this Plan, the term "grant" shall include
grant of an option or sale of an option. Each Option (as defined below) shall be
identified by the Committee at the time it is granted as either an "Incentive
Stock Option" which satisfies the requirements of Section 422 of the Code, or
any successor provision (an "ISO"), or an Option that is not an ISO (a "non-
ISO"). (Individually, each ISO or non-ISO is hereinafter referred to as an
"Option", and collectively they are
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<PAGE>
hereinafter referred to as "Options".) An Option shall be a non-ISO (i) if the
fair market value of the Stock which may be acquired upon exercise of such
Option exceeds the limitation set forth in Section 422(d) of the Code, (ii) if
for some other reason such Option does not satisfy the requirements of the Code
applicable to ISOs; or (iii) if the terms of such Option provide that it will
not be treated as an ISO.
2.2 Authorized Actions. Subject to the express provisions and limitations
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of the Plan, the Committee, subject to any limitations and authorization by the
Board of Directors of Cornerstone, shall have full power and authority to
interpret the Plan and any Options granted thereunder, to establish, amend and
rescind rules and regulations relating to the Plan or any Options, to determine
the form and content of Options (which need not be identical or uniform) to be
issued, to provide for conditions and assurances deemed necessary or advisable
to protect the interests of Cornerstone and to make all other determinations
necessary or advisable for the administration of the Plan. The Committee may
correct any defect or any omission or reconcile any inconsistency in the Plan or
any Option in the manner and to the extent that the Committee shall deem
advisable, subject to ratification by the Board of Directors of Cornerstone. The
Committee, subject to authorization by the Board of Directors of Cornerstone,
may also
(i) determine the Fair Market Value of the Common Stock, in
accordance with the Plan;
(ii) determine the number of shares of Common Stock to be covered by
each such award granted hereunder;
(iii) approve forms of Stock Option Agreements and any changes thereto
for use under the Plan;
(iv) determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder;
(v) determine whether and under what circumstances an Option may be
settled in cash under subsection 6.2 instead of Common Stock;
(vi) reduce the exercise price of any Option to the then current Fair
Market Value if the Fair Market Value of the Common Stock covered by such Option
shall have declined since the date the Option was granted.
Subject to the restrictions, limitations and authorization by the Board of
Directors of
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<PAGE>
Cornerstone set forth herein, the Committee shall determine the officers, key
employees and Consultants to whom, and the time or times at which, Options shall
be granted, the types of Options to be granted, the number of shares of Stock to
be subject to each of the Options, the exercise price of each of the Options
(the "Option Price"), the consideration, if any, to be paid for the Option, and
the period during which and the terms and conditions upon which each of the
Options may be exercised.
Furthermore, the Committee may, with the consent of the Option holder,
cancel any Option and issue a replacement Option, or amend any Option.
2.3 Decisions Are Final and Conclusive. All actions or
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determinations of the Committee (subject to approval of the Board of Directors
of Cornerstone) shall be by majority vote of its members and all such actions
and determinations as to any question arising under the Plan or any Options,
including questions of construction and interpretation, shall be final, binding
and conclusive upon all persons, including Cornerstone, its stockholders and
persons having any interests in the Options.
2.4 Committee Liability/Indemnification. No member or former member
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of the Committee or of the Board shall be liable for any action or determination
made in good faith with respect to the Plan or any Option awarded under it. To
the maximum extent permitted by applicable law, each member or former member of
the Committee or of the Board shall be indemnified and held harmless by
Cornerstone against any cost or expense (including counsel fees, which fees may
be advanced by Cornerstone), or liability (including any sum paid in settlement
of a claim with the approval of Cornerstone) arising out of any act or omission
to act in connection with the Plan unless arising out of such member's or former
member's own fraud or bad faith. Such indemnification shall be in addition to
any rights of indemnification the members or former members may have as
directors or under the Certificate of Incorporation or By-Laws of Cornerstone.
Section 3. Plan Eligibility.
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3.1 Eligibility. Officers, key employees of Cornerstone or any
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Subsidiary shall be eligible to receive Options. Consultants may only be granted
non-ISOs.
3.2 Rights of Participants. Nothing in this Plan or in any Option
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shall interfere with or limit in any way the right of Cornerstone or any of its
Subsidiaries to terminate any
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<PAGE>
participant's employment, or consulting relationship, at any time, or confer
upon any participant any right to continue in the employ of Cornerstone or any
Subsidiary, or to continue as a Consultant.
Section 4. Stock Subject to the Plan.
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4.1 Number. The total number of shares of Common Stock which may
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be acquired upon the exercise of Options granted under the Plan shall not exceed
1,463,534, subject to increase or decrease as provided for in Section 4.3
hereof.Such shares may consist, in whole or in part, of authorized but unissued,
or reacquired, shares of Common Stock or Common Stock of Cornerstone that is
held as treasury stock, which is not reserved for any other purpose.
4.2 Unused Stock. In the event any shares of Common Stock are
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subject to an Option which, for any reason, is terminated or expires unexercised
as to such shares, such shares shall again be available for acquisition pursuant
to Options granted pursuant to this Plan.
4.3 Adjustment in Capitalization. If there is any increase or
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decrease in the number, or change in the classification or designation, of
outstanding shares of Common Stock by reason of a stock dividend,
recapitalization, merger, consolidation, stock split, combination or exchange of
shares of Common Stock, the aggregate number and/or class of shares of Common
Stock available under this Plan, the number and class of shares of Stock subject
to each outstanding Option and the Option Price thereof shall be appropriately
adjusted, in a manner consistent with Section 424 of the Code, by the Committee,
whose determination shall be conclusive; provided, however, that fractional
shares shall be rounded down to the nearest whole share. In the event of any
other change affecting the Common Stock, such adjustment shall be made as may be
deemed equitable by the Committee, in its sole discretion, to give proper effect
to such event, subject to the limitations of Section 424 of the Code.
Section 5. Options.
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5.1 Option Agreement. Each Option granted under the Plan shall be
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evidenced by a written stock option agreement (the "Option Agreement") setting
forth the terms upon which the Option is granted, which Option Agreement shall
be substantially in the form as shall be approved by the Committee. Each Option
Agreement shall state the number of shares of Common Stock, as designated by the
Committee, to which that Option pertains. More than one Option may be granted to
an eligible officer or key employee.
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<PAGE>
5.2 Option Price. The per share Option Price for any ISO granted
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pursuant to this Plan shall not be less than the fair market value of a share of
Common Stock on the date the Option is granted, as such value is determined by
the Committee; provided, however, that in the case of an ISO granted to any
person who owns, directly or indirectly, shares of Common Stock possessing more
than 10% of the total combined voting power of all classes of stock of
Cornerstone or any of its subsidiaries, the per share Option Price shall be not
less than 110% of the fair market value of a share of Common Stock on the date
the ISO is granted, as such value is determined by the Committee, and such ISO
shall expire not later than ten years from the date on which such ISO is
granted.
The per share Option Price for any non-ISO granted pursuant to this
Plan shall be determined by the Committee.
5.3 Duration of Options. Each Option shall be of the duration
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specified in the Option Agreement pursuant to which it is granted. The Option
Agreement may provide that all rights to exercise such Option shall expire not
later than up to ten years from the date on which such Option is granted, except
as otherwise provided pursuant to Section 5.2.
5.4 Other Terms and Conditions. Options may contain such other
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provisions, which shall not be inconsistent with any of the foregoing terms, as
the Committee shall deem appropriate, subject to the restrictions and
limitations set forth herein. Without limiting the generality of the foregoing,
the Committee, in its discretion, may elect to include in any Option Agreement
provisions pursuant to which Cornerstone may agree to loan funds to the Option
holder upon exercise of an Option and/or provisions that the Option is not and
will not be treated as, an ISO. Notwithstanding any other provision of this
Plan, Cornerstone shall use its best efforts to ensure that any ISO granted
hereunder shall contain all provisions required to be included in the terms of
an ISO under the then applicable provisions of the Code, but in no event and
under no theory shall Cornerstone have any liability should an ISO granted
hereunder fail to contain all provisions required under the Code.
5.5 Exercise. Each Option granted under the Plan shall be
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exercisable in accordance with the terms specified in the Option Agreement
pursuant to which it is granted.
Section 6. Purchase of Stock.
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6.1 Written Notice. The holder of an Option wishing to exercise an
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Option,
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<PAGE>
or a portion of an Option, shall give written notice to Cornerstone. The date
Cornerstone receives such notice shall be considered the date such Option was
exercised as to the shares of Common Stock specified in such notice.
6.2 Payment. Simultaneously with the delivery to the holder of an
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Option of one or more certificates evidencing shares of Common Stock being
acquired upon exercise of such Option, such holder shall: (a) pay to Cornerstone
the sum of (i) the aggregate Option Price of all shares being purchased pursuant
to such exercise of the Option, or, if the Committee shall permit the payment of
such Option Price in installments, on such terms and conditions as it may
determine, and (ii) an amount equal to the federal, state and local income
taxes, if any, required to be withheld and paid by Cornerstone as a result of
such exercise; and, if applicable, (b) accept and agree to the terms of a
Restricted Stock Purchase Agreement substantially in the form attached to the
Option Agreement (each such agreement being hereafter referred to as a "Purchase
Agreement"), unless such holder is already a party to such a Purchase Agreement,
in which event the restrictions on transfer contained therein will, without any
action on the part of Cornerstone or such holder, be applicable to the shares of
Stock to be issued upon the exercise of such Option. The consideration to be
paid for the shares of Common Stock to be issued upon exercise of an Option,
including the method of payment, shall be determined by the Committee (and, in
the case of an Incentive Stock Option, shall be determined at the time of grant)
and may consist entirely of (1) cash, (2) check, (3) other Shares which (x) in
the case of Shares acquired upon exercise of an Option either have been owned by
the Optionee for more than six months on the date of surrender or were not
acquired, directly or indirectly, from the Company and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or (4) if the Common Stock
shall be publicly traded, delivery of a properly executed exercise notice
together with such other documentation as the Committee and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price. In
making its determination as to the type of consideration to accept, the Board
shall consider if acceptance of such consideration may be reasonably expected to
benefit Cornerstone. The proceeds from such payment shall constitute general
funds of Cornerstone and shall be available without restriction for its
corporate purposes.
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<PAGE>
6.3 Issuance of Stock Certificates. As soon as possible after
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receipt of written notice of exercise of an Option, and simultaneously with
payment and satisfaction of any other conditions to the exercise of such Option
set forth in the Plan or Option Agreement by the holder of the Option,
Cornerstone shall deliver, free and clear of any stock issue or transfer taxes
payable in connection therewith, to the holder of the Option (or, if, pursuant
to the Restricted Stock Purchase Agreement, all certificates of Common Stock
owned by such person must be held by the escrow agent, to the escrow agent
thereunder) a certificate or certificates for the appropriate number of shares
of Common Stock.
6.4 Privileges of a Stockholder. No holder of any Option or his
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legal representatives, legatees or distributees, as the case may be, shall be
deemed a stockholder (for purposes of voting, receipt of dividends or any other
rights) with respect to any shares of Common Stock covered by Options held by
such holder until he has exercised the Option as to such shares, paid for such
shares in full and a stock certificate has been issued to him or his custodian
or the escrow agent, for such shares of Common Stock.
Section 7. Non-Transferability of Options.
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Each Option will provide that it is not transferable by the holder
thereof otherwise than by will or the applicable laws of descent and
distribution, and is exercisable, during such holder's lifetime, only by him or
by his guardian or legal representative.
Section 8. Termination of Employment.
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(a) Each Option shall terminate upon the termination, for whatever
reason, of the Option holder's Continuous Status as an Employee or Consultant
with Cornerstone or any Subsidiary (but not in the event of a change of status
from Employee to Consultant (in which case an Employee's Incentive Stock Option
shall automatically convert to a Nonstatutory Stock Option on the ninety-first
(91st) day following such change of status) or from Consultant to Employee),
except that: (i) if the employment of an Option holder terminates due to the
Disability (as defined below) of such person, such Option holder may exercise
his Option or Options (to the extent he was entitled to do so at the termination
of his employment) at any time and from time to time within twelve (12) months
after such termination, but in no event after the expiration of his Option or
Options; provided, however, that options granted under the Plan shall not be
affected by any change of employment provided the Option holder continues to be
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<PAGE>
an employee of Cornerstone or any of its subsidiaries; (ii) in the event of the
death of a holder of an Option, the Option or Options theretofore granted to him
may be exercised (to the extent the deceased was entitled to do so at the date
of his death) at any time and from time to time within a period of twelve (12)
months after his death by his personal representatives or the person or persons
to whom his rights under said Option or Options shall pass by will or the
applicable laws of descent and distribution, but in no event may such person or
persons exercise any Option after its expiration; (iii) if the employment of an
Option holder is terminated other than for Cause (as defined below), such Option
holder may exercise his Option or Options (to the extent he was entitled to do
so at the termination of his employment or position as a director) at any time
and from time to time within thirty (30) days after such termination, but in no
event after the expiration of his Option or Options; and (iv) if Cornerstone
determines to cease using the services of a Consultant, such Consultant shall be
advised in writing of such termination in order to terminate the Continuous
Status of a Consultant with Cornerstone or any Subsidiary of such Consultant for
purposes of this Plan.
(b) As used in this Section and elsewhere in the Plan, the following
terms shall have the following meanings:
"Cause" means (i) a Criminal Conviction; (ii) the
willful failure by an employee, in the judgment of the
Committee, to substantially perform his duties, other
than any such failure resulting from his incapacity due
to physical or mental illness; or (iii) willful
misconduct by him that, in the judgment of the
Committee, is materially injurious to Cornerstone or
any of its subsidiaries. Notwithstanding the foregoing,
an employee shall not be deemed to have been terminated
for Cause under clauses (ii) or (iii) above unless and
until there shall have been delivered to him a copy of
a resolution, duly adopted by the affirmative vote of
not less than two-thirds of the entire membership of
the Committee at a meeting of the Committee called and
held for the purpose (after thirty (30) days prior
written notice to him and an opportunity for him,
together with his counsel (whose fees and expenses
shall be paid by him), to be heard before the
Committee), finding that in the good faith opinion of
the Committee he was guilty of conduct set forth above
in clause (ii) or (iii) above and specifying the
particulars thereof in detail. The employee agrees to
cooperate with the Committee of the Board in any
investigation by it to determine whether Cause for his
termination exists.
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<PAGE>
"Criminal Conviction" means any conviction of a
criminal violation related to an employee's duties or
responsibilities to Cornerstone or any Subsidiary,
regardless of the classification of such violation; or
any conviction of a criminal violation not related to
his duties or responsibilities to Cornerstone or any of
Subsidiary, which violation is classified as a felony.
"Disability" means that an Option holder has been
unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental
impairment which can be expected to result in death or
which has lasted or can be expected to last for a
continuous period of not less than one hundred twenty
(120) days.
(c) Rule 16b-3. Options granted to persons subject to Section
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16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(d) Buyout Provisions. The Administrator may at any time offer to
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buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
Section 9. Duration.
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The Plan shall remain in effect for ten years, or until sooner
terminated by the Board of Directors of Cornerstone; but Options theretofore
granted may extend beyond the date of the termination or expiration of the Plan,
in accordance with the provisions of the Plan. Subject to the foregoing, all
Options granted under this Plan shall be granted within ten years from the date
this Plan was adopted by the Board of Directors of Cornerstone.
Section 10. Amendment.
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No amendment to the Plan may be made unless such amendment shall
have been approved by the affirmative vote or written consent of 51% of the
Board of Directors of Cornerstone, and no amendment to the Plan shall be made
unless such amendment shall have also been approved by the affirmative vote or
written consent of the holders of a majority of the outstanding Common Stock.
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<PAGE>
No termination, expiration or amendment of the Plan may, without the
written consent of the holder of any Option then outstanding, affect adversely
the rights of the holder under such Option.
Section 11. Government Regulations.
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The Plan, the grant and exercise of Options thereunder and the
obligation of Cornerstone to sell and deliver shares of Common Stock pursuant to
such Options shall be subject to all applicable laws, rules and regulations, and
to any required approvals by any governmental agencies or national securities
exchanges.
So long as this Plan is in effect, each member of the Committee shall be
a director of Cornerstone who is a disinterested person as defined in Rule 16b-
3(c)(i) or any successor Rule under the Securities Exchange Act of 1934 (the
"Exchange Act"). With respect to persons subject to Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Committee fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
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<PAGE>
Exhibit 10.4
EXECUTIVE AGREEMENT
THIS EXECUTIVE AGREEMENT, dated and effective as of August 1, 1995, is
between The Cornerstone Investments Group, Inc., a Delaware corporation (the
"Company"), and William T. End (the "Executive").
WHEREAS, the Executive has become a founding principal of the Company
and an investor in the Company; and
WHEREAS, the Company believes that obtaining the Executive's services as
Executive Officer and Managing Director of the Company will be critical to
its success; and
WHEREAS, the Executive has indicated a willingness to assume the
positions of Executive Officer and Managing Director of the Company;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties agree as follows:
1. Duties. The Company hereby employs the Executive and the Executive
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hereby accepts employment by the Company as an Executive Officer and Managing
Director of the Company, upon the terms and subject to the conditions set
forth herein. The Executive shall use such other, additional titles as shall
be agreed upon between the Executive and the Company from time to time. The
Executive shall, to the best of his abilities, be responsible for the
management of the day-to-day business and operations of the Company, and
shall perform such other duties consistent with his position as an Executive
Officer and Managing Director as shall be specified from time to time by the
Board of Directors. At the Company's request, the Executive shall also serve
as a Managing Partner of affiliated partnerships or limited liability
entities arising out of any reorganization of the Company. During the term of
this Agreement, Executive and the Company agree that Executive shall be a
member of the Board of Directors of the Company.
2. Term. The term of this Agreement commences on the effective date
----
hereof (the "Effective Date") and ends on July 31, 2000. At any time, the
parties hereto may agree in writing to extend the term of this Agreement.
3. Performance. During the term of this Agreement, the Executive
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shall perform his duties on behalf of the Company on a substantially full-
time basis, allowing for such current directorships, special advisory roles
and activities as set forth in Exhibit A to this Agreement, at such Company
offices as may be designated by the Company from time to time.
<PAGE>
4. Compensation; Benefits.
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(a) Salary. For the term of his employment under this Agreement, the
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Company shall pay to the Executive an annual salary of not less than $250,000
per year, payable in equal monthly installments, in advance ("Base Salary"). The
Base Salary shall be increased cumulatively on an annual basis on December 31 of
each year in accordance with the increases in the "Consumer Price Index - Urban
Wage Earners and Clerical Workers - All Items" for Boston, Massachusetts as
compared to the prior calendar year. The Executive shall receive a bonus at the
end of each fiscal year. The amount of such bonus shall be determined in the
discretion of the Board of Directors of the Company.
(b) Benefits. The Company shall provide the Executive with the
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following benefits during the term of this Agreement:
(i) An aggregate of four (4) weeks of paid vacation each
calendar year, provided that the Company shall have the right to set policies
from time to time on how vacation may be utilized;
(ii) Health, dental, accident disability and life insurance
coverage under such policies or plans as the Company may maintain from time to
time, provided that the Executive shall receive life insurance in the amount of
not less than the initial annual Base Salary of the Executive; and provided
further that the Executive shall be entitled to receive such insurance benefits
that may be made available to other senior executive employees of the Company or
its operating subsidiaries or affiliates from time to time; and
(iii) Such other benefits and/or insurance that may be made
generally available to other senior executive employees of the Company or its
operating subsidiaries or affiliates from time to time, including reimbursement
for continuing professional certification and education.
5. Termination.
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(a) Death. Death of the Executive shall terminate his employment with
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the Company. After the death of the Executive, the Executive's estate or other
successors in interest shall be entitled to receive any compensation and
benefits earned by or accrued to the Executive and unpaid at the date of his
death, whether pursuant to this Agreement or otherwise. In addition to such
compensation and benefits, the Executive's estate shall receive an estate
allowance equal to three (3) months' salary for burial and other costs
associated with the Executive's death.
(b) Incapacity. If, during the term of this Agreement, the Executive
----------
is prevented from performing substantially all of his duties hereunder by reason
of illness, physical or mental disability or other incapacity (collectively,
"Incapacity") for a continuous period of one hundred and twenty (120) days, the
Executive shall provide the Company with the written
2
<PAGE>
opinion of the Executive's health care provider with respect to the capacity or
incapacity of the Executive under the terms of this Agreement. If such opinion
confirms the incapacity of the Executive, the Company may upon at least thirty
(30) days' written notice to the Executive terminate the Executive's employment.
In the event that the Company has reasonable cause to doubt the written opinion
of the Executive's health care provider, or has failed to receive any such
opinion, then the Company may require, at its expense, that the Executive obtain
the written opinion of a health care provider reasonably acceptable to the
Company. If any opinion is uncontested, or if the two (2) opinions express
substantially similar conclusions, the opinion or opinions shall be deemed
conclusive for purposes of this Agreement. Otherwise, a third opinion may be
obtained from a health care provider acceptable to both earlier health care
providers, and such third opinion shall be conclusive under this Agreement. In
the event of termination due to Incapacity, the Executive shall be entitled to
any applicable insurance benefits provided by the Company and, during only the
first year of such Incapacity, that portion of the Executive's Base Salary
which, when added to the payments from disability or similar such applicable
insurance benefits, shall equal the Executive's annual Base Salary as adjusted
pursuant to Section 4(a) above, for such year. The Executive shall not be
entitled to receive any further compensation or benefits hereunder, except
compensation earned or accrued to the date of termination, whether pursuant to
this Agreement or otherwise, and other benefits as required by law. For purposes
hereof, a continuous period of Incapacity shall be deemed interrupted when the
Executive returns to substantially full-time work for a continuous period of at
least thirty (30) days.
(c) Special Termination Provisions
------------------------------
(i) Other than as set forth elsewhere in this Section 5, during
the term of this Agreement, the Executive's employment may be terminated only
for Cause (as defined herein) as voted by two-thirds of all elected or appointed
members of the Board of Directors of the Company, excluding the Executive (if he
should so serve at such time). Only the following acts or omissions by the
Executive shall be deemed to constitute "Cause": (A) deliberate dishonesty
detrimental to the best interests of the Company; (B) willful and substantial
disloyalty involving conflict of interest or self-dealing to the Company; and
(C) substantial and continuing willful failure to perform his duties and
responsibilities as described herein, provided, however, in the case of (B) and
(C) above, only if such alleged conduct remains uncured for thirty (30) days
following receipt of written notice therein.
(ii) Notwithstanding the foregoing, by vote of two-thirds of all
elected or appointed members of the Board of Directors of the Company (excluding
the Executive, if he should so serve at such time), the Executive's employment
may be terminated at any time without Cause, but (A) in the event such
termination occurs after September 10, 1997, the Executive shall receive a
single payment (less applicable withholding for taxes and other similar items)
concurrent with such termination equal to one and one-half times the higher of:
(i) the aggregate of the Executive's Base Salary as adjusted under Section 4(a),
benefits and bonuses due and payable under this Agreement during the current
calendar year, and (ii) the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding
3
<PAGE>
calendar year, or (B) in the event such termination occurs on or before
September 10, 1997, the Executive shall receive a single payment (less
applicable withholding for taxes and similar such items) concurrent with such
termination equal to the greater of: (i) the balance of the aggregate
Executive's Base Salary, benefits and bonuses which would be due and payable to
Executive under this Agreement for the period beginning on the date of
termination and ending on September 10, 1997, or (ii) the amount payable under
Section 5(c)(ii)(A) above; provided that in connection with the calculation
under Section 5(c)(ii)(A) above, if "no preceding calendar year" exists, then no
such calculation shall be made.
6. Indemnification. During and after the term of this Agreement, the
---------------
Company will indemnify the Executive against all claims brought against him
which arise in the course of his employment by the Company pursuant to this
Agreement (except for claims which arise under this Agreement), including all
costs, expenses and legal fees incurred by the Executive in connection with such
claims, to the maximum extent permitted under the corporate laws of the State of
Delaware. This Section 6 shall survive termination of this Agreement and the
termination of the Executive's employment, except a termination for Cause based
upon the same, or substantially the same, facts as those on which the claim
against the Executive is based and for which he seeks indemnification.
Notwithstanding anything herein to the contrary, in the event of a willful
breach of a material provision of this Agreement, the breaching party shall pay
reasonable attorneys' fees and court costs (including, without limitation, all
such fees, costs and expenses incident to appeals) of the non-breaching party
incurred in any legal action or other proceeding brought for the enforcement of
this Agreement. In the event that the directors or stockholders, act, vote or
otherwise cause the Company to willfully breach a material provision of this
Agreement, the Executive may, at his option, deem himself to have been
terminated without Cause as set forth in Section 5(c)(ii) in lieu of all other
damages and remedies available at law, in equity or otherwise.
7. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement by the Company for all reasonable expenses incurred by the
Executive in the performance of his duties hereunder, provided that the
Executive properly accounts therefor in accordance with the Company's then-
existing policies and procedures.
8. Stockholder's Agreement. The Executive agrees to execute substantially
-----------------------
the same form of Stockholder's Agreement to apply to all stock in the Company
held by him, as executed by other Senior Executives of the Company.
9. Notices. All notices and other communications required or desired to
-------
be given under the terms of this Agreement shall be in writing and shall be
deemed given when delivered personally or two days after deposited in the United
States mail, certified or registered mail, return receipt requested, postage
prepaid and addressed as follows:
To the Company: The Cornerstone Investments Group, Inc.
50 Rowes Wharf, Suite 420
Boston, MA 02110
4
<PAGE>
Attention: President
With a Copy to: Nicolas A. Kensington, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
To the Executive: William T. End
3532 Timber Line
Cross Plains, WI 53528
or to such other address(es) as either party may from time to time notify the
other party as provided herein.
10. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such other party.
11. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement between the parties with respect to the subject matter addressed
herein and all prior discussions, understandings, negotiations and agreements
are merged herein. This Agreement may not be changed orally but only by an
agreement in writing signed by all of the parties hereto.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (but not choice of law) of the Commonwealth of
Massachusetts, and shall be enforced only in courts located in the Commonwealth
of Massachusetts. The parties hereby agree that such courts shall have venue
and exclusive subject matter and personal jurisdiction, and consent to service
of process by registered mail, return receipt requested, or by any other manner
provided by law.
13. Illegality. In case any one or more of the provisions of this
----------
Agreement should be adjudicated invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
14. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one instrument.
15. Arbitration. In the event that any dispute should arise between the
-----------
parties hereto as to the validity of this Agreement or as to the construction,
enforcement or performance of this Agreement, such dispute, subject to the
provisions of this Section 15, shall be settled by arbitration before a single
arbitrator selected by the Boston office of the American Arbitration
Association, and conducted at Boston, Massachusetts, in accordance with the
Commercial
5
<PAGE>
Arbitration Rules of the American Arbitration Association. The decision of the
arbitrator shall be final and binding on all parties thereto, and judgment upon
any award entered in such proceeding may be entered in any court having
jurisdiction thereof. If determined by the arbitrator to be appropriate, the
unsuccessful party to such arbitration shall pay to the successful party all
costs and expenses, including reasonable attorney's fees, incurred therein by
such successful party and such costs, expenses and attorneys' fees shall be
included in and as part of such judgment or award. The determination of the
arbitrator shall be conclusive on the matter of which party is successful for
purposes hereof.
16. Noncompetition and Nondisclosure. The Executive agrees that as a
--------------------------------
condition of his employment he will execute simultaneously herewith and be bound
by the terms of a certain Noncompetition and Nondisclosure Agreement (the
"Nondisclosure Agreement") in the form attached hereto as Exhibit B, the terms
of which are incorporated herein by reference.
17. Binding Effect. All of the terms and provisions of this Agreement,
--------------
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and assigns. Notwithstanding the
foregoing, this Agreement is personal to the Executive, and he may not assign
any of his rights or obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the day and year first above written.
/s/ William T. End THE CORNERSTONE INVESTMENTS GROUP, INC.
- ----------------------
William T. End
By: /s/ Donald J. Steiner
-------------------------------
Donald J. Steiner
Executive Officer and Managing Director
6
<PAGE>
EXHIBIT A
Current Directorships, Advisor Roles and
Activities for William T. End (April 4, 1995)
---------------------------------------------
Entity Role
------ ----
Hannaford Bros. Director
Gander Mountain Director
7
<PAGE>
Exhibit 10.5
AMENDMENT TO EXECUTIVE AGREEMENT
This Amendment, dated as of February 28, 1998, is made to the Executive
Agreement dated as of August 1, 1995 (the "Executive Agreement") between The
International Cornerstone Group, Inc., a Delaware corporation (the "Company"),
and William T. End (the "Executive").
In consideration of the premises and the mutual agreements hereinafter set
forth, the Company and the Executive hereby agree that Section 1 of the
Executive Agreement shall be amended, effective as of January 1, 1998, to read
in its entirety as follows:
1. Duties. The Company hereby employs the
------
Executive and the Executive hereby accepts employment by the
Company as Chairman of the Board of Directors and Chief
Executive Officer of the Company, upon the terms and subject
to the conditions set forth herein. The Executive shall have
such other titles and hold such other offices (either in
replacement of or in addition to the foregoing titles and
offices) as shall be agreed upon between the Executive and
the Company from time to time. The Executive shall, to the
best of his abilities, be responsible for the business and
operations of the Company, as well as such other duties
consistent with his position as an executive officer of the
Company as shall be reasonably specified from time to time
by the Board of Directors. During the term of this
Agreement, the Executive and the Company agree that the
Executive shall be a member of the Board of Directors of the
Company.
The Executive Agreement, as modified by this Amendment, shall continue in
full force and effect in accordance with its terms.
This Amendment may be executed in counterparts, which together shall
<PAGE>
constitute one and the same instrument.
Executed as of the date first written above.
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By: /s/ Donald J. Steiner
----------------------------------
Donald J. Steiner, Vice Chairman
----------------------------------
(print name and title)
/s/ William T. End
-------------------------------------
WILLIAM T. END
<PAGE>
Exhibit 10.6
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Noncompetition and Nondisclosure Agreement (the "Agreement"), dated as
of August 1, 1995, by and between William T. End (the "Executive") and The
Cornerstone Investments Group, Inc. (the "Company"), is executed in connection
with a certain Executive Agreement by and between the Executive and the Company
dated of even date herewith (the "Executive Agreement").
The parties hereto, in consideration of the premises and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. During the period of the Executive's employment by the Company and as
provided in Section 8 hereof, the Executive agrees that the Executive will not,
directly or indirectly, alone or as a partner, officer, director, employee or
stockholder of any company or business organization, engage in any business
activity in which the Company is then engaged, which is directly competitive
with and detrimental to the business of the Company (it being understood and
agreed that a catalog with substantially different merchandise or target
audience from any catalog then operated by the Company is not directly
competitive), except for those current directorships, special advisory roles and
activities as set forth on Exhibit A to the Employment Agreement. For purposes
of this Agreement, the Executive shall not be deemed to be a stockholder of any
other company or business or organization if (a) the Executive beneficially owns
(i) privately-held securities, (ii) securities listed on a national securities
exchange or (iii) securities sold in the over-the-counter market, provided that
in each of (i), (ii) and (iii) such securities do not exceed in the aggregate
five percent (5%) of the issued and outstanding capital stock of such companies
or business organizations, or (b) during the term of his employment by the
Company, he has obtained prior approval thereof from a majority of the Board of
Directors.
2. The Executive understands that his relationship with the Company and
its officers and employees is one of trust and confidence and that during the
period of his employment by the Company, the Executive may acquire knowledge of,
or access to, information which relates to the business, operations or plans of
the Company which is proprietary, confidential or not known generally to
executives in the catalog business (hereinafter "Confidential Information").
Confidential Information may include, but is not limited to, budget costs,
prices, vendor lists and information about products, designs, marketing plans,
customers and the Company's financial affairs. The Executive will not reveal or
otherwise disclose to any person, association, company or other entity any
Confidential Information of the Company so far as it has come or may come to his
knowledge, except as may be required in the ordinary course of performing his
duties as an employee of the Company or except as may be in the public domain
through no fault of his, and the Executive will keep secret all matters
entrusted to him and shall not use or attempt to use any such Confidential
Information in any manner which may injure or cause loss or may be reasonably
expected to injure or cause loss to the Company.
The Executive agrees that the Executive shall not, after the termination of
his employment with the Company, use or permit to be used, any notes, memoranda,
records,
<PAGE>
files, computer programs, data or other materials containing Confidential
Information, it being agreed that any of the foregoing shall be and remain the
sole and exclusive property of the Company and that immediately upon the
termination of his employment with the Company the Executive shall deliver all
of the foregoing, and all copies thereof, to the Company, at its main office.
3. The Executive will not at any time during his engagement and for the
period of two (2) years after the termination of the Executive's employment
hire, solicit or encourage any employee (other than Executive's personal
secretary) of the Company, (or any employee of Performance Associates, Inc. or
other "employee leasing company" whose employees perform services for the
Frontgate Cinmar Business) to terminate his or her employment in order to work
for a business or enterprise which competes or intends to compete with the
Company.
4. The Executive further represents that his performance of all of the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to maintain in confidence proprietary information acquired
by him in confidence or in trust prior to his employment by the Company. The
Executive has not entered into, and the Executive agrees that the Executive will
not enter into, any agreement, either written or oral, in conflict herewith.
5. The Executive agrees that any breach of this Agreement by him will
cause immediate and irreparable damage to the Company, which cannot be fully and
adequately compensated in money damages, and that in the event of such breach
the Company shall have, in addition to any and all remedies at law, the right to
an injunction, specific performance or other equitable relief to prevent the
violation, threatened violation or continued violation of any provision
hereunder.
6. Any waiver by the Company of a breach of any portion of this Agreement
shall not operate or be construed as a waiver of any subsequent breach hereof.
7. Each provision herein shall be treated as a separate and independent
clause, and the unenforceability of any one clause shall in no way impair the
enforceability of any of the other clauses herein. Moreover, if one or more of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
8. Subject to the provisions of this Section 8 and Section 9 hereof,
notwithstanding anything therein to the contrary, the restrictions contained in
Sections 1 and 3 above shall terminate upon the stated expiration date of the
term of the Executive Agreement set forth in Section 2 thereof, provided that
there has not occurred an uncured material default by such Executive of such
restrictions or the Executive Agreement. In addition, the restrictions
contained in Sections 1 and 3 above shall terminate if the Company fails to pay
any Base Salary or any amounts payable under Section 5(c)(ii) of the Executive
Agreement or otherwise materially breaches the Executive
2
<PAGE>
Agreement, or the Company shall fail to pay any amounts due, and such failure or
breach continues for seven (7) days after written notice from Executive
referring to his intent to terminate such restrictions.
In the event that (1) Executive shall voluntarily resign (other than for
reasons of incapacity) from his employment duties undertaken pursuant to the
Executive Agreement prior to the stated expiration date of the Executive
Agreement set forth in Section 2 thereof, or (2) Executive's employment with the
Company is terminated for Cause (as defined in the Executive Agreement) pursuant
to Section 5(c)(i)(A), Section 5(c)(i)(B), or Section 5(c)(i)(C) of said
Executive Agreement, and provided there has not occurred an uncured material
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 above shall survive such termination of the Executive's
engagement with the Company for a period of eighteen (18) months. In the event
that Executive's employment with the Company is terminated pursuant to Section
5(b) of the Executive Agreement, and provided there has not occurred an uncured
material default by the Company under the Executive Agreement, the restrictions
contained in Sections 1 and 3 above shall survive such termination of the
Executive's engagement with the Company for a period of twelve (12) months.
Except as provided in this Section 8 and Section 9 hereof, the Executive's
obligations under this Agreement shall survive the termination of the
Executive's engagement with the Company, regardless of the manner of such
termination, and shall be binding upon the Executive's heirs, executors and
administrators.
In the event that Executive's engagement with the Company is terminated
without Cause (i) pursuant to Section 5(c)(ii)(A) of the Executive Agreement,
and provided there has not occurred an uncured material default by the Company
under the Executive Agreement, the restrictions contained in Sections 1 and 3
hereof shall survive such termination of the Executive's engagement with the
Company for eighteen (18) months, or (ii) pursuant to Section 5(c)(ii)(B) of the
Executive Agreement, and provided there has not occurred an uncured default by
the Company under the Executive Agreement, the restrictions contained in
Sections 1 and 3 hereof shall survive such termination of the Executive's
engagement with the Company for the later to occur of (A) September 10, 1997,
or (B) eighteen (18) months from the date of such termination.
9. Provided that the Company is not in material default under the terms
of the Executive Agreement, the Company may, at is option, extend the term of
this Agreement for one additional period of twelve (12) months by providing
Executive ninety (90) days advance written notice of its intention to so extend.
In the event this Agreement is so extended, the Company shall pay to Executive
an amount equal to the aggregate compensation, benefits and bonuses actually
received by the Executive during the preceding calendar year. Such amount shall
be paid on a monthly basis, except for any bonuses, which shall be paid at the
customary date of payment of all executive bonuses (less applicable withholding
for taxes and other such items), on the first day of each month during such
extended period.
10. The Executive understands that his obligations under this Agreement
will extend to any other organization which succeeds to the business of the
Company by
3
<PAGE>
reason of any sale, merger or similar action. For purposes of this paragraph 10,
the term "business of the Company" shall be deemed to be that business in which
the Company was engaged prior to any such sale, merger or similar action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
THE CORNERSTONE INVESTMENTS GROUP, INC.
By: /s/ Donald J. Steiner /s/ William T. End
------------------------------------- -------------------------
Executive Officer/Managing Director William T. End
4
<PAGE>
EXHIBIT 1
CURRENT DIRECTORSHIP, ADVISOR
RULES AND ACTIVITIES OF
WILLIAM T. END
Entity Role
Hannaford Bros. Director
Gander Mountain Director
5
<PAGE>
Exhibit 10.7
EXECUTIVE AGREEMENT
THIS EXECUTIVE AGREEMENT, dated and effective as of August 1, 1995, is
between The Cornerstone Investments Group, Inc., a Delaware corporation (the
"Company"), and Donald J. Steiner (the "Executive").
WHEREAS, the Executive is a founding principal of the Company and an
investor in the Company; and
WHEREAS, the Company believes the Executive's services as Executive Officer
and Managing Director of the Company are critical to its success; and
WHEREAS, the Executive has indicated a willingness to assume the positions
of Executive Officer and Managing Director of the Company;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties agree as follows:
1. Duties. The Company hereby employs the Executive and the Executive
------
hereby accepts employment by the Company as an Executive Officer and Managing
Director of the Company, upon the terms and subject to the conditions set forth
herein. The Executive shall use such other, additional titles as shall be agreed
upon between the Executive and the Company from time to time. The Executive
shall, to the best of his abilities, be responsible for the management of the
day-to-day business of the Company, including, but not limited to, the Company's
finances and acquisitions, and shall perform such other duties consistent with
his position as an Executive Officer and Managing Director as shall be specified
from time to time by the Board of Directors. At the Company's request, the
Executive shall also serve as a Managing Partner of affiliated partnerships or
limited liability entities arising out of any reorganization of the Company.
During the term of this Agreement, Executive and the Company agree that
Executive shall be a member of the Board of Directors of the Company.
2. Term. The term of this Agreement commences on the effective date
----
hereof (the "Effective Date") and ends on July 31, 2000. At any time, the
parties hereto may agree in writing to extend the term of this Agreement.
3. Performance. During the term of this Agreement, the Executive shall
-----------
perform his duties on behalf of the Company on a substantially full-time basis,
allowing for such current directorships, special advisory roles and activities
as set forth in Exhibit A to this Agreement, at such Company offices as may be
designated by the Company from time to time.
<PAGE>
4. Compensation; Benefits.
----------------------
(a) Salary. For the term of his employment under this Agreement, the
------
Company shall pay to the Executive an annual salary of not less than $250,000
per year, payable in equal monthly installments, in advance ("Base Salary"). The
Base Salary shall be increased cumulatively on an annual basis on December 31 of
each year in accordance with the increases in the "Consumer Price Index - Urban
Wage Earners and Clerical Workers - All Items" for Boston, Massachusetts as
compared to the prior calendar year. The Executive shall receive a bonus at the
end of each fiscal year. The amount of such bonus shall be determined in the
discretion of the Board of Directors of the Company.
(b) Benefits. The Company shall provide the Executive with the
--------
following benefits during the term of this Agreement:
(i) An aggregate of four (4) weeks of paid vacation each calendar
year, provided that the Company shall have the right to set policies from time
to time on how vacation may be utilized;
(ii) Health, dental, accident disability and life insurance
coverage under such policies or plans as the Company may maintain from time to
time, provided that the Executive shall receive life insurance in the amount of
not less than the initial annual Base Salary of the Executive; and provided
further that the Executive shall be entitled to receive such insurance benefits
that may be made available to other senior executive employees of the Company or
its operating subsidiaries or affiliates from time to time; and
(iii) Such other benefits and/or insurance that may be made
generally available to other senior executive employees of the Company or its
operating subsidiaries or affiliates from time to time, including reimbursement
for continuing professional certification and education.
5. Termination.
-----------
(a) Death. Death of the Executive shall terminate his employment with
-----
the Company. After the death of the Executive, the Executive's estate or other
successors in interest shall be entitled to receive any compensation and
benefits earned by or accrued to the Executive and unpaid at the date of his
death, whether pursuant to this Agreement or otherwise. In addition to such
compensation and benefits, the Executive's estate shall receive an estate
allowance equal to three (3) months' salary for burial and other costs
associated with the Executive's death.
(b) Incapacity. If, during the term of this Agreement, the Executive is
----------
prevented from performing substantially all of his duties hereunder by reason of
illness, physical or mental disability or other incapacity (collectively,
"Incapacity") for a continuous period of one hundred and twenty (120) days, the
Executive shall provide the Company with the written
2
<PAGE>
opinion of the Executive's health care provider with respect to the capacity or
incapacity of the Executive under the terms of this Agreement. If such opinion
confirms the incapacity of the Executive, the Company may upon at least thirty
(30) days' written notice to the Executive terminate the Executive's employment.
In the event that the Company has reasonable cause to doubt the written opinion
of the Executive's health care provider, or has failed to receive any such
opinion, then the Company may require, at its expense, that the Executive obtain
the written opinion of a health care provider reasonably acceptable to the
Company. If any opinion is uncontested, or if the two (2) opinions express
substantially similar conclusions, the opinion or opinions shall be deemed
conclusive for purposes of this Agreement. Otherwise, a third opinion may be
obtained from a health care provider acceptable to both earlier health care
providers, and such third opinion shall be conclusive under this Agreement. In
the event of termination due to Incapacity, the Executive shall be entitled to
any applicable insurance benefits provided by the Company and, during only the
first year of such Incapacity, that portion of the Executive's Base Salary
which, when added to the payments from disability or similar such applicable
insurance benefits, shall equal the Executive's annual Base Salary as adjusted
pursuant to Section 4(a) above, for such year. The Executive shall not be
entitled to receive any further compensation or benefits hereunder, except
compensation earned or accrued to the date of termination, whether pursuant to
this Agreement or otherwise, and other benefits as required by law. For purposes
hereof, a continuous period of Incapacity shall be deemed interrupted when the
Executive returns to substantially full-time work for a continuous period of at
least thirty (30) days.
(c) Special Termination Provisions
------------------------------
(i) Other than as set forth elsewhere in this Section 5, during
the term of this Agreement, the Executive's employment may be terminated only
for Cause (as defined herein) as voted by two-thirds of all elected or appointed
members of the Board of Directors of the Company, excluding the Executive (if he
should so sereve as such time). Only the following acts or omissions by the
Executive shall deemed to acts or omissions by the Executive shall deemed to
constitute "Cause": (A) deliberate dishonesty detrimental to the best interests
of the Company; (B) willful and substantial disloyalty involving conflict of
interest or self-dealing to the Company; and (C) substantial and continuing
willful failure to perform his duties and responsibilities as described herein,
provided, however, in the case of (B) and (C) above, only if such alleged
conduct remains uncured for thirty (30) days following receipt of written notice
therein.
(ii) Notwithstanding the foregoing, by vote of two-thirds of all
elected or appointed members of the Board of Directors of the Company
(excluding the Executive, if he should so serve at such time), the Executive's
employment may be terminated at any time without Cause, but (A) in the event
such termination occurs after September 10, 1997, the Executive shall receive
a single payment (less applicable withholding or taxes and similar items)
concurrent with such termination equal to one and one-half times the higher of:
(i) the aggregate of the Executive's Base Salary as adjusted under Section 4(a),
benefits and bonuses due and payable under this Agreement during the current
calendar year, and (ii) the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding
3
<PAGE>
calendar year, or (B) in the event such termination occurs on or before
September 10, 1997, the Executive shall receive a single payment (less
applicable withholding for taxes and similar such items) concurrent with such
termination equal to the greater of: (i) the balance of the aggregate
Executive's Base Salary, benefits and bonuses which would be due and payable to
Executive under this Agreement for the period beginning on the date of
termination and ending on September 10, 1997, or (ii) the amount payable under
Section 4(c)(ii)(A) above; provided that in connection with the calculation
under Section 4(c)(ii)(A) above, if "no preceding calendar year" exists, no such
calculation shall be made.
6. Indemnification. During and after the term of this Agreement, the
---------------
Company will indemnify the Executive against all claims brought against him
which arise in the course of his employment by the Company pursuant to this
Agreement (except for claims which arise under this Agreement), including all
costs, expenses and legal fees incurred by the Executive in connection with such
claims, to the maximum extent permitted under the corporate laws of the State of
Delaware. This Section 6 shall survive termination of this Agreement and the
termination of the Executive's employment, except a termination for Cause based
upon the same, or substantially the same, facts as those on which the claim
against the Executive is based and for which he seeks indemnification.
Notwithstanding anything herein to the contrary, in the event of a willful
breach of a material provision of this Agreement, the breaching party shall pay
reasonable attorneys' fees and court costs (including, without limitation, all
such fees, costs and expenses incident to appeals) of the non-breaching party
incurred in any legal action or other proceeding brought for the enforcement of
this Agreement. In the event that the directors or stockholders, act, vote or
otherwise cause the Company to willfully breach a material provision of this
Agreement, the Executive may, at his option, deem himself to have been
terminated without Cause as set forth in Section 5(c)(ii) in lieu of all other
damages and remedies available at law, in equity or otherwise.
7. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement by the Company for all reasonable expenses incurred by the
Executive in the performance of his duties hereunder, provided that the
Executive properly accounts therefor in accordance with the Company's then-
existing policies and procedures.
8. Stockholder's Agreement. The Executive agrees to execute substantially
-----------------------
the same form of Stockholder's Agreement to apply to all stock in the Company
held by him, as executed by other Senior Executives of the Company.
9. Notices. All notices and other communications required or desired to
-------
be given under the terms of this Agreement shall be in writing and shall be
deemed given when delivered personally or two days after deposited in the United
States mail, certified or registered mail, return receipt requested, postage
prepaid and addressed as follows:
To the Company: The Cornerstone Investments Group, Inc.
50 Rowes Wharf, Suite 420
Boston, MA 02110
4
<PAGE>
Attention: President
With a Copy to: Nicolas A. Kensington, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
To the Executive: Donald J. Steiner
100 Pinckney Street
Boston, MA 02114
or to such other address(es) as either party may from time to time notify the
other party as provided herein.
10. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such other party.
11. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement between the parties with respect to the subject matter addressed
herein and all prior discussions, understandings, negotiations and agreements
are merged herein. This Agreement may not be changed orally but only by an
agreement in writing signed by all of the parties hereto.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (but not choice of law) of the Commonwealth of
Massachusetts, and shall be enforced only in courts located in the Commonwealth
of Massachusetts. The parties hereby agree that such courts shall have venue and
exclusive subject matter and personal jurisdiction, and consent to service of
process by registered mail, return receipt requested, or by any other manner
provided by law.
13. Illegality. In case any one or more of the provisions of this
----------
Agreement should be adjudicated invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
14. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one instrument.
15. Arbitration. In the event that any dispute should arise between the
-----------
parties hereto as to the validity of this Agreement or as to the construction,
enforcement or performance of this Agreement, such dispute, subject to the
provisions of this Section 15, shall be settled by arbitration before a single
arbitrator selected by the Boston office of the American Arbitration
Association, and conducted at Boston, Massachusetts, in accordance with the
Commercial
5
<PAGE>
Arbitration Rules of the American Arbitration Association. The decision of the
arbitrator shall be final and binding on all parties thereto, and judgment upon
any award entered in such proceeding may be entered in any court having
jurisdiction thereof. If determined by the arbitrator to be appropriate, the
unsuccessful party to such arbitration shall pay to the successful party all
costs and expenses, including reasonable attorney's fees, incurred therein by
such successful party and such costs, expenses and attorneys' fees shall be
included in and as part of such judgment or award. The determination of the
arbitrator shall be conclusive on the matter of which party is successful for
purposes hereof.
16. Noncompetition and Nondisclosure. The Executive agrees that as a
--------------------------------
condition of his employment he will execute simultaneously herewith and be bound
by the terms of a certain Noncompetition and Nondisclosure Agreement (the
"Nondisclosure Agreement") in the form attached hereto as Exhibit B, the terms
of which are incorporated herein by reference.
17. Binding Effect. All of the terms and provisions of this Agreement,
--------------
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and assigns. Notwithstanding the
foregoing, this Agreement is personal to the Executive, and he may not assign
any of his rights or obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the day and year first above written.
/s/ Donald J. Steiner THE CORNERSTONE INVESTMENTS GROUP, INC.
- --------------------------
Donald J. Steiner
By: /s/ William T. End
-------------------------
William T. End
Executive Officer and Managing Director
6
<PAGE>
EXHIBIT A
Current Directorships, Advisor Roles and
Activities for Donald J. Steiner (April 4, 1995)
-----------------------------------------------
Current Directorships, Advisor Roles and Activities for Donald J. Steiner.
Company Roles
------- -----
Bright Horizons Director, member-various board committees
Grand Circle Travel Special Advisor/Director
The Horizons Fund Director, member-various board committees
<PAGE>
Exhibit 10.8
AMENDMENT TO EXECUTIVE AGREEMENT
This Amendment, dated as of February 28, 1998, is made to the Executive
Agreement dated as of August 1, 1995 (the "Executive Agreement") between The
International Cornerstone Group, Inc., a Delaware corporation (the "Company"),
and Donald J. Steiner (the "Executive").
In consideration of the premises and the mutual agreements hereinafter set
forth, the Company and the Executive hereby agree that Section 1 of the
Executive Agreement shall be amended, effective as of January 1, 1998, to read
in its entirety as follows:
1. Duties. The Company hereby employs the Executive
------
and the Executive hereby accepts employment by the Company
as Vice Chairman of the Company, upon the terms and subject
to the conditions set forth herein. The Executive shall have
such other tides and hold such other offices (either in
replacement of or in addition to the foregoing titles and
offices) as shall be agreed upon between the Executive and
the Company from time to time. The Executive shall, to the
best of his abilities, be responsible for new business
development (including mergers and acquisitions by the
Company and its affiliated companies) and play a role in
strategic planning and equity offerings, and shall undertake
such other duties consistent with his position as an
executive officer of the Company as shall be reasonably
specified from time to time by the Board of Directors.
During the term of this Agreement, the Executive and the
Company agree that the Executive shall be a member of the
Board of Directors of the Company.
The Executive Agreement, as modified by this Amendment, shall continue in
full force and effect in accordance with its terms.
<PAGE>
This Amendment may be executed in counterparts, which together shall
constitute one and the same instrument.
Executed as of the date first written above.
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By: /s/ William T. End
----------------------------------
/S/ WILLIAM T. END CEO
----------------------------------
(print name and title)
/s/ Donald J. Steiner
-------------------------------------
DONALD J. STEINER
<PAGE>
Exhibit 10.9
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Noncompetition and Nondisclosure Agreement (the "Agreement"), dated as
of August 1, 1995, by and between Donald J. Steiner (the "Executive") and The
Cornerstone Investments Group, Inc. (the "Company"), is executed in connection
with a certain Executive Agreement by and between the Executive and the Company
dated of even date herewith (the "Executive Agreement").
The parties hereto, in consideration of the premises and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. During the period of the Executive's employment by the Company, and as
provided in Section 8 hereof, the Executive agrees that the Executive will not,
directly or indirectly, alone or as a partner, officer, director, employee or
stockholder of any company or business organization, engage in any business
activity in which the Company is then engaged, which is directly competitive
with and detrimental to the business of the Company (it being understood and
agreed that a catalog with substantially different merchandise or target
audience from any catalog then operated by the Company is not directly
competitive), except for those current directorships, special advisory roles and
activities as set forth on Exhibit A to the Employment Agreement. For purposes
of this Agreement, the Executive shall not be deemed to be a stockholder of any
other company or business or organization if (a) the Executive beneficially owns
(i) privately-held securities, (ii) securities listed on a national securities
exchange or (iii) securities sold in the over-the-counter market, provided that
in each of (i), (ii) and (iii) such securities do not exceed in the aggregate
five percent (5%) of the issued and outstanding capital stock of such companies
or business organizations, or (b) during the term of his employment by the
Company, he has obtained prior approval thereof from a majority of the Board of
Directors.
2. The Executive understands that his relationship with the Company and its
officers and employees is one of trust and confidence and that during the period
of his employment by the Company, the Executive may acquire knowledge of, or
access to, information which relates to the business, operations or plans of the
Company which is proprietary, confidential or not known generally to executives
in the catalog business (hereinafter "Confidential Information"). Confidential
Information may include, but is not limited to, budget costs, prices, vendor
lists and information about products, designs, marketing plans, customers and
the Company's financial affairs. The Executive will not reveal or otherwise
disclose to any person, association, company or other entity any Confidential
Information of the Company so far as it has come or may come to his knowledge,
except as may be required in the ordinary course of performing his duties as an
employee of the Company or except as may be in the public domain through no
fault of his, and the Executive will keep secret all matters entrusted to him
and shall not use or attempt to use any such Confidential Information in any
manner which may injure or cause loss or may be reasonably expected to injure or
cause loss to the Company.
<PAGE>
The Executive agrees that the Executive shall not, after the termination of
his employment with the Company, use or permit to be used, any notes, memoranda,
records, files, computer programs, data or other materials containing
Confidential Information, it being agreed that any of the foregoing shall be and
remain the sole and exclusive property of the Company and that immediately upon
the termination of his employment with the Company the Executive shall deliver
all of the foregoing, and all copies thereof, to the Company, at its main
office.
3. The Executive will not at any time during his engagement and for the
period of two (2) years after the termination of the Executive's employment
hire, solicit or encourage any employee (other than Employee's personal
secretary) of the Company, (or any employee of Performance Associates, Inc. or
other "employee leasing company" whose employees perform services for the
Frontgate Cinmar Business) to terminate his or her employment in order to work
for a business or enterprise which competes or intends to compete with the
Company.
4. The Executive further represents that his performance of all of the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to maintain in confidence proprietary information acquired
by him in confidence or in trust prior to his employment by the Company. The
Executive has not entered into, and the Executive agrees that the Executive will
not enter into, any agreement, either written or oral, in conflict herewith.
5. The Executive agrees that any breach of this Agreement by him will cause
immediate and irreparable damage to the Company, which cannot be fully and
adequately compensated in money damages, and that in the event of such breach
the Company shall have, in addition to any and all remedies at law, the right to
an injunction, specific performance or other equitable relief to prevent the
violation, threatened violation or continued violation of any provision
hereunder.
6. Any waiver by the Company of a breach of any portion of this Agreement
shall not operate or be construed as a waiver of any subsequent breach hereof.
7. Each provision herein shall be treated as a separate and independent
clause, and the unenforceability of any one clause shall in no way impair the
enforceability of any of the other clauses herein. Moreover, if one or more of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
8. Subject to the provisions of this Section 8 and Section 9 hereof, the
restrictions contained in Sections 1 and 3 above shall terminate upon the stated
expiration date of the term of the Executive Agreement set forth in Section 2
thereof, provided that there has not occurred an uncured material default by
such Executive of such restrictions or the Executive Agreement. In addition, the
restrictions contained in Sections 1 and 3 above shall immediately terminate if
the Company fails to pay any Base Salary or any
<PAGE>
amounts payable under Section 5(c)(ii) of the Executive Agreement or otherwise
materially breaches the Executive Agreement, or the Company shall fail to pay
any amounts due, and such failure or breach continues for seven (7) days after
written notice from Executive referring to his intent to terminate such
restrictions.
In the event that (1) Executive shall voluntarily resign (other than for
reasons of incapacity) from his employment duties undertaken pursuant to the
Executive Agreement prior to the stated expiration date of the Executive
Agreement set forth in Section 2 thereof, or (2) Executive's employment with the
Company is terminated for Cause (as defined in the Executive Agreement) pursuant
to Section 5(c)(i)(A), Section 5(c)(i)(B), or Section 5(c)(i)(C) of said
Executive Agreement, and provided there has not occurred an uncured material
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 above shall survive such termination of the Executive's
engagement with the Company for a period of eighteen (18) months. In the event
that Executive's employment with the Company is terminated pursuant to Section
5(b) of the Executive Agreement, and provided there has not occurred an uncured
material default by the Company under the Executive Agreement, the restrictions
contained in Sections 1 and 3 above shall survive such termination of the
Executive's engagement with the Company for a period of twelve (12) months.
In the event that Executive's engagement with the Company is terminated
without Cause (i) pursuant to Section 5(c)(ii)(A) of the Executive Agreement,
and provided there has not occurred an uncured material default by the Company
under the Executive Agreement, the restrictions contained in Sections 1 and 3
hereof shall survive such termination of the Executive's engagement with the
Company for eighteen (18) months, or (ii) pursuant to Section 5(c)(ii)(B) of the
Executive Agreement, and provided there has not occurred an uncured default by
the Company under the Executive Agreement, the restrictions contained in
Sections 1 and 3 hereof shall survive such termination of the Executive's
engagement with the Company for the later to occur of (A) September 10, 1997, or
(B) eighteen (18) months from the date of such termination.
Except as provided in this Section 8 and Section 9 hereof, the Executive's
obligations under this Agreement shall survive the termination of the
Executive's engagement with the Company, regardless of the manner of such
termination, and shall be binding upon the Executive's heirs, executors and
administrators.
9. Provided that the Company is not in material default under the terms of
the Executive Agreement, the Company may, at its option, extend the term of this
Agreement for one additional period of twelve (12) months by providing Executive
ninety (90) days advance written notice of its intention to so extend. In the
event this Agreement is so extended, the Company shall pay to Executive an
amount equal to the aggregate compensation, benefits and bonuses actually
received by the Executive during the preceding calendar year. Such amount shall
be paid on a monthly basis, except for any bonuses, which shall be paid at the
customary date of payment of all executive bonuses (less applicable withholding
for taxes and similar such items), on the first day of each month during such
extended period.
<PAGE>
10. The Executive understands that his obligations under this Agreement
will extend to any other organization which succeeds to the business of the
Company by reason of any sale, merger or similar action. For purposes of this
paragraph 10, the term "business of the Company" shall be deemed to be that
business in which the Company was engaged prior to any such sale, merger or
similar action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
THE CORNERSTONE INVESTMENTS GROUP, INC.
By: /s/ William T. End /s/ Donald J. Steiner
------------------------------- ---------------------------
William T. End Donald J. Steiner
Executive Officer and Managing Director
<PAGE>
Exhibit 10.10
EXECUTIVE AGREEMENT
THIS EXECUTIVE AGREEMENT is dated and effective as of August 1, 1995 and is
between The Cornerstone Investments Group, Inc. a Delaware corporation (the
"Company") and Mark Fasold (the "Executive").
1. Duties. The Company hereby employs the Executive and the Executive
------
hereby accepts employment by the Company as a Senior Officer of the Company,
with such titles and duties as shall be mutually agreed upon from time to time.
Executive shall also be designated a Partner of affiliated Partnerships or
limited liability entities arising out of any reorganization of the Company.
Executive shall perform such other duties consistent with his position as a
Senior Executive Officer as shall be specified from time to time by the Board of
Directors.
2. Term. Subject to the provisions for termination contained herein, the
----
term of this Agreement commences on the effective date hereof (the "Effective
Date") and ends on July 31, 2000. At any time the companies hereto may agree in
writing to extend the term of this Agreement.
3. Compensation: Benefits.
----------------------
(a) Salary/Bonus. For the term of his employment under this Agreement,
------------
the Company shall pay to the Executive an annual salary of no less than $150,000
per year, payable in equal installments, in advance ("Base Salary"). The Base
Salary shall be increased cumulatively on an annual basis on December 31 of each
year in accordance with the increases in the "Consumer Price Index-Urban Wage
Earners and Clerical Workers-All Items" for Boston, Massachusetts as compared to
the prior calendar year. In addition to the Base Salary described above, the
Executive shall receive a bonus equal to but not less than ten (10%) percent of
Executive's Base Salary or portion thereof payable at the end of each fiscal
year of the Company.
(b) Benefits. The Company shall provide the Executive with the
--------
following benefits during the term of this Agreement:
(i) An aggregate of four (4) weeks of paid vacation each year,
provided that the Company shall have the right to set policies from time to time
on how vacation may be utilized.
(ii) Health, dental, accident disability and life insurance
coverage under such policies or plans as the Company may adopt provided that
Executive shall receive life insurance in the amount of not less than the
current annual salary of Executive; and provided further that Executive shall
receive not less insurance benefits than are provided to other senior executive
employees of the Company or its operating subsidiaries, from time to time.
<PAGE>
(iii) Such other benefits and/or insurance as are made generally
available to the other senior executive employees of the Company or its
operating subsidiaries, from time to time, including reimbursement for
continuing professional certification and education, including certified public
accountancy.
(iv) If the benefits described in 3(b)(i), (ii) and (iii) above
are not equivalent to Executive's employment benefits from his preceding
employer (prior to joining the Company or its affiliates), the Base Salary (but
not annual bonus) will be increased by up to 10% to cover any possible deficits
in such benefits.
4. Termination.
-----------
(a) Death. Death of the Executive shall terminate his employment with
-----
the Company. After the death of the Executive, the Executive's estate or other
successors in interest shall be entitled to receive any compensation and
benefits earned or accrued to Executive to the date of his death, whether
pursuant to this Agreement or otherwise; provided Executive's estate shall
receive an Estate Allowance equal to three (3) months salary for burial and
other costs associated with Executive's death.
(b) Incapacity. If, during the term of this Agreement, the Executive
----------
is prevented from performing substantially all of his duties hereunder by reason
of illness, physical or mental disability or other incapacity (collectively,
"Incapacity") for a continuous period of one hundred and twenty (120) days, the
Executive shall provide the Company with the written opinion of the Executive's
health care provider with respect to the capacity or incapacity of the Executive
under the terms of this Agreement. If such opinion confirms the incapacity of
the Executive, the Company may upon at least thirty (30) days' written notice to
the Executive terminate the Executive's employment. In the event that the
Company has reasonable cause to doubt the written opinion of the Executives's
health care provider, or has failed to receive any such opinion, then the
Company may require, at its expense, that the Executive obtain the written
opinion of a health care provider reasonably acceptable to the Company. If any
opinion is uncontested, or if the two (2) opinions express substantially similar
conclusions, the opinion or opinions shall be deemed conclusive for purposes of
this Agreement. Otherwise, a third opinion may be obtained from a health care
provider acceptable to both earlier health care providers, and such third
opinion shall be conclusive under this Agreement. In the event of termination
due to Incapacity, the Executive shall be entitled to any applicable insurance
benefits provided by the Company and, during only the first year of such
Incapacity, that portion of the Executive's Base Salary which, when added to the
payments from such applicable disability or similar such insurance benefits,
shall equal the Executive's annual Base Salary, as adjusted for accrued and
unpaid bonus and as adjusted under Section 3(a) and 3(c)(iv) above, if
applicable for such year. The Executive shall not be entitled to receive any
further compensation or benefits hereunder, except compensation earned or
accrued to the date of termination, whether pursuant to this Agreement or
otherwise, and other benefits as required by law. For purposes hereof, a
continuous period of Incapacity shall be deemed interrupted when the Executive
returns to substantially full-time work for a continuous period of at least
thirty (30) days.
2
<PAGE>
(c) Special Termination Provisions.
------------------------------
(i) Other than as set forth elsewhere in this Section 4, during
the term of this Agreement, the Executive's employment may be terminated only
for Cause (as defined herein) as voted by two-thirds of all elected or appointed
members of the Board of Directors of the Company, excluding the Executive (if he
should so serve at such time). Only the following acts of omissions by the
Executive shall be deemed to constitute "Cause": (A) deliberate dishonesty
detrimental to the best interests of the Company; (B) willful and substantial
disloyalty involving conflict of interest or self-dealing to the Company; and
(C) substantial and continuing willful failure to perform his duties and
responsibilities as described herein, provided, however, in the case of (B) and
(C) above only if such alleged conduct remains uncured for thirty (30) days
following receipt of written notice thereof from the Company.
(ii) Notwithstanding the foregoing, by vote of two-thirds of all
elected or appointed members of the Board of Directors of the Company (excluding
the Executive, if he should so serve at such time), the Executive's engagement
may be terminated at any time without Cause, but (A) in the event such
termination occurs after September 10, 1997, the Executive shall receive a
single payment (less applicable withholding for taxes and other similar items)
concurrent with such termination, equal to one and one-half times the higher of:
(i) the aggregate of the Executive's Base Salary as adjusted under Section 3(a),
benefits and bonuses due and payable under this Agreement during the current
calendar year, and (ii) the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding calendar year, or (B) in
the event such termination occurs on or before September 10, 1997, the Executive
shall receive a single payment (less applicable withholding for taxes and
similar such items) concurrent with such termination equal to the greater of:
(i) the balance of the aggregate Executive's Base Salary, benefits and bonuses
which would be due and payable to Employee under this Agreement for the period
beginning on the date of termination and ending on September 10, 1997, or (ii)
the amount payable under Section 4(c)(ii)(A) above; provided that in connection
with the calculation under Section 4(c)(ii)(A) above, if no "preceding calendar
year" exists; no such calculation shall be made.
5. Indemnification. During and after the term of this Agreement, the
---------------
Company will indemnify the Executive against all claims brought against him
which arise in the course of his employment by the Company pursuant to this
Agreement (except for claims which arise under this Agreement), including all
costs, expenses and legal fees incurred by Executive in connection with such
claims, to the maximum extent permitted under the corporate laws of the State of
Delaware. This Section 5 shall survive termination of the Agreement and
termination of the Executive's engagement, except a termination for cause based
upon the same, or substantially the same, facts as those based on which the
claim against the Executive is made for which he seeks indemnification.
Notwithstanding anything herein to the contrary, in the event of a willful
breach of a material provision of this Agreement, the breaching party shall pay
reasonable attorneys' fees, court costs (including, without limitation, all such
fees, costs, and expenses incident to appeals) of the non-breaching party,
incurred in any legal action or other proceeding brought for the enforcement of
this Agreement. In the event that the directors or stockholders
3
<PAGE>
act, vote, or otherwise cause the Company to willfully breach a material
provision of this Agreement, Executive may, at his option, deem himself to have
been terminated without cause as set forth in Section 4(c)(ii) in lieu of all
other damages and remedies available at law, in equity, or otherwise.
6. Stockholder's Agreement. The Executive agrees to execute substantially
-----------------------
the same form of Stockholder's Agreement to apply to all stock in the Company
held by him, as is executed by other Senior Executives of the Company.
7. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement by the Company for all reasonable expenses incurred by Executive
in the performance of his duties hereunder, provided that the Executive properly
accounts therefor in accordance with the Company's then-existing policies and
procedures.
8. Notices. All notices and other communications required or desired to
-------
be given under the terms of this Agreement shall be in writing and shall be
deemed given when delivered personally or two days after deposited in the United
States mail, certified or registered mail, return receipt requested, postage
prepaid and addressed as follows:
To the Company: The Cornerstone Investments Group, Inc.
50 Rowes Wharf, Suite 420
Boston, MA 02110
Attention: President
With a Copy to: Nicolas A. Kensington, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
To the Executive: Mark Fasold
370 Route 85
Raymond, Maine 04071
or such other address as either party may from time to time notify the other
party as provided herein.
9. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by such other party.
10. Entire Agreement: Amendment. This instrument contains the entire
---------------------------
agreement between the parties with respect to the subject matter addressed
herein and all prior discussions, understandings, negotiations and agreements
are merged herein. This Agreement may not be changed orally but only by an
agreement in writing signed by all of the parties hereto.
4
<PAGE>
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws (but not choice of law) of the Commonwealth of
Massachusetts, and shall be enforced only in courts located in the Commonwealth
of Massachusetts. The parties hereby agree that such courts shall have venue and
exclusive subject matter and personal jurisdiction, and consent to service of
process by registered mail, return receipt requested, or by any other manner
provided by law.
12. Illegality. In case any one or more of the provisions of this
----------
Agreement should be adjudicated invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
13. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one instrument.
14. Arbitration. In the event that any dispute should arise between the
-----------
parties hereto as to the validity of this Agreement or as to the construction,
enforcement or performance of this Agreement, such dispute, subject to the
provisions of this paragraph 14, shall be settled by arbitration before a single
arbitrator selected by the Boston office of the American Arbitration
Association, and conducted at Boston, Massachusetts, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. The
decision of the arbitrator shall be final and binding on all parties thereto,
and judgment upon any award entered in such proceeding may be entered in any
court having jurisdiction thereof. If determined by the arbitrator to be
appropriate, the unsuccessful party to such arbitration shall pay to the
successful party all costs and expenses, including reasonable attorney's fees,
incurred therein by such successful party and such costs, expenses and
attorneys' fees shall be included in and as part of such judgment or award. The
determination of the arbitrator shall be conclusive on the matter of which party
is successful for purposes hereof
15. Noncompetition and Nondisclosure. The Executive agrees that as a
--------------------------------
condition of his employment he will execute simultaneously herewith and be bound
by the terms of a Noncompetition and Nondisclosure Agreement (the "Nondisclosure
Agreement") in the form set forth as Exhibit A hereto, the terms of which are
incorporated herein by reference.
16. Binding Effect. All of the terms and provisions of this Agreement,
--------------
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and assigns. Notwithstanding the
foregoing, this Agreement is personal to the Executive, and he may not assign
any of his rights or obligations hereunder.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the day and year first above written.
The Cornerstone Investments Group, Inc.
By: /s/ Donald J. Steiner
------------------------------------
Donald J. Steiner, Executive Officer
and Managing Director
Executive: /s/ Mark Fasold
-----------------------------
Mark Fasold
6
<PAGE>
Exhibit 10.11
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Noncompetition and Nondisclosure Agreement (the "Agreement"), dated as
August 1, 1995, by and between Mark Fasold (the "Executive") and The Cornerstone
Investments Group, Inc. (the "Company"), is executed in connection with a
certain Executive Agreement by and between the Executive and the Company dated
of even date herewith (the "Executive Agreement"). Unless otherwise indicated,
all references to "Company" hereinafter shall be deemed to include The
Cornerstone Investments Group, Inc.
The parties hereto, in consideration of the premises and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. During the period of the Executive's engagement by the Company, and as
provided in Section 8 hereof, the Executive agrees that the Executive will not,
directly or indirectly, alone or as a partner, officer, director, employee or
stockholder of any company or business organization, engage in any business
activity in which the Company is then engaged, which is directly competitive
with and detrimental to the business of the Company (it being understood and
agreed that a catalog with substantially different merchandise or target
audience from any catalog then operated by the Company is not directly
competitive), except for those current directorships, special advisory roles and
activities set forth on Exhibit I hereof. For purposes of this Agreement, the
Executive shall not be deemed to be a stockholder of any company or business
organization if (a) the Executive beneficially owns (i) privately-held
securities, (ii). securities listed on a national securities exchange or (iii)
securities sold in the over-the-counter market, provided. that in each. (i),
(ii) and (iii), such securities do not exceed in the aggregate five percent
(5%) of the issued and outstanding capital stock of such companies or business
organizations or (b) during the term of his engagement by the Company, he has
obtained prior approval thereof from a majority of the Board of Directors of the
Company.
2. The Executive understands that his relationship with the Company and
its officers and employees is one of trust and confidence and that during the
period of his engagement by the Company, the Executive may acquire knowledge of,
or access to, information which relates to the business, operations or plans of
the Company which is proprietary, confidential or not known generally to
executives in the catalog business (hereinafter "Confidential Information").
Confidential Information may include, but is not limited to, budget costs,
prices, customer lists, vendor lists and information about products, designs,
marketing plans, customers and the Company's financial affairs. The Executive
will not reveal or otherwise disclose to any person, association, company or
other entity any Confidential Information of the Company so far as it has come
or may come to his knowledge, except as may be required in the ordinary course
of performing his duties as an employee of the Company or except as may be in
the public domain through no fault of his, and the Executive will keep secret
all matters entrusted to him and shall not use
<PAGE>
or attempt to use any such Confidential Information in any manner which may
injure or cause loss or may be reasonably expected to injure or cause loss to
the Company.
The Executive agrees that the Executive shall not, after the termination of
his engagement with the Company, use or permit to be used, any notes, memoranda,
records, files, computer programs, data or other materials containing
Confidential Information, it being agreed that any of the foregoing shall be and
remain the sole and exclusive property of the Company and that immediately upon
the termination of his engagement with the Company the Executive shall deliver
all of the foregoing, and all copies thereof, to the Company, at its main
office.
3. The Executive will not at any time during his engagement and for the
two (2) year period following the termination of his engagement with the Company
hire, solicit or encourage any employee (other than Executive's personal
secretary) of the Company (or any employee of Performance Associates, Inc. or
other "employee leasing company" whose employees perform services for the
Frontgate Cinmar Business) to terminate his or her employment in order to work
for a business or enterprise which competes or intends to compete with the
Company.
4. The Executive further represents that his performance of all of the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to maintain in confidence proprietary information acquired
by him in confidence or in trust prior to his engagement by the Company. The
Executive has not entered into, and the Executive agrees that the Executive will
not enter into, any agreement, either written or oral, in conflict herewith.
5. The Executive agrees that any breach of this Agreement by him will
cause immediate and irreparable damage to the Company, which cannot be fully and
adequately compensated in money damages, and that in the event of such breach
the Company shall have, in addition to any and all remedies at law, the right to
an injunction, specific performance or other equitable relief to prevent the
violation, threatened violation or continued violation of any provision;
hereunder.
6. Any waiver by the Company of a breach of any portion of this Agreement
shall not operate or be construed as a waiver of any subsequent breach hereof.
7. Each provision herein shall be treated as a separate and independent
clause, and the unenforceability of any one clause shall in no way impair the
enforceability of any of the clauses herein. Moreover, if one or more of the
provisions contained in this Agreement shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
8. Subject to the provisions of this Section 8 and Section 9 hereof, the
restrictions contained in Sections 1 and 3 above shall terminate upon the stated
expiration date of the term of the Executive Agreement set forth in Section 2
thereof, provided that
2
<PAGE>
there has not occurred an uncured material default by Executive under such
restrictions or the Executive Agreement. In addition, the restrictions contained
in Sections 1 and 3 above shall immediately terminate if the Company fails to
pay any Base Salary or any amounts payable under Section 4(c)(ii) of the
Executive Agreement or otherwise materially breaches the Executive Agreement, or
the Company shall fail to pay any amounts due, and such failure or breach
continues for seven (7) days after written notice from Executive referring to
his intent to terminate such restrictions. In the event that (1) Executive shall
voluntarily resign (other than for reasons of incapacity) from his employment
duties undertaken pursuant to the Executive Agreement prior to the stated
expiration date of the Executive Agreement set forth in Section 2 thereof, or
(2) Executive's employment with the Company is terminated for Cause (as defined
in the Executive Agreement) pursuant to Section 4(c)(i)(A), Section 4(c)(i)(B),
or Section 4(c)(i)(C of said Executive Agreement, and provided there has not
occurred an uncured material default by the Company under the Executive
Agreement, the restrictions contained in Sections 1 and 3 above shall survive
such termination of the Executive's engagement with the Company for a period of
eighteen (18) months. In the event that Executive's employment with the Company
is terminated pursuant to Section 4(b) of the Executive Agreement, and provided
there has not occurred an uncured material default by the Company under the
Executive Agreement, the restrictions contained in Sections 1 and 3 above shall
survive such termination of the Executive's engagement with the Company for a
period of twelve (12) months. Except as provided in this Section 8 and Section 9
hereof, the Executive's obligations under this Agreement shall survive the
termination of the Executive's engagement with the Company, regardless of the
manner of such termination, and shall be binding upon the Executive's heirs,
executors and administrators.
In the event that Executive's engagement with the Company is terminated
without Cause (i) pursuant to Section 5(c)(ii)(A) of the Executive Agreement,
and provided there has not occurred an uncured material default by the Company
under the Executive Agreement, the restrictions contained in Sections 1 and 3
hereof shall survive such termination of the Executive's engagement with the
Company for eighteen (18) months, or (ii) pursuant to Section 5(c)(ii)(B) of
the Executive Agreement, and provided there has not occurred an uncured default
by the Company under the Executive Agreement, the restrictions contained in
Sections 1 and 3 hereof shall survive such termination of the Executive's
engagement with the Company for the later to occur of (A) September 10, 1997, or
(B) eighteen (18) months from the date of such termination.
9. Provided that the Company is not in material default under the terms
of the Executive Agreement, the Company may, at its option, extend the term of
this Agreement for one additional period of twelve (12) months by providing
Executive ninety (90) days advance written notice of its intention to so extend.
In the event this Agreement is so extended, the Company shall pay to Executive
an amount equal to the aggregate compensation, benefits and bonuses actually
received by the Executive during the preceding calendar year. Such amount shall
be paid on a monthly basis, except for any bonuses, which shall be paid at the
customary date of payment of all executive bonuses (less applicable withholding
and other such items), on the first day of each month during such extended
period.
3
<PAGE>
10. The Executive understands that his obligations under this Agreement
will extend to any other organization which succeeds to the business of the
Company by reason of any sale, merger or similar action. For purposes of this
paragraph 10, the term "business of the Company" shall be deemed to be that
business in which the Company was engaged prior to any such sale, merger or
similar action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
THE CORNERSTONE INVESTMENTS GROUP, INC.
By: /s/ Donald J. Steiner /s/ Mark Fasold
--------------------------------- -------------------------
Executive Officer/Managing Director Mark Fasold
4
<PAGE>
EXHIBIT 1
Mark Fasold
Noncompetition and Nondisclosure Agreement
dated as of August 1, 1995
Directorship, Special Advisory Roles and Activities: None
5
<PAGE>
Exhibit 10.12
EXECUTIVE AGREEMENT
THIS EXECUTIVE AGREEMENT, dated and effective as of September 13, 1995, is
between The Cornerstone Investments Group, Inc., a Delaware corporation (the
"Company"), Cinmar, Inc., an Ohio corporation and general partner of Cinmar
Acquisition, LP ("New L.P."), and John A. O'Steen (the "Executive").
WHEREAS, the Executive has become one of the founders of the Company and an
investor in the Company; and
WHEREAS, the Company believes that the Executive's services to the Company,
and to the "Frontgate Business" (as defined in the First Amended and Restated
Purchase Agreement of even date herewith by and between the Company, Cornerstone
Holdings Group, Inc., Cinmar, L.P., Cinmar, Inc. and certain other parties (the
"Purchase Agreement"), formerly operated by Cinmar L.P., will be critical to the
respective success of each such organization; and
WHEREAS, the Executive has indicated a willingness to assume the position
of Executive Officer of the Company and of Cinmar, Inc. and the business entity
now operating the "Frontgate Business";
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties agree as follows:
1. Duties. The Company hereby engages the Executive and the Executive
------
hereby accepts engagement by the Company as an Executive Officer, and Cinmar,
Inc. hereby engages the Executive and the Executive hereby accepts engagement by
Cinmar, Inc. as Chairman and Chief Executive Officer of Cinmar, Inc., the sole
general partner of Cinmar Acquisition, LP, the wholly-owned limited
partnership ("New L.P.") of the Company which will operate the "Frontgate
Business" formerly operated by Cinmar, L.P., upon the terms and subject to the
conditions set forth herein. The Executive shall be the primary executive
officer of New L.P., or its successor, if any, and shall have primary authority
over and, to the best of his abilities, be responsible for, the operation and
management of New L.P., subject to review and approval of the Board of Directors
of Cinmar, Inc. as is appropriate with respect to the customary authority of a
chief executive officer. The Executive shall use such other titles and have such
duties as shall be agreed upon between the Executive and the Company from time
to time.
The Executive shall also perform such other duties consistent with his
position as an Executive Officer of the Company as shall be specified from time
to time by the Board of Directors of the Company, provided Executive shall, in
his discretion, be entitled to allocate at least 50% of his time to the
Frontgate Business, and the balance, for other Cornerstone activities, and
greater amounts of his time for shorter periods of time if reasonably required
by the Frontgate Business.
The Executive shall perform his duties on behalf of New L.P. and the
Company on a substantially full-time basis, provided Executive shall be entitled
to serve on the
<PAGE>
Boards of Directors (or other governing bodies) of up to three (3) for profit
organizations (provided no conflict of interest with the Company exists) and,
with the consent of the Board of Directors, which shall not be unreasonably
withheld or delayed, additional Boards of Directors (or similar governing
bodies) of for profit organizations, and on the Boards of Directors (or similar
governing bodies) of not for profit organizations. During the term of this
Agreement, New L.P. (or its successor operating the Frontgate Business) shall
maintain its principal executive offices in the Greater Cincinnati, Ohio area
and Executive shall not be required to relocate from the Greater Cincinnati,
Ohio area.
2. Term. The term of this Agreement commences on the effective date
----
hereof (the "Effective Date") and ends on that date five (5) years from the
effective date hereof.
3. Management of New L.P. Cinmar, Inc. shall be governed by its separate
---------------------
Board of Directors or Management Board (the "Cinmar Board") consisting of five
(5) persons. The Executive shall serve upon the Cinmar Board until the earlier
of the termination of this Executive Agreement or until the occurrence of a
Triggering Event (as hereinafter defined). The initial Cinmar Board shall
consist of Executive, Paul D. Tarvin, Donald J. Steiner, William T. End and
Mark Fasold. If a replacement is needed for any of Donald J. Steiner, William T.
End or Mark Fasold, any successor designated by the Company shall be reasonably
acceptable to Executive and Paul D. Tarvin. If a replacement is needed for Paul
D. Tarvin or John A. O'Steen then the successor to such person at New L.P. shall
become a Member of the Cinmar Board. A "Triggering Event" is defined as (i) the
public offering of shares of the Company's or any successor's stock, or (ii) the
sale, lease, exchange or other transfer of substantially all of the stock or
assets of the Company or any successor (including by merger or consolidation)
other than to an entity whose ownership (directly or indirectly) is identical to
the ownership of the Company immediately prior to such transaction. However, the
term "Triggering Event" shall not include any event which occurs prior to the
closing by the Company of the Financing(s) of its initial financing anticipated
to occur on or about September 13, 1995.
4. Compensation: Benefits.
----------------------
(a) Salary. For the term of his engagement under this Agreement, New
------
L.P. shall pay to the Executive an annual salary based upon the annual
recommendation of the Board of Directors of the Company, but not less than
$175,000 per year, payable in equal monthly installments, in advance ("Base
Salary").
(b) Bonus/Profit-Sharing Programs. Subject to approval of the Company
-----------------------------
Board of Directors, the Executive, in conjunction with Paul D. Tarvin, may
structure such bonus and profit sharing programs as the Executive may deem
appropriate for New L.P. employees and officers, from time-to-time. The
Executive may participate in such programs.
(c) Options for Common Stock. The Company may, from time to time at
------------------------
the discretion of its Board of Directors, grant to the Executive certain options
to purchase Common Stock of the Company (which may or may not qualify as
Incentive
2
<PAGE>
Stock Options pursuant to Section 422 of the Federal Internal Revenue Code of
1986, as amended). Any such options shall vest over a period of no longer than
four (4) years.
(d) Benefits. The Company shall provide the Executive with the
--------
following benefits during the term of this Agreement:
(i) A reasonable amount of paid vacation each calendar as is
customary for similarly situated executives in the Company's industry;
(ii) Health, dental, accident disability and life insurance
coverage under such policies or plans as the Company may maintain from time to
time, provided that the Executive shall receive life insurance in the amount of
not less than the initial annual Base Salary of the Executive; and provided
further that the Executive shall be entitled to receive such insurance benefits
that may be made available to other senior executive employees of the Company or
its operating subsidiaries or affiliates from time to time; and
(iii) Such other benefits and/or insurance that may be made
generally available to other senior executive employees of the Company or its
operating subsidiaries or affiliates from time to time, including reimbursement
for continuing professional certification and education.
5. Termination.
-----------
(a) Death. Death of the Executive shall terminate his engagement with
-----
the Company and New L.P. After the death of the Executive, the Executive's
estate or other successors in interest shall be entitled to receive any
compensation and benefits earned by or accrued to the Executive and unpaid at
the date of his death, whether pursuant to this Agreement or otherwise. In
addition to such compensation and benefits, the Executive's estate shall receive
an estate allowance equal to three (3) months' salary for burial and other costs
associated with the Executive's death.
(b) Incapacity. If, during the term of this Agreement, the Executive
----------
is prevented from performing substantially all of his duties hereunder by reason
of illness, physical or mental disability or other incapacity (collectively,
"Incapacity") for a continuous period of one hundred and twenty (120) days, the
Executive shall provide the Company and New L.P. with the written opinion of the
Executive's health care provider with respect to the capacity or incapacity of
the Executive under the terms of this Agreement if such opinion confirms the
incapacity of the Executive, the Company and New L.P. may upon at least thirty
(30) days' written notice to the Executive terminate the Executive's employment.
In the event that the Company has reasonable cause to doubt the written opinion
of the Executive's health care provider, or has failed to receive any such
opinion, then the Company may require, at its expense, that the Executive obtain
the written opinion of a health care provider reasonably acceptable to the
Company. If any opinion is uncontested, or if the two (2) opinions express
substantially similar conclusions, the opinion or opinions shall be deemed
conclusive for purposes of this Agreement. Otherwise, a third opinion may be
obtained from a health care provider acceptable to
3
<PAGE>
both earlier health care providers, and such third opinion shall be conclusive
under this Agreement. In the event of termination due to Incapacity, the
Executive shall be entitled to any applicable insurance benefits provided by the
Company and, during only the first year of such Incapacity, that portion of the
Executive's Base Salary which, when added to such applicable insurance benefits,
shall equal the Executive's annual adjusted Base Salary for such year. The
Executive shall not be entitled to receive any further compensation or benefits
hereunder, except compensation earned or accrued to the date of termination,
whether pursuant to this Agreement or otherwise, and other benefits as required
by law. For purposes hereof, a continuous period of Incapacity shall be deemed
interrupted when the Executive returns to substantially full-time work for a
continuous period of at least thirty (30) days.
(c) Special Termination Provisions
------------------------------
(i) Other than as set forth elsewhere in this Section 5,
during the term of this Agreement, the Executive's employment may be terminated
by the Company and New L.P. only for Cause (as defined herein) as voted by
two-thirds of all elected or appointed members of the Board of Directors of the
Company, excluding the Executive (if he should so serve at such time). Only the
following acts or omissions by the Executive shall be deemed to constitute
Cause": (A) deliberate dishonesty detrimental to the best interests of the
Company; (B) willful and substantial disloyalty involving conflict of interest
or self-dealing to the Company; and (C) substantial and continuing willful
failure to perform his duties and responsibilities as described herein,
provided, however, in the case of (13) and (C) above only if such alleged
conduct remains uncured thirty (30) days following receipt of written notice
there of from the Company.
(ii) Notwithstanding the foregoing, by vote of two-thirds of
all elected or appointed members of the Board of Directors of the Company
(excluding the Executive, if he should so serve at such time), the Executive's
engagement may be terminated at any time without Cause, provided the Company may
not terminate both Executive and Paul D. Tarvin without cause prior to December
31, 1998 (or such earlier date as all shares of Tracking Stock - Series I of the
Company shall have been redeemed or converted into Common Stock of the Company),
but (A) in the event such termination occurs after September 10, 1997, the
Executive shall receive a single payment (less applicable withholding for taxes
and similar such items) concurrent with such termination equal to one and one-
half times the higher of: (i) the aggregate of the Executive's Base Salary,
benefits and bonuses due and payable under this Agreement during the current
calendar year, and (ii) the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding calendar year, or (B) in
the event such termination occurs on or before September 10, 1997, the Executive
shall receive a single payment (less applicable withholding for taxes and
similar such items) concurrent with such termination equal to the greater of:
(i) the balance of the aggregate Executive's Base Salary, benefits and bonuses
which would be due and payable to Executive under this Agreement for the period
beginning on the date of termination and ending on September 10, 1997, or (ii)
the amount payable under Section 5(c)(ii)(A) above; provided that in connection
with the calculation under Section 5(c)(ii)(A) above, if no "preceding calendar
year" exists, no such calculation shall be made.
4
<PAGE>
6. Indemnification. During and after the term of this Agreement, the
---------------
Company and New L.P. shall indemnify the Executive against all claims brought
against him which arise in the course of his engagement by the Company, Cinmar,
Inc. and New L.P. pursuant to this Agreement (except for claims which arise
under this Agreement), including all costs, expenses and legal fees incurred by
the Executive in connection with such claims, to the maximum extent permitted
under the corporate laws of the State of Delaware. This Section 6 shall survive
termination of this Agreement and the termination of the Executive's engagement,
except a termination for Cause based upon the same, or substantially the same,
facts as those on which the claim against the Executive is based and for which
he seeks indemnification. Notwithstanding anything herein to the contrary, in
the event of a willful breach of a material provision of this Agreement, the
breaching party shall pay reasonable attorneys' fees and court costs (including,
without limitation, all such fees, costs and expenses incident to appeals) of
the non-breaching party incurred in any legal action or other proceeding brought
for the enforcement of this Agreement. In the event that any of the directors or
stockholders, acting singly or in concert, act, vote or otherwise cause the
Company to willfully breach a material provision of this Agreement, the
Executive may, at his option, deem himself to have been terminated without Cause
as set forth in Section 5(c)(ii) in lieu of all other damages and remedies
available at law, in equity or otherwise.
7. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement by the Company or New L.P. for all reasonable expenses incurred by
the Executive in the performance of his duties hereunder, provided that the
Executive properly accounts therefor in accordance with the Company's or New
L.P.'s then-existing policies and procedures.
8. Notices. All notices and other communications required or desired to
-------
be given under the terms of this Agreement shall be in writing and shall be
deemed given when delivered personally or two days after deposited in the United
States mail, certified or registered mail, return receipt requested, postage
prepaid and addressed as follows:
To the Company: The Cornerstone Investments Group, Inc.
or New L.P. 50 Rowes Wharf, Suite 420
Boston, MA 02110
Attention: President
With a Copy to: Nicolas A. Kensington, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
To the Executive: John A. O'Steen
7950 Spooky Hollow Road
Cincinnati, OH 45242
or to such other address(es) as either party may from time to time notify the
other party as provided herein.
5
<PAGE>
9. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such other party.
10. Entire Agreement; Amendment. This Agreement contains the entire
---------------------------
agreement between the parties with respect to the subject matter addressed
herein and all prior discussions, understandings, negotiations and agreements
are merged herein. This Agreement may not be changed orally but only by an
agreement in writing signed by all of the parties hereto.
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Ohio and shall be enforced
only in courts located in the State of Ohio. The parties hereby agree that such
courts shall have venue and exclusive subject matter and personal jurisdiction,
and consent to service of process by registered mail, return receipt requested,
or by any other manner provided by law. During the period commencing September
1, 1995 and ending December 31, 1998 (or such earlier date as all shares of
Tracking Stock - Series I of the Company shall have been redeemed or convened
into Common Stock of the Company), this Agreement shall be deemed to be a Close
Corporation Agreement of Cinmar, Inc. pursuant to Section 1701.591 of the Ohio
Revised Code and shall be entered in the records of minutes of the proceedings
of shareholders of Cinmar, Inc. The existence of this Agreement shall be noted
conspicuously on each certificate for shares of Cinmar, Inc. The Company, as the
sole shareholder of Cinmar, Inc., acknowledges and agrees that the Executive, by
virtue of his holdings of Tracking Stock - Series I of the Company, has a
substantial economic interest in the operation of Cinmar, Inc. and New L.P. and
is an intended third party beneficiary of such Close Corporation Agreement.
During the period commencing September 1, 1995 and ending December 31, 1998 (or
such earlier date as all shares of Tracking Stock - Series I of the Company
shall have been redeemed or converted into Common Stock of the Company),
Executive shall be entitled to enforce the foregoing provisions regarding
management of Cinmar, Inc. and such provisions may not be amended without
Executive's consent.
12. Illegality. In case any one or more of the provisions of this
----------
Agreement should be adjudicated invalid, illegal or unenforceable in any respect
the validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
13. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one instrument.
14. Arbitration In the event that any dispute should arise between the
-----------
parties hereto as to the validity of this Agreement or as to the construction,
enforcement or performance of this Agreement, such dispute, subject to the
provisions of this Section 14, shall be settled by arbitration before a single
arbitrator selected by the Cincinnati office of the American Arbitration
Association, and conducted at Cincinnati, Ohio in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The
6
<PAGE>
decision of the arbitrator shall be final and binding on all parties thereto,
and judgment upon any award entered in such proceeding may be entered in any
court having jurisdiction thereof. If determined by the arbitrator to be
appropriate, the unsuccessful party to such arbitration shall pay to the
successful party all costs and expenses, including reasonable attorney's fees,
incurred therein by such successful party and such costs, expenses and
attorneys' fees shall be included in and as part of such judgment or award. The
determination of the arbitrator shall be conclusive on the matter of which party
is successful for purposes hereof.
15. Noncompetition and Nondisclosure. The Executive agrees that as a
--------------------------------
condition of his engagement he will execute simultaneously herewith and be bound
by the terms of a certain Noncompetition and Nondisclosure Agreement (the
"Nondisclosure Agreement") in the form attached hereto as Exhibit A, the terms
of which are incorporated herein by reference.
16. Binding Effect. All of the terms and provisions of this Agreement,
--------------
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and assigns. Notwithstanding the
foregoing, this Agreement is personal to the Executive, and he may not assign
any of his rights or obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the first above written.
/s/ John A. O'Steen THE CORNERSTONE INVESTMENTS
-------------------------
John A. O'Steen GROUP, INC.
By: /s/ Donald J. Steiner
-------------------------------
Donald J. Steiner
Executive Officer and
Managing Director
CINMAR, INC.,
General Partner of
Cinmar Acquisition, LP
By: /s/ John A. O'Steen
--------------------------------
Its: Chairman & CEO
7
<PAGE>
Exhibit 10.13
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Noncompetition and Nondisclosure Agreement (the "Agreement"), dated as
of September 13, 1995, by and between John A. O'Steen (the "Executive") and The
Cornerstone Investments Group, Inc. (the "Company"), is executed in connection
with a certain Executive Agreement by and between the Executive and the Company
dated of even date herewith (the "Executive Agreement"). Unless otherwise
indicated, all references to "Company" hereinafter shall be deemed to include
The Cornerstone Investments Group, Inc., Cinmar, Inc., and "New L.P." (as
defined in the Executive Agreement).
The parties hereto, in consideration of the premises and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. During the period of the Executive's engagement by the Company, and
as provided in Section 8 hereof, the Executive agrees that the Executive wi11
not, directly or indirectly, alone or as a partner, officer, director, employee
or stockholder of any company or business organization, engage in any business
activity in which the Company is then engaged, which is directly competitive
with and detrimental to the business of the Company (it being understood and
agreed that a catalog with substantially different merchandise or target
audience from any catalog then operated by the Company is not directly
competitive), except for those directorships as set forth in Section 1 of the
executive Agreement. For purposes of this Agreement, the Executive shall not
be deemed to be a stockholder hereunder if (a) the Executive beneficially owns
(i) privately-held securities, (ii) securities listed on a national securities
exchange or (iii) securities sold in the over-the-counter market, provided such
securities do not exceed in the aggregate five percent (5%) of the issued and
outstanding capital stock of such corporations which are direct competitors of
the Company, and (b) during the term of his engagement by the Company, he has
obtained prior approval thereof from a majority of the Board of Directors of the
Company.
2. The Executive understands that his relationship with the Company and
its officers and employees is one of trust and confidence and that during the
period of his engagement by the Company, the Executive may acquire knowledge of,
or access to, information which relates to the business, operations or plans of
the Company which is proprietary, confidential or not known generally to
executives in the catalog business (hereinafter "Confidential Information").
Confidential Information may include, but is not limited to, budget costs,
prices, customer lists, vendor lists and information about products, designs,
marketing plans, customers and the Company's financial affairs. The Executive
will not reveal or otherwise disclose to any person, association, company or
other entity any Confidential Information of the Company so far as it has come
or may come to his knowledge, except as may be required in the ordinary course
of performing his duties as an employee of the Company or except as may be in
the public domain through no fault of his, and the Executive will keep secret
all matters entrusted to him and shall not use or attempt to use any such
Confidential Information in any manner which may injure or cause loss or may be
reasonably expected to injure or cause loss to the Company.
<PAGE>
The Executive agrees that the Executive shall not, after the termination of
his engagement with the Company, use or permit to be used, any notes, memoranda,
records, files, computer programs, data or other materials containing
Confidential Information, it being agreed that any of the foregoing shall be and
remain the sole and exclusive property of the Company and that immediately upon
the termination of his engagement with the Company the Executive shall deliver
all of the foregoing, and all copies thereof, to the Company, at its main
office.
3. The Executive wi11 not at any time during his engagement and for the
two (2) year period following the termination of his engagement with the Company
hire, or solicit or encourage any employee (other than Executive's personal
secretary) of the Company (or any employee of Performance Associates, Inc. or
other "employee leasing company" whose employees perform services for the
Frontgate Business) to terminate his or her employment in order to work for a
business or enterprise which competes or intends to compete with the Company.
4. The Executive further represents that his performance of all of the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to maintain in confidence proprietary information acquired
by him in confidence or in trust prior to his engagement by the Company. The
Executive has not entered into, and the Executive agrees that the Executive will
not enter into, any agreement, either written or oral, in conflict herewith.
5. The Executive agrees that any breach of this Agreement by him will
cause immediate and irreparable damage to the Company, which cannot be fully and
adequately compensated in money damages, and that in the event of such breach
the Company shall have, in addition to any and all remedies at law, the right to
an injunction, specific performance or other equitable relief to prevent the
violation, threatened violation or continued violation of any provision
hereunder.
6. Any waiver by the Company of a breach of any portion of this Agreement
shall not operate or be construed as a waiver of any subsequent breach hereof.
7. Each provision herein shall be treated as a separate and independent
clause, and the unenforceability of any one clause shall in no way impair the
enforceability of any of the other clauses herein. Moreover, if one or more of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
8. Subject to the provisions of this Section 8 and Section 9 hereof, the
restrictions contained in Sections 1 and 3 above shall terminate upon the stated
expiration date of the term of the Executive Agreement set forth in Section 2
thereof, provided there has not occurred an uncured material default by
Executive under such restrictions or the Executive Agreement. In addition, the
restrictions contained in Sections 1 and 3 above shall immediately terminate if
the Company fails to pay any Base Salary or any
2
<PAGE>
amounts payable under Section 5(c)(ii) of the Executive Agreement or otherwise
materially breaches the Executive Agreement, or the Company shall fail to pay
any amounts due, or fail to issue any securities to be issued, to Executive
pursuant to the Cornerstone II Notes or Cornerstone II Equity (as such terms are
defined in the Purchase Agreement), or breaches a certain Tracking Stock
Repurchase Letter of even date herewith between the Company and Executive, and
such failure or breach continues for seven (7) days after written notice from
Executive referring to his intent to terminate such restrictions.
In the event that (1) Executive shall voluntarily resign (other than for
reasons of incapacity) from his employment duties undertaken pursuant to the
Executive Agreement prior to the stated expiration date of the Executive
Agreement set forth in Section 2 thereof, or (2) Executive's employment with the
Company is terminated for Cause (as defined in the Executive Agreement) pursuant
to Section 5(c)(i)(A), Section 5(c)(i)(B), or Section 5(c)(i)(C) of said
Executive Agreement, and provided there has not occurred an uncured material
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 above shall survive such termination of the Executive's
engagement with the Company for a period of eighteen (18) months. In the event
that Executive's employment with the Company is terminated pursuant to Section
5(b) of the Executive Agreement, and provided there has not occurred an uncured
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 above shall survive such termination of the Executive's
engagement with the Company for a period of twelve (12) months.
In the event that Executive's engagement with the Company is terminated
without cause (i) pursuant to Section 5(c)(ii)(A) of the Executive Agreement,
and provided there has not occurred an uncured material default by the Company
under the Executive Agreement, the restrictions contained in Sections 1 and 3
hereof shall survive such termination of the Executive's engagement with the
Company for eighteen (18) months, or (ii) pursuant to Section 5(c)(ii)(B) of the
Executive Agreement, and provided there has not occurred an uncured default by
the Company under the Executive Agreement, the restrictions contained in
Sections 1 and 3 hereof shall survive such termination of the Executive's
engagement with the Company for the later to occur of (A) September 10, 1997, or
(B) eighteen (18) months from the date of such termination.
Except as provided in this Section 8 and Section 9 hereof, the Executive's
obligations under this Agreement shall survive the termination of the
Executive's engagement with the Company, regardless of the manner of such
termination, and shall be binding upon the Executive's heirs, executors and
administrators.
9. Provided that the Company is not in material default under the terms
of the Executive Agreement, the Company may, at its option, extend the term of
this Agreement for one additional period of twelve (12) months by providing
Executive ninety (90) days advance written notice of its intention to so extend.
In the event this Agreement is so extended, the Company shall pay to the
Executive an amount equal to the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding calendar year pursuant
to the terms of the Executive Agreement. Such amount
3
<PAGE>
shall be paid on a monthly basis, except for any bonuses, which shall be paid at
the customary date of payment of all executive bonuses (less applicable
withholding for taxes and similar such items), on the first day of each month
during such extended period.
10. The Executive understands that his obligations under this Agreement
will extend to any other organization which succeeds to the business of the
Company by reason of any sale, merger or similar action. For purposes of this
paragraph 10, the term "business of the Company" shall be deemed to be that
business in which the Company was engaged prior to any such sale, merger or
similar action
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
THE CORNERSTONE INVESTMENTS GROUP, INC.
By: /s/ William T. End /s/ John A. O'Steen
-------------------------------------- --------------------------
Executive Officer/Managing Director John A. O'Steen
4
<PAGE>
Exhibit 10.14
EXECUTIVE AGREEMENT
THIS EXECUTIVE AGREEMENT, dated and effective as of September 13, 1995, is
between The Cornerstone Investments Group, Inc., a Delaware corporation (the
"Company"), Cinmar, Inc., an Ohio corporation and general partner of Cinmar
Acquisition, LP ("New L.P."), and Paul D. Tarvin (the "Executive").
WHEREAS, the Executive has become one of the founders of the Company and an
investor in the Company; and
WHEREAS, the Company believes that the Executive's services to the Company,
and to the "Frontgate Business" (as defined in the First Amended and Restated
Purchase Agreement of even date herewith by and between the Company, Cornerstone
Holdings Group, Inc., Cinmar, LP., Cinmar, Inc. and certain other parties (the
"Purchase Agreement"), formerly operated by Cinmar L.P., will be critical to the
respective success of each such organization; and
WHEREAS, the Executive has indicated a willingness to assume the position
of an Executive Officer of the Company and of Cinmar, Inc. and the business
entity now operating the "Frontgate Business";
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties agree as follows:
1. Duties. The Company hereby engages the Executive and the Executive
------
hereby accepts engagement by the Company as an Executive Officer, and Cinmar,
Inc. hereby engages the Executive and the Executive hereby accepts engagement by
Cinmar, Inc. as President and Chief Operating Officer of Cinmar, Inc., the sole
general partner of Cinmar Acquisition, LP, the wholly-owned limited partnership
("New L.P.") of the Company which will operate the "Frontgate Business" formerly
operated by Cinmar, L.P., upon the terms and subject to the conditions set forth
herein. The Executive shall be the primary executive operating officer of New
L.P., or its successor, if any, and shall have primary authority over and, to
the best of his abilities, be responsible for, the operation of New L.P.,
subject to review and approval of the Board of Directors of Cinmar, Inc. as is
appropriate with respect to the customary authority of a chief operating
officer. The Executive shall use such other titles and have such duties as shall
be agreed upon between the Executive and the Company from time to time. The
Executive shall report to the Chief Executive Officer, John A. O'Steen. In the
event that John A. O'Steen shall no longer serve as Chief Executive Officer of
Cinmar, Inc. during the term of this Agreement, Executive shall be appointed to
the position of Chief Executive Officer to serve in such capacity for the
remaining term, or any extended term, of this Agreement.
The Executive shall also perform such other duties consistent with his
position as an Executive Officer of the Company as shall be specified from time
to time by the Board of Directors of the Company, provided Executive shall, in
his discretion, be entitled to allocate at least 75% of his time to the
Frontgate Business, and the balance, for other
<PAGE>
Cornerstone activities, and greater amounts of his time for shorter periods of
time if reasonably required by the Frontgate Business.
The Executive shall perform his duties on behalf of New L.P. and the Company
on a substantially full-time basis, provided Executive shall be entitled to
serve on the Boards of Directors (or other governing bodies) of up to three (3)
for profit organizations (provided no conflict of interest with the Company
exists) and, with the consent of the Board of Directors, which shall not be
unreasonably withheld or delayed, additional Boards of Directors (or similar
governing bodies) of for profit organizations, and on the Boards of Directors
(or similar governing bodies) of not for profit organizations. During the term
of this Agreement, New L.P. (or its successor operating the Frontgate Business)
shall maintain its principal executive offices in the Greater Cincinnati, Ohio
area and Executive shall not be required to relocate from the Greater
Cincinnati, Ohio area.
2. Term. The term of this Agreement commences on the effective date
----
hereof (the "Effective Date") and ends on that date five (5) years from the
effective date hereof.
3. Management of New L.P. Cinmar, Inc. shall be governed by its separate
---------------------
Board of Directors or Management Board (the "Cinmar Board") consisting of five
(5) persons. The Executive shall serve upon the Cinmar Board until the earlier
of the termination of this Executive Agreement or until the occurrence of a
Triggering Event (as hereinafter defined). The initial Cinmar Board shall
consist of John A. O'Steen, Paul D. Tarvin, Donald J. Steiner, William T. End
and Mark Fasold. If a replacement is needed for any of Donald J. Steiner,
William T. End or Mark Fasold, any successor designated by the Company shall be
reasonably acceptable to John A. O'Steen and Paul D. Tarvin. If a replacement is
needed for Paul D. Tarvin or John A. O'Steen then the successor to such person
at New L.P. shall become a Member of the Cinmar Board. A "Triggering Event" is
defined as (i) the public offering of shares of the Company's or any successor's
stock, or (ii) the sale, lease, exchange or other transfer of substantially all
of the stock or assets of the Company or any successor (including by merger or
consolidation) other than to an entity whose ownership (directly or indirectly)
is identical to the ownership of the Company immediately prior to such
transaction. However, the term "Triggering Event" shall not include any event
which occurs prior to the closing by the Company of the Financing(s) of its
initial financing anticipated to occur on or about September 13, 1995.
4. Compensation: Benefits.
----------------------
(a) Salary. For the term of his engagement under this Agreement, New
------
L.P. shall pay to the Executive an annual salary based upon the annual
recommendation of the Board of Directors of the Company, but not less than
$175,000 per year, payable in equal monthly installments, in advance ("Base
Salary").
(b) Bonus/Profit-Sharing Programs. Subject to approval of the Company
-----------------------------
Board of Directors, the Executive, in conjunction with John A. O'Steen, may
structure such bonus and profit sharing programs as the Executive may deem
appropriate for New
2
<PAGE>
L.P. employees and officers, from time-to-time. The Executive may participate in
such programs.
(c) Options for Common Stock. The Company may, from time to time at
------------------------
the discretion of its Board of Directors, grant to the Executive certain options
to purchase Common Stock of the Company (which may or may not qualify as
Incentive Stock Options pursuant to Section 422 of the Federal Internal Revenue
Code of 1986, as amended). Any such options shall vest over a period of no
longer than four (4) years.
(d) Benefits. The Company shall provide the Executive with the
--------
following benefits during the term of this Agreement:
(i) A reasonable amount of paid vacation each calendar as is
customary for similarly situated executives in the Company's industry.
(ii) Health, dental, accident disability and life insurance
coverage under such policies or plans as the Company may maintain from time to
time, provided that the Executive shall receive life insurance in the amount of
not less than the initial annual Base Salary of the Executive; and provided
further that the Executive shall be entitled to receive such insurance benefits
that may be made available to other senior executive employees of the Company or
its operating subsidiaries or affiliates from time to time; and
(iii) Such other benefits and/or insurance that may be made
generally available to other senior executive employees of the Company or its
operating subsidiaries or affiliates from time to time, including reimbursement
for continuing professional certification and education.
5. Termination.
-----------
(a) Death. Death of the Executive shall terminate his engagement with
-----
the Company and New L.P. After the death of the Executive, the Executive's
estate or other successors in interest shall be entitled to receive any
compensation and benefits earned by or accrued to the Executive and unpaid at
the date of his death, whether pursuant to this Agreement or otherwise. In
addition to such compensation and benefits, the Executive's estate shall receive
an estate allowance equal to three (3) months' salary for burial and other costs
associated with the Executive's death.
(b) Incapacity. If, during the term of this Agreement, the Executive
----------
is prevented from performing substantially all of his duties hereunder by reason
of illness, physical or mental disability or other incapacity (collectively,
"Incapacity") for a continuous period of one hundred and twenty (120) days, the
Executive shall provide the Company and New L.P. with the written opinion of the
Executive's health care provider with respect to the capacity or incapacity of
the Executive under the terms of this Agreement. If such opinion confirms the
incapacity of the Executive, the Company and New L.P. may upon at least thirty
(30) days' written notice to the Executive terminate the Executive's employment.
In the event that the Company has reasonable cause to doubt the written
3
<PAGE>
opinion of the Executive's health care provider, or has failed to receive any
such opinion, then the Company may require, at its expense, that the Executive
obtain the written opinion of a health care provider reasonably acceptable to
the Company. If any opinion is uncontested, or if the two (2) opinions express
substantially similar conclusions, the opinion or opinions shall be deemed
conclusive for purposes of this Agreement. Otherwise, a third opinion may be
obtained from a health care provider acceptable to both earlier health care
providers, and such third opinion shall be conclusive under this Agreement. In
the event of termination due to Incapacity, the Executive shall be entitled to
any applicable insurance benefits provided by the Company and, during only the
first year of such Incapacity, that portion of the Executive's Base Salary
which, when added to such applicable insurance benefits, shall equal the
Executive's annual adjusted Base Salary for such year. The Executive shall not
be entitled to receive any further compensation or benefits hereunder, except
compensation earned or accrued to the date of termination, whether pursuant to
this Agreement or otherwise, and other benefits as required by law. For purposes
hereof, a continuous period of Incapacity shall be deemed interrupted when the
Executive returns to substantially full-time work for a continuous period of at
least thirty (30) days.
(c) Special Termination Provisions
------------------------------
(i) Other than as set forth elsewhere in this Section 5,
during the term of this Agreement, the Executive's employment by the Company and
New L.P. may be terminated only for Cause (as defined herein) as voted by two-
thirds of all elected or appointed members of the Board of Directors of the
Company, excluding the Executive ?? he should so serve at such time). Only the
following acts or omissions by the Executive shall be deemed to constitute
"Cause": (A) deliberate dishonesty detrimental to the best interests of the
Company; (B) willful and substantial disloyalty involving conflict of interest
or self-dealing to the Company; and (C) substantial and continuing willful
failure to perform his duties and responsibilities as described herein,
provided, however, in the case of (B) and (C) above only if such alleged conduct
remains uncured for thirty (30) days following receipt of written notice thereof
from the Company.
(ii) Notwithstanding the foregoing, by vote of two-thirds of
all elected or appointed members of the Board of Directors of the company
(excluding the Executive, if he should so serve at such time), the Executive's
engagement may be terminated at any time without Cause, provided the Company may
not terminate both Executive and John A. O'Steen without Cause prior to December
31, 1998 (or such earlier date as all shares of Tracking Stock-Series I of the
Company shall have been redeemed or converted into Common Stock of the Company),
but (A) in the event such termination occurs after September 10, 1997, the
Executive shall receive a single payment (less applicable withholding for taxes
and similar such items) concurrent with such termination equal to one and one-
half times the higher of: (i) the aggregate of the Executive's Base Salary,
benefits and bonuses due and payable under this Agreement during the current
calendar year, and (ii) the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding calendar year, or (B) in
the event such termination occurs on or before September 10, 1997, the Executive
shall receive a single payment (less applicable withholding for taxes and
similar such items)
4
<PAGE>
concurrent with such termination equal to the greater of: (i) the balance of the
aggregate Executive's Base Salary, benefits and bonuses which would be due and
payable to Executive under this Agreement for the period beginning on the date
of termination and ending on September 10, 1997, or (ii) the amount payable
under 5(c)(ii)(A) above; provided that in connection with the calculation under
Section 5(c)(ii)(A) above, if no "preceding calendar year" exists, then no such
calculation shall be made.
6. Indemnification. During and after the term of this Agreement, the
---------------
Company and New L.P. shall indemnify the Executive against all claims brought
against him which arise in the course of his engagement by the Company, Cinmar,
Inc. and New L.P. pursuant to this Agreement (except for claims which arise
under this Agreement), including all costs, expenses and legal fees incurred by
the Executive in connection with such claims, to the maximum extent permitted
under the corporate laws of the State of Delaware. This Section 6 shall survive
termination of this Agreement and the termination of the Executive's engagement,
except a termination for Cause based upon the same, or substantially the same,
facts as those on which the claim against the Executive is based and for which
he seeks indemnification. Notwithstanding anything herein to the contrary, in
the event of a willful breach of a material provision of this Agreement, the
breaching party shall pay reasonable attorneys' fees and court costs (including,
without limitation, all such fees, costs and expenses incident to appeals) of
the non-breaching party incurred in any legal action or other proceeding brought
for the enforcement of this Agreement. In the event that any of the directors or
stockholders, acting singly or in concert, act, vote or otherwise cause the
Company to willfully breach a material provision of this Agreement, the
Executive may, at his option, deem himself to have been terminated without
Cause as set forth in Section 5(c)(ii) in lieu of all other damages and remedies
available at law, in equity or otherwise.
7. Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement by the Company or New L.P. for all reasonable expenses incurred by
the Executive in the performance of his duties hereunder, provided that the
Executive properly accounts therefor in accordance with the Company's or New
L.P.'s, as then-existing policies and procedures.
8. Notices. All notices and other communications required or desired to
-------
be given under the terms of this Agreement shall be in writing and shall be
deemed given when delivered personally or two days after deposited in the United
States mail, certified or registered mail, return receipt requested, postage
prepaid and addressed as follows:
To the Company: The Cornerstone Investments Group, Inc.
or New LP. 50 Rowes Wharf, Suite 420
Boston, MA 02110
Attention: President
With a Copy to: Nicholas A. Kensington, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
5
<PAGE>
To the Executive: Paul D. Tarvin
2187 Spinningwheel Lane
Cincinnati, OH 45244
or to such other address(es) as either party may from time to time notify the
other party as provided herein.
9. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by such other party.
10. Entire Agreement: Amendment. This Agreement contains the entire
---------------------------
agreement between the parties with respect to the subject matter addressed
herein and all prior discussions, understandings, negotiations and agreements
are merged herein. This Agreement may not be changed orally but only by an
agreement in writing signed by all of the parties hereto.
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Ohio and shall be enforced
only in courts located in the State of Ohio. The parties hereby agree that such
courts shall have venue and exclusive subject matter and personal jurisdiction,
and consent to service of process by registered mail, return receipt requested,
or by any other manner provided by law. During the period commencing September
1, 1995 and ending December 31, 1998, (or such earlier date as all shares of
Tracking Stock-Series I of the Company shall have been redeemed or converted
into Common Stock of the Company), this Agreement shall be deemed to be a Close
Corporation Agreement of Cinmar, Inc. pursuant to Section 1701.591 of the Ohio
Revised Code and shall be entered in the records of minutes of the proceedings
of the shareholders of Cinmar, Inc. The existence of this Agreement shall be
noted conspicuously on each certificate for shares of Cinmar, Inc. The Company,
as the sole shareholder of Cinmar, Inc., acknowledges and agrees that the
Executive, by virtue of his holdings of Tracking Stock - Series I of the
Company, has a substantial economic interest in the operation of Cinmar, Inc.
and New L.P. and is an intended third party beneficiary of such Close
Corporation Agreement. During the period commencing September 1, 1995 and ending
December 31, 1998 (or such earlier date as all shares of Tracking Stock-Series I
of the Company shall have been redeemed or converted into Common Stock of the
Company), this Executive shall be entitled to enforce the foregoing provisions
regarding management of Cinmar, Inc. and such provisions may not be amended
without Executive's consent.
12. Illegality. In case any one or more of the provisions of this
----------
Agreement should be adjudicated invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
13. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one instrument.
6
<PAGE>
14. Arbitration. In the event that any dispute should arise between the
-----------
parties hereto as to the validity of this Agreement or as to the construction,
enforcement or performance of this Agreement, such dispute, subject to the
provisions of this Section 14, shall be settled by arbitration before a single
arbitrator selected by the Cincinnati office of the American Arbitration
Association, and conducted at Cincinnati, Ohio in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The decision of the
arbitrator shall be final and binding on all parties thereto, and judgment upon
any award entered in such proceeding may be entered in any court having
jurisdiction thereof. If determined by the arbitrator to be appropriate, the
unsuccessful party to such arbitration shall pay to the successful party all
costs and expenses, including reasonable attorney's fees, incurred therein by
such successful party and such costs, expenses and attorneys' fees shall be
included in and as part of such judgment or award. The determination of the
arbitrator shall be conclusive on the matter of which party is successful for
purposes hereof.
15. Noncompetition and Nondisclosure. The Executive agrees that as a
--------------------------------
condition of his engagement he will execute simultaneously herewith and be bound
by the terms of a certain Noncompetition and Nondisclosure Agreement (the
"Nondisclosure Agreement") in the form attached hereto as Exhibit A, the terms
of which are incorporated herein by reference.
16. Binding Effect. All of the terms and provisions of this Agreement,
--------------
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and assigns. Notwithstanding the
foregoing, this Agreement is personal to the ????itive, and he may not assign
any of his rights or obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the day and year first above written.
/s/ Paul D. Tarvin THE CORNERSTONE INVESTMENTS
- -----------------------------
Paul D. Tarvin GROUP, INC.
By: /s/ Donald J. Steiner
------------------------------
Donald J. Steiner
Executive Officer and
Managing Director
CINMAR, INC.,
General Partner of
Cinmar Acquisition, LP
By: /s/ John A. O'Steen
------------------------------
Its: Chairman & CEO
7
<PAGE>
Exhibit 10.15
NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Noncompetition and Nondisclosure Agreement (the "Agreement"), dated as
of September 13, 1995, by and between Paul D. Tarvin (the "Executive") and The
Cornerstone Investments Group, Inc. (the "Company"), is executed in connection
with a certain Executive Agreement by and between the Executive and the Company
dated of even date herewith (the "Executive Agreement"). Unless otherwise
indicated, all references to "Company" hereinafter shall be deemed to include
The Cornerstone Investments Group, Inc., Cinmar, Inc., and "New LP." (as defined
in the Executive Agreement).
The parties hereto, in consideration of the premises and covenants herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. During the period of the Executive's engagement by the Company, and as
provided in Section 8 hereof, the Executive agrees that the Executive will not,
directly or indirectly, alone or as a partner, officer, director, employee or
stockholder of any company or business organization, engage in any business
activity in which the Company is then engaged, which is directly competitive
with and detrimental to the business of the Company (it being understood and
agreed that a catalog with substantially different merchandise or target
audience from any catalog then operated by the Company is not directly
competitive), except for those directorships as set forth in Section 1 of the
Executive Agreement. For purposes of this Agreement, the Executive shall not be
deemed to be a stockholder hereunder if (a) the Executive beneficially owns (i)
privately-held securities, (ii) securities listed on a national securities
exchange or (iii) securities sold in the over-the-counter market, provided such
securities do not exceed in the aggregate five percent (5%) of the issued and
outstanding capital stock of such corporations which are direct competitors of
the Company, and (b) during the term of his engagement by the Company, he has
obtained prior approval thereof from a majority of the Board of Directors of the
Company.
2. The Executive understands that his relationship with the Company and
its officers and employees is one of trust and confidence and that during the
period of his engagement by the Company, the Executive may acquire knowledge of,
or access to, information which relates to the business, operations or plans of
the Company which is proprietary, confidential or not known generally to
executives in the catalog business (hereinafter "Confidential Information").
Confidential Information may include, but is not limited to, budget costs,
prices, customer lists, vendor lists and information about products, designs,
marketing plans, customers and the Company's financial affairs. The Executive
will not reveal or otherwise disclose to any person, association, company or
other entity any Confidential Information of the Company so far as it has come
or may come to his knowledge, except as may be required in the ordinary course
of performing his duties as an employee of the Company or except as may be in
the public domain through no fault of his, and the Executive will keep secret
all matters entrusted to him and shall not use or attempt to use any such
Confidential Information in any manner which may injure or cause loss or may be
reasonably expected to injure or cause loss to the Company.
<PAGE>
The Executive agrees that the Executive shall not, after the termination of
his engagement with the Company, use or permit to be used, any notes, memoranda,
records, files, computer programs, data or other materials containing
Confidential Information, it ???ing agreed that any of the foregoing shall be
and remain the sole and exclusive property of the Company and that immediately
upon the termination of his engagement with the Company the Executive shall
deliver all of the foregoing, and all copies thereof, to the Company, at its
main office.
3. The Executive will not at any time during his engagement and for the
two (2) year period following the termination of his engagement with the Company
hire, solicit or encourage any employee (other than Executive's personal
secretary) of the Company (or any employee of Performance Associates, Inc. or
other "employee leasing company" whose employees perform services for the
Frontgate Business) to terminate his or her employment in order to work for a
business or enterprise which competes or intends to compete with the Company.
4. The Executive further represents that his performance of all of the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to maintain in confidence proprietary information acquired
by him in confidence or in trust prior to his engagement by the Company. The
Executive has not entered into, and the Executive agrees that the Executive will
not enter into, any agreement, either written or oral, in conflict herewith.
5. The Executive agrees that any breach of this Agreement by him will
cause ??mediate and irreparable damage to the Company, which cannot be fully and
adequately compensated in money damages, and that in the event of such breach
the Company shall have, in addition to any and all remedies at law, the right to
an injunction, specific performance or other equitable relief to prevent the
violation, threatened violation or continued violation of any provision
hereunder.
6. Any waiver by the Company of a breach of any portion of this Agreement
shall not operate or be construed as a waiver of any subsequent breach hereof.
7. Each provision herein shall be treated as a separate and independent
clause, and the unenforceability of any one clause shall in no way impair the
enforceability of any of the other clauses herein. Moreover, if one or more of
the provisions contained in this Agreement shall for any reason be held to be
excessively broad as to scope, activity or subject so as to be unenforceable at
law, such provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it or them, so as to be enforceable to the extent
compatible with the applicable law as it shall then appear.
8. Subject to the provisions of this Section 8 and Section 9 hereof,
notwithstanding anything herein to the contrary, the restrictions contained in
Sections 1 and 3 shall terminate upon the stated expiration date of the term of
the Executive Agreement set forth in Section 2 thereof, provided there has not
occurred an uncured material default by Executive under such restrictions or the
Executive Agreement. In addition, the restrictions contained in Sections 1 and 3
above shall immediately terminate
2
<PAGE>
if the Company fails to pay any Base Salary or any amounts payable under Section
5(c)(ii) of the Executive Agreement or otherwise materially breaches the
Executive Agreement, or the Company shall fail to pay any amounts due, or fail
to issue any securities to be issued, to Executive pursuant to the Cornerstone
II Notes or Cornerstone II Equity (as such terms are defined in the Purchase
Agreement), or breaches a certain Tracking Stock Repurchase Letter of even date
herewith between the Company and Executive, and such failure or breach continues
for seven (7) days after written notice from Executive referring to his intent
to terminate such restrictions.
In the event that (1) Executive shall voluntarily resign (other than for
reasons of incapacity) from his employment duties undertaken pursuant to the
Executive Agreement prior to the stated expiration date of the Executive
Agreement set forth in Section 2 thereof, or (2) Executive's employment with the
Company is terminated for Cause (as defined in the Executive Agreement) pursuant
to Section 5(c)(i)(A), Section 5(c)(i)(B), or Section 5(c)(i)(C) of said
Executive Agreement, and provided there has not occurred an uncured material
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 above shall survive such termination of the Executive's
engagement with the Company for a period of eighteen (18) months. In the event
that Executive's employment with the Company is terminated pursuant to Section
5(b) of the Executive Agreement, and provided there has not occurred an uncured
material default by the Company under the Executive Agreement, the restrictions
contained in Sections 1 and 3 above shall survive such termination of the
Executive's engagement with the Company for a period of twelve (12) months.
In the event that Executive's engagement with the Company is terminated
without cause (i) pursuant to Section 5(c)(ii)(A) of the Executive Agreement,
and provided there has not occurred an uncured material default by the Company
under the Executive Agreement, the restrictions contained in Sections 1 and 3
hereof shall survive such termination of the Executive's engagement with the
Company for eighteen (18) months, or (ii) pursuant to Section 5(c)(ii)(B) of the
Executive Agreement, and provided there has not occurred an uncured material
default by the Company under the Executive Agreement, the restrictions contained
in Sections 1 and 3 hereof shall survive such termination of the Executive's
engagement with the Company for the later to occur of (A) September 10, 1997, or
(B) eighteen (18) months from the date of such termination.
Except as provided in this Section 8 and Section 9 hereof, the Executive's
obligations under this Agreement shall survive the termination of the
Executive's engagement with the Company, regardless of the manner of such
termination, and shall be binding upon the Executive's heirs, executors and
administrators.
9. Provided that the Company is not in material default under the terms
of the Executive Agreement, the Company may, at its option, extend the term of
this Agreement for one additional period of twelve (12) months by providing
Executive ninety (90) days advance written notice of its intention to so extend.
In the event this Agreement is so extended, the Company shall pay to the
Executive an amount equal to the aggregate compensation, benefits and bonuses
actually received by the Executive during the preceding calendar year pursuant
to the terms of the Executive Agreement. Such amount
3
<PAGE>
shall be paid on a monthly basis, except for any bonuses, which shall be paid at
the customary date of payment of all executive bonuses (less applicable
withholding for taxes and similar such items), on the first day of each month
during such extended period.
10. The Executive understands that his obligations under this Agreement
will extend to any other organization which succeeds to the business of the
Company by reason of any sale, merger or similar action. For purposes of this
paragraph 10, the term "business of the Company" shall be deemed to be that
business in which the Company was engaged prior to any such sale, merger or
similar action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
THE CORNERSTONE INVESTMENT GROUP, INC.
By: /s/ William T. End /s/ Paul D. Tarvin
------------------------------------- ------------------------
Executive Officer/Managing Director Paul D. Tarvin
4
<PAGE>
Exhibit 10.17
TRAVELSMITH OUTFITTERS, INC.
2935 KERNER BOULEVARD
SAN RAFAEL, CA 94901
__________________________________
COMMON STOCK PURCHASE AGREEMENT
June 30, 1996
__________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 - Authorization and Sale of Common Shares by the Company........... 1
1.1 Authorization of Common Shares............................. 1
1.2 Sale of Common Stock....................................... 1
1.3 Partial Payment of the Purchase Price...................... 1
SECTION 2 - Closing Date; Delivery........................................... 1
2.1 Closing Date............................................... 1
2.2 Delivery................................................... 2
SECTION 3 - Representations and Warranties of the Company.................... 2
3.1 Corporate Power............................................ 2
3.2 Authorization.............................................. 2
3.3 No Conflicts............................................... 2
3.4 Governmental Consents, etc................................. 3
3.5 Offering................................................... 3
3.6 Brokers or Finders......................................... 3
SECTION 4 - Representations, Warranties and Covenants of the Purchaser....... 3
4.1 Accredited Investor........................................ 3
4.2 Institutional Buyer........................................ 3
4.3 Experience; Risk........................................... 3
4.4 Investment................................................. 3
4.5 Restricted Securities; Rule 144............................ 4
4.6 No Public Market........................................... 4
4.7 Access to Data............................................. 4
4.8 Authorization.............................................. 4
4.9 Government Consents........................................ 4
4.10 Further Limitations on Disposition......................... 5
SECTION 5 - Conditions to Closing of Purchaser............................... 5
5.1 Representations and Warranties Correct..................... 5
5.2 Covenants.................................................. 5
5.3 Compliance Certificate..................................... 5
5.4 BlueSky.................................................... 5
5.5 Stockholder Rights Agreement............................... 5
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
5.6 James C. Slaughter Stock Purchase Agreement................ 5
5.7 John Kaufman Stock Purchase Agreement...................... 5
5.8 Employment Agreements...................................... 5
5.9 Board of Directors......................................... 6
5.10 Conversion of Convertible Notes............................ 6
5.11 Amended Articles of Incorporation.......................... 6
5.12 Amended Bylaws............................................. 6
SECTION 6 - Conditions to Closing of the Company....................... 6
6.1 Representations............................................. 6
6.2 Covenants................................................... 6
6.3 BlueSky..................................................... 6
6.4 Stockholder Rights Agreement................................ 6
6.6 James C. Slaughter Stock Purchase Agreement................. 6
6.7 John Kaufman Stock Purchase Agreement....................... 7
6.8 Board of Directors.......................................... 7
6.9 Conversion of Convertible Notes............................. 7
6.10 Amended Articles of Incorporation........................... 7
SECTION 7 - Affirmative Covenants of the Company........................ 7
7.1 Financial Information....................................... 7
7.2 Inspection.................................................. 8
7.3 Confidentiality of Information.............................. 8
7.4 Termination of Covenants.................................... 8
7.5 Assignability............................................... 8
7.6 Sale of Additional Shares of Common Stock................... 8
7.7 Future Business Relationship................................ 10
7.8 Failure by Purchaser to Purchase Shares..................... 12
7.9 Use of Services of Banker and/or Independent Appraiser...... 12
7.10 Cinmar Agreement............................................ 12
7.11 Purchaser Obligations under Employment Agreements........... 13
SECTION 8 - Miscellaneous............................................... 13
8.1 Governing Law............................................... 13
8.2 Survival.................................................... 13
8.3 Entire Agreement; Amendment................................. 13
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.4 Successors and Assigns....................................... 13
8.5 Notices, etc................................................. 13
8.6 Delays or Omissions.......................................... 14
8.7 Expenses..................................................... 14
8.8 Severability................................................. 14
8.9 Counterparts................................................. 14
8.10 Specific Performance......................................... 15
</TABLE>
-iii-
<PAGE>
Exhibits
A - Form of Promissory Note
B - Stockholder Rights' Agreement
C - Form of Employment Agreement
D - Form of Slaughter Stock Purchase Agreement
E - Form of Kaufman Stock Purchase Agreement
F - Form of Amended Articles of Incorporation
G - Form of Amended Bylaws
-iv-
<PAGE>
TRAVELSMITH OUTFITTERS, INC.
COMMON STOCK PURCHASE AGREEMENT
This Agreement is made as of June 30, 1996, among TravelSmith Outfitters,
Inc. a California corporation (the "Company"), Charles L. Slaughter
("Slaughter") and Scott Sklar ("Sklar" and together with Slaughter, the
"Management") and The International Cornerstone Group, Inc., a Delaware
corporation (the "Purchaser").
SECTION 1
Authorization and Sale of Common Shares by the Company
------------------------------------------------------
1.1 Authorization of Common Shares. The Company has authorized the sale
------------------------------
and issuance of Seventeen Thousand Three Hundred Ninety (17,390) shares (the
"Shares") of its Common Stock (the Common Stock"), having the rights,
preferences, privileges and restrictions set forth in the Company's Amended and
Restated Articles of Incorporation (the "Restated Articles").
1.2 Sale of Common Stock. Subject to the terms and conditions hereof, the
--------------------
Company will issue and sell to the Purchaser, and the Purchaser agrees to
purchase from the Company, at a purchase price of $14 per share, the Shares.
1.3 Partial Payment of the Purchase Price. Notwithstanding anything
-------------------------------------
contained herein to the contrary, at the Closing (as hereinafter defined)
payment of the purchase price by the Purchaser shall be made (i) by delivery of
50% of the purchase price in cash and (ii) by delivery of a promissory note (the
"Note") in the aggregate principal amount of the remaining 50% of the purchase
price, with the terms and conditions as set forth in and substantially in the
form of Exhibit A hereto.
---------
SECTION 2
Closing Date: Delivery
----------------------
2.1 Closing Date. The closing of the purchase and sale of the Shares
------------
hereunder (the "Closing") shall be held at the offices of Wilson, Sonsini,
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, at 10:00
a.m. on July 17, 1996, or at such other time and place upon which the Company
and the Purchaser shall agree (the date of the Closing is hereinafter referred
to as the "Closing Date").
<PAGE>
2.2 Delivery. At the Closing, the Company will deliver to the Purchaser a
--------
certificate or certificates representing the Shares against payment of the
purchase price therefor, by check payable to the Company in the amount of 50% of
the purchase price therefor and by delivery of the Note.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
The Company hereby represents and warrants to the Purchasers as follows:
3.1 Corporate Power. The Company will have prior to the Closing Date all
---------------
requisite legal and corporate power to execute and deliver this Agreement, the
Stockholder Rights Agreement substantially in the form attached hereto as
Exhibit B (the "Stockholder Rights Agreement") and the Employment Agreements, to
- ---------
be entered into with each of Slaughter and Sklar, substantially in the form
attached hereto as Exhibit C (the "Employment Agreements"), to sell and issue
---------
the Shares hereunder and to carry out and perform its obligations under the
terms of this Agreement, the Stockholder Rights Agreement and the Employment
Agreements and the transactions contemplated hereby and thereby. The Company is
a corporation duly organized and validly existing under, and by virtue of, the
laws of the State of California and is in good standing under such laws.
3.2 Authorization. All corporate action on the part of the Company, its
-------------
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance of this Agreement, the Stockholder Rights Agreement and
the Employment Agreements by the Company, the authorization, sale, issuance and
delivery of the Shares and the performance of the Company's obligations
hereunder and thereunder has been taken or will be taken prior to the Closing.
This Agreement, the Stockholder Rights Agreement and the Employment Agreements,
when executed and delivered by the Company, shall constitute the valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The Shares are duly authorized and, when issued, sold and delivered in
compliance with the provisions of this Agreement, will be duly and validly
issued and will be fully paid and nonassessable and free and clear of all liens
and encumbrances, provided, however, that the Shares may be subject to
-------- -------
restrictions on transfer under state and/or federal securities laws as set forth
herein. All preemptive rights and rights of first refusal relating to the
issuance of the Shares have been waived.
3.3 No Conflicts. The execution, delivery and performance of and
------------
compliance with this Agreement, the Stockholder Rights Agreement and the
Employment Agreements and the issuance of the Shares, have not resulted and will
not result in any violation of, or conflict with, or constitute a default under
its Articles of Incorporation or Bylaws, or in any material respect, any
mortgage, indenture, contract, agreement, instrument, judgment or decree, and to
its knowledge, any order, statute, rule or regulation applicable to the Company,
or result in the creation of any mortgage, pledge, lien, encumbrance or charge
upon any of the properties or assets of the Company.
-2-
<PAGE>
3.4 Governmental Consents, etc. No consent, approval, order or
--------------------------
authorization of or designation, declaration or filing with any state or federal
governmental authority on the part of the Company is required in connection with
the valid execution and delivery of this Agreement, the Stockholder Rights
Agreement or the Employment Agreements, or the offer, sale or issuance of the
Shares, or the consummation of any other transaction contemplated hereby, except
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) under the California Corporate Securities Law
and other applicable Blue Sky laws, of the offer and sale of the Shares, which
filing and qualification, if required, will be accomplished in a timely manner
prior to or promptly upon completion of the Closing.
3.5 Offering. Subject to the accuracy of the Purchaser's representations
--------
in Section 4 hereof, the offer, sale and issuance of the Shares to be issued in
conformity with the terms of this Agreement constitute transactions exempt from
the registration requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act").
3.6 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
SECTION 4
Representations, Warranties and Covenants of the Purchaser
----------------------------------------------------------
The Purchaser hereby represents, warrants and covenants to the Company with
respect to the purchase of the Shares as follows:
4.1 Accredited Investor. The Purchaser qualifies as an "accredited
-------------------
investor" as such term is defined in the Securities Act.
4.2 Institutional Buyer. The Purchaser qualifies as an "institutional
-------------------
buyer" as such term is defined in the Massachusetts Uniform Securities Act.
4.3 Experience; Risk. The Purchaser has such knowledge and experience in
----------------
financial and business matters that such Purchaser is capable of evaluating the
merits and risks of the purchase of the Shares pursuant to the Agreement and of
protecting the Purchaser's interests in connection therewith. The Purchaser is
able to fend for itself in the transactions contemplated by this Agreement and
has the ability to bear the economic risk of the investment, including complete
loss of the investment. The Purchaser is experienced in evaluating and investing
in companies such as the Company.
4.4 Investment. The Purchaser is acquiring the Shares for investment for
----------
its own account, not as a nominee or agent, and not with a view to, or for
resale in connection with, any distribution thereof, and the Purchaser has no
present intention of selling, granting any participation in, or
-3-
<PAGE>
otherwise distributing the same. The Purchaser understands that the Shares to be
purchased have not been registered under the Securities Act by reason of a
specific exemption from the registration provisions of the Securities Act which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of such Purchaser's representations as expressed herein.
4.5 Restricted Securities: Rule 144. The Purchaser understands that the
-------------------------------
Shares, will be "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
the Shares may be resold without registration under the Securities Act only in
certain limited circumstances. The Purchaser acknowledges that the Shares must
be held indefinitely unless subsequently registered under the Securities Act or
an exemption from such registration is available. The Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain
current public information about the Company, the resale occurring not less
than two years after a party has purchased and paid for the security to be
sold, the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker" (as provided by, Rule 144(f)) and
the number of shares being sold during any three-month period not exceeding
specified limitations.
4.6 No Public Market. The Purchaser understands that no public market now
---------------
exists for any of the securities issued by the Company and that there is no
assurance that a public market will ever exist for the Shares.
4.7 Access to Data. The Purchaser has had an opportunity to discuss the
--------------
Company's business, management and financial affairs with the Company's
management and the opportunity to review the Company's facilities and has
received all information requested from the Company regarding the investment in
the Company.
4.8 Authorization. The Purchaser represents that it has the full right,
-------------
power and authority to enter into and perform the Purchaser's obligations under
this Agreement, the Stockholder Rights Agreement and the Employment Agreements,
and this Agreement, the Stockholder Rights Agreement and the Employment
Agreements when executed and delivered by the Purchaser will constitute valid
and binding obligations of the Purchaser, enforceable in accordance with their
respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors, rules of law governing
specific performance, injunctive relief or other equitable remedies.
4.9 Government Consents. No consent, approval or authorization of or
-------------------
designation, declaration or filing with any state, federal, or foreign
governmental authority on the part of the Purchaser is required in connection
with the valid execution and delivery of this Agreement, the Stockholder Rights
Agreement and the Employment Agreements by the Purchaser, and the consummation
by the Purchaser of the transactions contemplated hereby.
-4-
<PAGE>
4.10 Further Limitations on Disposition. Without in any way limiting the
----------------------------------
representations set forth above, the Purchaser further agrees not to make any
disposition of all or any portion of the Shares except in compliance with
Section 8 of the Stockholder Rights Agreement.
SECTION 5
Conditions to Closing of Purchaser
----------------------------------
The Purchaser's obligation to purchase the Shares at the Closing is, at the
option of the Purchasers, subject to the fulfillment on or prior to the Closing
Date of the following conditions:
5.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 3 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date with the same force
and effect as if they had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.
5.3 Compliance Certificate. The Company shall have delivered to the
----------------------
Purchasers a certificate executed by the President of the Company, dated the
Closing Date and certifying to the fulfillment of the conditions specified in
Sections 5.1, 5.2, 5.4, 5.9, 5.11 and 5.12 of this Agreement.
5.4 Blue Sky. The Company shall have obtained all necessary Blue Sky law
--------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Shares.
5.5 Stockholder Rights Agreement. The Company and each other holder of the
----------------------------
Company's capital stock shall have executed and delivered the Stockholder Rights
Agreement.
5.6 James C. Slaughter Stock Purchase Agreement. James C. Slaughter shall
-------------------------------------------
have executed and delivered to the Purchaser the Stock Purchase Agreement
substantially in the form attached hereto as Exhibit D (the "Slaughter Stock
---------
Purchase Agreement").
5.7 John Kaufman Stock Purchase Agreement. John Kaufman shall have
-------------------------------------
executed and delivered to the Purchaser the Stock Purchase Agreement
substantially in the form attached hereto as Exhibit E (the "Kaufman Stock
---------
Purchase Agreement").
5.8 Employment Agreements. The Company and each of Slaughter and Sklar
---------------------
shall have executed and delivered the Employment Agreement.
-5-
<PAGE>
5.9 Board of Directors. Effective as of the Closing Date, the Company's
------------------
Board of Directors shall include Charles L. Slaughter, Scott Sklar, James C.
Slaughter, Donald J. Steiner, William End, and Wally Bernheimer.
5.10 Conversion of Convertible Notes. Each of Slaughter and Sklar shall
-------------------------------
have exercised his respective right to convert his respective Subordinated
Convertible Note, dated February 7, 1996 ("Convertible Note"), into Common
Stock pursuant to Section 4 of such Convertible Note.
5.11 Amended Articles of Incorporation. The Amended Articles of
---------------------------------
Incorporation substantially in the form of Exhibit F ("Amended Articles") shall
---------
have been filed with the Secretary of State of California.
5.12 Amended Bylaws. The Bylaws substantially in the form of Exhibit G
-------------- ---------
shall have been approved by the Board of Directors of the Company.
SECTION 6
Conditions to Closing of the Company
------------------------------------
The Company's obligation to sell and issue the Company Shares at the
Closing is, at the option of the Company, subject to the fulfillment of the
following conditions:
6.1 Representations. The representations made by the Purchaser in Section
---------------
4 hereof shall be true and correct when made, and shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of said date.
6.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement to be performed by the Purchaser on or prior to the Closing Date shall
have been performed or complied with in all material respects.
6.3 Blue Sky. The Company shall have obtained all necessary Blue Sky law
---------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Shares.
6.4 Stockholder Rights Agreement. The Purchaser shall have executed and
----------------------------
delivered to the Company the Stockholder Rights Agreement.
6.5 Employment Agreements. The Purchaser shall have executed and delivered
---------------------
the Employment Agreement.
6.6 James C. Slaughter Stock Purchase Agreement. The Purchaser shall have
-------------------------------------------
executed and delivered to James C. Slaughter the Slaughter Stock Purchase
Agreement.
-6-
<PAGE>
6.7 John Kaufman Stock Purchase Agreement. The Purchaser shall have
-------------------------------------
executed and delivered to John Kaufman the Kaufman Stock Purchase Agreement.
6.8 Board of Directors. Effective as of the Closing Date, the Company's
------------------
Board of Directors shall include Charles L. Slaughter, Scott Sklar, James C.
Slaughter, Donald J. Steiner, William End, and Wally Bernheimer.
6.9 Conversion of Convertible Notes. The Purchaser shall have exercised
-------------------------------
its right to convert its Convertible Note into Common Stock pursuant to Section
4 of such Convertible Note.
6.10 Amended Articles of Incorporation. The Amended Articles shall have
------------------- -------------
been filed with the Secretary of State of California.
SECTION 7
Affirmative Covenants of the Company
------------------------------------
The Company hereby covenants and agrees as follows:
7.1 Financial Information.
---------------------
(a) As soon as practicable after the end of each fiscal year, and in
any event within sixty (60) days thereafter, the Company will furnish to
Purchaser consolidated balance sheets of the Company and its subsidiaries, if
any, as of the end of such fiscal year and consolidated statements of income and
cash flows for the Company and its subsidiaries, if any, for such year, prepared
in accordance with generally accepted accounting principles with a written
explanation of any changes in the application of such principles and setting
forth in each case in comparative form the figures for the previous fiscal year,
all in reasonable detail. In addition, the Company agrees to cause such annual
financial statements to be audited by independent public accountants engaged by
the Company and to deliver such audited financial statements, together with the
auditor's report thereon, to the Purchaser within ninety (90) days after the
Company's fiscal year end.
(b) As soon as practicable after the end of each calendar month and
fiscal quarter, and in any event within thirty (30) days and forty-five (45)
days, respectively, thereafter, the Company will furnish to Purchaser its
consolidated balance sheets as of the end of such period and its consolidated
statements of income and cash flows for the period then ended and for the
current fiscal year to date, together with comparisons of such statements to the
Company's operating results in the prior year period and to the Company's
operating plan then in effect. Such monthly and quarterly financial statements
shall be prepared in accordance with generally accepted accounting principles
applied on a consistent basis, except as noted and except for normal recurring
year-end adjustments and for the absence of footnotes.
-7-
<PAGE>
(c) As soon as practicable after its adoption by the Board of
Directors, the Company shall furnish to the Purchaser an annual budget. Such
budget shall include, among other things, revenues and profit or loss
projections, cash flow from operations, capital requirements and operating
expense budgets, manpower projections and projected balance sheets for each
month of such year and for the end of such year.
7.2 Inspection. The Company shall permit the Purchaser to visit and
----------
inspect the Company's properties, to examine its books of account and records
and to discuss the Company's affairs, finances and accounts with the Company and
its officers and, in the presence of representatives of the Company, its
accountants, all at such reasonable times as may be reasonably requested by
Purchaser.
7.3 Confidentiality of Information. The Purchaser agrees that any
------------------------------
information obtained by Purchaser pursuant to Sections 7.1 and 7.2 is
proprietary to the Company or confidential and will not be disclosed without the
prior written consent of the Company or used for any purpose other than in
Purchaser's capacity as a shareholder of the Company. The Purchaser further
acknowledges and understands that any information so obtained which may be
considered "inside" non-public information will not be utilized by such
Purchaser in connection with purchases or sales of the Company's securities
except in compliance with applicable state and federal anti-fraud statutes.
7.4 Termination of Covenants. The covenants of the Company in Sections
------------------------
7.1, 7.2 and 7.3 shall terminate and be of no further force or effect at such
time as the Company is required to file reports with the Securities and Exchange
Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended.
7.5 Assignability. The rights granted pursuant to Sections 7.1 and 7.2 may
-------------
not be assigned by the Purchaser except to (a) an entity controlling, controlled
by or under common control with Purchaser or (b) to a purchaser or transferee
from Purchaser which acquires at least 15,000 shares of Common Stock or Series A
Preferred Stock of the Company (appropriately adjusted for any stock split,
reverse stock split, stock dividend or similar recapitalization occurring after
the date hereof), provided that written notice of any such sale or transfer is
given to the Company.
7.6 Sale of Additional Shares of Common Stock. (a) The Company shall, by
-----------------------------------------
written notice to the Purchaser, sell to the Purchaser and the Purchaser shall
purchase up to an additional number of shares of Common Stock ("Additional
Shares") equal to the quotient of (i) an amount determined by the Board of
Directors, in its sole discretion, which amount shall not be less than $1
million and not more than $2 million, divided by (ii) the Fair Market Value (as
----------
defined below), and the Purchaser shall purchase from the Company such
Additional Shares provided that it receives notice in accordance herewith and
subject to the conditions set forth in Section 7.6(c). Such sale and purchase
shall occur not sooner than January 1, 1997 and not later than December 31,
1997. Notice to the Purchaser of its intent to sell the Additional Shares shall
be given at least thirty (30) days prior to the proposed sale. The closing of
the purchase and sale of the Additional Shares ("Additional Shares Closing")
shall be held at such place, time and date as shall be specified in the
Company's notice. At such closing, (i) the Company shall deliver to the
Purchaser (A) a certificate or certificates
-8-
<PAGE>
representing the Additional Shares and (B) a certificate executed by a Co-
President of the Company, dated the date of the Additional Shares Closing,
containing the representations and warranties set forth in Section 3 (with such
adjustments as are appropriate to reflect the fact that such representations and
warranties relate to the Additional Shares Closing rather than the Closing) and
(ii) the Purchaser shall deliver to the Company (A) a check payable to the
Company in the amount of the purchase price for the Additional Shares and (B) a
certificate executed by an officer of the Purchaser, dated the date of the
Additional Shares Closing, containing the representations and warranties set
forth in Section 4 (with such adjustments as are appropriate to reflect the fact
that such representations and warranties relate to the Additional Shares Closing
rather than the Closing).
(b) Fair Market Value. The per share Fair Market Value shall be a
-----------------
value determined by and agreed upon by a Super-Majority (as such term is defined
in the Stockholder Rights Agreement) of the Board of Directors. If a Super-
Majority of the Board of Directors cannot agree upon a value within seven days
after the receipt of the notice pursuant to Section 7.6(a) or 7.7(c), the
Management and the Purchaser shall jointly retain, within thirty days from the
end of such seven day period, an independent broker, dealer or investment banker
who shall be acceptable, in the exercise of its sole discretion, to each of the
Management and the Purchaser (an "Independent Appraiser") for the purpose of
determining the per share fair market value ("Fair Market Value") of the
outstanding shares of capital stock of the Company. The Independent Appraiser
shall determine a per share value based on the sale of the Company in its
entirety or the registration of substantially all of the shares of the Company.
The Independent Appraiser shall (i) consider the valuations of comparable
privately or publicly held companies and (ii) consider the valuation of the
Company in both a private sale scenario and an IPO scenario and shall assign to
each such scenario relative weights based on its sole opinion of the suitability
of an IPO for the Company (including the possibility that the Company is not
suitable for an IPO) and the suitability of a private sale of the Company.
Notwithstanding the foregoing, the Independent Appraiser shall base the Fair
Market Value determination on its determination of the most appropriate
methodology for valuing the Company. Upon its determination of Fair Market
Value, the Independent Appraiser shall prepare and deliver to each of the
Management and the Purchaser a report (the "Appraisal Report") stating its
determination of the Fair Market Value and setting forth in reasonable detail
the method by which the same was determined. As a condition to its selection,
the Independent Appraiser shall submit the Appraisal Report within 30 business
days after its appointment.
Unless within five days after receipt of the Appraisal Report, the
Management or the Purchaser (any such person being hereinafter referred to as
the "Objecting Party" and the non-objecting party being hereinafter referred to
as the "Non-Objecting Party") delivers a written notice to the Company stating
that it objects to the Fair Market Value set forth in such Appraisal Report
(such notice being hereinafter referred to as the "Objection Notice"), the Fair
Market Value set forth therein shall be final and binding on all parties. The
Objection Notice shall set forth in reasonable detail the reasons for the
Objecting Party's objections. If the Objecting Party and the Non-Objecting Party
do not agree on the determination of the Fair Market Value within five days
after receipt of an Objection Notice, the Objecting Party and the Non-Objecting
Party shall select another Independent Appraiser to review the determination of
Fair Market Value and to determine such amount independently in accordance with
the provisions of this Section 7.6(b). Such Independent Appraiser's
determination of
-9-
<PAGE>
Fair Market Value shall be final and binding on all parties. The fees and
expenses of the second Independent Appraiser shall be borne by the Objecting
Party.
For purposes of the Fair Market Value determination for purposes of Section
7.6(a), an Independent Appraiser shall exclude any effects of the purchase of
the Additional Shares by the Purchaser. For all Fair Market Value
determinations, an Independent Appraiser shall assume the total number of
outstanding shares of capital stock of the Company to be the number actually
outstanding plus shares issuable with respect to any outstanding options or
other securities convertible into or exercisable for capital stock of the
Company.
(c) Notwithstanding any provision of Section 7.6(a) to the contrary,
the Purchaser shall not have any obligation to purchase the Additional Shares
if, on the closing date scheduled therefor, the sale and purchase of the
Additional Shares shall have resulted or will result in a violation of, or
conflict with any order, statute, rule or regulation applicable to the Company.
7.7 Future Business Relationship. (a) Subsequent to the Closing, the
----------------------------
Management and the Purchaser will discuss, in good faith, any proposals by the
Purchaser to reach a mutually acceptable arrangement enabling the Purchaser to
acquire 80% of the Company's capital stock on or prior to February 1, 2000.
Notwithstanding the foregoing, each party shall have sole discretion in
determining whether to consummate any proposed arrangement. At no time will the
Purchaser have an obligation to sell any of its voting securities of the Company
to any person unless the Purchaser shall have failed to fulfill its contractual
obligation to purchase the Additional Shares pursuant to Section 7.6(a) above or
the Management's shares of capital stock pursuant to Section 7.7(c) below, in
which case Section 7.8 shall apply.
(b) If the Company and the Purchaser fail to reach an arrangement
enabling the Purchaser to acquire 80% of the Company's capital stock by February
1, 2000, the Board of Directors shall seek alternatives for achieving liquidity
at the highest possible value for the shareholders of the Company ("Liquidity
Process"). At the option of the Board of Directors, such alternatives may
include the engagement of an independent broker, agent or investment banker who
shall be acceptable, in the exercise of its sole discretion, to each of the
Management and the Purchaser (the "Banker") to pursue (i) a private sale of the
Company by merger, consolidation, or sale of all or substantially all of the
assets of the Company, or by any other means to an independent third party or
(ii) an underwritten public offering of capital stock of the Company pursuant to
an effective registration statement under the Securities Act of 1933 for the
account of the Company ("IPO"). Such Banker shall evaluate any such alternatives
against any existing or newly proposed offer from the Purchaser. Such sale or
IPO must be acceptable to each of the Management and the Purchaser. Neither the
Management nor the Purchaser shall be obligated to sell any of its shares of
capital stock of the Company as a result of such Process.
(c) (i) Each of Slaughter, Sklar and Robert James Slaughter may,
by written notice (the "Put Notice") to the Purchaser at least sixty (60) days
prior to the proposed sale, require the Purchaser to purchase any or all of the
capital stock of the Company held by him at a purchase price equal to Fair
Market Value (the "Put Right"), and the Purchaser agrees to purchase from him
-10-
<PAGE>
such shares provided that it receives a Put Notice in accordance herewith. Such
sale and purchase shall occur not sooner than February 1, 2000 and not later
than February 1, 2003 (the "Put Period"), provided, however, that if the
Purchaser fails to purchase such shares in accordance with this Section
7.7(c)(i), the Purchaser's obligation to purchase such shares shall continue
indefinitely beyond February 1, 2003. If each of Slaughter, Sklar and/or Robert
James Slaughter gives a Put Notice to the Purchaser, the closing (a "Put
Closing") of the purchase and sale of such shares shall be held at such place,
time and date as shall be specified in each of Slaughter's, Sklar's and/or
Robert James Slaughter's Put Notice.
(ii) At a Put Closing, if it so elects by written notice to
Slaughter, Sklar and/or Robert James Slaughter, as the case may be, the
Purchaser may pay (A) up to 25% of the purchase price for such shares in the
form of common stock of the Purchaser ("Purchaser Stock"), provided, that (I)
the Purchaser Stock is then listed on a national securities exchange or the
Nasdaq National Market (for purposes of determining the number of shares to be
issued in payment of such portion of the purchase price, the value of Purchaser
Stock shall equal the average of the closing sale price thereon over the 20
trading days immediately preceding the closing of such purchase and sale) and
(II) Slaughter, Sklar, and/or Robert James Slaughter, as the case may be, are
not prevented under any federal securities laws, California Corporate Securities
Law or any other applicable Blue Sky laws from freely offering, selling,
exchanging, transferring or otherwise disposing of any Purchaser Stock and (B)
up to 50% of the purchase price in the form of a full recourse promissory note,
the principal of such shall bear interest at an annual rate equal to the "prime"
rate of interest offered by The First National Bank of Boston as of the date of
such Put Closing plus 2% and be payable one year from the date of such Put
Closing and which shall provide, among other things, that (i) no pre-payment
penalty shall be imposed, (ii) the Purchaser shall be required to use its best
efforts to pre-pay the principal in full as soon as the Purchaser has adequate
resources to do so, and (iii) 50% of such shares shall be pledged as security
for such promissory note. Any portion of the purchase price not paid in the form
of Purchaser Stock or promissory note shall be paid in cash at such Put Closing.
(iii) At a Put Closing, (I) each of Slaughter, Sklar and/or
Robert James Slaughter shall deliver to the Purchaser (A) a certificate or
certificates representing the shares to be sold by him and (B) a certificate,
dated the date of such Put Closing, containing the representations and
warranties set forth in Section 1 of the Kaufman Stock Purchase Agreement and
(II) the Purchaser shall deliver to each of Slaughter, Sklar and/or Robert James
Slaughter, (A) a check payable to him, a promissory note and/or Purchaser Stock
in accordance with Section 7.7.(c)(ii) in an aggregate amount equal to the
purchase price for such shares, and (B) a certificate executed by an officer of
the Purchaser, dated the date of such Put Closing, containing the
representations and warranties set forth in Section 2 of the Kaufman Stock
Purchase Agreement.
(iv) If Slaughter, Sklar and/or Robert James Slaughter elects
to exercise his Put Right as to only a portion of his shares, Slaughter, Sklar,
and/or Robert James Slaughter, as the case may be, may not elect to exercise his
Put Right as to the rest of such shares at any time.
(v) From and after the date Purchaser Stock is listed on a
national securities exchange or the Nasdaq National Market, any person other
than Slaughter, Sklar and/or
-11-
<PAGE>
Robert James Slaughter holding shares of the capital stock the Company
("Minority Holders"), may require the Purchaser to purchase any or all of the
----------------
capital stock of the Company held by such Minority Holder at a purchase price
equal to fair market value as determined by a majority of the Board of
Directors, and the Purchaser agrees to purchase from such Minority Holder such
shares, provided, that such Minority Holder gives notice to the Purchaser of his
intent to sell such shares at least sixty (60) days prior to the proposed sale.
If any Minority Holder gives such notice to the Purchaser, the closing of the
purchase and sale of such shares shall be held at such place, time and date as
shall be specified in such Minority Holder's notice. At such closing, (I) the
Minority Holder shall deliver to the Purchaser (A) a certificate or certificates
representing the shares to be sold by him and (B) a certificate, dated the date
of the closing, containing the representations and warranties set forth in
Section 1 of the Kaufman Stock Purchase Agreement and (II) the Purchaser shall
deliver to such Minority Holder (A) the number of shares of Purchaser Stock
equal to (a) the number of shares specified in such Minority Holder's notice
multiplied by the fair market value divided by (b) the average of the closing
sale price on a national securities exchange or the Nasdaq National Market, as
the case may be, over the 20 trading days immediately preceding the closing of
such purchase and sale, and (B) a certificate executed by an officer of the
Purchaser, dated the date of the closing, containing the representations and
warranties set forth in Section 2 of the Kaufman Stock Purchase Agreement.
7.8 Failure by Purchaser to Purchase Shares. If the Purchaser fails to
---------------------------------------
fulfill its contractual obligation to purchase any or all of the Additional
Shares pursuant to Section 7.6(a) above or any or all of the shares of capital
stock pursuant to Section 7.7(c) above, (i) the Management, if it so elects by
written notice to the Purchaser, may pursue (A) a private sale of the Company by
merger, consolidation, or sale of all or substantially all of the assets of the
Company, or by any other means to a third party or (B) an IPO and the Purchaser
shall vote all of its shares of capital stock in the Company to approve such a
transaction and shall take any action required to consummate such a transaction
on terms and conditions to be determined solely by the Management and the third
party or underwriter, as the case may be, including the sale of all of the
shares of capital stock of the Company held by the Purchaser and (ii) the
Purchaser shall no longer be entitled to board representation and rights related
thereto pursuant to Section 6.3 of the Stockholder Rights Agreement. The
foregoing remedy shall be in addition to and not in lieu of any and all legal
and equitable remedies of Management and the Company for Purchaser's failure to
fulfill its contractual obligations set forth in Sections 7.6(a) and 7.7(c).
7.9 Use of Services of Banker and/or Independent Appraiser. None of the
------------------------------------------------------
Company, the Management nor the Purchaser shall engage or receive any services
from a Banker or an Independent Appraiser for a period of five years from the
date of conclusion of the Liquidity Process, in the case of Banker, and from the
date of the Appraisal Report, in the case of an Independent Appraiser; provided,
that such Banker or Independent Appraiser may again be selected as a Banker or
Independent Appraiser pursuant to the provisions of this Agreement.
7.10 Cinmar Agreement. The Company shall execute and deliver a Distribution
----------------
Agreement with Cinmar, Inc. within ninety (90) days of the date hereof.
-12-
<PAGE>
7.11 Purchaser Obligations under Employment Agreements. The Purchaser
-------------------------------------------------
acknowledges and agrees to fulfill its obligations under Section 10(a)(i) and
10(d)(ii) of each of the Employment Agreements.
SECTION 8
Miscellaneous
-------------
8.1 Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California as applied to contracts made and to be fully
performed entirely within that state between residents of that state. All
disputes arising out of this Agreement shall be subject to the exclusive
jurisdiction and venue of the California state courts of Santa Clara County,
California, (or, if there is exclusive federal jurisdiction, the United States
District Court for the Northern District of California) and the parties consent
to the personal and exclusive jurisdiction and venue of these courts.
8.2 Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby.
8.3 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the parties hereto.
8.4 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the rights of the Purchasers to purchase the Shares and
the Additional Shares shall not be assignable without the consent of the
Company.
8.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to the Purchaser, at the address set forth on the signature
page hereto and with a copy to Hale and Dorr, 60 State Street, Boston,
Massachusetts 02109, Attention: Patrick J. Rondeau, Esq., or at such other
address as shall have furnished to the Company upon not less than 10 days notice
in writing, or (b) if to the Company, at its address as set forth on the cover
page of this Agreement and addressed to the attention of the President and with
a copy to Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304, Attention: John V. Roos, Esq. or at such other address as the
Company shall have furnished to the Purchasers upon not less than 10 days notice
in writing.
-13-
<PAGE>
8.6 Delays or Omissions. No delay or omission to exercise any right, power
-------------------
or remedy accruing to any party, upon any breach or default of any other party
under this Agreement, shall impair any such right, power or remedy of such party
nor shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
8.7 Expenses. Each party will pay its own costs and expenses in connection
--------
with the transactions contemplated hereby; provided, that the Company agrees to
reimburse the Purchaser following the Closing for the reasonable fees and
expenses of Purchaser's counsel as well as Purchaser's reasonable out-of-pocket
expenses incurred in performing its due diligence investigation, not to exceed
$10,000 in aggregate.
8.8 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
8.9 Third Party Beneficiaries. The Minority Holders shall be considered
-------------------------
third party beneficiaries under this Agreement.
8.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
-14-
<PAGE>
8.10 Specific Performance. The parties hereto agree that irreparable damage
-------------------
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof; in addition to any other remedy at law
or in equity.
"COMPANY" TRAVELSMITH OUTFITTERS, INC.
a California corporation
/s/ Charles L. Slaughter
------------------------------------------
By: Charles L. Slaughter
Title: Co-President
"PURCHASER" THE INTERNATIONAL CORNERSTONE GROUP
__________________________________________
By:
Title:
Address: 600 Atlantic Avenue, Suite 2800
Boston,MA 02210
"MANAGEMENT"
/s/ Charles L. Slaughter
------------------------------------------
Charles L. Slaughter
/s/ Scott Sklar
-------------------------------------------
Scott Sklar
-15-
<PAGE>
8.10 Specific Performance. The parties hereto agree that irreparable damage
--------------------
would occur in the event any provision of this Agreement was not performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof; in addition to any other remedy at law
or in equity.
"COMPANY" TRAVELSMITH OUTFITTERS, INC.
a California corporation
__________________________________________
By: Charles L. Slaughter
Title: Co-President
"PURCHASER" THE INTERNATIONAL CORNERSTONE GROUP
/s/ Donald J. Steiner
------------------------------------------
By:
Title:
Address: 600 Atlantic Avenue, Suite 2800
Boston, MA 02210
"MANAGEMENT"
__________________________________________
Charles L. Slaughter
__________________________________________
Scott Sklar
-15-
<PAGE>
Exhibit 10.18
TRAVELSMITH OUTFITTERS, INC.
2935 Kerner Boulevard
Suite B
San Rafael, CA 94901
__________________
STOCKHOLDER RIGHTS AGREEMENT
July 17, 1996
__________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 Definitions................................................................ 1
SECTION 2 Preemptive Rights ........................................................ 2
2.1 Preemptive Rights ........................................................ 2
SECTION 3 Transfer Restrictions and Right of First Refusal.......................... 4
3.1 Transfer by Cornerstone .................................................. 4
3.2 Cornerstone's and the Company's Right of First Refusal ................... 5
3.3 Company's Right of First Refusal ......................................... 6
3.4 Permitted Sales of Refused Securities .................................... 7
3.5 Intra-family transfers ................................................... 7
3.6 Transfers from Management to Cornerstone ................................. 7
SECTION 4 Co-Sale .................................................................. 7
4.1 Right to Participate ..................................................... 7
4.2 Qualified Participation .................................................. 8
4.3 Continuing Rights ........................................................ 8
4.4 Intra-Family Transfers ................................................... 8
SECTION 5 Registration Rights ...................................................... 8
5.1 Requested Registration ................................................... 8
5.2 Company Registration ..................................................... 10
5.3 Registration on Form S-3 ................................................. 11
5.4 Limitations on Subsequent Registration Rights ............................ 12
5.5 Expenses of Registration ................................................. 12
5.6 Registration Procedures .................................................. 12
5.7 Indemnification .......................................................... 13
5.8 Information by Holder .................................................... 14
5.9 Rule 144 Reporting ....................................................... 15
5.10 Transfer of Registration Rights .......................................... 15
5.11 Termination .............................................................. 15
5.12 Lockup Agreement ......................................................... 15
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 6 Voting Rights ...................................................... 16
6.1 General Voting Rights .............................................. 16
6.2 Voting Rights regarding Management ................................. 17
6.3 Board of Directors ................................................. 17
6.4 Board Meetings ..................................................... 18
SECTION 7 Fair Market Value Determination .................................... 18
7.1 Board Determination ................................................ 18
7.2 By Independent Appraiser ........................................... 18
7.3 Prohibition on Future Use of Independent Appraiser ................. 19
SECTION 8 Compliance with Securities Laws .................................... 19
8.1 Compliance with Securities Laws .................................... 19
8.2 Legends ............................................................ 19
SECTION 9 Miscellaneous ...................................................... 20
9.1 Governing Law ...................................................... 20
9.2 Entire Agreement; Amendment and Termination ........................ 20
9.3 Assignment ......................................................... 21
9.4 Notices, etc ....................................................... 21
9.5 Delays or Ommissions ............................................... 21
9.6 Severability ....................................................... 22
9.7 Counterparts ....................................................... 22
9.8 Specific Performance ............................................... 22
</TABLE>
-ii-
<PAGE>
TRAVELSMITH OUTFITTERS, INC.
STOCKHOLDER RIGHTS AGREEMENT
This Agreement is made as of July 17, 1996 among TravelSmith Outfitters,
Inc., a California corporation (the "Company"), The International Cornerstone
Group, Inc., a Delaware corporation ("Cornerstone"), and Charles L. Slaughter
and Scott Skiar (the "Management") and Robert James Slaughter (together with
Management and Cornerstone, collectively the "Shareholders" and individually a
"Shareholder").
RECITALS
WHEREAS, the Company and the Shareholders are parties to a certain
Stockholder Rights Agreement dated as of July 23, 1993 (the "Prior Agreement");
and
WHEREAS, the Prior Agreement granted the Shareholders certain rights with
respect to their share ownership; and
WHEREAS, the Shareholders constitute all of the "Holders" under the Prior
Agreement; and
WHEREAS, the Prior Agreement may be amended as set forth in Section 8.2
thereof; and
WHEREAS, the Shareholders wish to terminate the Prior Agreement and restate
their rights herein;
NOW, THEREFORE, in consideration of the foregoing, the parties agree as
follows:
SECTION 1
Definitions
-----------
As used in this Agreement, the following terms shall have the following
respective meanings:
1.1 "Commission" shall mean the Securities and Exchange Commission of the
----------
United States or any other U.S. federal agency at the time administering the
Securities Act.
1.2 "Common Stock" shall mean shares of the Company's Common Stock.
------------
1.3 "Holder" shall mean each of the Shareholders (and their transferees as
------
permitted by Section 5.10) holding Registrable Securities or securities
convertible into Registrable Securities.
<PAGE>
1.4 "Other Holders" shall mean holders of Company securities, other than
-------------
the Holders, proposing to distribute their securities pursuant to a registration
under Section 5 of this Agreement.
1.5 "Preferred" shall mean shares of the Company's Series A Preferred
---------
Stock.
1.6 "Registrable Securities" means Common Stock, Common Stock issued or
----------------------
issuable on conversion of the Preferred and any shares of Common Stock issued or
issuable in respect of such Common Stock upon any stock split, stock dividend,
recapitalization, or similar event. Shares of Common Stock or other securities
shall only be treated as Registrable Securities if they have not been (A) sold
to or through a broker or dealer or underwriter in a public distribution or a
public securities transaction, or (B) sold or, in the opinion of counsel to the
Company, are available for sale in a single transaction exempt from the
registration and prospectus delivery requirements of the Securities Act so that
all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale.
1.7 The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
1.8 "Registration Expenses" shall mean all expenses, except as otherwise
---------------------
stated below, incurred by the Company in complying with Sections 5.1, 5.2, and
5.3 hereof, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company (but not fees and disbursements of special counsel for Holders,
if any), blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
1.9 "Securities" shall mean the capital stock of the Company.
----------
1.10 "Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar United States federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
1.11 "Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders.
SECTION 2
Preemptive Rights On New Issuances
----------------------------------
2.1 Preemptive Rights. Until Cornerstone beneficially owns 80% of the
-----------------
outstanding capital stock of the Company (including capital stock issuable upon
conversion of any securities
-2-
<PAGE>
convertible into Common Stock of the Company) ("80% Ownership"), the Company
hereby grants to Cornerstone the right of first refusal to purchase all or any
portion of New Securities (as defined in Section 2.1(a)) that the Company may,
from time to time, propose to sell and issue at a price at or above Fair Market
Value (as determined in Section 7). After Cornerstone achieves 80% Ownership or
at any time the Company proposes to sell and issue New Securities at a price
below Fair Market Value, the Company hereby grants to each Shareholder
(including Cornerstone) the right of first refusal to purchase such
Shareholder's pro rata portion of New Securities that the Company may, from time
to time, propose to sell and issue. Such Shareholder's pro rata portion, for
purposes of this right of first refusal, is the ratio of the number of shares of
capital stock held by such Shareholder (including capital stock issuable upon
conversion of any securities convertible into capital stock of the Company held
by such Shareholder) bears to the total number of shares of capital stock
outstanding at the time of issuance of such New Securities (including capital
stock issuable upon conversion of all outstanding securities convertible into
capital stock). This right of first refusal shall be subject to the following
provisions:
(a) "New Securities" shall mean any capital stock of the Company,
whether now authorized or not, and any rights, options, or warrants to purchase
said capital stock, and securities of any type whatsoever that are, or may
become, convertible into capital stock; provided, however, that "New Securities"
does not include (i) securities offered to the public pursuant to a registration
statement filed under the Securities Act; (ii) securities issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of
substantially all of the assets, or other reorganization; (iii) shares of the
Company's Common Stock issued to Cornerstone pursuant to Section 7.6 of the
Common Stock Purchase Agreement, dated as of June 30, 1996, among the Company
and the Shareholders (the "Purchase Agreement"); (iv) shares of the Company's
capital stock (or related options) issued to employees, officers, directors,
consultants, or other persons performing services for the Company (including,
but not by way of limitation, distributors and sales representatives) pursuant
to any stock offering, plan, or arrangement approved by the Board of Directors
of the Company; (v) shares of the Company's capital stock (or related warrants)
granted to financial institutions in connection with the extension of credit to
the Company or in connection with the lease of equipment; or (vi) shares of the
Company's capital stock issued in connection with any stock split, stock
dividend, or recapitalization by the Company.
(b) In the event that the Company proposes to issue New Securities, it
shall give Cornerstone or each Shareholder, as the case may be, written notice
delivered or mailed as provided in Section 9.4 of its intention, which notice
shall describe the type of New Securities, the price, and the general terms upon
which the Company proposes to issue the same. Cornerstone or each Shareholder,
as the case may be, shall have fifteen (15) days from the date of mailing of any
such notice to agree to purchase all or any portion, in the case of Cornerstone,
or its pro rata share, in the case of each Shareholder, of such New Securities
for the price and upon the general terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased.
-3-
<PAGE>
(c) In the event that a Shareholder (including Cornerstone) fails to
exercise in full the right of first refusal within said fifteen (15) day period,
the Company shall have one hundred twenty (120) days thereafter to sell (or
enter into an agreement pursuant to which the sale of New Securities covered
thereby shall be closed, if at all, within one hundred twenty (120) days from
the date of said agreement) the New Securities respecting which the
Shareholder's rights were not exercised, at a price and upon general terms no
more favorable to the purchasers thereof than specified in the Company's notice.
In the event the Company has not sold the New Securities within said one hundred
twenty (120) day period (or sold and issued New Securities in accordance with
the foregoing within one hundred twenty (120) days from the date of said
agreement), the Company shall not thereafter issue or sell any New Securities,
without first offering such securities to the Shareholders in the manner
provided above.
(d) Any Shareholder's failure to exercise this right of first refusal
on any issuance of New Securities shall not adversely affect such Shareholder's
right of first refusal to purchase subsequent issuances of New Securities.
SECTION 3
Transfer Restrictions and Right of First Refusal
------------------------------------------------
Before any Securities registered in the name of any Holder may be sold or
transferred to a third party (a "Proposed Transferee"), including a transfer by
operation of law or other involuntary transfer, such Securities shall first be
offered to (i) in the case of the sale of Securities held by Cornerstone, the
Management and then to the Company, and (ii) in the case of the sale of
Securities held by any Holder other than Cornerstone ("Non-Cornerstone Holder"),
Cornerstone and then to the Company, or first to the Company, as provided in
Section 3 below:
3.1 Transfer by Cornerstone.
-----------------------
(a) Management's Right of First Refusal. Cornerstone's Securities
-----------------------------------
shall first be offered to the Management. Cornerstone shall deliver or mail by
certified mail a written notice (the "Notice") to the Company and the
Shareholders stating (i) its bona fide intention to sell or transfer Securities,
(ii) the number of shares of such Securities to be sold or transferred (which
amount of Securities shall be referred to herein as "Offered Securities"), and
(iii) the price for which Cornerstone proposes to sell or transfer such
Securities.
(b) The Management shall have the right exercisable at any time within
thirty (30) days of receipt of the Notice, to purchase all or any portion of the
Offered Securities, at the price per share specified in the Notice. Such right
shall be exercised by written notice and delivered or mailed as provided in
Section 9.4, which notice shall specify the time, place and date for settlement
of such purchase and the number of shares of Offered Securities which the
Management desires to purchase,
-4-
<PAGE>
and any such purchase shall be consummated within thirty (30) days of such
notice from the Management.
(c) If the Management elects not to exercise its right pursuant to
Section 3.1 with respect to all of the Offered Securities, or if such right is
not exercised within thirty (30) days of receipt of the Notice by the
Management, Cornerstone shall notify the Company of such fact within five (5)
days after the expiration of such thirty (30) day period.
(d) The Company will have an option, for ten (10) days after receiving
the notice specified in Section 3.1(c), to give written notice to Cornerstone
and the Management of its election to purchase all, but not less than all, of
the Offered Securities not purchased by the Management pursuant to Section 3.1
at the purchase price specified in the Notice.
(e) If exercised by the Company pursuant hereto, the right to purchase
the Offered Securities shall be exercised by written notice, signed by an
officer of the Company, and delivered or mailed to Cornerstone as provided in
Section 9.4. The exercise of the option shall specify the time, place and date
for settlement of such purchase, which shall be consummated at a closing held at
the Company or such other place agreed upon by the Company and Cornerstone
within fifteen (15) days after the expiration of the notice period specified in
Section 3.1(d).
(f) If the Company elects not to exercise its right pursuant to
Section 3.1(d), or if such right is not exercised within the ten (10) day period
set forth in Section 3.1(d), Cornerstone shall notify the Shareholders of such
fact within five (5) days after the expiration of such ten (10) day period.
(g) The Management's right of first refusal set forth in this Section
3.1 is nonassignable except to another Shareholder.
3.2 Cornerstone's and the Company's Right of First Refusal
------------------------------------------------------
(a) Prior to Cornerstone's 80% Ownership, a Non-Cornerstone Holder's
Securities shall first be offered to Cornerstone. The Non-Cornerstone Holder
shall deliver or mail by certified mail a written notice (the "Notice") to the
Company and the Shareholders (including Cornerstone) stating (i) its bona fide
intention to sell or transfer Securities, (ii) the number of shares of such
Securities to be sold or transferred (which amount of Securities shall be
referred to herein as "Offered Securities"), and (iii) the price for which such
Non-Cornerstone Holder proposes to sell or transfer such Securities.
(b) Cornerstone shall have the right exercisable at any time within
thirty (30) days of receipt of the Notice, to purchase all or any portion of the
Offered Securities, at the price per share specified in the Notice. Such right
shall be exercised by written notice signed by an officer of Cornerstone and
delivered or mailed as provided in Section 9.4, which notice shall specify the
time, place and date for settlement of such purchase and the number of shares of
Offered Securities which
-5-
<PAGE>
Cornerstone desires to purchase, and any such purchase shall be consummated
within thirty (30) days of such notice from Cornerstone.
(c) If Cornerstone elects not to exercise its right pursuant to
Section 3.2 with respect to all of the Offered Securities, or if such right is
not exercised within thirty (30) days of receipt of the Notice by Cornerstone,
the selling Holder shall notify the Company of such fact within five (5) days
after the expiration of such thirty (30) day period.
(d) The Company will have an option, for ten (10) days after receiving
the notice specified in Section 3.2(c), to give written notice to Cornerstone
and the selling Holder of its election to purchase all, but not less than all,
of the Offered Securities not purchased by Cornerstone pursuant to Section 3.2
at the purchase price specified in the Notice.
(e) If exercised by the Company pursuant hereto, the right to purchase
the Offered Securities shall be exercised by written notice, signed by an
officer of the Company, and delivered or mailed to the selling Holder as
provided in Section 9.4. The exercise of the option shall specify the time,
place and date for settlement of such purchase, which shall be consummated at a
closing held at the Company or such other place agreed upon by the Company and
the selling Holder within fifteen (15) days after the expiration of the notice
period specified in Section 3.2(d).
(f) If the Company elects not to exercise its right pursuant to
Section 3.2(d), or if such right is not exercised within the ten (10) day
period set forth in Section 3.2(d), the selling Holder shall notify the
Shareholders of such fact within five (5) days after the expiration of such ten
(10) day period.
(g) Cornerstone's right of first refusal set forth in this Section
3.2 is nonassignable except to another Shareholder.
3.3 Company's Right of First Refusal.
--------------------------------
(a) After Cornerstone reaches 80% Ownership, the Non-Cornerstone
Holder's Securities shall first be offered to the Company. The Holder shall
deliver or mail by certified mail a Notice to the Company and the Shareholders
(including Cornerstone).
(b) The Company shall have the right exercisable at any time within
thirty (30) days of receipt of the Notice, to purchase all, but not less than
all, of the Offered Securities, at the price per share specified in the Notice.
Such right shall be exercised by written notice signed by an officer of the
Company and delivered or mailed as provided in Section 9.4, which notice shall
specify the time, place and date for settlement of such purchase and the number
of shares of Offered Securities which the Company desires to purchase, and any
such purchase shall be consummated within thirty (30) days of such notice from
the Company.
-6-
<PAGE>
(c) If the Company elects not to exercise its right pursuant to
Section 3.3 with respect to all of the Offered Securities, or if such right is
not exercised within thirty (30) days of receipt of the Notice by the Company,
the selling Holder shall notify the Shareholders of such fact within five (5)
days after the expiration of such thirty (30) day period.
3.4 Permitted Sales of Refused Securities. Subject to Section 4 hereof and
-------------------------------------
any other restrictions on transfer, and if the Management, Cornerstone and/or
the Company has not exercised its rights of first refusal as described herein,
the selling Holder may then sell such shares to the Proposed Transferee at the
price specified in the Notice or at a higher price, provided that such sale or
transfer is consummated within one hundred twenty (120) days of the date of said
Notice, and provided further that any such sale is in accordance with all the
terms and conditions hereof If the selling Holder fails to consummate the sale
or transfer within such one hundred twenty (120) day period, the option of the
Management, Cornerstone and/or the Company provided hereby shall be deemed to be
revived with respect to such shares and no sale or transfer of Securities shall
be effected without first offering the shares in accordance herewith.
3.5 Intra-family transfers. The provisions of Sections 3.1, 3.2, 3.3 and
----------------------
4.1 shall not apply to a transfer of any shares of Securities by a Holder,
either during his lifetime, or on death by will or intestacy, to his ancestors,
descendants, or spouse, or any custodian or trustee for the account of a Holder
or a Holder's ancestors, descendants or spouse; provided, in each such case any
such transferee shall receive and hold such shares subject to the provisions of
this Agreement and there shall be no further transfer of such shares unless in
accordance herewith.
3.6 Transfers from Management to Cornerstone. The provisions of Sections
----------------------------------------
3.1, 3.2, 3.3 and 4.1 shall not apply to a transfer of any shares of Securities
by Management or Robert James Slaughter to Cornerstone pursuant to Section
7.7(c) of the Purchase Agreement.
SECTION 4
Co-Sale
-------
4.1 Right to Participate. In the event and to the extent the Rights of
--------------------
First Refusal described in Section 3 are not exercised in their entirety by
Cornerstone and/or the Company, each Shareholder shall have the right to
participate, to the extent of their Co-Sale pro rata Portion defined in this
--- ----
Section 4.1, in the sale to the Proposed Transferee, subject to the terms and
conditions set forth in this Section 4. A Shareholder shall exercise its right
by delivering to the Company and selling Holders, prior to the expiration of a
ten (10) day period from the date of the notice set forth in Section 3.1(f),
Section 3.2(f) or Section 3.3(c), (i) written notice of its intention to
participate in such Co-Sale, specifying the number of shares such Shareholder
desires to sell to the Proposed Transferee, and (ii) one or more certificates
representing the number of shares of Securities which such Shareholders elects
to sell hereunder, duly endorsed for transfer to the Proposed Transferee. The
Co-Sale pro rata Portion shall equal the amount of Offered Securities, as
--- ----
converted into Common
-7-
<PAGE>
Stock, multiplied by a fraction, the numerator of which shall equal the number
of shares of capital stock owned by such Shareholder (including capital stock
issuable upon conversion of any securities convertible into capital stock of the
Company ("Conversion Shares")), and the denominator of which shall equal the
aggregate of all capital stock and Conversion Shares held by all Shareholders as
a group.
4.2 Qualified Participation. If the Proposed Transferee desires to
-----------------------
purchase a number of shares of Securities other than the amount originally
offered, the amount that the Proposed Transferee desires to purchase shall be
substituted for Offered Securities for the purpose of determining each
Shareholder's Co-Sale pro rata Portion. In the event of Shareholder
--- ----
participation in the Co-Sale described herein, the amount of Offered Securities
which the selling Holder is entitled to sell on its own behalf pursuant to
Section 4 hereof shall be reduced accordingly, and the selling Holder shall
include such other Shareholder's shares in the sale at the closing thereof.
4.3 Continuing Rights. The exercise or non-exercise of the right to
-----------------
participate hereunder shall not adversely affect a Shareholder's right to
participate in subsequent sales by the same or any other Holder pursuant to this
Section 4.
4.4 Intra-Family Transfers. The provisions of this Section 4 shall not
----------------------
apply with respect to transfers described in Section 3.5.
SECTION 5
Registration Rights
-------------------
5.1 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
any Holders a written request that the Company effect any registration,
qualification or compliance with respect to not less than twenty percent (20%)
of the Registrable Securities, the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the
Securities Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written
-8-
<PAGE>
request received by the Company within twenty (20) days after receipt of such
written notice from the Company;
Provided, however, that the Company shall not be obligated to take
any action to effect any such registration, qualification or compliance
pursuant to this Section 5.1:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(B) Prior to the earlier to occur of (i) six (6) months after the
effective date of the Company's first registered public offering of its stock
or (ii) February 1, 2000;
(C) During the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on the date six
(6) months immediately following the effective date of, any registration
statement pertaining to securities of the Company sold by the Company (other
than a registration of securities in a Rule 145 transaction or with respect to
an employee benefit plan), provided that the Company is actively employing in
good faith all reasonable efforts to cause such registration statement to
become effective;
(D) After the Company has effected two registrations pursuant to
this paragraph 5.1, and such registrations have been declared or ordered
effective, provided that all Registrable Securities requested to be included in
each such registration were in fact included in the registration;
(E) If the Company shall furnish to such Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors it would be seriously detrimental to the Company or
its shareholders for a registration statement to be filed in the near future,
then the Company's obligation to use its best efforts to register, qualify or
comply under this Section 5 shall be deferred for a period not to exceed ninety
(90) days from the date of receipt of written request from the Initiating
Holders, provided, however, that the Company shall not utilize this right more
than once in any twelve (12) month period; or
(F) If the Company would be required to obtain audited financial
statements in order to conduct any such registration, qualification or
compliance, then the Company may postpone such registration, qualification or
compliance until it may use annual, rather than interim, audited financial
statements.
Subject to the foregoing clauses (A) through (F), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable, after receipt of the request or
requests of the Initiating Holders.
-9-
<PAGE>
(b) Underwriting. In the event that a registration pursuant to Section
------------
5.1 is for a registered public offering involving an underwriting, the Company
shall so advise the Holders as part of the notice given pursuant to Section
5.1(a)(i). In such event, the right of any Holder to registration pursuant to
Section 5.1 shall be conditioned upon such Holder's participation in the
underwriting arrangements required by this Section 5.1, and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent requested
shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting and the Other Holders) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company, but subject to the reasonable approval of
a majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 5.1, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Company shall so advise all
Holders and Other Holders, and the number of shares that may be included in the
registration and underwriting shall be allocated first among all Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by such Holders at the time of filing the registration statement
and second among the Other Holders in proportion to the number of shares
proposed to be included in such registration by such Other Holders. No
Registrable Securities or other securities excluded from the underwriting by
reason of the underwriter's marketing limitation shall be included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriters may round the number of shares
allocated to any holder to the nearest one hundred (100) shares.
If any Holder of Registrable Securities or Other Holder disapproves of
the terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, the managing underwriter and the Initiating
Holders. The Registrable Securities and/or other securities so withdrawn shall
also be withdrawn from registration.
5.2 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within twenty (20) days after receipt of such written notice from
the Company or by any Holder.
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<PAGE>
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 5.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 5.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall, together with the
Company and the Other Holders, enter into an underwriting agreement in customary
form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 5.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities and other securities to be included in such registration.
The Company shall so advise all Holders and Other Holders and the number of
shares that may be included in the registration and underwriting by all Holders
and Other Holders shall be allocated among them, as nearly as practicable,
first, to the Company (or, if applicable, to the holders for whose account the
- -----
Company is registering the securities), second, among the Holders of Registrable
------
Securities in proportion to the respective amounts of Registrable Securities
held by such Holders at the time of filing of the registration statement, and,
third, among the Other Holders in proportion to the number of shares proposed
- -----
to be included in such registration by such Other Holders. To facilitate the
allocation of shares in accordance with the above provisions, the Company may
round the number of shares allocated to any Holder or Other Holder to the
nearest 100 shares. If any Holder or Other Holder disapproves of the terms of
any such underwriting, he may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 5.2
prior to the effectiveness of such registration whether or not any Holder has
elected to include Registrable Securities in such registration.
5.3 Registration on Form 5-3.
------------------------
(a) Request for Registration. If any Holder or Holders request that
------------------------
the Company file a registration statement on Form S-3 (or any successor form to
Form S-3) for a public offering of shares of the Registrable Securities the
reasonably anticipated aggregate price to the public of which would exceed
$1,500,000, and the Company is a registrant entitled to use Form S-3 to register
the Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as the Holder or Holders may reasonably request. The substantive
provisions of Section 5.1(b) shall be applicable to each registration initiated
under this Section 5.3.
(b) Limitations. Notwithstanding the foregoing, the Company shall not
-----------
be obligated to take any action pursuant to this Section 5.3: (i) in any
particular jurisdiction in which the
-11-
<PAGE>
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act; (ii) if the Company, within ten (10) days of the receipt of
the request of the initiating Holders, gives notice of its bona fide intention
to effect the filing of a registration statement with the Commission within
ninety (90) days of receipt of such request (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities); (iii) during the period starting with
the date sixty (60) days prior to the Company's estimated date of filing of, and
ending on the date six (6) months immediately following, the effective date of
any registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or (iv) if the Company shall furnish to such Holder a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors it would be seriously detrimental to the Company or
its shareholders for registration statements to be filed in the near future,
then the Company's obligation to use its best efforts to file a registration
statement shall be deferred for a period not to exceed ninety (90) days from the
receipt of the request to file such registration by such Holder, provided,
however, that the Company shall not utilize this right more than once in any
twelve (12) month period.
5.4 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date hereof, the Company will not, without the prior written consent of not
less than a Super-Majority (as such term is defined below) of the Board of
Directors, enter into any agreement with any holder or prospective holder of
any securities of the Company which allows such holder or prospective holder of
any securities of the Company to include such securities in any registration
filed under Sections 5.1, 5.2 or 5.3 hereof, unless, under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not diminish the amount of Registrable Securities which are included. However,
the Company may by agreement grant such holder or prospective holder a
registration right analogous to that set forth in Section 5.1 provided that (i)
such holder or prospective holder may not demand a registration analogous to
that set forth in Section 5.1 at any time earlier than the Holders first have
such right, and (ii) that the Registrable Securities may be included in any
such registration demanded by such holders to the extent such inclusion will
not diminish the amount of securities of such holders which are included.
5.5 Expenses of Registration.
------------------------
(a) Registration Expenses. The Company shall bear all Registration
---------------------
Expenses incurred in connection with all registrations pursuant to Section 5.1,
Section 5.2 and Section 5.3.
(b) Selling Expenses. Unless otherwise stated, all Selling Expenses
----------------
relating to securities registered on behalf of the Holders shall be borne by
the Holders pro rata on the basis of the number of shares so registered.
-12-
<PAGE>
5.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will:
(a) keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof;
(b) Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for at least one hundred twenty (120)
days or until the distribution described in the Registration Statement has been
completed; and
(c) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
5.7 Indemnification.
---------------
(a) By Company. The Company will indemnify and each Holder, each of
----------
its officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of the Securities Act or any
rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein. If the Holders are represented by
counsel other than counsel for the Company, the Company will not be obligated
under this Section 5.7(a) to reimburse legal fees and expenses of more than one
separate counsel for all Holders.
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<PAGE>
(b) By Holders. Each Holder will, if Registrable Securities held by
----------
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
liability of each Holder under this subsection (b) shall be limited in an amount
equal to the initial public offering price of the shares sold by such Holder,
unless such liability arises out of or is based on willful conduct by such
Holder.
(c) Procedures. Each party entitled to indemnification under this
----------
Section 5.7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
5.8 Information by Holder. The Holder or Holders of Registrable Securities
---------------------
included in any registration shall furnish to the Company such information
regarding such Holder or Holders, the Registrable Securities held by them and
the distribution proposed by them as the Company may
-14-
<PAGE>
request in writing and only as shall be necessary to enable the Company to
comply with the provisions hereof in connection with any registration,
qualification or compliance referred to in this Agreement.
5.9 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration,
after such time as a public market exists for the Common Stock of the Company,
the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended.
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of 1934, as amended (at any time
after it has become subject to such reporting requirements);
(c) Furnish to any Holder forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Securities Exchange Act of 1934 (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the possession of
or reasonably obtainable by the Company as such Holder may reasonably request
in availing itself of any rule or regulation of the Commission allowing such
Holder to sell any such securities without registration.
5.10 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Holders under Sections 5.1, 5.2 and 5.3 may be
assigned in connection with any transfer or assignment by a Holder of
Registrable Securities provided that: (i) such transfer may otherwise be
effected in accordance with applicable securities laws, (ii) such transfer is
effected in compliance with the restrictions on transfer contained in this
Agreement and in any other agreement between the Company and the Holder, and
(iii) such assignee or transferee is a general partner, limited partner,
subsidiary, ancestor, descendent, or spouse of the Holder or a custodian or
trustee for the account of an ancestor, descendent, or spouse of the Holder and
acquires at least 1,000 shares of Preferred and/or Common Stock (appropriately
adjusted for stock splits, stock dividends, recapitalizations and similar
events). No transfer or assignment will divest Holder or any subsequent owner
of such rights and powers unless all Registrable Shares are transferred or
assigned.
5.11 Termination. The rights granted pursuant to this Section 5 shall
-----------
terminate as to any Holder at the later of (i) two years after the Company's
initial public offering or (ii) at such time as such Holder may sell under Rule
144, or a successor rule, in a three month period all Registrable Securities
then held by such Holder.
-15-
<PAGE>
5.12 Lockup Agreement. Each Holder agrees that, if, in connection with the
----------------
Company's initial public offering of the Company's securities, the Company or
the underwriters managing the offering so request, the Holder shall not sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Registrable Securities (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days) from the effective date of such registration as may
be requested by the Company or the underwriters; provided that each officer and
director of the Company who owns stock of the Company also agrees to such
restrictions. This Section 5.12 shall be binding on all transferees or assignees
of Registrable Securities, whether or not such persons are entitled to
registration rights pursuant to Section 5.10.
SECTION 6
Voting Rights
-------------
6.1 General Voting Rights. The Company shall not, without the consent of
---------------------
not less than two-thirds of the members of the Board of Directors then in
office, provided, that at no time shall the Board of Directors act without the
consent of at least one Cornerstone Director and one Management Director as long
as Management or Cornerstone, as the case may be, is entitled to nominate
Cornerstone Directors or Management Directors, as the case may be, pursuant to
Section 6.3(a) (a "Super-Majority"):
(a) merge into or consolidate with any other corporation (other than a
wholly owned subsidiary corporation); or
(b) sell all or substantially all of the assets of the Company (except
a sale to an affiliate of the Company); or
(c) issue or sell any New Securities, as defined in Section 2.1(a)
hereof; or
(d) amend the Articles of Incorporation or Bylaws of the Company in a
manner that affects the rights of a party under this Agreement, the Purchase
Agreement or the Employment Agreement, dated July ____, 1996, between the
Company and each of the members of the Management without the consent of such
party; or
(e) incur additional indebtedness (including additional amounts drawn
pursuant to existing credit facilities), provided, that for purposes of this
subsection (e) of Section 6.1 but no other subsection of Section 6.1, no
director shall "unreasonably" withhold approval, where the term "unreasonable"
is defined as to be consistent with current bank covenants; or
(f) move any portion of the Company's operations.
-16-
<PAGE>
6.2 Voting Rights regarding Management. (a) The Company shall not, without
----------------------------------
the consent of two-thirds of the members of the Board of Directors (excluding
the applicable member of Management):
(i) terminate a member of Management's employment with the Company,
subject to Section 6.2(b) below;
(ii) assign any duties or reduce any of his duties, either of which
results in a significant diminution in his position or responsibilities with the
Company in effect immediately prior to such assignment, or remove him from such
position and responsibilities;
(iii) reduce, without good business reasons, the facilities and
perquisites (including office space and location) available to him immediately
prior to such reduction;
(iv) reduce his base pay or incentive bonus as in effect immediately
prior to such reduction; or
(v) reduce the kind or level of employee benefits to which he is
entitled immediately prior to such reduction with the result that his overall
benefits package is significantly reduced.
(b) The Company shall not terminate, other than for Cause, the
employment of more than one member of Management prior to February 1, 2000.
6.3 Board of Directors. (a) So long as the Non-Cornerstone Holders shall
------------------
collectively own at least 20% of the outstanding capital stock of the Company
(including capital stock issuable upon conversion of any securities convertible
into capital stock of the Company) and either of the members of Management shall
be employed by the Company and so long as Cornerstone owns at least 20% of the
outstanding capital stock of the Company (including capital stock issuable upon
conversion of any securities convertible into capital stock of the Company),
each Shareholder shall vote all of its Securities for the following slate of
Directors at each election of the Board of Directors whether by annual or
special meeting or written consent: (i) Donald Steiner, William End and Wally
Bernheimer as the current representatives of Cornerstone, or his successor
nominated by Cornerstone ("Cornerstone Directors"), (ii) Charles L. Slaughter,
Scott Sklar and James C. Slaughter, as the current representatives of
Management, or his successor nominated by Management ("Management Directors"),
and (iii) one additional director approved by two-thirds of the Cornerstone
Directors and two-thirds of the Management Directors (the "Independent
Director").
(b) If two-thirds of the Cornerstone Directors, on the one hand, and
two-thirds of the Management Directors, on the other hand, cannot agree upon the
Independent Director within thirty (30) days of the date hereof or any date a
vacancy occurs in that office, within seven (7) days from the end of such thirty
(30) day period, two-thirds of the Cornerstone Directors shall appoint a person
("Cornerstone Judge") who with a person appointed by two-thirds of the
Management
-17-
<PAGE>
Directors ("Management Judge") shall appoint the Independent Director. If the
Cornerstone Judge and the Management Judge cannot agree upon the Independent
Director within fourteen (14) days from the date of their appointment, they
shall appoint a third person who shall appoint the Independent Director within
fourteen (14) days from the date of his appointment and whose determination
shall be final and binding on all parties.
6.4 Board Meetings. Meetings of the Board of Directors shall be held not
--------------
less frequently than once per quarter.
SECTION 7
Fair Market Value Determination
-------------------------------
7.1 Board Determination. The per share Fair Market Value shall be a
-------------------
value determined by and agreed upon by a Super-Majority of the Board of
Directors.
7.2 By Independent Appraiser. If a Super-Majority of the Board of
------------------------
Directors cannot agree upon a value within seven days from the date the Company
determines to issue New Securities, Cornerstone and the Management shall
jointly retain, within thirty days from the end of such seven day period, an
independent broker, dealer or investment banker who shall be acceptable, in the
exercise of its sole discretion, to each of the Management and Cornerstone (an
"Independent Appraiser") for the purpose of determining the per share Fair
Market Value of the outstanding shares of Common Stock. The Independent
Appraiser shall determine a per share value based on the sale of the Company in
its entirety or the registration of substantially all of the shares of capital
stock of the Company. The Independent Appraiser shall (i) consider the
valuations of comparable privately or publicly held Companies and (ii) consider
the valuations of the Company in both a private sale scenario and an IPO
scenerio and shall assign to each such scenerio relative weights based on its
sole opinion of the suitability of an IPO (as such term is defined in the
Purchase Agreement) for the Company (including the possibility that the Company
is not suitable for an IPO) and the suitability of a private sale of the
Company. Notwithstanding the foregoing, the Independent Appraiser shall base
such Fair Market Value determination on its determination of the most
appropriate methodology for valuing the Company. Upon its determination of Fair
Market Value, the Independent Appraiser shall prepare and deliver to each of
the Management and Cornerstone a report (the "Appraisal Report") stating its
determination of the Fair Market Value and setting forth in reasonable detail
the method by which the same was determined. As a condition to its selection,
the Independent Appraiser shall submit the Appraisal Report within 30 business
days after its appointment.
Unless within five days after receipt of the Appraisal Report, the
Management or Cornerstone (any such person being hereinafter referred to as the
"Objecting Party" and the non-objecting party being hereinafter referred to as
the "Non-Objecting Party") delivers a written notice to the Company stating
that it objects to the Fair Market Value set forth in such Appraisal Report
(such notice being hereinafter referred to as the "Objection Notice"), the Fair
Market Value set forth therein
-18-
<PAGE>
shall be final and binding on all parties. The Objection Notice shall set forth
in reasonable detail the reasons for the Objecting Party's objections. If the
Objecting Party and the Non-Objecting Party do not agree on the determination of
the Fair Market Value within five days after receipt of an Objection Notice, the
Objecting Party and the Non-Objecting Party shall select another Independent
Appraiser to review the determination of Fair Market Value and to determine such
amount independently in accordance with the provisions of this Section 7.2. Such
Independent Appraiser's determination of Fair Market Value shall be final and
binding on all parties. The fees and expenses of the second Independent
Appraiser shall be borne by the Objecting Party.
For all Fair Market Value determinations, an Independent Appraiser
shall assume the total number of outstanding shares of Common Stock to be the
number actually outstanding plus shares issuable with respect to any outstanding
options or other securities convertible into or exercisable for Common Stock.
7.3 Prohibition on Future Use of Independent Appraiser. None of the
--------------------------------------------------
Company, the Management nor Cornerstone shall engage, or receive any services
from, any Independent Appraiser for a period of five years from the date of any
Appraisal Report; provided that such Independent Appraiser may again be selected
as an Independent Appraiser pursuant to the provisions of this Agreement.
SECTION 8
Compliance with Securities Laws
-------------------------------
8.1 Compliance with Securities Laws. Each Shareholder agrees not to make
-------------------------------
any disposition of any Securities unless and until:
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) The Shareholder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of the
proposed disposition, and if reasonably requested by the Company, such
Shareholder shall have furnished the Company with an opinion of counsel,
reasonably satisfactory to the Company, that such disposition will not require
registration under the Securities Act.
8.2 Legends. Each Shareholder further understands that the share
-------
certificates evidencing any Securities shall be endorsed with the following
legends (in addition to any legends required under applicable state securities
laws):
-19-
<PAGE>
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933."
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER INCLUDING RIGHTS OF FIRST REFUSAL AND CO-SALE
PROVISIONS AS SET FORTH IN AN AGREEMENT DATED JULY 17, 1996, BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE CORPORATION."
(c) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
LOCKUP NOT TO EXCEED 180 DAYS FOLLOWING THE CORPORATION'S INITIAL PUBLIC
OFFERING, A COPY OF WHICH LOCKUP IS ON FILE AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
(d) Any legend required to be placed thereon by the California
Commissioner of Corporations or any other applicable state securities laws.
SECTION 9
Miscellaneous
-------------
9.1 Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California as applied to contracts made and to be fully
performed entirely within that state between residents of that state. All
disputes arising out of this Agreement shall be subject to the exclusive
jurisdiction and venue of the California state courts of Santa Clara County,
California, (or, if there is exclusive federal jurisdiction, the United States
District Court for the Northern District of California) and the parties consent
to the personal and exclusive jurisdiction and venue of these courts.
9.2 Entire Agreement: Amendment and Termination.
-------------------------------------------
(a) This Agreement constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
This Agreement supersedes the Prior Agreement, and the Prior Agreement is hereby
terminated.
(b) This Agreement or any term hereof may only be amended, waived,
discharged or terminated by a written instrument signed by the Company, the
Management and Cornerstone and to the extent his rights, obligations and
liabilities are affected, Robert James Slaughter. The
-20-
<PAGE>
provisions of Sections 2, 3, 4, and 6 including preemptive rights, rights of
first refusal, co-sale rights and voting rights, shall terminate upon (i) the
effective date of a merger involving the Company in which the shareholders of
this Company prior to the merger own less than fifty percent (50%) of the equity
securities of the surviving corporation, (ii) the effective date of a sale of
all or substantially all of the assets of the Company (except a sale to an
affiliate of the Company), (iii) the closing of the Company's initial firmly
underwritten public offering, and the provisions of Sections 2, 3, and 4 shall
not be applicable to such transactions; or (iv) the written consent of the
Company, the Management, Cornerstone and Robert James Slaughter. Any amendment,
waiver, discharge or termination signed by the Management, Cornerstone and
Robert James Slaughter shall be binding on all such Holders. Notwithstanding the
foregoing, this Agreement shall terminate at such time as either Cornerstone, or
the Management and Robert James Slaughter (as a group), no longer own any shares
of capital stock of the Company.
9.3 Assignment. The rights granted to the Shareholders in Sections 2, 4
----------
and 6 may not be assigned by a Shareholder, except (a) to another Shareholder,
(b) to an entity controlling, controlled by or under common control with such
Shareholder, or (c) to a purchaser or transferee from such Shareholder which
acquires at least 15,000 shares of Common Stock or Preferred (appropriately
adjusted for any stock split, reverse stock split, stock dividend or similar
recapitalization occurring after the date hereof), provided that written notice
of any such sale or transfer is given to the Company.
9.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be deemed given if in writing and mailed by registered
or certified mail, postage prepaid, or otherwise delivered by hand or by
messenger, addressed (a) if to a Holder, at such Holder's address as set forth
under his, her or its name on the signature page of this Agreement, or at such
other address as such Holder shall have furnished to the Company in writing, or
(b) if to any other holder of any Registrable Securities, at such address as
such holder shall have furnished the Company in writing, or, until any such
holder so furnishes an address to the Company, then to and at the address of the
last holder of such Registrable Securities who has so furnished an address to
the Company, or (c) if to the Company, at its address as set forth on the cover
page of this Agreement and addressed to the attention of the Corporate Secretary
and with a copy to Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94306, Attention: John V. Roos, or at such other address as the
Company shall have furnished to the holders.
9.5 Delays or Ommissions. No delay or omission to exercise any right,
--------------------
power or remedy accruing to any party, upon any breach or default of any other
party under this Agreement, shall impair any such right, power or remedy of such
party nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either
-21-
<PAGE>
under this Agreement or by law or otherwise afforded to any party, shall be
cumulative and not alternative.
9.6 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
9.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
9.8 Specific Performance. The parties hereto agree that irreparable
--------------------
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
-22-
<PAGE>
The foregoing Stockholder Rights Agreement is hereby executed as of the
date first above written.
"COMPANY" TRAVELSMITH OUTFITTERS, INC.,
a California corporation
By: /s/ Charles L. Slaughter
-----------------------------
Name: Charles L. Slaughter
Title: Co-President
"SHAREHOLDERS"
/s/ Scott Sklar
--------------------------------
Scott Sklar
TravelSmith Outfitters, Inc.
3140 Kerner Boulevard
San Rafael, CA 94901
/s/ Charles L. Slaughter
--------------------------------
Charles L. Slaughter
TravelSmith Outfitters, Inc.
3140 Kerner Boulevard
San Rafael, CA 94901
/s/ R. James Slaughter
--------------------------------
Robert James Slaughter
34 Edwards Avenue
Sausilito, CA 94965
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By: /s/ Donald J. Steiner
-----------------------------
Name:
Title:
600 Atlantic Avenue, Suite 2800
Boston, MA 02210
-23-
<PAGE>
Exhibit 10.19
STOCKHOLDERS AGREEMENT
This Stockholders Agreement (the "Agreement") made this 31st day of
----------
March 1997, by and among The International Cornerstone Group, Inc., a Delaware
corporation ("Cornerstone") and The Bruce A.L. Willard Living Trust U/A dated
-------------
11-11-93 ("Willard Trust"), of which Bruce A.L. Willard ("Willard") is the
---------------
sole trustee (Cornerstone and Willard Trust are hereinafter sometimes referred
to as the "Stockholders") and The Territory Ahead, a Delaware corporation (the
------------
"Company").
RECITALS
--------
WHEREAS, contemporaneously with the execution of this Agreement,
Cornerstone will acquire 2,400 shares of the Common Stock, $0.01 par value per
share ("Common Stock") of the Company under the terms and conditions of that
------------
certain Stock Purchase Agreement (the "Stock Purchase Agreement") by and among
------------------------
Cornerstone, the Company and Lands' End Diversified Businesses, Inc. ("Lands'
------
End") (the "Acquisition");
- --- -------------
WHEREAS, Willard Trust currently owns 600 shares of the Common Stock
of the Company;
WHEREAS, Willard has been the Chief Executive Officer of the Company
for the past eight years and shall continue to act as the Chief Executive
Officer of the Company after the Acquisition in accordance with the terms of
that certain Employment Agreement of even date herewith between Willard and the
Company (the "Employment Agreement");
----------------------
WHEREAS, after the Acquisition, Cornerstone and Willard Trust will be
the sole Stockholders of the Company; and
WHEREAS, Cornerstone and Willard Trust have decided to set forth the
terms of their relationship as Stockholders of the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, and for other good and lawful consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE 1.
----------
GENERAL
-------
1.1 Definitions. Any terms used herein but not defined herein shall have
-----------
the meaning ascribed to such terms in the Stock Purchase Agreement.
<PAGE>
(a) "Affiliate" means, with respect to any particular Person, any
---------
Person controlling, controlled by or under common control with such Person.
(b) "Employment Agreement" means the Employment Agreement dated as of
--------------------
the date hereof by and between the Company and Willard.
(c) "Family Group" means Willard's descendants (whether natural or
------------
adopted) and any trust solely for the benefit of Willard and/or Willard's
descendants.
(d) "Independent Third Party" means any Person who, immediately prior
-----------------------
to the contemplated transaction, does not own in excess of 5% of the Company's
shares of Common Stock on a fully-diluted basis (a "5% Owner"), who is not an
--------
Affiliate of any such 5% Owner and who is not a member of the Family Group of
any such 5% Owner.
(e) "Other Stockholder" means, with respect to a Person, the
-----------------
stockholder other than such Person.
(f) "Person" means an individual, a partnership, a corporation, a
------
limited liability company, a limited liability partnership, an association, a
joint stock company, a trust, a joint venture, an unincorporated organization, a
governmental entity or any department, agency or political subdivision thereof,
or any other entity of whatsoever term or nature.
(g) "Sale of the Company" means the sale of the Company to an
-------------------
Independent Third Party or group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power under normal circumstances before giving effect to this Agreement)
to elect a majority of the Company's Board of Directors (whether by merger,
consolidation or sale or transfer of the Company's capital stock) or (ii) all or
substantially all of the Company's assets, determined on a consolidated basis,
by sale of assets, merger or otherwise.
(h) "Stockholder Shares" means collectively (i) any Common Stock
----------- ------
purchased or otherwise acquired by either Willard Trust or Cornerstone, (ii) any
equity securities of the Company issued or issuable directly or indirectly with
respect to the Common Stock referred to in clause (i) above by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization, and (iii) any
other shares of any class or series of capital stock of the Company held by
either Willard Trust or Cornerstone. As to any particular shares of Common Stock
constituting Stockholder Shares, such shares of Common Stock shall cease to be
Stockholder Shares when they have been transferred to a Person other than
Willard Trust or Cornerstone, except as set forth in this Agreement.
2
<PAGE>
1.2 Formation. The parties agree that this Agreement shall govern certain
---------
of the operations of the Company and shall set forth certain of their rights and
obligations in regard to the ownership and management of the Company.
1.3 Principal Place of Business. The principal place of business of the
---------------------------
Company shall be located at 419 State Street, Santa Barbara, California 9310l-
304, or at such other place, subject to subsection 2.2.12, as the Board of
Directors shall, from time to time, select.
1.4 Authorization of Shares. The aggregate number of shares which the
-----------------------
Company shall have authority to issue shall be 3,000 shares of Common Stock.
ARTICLE 2.
----------
GOVERNANCE AND MANAGEMENT
-------------------------
Anything in this Agreement or any other agreement between or among the
parties hereto to the contrary notwithstanding, the following provisions shall
be paramount:
2.1 Certificate of Incorporation and Bylaws. Attached hereto as Schedule
--------------------------------------- --------
2.1(1) and made a part hereof is a true, correct and complete copy of the
- ------
current Certificate of Incorporation of the Company; and, attached hereto as
Schedule 2.1(2) and made a part hereof is a true, correct and complete copy of
- ---------------
the current Bylaws of the Company. As part of the Closing of the Acquisition,
Willard and Cornerstone agree to amend the Bylaws in the form attached hereto as
Schedule 2.1(3). The Bylaws of the Company shall at all times meet the
- ---------------
requirements of this Article 2, and neither the Certificate of Incorporation nor
the Bylaws shall be amended other than in compliance with Section 2.2 hereof.
The procedures of the Board of Directors and the Stockholders and the governance
of the Company shall be conducted in accordance with applicable law and the
Certificate of Incorporation and Bylaws of the Company, the terms of which are
hereby incorporated herein by reference. In the event the parties hereto shall
amend this Agreement in such a way as to create or cause a conflict between this
Agreement and either the Certificate of Incorporation, the Bylaws or both, then
the parties shall, in good faith, cause the Certificate of Incorporation and the
Bylaws (as the case may be) to be amended so that such Certificate of
Incorporation and Bylaws shall no longer be in conflict with this Agreement, as
so amended.
2.2 Major Decisions. From and after the Closing of the Acquisition and
---------------
until the provisions of this Section 2.2 cease to be effective, the Board shall
not authorize any of the following actions without the affirmative approval of
both Willard and Cornerstone:
2.2.1 The entering into of any contract (other than in the
ordinary course of business) involving an amount in excess
of $250,000 or a duration in excess of 12 months;
3
<PAGE>
2.2.2 The liquidation, dissolution or recapitalization of the
Company;
2.2.3 Until the third anniversary of the date of the Closing of
the Acquisition, the merger or consolidation of the Company
with any other entity, the entering into of any share
exchange with any other entity, the sale of all or
substantially all of the assets of the Company, or any
similar transaction;
2.2.4 The material change of the line of business of the Company;
2.2.5 The incurrence of indebtedness in excess of $250,000 (other
than pursuant to the Company's bank facility described in
Section 8.3 below);
2.2.6 Any material transaction between the Company and Willard or
Cornerstone or any officer or director of the Company;
2.2.7 Except as expressly permitted pursuant to Article 5 hereof,
the issuance and sale to any Person of any shares of capital
stock of the Company or any other securities convertible
into shares of capital stock of the Company;
2.2.8 The approval of an annual operating plan and capital budget
for the Company or any material expenditure in excess of
such amount contemplated by such an approved operating plan
or capital budget;
2.2.9 The declaration of a dividend on the securities of the
Company or the redemption of any outstanding shares of
Common Stock or any other securities of or issued by the
Company or the purchase of any securities of the Company;
2.2.10 The acquisition of any company or business;
2.2.11 Any amendment of the Certificate of Incorporation or Bylaws
that would conflict with or contravene the provisions of
this Agreement;
2.2.12 The relocation of the Company's chief executive offices
outside of the City of Santa Barbara, California and its
immediate environs.
2.3 Board of Directors. From and after the Closing of the Acquisition and
------------------
until the provisions of this Section 2.3 cease to be effective, each Stockholder
shall vote all of his or its
4
<PAGE>
Stockholder Shares and any other voting securities of the Company over which
such Stockholder has voting control and shall take all other necessary or
desirable actions within his or its control (whether in his or its capacity as a
stockholder, director, member of a board committee or officer of the Company or
otherwise, and including, without limitation, attendance at meetings in person
or by proxy for purposes of obtaining a quorum and execution of written consents
in lieu of meetings), and the Company shall take all necessary and desirable
actions within its control (including, without limitation, calling special board
and stockholder meetings), so that the following provisions shall govern the
size, election and certain procedures of the Board of Directors:
2.3.1 Number: The Board of Directors shall consist of five (5)
------
members; provided, however, that an interim Board of
-------- -------
Directors consisting of two directors shall be elected,
which such directors shall be Bruce A.L. Willard and William
T. End. Within five (5) business days of the date of this
Agreement, the remaining three (3) directors shall be
elected.
2.3.2 Election: The following Persons shall be elected to the
--------
Board:
(a) Cornerstone shall have the right to designate two of the
members of the Board of Directors ("Cornerstone Directors");
---------------------
provided, however, that one director shall be William End so
-------- --------
long as Mr. End is affiliated with Cornerstone.
(b) Willard shall have the right to designate two of the
members of the Board of Directors ("Willard Directors").
------------------
(c) The fifth member of the Board of Directors (the
"Independent Director") shall be designated by Willard and
--------------------
Cornerstone for a three year term in accordance with the
following terms. The Independent Director shall not be
affiliated with either Willard or Cornerstone and shall have
recognized experience in the industry in which the Company
competes. At the Closing of the Acquisition, Willard and
Cornerstone shall agree on an initial mutually acceptable
individual as the Independent Director. Such individual
shall be offered the position of Independent Director. If
such individual does not accept the position, Willard and
Cornerstone shall agree on an additional mutually acceptable
candidate who shall be offered the position. Within six
months after the Closing of the Acquisition, Willard and
Cornerstone shall agree on three additional mutually
acceptable individuals as the Independent Director and shall
rank such individuals in the order in which they shall be
asked to serve as the Independent Director. After the term
of the initial Independent Director expires, if such
5
<PAGE>
initial Independent Director is not renominated, each such
individual on the list shall be offered the position of
Independent Director in the order in which his/her name
appears on the list. As each individual is removed from the
Board, Willard and Cornerstone shall agree upon an
additional mutually acceptable candidate, who shall be added
to the bottom of the list. If Cornerstone and Willard are
not able to agree on an additional mutually acceptable
candidate within a reasonable period of time, then, at the
request of either Cornerstone or Willard, such additional
director shall be selected by the American Arbitration
Association.
(d) From and after such time as Willard is no longer
employed by the Company as a result of his death,
disability, termination for cause or voluntary resignation,
the Independent Director shall be nominated and elected by
Cornerstone. If Willard is no longer employed by the Company
as a result of a termination without cause (as described in
the Employment Agreement), the Independent Director will
continue to be nominated and elected pursuant to the
provisions of subparagraph (c) above.
(e) Notwithstanding anything to the contrary contained
herein, during the pendency of a Default Condition,
Cornerstone shall have the right to nominate and elect two
additional Cornerstone Directors, both of whom shall serve
only during the Default Condition. Upon evidence reasonably
satisfactory to Cornerstone of a cure of the Default
Condition, the two additional Cornerstone Directors shall be
removed from the Board of Directors on the first day of the
next consecutive fiscal quarter, provided no Default
Condition then exists. For the purposes of this Agreement, a
"Default Condition" shall be deemed to occur during the
period following written notice from Cornerstone to Willard
and for so long as the following two conditions concurrently
exist: (A) the continuing failure of the Cornerstone
Directors and the Willard Directors to reach agreement (as
reflected by the casting of votes at a duly called Board of
Directors meeting) with respect to any material strategic
and/or operating strategy to be employed or any material
action to be taken by the Company and (B) one of the
following: (i) two successive payment defaults under the
Company's bank facility referred to in Section 8.3, (ii) the
existence of a covenant default thereunder during any two
consecutive fiscal quarters, (iii) the receipt by the
Company of any notice from the Company's bank that it is
accelerating payment of
6
<PAGE>
the outstanding balance of the Company's facility or (iv)
the failure of the Company to achieve net sales and earnings
before interest, taxes, depreciation and amortization
("EBITDA") which equal or exceed 85% of projected net sales
or EBITDA, respectively, as reflected on the Company's then
current Operating Plan, for at least two successive fiscal
quarters. A Default Condition shall cease to exist on the
earlier to occur of, as applicable, (i) the cure of the
Company's default under its bank facility or (ii) the
Company achieving net sales or EBITDA equal to or in excess
of 85% of projected net sales or EBITDA, as set forth in the
Company's Operating Plan, for at least one fiscal quarter.
Net Sales and EBITDA shall be derived from the Company's
financial statements. The Operating Plan referred to above
shall be the 5-year plan attached to this Agreement as
Schedule 2.3.2(e), as modified from time to time by the
-----------------
Board of Directors. The Board of Directors shall review,
make appropriate modifications and approve at least annually
the Company's Operating Plan within 30 days' of the
Company's fiscal year end. If the Board of Directors fails
to approve the Operating Plan for two successive annual
fiscal periods, a Default Condition shall be deemed to exist
and continue to exist until such time as the Board of
Directors adopts such Operating Plan.
2.3.3 Removal: Upon the written request of Willard, and under no
-------
other circumstances, any Willard Director shall be removed
from the Board. Upon the written request of Cornerstone, and
under no other circumstances, any Cornerstone Director shall
be removed from the Board. As long as Willard's employment
has not been terminated as a result of his death,
disability, termination for cause or voluntary resignation,
the Independent Director shall be removed from the Board
only upon the mutual agreement of Willard and Cornerstone,
or at the expiration of the Independent Director's three
year term.
2.3.4 Vacancy: In the event that any director designated
-------
hereunder by any particular Stockholder for any reason
ceases to serve as a member of the Board during his term of
office, the resulting vacancy on the Board shall be filled
by a director designated by the Stockholder who was entitled
to designate such director in accordance with the provisions
of Section 2.3.2.
7
<PAGE>
2.3.5 Compensation: Willard and Cornerstone shall agree upon a
------------
mutually acceptable compensation package for directors who
are Independent Third Parties and not employed by the
Company.
2.3.6 Quorum: A quorum of the Board of Directors shall be
------
constituted only if three of the five directors are present
at meetings of the Board of Directors for purposes of
transacting business; provided, however, that one of the
-------- -------
three directors present must be a Willard Director and one
of the three directors present must be a Cornerstone
Director.
2.3.7 Vote: The adoption of any resolution, or the approval of
----
any action, by the Board of Directors shall require the
affirmative approval of at least a majority of all of the
members of the Board of Directors (not just of those present
and voting).
2.3.8 Meetings: The Board of Directors shall meet as indicated
--------
in the Bylaws.
2.3.9 Committees: Any committee of the Board shall be created
----------
only upon the approval of at least three members of the
Board; provided, however, that one of the three members must
-------- -------
be a Willard Director and one of the three members must be a
Cornerstone Director.
ARTICLE 3.
----------
RESTRICTIONS ON TRANSFER
------------------------
3.1 Restrictions on Transfers. Until the third anniversary of the date of
-------------------------
the Closing of the Acquisition, no Stockholder shall, at any time, without the
express prior written consent of the Other Stockholder, sell, transfer,
encumber, assign, mortgage, alienate, pledge, hypothecate or in any manner
dispose of, directly or indirectly, whether by voluntary or involuntary
disposition (a "Transfer"), any Stockholder Shares owned by such Stockholder.
3.2 Restrictions on Certificates. Each certificate evidencing Stockholder
----------------------------
Shares and each certificate issued in exchange for or upon the transfer of any
Stockholder Shares (if such shares remain subject to the transfer restrictions
after such transfer) shall be stamped or otherwise imprinted with legends in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES
8
<PAGE>
ACT"), AND SUCH SHARES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT (1) PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS AGAINST TRANSFER SET FORTH IN A STOCKHOLDERS AGREEMENT
DATED AS OF MARCH 31,1997, AMONG THE ISSUER OF SUCH SECURITIES (THE
"COMPANY") AND CERTAIN OF THE COMPANY'S STOCKHOLDERS. A COPY OF SUCH
STOCKHOLDERS AGREEMENT WILL BE FURNISHED WITHOUT CHARGE BY THE COMPANY
TO THE HOLDER HEREOF UPON WRITTEN REQUEST."
The Company shall imprint such legend on certificates evidencing Stockholder
Shares outstanding prior to the date hereof.
3.3 Right of First Refusal. At least sixty (60) days prior to making any
----------------------
Transfer of any Stockholder Shares by a transferring Stockholder to any Person
other than the Company or another Stockholder, the transferring Stockholder (the
"Share Transferor") shall deliver a written notice (the "Notice") to Company and
----------------- ------
the non-transferring Stockholder. The Notice shall disclose in reasonable detail
the proposed number of Stockholder Shares to be transferred, the identity of the
proposed transferee and the proposed terms and conditions of the Transfer. The
non-transferring Stockholder may elect (i) to purchase Stockholder Shares from
the Transferor pursuant to this Section 3.3 or (ii) participate in the sale of
Stockholder Shares pursuant to the non-transferring Stockholder's right of co-
sale in Section 3.4. If the non-transferring Stockholder elects to purchase all
(but not less than all) of the Stockholder Shares specified in the Notice at the
price and on the terms specified therein the non-transferring Stockholder shall
deliver written notice of such election to the Transferor as soon as practical
but in any event within thirty (30) days after the delivery of the Notice. If
the non-transferring Stockholder has elected to purchase Stockholder Shares from
the Share Transferor, the transfer of such shares shall be consummated as soon
as practical after the delivery of the election notice, but in any event within
sixty (60) days after the delivery of the Notice. If the non-transferring
Stockholder has not elected to purchase all of the Stockholder Shares being
offered, the Share Transferor may, within ninety (90) days after the delivery of
the Notice, transfer such Stockholder Shares, subject to the provisions of
Section 3.4, to the transferee named in the Notice at a price no less than the
price per share specified in the Notice and on other terms no more favorable to
the transferee than offered to the non-transferring Stockholder in the Notice.
The purchase price specified in any Notice shall be payable solely in cash at
the closing of the transaction.
9
<PAGE>
3.4 Right of Co-Sale. Notwithstanding the provisions of Section 3.3, at
----------------
least sixty (60) days prior to making any Transfer of any Stockholder Shares by
a transferring Stockholder to any Person other than the Company or another
Stockholder, the Share Transferor shall deliver a written notice (the "Sale
----
Notice") to the Company and the non-transferring Stockholder. The Sale Notice
- -------
shall disclose in reasonable detail the proposed number of Stockholder Shares to
be transferred, the identity of the prospective transferee and the proposed
terms and conditions of the Transfer. The non-transferring Stockholder may elect
to participate in the contemplated Transfer by delivering written notice to the
Share Transferor within thirty (30) days after delivery of the Sale Notice. If
the non-transferring Stockholder has elected to participate in such Transfer,
the non-transferring Stockholder shall be entitled to sell in the contemplated
Transfer, at the same price and on the same terms, a number of Stockholder
Shares equal to the product of (i) the quotient determined by dividing the
percentage of Stockholder Shares owned by such Person by the aggregate
percentage of Stockholder Shares owned by all of the Stockholders participating
in such sale and (ii) the number of Stockholder Shares to be sold in the
contemplated Transfer.
3.5 Permitted Transfers. The restrictions contained in this Article 3
-------------------
shall not apply with respect to any Transfer of Stockholder Shares by any
Stockholder (i) in the case of Willard, pursuant to applicable laws of descent
and distribution or among Willard's Family Group or (ii) in the case of
Cornerstone, among its Affiliates (collectively referred to herein as "Permitted
---------
Transferees"); provided that the restrictions contained in this Article 3 shall
- -----------
continue to be applicable to the Stockholder Shares after any such Transfer and
provided further that the transferees of such Stockholder Shares shall have
agreed in writing to be bound by the provisions of this Agreement affecting the
Stockholder Shares so transferred.
3.6 Transfers. Prior to transferring any Stockholder Shares to any
---------
Person, the transferring Stockholder shall cause the prospective transferee to
execute and deliver to the Company and the Other Stockholder a counterpart of
this Agreement.
3.7 Transfers in Violation of Agreement. Any Transfer or attempted
-----------------------------------
Transfer of any Stockholder Shares in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Stockholder Shares as the owner
of such shares for any purpose.
ARTICLE 4.
----------
REGISTRATION RIGHTS
-------------------
4.1 Request for Registration. Willard shall have a one-time right to
------------------------
demand that the Company file a Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act") covering the registration of the
---------------
shares of Common Stock held beneficially by Willard (the "Registrable
-----------
Securities").
- -----------
10
<PAGE>
4.1.1 The demand registration right shall not be exercised during
any of the following periods: (i) the period commencing on
the Closing Date of the Acquisition and ending on the
earlier to occur of (x) the date of an initial public
offering of the equity securities of Cornerstone and (y)
that date which is three years following the Closing of the
Acquisition, and (ii) the 24 month period following the
effective date of an initial public offering of the equity
securities of Cornerstone.
4.1.2 Willard agrees not to exercise his demand registration right
unless (i) the offering proposed by him is firmly
underwritten by one of the investment banking firms set
forth on Schedule 5.1 hereto or an investment banking firm
------------
of comparable size and reputation, and (ii) if Willard
exercises his demand registration right prior to such time
as Cornerstone effects an initial public offering of its
equity securities, such investment banker reasonably
believes that it can effect an offering of the Company's
equity securities at a valuation which would provide a total
market capitalization of the Company immediately following
the closing of such offering of at least $100 million.
4.1.3 The demand registration right described herein shall
terminate on the earliest to occur of (v) the initial public
offering of the equity securities of the Company, (w) 24
months following the expiration of any "lock-up" period
mandated by the managing underwriter of the initial public
offering of Cornerstone's equity securities, (x) the date of
the Reorganization (defined below), (y) a transfer by
stockholders of the Company of more than 50% of the
outstanding capital stock of the Company (computed on a
fully-diluted basis), provided that such selling
stockholders have fully complied with the co-sale provisions
of Section 3.4 and (z) a merger or consolidation of the
Company, provided that the Company has fully complied with
the provisions of Section 2.2 and Willard has received at
least thirty (30) days written notice of such sale.
4.1.4 The Company shall, within ten (10) days of the receipt of
such a request for registration, use its reasonable best
efforts to effect as soon as practicable the registration
under the Securities Act of all Registrable Securities which
Willard requests to be registered.
4.1.5 The right of Willard to include his Registrable Securities
in a registration shall be conditioned upon his
participation in the firm underwriting. Willard hereby
agrees (together with the Company) to enter into an
underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting
pursuant to Section 4.1.2 above, containing customary
provisions with respect to indemnification
11
<PAGE>
and contribution and providing customary representations and
warranties by the Company (which shall be made to and for
the benefit of the underwriters and Willard).
Notwithstanding any other provision of this Section 4.1, if
the underwriter advises Willard in writing that marketing
factors require a limitation of the number of shares to be
underwritten because including all of such securities would
jeopardize the success of the offering, then the number of
shares of Registrable Securities that may be included in the
underwriting shall be reduced accordingly. Any Registrable
Securities excluded or withdrawn from such underwriting
shall be withdrawn from the registration. The Company is
obligated to effect only one registration pursuant to this
Section 4.1.
4.1.6 Notwithstanding the foregoing, if the Company shall furnish
to Willard a certificate signed by one of the Cornerstone
Directors, stating that in the good faith judgment of the
Board of Directors of the Company it would be seriously
detrimental to the Company and its stockholders for such
registration statement to be filed and it is therefore
essential to defer the filing of such registration
statement, the Company shall have the right to defer
performance of its obligations pursuant to this Section 4.1
for a period of not more than one hundred eighty (180) days
after receipt of the request of Willard; provided, however,
--------- -------
that the Company may not utilize this right more than once.
Notwithstanding the right of the Company to defer
registration for 180 days, if such deferral would otherwise
cause a termination of the demand registration right to
occur pursuant to Section 4.1.3(w), Willard's right to
demand registration shall extend for an additional 180 days.
4.2 Company Registration.
--------------------
4.2.1 If (but without any obligation to do so) the Company
proposes to register (including for this purpose a
registration effected by the Company for stockholders other
than Willard) any of its stock or other securities under the
Securities Act in connection with the public offering of
such securities solely for cash, the Company shall, at each
such time, promptly give Willard written notice of such
registration. Upon the written request of Willard given
within twenty (20) days after the mailing of such notice of
the Company, the Company shall, subject to the provisions of
subsection 4.2.2, cause to be registered under the
Securities Act all of the Registrable Securities that
Willard has requested to be registered; provided, however,
--------- -------
that the Company shall not be required to give notice or
include such Registrable Securities in any such registration
if the proposed registration relates solely to (i)
securities to be offered to employees pursuant to a stock
option, stock savings or other employee benefit plan; (ii)
securities
12
<PAGE>
proposed to be issued in exchange for securities or assets
of, or in connection with a merger or consolidation with,
another corporation; (iii) securities to be offered by the
Company generally to any class or series of its then
existing security holders; (iv) securities issuable upon
conversion of securities which are the subject of an
underwritten redemption; or (v) securities to be offered or
issued pursuant to a combination of transactions referred to
in clauses (i) through (iv).
4.2.2 The Company may, at its sole discretion and without the
consent of Willard, withdraw such registration statement and
abandon the proposed offering. If the proposed primary or
secondary offering does not include Registrable Securities
and if, in the opinion of the proposed managing underwriter,
it is not feasible to effect such primary or secondary
offering in conjunction with the offering of the Registrable
Securities, the Company may proceed with the registration of
shares in such primary or secondary offering without
including the Registrable Securities. The Company may, at
its option, require that the number of Registrable
Securities offered for sale by Willard be decreased if, in
the reasonable opinion of the proposed managing underwriter,
such reduction is desirable. If the Company shall require
such a reduction, Willard shall have the right to withdraw
from the offering.
4.2.3 Cornerstone shall cause Willard to become a party to the
Registration Agreement dated September 13, 1995, as amended,
between Cornerstone and its investors and to cause any
shares of capital stock of Cornerstone acquired by Willard
(i) in the Reorganization and (ii) upon the exercise of the
warrants granted to Willard as of the date hereof pursuant
to that certain Stock Purchase Warrant between Cornerstone
and Willard, to have the benefit of the piggyback
registration rights set forth therein.
4.3 Obligations of the Company.
--------------------------
Whenever required under Section 4.1 or 4.2 of this Agreement to effect
the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
4.3.1 Prepare and file with the Securities and Exchange Commission
("SEC") a registration statement with respect to such
---
Registrable Securities and use its reasonable best efforts
to cause such registration statement to become effective,
and, upon the request of Willard, keep such registration
statement effective for up to ninety (90) days.
13
<PAGE>
4.3.2 Prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectus used in connection with such registration
statement as may be necessary to comply with the provisions
of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
4.3.3 Furnish to Willard such number of copies of the registration
statement and each amendment and supplement thereto, and
such number of copies of the prospectus, including each
summary, preliminary, final, amended or supplemental
prospectus, in conformity with the requirements of the
Securities Act, and such other documents as he may
reasonably request in order to facilitate the disposition of
Registrable Securities owned by him.
4.3.4 Use its best efforts to register and qualify the securities
covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall
be reasonably requested by Willard, provided that the
Company shall not be required in connection therewith or as
a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions.
4.3.5 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement,
in usual and customary form, with the managing underwriter
of such offering.
4.3.6 Notify Willard, at any time when a prospectus relating
thereto covered by such registration statement is required
to be delivered under the Securities Act, of the happening
of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing.
4.3.7 Furnish to Willard and to each underwriter, if any, a signed
counterpart, addressed to Willard and such underwriter, of
(i) an opinion of counsel for the Company, dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, an
opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such
registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who
have issued a report on the Company's financial statements
included in such registration statement, in each case
covering substantially the same matters
14
<PAGE>
with respect to such registration statement (and the
prospectus included therein) and, in the case of such
accountant's letter, with respect to events subsequent to
the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public
offerings of securities.
4.3.8 Use its best efforts (i) to cause all the securities covered
by such registration statement to be listed on a national
securities exchange (if such securities are not already so
listed) and on each additional national securities exchange
on which similar securities issued by the Company are then
listed, if the listing of such securities is then permitted
under the rules of such exchange or (ii) to secure
designation of all such securities covered by such
registration statement as a Nasdaq "national market system
security" within the meaning of Rule 11Aa2-1 under the 1934
Act, or failing that, to secure Nasdaq authorization for
such securities and, without limiting the generality of the
foregoing, to arrange for at least two market makers to
register as such with respect to such securities with the
National Association of Securities Dealers, Inc.
4.3.9 As soon as practicable after the effective date of the
registration statement, and in any event within 16 months
thereafter, make "generally available to its security
holders" (within the meaning of Rule 158 under the
Securities Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Securities Act
and covering a period of at least twelve (12) consecutive
months beginning after the effective date of the
registration statement.
4.3.10 Deliver promptly to counsel for Willard and the managing
underwriter copies of all correspondence between the SEC and
the Company, its counsel or auditors and all memoranda
relating to discussions with the SEC or its staff with
respect to the registration statement and permit Willard and
each underwriter and any attorney, accountant or other
representative retained by them to do such investigation,
upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as
it deems reasonably necessary. Such investigation shall
include access to books, records and properties and
opportunities to discuss the business of the Company with
its officers and independent auditors during normal business
hours.
4.4 Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Agreement with
respect to Willard that Willard shall furnish to the Company such information
regarding itself, the Registrable Securities held by Willard and the intended
method of disposition of such securities as shall be reasonably required
15
<PAGE>
to effect the registration of the Registrable Securities and to execute such
documents that are necessary or customary in connection with such registration
as the Company may reasonably request.
4.5 Expenses of Demand Registration. All expenses other than underwriting
-------------------------------
discounts and commissions incurred in connection with the underwriting,
registrations, filings or qualifications pursuant to Section 4.1, including,
without limitation, all registration, filing and qualification fees, printing
and accounting fees, and the fees and disbursements of counsel for the Company
and one counsel for Willard shall be borne by the Company.
4.6 Expenses of Company Registration. All expenses other than
--------------------------------
underwriting discounts and commissions incurred in connection with the
underwriting, registrations, filings or qualifications pursuant to Section 4.2,
including, without limitation, all registration, filing and qualification fees,
printing and accounting fees, and the fees and disbursements of counsel for the
Company shall be borne by the Company.
4.7 Underwriting Requirements. The Company shall not be required to
-------------------------
include any of Willard's securities in an underwritten offering of the Company's
securities unless Willard accepts the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it, including the
underwriting discounts and commissions. If the total amount of securities,
including Registrable Securities, requested by stockholders to be included in
such offering exceeds the amount of securities that the underwriters reasonably
believe compatible with the success of the offering, then the Company shall be
required to include in the offering only that number, if any, of such
securities, including Registrable Securities, which the underwriters believe
will not adversely affect the success of the offering. Whether or not included
in such underwriting, if so requested by the proposed managing underwriter,
Willard (as to any other shares of Common Stock owned by him) shall join in any
agreement by other significant stockholders of the Company to refrain from sales
of shares of Common Stock for up to 180 days following commencement of the
offering.
4.8 Delay of Registration. Willard shall not have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
4.9 Rule 144. If the Company shall have filed a registration statement
--------
pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended (the "1934 Act") or a registration statement pursuant to the
--------
requirements of the Securities Act, the Company will timely file the reports
required to be filed by it under the Securities Act or the 1934 Act (including
but not limited to the reports under Section 13 and 15(d) of the 1934 Act
referred to in subparagraph (c)(1) of Rule 144) and the rules and regulations
adopted by the SEC thereunder (or, if the Company is not required to file such
reports, will make publicly available other information), and will take such
further action as Willard may reasonably request, all to the extent required
from time to time to enable Willard to sell Registrable Securities without
16
<PAGE>
registration under the Securities Act within the limitation of the exemptions
provided by (i) Rule 144, as such Rule may be amended from time to time, or (ii)
any similar rule or regulation hereafter adopted by the SEC. Upon the request of
Willard, the Company will deliver to Willard a written statement as to whether
it has complied with such requirements.
4.10 Registration Rights to Others. If the Company shall at any time
-----------------------------
provide to any holder of capital stock of the Company (whose percentage
ownership of such capital stock is equal to or within 5% of the percentage
ownership of such capital stock held by Willard), rights with respect to the
registration of such securities under the Securities Act on terms or conditions
more favorable to such holder than the terms and conditions provided herein, the
Company shall provide (by way of amendment to this agreement or otherwise) such
more favorable terms or conditions to Willard.
4.11 Indemnification. In the event any Registrable Securities are included
---------------
in a registration statement under this Agreement:
4.11.1 To the extent permitted by law, the Company will indemnify
and hold harmless Willard against any losses, claims,
damages or liabilities to which he may become subject under
the Securities Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based
upon any of the following statements, omissions or
violations (collectively, a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact
contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein
or any amendments or supplements thereto, (ii) the omission
or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Securities Act, the
1934 Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any
state securities law; and the Company will reimburse Willard
for any legal or other expenses reasonably incurred by him
in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that
--------- -------
the indemnity agreement contained in this Section shall not
apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected
without the consent of the Company, which consent shall not
be unreasonably withheld, nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or
action to the extent that it arises out of or is based upon
a Violation which occurs in reliance
17
<PAGE>
upon and in conformity with information furnished in writing
for use in connection with such registration by, or on
behalf of, Willard.
4.11.2 To the extent permitted by law, Willard will indemnify and
hold harmless the Company, each of its officers, directors,
agents or employees, and each Person, if any, who controls
the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities to which
the Company or any such director, agent, employee, officer
or controlling Person, may become subject, under the
Securities Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon
any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in
conformity with information furnished in writing by, or on
behalf of, Willard for use in connection with such
registration; and Willard will reimburse any legal or other
expenses reasonably incurred by the Company or any such
agent, employee, director, officer or controlling Person, in
connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however,
--------- -------
that the indemnity agreement contained in this Section shall
not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is
effected without the consent of Willard, which consent shall
not be unreasonably withheld.
4.11.3 Promptly after receipt by an indemnified party under this
Section 4.11 of notice of the commencement of any action
(including any governmental action), such indemnified party
will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 4.11, deliver to
the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however,
--------- -------
that an indemnified party shall have the right to retain its
own counsel, with the fees and expenses to be paid by the
indemnifying party, if, in the reasonable opinion of counsel
for the indemnified party, representation of such
indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party
and
18
<PAGE>
any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable period of time of the
commencement of any such action shall relieve such
indemnifying party of any liability to the indemnified party
under this Section 4.11 to the extent prejudicial to its
ability to defend such action, but the omission so to
deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 4.11.
4.11.4 If the indemnification provided for in this Section 4.11 is
held by a court of competent jurisdiction to be unavailable
to an indemnified party or insufficient to hold it harmless
with respect to any loss, liability, claim, damage or
expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party hereunder, shall
contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and
of the indemnified party on the other in connection with the
statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other
relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be
determined by reference to, among other things whether the
untrue or alleged untrue statements of a material fact or
the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such
statement or omission.
ARTICLE 5.
----------
PUBLIC OFFERING
---------------
5.1 Request for Public Offering. At the request of Willard, the Company
---------------------------
shall retain an investment banking firm mutually agreeable to Willard and
Cornerstone for the purpose of advising the Board of Directors of the Company on
the advisability of effecting a public offering of the securities of the
Company. Attached hereto as Schedule 5.1 is a list of the investment banking
------------
firms mutually acceptable to Willard and Cornerstone from which the Board of
Directors may select (assuming that the investment banking firm selected has not
been engaged by Cornerstone within 12 months of such selection) an investment
banking firm to advise the
19
<PAGE>
Board on the advisability of effecting a public offering. In so advising the
Board, such investment banking firm shall take into account the capital
requirements of the Company, the relative cost to the Company of financing the
Company's capital requirements in the public market or through available credit
facilities in the private markets, valuations of companies comparable to the
Company in initial public offerings, the condition of the initial public
offering market and other factors which it deems relevant.
5.2 Approval of Board of Directors. Following the report of the investment
------------------------------
banking firm, each of Willard and Cornerstone agrees that the Company may effect
a public offering of its securities if such offering is approved by a majority
of the directors on the Company's Board of Directors. In such a case, the
Company shall effect a public offering of its securities at the times and on the
terms approved by a majority of the directors. Attached hereto as Schedule 5.1
------------
is a list of the investment banking firms mutually acceptable to Willard and
Cornerstone from which the Board of Directors may select (assuming that the
investment banking firm selected has not been engaged by Cornerstone within 12
months of such selection) an investment banking firm to effect the public
offering.
5.3 Restrictions on Public Offering. Notwithstanding the foregoing, unless
-------------------------------
approved by Cornerstone, the Company shall not effect a public offering of the
equity securities of the Company during the following periods: (i) the period
commencing on the Closing Date of the Acquisition and ending on the earlier to
occur of (x) the date of an initial public offering of the equity securities of
Cornerstone and (y) that date which is three years following the Closing of the
Acquisition, and (ii) the 24 month period following the effective date of an
initial public offering of the equity securities of Cornerstone.
5.4 Cornerstone Public Offering. Notwithstanding the foregoing, the
---------------------------
Company shall defer its public offering if, within thirty (30) days of its
decision to proceed with a public offering, Cornerstone delivers notice to the
Company that its Board of Directors has determined in good faith to proceed with
a public offering of the securities of Cornerstone. In such case, the Company
agrees to defer its offering for a period of one hundred eighty (180) days,
after which time the Company will proceed with its offering if Cornerstone has
not yet filed a registration statement with the SEC. If Cornerstone has filed a
registration statement with the SEC, the Company shall defer its offering until
expiration of the 24 month period following the effective date of the initial
public offering of the equity securities of Cornerstone.
ARTICLE 6.
----------
REORGANIZATION
--------------
6.1 Request for Reorganization. At any time following the Closing of the
--------------------------
Acquisition, Willard shall, upon 90 days written notice to Cornerstone, have the
right to cause Cornerstone and the Company to effect a reorganization (the
"Reorganization"), which shall be structured,
--------------
20
<PAGE>
if possible, as a tax-free reorganization, pursuant to which the Company shall
be merged with a wholly-owned subsidiary of Cornerstone in a merger which will
result in the issuance of shares of common stock of Cornerstone for the shares
of Common Stock of the Company held by Willard such that immediately following
the merger, the Company shall be wholly-owned by Cornerstone and Willard shall
hold shares of common stock of Cornerstone.
6.2 Merger Consideration. The number of shares of common stock of
--------------------
Cornerstone which Willard shall receive in the Reorganization shall be equal to
the product of (i) a fraction, the numerator of which is the Fair Market Value
(as defined below) of the Company and the denominator of which is the Fair
Market Value of Cornerstone and the Company combined, multiplied by (ii)
Willard's then percentage ownership of the Company's outstanding capital stock,
multiplied by (iii) the total number of shares of common stock of Cornerstone to
be outstanding after the Reorganization on a fully-diluted basis giving effect
to the conversion of outstanding preferred stock convertible into common stock
of Cornerstone, and to the exercise of all outstanding vested and in-the-money
options or warrants to purchase common stock of Cornerstone, but not to the
conversion of convertible notes, and after the issuance of the shares to
Willard. For purposes of this Agreement, "Fair Market Value" shall be determined
-----------------
as to either Cornerstone or the Company, as applicable, by reference to the
aggregate price at which each such company as a going concern, could be sold in
an arm's-length transaction to an unaffiliated bona fide third party, at the
time the notice referred to in Section 6.1 is given, in an orderly sale without
regard to the lack of liquidity of its common stock and shall be determined, at
the sole cost and expense of Cornerstone, by an investment bank mutually
acceptable to Cornerstone and Willard; provided that if Cornerstone and Willard
cannot mutually agree upon an investment bank, then the bank shall be selected
from the list attached as Schedule 5.1.
------------
6.3 Termination of Right to Request Reorganization. The right of Willard
----------------------------------------------
to cause Cornerstone and the Company to effect the Reorganization shall
terminate on the earlier to occur of the following, (A) 10 days prior to the
effective date of the initial public offering of the securities of Cornerstone
provided that such offering (i) results in gross proceeds to Cornerstone and its
selling stockholders of at least $10 million and (ii) is effected at a valuation
which results in a post offering market capitalization of Cornerstone of at
least $150 million, (B) the effective date of any public offering of Common
Stock of the Company effected pursuant to Section 4.1 or Article 5 of this
Agreement, (C) a transfer by stockholders of the Company of more than 50% of the
outstanding capital stock of the Company (computed on a fully-diluted basis),
provided that such selling stockholders have fully complied with the co-sale
provisions of Section 3.4, (D) a sale of all or substantially all of the
Company's assets to a third party, provided that the Company has fully complied
with the provisions of Section 2.2 and Willard has received at least thirty (30)
days written notice of such sale and (E) a sale of all or substantially all of
the capital stock or assets of Cornerstone, or a merger involving Cornerstone,
provided that Willard receives 30 days prior written notice of such sale or
merger, which notice shall include full and complete disclosure of the terms and
conditions of such sale or merger, so that Willard may effect a Reorganization
prior to the effective date of such sale or merger.
21
<PAGE>
ARTICLE 7.
----------
TERMINATION
-----------
7.1 Termination by Consent. Except as otherwise provided in this
----------------------
Agreement, this Agreement may be terminated by the written consent of all
parties hereto.
7.2 Termination/Modification upon Certain Events.
--------------------------------------------
7.2.1 The provisions of Section 2.2 shall terminate upon the
earlier to occur of the following: (i) the closing of the
initial public offering pursuant to an effective
registration statement under the Securities Act, covering
the offer and sale of equity securities for the account of
the Company, (ii) the effective date of the Reorganization,
(iii) the date Willard is no longer employed by the Company
for any reason other than a termination without cause, (iv)
the date on which Willard beneficially owns less than 25%
of the Company's Common Stock which he owned on the Closing
Date of the Acquisition and (v) the closing of the initial
public offering pursuant to an effective registration
statement under the Securities Act, covering the offer and
sale of equity securities for the account of Cornerstone;
provided, however, that with regard to (v), Section 2.2
shall terminate only if the Company is a "Significant
Subsidiary" (as such term is defined in Rule 1-02 of
Regulation S-X, but changing 10% to 5% therein) of
Cornerstone after the closing of the initial public offering
and the initial public offering is effected at a valuation
that results in a post offering market capitalization of
Cornerstone of at least $150 million.
7.2.2 The provisions of subsections 2.2.1, 2.2.5, 2.2.7, 2.2.8,
2.2.9, 2.2.10 and 2.2.12 shall terminate on the date Willard
is no longer employed by the Company as a result of a
termination without cause. On such date of termination, the
provisions of subsection 2.2.6 shall be modified to read in
full as follows: "Any material transaction between the
Company and any of its Affiliates, other than the
declaration of a dividend on the securities of the Company,
on a basis more favorable than could be obtained in an arm's
length transaction." Notwithstanding the foregoing,
subsections 2.2.2, 2.2.3, 2.2.4 and 2.2.11 shall continue in
full force and effect.
7.2.3 The provisions of Section 2.3 shall terminate upon the
earlier to occur of the following: (i) the closing of the
initial public offering pursuant to an effective
registration statement under the Securities Act, covering
the offer and sale of equity securities for the account of
the Company, (ii) the
22
<PAGE>
effective date of the Reorganization, (iii) the closing of
the initial public offering pursuant to an effective
registration statement under the Securities Act, covering
the offer and sale of equity securities for the account of
Cornerstone, (iv) the date on which Willard beneficially
owns less than 25% of the Company's Common Stock which he
owned on the Closing Date of the Acquisition and (v) the
date Willard is no longer employed by the Company for any
reason other than a termination without cause.
7.2.4 Upon the closing of the Company's initial public offering of
Common Stock pursuant to an effective Registration Statement
under the Securities Act, the provisions of Article 3 shall
be modified as follows:
7.2.4.1 The provisions of Sections 3.1, 3.3, 3.4 and 3.6
shall not apply with respect to any Transfer of Stockholder
Shares (i) pursuant to an effective Registration Statement
filed under the Securities Act or (ii) in compliance with
Rule 144 promulgated under the Securities Act; and
7.2.4.2 The provisions of Section 3.2, 3.5 and 3.7 shall
continue to apply.
7.2.5 Following a transfer by stockholders of the Company of more
than 50% of the outstanding capital stock of the Company
(computed on a fully-diluted basis), provided that such
selling stockholders have fully complied with the co-sale
provisions of Section 3.4, or following a sale of all or
substantially all of the Company's assets to a third party,
by merger, sale of assets or otherwise, provided that the
Company has fully complied with the provisions of Section
2.2 and Willard has received at least thirty (30) days
written notice of such sale, the provisions of Sections 3.3
and 3.4 shall terminate.
7.2.6 If at the time Cornerstone determines to effect a public
offering of its securities, the managing underwriter of such
offering advises Cornerstone that the existence of Willard's
rights pursuant to the terms of this Agreement would
materially interfere with the marketing of such offering,
Willard agrees to discuss an appropriate modification of
such rights; provided, however, that Willard shall have no
--------- -------
obligation to modify or amend such rights.
23
<PAGE>
ARTICLE 8
---------
CLOSING PAYMENTS/AGREEMENTS
---------------------------
8.1 Closing Payments. On the Closing Date of the Acquisition, the Company
----------------
and Willard will terminate Willard's employment agreement dated as of March 23,
1993 (the "Prior Employment Agreement") pursuant to that certain Termination
Agreement dated the Closing Date, between Willard and the Company, and the
Company shall pay to Willard on the calendar day immediately following the
Closing Date of the Acquisition, by wire transfer, the sum of $2,462,500 in
complete satisfaction of Willard's agreement to terminate the stock appreciation
rights referred to in Section 5 of the Prior Employment Agreement.
8.2 Loan to Willard. At the Closing of the Acquisition, the Company agrees
---------------
to loan to Willard $1,728,000 pursuant to the terms of that certain Loan and
Security Agreement between the Company and Willard in substantially the form of
Exhibit "A" attached hereto.
- ----------
8.3 Guarantee of Bank Facility. Subject to the provisions of this Section
--------------------------
8.3, Cornerstone hereby agrees to guarantee a bank facility to provide for the
working capital needs of the Company, such facility to be in the estimated
principal amount of $7.75 million for 1997, $10.75 million for 1998 and $13.0
million for 1999 (each of which amounts are in addition to the amount of any
borrowings the Company effects in connection with or to facilitate the
Acquisition referred to herein and all other related transactions, and with
appropriate increases thereafter based upon the size and growth of the business
of the Company, as approved by the Company's Board of Directors). Upon the
execution and delivery of such guaranty by Cornerstone to the Company's bank,
Cornerstone and the Company shall enter into a customary indemnification
agreement. Cornerstone may, in its sole discretion, provide or cause to be
provided to the Company a credit facility with Cornerstone's lender in lieu of a
guaranty on terms which are not materially less advantageous to the Company than
those which may be obtained by the Company independently. Cornerstone covenants
to either, at its option, guarantee a bank facility for the working capital
needs of the Company or to provide to the Company a credit facility with
Cornerstone's lender within 90 days of the date of this Agreement; provided,
--------
however, that if the bank or credit facility referred to in this sentence is not
- -------
in place within 90 days of the date hereof, Cornerstone agrees that the
promissory note dated the date hereof between Cornerstone and the Company in the
principal amount of Four Million One Hundred Eighty-Nine Thousand Seven Hundred
Forty-Two Dollars and Seventy-One Cents ($4,189,742.71) shall be extended until
such time as the bank or credit facility is in place. Cornerstone's obligation
to guarantee the bank facility is subject to standard asset-based lending tests,
such as customary coverage tests based on inventory and receivables eligible as
security, coverage ratios and cash flow and net income maintenance covenants
relating to the Company. Cornerstone hereby agrees that if such standard lending
tests are met, Cornerstone will guarantee the full amounts of the bank facility
set forth in the first sentence of this Section 8.3. To the extent such standard
lending tests are not met, Cornerstone shall not be obligated to provide or
maintain such guaranty for any amounts not then outstanding. In addition, if
such standard
24
<PAGE>
lending tests are not met, and if the lender under the facility referred to
above declines to lend the full amount of the facility required, Cornerstone
may, but is not obligated to, contribute to the Company the difference between
the required amount and the amount the lender will fund. Until March 31, 2000,
any amounts invested by Cornerstone in the Company shall be in the form of debt,
rather than additional purchases of equity. Cornerstone and the Company
acknowledge that the facility is anticipated to be a revolving credit facility
from a commercial bank with an established national or regional reputation, on
such terms and conditions as are customary in facilities of this type from
lenders of this type, with an interest rate equal to Cornerstone's interest rate
on its primary credit facility. Cornerstone's obligation to provide any such
guaranty shall terminate upon (i) a transfer by stockholders of the Company of
more than 50% of the outstanding capital stock of the Company (computed on a
fully-diluted basis), (ii) a sale of all or substantially all of the assets of
the Company to a third party, by sale of assets, merger or otherwise, or (iii)
such time as Cornerstone owns all of the outstanding capital stock of the
Company.
8.4 Stock Option Plan. Attached hereto as Exhibit "B" is a copy of the
----------------- ----------
Stock Option Plan of Cornerstone. The Board of Directors of Cornerstone have
taken all action necessary to reserve for issuance to directors and senior
management employees of the Company options to purchase the common stock of
Cornerstone. At the Closing of the Acquisition, Cornerstone shall have reserved
for issuance options to purchase 316,667 shares of the common stock of
Cornerstone for issuance to directors and senior management employees of the
Company, all of which options, upon issuance, will vest ratably over four (4)
years and be exercisable within seven (7) years after the grant date pursuant to
the terms of the Stock Option Plan of Cornerstone. Of the options to purchase
316,667 shares reserved for issuance, options to purchase at least 126,667
shares shall be granted to Willard as described in the following sentences. At
the Closing of the Acquisition, fifty percent (50%) of the options reserved for
issuance, or options to purchase 158,334 shares of common stock of Cornerstone
shall be granted at an exercise price of $6.00 per share as follows: (i) options
to purchase 63,334 shares of the common stock of Cornerstone shall be issued to
Willard pursuant to a separate Option Agreement between Willard and Cornerstone
to be entered into between the parties within five business days of the Closing
Date of the Acquisition and (ii) options to purchase 95,000 shares of the common
stock of Cornerstone shall be issued to senior management employees of the
Company, as directed by Willard, each of which grant shall be evidenced by a
separate Option Agreement between Cornerstone and such designated senior
management employee. Of the 316,667 shares reserved for issuance above, the
remaining fifty percent (50%), or options to purchase 158,333 shares of the
common stock of Cornerstone, shall be granted as follows: (i) options to
purchase 63,333 shares will be issued to Willard no later than April 15, 1997 at
a fair market value exercise price of $6.00 per share and (ii) options to
purchase 95,000 shares at an exercise price equal to fair market value shall be
granted to senior management employees and/or directors of the Company as
directed by a committee of the Board of Directors of the Company authorized by
the Board of Directors to identify such senior management employees and/or
directors and to make such grants.
25
<PAGE>
8.5 Sourcing Organization. Immediately following the Closing of the
---------------------
Acquisition, Cornerstone and Willard undertake in good faith to explore the
creation of a separate organization to provide for international sourcing of
product for the Company, Cornerstone and its Affiliates.
8.6 Employment Agreement. At the Closing of the Acquisition, Cornerstone
--------------------
will cause the Company to enter into a five-year employment agreement with
Willard pursuant to the terms of the Employment Agreement in the form of Exhibit
-------
"C" attached hereto.
- --
8.7 Payment of Expenses. At the Closing of the Acquisition, the Company
-------------------
shall pay all of the legal fees and expenses of Willard in connection with the
Acquisition and related agreements. Cornerstone shall be responsible for payment
of its own expenses in connection with the Acquisition and related transactions.
ARTICLE 9
---------
DISPUTE RESOLUTION
------------------
9.1 Purpose and Intent of Parties. In the event of a dispute between the
-----------------------------
Stockholders, each Stockholder agrees that to the extent any such dispute shall
not be resolved by voluntary agreement of the parties, such dispute shall be
finally settled by arbitration in accordance with the provisions set forth below
and that any such circumstance shall not constitute a grounds for termination of
this Agreement or the withholding of performance under this Agreement. There
shall be no resort to the courts by the parties in connection with such matters
except to specifically enforce this covenant to arbitrate or to enforce the
outcome of an arbitration. This Article shall not apply, however, in the event
of any litigation or proceeding commenced by a third party against a party in
which the other party is an indispensable party or potential third party
defendant.
The parties desire to provide for nonjudicial settlement of any claims
of breach of this Agreement. In furtherance of the purpose and objectives of the
parties, the parties shall settle all claims under this Agreement by means of
the alternative dispute resolution procedure described herein so that the
operation and maintenance of the Company as contemplated by this Agreement shall
not be jeopardized.
9.2 Resolution by Dispute Negotiation.
---------------------------------
9.2.1 In the event of any dispute or disagreement between or among
the parties described in this Agreement, then, upon the
written request of any party, each party with an interest in
the dispute shall appoint a designated representative of the
party whose task it will be to meet for the purpose of
endeavoring to resolve such dispute. The designated
representatives
26
<PAGE>
shall meet as expeditiously as possible at a mutually
agreeable location as often as the parties reasonably deem
necessary to gather and furnish to the other all information
with respect to the matter in issue which the parties
believe to be appropriate and germane in connection with its
resolution. Such representatives shall discuss the problem
and/or negotiate in good faith in an effort to resolve the
dispute without the necessity of any formal proceeding.
9.2.2 During the course of such negotiation, all reasonable
requests made by one party to the other for information will
be honored in order that each of the parties may be fully
advised. The specific format for such discussions shall be
left to the discretion of the designated representatives,
but may include the preparation of agreed upon statements of
fact or positions furnished to the other parties. All verbal
and written communications between the parties and issued or
prepared in connection with this Section shall be deemed
prepared and communicated in furtherance of, and in the
context of, dispute settlement and shall not be admissible
in evidence (whether as an admission or otherwise) in any
proceedings under Sections 9.3 or 9.4 hereof for the
resolution of any such dispute.
9.2.3 No formal proceedings for the arbitration of such dispute
shall be commenced until either of the designated
representatives concludes in good faith that continued
negotiation of the matter in issue under this Section does
not appear likely to produce a mutually acceptable
resolution.
9.3 Summary Arbitration. Any dispute referred to in Section 9.1 hereof
-------------------
which is not resolved pursuant to Section 9.2 hereof may, by notice from any
Stockholder to the others, be made subject to resolution pursuant to this
Section 9.3 and in such event shall be resolved as follows:
9.3.1 If the dispute shall not be resolved to the mutual
satisfaction of the parties within ten (10) days after one
party gives the other written notice of its intention to
invoke the provisions of this Section then, upon the written
request of either party (the "Commencing Party"), the
------------------
dispute shall be submitted to a single arbitrator having
expertise with respect to the matter in dispute, which
arbitrator shall be selected by the mutual agreement of the
parties or, if they fail to agree upon an arbitrator within
20 days after the Commencing Party's request, by the
American Arbitration Association; provided, however, that
--------- -------
the other party shall have the right to object to the
summary arbitration proceeding of this Section and demand
full arbitration under Section 9.4 hereof.
27
<PAGE>
9.3.2 Except as otherwise mutually agreed by the parties, the
arbitration shall be held in Santa Barbara, California.
Notwithstanding the provisions of this Section, the parties
shall act in good faith to mutually agree to hold an
arbitration at a location best corresponding to the location
of witnesses, records and experts relevant to the dispute
being arbitrated.
9.3.3 The arbitrator shall promptly commence the arbitration and
shall conduct the arbitration in such a manner (including
the allowance of such discovery as the arbitrator determines
is appropriate under the circumstances) and on such a
schedule as the arbitrator deems to be fair and reasonable
and to provide each party with an adequate opportunity to
present and support its position. Disputes involving matters
that require the mutual consent of the parties may be
resolved by the arbitrator simply meeting with the
representatives of each of the respective parties and
casting the deciding vote. Disputes relating to financial
matters affecting the disparate interests of the parties,
and disputes alleging a breach of contract, usually require
the presentation of detailed evidence in a process more
similar to a judicial proceeding. The arbitrator shall
resolve the dispute and give the parties written notice of
his decision, with the reasons therefor set out in full,
within 45 days after the arbitrator's selection (or a
shorter period if mutually agreed by the parties) and shall
have ten (10) days thereafter to reconsider and modify his
decision if either party so requests. Thereafter, the
arbitrator's decision shall be final, binding and
nonappealable.
9.3.4 The arbitrator shall have authority to award relief under
legal or equitable principles, including interim and
preliminary relief, and compensatory (but not punitive)
damages; provided, however, that the arbitrator may not
--------- -------
order the termination of any agreement among the parties,
although in the case of a contract for the providing of
services, the arbitrator may allow the other party to such
contract to seek an alternate means of obtaining the
services not being provided by the party which loses the
arbitration. The parties shall each pay, on a monthly basis,
one-half of all costs of the arbitrator and the reasonable
legal expenses of all parties.
9.3.5 Judgment upon the award rendered by the arbitrator may be
entered in any court having in personam and subject matter
jurisdiction. Each party hereby submits to the in personam
jurisdiction of the federal and state courts in any location
at which an arbitration may be held pursuant to this Section
for the purpose of confirming any such award and entering
judgment thereon.
28
<PAGE>
9.4 Full Arbitration. Any dispute referred to in Section 9.1 hereof which
----------------
is not resolved pursuant to Section 9.2 hereof, and which is not made subject to
summary arbitration by the parties pursuant to Section 9.3 hereof, shall be
settled by arbitration held in Santa Barbara, California, in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect except as specifically provided below:
9.4.1 The panel to be appointed shall consist of three (3)
independent arbitrators: one (1) independent arbitrator
selected by each of the parties, and a third independent
arbitrator selected by the two (2) party-selected
arbitrators. All arbitrators selected pursuant to this
subsection shall have expertise in the subject matter of the
arbitration.
9.4.2 The arbitrators shall allow such discovery as the
arbitrators determine appropriate under the circumstances
and shall resolve the dispute as expeditiously as
practicable, and, if reasonably practicable, within 120 days
after the selection of the arbitrators. The arbitrators
shall give the parties written notice of their decision with
the reasons thereof set out in full, and shall have 30 days
thereafter to reconsider and modify their decision if either
party so requests within ten (10) days after the decision.
Thereafter, the decision of the arbitrators shall be final,
binding and nonappealable.
9.4.3 The arbitrators shall have authority to award relief,
including relief for bad faith and arbitrary or capricious
action.
9.4.4 Judgment upon the award rendered by the arbitrators may be
entered in any court having in personam and subject matter
jurisdiction. Each party hereby submits to the in personam
jurisdiction of the federal and state courts in any location
at which an arbitration may be held pursuant to this Section
for the purpose of confirming any such award and entering
judgment thereon.
9.5 Continued Performance. The fact that the dispute resolution procedures
---------------------
specified in this Article shall have been or may be invoked shall not excuse any
party from performing its obligations under this Agreement, and during the
resolution of any such dispute, the parties shall continue to perform their
respective obligations in good faith, subject to any rights to terminate such
agreements, that may be available to either of them.
9.6 Criteria for Arbitration. In addition to the evidence and applicable
------------------------
law, the parties agree that the arbitrators in any arbitration proceeding may
consider the following:
9.6.1 The parties' need for a prompt, equitable resolution so that
a pending dispute will not undermine the success of their
Company; and
29
<PAGE>
9.6.2 The purposes and objectives stated in this Agreement and the
other agreements among the parties.
ARTICLE 10.
-----------
MISCELLANEOUS
-------------
10.1 Amendment and Waiver. Except as otherwise provided herein, the
--------------------
provisions of this Agreement may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the prior written consent of both Willard
and Cornerstone. The failure of any party to enforce any of the provisions of
this Agreement shall in no way be construed as a waiver of such provisions and
shall not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
10.2 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without regard to choice of
law provisions.
10.3 Assignment of Rights. This Agreement and the rights and obligations
--------------------
of the parties hereunder shall inure to the benefit of and be binding upon,
their respective successors, assigns and legal representatives. The rights of a
Stockholder under this Agreement may not be assigned or otherwise conveyed by
any Stockholder except in connection with a Transfer of Stockholder Shares which
is in compliance with this Agreement.
10.4 Ownership. Each Stockholder represents and warrants that he or it is
---------
the sole legal and beneficial owner of the Stockholder Shares subject to this
Agreement and that no other Person has any interest in such Stockholder Shares.
10.5 Notices. All notices required or permitted hereunder shall be in
-------
writing and shall be deemed effectively given upon personal delivery to the
party to be notified or five (5) days after deposit in the United States mail,
by registered or certified mail, postage prepaid and properly addressed to the
party to be notified as set forth below or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties
hereto.
If to Cornerstone, to:
The International Cornerstone Group, Inc.
415 Congress Street, Suite 600
Portland, Maine 04101
Attention: William T. End
Facsimile: (207) 780-1940
30
<PAGE>
with a copy to:
Hale and Dorr LLP
670 State Street
Boston, Massachusetts 02109
Attention: Mark Borden
Facsimile: (617) 526-5000
If to Willard, to:
Bruce Willard
930 Knollwood Drive
Santa Barbara, California 93108
Facsimile: (805) 565-3506
with a copy to:
Troop Meisinger Steuber & Pasich, LLP
10940 Wilshire Boulevard
Los Angeles, California 90024
Attention: C.N. Franklin Reddick III
Facsimile: (310) 443-8512
If to the Company, to:
The Territory Ahead, Inc.
419 State Street
Santa Barbara, California 93101
Facsimile: (805) 899-8218
with a copy to:
Hale and Dorr LLP
670 State Street
BOston, Massachusetts 02109
Attention: Mark Borden
Facsimile: (617) 526-5000
10.6 Severability. In the event One or more of the provisions of this
------------
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
31
<PAGE>
10.7 Counterparts. This Agreement may be executed in any number of
------------
counterparts1 each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one instrument.
10.8 Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties relative to the specific subject matter hereof. Any previous
agreement among the parties relative to the specific subject matter hereof is
superseded by this Agreement.
10.9 Captions. The Article and Section captions used herein are for
--------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
[Signatures to follow on next page)
32
<PAGE>
The foregoing Agreement is hereby executed as of the date first above
written.
THE TERRITORY AHEAD, INC.
By /s/ Bruce A. L. Willard
------------------------------
Title President
---------------------------
STOCKHOLDERS:
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By /s/ William T. End
------------------------------
Title Managing Director
---------------------------
/s/ Bruce A.L. Willard, Trustee
- ---------------------------------
BRUCE A.L. WILLARD, Trustee of
The Bruce A.L. Willard Living
Trust U/A dated 11-11-93
<PAGE>
EXHIBIT 10.20
WHISPERING PINES LLC
LIMITED LIABILITY COMPANY AGREEMENT
DATED AS OF SEPTEMBER 4, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
Definitions............................................................................... 1
ARTICLE II
General................................................................................... 10
2.01 Name of the Limited Liability Company......................................... 10
2.02 Office of the Limited Liability Company; Agent for Service of
Process; Initial Principal Place of Business.................................. 10
2.03 Organization.................................................................. 10
2.04 Purposes...................................................................... 10
2.05 Members....................................................................... 10
2.06 Designation of Managers....................................................... 11
2.07 Term.......................................................................... 11
2.08 Liability of Members.......................................................... 11
ARTICLE III
Capital Contributions; Additional Financing; Representations and Warranties............... 11
3.01 Capital Accounts.............................................................. 11
3.02 Capital Contributions and Assumption of Liabilities........................... 11
3.03 No Other Contributions; No Withdrawal of or Interest on Capital............... 12
3.04 Third Party and Other Loans................................................... 12
3.05 Representations and Warranties................................................ 12
3.06 Further Assurances............................................................ 21
ARTICLE IV
Cash Distributions........................................................................ 22
4.01 Distribution of Distributable Cash and Net Proceeds Upon Liquidation.......... 22
4.02 Distribution of Assets in Kind................................................ 22
ARTICLE V
Allocation of Net Profits and Net Losses.................................................. 23
5.01 Basic Allocations............................................................. 23
ARTICLE VI
Management................................................................................ 23
6.01 Management of the LLC......................................................... 23
6.02 Managers...................................................................... 23
6.03 Officers...................................................................... 26
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
6.04 Interpretation of Rights and Duties of Managers and Members.................. 27
6.05 Binding the LLC.............................................................. 28
6.06 Contracts with Members....................................................... 28
6.07 Voluntary Loans.............................................................. 28
6.08 Indemnification and Exculpation.............................................. 29
6.09 Other Activities and Business Opportunities.................................. 30
ARTICLE VII
Fiscal Matters........................................................................... 30
7.01 Books and Records............................................................ 31
7.02 Reports...................................................................... 31
7.03 Bank Accounts................................................................ 31
7.04 Fiscal Year.................................................................. 31
7.05 Tax Matters Partner.......................................................... 31
ARTICLE VIII
Transfers of Interests................................................................... 32
8.01 Transfers of Interests by Members............................................ 32
8.02 First and Second Purchase Options............................................ 33
8.03 Calculation of First and Second Option Exercise Price........................ 34
8.04 Form of Payment.............................................................. 36
8.05 Manner of Exercise........................................................... 37
8.06 Payment...................................................................... 38
8.07 Rights With Respect to Cornerstone Shares.................................... 38
8.08 Transfer of Title............................................................ 39
8.09 Assignment of Option......................................................... 39
8.10 CLI Purchase Option.......................................................... 39
ARTICLE IX
Dissolution and Liquidation.............................................................. 41
9.01 Events Causing Dissolution................................................... 41
9.02 Events Causing Dissolution under the Act..................................... 41
9.03 Procedures on Dissolution.................................................... 41
9.04 Distributions Upon Liquidation............................................... 41
ARTICLE X
General Provisions....................................................................... 42
10.01 Notices...................................................................... 42
10.02 Word Meanings; Schedules..................................................... 42
10.03 Binding Provisions........................................................... 43
10.04 Applicable Law............................................................... 43
10.05 Counterparts................................................................. 43
10.06 Separability of Provisions................................................... 43
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
10.07 Section Titles............................................................... 43
10.08 Amendments................................................................... 43
10.09 Third Party Beneficiaries.................................................... 43
10.10 Entire Agreement............................................................. 44
10.11 Offset....................................................................... 44
10.12 Waiver of Partition.......................................................... 44
10.13 Expenses..................................................................... 44
</TABLE>
Schedule A - Members
Schedule B - Certain Tax Matters
Schedule C - CLI Assumed Liabilities -- Third Parties
Schedule D - CLI Assumed Liabilities -- CLI
Schedule E - Assumed Contacts
Schedule F - Excluded Assets
Disclosure Schedule
iii
<PAGE>
WHISPERING PINES LLC
--------------------
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
LIMITED LIABILITY COMPANY AGREEMENT, dated as of the 4th day of September,
1997, by and between The International Cornerstone Group, Inc., a Delaware
corporation ("Cornerstone"), and Cabin Life Studios, Inc., a New York
corporation ("CLI").
WHEREAS, CLI desires to contribute the CLI Assets and the CLI Assumed
Liabilities (as defined below) to a newly-formed limited liability company (such
contribution of assets and liabilities shall be referred to herein as the "CLI
Contribution") in exchange for a 49% interest therein; and
WHEREAS, Cornerstone desires to contribute cash to the newly-formed limited
liability company in exchange for a 51% interest therein, together with the
right to acquire all other equity interests in such entity at a future date.
NOW, THEREFORE, Cornerstone and CLI desire to organize a Delaware limited
liability company, and for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
agreements hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
----------
Definitions
------------
The following capitalized terms used in this Agreement shall have the
respective meanings ascribed to them below:
"Accounts Receivable" means accounts, accounts receivable, notes and notes
-------------------
receivable existing immediately prior to the CLI Contribution which are payable
to CLI, including any security held by CLI for the payment thereof.
"Act" means the Delaware Limited Liability Company Act in effect at the
---
time of the initial filing of the Certificate with the office of the Secretary
of State of the State of Delaware, and as thereafter amended from time to time.
"Additional Payment" has the meaning ascribed to it in Section
------------------
8.03(a)(i)(B).
"Adjusted Capital Account" has the meaning ascribed to it in Schedule B.
------------------------ ----------
"Affiliate" shall mean, with respect to any specified person or entity, (i)
---------
any person or entity that directly or indirectly controls, is controlled by, or
is under common control with such specified person or entity; (ii) any person or
entity that
<PAGE>
directly or indirectly controls 10% or more of the outstanding equity securities
of the specified entity or of which the specified person or entity is directly
or indirectly the owner of 10% or more of any class of equity securities; (iii)
any person or entity that is an officer of, director of, manager of, partner in,
or trustee of, or serves in a similar capacity with respect to, the specified
person or entity or of which the specified person or entity is an officer,
director, partner, manager or trustee, or with respect to which the specified
person or entity serves in a similar capacity; or (iv) any person that is a
member of the immediate family of the specified person.
"Agreement" means this Limited Liability Company Agreement as it may be
---------
amended, supplemented, or restated from time to time.
"Board of Managers" or "Board" means the Board of Managers described in
----------------- -----
Article VI of this Agreement.
"Business Day" has the meaning ascribed to it in Section 8.02(a).
------------
"Capital Account" has the meaning ascribed to it in Schedule B.
--------------- ----------
"Capital Contribution" means any contribution by a Member to the capital of
--------------------
the LLC.
"Capital Transaction" means a sale or other disposition of all of a portion
-------------------
of the LLC's property in a single transaction or in a series of related
transactions, other than such a sale or disposition in the ordinary course of
the LLC's business.
"Carrying Value" has the meaning ascribed to it in Schedule B.
-------------- ----------
"CERCLA" means in the federal Comprehensive Environmental Compensation,
------
Liability and Response Act of 1980.
"Certificate" means the Certificate of Formation of the LLC filed under and
-----------
pursuant to the Act with the office of the Secretary of State of the State of
Delaware, as it may from time to time be amended in accordance with the Act.
"Chairman" means the person occupying the office of the Chairman (as
--------
provided in Section 6.03) of the LLC at any time or from time to time.
"CLI" has the meaning ascribed to it in the recital to this Agreement.
---
"CLI Assets" means all of CLI's right, title and interest in and to the
----------
assets of CLI existing immediately prior to the CLI Contribution (other than the
CLI Excluded Assets), including, without limitation, the following:
2
<PAGE>
(i) all Inventory of CLI;
(ii) all Accounts Receivable;
(iii) all prepaid expenses, deposits, bank accounts and other similar
assets of CLI, including the cash represented by such assets;
(iv) all Contract Rights;;
(v) all books, records and accounts, correspondence, production
records, technical, accounting, manufacturing and procedural manuals,
customer lists, employment records, studies, reports or summaries relating
to any environmental conditions or consequences of any operation, present
or former, as well as all studies, reports or summaries relating to any
environmental aspect or the general condition of the CLI Assets, and any
confidential information which has been reduced to writing relating to or
arising out of the business of CLI;
(vi) all rights of CLI under express or implied warranties from the
suppliers of CLI;
(vii) the motor vehicles and other rolling stock owned by CLI;
(viii) all Fixed Assets;
(ix) all of CLI's right, title and interest in and to all Intangible
Property, including the name "Whispering Pines" or any derivation thereof,
either owned or, where not owned, used by CLI in its business and all licenses
and other agreements to which CLI is a party (as licensor or licensee) or by
which CLI is bound relating to any of the foregoing kinds of property or rights
to any "know-how" or disclosure or use of ideas; and
(x) all other assets, properties, claims, rights and interests of CLI,
of every kind and nature and description, whether tangible or intangible,
real, personal or mixed.
"CLI Assumed Liabilities" means the following liabilities which exist
-----------------------
immediately prior to the CLI Contribution:
(i) payables of CLI which have been incurred in the Ordinary Course
of Business in connection with the September 1997 catalog, which are listed
on Schedule C attached hereto;
----------
3
<PAGE>
(ii) a payable owed to CLI in the amount of $72,144.69, which
represents the amount of the liabilities incurred by CLI in the Ordinary
Course of Business in connection with the September 1997 catalog and paid
by CLI prior to the CLI Contribution, which liabilities are listed on
Schedule D attached hereto; and
----------
(iii) obligations which arise from and after the CLI Contribution
with respect to the contracts, agreements, leases or licenses listed on
Schedule E attached hereto.
----------
"CLI Balance Sheet" means the June 30, 1997 balance sheet of CLI.
-----------------
"CLI Balance Sheet Date" means June 30, 1997.
----------------------
"CLI Contribution" has the meaning ascribed to it in the recital to this
----------------
Agreement.
"CLI Excluded Assets" means the assets listed on Schedule F.
------------------- ----------
"CLI Excluded Liabilities" means any and all liabilities or obligations of
------------------------
CLI, whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated, whether due or to become due, and whether claims
with respect thereto are asserted before or after the CLI Contribution, other
than the CLI Assumed Liabilities.
"CLI Financial Statements" means the financial statements for the period
------------------------
ending June 30, 1997 as described in Section 3.05(c)(i).
"CLI Intellectual Property" has the meaning ascribed to it in Section
-------------------------
3.05(g)(i).
"CLI Material Adverse Effect" has the meaning ascribed to it in Section
---------------------------
3.05(a).
"CLI Related Party Transaction" has the meaning ascribed to it in Section
-----------------------------
3.05(u).
"CLI Stockholders" means Margaret Kelly Murray, Susan Kelly Panian and
----------------
Edward Panian.
"Code" means the Internal Revenue Code of 1986, as amended from time to
----
time.
"Contract Rights" means all rights of CLI under the contracts, agreements,
---------------
leases and licenses listed on Schedule E attached hereto.
----------
4
<PAGE>
"Cornerstone" has the meaning ascribed to it in the recital to this
-----------
Agreement.
"Cornerstone Appraiser" has the meaning ascribed to it in Section 8.04.
---------------------
"Cornerstone Appraisal Report" has the meaning ascribed to it in Section
----------------------------
8.04.
"Cornerstone Fair Market Value" has the meaning ascribed to it in Section
-----------------------------
8.04.
"Cornerstone IPO Date" has the meaning ascribed to it in Section 8.02(a).
--------------------
"Depreciation Adjustments" has the meaning ascribed to it in Code Section
------------------------
1250(b)(1) and (4).
"Disclosure Schedule" has the meaning ascribed to it in Section 3.05 of
-------------------
this Agreement.
"Distributable Cash" means, with respect to any fiscal period, the excess
------------------
of all cash receipts of the LLC from any source whatsoever, including normal
operations, sales of assets, proceeds of borrowings, Capital Contributions of
the Members, proceeds from a Capital Transaction, and any and all other sources
over the sum of the following amounts:
(i) cash disbursements for advertising and promotion expenses,
salaries, employee benefits (including profit-sharing, bonus and similar
plans), fringe benefits, accounting and bookkeeping services and equipment,
costs of sales of assets, utilities, rental payments with respect to
equipment or real property, management fees and expenses, insurance, real
estate, income, sales, franchise and other taxes, legal expenses, costs of
repairs and maintenance, and any and all other items which are customarily
considered to be operating expenses, corporate overhead expenses, Taxes,
depreciation and amortization;
(ii) payments of interest, principal and premium and points and other
costs of borrowing under any indebtedness of the LLC, including, without
limitation, all outstanding principal and interest due under any Voluntary
Loans made by Cornerstone to the LLC;
(iii) payments made to purchase inventory or capital assets, and for
capital construction, rehabilitation, acquisitions, alterations and
improvements; and
(iv) amounts set aside as reserves for working capital, contingent
liabilities, replacements or for any of the expenditures described in
clauses (i), (ii) and (iii) above which are deemed by the Board of Managers
in good faith to be necessary to meet the current and anticipated future
needs of the LLC.
5
<PAGE>
"EBIT" has the meaning ascribed to it in Section 8.03(a)(ii)(B)(1).
----
"Economic Risk of Loss" has the meaning ascribed to it in Schedule B.
--------------------- ----------
"Encumbrances" has the meaning ascribed to it in Section 3.05(e)(ii).
------------
"Environment" shall have the meaning set forth in CERCLA.
-----------
"Environmental Law" has the meaning ascribed to it in Section 3.05(r).
-----------------
"Excess Negative Balance" has the meaning ascribed to it in Schedule B.
----------------------- ----------
"First CLI Valuation Amount" has the meaning ascribed to it in Section
--------------------------
8.03(a).
"First Closing Date" has the meaning ascribed to it in Section 8.05(a)
------------------
"First Exercise Period" has the meaning ascribed to it in Section 8.02(a).
---------------------
"First Option Exercise Price" has the meaning ascribed to it in Section
---------------------------
8.03(a).
"First Purchase Option" has the meaning ascribed to it in Section 8.02(a).
---------------------
"First Record Date" has the meaning ascribed to it in Section 8.05(a).
-----------------
"Fiscal 1999" means the fiscal year ending January 31, 2000.
-----------
"Fiscal 2002" means the fiscal year ending January 31, 2003.
-----------
"Fixed Assets" means all of the machinery, equipment, tools, production
------------
reels and spools, tooling, dies, production fixtures, maintenance machinery and
equipment, furniture, leasehold improvements and construction in progress owned
by CLI immediately prior to the CLI Contribution whether or not reflected as
capital assets in the accounting records of CLI.
"GAAP" has the meaning ascribed to it in Section 3.05(c)(i).
----
"Governmental Entity" has the meaning ascribed to it in Section 3.05(b).
-------------------
"Gross Income" has the meaning ascribed to it in Schedule B.
------------ ----------
"Intellectual Property" means all (i) patents and patent applications, (ii)
---------------------
trademarks, service marks, logos, trade names and corporate names and
registrations and applications for registration thereof, (iii) copyrights and
registrations and applications for registration thereof, (iv) computer software,
data and
6
<PAGE>
documentation, (v) trade secrets and confidential business information, customer
and mailing lists, designs, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans, and
supplier lists and information and (vi) other proprietary rights relating to any
of the foregoing.
"Inventory" means all inventories of raw materials, work in process,
---------
finished goods, office supplies, maintenance supplies, packaging materials,
spare parts and similar items.
"LLC" means the limited liability company formed upon filing of the
---
Certificate, as it may from time to time be constituted.
"LLC Appraisal Report" has the meaning ascribed to it in Section 8.10(c).
--------------------
"LLC Appraiser" has the meaning ascribed to it in Section 8.10(b).
-------------
"LLC Fair Market Value" has the meaning ascribed to it in Section 8.10(b).
---------------------
"Majority Interest" means one or more Members owning, in the aggregate,
-----------------
Percentage Interests greater than 50%.
"Manager" shall refer to any person named as a Manager in this Agreement
-------
and any person who becomes an additional, substitute or replacement Manager as
permitted by this Agreement, but such term does not include any person who has
ceased to be a manager of the LLC.
"Materials of Environmental Concern" means any chemicals, pollutants or
----------------------------------
contaminants, hazardous substances (as such term is defined under CERCLA), solid
wastes and hazardous wastes (as such terms are defined under the federal
Resources Conservation and Recovery Act), toxic materials, oil or petroleum and
petroleum products, or any other material subject to regulation under any
Environmental Law.
"Members" means any person or entity executing this Agreement as of the
-------
date of this Agreement as a member or hereafter admitted to the LLC as a member
as provided in this Agreement, but such term does not include any person or
entity which has ceased to be a member of the LLC.
"Membership Interest" means all of a Member's interest in the LLC,
-------------------
including, without limitation, the rights to allocations of Net Profits, Net
Losses, Gross Income and Nonrecourse Deductions, and distributions of
Distributable Cash or other property, to designate Managers and officers of the
LLC, to vote, and to consent to or approve any matter as provided herein or in
the Act.
"Minimum Gain" has the meaning ascribed to it in Schedule B.
------------ ----------
7
<PAGE>
"Minimum Payment" means the One Million Dollars referenced in Section
---------------
8.03(a)(i)(A).
"Net Profits" and "Net Losses" have the meanings ascribed to them in
----------- ----------
Schedule B.
- ----------
"NMS" means the Nasdaq National Market Service.
---
"Nonrecourse Debt" has the meaning ascribed to it in Schedule B.
---------------- ----------
"Nonrecourse Deductions" has the meaning ascribed to it in Schedule B.
---------------------- ----------
"Ordinary Course of Business" has the meaning ascribed to it in
----------------------------
3.05(c)(ii).
"Partner Nonrecourse Debt" has the meaning ascribed to it in Schedule B.
------------------------ ----------
"Percentage Interest" means, with respect to each Member, the following
-------------------
percentages:
Cornerstone 51%
CLI 49%
----
100%
provided, that, the Percentage Interests of the Members are subject to
- --------------
adjustment as a result of the acquisition by Cornerstone of the Membership
Interests of CLI pursuant to and in accordance with the rights granted to
Cornerstone in Section 8.02 below.
"Permit" has the meaning ascribed to it in Section 3.05(t).
------
"Permitted Encumbrances" has the meaning ascribed to it in Section
----------------------
3.05(e)(ii).
"Personal Property" has the meaning ascribed to it in Section 3.05(e)(iii).
-----------------
"President" means the person occupying the office of the President (as
---------
provided in Section 6.03) of the LLC at any time or from time to time.
"Recapture Income" has the meaning ascribed to it in Schedule B.
---------------- ----------
"Release" shall have the meaning set forth in CERCLA.
-------
"Resigning Member" has the meaning ascribed to it in Section 2.05(b).
----------------
"Second Closing Date" has the meaning ascribed to it in Section 8.05(b).
-------------------
8
<PAGE>
"Second Exercise Period" has the meaning ascribed to it in Section 8.02(b).
----------------------
"Second Option Exercise Price" has the meaning ascribed to it in Section
----------------------------
8.03(b).
"Second Purchase Option" has the meaning ascribed to it in Section 8.02(b).
----------------------
"Second Record Date" has the meaning ascribed to it in Section 8.05(b).
------------------
"Share of Minimum Gain" has the meaning ascribed to it in Schedule B.
--------------------- ----------
"Statutory Dissolution Event" has the meaning ascribed to it in Section
---------------------------
9.02.
"Straight Line Method of Adjustment" has the meaning ascribed to it in Code
----------------------------------
Section 1250(b)(5).
"Taxes" means all taxes, charges, fees, levies or other similar assessments
-----
or liabilities, including without limitation income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales, use,
transfer, transfer gains, withholding, employment, payroll, unemployment
insurance, social security, business license, occupation, business organization,
stamp, environmental and franchise taxes imposed by the United States of America
or any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or dispute
thereof.
"Tax Returns" means all reports, returns, declarations, statements or other
-----------
information required to be supplied to a taxing authority in connection with
Taxes.
"Transfer" and any grammatical variation thereof shall refer to any sale,
--------
exchange, redemption, assignment, conveyance, encumbrance, hypothecation, gift,
pledge, grant of a security interest, or other transfer, disposition or
alienation in any way (whether voluntarily, involuntarily or by operation of
law). Transfer shall specifically, without limitation of the above, include
assignments and distributions resulting from death, incompetency, bankruptcy,
liquidation and dissolution.
"Treasurer" means the person occupying the office of the Treasurer (as
---------
provided in Section 6.03) of the LLC at any time or from time to time.
"Voluntary Loan" has the meaning ascribed to it in Section 6.07 of this
--------------
Agreement.
9
<PAGE>
ARTICLE II
----------
General
--------
2.01 Name of the Limited Liability Company. The name of the LLC is
-------------------------------------
Whispering Pines LLC. The name of the LLC may be changed at any time or from
time to time with the approval of the Board of Managers.
2.02 Office of the Limited Liability Company; Agent for Service of
-------------------------------------------------------------
Process; Initial Principal Place of Business. The address of the registered
- --------------------------------------------
office of the LLC in the State of Delaware is Corporation Trust Center, 1209
Orange Street, Wilmington, Delaware 19801. The name and address of the resident
agent for service of process on the LLC in the State of Delaware is The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801. The Board of Managers may establish places of
business of the LLC within and without the State of Delaware, as and when
required by the LLC's business and in furtherance of its purposes set forth in
Section 2.04 hereof, and may appoint agents for service of process in all
jurisdictions in which the LLC shall conduct business. The Board of Managers
may cause the LLC to change from time to time its resident agent for service of
process, or the location of its registered office in the State of Delaware. The
initial principal place of business of the LLC shall be 61 Sherman Street,
Fairfield, Connecticut 06430. The LLC shall not continue to conduct operations
at any of the facilities in the State of New York owned or leased by CLI.
2.03 Organization. The Board of Managers shall cause to be filed such
------------
certificates and documents as may be necessary or appropriate to comply with the
Act and any other applicable requirements for the operation of a limited
liability company in accordance with the laws of the State of New York and any
other jurisdictions in which the LLC shall conduct business, and shall continue
to do so for so long as the LLC conducts business therein.
2.04 Purposes. The general character of the business of the LLC is to
--------
engage in the direct-mail order catalog business, including without limitation
both domestic and foreign sales of products that promote and enhance the theme
of rustic Americana; to engage in any lawful activities directly or indirectly
related or incidental thereto (including, without limitation, the borrowing of
money); and to engage in any other activity in which a limited liability company
organized under the laws of the State of Delaware may lawfully engage.
2.05 Members.
-------
(a) No Member shall have the right to resign, withdraw or retire from
the LLC, without the prior written approval of the Board of Managers. If any
Member (a "Resigning Member") obtains the prior approval of the Board of
Managers
10
<PAGE>
and thereafter resigns, the Resigning Member shall not have any rights to any
distributions under Section 18-604 of the Act.
(b) No Member may be expelled or required to resign, withdraw or
retire from the LLC (except upon a Transfer of all of such Member's Membership
Interest in accordance with the provisions of Article VIII).
2.06 Designation of Managers. The persons specified in Section
-----------------------
6.02(a) have been designated to serve as the initial managers of the LLC. Any
Manager may withdraw or be removed as a manager of the LLC, and other persons
may be substituted as Managers, only in the manner specified in Section 6.02.
2.07 Term. The LLC shall commence upon the filing and effectiveness
----
of the Certificate and shall have a perpetual existence, unless and until it is
dissolved and terminated in accordance with Article IX.
2.08 Liability of Members. The liability of the Members for the
--------------------
losses, debts and obligations of the LLC shall be limited to their capital
contributions; provided, however, that each Member acknowledges that, under
-------- -------
applicable law, the Members may under certain circumstances be liable to the LLC
to the extent of previous distributions made to them in the event that the LLC
does not have sufficient assets to discharge its liabilities. Without limiting
the foregoing, (i) no Member, in such Member's capacity as a Member, shall have
any liability to restore any negative balance in such Member's Capital Account,
and (ii) the failure of the LLC to observe any formalities or requirements
relating to exercise of its powers or management of its business or affairs
under this Agreement or the Act shall not be grounds for imposing personal
liability on the Members or Managers for liabilities of the LLC.
ARTICLE III
-----------
Capital Contributions; Additional Financing; Representations and Warranties
----------------------------------------------------------------------------
3.01 Capital Accounts. For each Member (and each permitted assignee),
----------------
the LLC shall establish and maintain a separate Capital Account.
3.02 Capital Contributions and Assumption of Liabilities. On the date
---------------------------------------------------
of this Agreement: (a) CLI shall contribute the CLI Assets to the LLC and the
LLC shall assume the CLI Assumed Liabilities from the CLI (the CLI
Contribution); and (b) Cornerstone shall contribute (as a capital contribution
and not as a loan) to the LLC the amount of One Million Dollars ($1,000,000.00)
payable in cash. The Members agree that as a result of these contributions, the
opening balances of their Capital Accounts are in the same ratio as their
respective Percentage Interests, and their opening Capital Accounts are as
reflected on Schedule A attached hereto. CLI shall remain liable for the CLI
----------
Excluded Liabilities.
11
<PAGE>
3.03 No Other Contributions; No Withdrawal of or Interest on Capital.
---------------------------------------------------------------
Except as otherwise provided in this Article III, no Member shall be obligated
or permitted to contribute any additional capital to the LLC. No interest shall
accrue on any Capital Contributions, and no Member shall have the right to
withdraw or to be repaid any Capital Contribution made by it or to receive any
other payment in respect of its Membership Interest, including, without
limitation, as a result of the withdrawal or resignation of such Member from the
LLC, except as specifically provided in this Agreement.
3.04 Third Party and Other Loans. It in the event that the LLC
---------------------------
requires additional funds to carry out its purposes, to conduct its business and
affairs, or to meet its obligations, or to make any expenditure authorized by
this Agreement, the LLC may borrow funds from such persons and entities, and on
such terms and conditions as may be acceptable to the Board of Managers.
Cornerstone may, but shall not be obligated to, make Voluntary Loans to the LLC
pursuant to and in accordance with the provisions of Section 6.07.
3.05 Representations and Warranties. Each of CLI and the CLI
------------------------------
Stockholders represents and warrants to the LLC and Cornerstone that the
statements contained in this Section 3.05 are true and correct as of the date of
this Agreement, except as set forth in the disclosure schedule attached hereto
(the "Disclosure Schedule"). The Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Section 3.05, and the disclosures in any paragraph of the Disclosure
Schedule shall qualify other paragraphs in this Section 3.05 only to the extent
it is clear from a reading of the disclosure that such disclosure is applicable
to such other paragraphs. The representations and warranties set forth in this
Section 3.05 shall survive until the date 18 months after the date of this
Agreement, and no claim may be made by the LLC or Cornerstone for a breach of
any such representation or warranty after such date.
(a) Organization, Qualification and Corporate Power. CLI is a
-----------------------------------------------
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of New York. CLI is duly qualified to
conduct business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification, except where the failure
to be so qualified or to be in good standing would not have a material adverse
effect on the business, results of operations or financial condition of CLI as
in effect immediately prior to the CLI Contribution (a "CLI Material Adverse
Effect"). CLI has all requisite corporate power and authority to carry on the
business in which it is engaged and to own and use the properties owned and used
by it. CLI does not own any capital stock of or other equity interest in any
corporation, partnership or other entity.
12
<PAGE>
(b) Noncontravention. The consummation of the transactions
----------------
contemplated by this Agreement do not: (i) violate the provisions of any law,
rule or regulation applicable to CLI; (ii) violate the provisions of the charter
or by-laws of CLI; (iii) violate any judgment, decree, order or award of any
court, governmental, regulatory or administrative agency, commission or
instrumentality (a "Governmental Entity") or arbitrator applicable to CLI; (iv)
require that CLI obtain any consent, approval, authorization, waiver or permit
from, or that CLI make any filing with or notification to, any Governmental
Entity; or (v) conflict with or result in the breach or termination of, or
require any notice, consent or waiver (other than those notices, consents or
waivers listed in Section 3.05(b) of the Disclosure Schedule, all of which have
been obtained and copies of which have been delivered to Cornerstone) under, or
cause the creation of any Security Interest upon the CLI Assets pursuant to, any
agreement or instrument to which CLI is a party or by which CLI or any of its
assets is bound.
(c) Financial Statements and Information.
------------------------------------
(i) CLI has previously delivered to Cornerstone its unaudited
balance sheets, statements of operations and statements of cash flows as of
and for the year ended December 31, 1996 and the six-month period ended
June 30, 1997. For purposes of this Agreement, such financial statements
shall be referred to as the "CLI Financial Statements," the June 30, 1997
balance sheet of CLI shall be referred to as the "CLI Balance Sheet" and
June 30, 1997 shall be referred to as the "CLI Balance Sheet Date." The
CLI Financial Statements (i) have been prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP")
(except that the unaudited interim financial statements do not contain
footnotes and are subject to normal, recurring year-end adjustments which
will not be material), and (ii) fairly present, as of the dates and for the
periods therein indicated, the financial condition and the results of
operations of CLI.
(ii) CLI has no liability or obligation whatsoever, whether
accrued, absolute or contingent, other than (i) the liabilities shown on
the CLI Balance Sheet, (ii) liabilities, similar in nature to those shown
on the CLI Balance Sheet, which have arisen after the CLI Balance Sheet
Date in the ordinary course of business consistent with past practice (the
"Ordinary Course of Business") and (iii) contractual liabilities which are
not required to be reflected on a balance sheet under GAAP.
(iii) Since CLI Balance Sheet Date, there has occurred no event
or development which has had as of the date hereof, or may reasonably be
foreseen to have in the future a CLI Material Adverse Effect.
(d) Tax Matters.
-----------
13
<PAGE>
(i) CLI has filed all Tax Returns that it was required to file
and all such Tax Returns were true, complete and accurate in all material
respects. CLI has paid all Taxes due on or before the date hereof. The
aggregate unpaid Taxes of CLI for tax periods since the CLI Balance Sheet
Date do not exceed the accruals and reserves for Taxes set forth on the CLI
Balance Sheet. CLI has no liability for any Tax obligation of any taxpayer
(including, without limitation, any affiliated group of corporations or
other entities that included CLI during a prior period) other than itself.
All Taxes that CLI is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required, have been paid
to the proper Governmental Entity. There are no liens, Security Interests
or other encumbrances of the CLI Assets that arose as a result of CLI's
failure or alleged failure to pay any Taxes.
(e) Assets.
------
(i) Each tangible asset included in the CLI Assets is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear
and tear and obsolescence) and is suitable for the purposes for which it
presently is used.
(ii) Section 3.05(e)(ii) of the Disclosure Schedule sets forth a
true, correct and complete list of all claims, liabilities, liens, pledges,
charges, encumbrances and equities of any kind affecting the CLI Assets
(collectively, ("Encumbrances"). CLI is, immediately prior to the CLI
Contribution, the true and lawful owner of the CLI Assets, free and clear
of all Encumbrances of any kind the, except as set forth on Section
3.05(e)(ii) of the Disclosure Schedule (the "Permitted Encumbrances"). The
delivery by CLI to the LLC of the instruments of transfer of ownership
contemplated by this Agreement will vest good and marketable title to the
CLI Assets in the LLC, free and clear of all liens, mortgages, pledges,
security interests, restrictions, prior assignments, encumbrances and
claims of any kind or nature whatsoever, except for the Permitted
Encumbrances.
(iii) Section 3.05(e)(iii) of the Disclosure Schedule sets forth
(i) a list of all items of tangible personal property included in the CLI
Assets, including items not previously owned by CLI but in the possession
of or used in the business of CLI (the "Personal Property"), other than
individual assets which are not material to the business of CLI, and (ii) a
description of the owner of, and any agreement relating to the use of, each
item of Personal Property in the possession of, but not owned by, CLI and
the circumstances under which such Personal Property is used. Each item of
Personal Property not owned by CLI is in such condition that upon the
return of such property
14
<PAGE>
to its owner in its present condition at the end of the relevant lease term
or as otherwise contemplated by the applicable agreement between CLI and
the owner or lessor thereof, the obligations of CLI (or its successor) to
such owner or lessor will be discharged.
(f) Inventory. All Inventory included in the CLI Assets, including,
---------
without limitation, all products described in CLI's current catalogues and those
which are to be shipped in the 120-day period following CLI Contribution,
consist of a quality and quantity usable and saleable in the Ordinary Course of
Business, except for obsolete, damaged or overstocked Inventory, which has been
written-off, or for which an adequate reserve has been taken on the CLI Balance
Sheet. All Inventories not written-off were recorded on the CLI Balance Sheet
at the lower of cost or market, in accordance with GAAP applied consistently
with past practice. Since the CLI Balance Sheet Date, there has been no material
change in the accounting policies or procedures applicable to the Inventory of
CLI.
(g) Intellectual Property.
---------------------
(i) Immediately following the CLI Contribution, each item of
Intellectual Property used in or necessary for the operation of CLI's
business as presently conducted ("CLI Intellectual Property"), will either
be owned or available for use by the LLC on the same terms and conditions
as enjoyed by CLI prior to the CLI Contribution. CLI has taken all
reasonable measures to protect the proprietary nature of each item of CLI
Intellectual Property owned by CLI, and to maintain in confidence all trade
secrets and confidential information of CLI. To the knowledge of the CLI
Stockholders, no other person or entity has any rights to any of the CLI
Intellectual Property (except pursuant to agreements or arrangements listed
in Section 3.05(g) of the Disclosure Schedule) and no other person or
entity is infringing, violating or misappropriating any of the CLI
Intellectual Property.
(ii) None of the activities or business conducted by CLI
infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any other person or entity. CLI has not
received any complaint, claim or notice alleging any such infringement,
violation or misappropriation.
(iii) Section 3.05(g) of the Disclosure Schedule lists each
registered trademark or service mark, registered copyright and patent which
has been issued to CLI with respect to any of its Intellectual Property and
each pending application for trademark or service mark registration or
copyright or patent application which CLI has made with respect to any of
its Intellectual Property.
15
<PAGE>
(h) Mailing Lists. CLI is entitled to the unrestricted use of all
-------------
direct mailing lists used by CLI, without any payment obligations other than
royalties, license fees or other charges pursuant to the agreements described in
Section 3.05(h) of the Disclosure Schedule. Section 3.05(h) of the Disclosure
Schedule describes any obligation that CLI had at June 30, 1997 to provide a
mailing list to any other party (net of any obligation of such party to provide
a mailing list to CLI).
(i) Owned Real Property. CLI does not own, nor has it ever owned, any
-------------------
real property.
(j) Real Property Leases. Section 3.05(j) the Disclosure Schedule
--------------------
lists all leases or subleases of real property to which CLI is a party. CLI has
delivered to Cornerstone true, complete and accurate copies of the leases and
subleases (each as amended to date) listed in Section 3.05(j) of the Disclosure
Schedule. With respect to each such lease and sublease:
(i) the lease or sublease is legal, valid, binding, enforceable
and is in full force and effect;
(ii) the lease or sublease will continue to be legal, valid,
binding, enforceable and in full force and effect immediately following the
CLI Contribution in accordance with the terms thereof as in effect prior to
the CLI Contribution;
(iii) neither CLI nor, to the knowledge of the CLI Stockholders,
any other party to the lease or sublease is in breach or default thereof,
and, to the knowledge of the CLI Stockholders, no event has occurred which,
with notice or lapse of time, would constitute a breach or default or
permit termination, modification, or acceleration thereunder;
(iv) there are no material disputes or oral agreements in effect
as to the lease or sublease; and
(v) CLI has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or
subleasehold.
(k) Contracts. Section 3.05(k) of the Disclosure Schedule lists each
---------
of the following contracts to which CLI is a party immediately prior to the CLI
Contribution:
(i) any contract (or group of related contracts) for the lease of
personal property from third parties providing for lease payments in excess
of $10,000 per annum;
16
<PAGE>
(ii) any contract or purchase commitment (or group of related
contracts or purchase commitments) for the purchase of raw materials,
commodities, supplies, products or other personal property or for the
receipt of services (i) which calls for performance over a period of more
than one year, (ii) which involves more than the sum of $15,000, or (iii)
in which CLI has agreed to purchase a minimum quantity of goods or services
or has agreed to purchase goods or services exclusively from a certain
party;
(iii) any contract establishing a partnership or joint venture;
(iv) any contract (or group of related contracts) under which CLI
has created, incurred, assumed, or guaranteed indebtedness (including
capitalized lease obligations) involving more than $10,000 or under which
it has imposed a Security Interest on any of its assets;
(v) any contract concerning confidentiality, non-solicitation or
non-competition;
(vi) any contract relating to the purchase, rental, use, exchange
or disclosure of mailing lists;
(vii) any contract involving any Affiliate of CLI;
(viii) any contract under which the consequences of a default or
termination could have a CLI Material Adverse Effect; and
(ix) any other contract (or group of related contracts) either
involving more than $15,000 or not entered into in the Ordinary Course of
Business.
CLI has delivered to Cornerstone a true, complete and accurate copy of each
contract (as amended to date) listed in Section 3.05(k) of the Disclosure
Schedule. With respect to each such contract: (i) the contract is legal, valid,
binding and enforceable, and is in full force and effect; (ii) the contract will
continue to be legal, valid, binding and enforceable, and in full force and
effect immediately following the CLI Contribution in accordance with the terms
thereof as in effect prior to the CLI Contribution; and (iii) neither CLI nor,
to the knowledge of the CLI Stockholders, any other party to such contract is in
breach or default thereof, and, to the knowledge of the CLI Stockholders, no
event has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification, or acceleration, under such
contract.
(l) Books and Records; Bank Accounts.
--------------------------------
17
<PAGE>
(i) The corporate minute books, financial and accounting records
and other business records of CLI are true, complete and accurate in all
material respects.
(ii) Section 3.05(l)(ii) of the Disclosure Schedule lists all
bank accounts and safe deposits of CLI, and all authorized signatories
thereto.
(m) Accounts Receivable and Accounts Payable. All Accounts Receivable
----------------------------------------
have arisen in bona fide transactions in the Ordinary Course of Business. All
Accounts Receivable are collectible at the recorded amounts thereof, and are not
subject to any setoffs or counterclaims (subject to the reserve on the CLI
Financial Statements for uncollectibility and sales returns). All accounts
payable are accurately recorded on the books and records of CLI and no account
payable is overdue by more than 30 days.
(n) Insurance. Section 3.05(n) of the Disclosure Schedule sets forth
---------
a true and complete list of all claims made under each insurance policy
(including fire, theft, casualty, general liability, workers compensation,
business interruption, environmental, product liability and automobile insurance
policies and bond and surety arrangements) to which CLI has been a party, a
named insured, or otherwise the beneficiary of coverage at any time within the
past three years and the amount of coverage.
(o) Litigation. Section 3.05(o) of the Disclosure Schedule
----------
identifies, and contains a brief description of, (a) any unsatisfied judgement,
order, decree, stipulation or injunction and (b) any claim, complaint, action,
suit, proceeding, hearing or investigation of or in any court or Governmental
Entity or before any arbitrator to which CLI is a party or, to the knowledge of
the CLI Stockholders, is threatened to be made a party. None of the complaints,
actions, suits, proceedings, hearings, and investigations set forth in Section
3.05(o) of the Disclosure Schedule would have a CLI Material Adverse Effect.
(p) Product Warranty. No product manufactured or sold by CLI is
----------------
subject to any guaranty, warranty, right of return or other indemnity other than
WPI's standard terms and conditions of sale, which are set forth in Section
3.05(p) of the Disclosure Schedule. Section 3.05(p) of the Disclosure Schedule
sets forth the aggregate expenses incurred by CLI in fulfilling its obligations
under its guaranty, warranty, right of return and indemnity provisions during
each of the fiscal years and the interim period covered by the CLI Financial
Statements; CLI knows of no reason why such expenses should increase as a
percentage greater than the percentage increase in sales in the future; and the
CLI Balance Sheet contains adequate reserves for CLI's liability for such
expenses as of the CLI Balance Sheet Date.
18
<PAGE>
(q) Employees.
---------
(i) To the knowledge of the CLI Stockholders, no key employee or
group of employees has any plans to terminate employment with CLI. Section
3.05(q) of the Disclosure Schedule lists all employees of CLI who are a
party to a non-competition agreement with the CLI. CLI has furnished to
Cornerstone true, complete and accurate copies of all non-compete
agreements between CLI and its employees, and such agreements are in full
force and effect.
(ii) No employees of CLI are represented by any labor
organization and, as of the date hereof no labor organization or group of
employees of CLI has made a demand on CLI for recognition, has filed a
petition seeking a representation proceeding or given CLI notice of any
intention to hold an election of a collective bargaining representative.
There is no strike, work stoppage, or labor disturbance pending or, to the
knowledge of the CLI Stockholders, threatened against CLI.
(r) Environmental Matters.
---------------------
(i) CLI has complied with all applicable Environmental Laws (as
defined below). There is no pending or, to the knowledge of the CLI
Stockholders, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any
Environmental Law involving CLI. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation or the common law relating to the environment or occupational
health and safety, including, without limitation, any statute, regulation
or order pertaining to (i) treatment, storage, disposal, generation and
transportation of industrial, toxic or hazardous substances or solid or
hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and
soil contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous substances, or solid or
hazardous waste, including, without limitation, emissions, discharges,
injections, spills, escapes or dumping of pollutants, contaminants or
chemicals; (v) the protection of wild life, marine sanctuaries and
wetlands, including, without limitation, all endangered and threatened
species; (vi) storage tanks, vessels and containers; (vii) underground and
other storage tanks or vessels, abandoned, disposed or discarded barrels,
containers and other closed receptacles; (viii) health and safety of
employees and other persons; and (ix) manufacture, processing, use,
distribution, treatment, storage, disposal, transportation or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or oil or petroleum products or solid
19
<PAGE>
or hazardous waste. As used in this Section 3.05(r), the terms "release"
and "environment" shall have the meaning set forth in CERCLA.
(ii) There have been no releases by CLI or any other party of any
Materials of Environmental Concern into the environment at any parcel of
real property or any facility formerly or currently owned, operated or
controlled by CLI. To the knowledge of the CLI Stockholders, there have
been no releases of Materials of Environmental Concern at parcels of real
property or facilities other than those owned, operated or controlled by
CLI that could reasonably be expected to have an impact on the real
property or facilities owned, operated or controlled by CLI.
(iii) Section 3.05(r)(iii) of the Disclosure Schedule lists all
environmental reports, investigations and audits (whether conducted by or
on behalf of CLI or a third party, and whether done at the initiative of
CLI or directed by a Governmental Entity or other third party) in CLI's
possession or control that were issued or conducted during the past five
years relating to premises currently or previously owned or operated by
CLI. True, complete and accurate copies of each such report, or the
results of each such investigation or audit, have been provided to
Cornerstone.
(s) Legal Compliance. CLI, and the conduct and operations of its
----------------
business, are in compliance with all laws (including rules and regulations
thereunder) of any federal, state, local or foreign government or Governmental
Entity which are applicable to CLI or its business, except for any violation of,
or default under, a law which would not have a CLI Material Adverse Effect.
(t) Permits. Section 3.05(t) of the Disclosure Schedule lists all
-------
permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity ("Permits") issued to or held by CLI. Such listed Permits
are the only Permits that are required for CLI to conduct its business as
presently conducted, except for those the absence of which would not have a CLI
Material Adverse Effect. CLI, and the conduct and operations of its business,
comply in all material respects with each such Permit; each such Permit is in
full force and effect; and, to the knowledge of the CLI Stockholders, no
suspension or cancellation of such Permit is threatened and there is no basis
for believing that such Permit will not be renewable upon expiration. The
consummation of the transactions contemplated by this Agreement will not result
in the suspension or cancellation of any such Permit.
(u) Certain Business Relationships With Affiliates. No Affiliate of
----------------------------------------------
CLI (a) owns any property or right, tangible or intangible, which is used in the
business of CLI, (b) has any claim or cause of action against CLI, (c) is a
party to any contract or other arrangement, written or verbal, with CLI or (d)
owes any money to CLI or is owed any money by CLI (other than salary and other
employee benefits
20
<PAGE>
accrued in the Ordinary Course of Business) (the agreements, arrangements and
relationships described in this sentence are hereinafter referred to as "CLI
Related Party Transactions"). Section 3.05(u) of the Disclosure Schedule
describes any CLI Related Party Transactions which are reflected in the
statements of operations of CLI included in the CLI Financial Statements. Each
of the CLI Stockholders agrees that the LLC shall not assume or otherwise
acquire from CLI any obligation or liability to any of the CLI Stockholders
other than those (if any) set forth on Schedule C attached hereto.
----------
(v) Suppliers. No significant supplier or contractor has indicated
---------
within the past year that it will stop, or decrease the rate of, supplying
materials, commodities, supplies or other products or services to CLI other than
at the direction of CLI. Section 3.05(v) of the Disclosure Schedule lists each
supplier or contractor that is the sole supplier of any significant item or
service to CLI.
(w) Brokers' Fees. Neither CLI nor the CLI Stockholders have any
-------------
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the contribution of the CLI Assets to the LLC as
contemplated by this Agreement.
(x) Acquired Assets Complete. The CLI Assets are, when utilized by a
------------------------
labor force substantially similar to that employed by CLI on the date hereof,
adequate to conduct the business and operations of CLI as presently conducted.
(y) Disclosure. No statement by CLI or the CLI Stockholders contained
----------
in this Agreement, the Disclosure Schedule or any certificate to be delivered by
or on behalf of CLI or the CLI Stockholders pursuant to this Agreement contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary, in light of the circumstances under which it
was or will be made, in order to make the statements herein or therein not
misleading.
3.06 Further Assurances. At any time and from time to time after the
------------------
date of this Agreement, at the LLC's request and without further consideration,
CLI shall promptly, or shall promptly cause CLI to, execute and deliver such
instruments of sale, transfer, conveyance, assignment and confirmation, and take
such other action, as the LLC may reasonably request to more effectively
transfer, convey and assign to the LLC, and to confirm the LLC's title to, all
of the CLI Assets, to put the LLC in actual possession and operating control
thereof, to assist the LLC in exercising all rights with respect thereto and to
carry out the purpose and intent of this Agreement. At any time and from time to
time after the date of this Agreement, at CLI's request and without further
consideration, the LLC shall promptly execute and deliver such instruments of
assumption, and take such other actions, as CLI may reasonably request to more
effectively evidence and effectuate the assumption by the LLC of the CLI Assumed
Liabilities.
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ARTICLE IV
----------
Cash Distributions
------------------
4.01 Distribution of Distributable Cash and Net Proceeds Upon
--------------------------------------------------------
Liquidation. Subject to any limitations and restrictions set forth in the Act:
- -----------
(a) Distributable Cash of the LLC shall be distributed at such times,
and in such amounts, as shall be determined by the Board of Managers.
(b) Any and all net proceeds upon liquidation of the LLC shall be
distributed to the Members at the time or times, and in the amounts, determined
by the Board of Managers or a liquidator in accordance with Sections 9.03 and
9.04.
(c) Distributable Cash and net proceeds upon liquidation of the LLC
shall be distributed to the Members, at the times and in the amounts specified
above, as follows:
(i) First, in the case of Distributable Cash arising from a
Capital Transaction and net proceeds upon liquidation of the LLC only, to
all Members with positive Adjusted Capital Account balances (after such
balances have been adjusted to reflect the allocation of Gross Income, Net
Profits, Net Losses and Nonrecourse Deductions arising from such event
pursuant to Section 5.01 and Section B of Schedule B), in proportion to and
----------
to the extent of such positive balances; and
(ii) The balance, if any, to the Members in accordance with their
respective Percentage Interests.
Amounts distributed pursuant to clause (i) above shall be considered to
have been distributed pursuant to clause (ii) to the extent that they would have
been distributed pursuant to clause (ii) had clause (i) not been contained in
this Agreement.
4.02 Distribution of Assets in Kind. Except as set forth in Section
------------------------------
8.10, the Board of Managers shall have the right to make distributions of assets
of the LLC in kind, but no Member shall have the right to require any
distribution of any assets of the LLC in kind. If any assets of the LLC are
distributed in kind, such assets shall be distributed on the basis of their fair
market value as determined by the Board of Managers in good faith and with
fairness to all Members. Any Member entitled to any interest in such assets
shall, unless otherwise determined by the Board of Managers in good faith and
with fairness to all Members, receive separate assets of the LLC and not an
interest as a tenant-in-common with any other Member.
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ARTICLE V
----------
Allocation of Net Profits and Net Losses
----------------------------------------
5.01 Basic Allocations.
-----------------
(a) Except as provided in Section B of Schedule B (which shall be
----------
applied first), the Net Profits and Net Losses of the LLC for any year (or other
fiscal period) shall be allocated among the Members as follows:
(i) First, among the Members in such proportions and such amounts
as may be necessary so that following such allocation the balances in their
respective Adjusted Capital Accounts are in the same ratio as their
respective Percentage Interests; and
(ii) The balance, if any, to the Members in accordance with their
Percentage Interests.
(b) Allocations of Net Profits and Net Losses provided for in this
Section 5.01 shall generally be made as of the end of the fiscal year of the
LLC.
ARTICLE VI
----------
Management
----------
6.01 Management of the LLC. The business and affairs of the LLC shall
---------------------
be managed by or under the direction of a Board of Managers, who may exercise
all of the powers of the LLC except as otherwise provided by law or this
Agreement. All management and other responsibilities not specifically reserved
to the Members in this Agreement shall be vested in the Board of Managers, and
the Members shall have no voting rights except as specifically provided in this
Agreement or required by non-waivable provisions of applicable law. It in the
event of a vacancy on the Board of Managers, the remaining Managers, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
6.02 Managers.
--------
(a) The number of Managers who shall constitute the whole Board of
Managers shall be determined from time to time by the Board of Managers, and
shall initially be five (5). Two (2) of the Managers shall be elected by CLI.
The remaining Managers shall be elected by Cornerstone. Each of CLI and
Cornerstone shall consult with the other concerning the identity of the Managers
to be elected by CLI and Cornerstone, respectively; provided that such
consultation obligation shall in no way limit the right of CLI and Cornerstone
to elect such Managers as it in its sole
23
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discretion determines. Margaret Kelly Murray and Susan Kelly Panian shall serve
as the Managers initially elected by CLI. William T. End, Donald J. Steiner and
Mark Fasold shall serve as the Managers initially elected by Cornerstone.
Managers need not be Members of the LLC. The LLC shall permit CLI to designate,
by delivery of written notice to Cornerstone, a representative of CLI, who must
be reasonably acceptable to Cornerstone, who shall be permitted to attend, as a
non-voting observer, meetings of the Board of Managers, provided such person
executes an appropriate confidentiality agreement. CLI hereby designates Michael
Kelly as its initial non-voting observer representative.
(b) Each Manager shall hold office until his or her death, resignation
or removal in accordance with the provisions hereof.
(c) Any Manager may resign by delivering his or her written
resignation to (i) the President or any other officer of the LLC designated by
the Board of Managers to receive such resignations, and (ii) each Member. Such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
(d) Any Manager may be removed at any time, with or without cause, by
action of the Member (or Members, as the case may be) who appointed such Manager
pursuant to Section 6.02(a), by delivery by such Member (or Members, as the case
may be) of written notice of such removal to (i) the Manager being so removed
and (ii) all other Members. Such removal shall be effective upon the giving of
the notice specified in the preceding sentence to each person or entity entitled
thereto, unless such notice is specified to be effective at some other time or
upon the happening of some other event.
(e) Any vacancy on the Board of Managers resulting from the death,
resignation or removal of any Manager shall be filled, as promptly as
practicable, by the Member (or Members, as the case may be) entitled to appoint
such Manager pursuant to Section 6.02(a), by designating a replacement Manager
in a written notice given to all other Members and all Managers. Such
designation of a replacement Manager shall be effective upon the giving of the
notice specified in the preceding sentence to each person or entity entitled
thereto, unless such notice is specified to be effective at some other time or
upon the happening of some other event.
(f) Regular meetings of the Board of Managers may be held without
notice at such time and place as shall be determined from time to time by the
Board of Managers; provided that any Manager who is absent when such a
determination is made shall be given prior notice of such meeting. Special
meetings of the Board of Managers may be held at any time and place designated
in a call by the Chairman or President. Notice of any special meeting of
Managers shall be given to each Manager by whichever of the Chairman or
President called the meeting and shall specify the
24
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purpose thereof and, to the extent practicable, the matters to be voted on at
such meeting. Notice shall be duly given to each Manager (i) by giving notice to
such Manager in person or by telephone at least 48 hours in advance of the
meeting, (ii) by sending a telegram, telex or facsimile transmission, or
delivering written notice by hand, to his or her last known business or home
address at least 48 hours in advance of the meeting, or (iii) by mailing written
notice to his or her last known business or home address at least five business
days in advance of the meeting. Except as required in this Section 6.02(f), a
notice or waiver of notice of a meeting of the Board of Managers need not
specify the purposes of the meeting.
(g) At any meeting of the Board of Managers, the vote of the greater
of (x) three Managers or (y) a majority of all Managers then in office (whether
or not present at the relevant meeting) shall be sufficient to take any action,
unless a different vote is specified by law, the Certificate or this Agreement.
(h) Managers or any members of any committee designated by the
Managers may participate in a meeting of the Board of Managers or such committee
by means of telephone conference or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation by such means shall constitute presence in person at such meeting.
Any action required or permitted to be taken at any meeting of the Board of
Managers or of any committee of the Board of Managers may be taken without a
meeting, if at least 80% of the members of the Board or committee, as the case
may be, consent to the action in writing, and the written consents are filed
with the minutes of proceedings of the Board or committee.
(i) The Board of Managers may, by resolution, designate one or more
committees, each committee to consist of one or more of the Managers of the LLC.
Any such committee, to the extent provided in the resolution of the Board of
Managers and subject to the provisions of the Act, shall have and may exercise
all the powers and authority of the Board of Managers in the management of the
business and affairs of the LLC. Each such committee shall keep minutes and
make such reports as the Board of Managers may from time to time request.
Except as the Board of Managers may otherwise determine, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
Managers or in such rules, its business shall be conducted as nearly as possible
in the same manner as is provided in this Agreement for the Board of Managers.
(j) Managers shall not be paid any compensation for their services as
Managers, other than reimbursement for expenses of attendance at meetings of the
Board of Managers. No such payment shall preclude any Manager from serving the
LLC or any of its parent or subsidiary entities in any other capacity and
receiving compensation for such service.
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(k) The LLC shall not be obligated to pay any compensation to any
officer or employee of Cornerstone with respect to advice or consultation
services provided by such person to the LLC. Notwithstanding the foregoing, the
LLC and Cornerstone acknowledge and agree that they may from time to time enter
into business arrangements pursuant to which Cornerstone provides services to
the LLC, for compensation to be agreed upon, relating to matters such as order
fulfillment, order taking, customer service, computerized operating systems,
management reporting systems, inventory management systems and negotiation of
service contracts with third parties; provided that any such agreement between
the LLC and Cornerstone (or any Affiliate thereof), that the Managers elected by
CLI believe is not upon arms-length terms or does not contain customary terms
and conditions, must be approved by at least one of the Managers elected by CLI.
6.03 Officers.
--------
(a) The officers of the LLC shall consist of a Chairman of the Board
of Managers (the "Chairman"), a President and Chief Executive Officer (the
"President"), a Treasurer and such other officers with such other titles as the
Board of Managers shall determine; provided, however, that, if the Board
-------- -------
determines to establish any such other officer position with a title expressly
referenced in the General Corporation Law of the State of Delaware, such officer
shall, to the maximum extent possible, have the duties and responsibilities
associated with such officer position under the General Corporation Law of the
State of Delaware.
(b) The Chairman shall be selected by the Board of Managers, from
among the members of the Board of Managers, and shall preside at all meetings of
the Board of Managers. The President shall (i) be the Chief Executive Officer
of the LLC, (ii) subject to the direction of the Board of Managers, have general
charge and supervision of the business of the LLC, and (iii) perform such other
duties and have such other powers as the Board of Managers may from time to time
prescribe. The Treasurer shall perform such duties and shall have such powers
as may from time to time be assigned to him or her by the Board of Managers or
the President. It in addition, the Vice President-Finance shall perform such
duties and have such powers as are incident to the office of treasurer of a
corporation organized under the General Corporation Law of the State of
Delaware.
(c) The Chairman, the President, the Treasurer and any other officer
position established by the Board of Managers shall be filled by a designee of
the Board of Managers. The initial officers of the LLC shall be as follows:
Chairman William T. End
President Susan Kelly Panian
Founder Merchandising Marketing Director Margaret Kelly Murray
Vice President Edward Panian
26
<PAGE>
Treasurer Mark Fasold
Secretary Donald J. Steiner
(d) No officer need be a Member or a Manager. Subject to any duly
authorized written agreement between the LLC and such officer to the contrary,
any two or more offices may be held by the same person.
(e) Except as otherwise provided by law, by the Certificate or by this
Agreement, (i) each officer designated by a Member as set forth in Section
6.03(c) shall hold office until his or her death, resignation or removal, and
(ii) each officer designated by the Board of Managers shall hold office until
his or her death, resignation or removal, unless a different term is specified
in the action of the Board of Managers designating him. Any officer may resign
by delivering his or her written resignation to the President, any other officer
designated by the Board of Managers to receive such resignations, or any
Manager. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Any officer may be removed at any time, with or without cause, by action
of the Board of Managers.
(f) Except as the Board of Managers may otherwise determine, no
officer who resigns or is removed shall have any right to any compensation as an
officer for any period following his or her resignation or removal, or any right
to damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the LLC.
(g) The Board of Managers may fill any vacancy occurring in any other
office for any reason and may, in its discretion, leave unfilled for such period
as it may determine any such other office.
(h) Officers of the LLC shall be entitled to such salaries,
compensation or reimbursement as shall be fixed or allowed from time to time by
the Board of Managers, subject to the terms of any duly authorized written
agreement between the LLC and such officer and subject further to the provisions
of Section 6.02(k).
6.04 Interpretation of Rights and Duties of Managers and Members. To
-----------------------------------------------------------
the fullest extent permitted by the Act and other applicable law, and to the
extent not inconsistent with the specific provisions of this Agreement or the
Certificate, it is the intention of the parties that:
(a) the Board of Managers shall act collectively, and no Manager
acting individually in his or her capacity as such, shall have any right or
authority to bind the LLC (provided that nothing shall prohibit a Manager
27
<PAGE>
who is also an officer from binding the LLC in his or her capacity as an
officer); and
(b) the Members shall have no power or authority whatsoever with
respect to the management of the business and affairs of the LLC.
6.05 Binding the LLC. Except as the Board of Managers may generally
---------------
or in any particular case or cases otherwise authorize, and subject to the other
provisions of this Agreement and the Certificate, all deeds, leases, contracts,
bonds, notes, checks, drafts or other obligations made, accepted or endorsed by
the LLC shall be signed by the Chairman, the President or the Treasurer, or any
of them acting singly.
6.06 Contracts with Members. Subject to Section 6.02(k), the LLC may
----------------------
engage in business with, or enter into one or more agreements, leases, contracts
or other arrangements for the furnishing to or by the LLC of goods, services or
space with any Manager, any Member or any Affiliate of a Manager or Member, and
may pay compensation in connection with such business, goods, services or space,
on such terms and conditions as the Board of Managers may in its sole discretion
determine; provided that any such agreement between the LLC and a Member or an
Affiliate of such Member, that the other Member believes is not an arms-length
terms or does not contain customary terms and conditions, must be approved by at
least one of the Managers elected by the other Member.
6.07 Voluntary Loans.
---------------
(a) It in the event the LLC requires additional funds to carry out its
purposes, to conduct its business, to meet its obligations, or to make any
expenditure authorized by this Agreement or by the Board of Managers,
(regardless of whether additional funds are available from third parties on
terms acceptable to the Board of Managers), Cornerstone may, but shall not be
obligated to, loan such funds to the LLC. Any loan made pursuant to this
Section 6.07 (a "Voluntary Loan") shall be nonrecourse to the Members, shall be
evidenced by a promissory note, and shall bear interest at such rate and be
payable at such time or times as is agreed between the LLC and Cornerstone.
(b) Cornerstone acknowledges that (i) it is its current intention
to support the growth of the LLC's business, provided such growth can be
accomplished in accordance with a business plan Cornerstone, in its sole
discretion, deems acceptable, and (ii) the LLC is likely to need additional
funding to support such growth. Cornerstone agree to use commercially
reasonable efforts to cause the LLC to be designed as an "eligible subsidiary"
under Cornerstone's Loan Agreement with Fleet National Bank and certain other
banks dated July 22, 1997 (the "Cornerstone Credit Agreement"), provided that
the LLC shall execute such documents and take such actions as may be reasonably
requested by Fleet Bank or
28
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Cornerstone in connection therewith (including executing documents and taking
actions for the purpose of pledging the LLC's assets to Fleet Bank). Such
arrangement shall permit Cornerstone to cause Fleet Bank to advance funds to the
LLC, which advances shall be considered borrowings under the Cornerstone Credit
Agreement and shall be upon the terms and subject to the conditions of the
Cornerstone Credit Agreement. Although Cornerstone shall not be obligated to
cause Fleet Bank to advance funds to the LLC under the Cornerstone Credit
Agreement, Cornerstone agrees that (i) at the beginning of each fiscal year of
the LLC, it shall discuss in good faith with management of the LLC the LLC's
borrowing needs for such fiscal year and attempt to reach agreement with
management on the LLC's borrowing needs for such fiscal year and (ii) it shall
use commercially reasonable efforts to maintain during such fiscal year
borrowing availability under the Cornerstone Credit Agreement in an amount equal
to the agreed upon amount of the LLC's borrowing needs for such fiscal year.
6.08 Indemnification and Exculpation.
-------------------------------
(a) No Manager shall have any liability to the LLC or to any Member
for any loss suffered by the LLC which arises out of any action or inaction of
such Manager if such Manager determined in good faith that such course of
conduct was (i) in accordance with the provisions of this Agreement or (ii) in,
or not opposed to, the best interests of the LLC, and, in either case, such
course of conduct did not constitute gross negligence or willful misconduct of
such Manager.
(b) Subject to the provisions of Section 6.09, each Manager and Member
shall be subject to the fiduciary duties of care and loyalty to the full extent
that such duties would be imposed upon a director or a stockholder,
respectively, of a corporation organized and existing under the General
Corporation Law of the State of Delaware; provided that (i) to the extent the
provisions of this Agreement, or any other agreement entered into between or
among the LLC and one or more Members and/or Managers, restrict or modify the
duties and liabilities a Member or a Manager otherwise existing at law or in
equity, such provisions shall supersede (to the extent of such restriction or
modification) such duties and liabilities, and (ii) no Member or Manager shall
have any liability or obligation to the LLC or any other Member or Manager for
any action or omission permitted (or which such Member or Manager believes in
good faith is permitted) under the terms of this Agreement or any other
agreement entered into between or among the LLC and one or more Members and/or
Managers.
(c) Each Manager shall be indemnified by the LLC against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by it with respect to actions taken by such Manager on behalf of the
LLC, provided that no indemnification shall be provided for any person with
respect to any matter as to which he shall have been adjudicated in any
proceeding not to have
29
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acted in good faith in the good faith belief that his or her action was in, or
not opposed to, the best interest of the LLC. Without limiting the foregoing,
the Board of Managers may elect (on a case by case basis) to permit such
indemnification to include payment by the LLC of expenses incurred in defending
a civil or criminal action or proceeding in advance of the final disposition of
such action or proceeding, upon receipt of an undertaking by the person
indemnified to repay such payment if he shall be adjudicated not to be entitled
to indemnification under this Section 6.08, which undertaking may be accepted
without reference to the financial ability of such person to make repayment. Any
indemnification to be provided hereunder may be provided although the person to
be indemnified is no longer a Manager.
(d) Any indemnity under this Section 6.08 shall be paid from, and only
to the extent of, LLC assets, and no Member shall have any personal liability on
account thereof in the absence of a separate written agreement to the contrary.
The LLC shall not incur the cost of that portion of any insurance, other than
public liability insurance, which insures any party against any liability as to
which such party is herein prohibited from being indemnified.
6.09 Other Activities and Business Opportunities. Subject to the
-------------------------------------------
terms of any separate contractual arrangements between the LLC and any Manager
or any Member (such as an employment, consulting or noncompetition agreement),
the Members, Managers and any Affiliates of any of them may engage in and
possess interests in other business ventures and investment opportunities of
every kind and description, independently or with others, including serving as
directors, officers, stockholders, managers, members and general or limited
partners of corporations, partnerships or other limited liability companies with
purposes similar to those of the LLC. Neither the LLC nor any other Member or
Manager shall have, by virtue of their affiliation with the LLC, any rights in
or to such ventures or opportunities or the income or profits therefrom.
Without limiting the foregoing, the LLC and CLI acknowledge that Cornerstone
currently operates, through subsidiaries, a number of businesses which may be
deemed competitive with that of the LLC, and may acquire and operate additional
competitive businesses in the future. The LLC and CLI acknowledge that there
shall be no restriction upon the right of Cornerstone or its Affiliates
(including any who serve as Managers of the LLC) to engage in businesses which
may be deemed competitive with that of the LLC, and neither Cornerstone nor any
Affiliate thereof (including any Manager elected by Cornerstone) shall have any
liability or obligation (whether based upon breach of a fiduciary duty,
usurpation of corporate opportunity or any other theory whatsoever) to the LLC
or any Member by reason of the participation of Cornerstone or any Affiliate
thereof in such businesses.
ARTICLE VII
-----------
Fiscal Matters
--------------
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7.01 Books and Records. The Board of Managers shall keep or cause an
-----------------
officer of the LLC or a designated third party to keep, at the principal office
of the LLC or in such other location as the Board of Managers may designate,
complete and accurate books and records of the LLC, maintained in such form and
manner as the Board of Managers may determine, as well as any other documents
and information required to be furnished to the Members under the Act. If and
to the extent required under the Act, such books, records and information shall
be available for examination and copying by any Member, at its reasonable
request, subject to such standards as the Board of Managers may reasonably
require, as required by the Act.
7.02 Reports. The LLC shall prepare and deliver to each Member: (i)
-------
unaudited monthly and quarterly financial statements of the LLC, as promptly as
practicable following the completion of each month and quarter, and (ii) audited
annual financial statements of the LLC, as promptly as practicable following
completion of each fiscal year. The LLC shall prepare and furnish to all
Members such other financial statements and reports as the Board of Managers in
its sole and absolute discretion may determine necessary or advisable.
7.03 Bank Accounts. The Board of Managers shall (or shall authorize
-------------
and direct one or more officers of the LLC to) cause the LLC to open and
maintain one or more accounts with such one or more financial institutions as
the Board of Managers or such officers may determine to be necessary or
advisable. The Board of Managers shall adopt such resolutions (including
resolutions concerning withdrawal authority of officers and employees of the
LLC) as may be necessary to implement the provisions of this Section 7.03. No
funds belonging to any person or entity other than the LLC (whether or not a
Member) shall in any way be deposited or kept in any such account of the LLC or
otherwise be commingled with any funds of the LLC.
7.04 Fiscal Year. The fiscal year of the LLC shall end on the last
-----------
Saturday of January of each year.
7.05 Tax Matters Partner. Cornerstone shall serve as the "tax matters
-------------------
partner" of the LLC. If at any time Cornerstone is not eligible under the Code
to serve, or refuses to serve, as the "tax matters partner," then another Member
selected by Cornerstone shall serve as the "tax matters partner." The "tax
matters partner" is hereby authorized to and shall perform all duties of a "tax
matters partner" under the Code and such other duties as are reasonably
delegated to the "tax matters partner" by the Board of Managers, and shall serve
as "tax matters partner" until its resignation or until the designation of its
successor, whichever occurs sooner. CLI shall provide to the LLC all
information relating to tax matters (including without limitation information as
to tax bases of the CLI Assets and the depreciation of such assets) as may be
reasonably requested by the LLC. The "tax matters partner" shall be reimbursed
by the LLC for all reasonable out-of-pocket expenses actually incurred by the
"tax matters partner" in connection with its performance of its duties as such
31
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(such as filing fees and the fees of any third party engaged by the "tax matters
partner"), and the LLC shall indemnify and hold harmless the "tax matters
partner," to the maximum extent permissible under the Act, from and against any
and all losses, claims, liabilities, costs and expenses incurred by the "tax
matters partner" in connection with its performance of its duties as such,
except insofar as the same may have been incurred by reason of gross negligence
or willful misconduct of such "tax matters partner."
ARTICLE VIII
------------
Transfers of Interests
----------------------
8.01 Transfers of Interests by Members.
---------------------------------
(a) All Transfers (except for Transfers effected pursuant to Section
8.02) shall be subject to the provisions of this Section 8.01. No Member may
Transfer all or any part of its Membership Interest (including the interest of
an assignee within the meaning of Section 18-702 of the Act) to any person or
entity except with the prior written approval of the Board of Managers, the
granting or denying of which approval shall be in the Board's sole and absolute
discretion. Any Transfer in contravention of the foregoing sentence or any
other provision of this Agreement shall be null and void and ineffective to
transfer all or any part of any Membership Interest (including the interest of
an assignee within the meaning of Section 18-702 of the Act), and shall not
bind, or be recognized by, or on the books of, the LLC, and any transferee or
assignee in such transaction shall not be or be treated as or deemed to be a
Member (or an assignee) for any purpose. It in the event any Member shall at
any time attempt or purport to Transfer a Membership Interest, or any part
thereof, in contravention of any of the provisions of this Agreement, then the
LLC shall, in addition to all rights and remedies at law and equity, be entitled
to a decree or order restraining and enjoining such transaction, and the
offending Member shall not plead in defense thereto that there would be an
adequate remedy at law, it being expressly hereby acknowledged and agreed that
damages at law would be an inadequate remedy for a breach or threatened breach
of the provisions of this Agreement concerning such transactions.
(b) No assignment of the interest of a Member shall be made if, in the
opinion of counsel to the LLC, such assignment (i) may not be effected without
registration under the Securities Act, (ii) would result in the violation of any
applicable state securities laws, (iii) unless approved by the Board of Managers
would result in a termination of the LLC under Section 708 of the Code or (iv)
unless approved by the Board of Managers, would result in the treatment of the
LLC as an association taxable as a corporation or as a "publicly-traded limited
partnership" for tax purposes. The LLC shall not be required to recognize any
such assignment until the instrument conveying such interest has been delivered
to the Board of Managers
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for recordation on the books of the LLC. Unless an assignee becomes a
substituted Member in accordance with the provisions of Section 8.01(c), it
shall not be entitled to any of the rights granted to a Member hereunder, other
than the right to receive all or part of the share of the Gross Income, Net
Profits, Net Losses, Nonrecourse Deductions, distributions of cash or property
or returns of capital to which its assignor would otherwise be entitled.
(c) An assignee of the interest of a Member, or any portion thereof,
shall become a substituted Member entitled to all the rights of a Member if, and
only if:
(i) the assignor gives the assignee such right;
(ii) the Board of Managers consents to such substitution, which
consent may be granted or withheld in its sole and absolute discretion;
(iii) the assignor or the assignee pays to the LLC all costs and
expenses incurred in connection with such substitution, including
specifically, without limitation, costs incurred in the review and
processing of the assignment and in amending the LLC's then current Limited
Liability Company Agreement, and if required, the Certificate; and
(iv) the assignee executes and delivers an amendment to this
Agreement (and to the Certificate, if required), which amendment shall be
executed by an officer of the LLC (other than the assignor, if he is an
officer of the LLC), and such assignee, and such other instruments, in form
and substance satisfactory to the Board of Managers, as may be necessary,
appropriate or desirable to effect such substitution and to confirm the
agreement of the assignee to be bound by the terms and provisions of this
Agreement.
(d) The LLC and the Board of Managers shall be entitled to treat the
record owner of any LLC interest as the absolute owner thereof in all respects,
and shall incur no liability for distributions of cash or other property made in
good faith to such owner until such time as a written assignment of such
interest has been received and accepted by the Board of Managers and recorded on
the books of the LLC. The Board of Managers may refuse to accept an assignment
until the end of the next successive quarterly accounting period. It in no
event shall any Membership Interest, or any portion thereof, be sold,
transferred or assigned to a minor or incompetent, and any such attempted sale,
transfer or assignment shall be void and ineffectual and shall not bind the LLC
or the Board of Managers.
8.02 First and Second Purchase Options.
---------------------------------
33
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(a) First Purchase Option. CLI hereby grants to Cornerstone an
---------------------
exclusive, irrevocable option (the "First Purchase Option") to purchase 59.18%
of CLI's Membership Interest (which constitutes 29.0% of the total Membership
Interests held by all Members). The First Purchase Option is exercisable at any
time during the period (the "First Exercise Period") beginning on the earlier to
occur of (i) the date of the closing of an initial public offering of
Cornerstone Common Stock pursuant to a Registration Statement on Form S-1 (or
any successor form thereto) that is declared effective by the U.S. Securities
and Exchange Commission (the "Cornerstone IPO Date") and (ii) February 1, 2000,
and ending at 11:59 p.m., Boston time, on the date 90 days following such date;
provided that if the Cornerstone IPO Date occurs prior to February 1, 2000 and
Cornerstone does not exercise the First Purchase Option within 90 days following
the Cornerstone IPO Date, Cornerstone may exercise the First Purchase Option at
any time during the 90-day period beginning on February 1, 2000 and such period
shall also constitute part of the "First Exercise Period." If the last day of
the First Exercise Period is not otherwise a Business Day (as defined below),
then the last day of the First Exercise Period shall be the next succeeding
Business Day. "Business Day" shall mean any day, other than a Saturday, Sunday
or holiday, during which banks are open for business in Boston, Massachusetts.
(b) Second Purchase Option. Subject to the exercise by Cornerstone of
----------------------
the First Purchase Option and the timely payment therefor by Cornerstone in
accordance with Section 8.06, CLI hereby grants to Cornerstone an exclusive,
irrevocable option (the "Second Purchase Option") to purchase all but not less
than all of CLI's remaining Membership Interest. The Second Purchase Option is
exercisable at any time during the period (the "Second Exercise Period")
beginning on February 1, 2003, and ending at 11:59 p.m., Boston time, on the
date 90 days following such date. If the last day of the Second Exercise Period
is not otherwise a Business Day, then the last day of the Second Exercise Period
shall be the next succeeding Business Day.
8.03 Calculation of First and Second Option Exercise Price.
-----------------------------------------------------
(a) Upon exercise of the First Purchase Option, Cornerstone shall make
an aggregate payment to CLI (the "First Option Exercise Price"), determined in
accordance with the following formula:
(i) If the Cornerstone IPO Date occurs prior to January 31, 2000,
the First Option Exercise Price shall be an amount equal to
(A) One Million Dollars ($1,000,000) (the "Minimum
Payment"), plus;
(B) the amount, if any, by which the First CLI Valuation
Amount (as defined below) exceeds the Minimum
34
<PAGE>
Payment (such additional amount, if any, being
hereinafter referred to as the "Additional Payment").
(ii) If the Cornerstone IPO Date has not occurred by January 31,
2000, the First Option Exercise Price shall be an amount equal to the
greater of (A) or (B), where :
(A) equals the Minimum Payment; and
(B) equals an amount equal to twenty-nine percent (29%), of
the greater of:
(1) the amount of the LLC's earnings for the fiscal
year ending January 31, 2000 ("Fiscal 1999"),
before deducting interest expense, taxes and
amortization of goodwill ("EBIT"), multiplied by
seven (7); or
(2) the sum of:
(a) the LLC's EBIT for Fiscal 1999, multiplied by
three (3);
plus
(b) the LLC's net sales for Fiscal 1999,
multiplied by twenty-five percent (25%).
The amount calculated pursuant to this Section 8.03(b)(ii) being referred
to herein as the "First CLI Valuation Amount."
(b) Upon exercise of the Second Purchase Option, Cornerstone shall
make an aggregate payment to CLI (the "Second Option Exercise Price"), in an
amount equal to twenty percent (20%) of the greater of (i) and (ii) where:
(i) equals the amount of the LLC's EBIT for the fiscal year ended
January 31, 2003 ("Fiscal 2002"), multiplied by seven (7);
and
(ii) equals the amount equal to the sum of:
(A) the LLC's EBIT for Fiscal 2002, multiplied by three
(3);
35
<PAGE>
plus
(B) the LLC's net sales for Fiscal 2002, multiplied by
twenty-five percent (25%).
(c) All calculations of the LLC's EBIT and net sales shall be based
upon the financial statements for the relevant fiscal year as audited by the
LLC's independent certified public accountants. Any determination of a purchase
price based on the financial results for a particular fiscal year shall be made
by the first Business Day in April following the end of such fiscal year.
8.04 Form of Payment. The First Option Exercise Price and the Second
---------------
Option Exercise Price, each calculated in accordance with Section 8.03, shall be
paid to CLI in cash, in Cornerstone Common Stock, or in any combination thereof,
at the election of CLI. The number of shares of Cornerstone Common Stock to be
delivered in payment of all or a portion of the First Option Exercise Price or
the Second Option Exercise Price shall be determined by dividing the portion of
the First Option Exercise Price or the Second Option Exercise Price, as the case
may be, to be paid in Cornerstone Common Stock by the Cornerstone Fair Market
Value. "Cornerstone Fair Market Value" shall mean: (a) if the Cornerstone IPO
Date occurs 20 or more days before the First Closing Date or the Second Closing
Date (each as defined below), as the case may be, the average of the closing
prices of the Cornerstone Common Stock quoted on the Nasdaq National Market (the
"NMS") (or, if then traded on a national securities exchange, the average of the
closing prices of the Cornerstone Common Stock on the principal national
securities exchange on which listed or, if quoted on the Nasdaq over-the-counter
system, the average of the mean of the closing bid and ask prices) on each of
the twenty (20) trading days immediately preceding the First Closing Date or the
Second Closing Date, as the case may be; or (b) if the Cornerstone IPO Date
occurs after, or less than 20 days before, the First Closing Date or the Second
Closing Date, as the case may be, the per-share fair market value of the
Cornerstone Common Stock determined in good faith by a broker, dealer or
investment banker of national reputation in the United States having expertise
in making such determinations and selected by Cornerstone and approved by CLI
(whose approval may not be unreasonably withheld or delayed) (the "Cornerstone
Appraiser"), based on what it believes to be the most appropriate methodology
for valuing Cornerstone. In determining the Cornerstone Fair Market Value, the
Cornerstone Appraiser may consider (i) the valuations of comparable privately or
publicly held companies and (ii) the valuations of Cornerstone in both a private
sale scenario and an initial public offering scenario, based on its sole opinion
of the suitability of a private sale of Cornerstone and the suitability of an
initial public offering for Cornerstone. Upon its determination of Cornerstone
Fair Market Value, the Cornerstone Appraiser shall prepare and deliver to each
of Cornerstone and CLI a report (the "Cornerstone Appraisal Report") stating its
determination of the Cornerstone Fair Market Value and setting forth in
reasonable detail the method by
36
<PAGE>
which the same was determined. Cornerstone shall cause the Cornerstone
Appraiser to submit the Cornerstone Appraisal Report within thirty (30) days
after CLI gives the notice required by the last sentence of Section 8.05(a) or
8.05(b), as the case may be. The Cornerstone Fair Market Value set forth in the
Cornerstone Appraisal Report shall be binding on both Cornerstone and CLI.
8.05 Manner of Exercise.
------------------
(a) The First Purchase Option shall be exercised by delivery, during
the First Exercise Period, of a written notice from Cornerstone to CLI (i)
fixing a closing date (the "First Closing Date") on which date such Membership
Interest of CLI will be purchased, which date shall be no earlier than forty
(40) days after, and no later than ninety (90) days after, the date of such
notice (the "First Record Date"), (ii) stating that the First Purchase Option is
being exercised and setting forth the First Option Exercise Price, determined in
accordance with Section 8.03(a) hereof; provided, however, that (A) in the event
-------- -------
that the First Purchase Option is exercised prior to the completion of Fiscal
1999, such notice shall state that the First Option Exercise Price shall be
equal to the Minimum Payment subject to adjustment pursuant to Section
8.03(a)(i)(B) following the LLC's completion of Fiscal 1999 and the closing of
the books and records of the LLC for such year and (B) if such notice is given
before the First Option Exercise Price can be determined, Cornerstone shall
deliver a subsequent notice setting forth the First Option Exercise price
promptly following its determination; and (iii) setting forth any instructions
that CLI will need to obtain such payment. The First Purchase Option shall be
deemed to be exercised on the First Record Date, at which time the decision to
exercise the First Purchase Option shall be deemed irrevocable. CLI, within 10
days following notice of Cornerstone's exercise of the First Purchase Option,
shall notify Cornerstone in writing as to the portion, if any, of the First
Option Exercise Price to be paid in cash and the portion, if any, of the First
Option Exercise Price to be paid in Cornerstone Common Stock.
(b) The Second Purchase Option shall be exercised by delivery, during
the Second Exercise Period, of a written notice from Cornerstone to CLI (i)
fixing a closing date (the "Second Closing Date") on which date such Membership
Interest of CLI will be purchased, which date shall be no earlier than forty
(40) days after, and no later than ninety (90) days after, the date of such
notice (the "Second Record Date"); (ii) stating that the Second Purchase Option
is being exercised and setting forth the Second Option Exercise Price,
determined in accordance with Section 8.03(b) hereof; provided, however, that if
-------- -------
such notice is given before the Second Option Exercise Price can be determined,
Cornerstone shall deliver a subsequent notice setting forth the Second Option
Exercise price promptly following its determination; and (iii) setting forth any
instructions that CLI will need to obtain such payment. The Second Purchase
Option shall be deemed to be exercised on the Second Record Date, at which time
the decision to exercise the Second Purchase
37
<PAGE>
Option shall be deemed irrevocable. CLI, within 10 days of receipt of notice of
Cornerstone's exercise of the Second Purchase Option, shall notify Cornerstone
in writing as to the portion, if any, of the Second Option Exercise Price to be
paid in cash and the portion, if any, of the Second Option Exercise Price to be
paid in Cornerstone Common Stock.
8.06 Payment.
-------
(a) On the First Closing Date Cornerstone shall pay to CLI, in
immediately available funds, the portion, if any, of the First Option Exercise
Price to be paid in cash, and certificates representing the portion, if any, of
the First Option Exercise Price to be paid in Cornerstone Common Stock. Payment
shall be mailed to CLI at the address set forth in the LLC's records or at the
address provided by CLI. If applicable, Cornerstone shall pay the Additional
Payment to CLI, in the same proportion of cash and stock as previously elected
by CLI, promptly upon calculation of the Additional Payment and in no event
later than May 1, 2000. All shares of Cornerstone Common Stock, at the time of
delivery to CLI, shall be duly authorized, validly issued, fully paid and
nonassessable.
(b) On the Second Closing Date, Cornerstone shall pay to CLI, in
immediately available funds, the portion, if any, of the Second Option Exercise
Price to be paid in cash, and certificates representing the portion, if any, of
the Second Option Exercise Price to be paid in Cornerstone Common Stock.
Payment shall be mailed to CLI at the address set forth in the LLC's records or
at the address provided by CLI. All such shares of Cornerstone Common Stock, at
the time of delivery to CLI, shall be duly authorized, validly issued, fully
paid and nonassessable.
8.07 Rights With Respect to Cornerstone Shares. If any portion of the
-----------------------------------------
First Option Exercise Price or the Second Option Exercise Price is to be paid in
the form of shares of Cornerstone Common Stock, then (a) either (i) such shares
of Cornerstone Common Stock shall be registered under the Securities Act of
1933, as amended (the "Securities Act"), at the time of issuance or (ii)
Cornerstone shall grant to CLI registration rights with respect to such shares
of Cornerstone Common Stock substantially equivalent to the registration rights
granted to the former stockholders of Garnet Hill, Inc. at the time of its
acquisition by Cornerstone in July 1997, and (b) Cornerstone shall cause such
shares of Cornerstone Common Stock to be listed, at the time they are registered
under the Securities Act, on such stock exchange or stock market (if any) as the
outstanding shares of Cornerstone Common Stock are then listed. In addition, if
such shares of Cornerstone Common Stock are issued to CLI prior to the
Cornerstone IPO Date, CLI shall enter into a Cornerstone Stockholders Agreement
with respect to such shares of Cornerstone Common Stock upon terms substantially
equivalent to the Cornerstone Stockholders Agreement entered into by the former
stockholders of Garnet Hill, Inc. at the time of its acquisition by Cornerstone
in July 1997.
38
<PAGE>
8.08 Transfer of Title. Transfer of title to Cornerstone of the
-----------------
Membership Interest of CLI shall be deemed to occur automatically on the First
Closing Date or the Second Closing Date, as the case may be, subject to the
payment by Cornerstone on such date of the amount owing to CLI as determined in
accordance with Section 8.03 hereof. Thereafter the LLC shall be entitled to
treat Cornerstone as the holder of record of the Membership Interest of CLI to
be acquired by Cornerstone pursuant to the First Purchase Option or the Second
Purchase Option, as the case may be. After the Second Closing Date, CLI shall
have no rights in the LLC. At any time and from time to time after the First
Closing Date or the Second Closing Date, as the case may be, at Cornerstone's
request and without further consideration, CLI shall promptly execute and
deliver such instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as Cornerstone may reasonably request
to more effectively transfer, convey and assign to Cornerstone, and to confirm
Cornerstone's title to, the Membership Interest of CLI acquired by Cornerstone
on the First Closing Date or the Second Closing Date, as the case may be.
8.09. Assignment of Option. Cornerstone may not assign, delegate,
--------------------
transfer or sell any or all of its rights or obligations under this Article
VIII, in whole or in part, to any person or entity without the prior approval of
CLI, except that Cornerstone may, without the prior approval of CLI, make such
assignment, delegation, transfer or sale, by operation of law or otherwise, to
(a) any person or entity to which Cornerstone has assigned, sold, leased,
transferred or otherwise disposed of all or substantially all of the assets of
Cornerstone, (b) any successor corporation resulting from any merger or
consolidation of Cornerstone with or into another corporation; or (c) any wholly
owned subsidiary of Cornerstone; provided, however, that, with respect to
-------- -------
clauses (a) and (b) above, Cornerstone will not, without such approval, merge or
consolidate with any person or entity or agree to sell, lease, transfer or
otherwise dispose of all or substantially all of its assets to any person or
entity, unless the person or entity formed by or surviving such consolidation or
merger or to which Cornerstone effects such sale, lease, transfer or other
disposition shall have agreed in writing to be bound by the terms of this
Agreement, except that it shall have the right to deliver its stock in
substitution for Cornerstone Common Stock; provided, however, that in the event
-----------------
of any assignment, delegation, transfer or sale under clause (c) above,
Cornerstone shall provide written notice to CLI of any such assignment,
delegation, transfer or sale not later than thirty (30) days after such
assignment, delegation, transfer or sale setting forth the identity and address
of the assignee and summarizing the terms of the assignment, delegation,
transfer or sale.
8.10 CLI Purchase Option.
-------------------
(a) If Cornerstone does not exercise the First Purchase Option or the
Second Purchase Option, then CLI shall have an option to purchase all of, but
not less than all of, Cornerstone's Membership Interest in the LLC from
Cornerstone,
39
<PAGE>
which option shall be exercisable at any time during the ninety (90) days
following the First Expiration Date (if Cornerstone elects not to exercise the
First Purchase Option) or the Second Expiration Date (if Cornerstone has
exercised the First Purchase Option but elects not to exercise the Second
Purchase Option). The exercise price for CLI's option to purchase Cornerstone's
Membership Interest shall be the price determined according to the provisions of
this Section 8.10. CLI must give written notice that is received by Cornerstone
within the ninety (90) days following the First Expiration Date or the Second
Expiration Date, as the case may be, in order to exercise its option to purchase
Cornerstone's Membership Interest.
(b) The exercise price for CLI's option to purchase Cornerstone's
Membership Interest shall be the LLC Fair Market Value (as defined below) as
determined by a broker, dealer or investment banker who shall be jointly
selected by Cornerstone and CLI (the "LLC Appraiser"). "LLC Fair Market Value"
shall mean the value of Cornerstone's Membership Interest in the LLC determined
in good faith by the LLC Appraiser based on what it believes to be the most
appropriate methodology for valuing Cornerstone's Membership Interest in the
LLC. In determining the LLC Fair Market Value, the LLC Appraiser may consider
(i) the valuations of comparable privately or publicly held companies and (ii)
the valuations of the LLC in both a private sale scenario and an initial public
offering scenario, based on its sole opinion of the suitability of a private
sale of the LLC and the suitability of an initial public offering for the LLC.
(c) Upon its determination of LLC Fair Market Value, the LLC Appraiser
shall prepare and deliver to each of Cornerstone and CLI a report (the "LLC
Appraisal Report") stating its determination of the LLC Fair Market Value and
setting forth in reasonable detail the method by which the same was determined.
Cornerstone and CLI shall cause the LLC Appraiser to submit the LLC Appraisal
Report within thirty (30) days after its appointment. The LLC Fair Market Value
set forth in the LLC Appraisal Report shall be binding on both Cornerstone and
CLI.
(d) The consummation of CLI's purchase of Cornerstone's Membership
Interest shall take place on a mutually agreeable date within sixty (60) days
following the submission of the LLC Appraisal Report. Upon such consummation,
Cornerstone shall execute such instruments of conveyance as may be reasonably
requested by CLI to transfer Cornerstone's Membership Interest to CLI, and CLI
shall pay to Cornerstone, in immediately available funds, the LLC Fair Market
Value. At any time and from time to time after such closing, at CLI's request
and without further consideration, Cornerstone shall promptly execute and
deliver such instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as CLI may reasonably request to more
effectively transfer, convey and assign to CLI, and to confirm CLI's title to,
the Membership Interest of Cornerstone so acquired by CLI .
40
<PAGE>
ARTICLE IX
----------
Dissolution and Liquidation
---------------------------
9.01 Events Causing Dissolution. The LLC shall be dissolved and its
--------------------------
affairs wound up upon:
(a) The sale or other disposition of all or substantially all of the
assets of the LLC, or any transaction authorized by or subject to Section 18-209
of the Act as a result of which the LLC is not the surviving entity;
(b) The election to dissolve the LLC made in writing by Members owning
a Majority Interest; or
(c) The entry of a decree of judicial dissolution under Section 18-802
of the Act.
9.02 Events Causing Dissolution under the Act. If, pursuant to the
----------------------------------------
Act, any event not specified in Section 9.01 dissolves the LLC (a "Statutory
Dissolution Event"), upon the occurrence of any such event, each Member hereby
elects to continue the LLC and its business, and notwithstanding the occurrence
of a Statutory Dissolution Event, the LLC shall not be dissolved and its
business and affairs shall not be discontinued, and the LLC shall remain in
existence as a limited liability company under the laws of the State of
Delaware.
9.03 Procedures on Dissolution. Dissolution of the LLC shall be
-------------------------
effective on the day on which occurs the event giving rise to the dissolution,
but the LLC shall not terminate until the Certificate shall have been cancelled
and the assets of the LLC shall have been distributed as provided herein.
Notwithstanding the dissolution of the LLC, prior to the termination of the LLC,
as aforesaid, the business of the LLC and the affairs of the Members, as such,
shall continue to be governed by this Agreement. The Board of Managers or a
liquidator appointed by the Board of Managers shall liquidate the assets of the
LLC, apply and distribute the proceeds thereof as contemplated by this Agreement
and cause the cancellation of the Certificate; provided that any one or more
persons charged with liquidating the assets of the LLC and applying and
distributing the proceeds thereof as set forth herein shall be deemed a
"liquidating trustee" within the meaning of the Act for all purposes.
9.04 Distributions Upon Liquidation.
------------------------------
(a) After payment of liabilities owing to the LLC's creditors,
including, without limitation, any Members that are creditors, the Board of
Managers or such liquidator may, in its sole discretion, set up such reserves as
it deems
41
<PAGE>
reasonably necessary for any contingent or unforeseen liabilities or obligations
of the LLC. Said reserves may be paid over by the Board of Managers or such
liquidator to a bank, to be held in escrow for the purpose of paying any such
contingent or unforeseen liabilities or obligations and, at the expiration of
such period as the Board of Managers or such liquidator may deem advisable, such
reserves, if any, shall be distributed to the Members or their assigns in the
manner set forth in paragraph (b) below.
(b) After paying such liabilities and providing for such reserves, if
any, the Board of Managers or liquidator shall cause the remaining net assets of
the LLC to be distributed to and among the Members in the order of priority set
forth in Section 4.01. It in the event that any part of such net assets
consists of notes or accounts receivable or other noncash assets, the Board of
Managers or liquidator may take whatever steps it deems appropriate to convert
such assets into cash or into any other form which would facilitate the
distribution thereof. If any assets of the LLC are to be distributed in kind,
such assets shall be distributed on the basis of their fair market value net of
any liabilities.
ARTICLE X
---------
General Provisions
------------------
10.01 Notices. Except for notices of meetings of the Board of
-------
Managers, notice of which shall be given in the manner provided in Section
6.02(f), any and all notices under this Agreement shall be deemed given (a) on
the first business day after being sent by express mail, receipt confirmed
telecopy, or commercial overnight delivery service providing a receipt for
delivery, (b) on the date of hand delivery or (c) on the date actually received,
if sent by any other method. In order to be effective, all such notices shall
be addressed, if to the LLC (or a specified officer thereof), at its principal
office, and if to a Member or Manager, at the last address of record on the
books of the LLC, and copies of such notices shall also be sent to the last
address for the recipient which is known to the sender, if different from the
address so specified.
10.02 Word Meanings; Schedules. The words such as "herein,"
------------------------
"hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and
not merely to a subdivision in which such words appear unless the context
otherwise requires. The singular shall include the plural and the masculine
gender shall include the feminine and neuter, and vice versa, unless the context
otherwise requires. References to Articles, Sections and Schedules shall be
construed as references to the Articles and Sections of, and the Schedules to,
this Agreement, in each case unless the context otherwise requires. All such
Schedules shall be deemed to be, and constitute, an integral part hereof for all
purposes.
42
<PAGE>
10.03 Binding Provisions. Subject to the restrictions on Transfers set
------------------
forth herein, the covenants and agreements contained herein shall be binding
upon, and inure to the benefit of, the parties hereto, their heirs, legal
representatives, successors and assigns.
10.04 Applicable Law. This Agreement shall be construed and enforced
--------------
in accordance with the laws of the State of Delaware, including the Act, as
interpreted by the courts of the State of Delaware, notwithstanding any rules
regarding choice of law to the contrary.
10.05 Counterparts. This Agreement may be executed in several
------------
counterparts and as so executed shall constitute one agreement binding on all
parties hereto, notwithstanding that all of the parties have not signed the same
counterpart.
10.06 Separability of Provisions. Each provision of this Agreement
--------------------------
shall be considered separable. To the extent that any provision of this
Agreement is prohibited or ineffective under the Act, this Agreement shall be
considered amended to the smallest degree possible in order to make the
Agreement effective under the Act (and, if the Act is subsequently amended or
interpreted in such manner as to make effective any provision of this Agreement
that was formerly rendered invalid, such provision shall automatically be
considered to be valid from the effective date of such amendment or
interpretation).
10.07 Section Titles. Section titles are for descriptive purposes only
--------------
and shall not control or alter the meaning of this Agreement as set forth in the
text.
10.08 Amendments. Except for amendments which are otherwise
----------
specifically provided for herein, (i) this Agreement may be amended or modified
only by a writing executed by Cornerstone and CLI, and (ii) the Certificate of
Formation of the LLC may not be amended in a manner inconsistent with this
Agreement unless such amendment is approved in writing by both Cornerstone and
CLI. Any such amendment shall be binding upon all of the Members.
10.09 Third Party Beneficiaries. The provisions of this Agreement,
-------------------------
including, without limitation, Article III, are not intended to be for the
benefit of any creditor (other than a Member or Manager who is a creditor) or
other person (other than a Member or Manager in his, her or its capacity as
such) to whom any debts, liabilities or obligations are owed by (or who
otherwise has any claim against) the LLC or any of the Members or Managers.
Moreover, notwithstanding anything contained in this Agreement, including
without limitation Article III, no such creditor or other person shall obtain
any rights under this Agreement or shall, by reason of this Agreement, make any
claim in respect of any debt, liability or obligation (or otherwise) against the
LLC or any Member or Manager.
43
<PAGE>
10.10 Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter. The Members and Managers hereby agree that each Member and each
Manager shall be entitled to rely on the provisions of this Agreement, and no
Member or Manager shall be liable to the LLC or any other Member or Manager for
any action or refusal to act taken in good faith reliance on the terms of this
Agreement.
10.11 Offset. Whenever the LLC is to pay any sum to any Member, any
------
amounts owed by such Member to the LLC may be deducted from such sum before
payment.
10.12 Waiver of Partition. Each Member agrees that irreparable damage
-------------------
would be done to the LLC if any Member brought an action in court to dissolve
the LLC. Accordingly, each Member agrees that it shall not, either directly or
indirectly, take any action to require partition or appraisal of the LLC or of
any of the assets or properties of the LLC, and notwithstanding any provisions
of this Agreement to the contrary, each Member (and its successors and assigns)
accepts the provisions of the Agreement as its sole entitlement on termination,
dissolution and/or liquidation of the LLC and hereby irrevocably waives any and
all right to maintain any action for partition or to compel any sale or other
liquidation with respect to its interest, in or with respect to, any assets or
properties of the LLC. Each Member agrees that it will not petition a court for
the dissolution, termination or liquidation of the LLC.
10.13 Expenses. Cornerstone shall be responsible for its own costs and
--------
expenses, including counsel fees, incurred in connection with the transactions
contemplated by this Agreement. CLI shall be responsible for the costs and
expenses of CLI or the CLI Stockholders incurred in connection with the
transactions contemplated by this Agreement (none of which shall be considered
CLI Assumed Liabilities).
44
<PAGE>
IT IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the day and year first above written.
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By: /s/ William T. End
--------------------------
Name: ________________________
Title: _______________________
CABIN LIFE STUDIOS, INC.
By: /s/ Margaret Kelly Murray
--------------------------
Name: Maraget Kelly Murray
------------------------
Title: President
-----------------------
With respect to Section 3.05 only:
/s/ Margaret Kelly Murray
------------------------------
Margaret Kelly Murray
/s/ Susan Kelly Panian
------------------------------
Susan Kelly Panian
/s/ Edward Panian
------------------------------
Edward Panian
45
<PAGE>
Schedule A
----------
Members
-------
<TABLE>
<CAPTION>
Name and Business
Address of Member Capital Contribution Percentage Interest
- ----------------- -------------------- --------------------
<S> <C> <C>
The International Cornerstone $1,000,000 51.0%
Group, Inc.
600 Atlantic Avenue
Suite 2800
Boston, MA 02210
Cabin Life Studios, Inc. $ 960,784 49.0%
61 Sherman Street
Fairfield, CT 06430
</TABLE>
A-1
<PAGE>
Schedule B
----------
Certain Tax Matters
-------------------
A. Certain Definitions. The following capitalized terms used in this
-------------------
Agreement shall have the respective meanings ascribed to them below:
"Adjusted Capital Account" means, for each Member, such Member's Capital
------------------------
Account balance increased by such Member's Share of Minimum Gain.
"Capital Account" means a separate account maintained for each Member and
---------------
adjusted in accordance with Treasury Regulations under Section 704 of the Code.
To the extent consistent with such Treasury Regulations, the adjustments to such
accounts shall include the following:
(i) There shall be credited to each Member's Capital Account the
amount of any cash (which shall not include imputed or actual interest on
any deferred contributions) actually contributed by such Member to the
capital of the LLC, the fair market value (without regard to Code Section
7701(g)) of any property contributed by such Member to the capital of the
LLC, the amount of liabilities of the LLC assumed by the Member or to which
property distributed to the Member was subject and such Member's share of
the Net Profits and Gross Income of the LLC and of any items in the nature
of income or gain separately allocated to the Members; and there shall be
charged against each Member's Capital Account the amount of all cash
distributions to such Member, the fair market value (without regard to Code
Section 7701(g)) of any property distributed to such Member by the LLC, the
amount of liabilities of the Member assumed by the LLC or to which property
contributed by the Member to the LLC was subject and such Member's share of
the Net Losses and Nonrecourse Deductions of the LLC and of any items in
the nature of losses or deductions separately allocated to the Members.
(ii) If the LLC at any time distributes any of its assets in-kind to
any Member, the Capital Account of each Member shall be adjusted to account
for that Member's allocable share of the Net Profits, Net Losses or Gross
Income that would have been realized by the LLC had it sold the assets that
were distributed at their respective fair market values (taking Code
Section 7701(g) into account) immediately prior to their distribution.
(iii) It in the event any interest in the LLC is transferred in
accordance with the terms of this Agreement, the transferee shall succeed
to the Capital Account of the transferor to the extent it relates to the
transferred interest.
B-1
<PAGE>
(iv) If elected by the LLC, upon (A) any increase in a Member's
interest in the LLC resulting from the contribution of cash or property by
such Member to the LLC, (B) any reduction in a Member's interest in the LLC
resulting from a distribution to such Member in redemption of all or a
portion of such Member's interest in the LLC and (C) whenever else allowed
under Treasury Regulation Section 1.704-1(b)(2)(ii)(f), the Capital Account
balance of each Member shall be adjusted to the extent allowable under such
Treasury Regulation to reflect the Member's allocable share (as determined
under Article V) of the Net Profits, Net Losses or Gross Income that would
be realized by the LLC if it sold all of its property at its fair market
value (taking Code Section 7701(g) into account) on the day of the
adjustment. It in the case of an adjustment to Capital Accounts pursuant
to clause (A) of the preceding sentence, the aggregate fair market value of
the LLC's assets shall be considered to be equal to the amount determined
by dividing (X) the amount of the Capital Contribution of the Member made
in connection with the acquisition of the increased interest in the LLC by
(Y) the increase in the Percentage Interest of the Member attributable to
such Capital Contribution.
"Carrying Value" means, with respect to any asset, the asset's adjusted
--------------
basis for federal income tax purposes; provided, however, that (i) upon a
-------- -------
contribution of an asset in-kind, such asset's Carrying Value and (ii) in the
circumstances described in paragraph (ii) of the definition of "Capital
Account," the Carrying Value of all of the LLC's assets shall be adjusted to
their respective fair market values and shall thereafter be adjusted in
accordance with the provisions of Treasury Regulation Section 1.704-
1(b)(2)(iv)(g).
"Economic Risk of Loss" means the risk as determined under Treasury
---------------------
Regulation Section 1.752-2 (taking all applicable "grandfathering" rules into
account) that a Member or person related to a Member will suffer an economic
loss as a result of the failure of the limited liability company to repay a
liability.
"Excess Negative Balance" for a Member means the excess, if any, of (i) the
-----------------------
negative balance in a Member's Capital Account after reducing such balance by
the net adjustments, allocations and distribution described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) which, as of the end of
the LLC's taxable year are reasonably expected to be made to such Member, over
(ii) the sum of (A) the amount, if any, which the Member is required to restore
to the LLC upon liquidation of such Member's interest in the LLC (or which is so
treated pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(c)), (B) the
Member's Share of Minimum Gain and (C) that portion of any indebtedness of the
LLC (other than Partner Nonrecourse Debt) with respect to which the Member bears
the Economic Risk of Loss that such indebtedness would not be repaid out the
LLC's assets if all of the LLC's assets were sold at their respective Carrying
Values as of the end of the fiscal year or other
B-2
<PAGE>
period and the proceeds from the sales together with any amounts described in
clause (A) above, were used to pay the LLC's liabilities.
"Gross Income" means, for each fiscal year or other period, an amount equal
------------
to the LLC's gross income as determined for federal income tax purposes for such
fiscal year or period but computed with the adjustments specified in clauses
(i), (ii) and (iii) of the definition of "Net Profits" and "Net Losses".
"Minimum Gain" means the amount determined by computing with respect to
------------
each Nonrecourse Debt of the LLC, the amount of Gross Income, if any, that would
be realized by the LLC if it disposed of the property securing such debt in full
satisfaction thereof, and by then aggregating the amounts so computed. For
purposes of determining the amount of such Gross Income with respect to a
liability, the Carrying Value of the asset securing the liability shall be
allocated among all the liabilities that the asset secures in the manner set
forth in Treasury Regulation Section 1.704-2(d)(2).
"Net Profits" and "Net Losses" mean the taxable income or loss, as the case
----------- ----------
may be, for a period as determined in accordance with Code Section 703(a)
computed with the following adjustments:
(i) Items of gain, loss, and deduction shall be computed based upon
the Carrying Values of the LLC's assets rather than upon the assets'
adjusted bases for federal income tax purposes (in accordance with Treasury
Regulation Sections 1.704-1(b)(2)(iv)(g) and 1.704-3(d));
(ii) Any tax-exempt income received by the LLC shall be included as an
item of gross income;
(iii) The amount of any adjustments to the Carrying Values of any
assets of the LLC pursuant to Code Section 743 shall not be taken into
account;
(iv) Any expenditure of the LLC described in Code Section 705(a)(2)(B)
(including any expenditures treated as being described in Section
705(a)(2)(B) pursuant to Treasury Regulations under Code Section 704(b))
shall be treated as a deductible expense; and
(v) The amount of Gross Income and Nonrecourse Deductions specifically
allocated to any Member pursuant to Section 5.01 and Section B.1 and 2 of
this Schedule B shall not be included in the computation.
----------
"Nonrecourse Debt" means any liability of a limited liability company to
----------------
the extent that the liability is nonrecourse for purposes of Treasury Regulation
Section 1.1001-2.
B-3
<PAGE>
"Nonrecourse Deductions" for a taxable year means deductions funded by
----------------------
Nonrecourse Debt (as determined under Treasury Regulation Sections 1.704-2(c)
and 1.704-2(i)(2)) for such year and are generally equal to the excess, if any,
of (i) the net increase in Minimum Gain during such year over (ii) the sum of
(A) the aggregate distributions of proceeds from Nonrecourse Debts attributable
to increases in Minimum Gain during such year and (B) increases in Minimum Gain
during such year attributable to conversions of liabilities into Nonrecourse
Debts.
"Partner Nonrecourse Debt" means any Nonrecourse Debt to the extent that a
------------------------
Member bears the Economic Risk of Loss associated with the debt.
"Share of Minimum Gain" means, for each Member, the sum of such Member's
---------------------
share of Minimum Gain attributable to Nonrecourse Debt other than Partner
Nonrecourse Debt (computed in accordance with Treasury Regulation Section 1.704-
2(g)) and such Member's share of Minimum Gain attributable to Partner
Nonrecourse Debt (computed in accordance with Treasury Regulation Section 1.704-
2(i)(5)).
B. Allocations.
-----------
1. Allocations of Nonrecourse Deductions and Minimum Gain.
------------------------------------------------------
Notwithstanding the provisions of Section 5.01 above, the following allocations
of Gross Income and Nonrecourse Deductions shall be made in the following order
of priority:
(a) If in any year there is a net decrease in the amount of Minimum
Gain attributable to either (i) Nonrecourse Debt that is not Partner Nonrecourse
Debt or (ii) Partner Nonrecourse Debt, then each Member shall first be allocated
items of Gross Income for such year (and, if necessary, subsequent years) in an
amount equal to such Member's share of the net decrease in such Minimum Gain
(determined in accordance with Treasury Regulation Sections 1.704-2(g)(2) and
1.704-2(i)(5)) to the minimum extent required by, and in the manner specified
in, Treasury Regulation Sections 1.704-2(f) and 1.704-2(i)(4).
(b) All Nonrecourse Deductions of the LLC for any year other than
Nonrecourse Deductions attributable to Partner Nonrecourse Debt shall be
allocated to the Members in accordance with their Percentage Interests.
(c) All Nonrecourse Deductions of the LLC for any year attributable to
Partner Nonrecourse Debt shall be allocated to the Member who bears the Economic
Risk of Loss with respect to the debt.
2. Overriding Allocations of Net Profits and Net Losses. Notwithstanding
----------------------------------------------------
the provisions of Section 5.01 above, but subject to the provisions of Section
B.1 of
B-4
<PAGE>
this Schedule B, the following allocations of Net Profits and Net Losses
----------
and items thereof shall be made:
(a) If, during any year a Member receives any adjustment, allocation
or distribution described in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), and, as a result of such adjustment, allocation
or distribution, such Member's Capital Account has an Excess Negative Balance,
then items of Gross Income for such year (and, if necessary, subsequent years)
shall first be allocated to such Member in an amount equal to such Member's
Excess Negative Balance.
(b) It in no event shall Net Losses of the LLC be allocated to a
Member if such allocation would cause or increase an Excess Negative Balance in
such Member's Capital Account.
(c) It in the event that Gross Income, Net Profits, Net Losses or
items thereof are allocated to one or more Members pursuant to subsection (a)
above, subsequent Gross Income, Net Profits and Net Losses from operations will
first be allocated (subject to the provisions of subsection (a) above) to the
Members in a manner designed to result in each Member having a Capital Account
balance equal to what it would have been had the original allocation of Gross
Income, Net Profits, Net Losses or items thereof pursuant to subsection (a) not
occurred.
(d) Except as otherwise provided herein or as required by Code Section
704, for tax purposes, all items of income, gain, loss, deduction or credit
shall be allocated to the Members in the same manner as are Net Profits and Net
Losses; provided, however, that if the Carrying Value of any property of the LLC
differs from its adjusted basis for tax purposes, then items of income, gain,
loss, deduction or credit related to such property for tax purposes shall be
allocated among the Members so as to take account of the variation between the
adjusted basis of the property for tax purposes and its Carrying Value in the
manner provided for under Code Section 704(c).
(e) To the extent that any portion of any Net Profits realized upon a
sale or other disposition of any asset of the LLC is treated as ordinary income
pursuant to Code Sections 1245 or 1250 ("Recapture Income"), such Recapture
Income shall be allocated (prior to any allocation of Net Profits from such
event pursuant to Section 5.01 above) as follows:
(i) It in the case of Recapture Income arising under Code Section
1245, to each Member in an amount equal to the amount of depreciation
deductions allocated to such Member with respect to such asset; and
(ii) It in the case of Recapture Income arising under Code Section
1250, to each Member in an amount equal to the excess of the amount of
B-5
<PAGE>
"depreciation adjustments" (as defined in Code Section 1250(b)(1) and (4))
allocated or attributable to such Member with respect to such asset over
the amount of depreciation adjustments that would have been allocated or
attributable to such Member had the "straight-line method of adjustment"
(as described in Code Section 1250(b)(5)) been used with respect to such
asset;
provided, however, that in the event the amount of Recapture Income arising from
the sale or disposition is less than the aggregate amount set forth in clause
(i) or (ii) (whichever is applicable), the Recapture Income shall be allocated
to Members based on the order in time in which they were allocated depreciation
deductions or adjustments with respect to such asset.
B-6
<PAGE>
EXHIBIT 21.1
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION OWNERSHIP INTEREST*
- ------------------ ---------------------------- -------------------
<S> <C> <C>
Ballard Designs, Inc......... Georgia Wholly-owned
Cinmar, Inc.................. Ohio Wholly-owned
Cinmar, L.P.................. Delaware Wholly-owned
Cornerstone Consolidated
Services Group, Inc......... Delaware Wholly-owned
Cornerstone Real Estate Com-
pany I, LLC................. Delaware Wholly-owned
Garnet Hill, Inc............. New Hampshire Wholly-owned
Smith & Noble LLC............ Delaware Wholly-owned
The Cornerstone Holdings
Group, Inc.................. Delaware Wholly-owned
The Cornerstone Brands Group,
Inc......................... Delaware Wholly-owned
The Territory Ahead, Inc..... Delaware Majority-owned
TravelSmith Outfitters,
Inc......................... California Majority-owned
Whispering Pines LLC......... Delaware Majority-owned
</TABLE>
- --------
* Certain of the subsidiaries listed are indirect subsidiaries of the
Registrant
(i.e. owned by another subsidiary of the Registrant rather than directly by
the Registrant).
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of (1) our report dated April 17, 1998 (except Note 3, as to which the
date is August 25, 1998) with respect to the consolidated financial statements
of Cornerstone Brands, Inc. (2) our report dated September 12, 1997, with
respect to the financial statements of Garnet Hill, Inc. and (3) our report
dated June 20, 1998 with respect to the financial statements of Cinmar L.P.,
in the Registration Statement (Form S-1) and related Prospectus of Cornerstone
Brands, Inc. for the registration of shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
The foregoing consent is in the form that will be signed to reflect the
merger of the Company and Smith & Noble LLC as described in Note 3 to the
financial statements and the inclusion, in an amendment to the Registration
Statement, of financial statements of the Company including the date of
consummation of the merger.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 25, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the use of our
reports on the financial statements of Smith & Noble LLC (and to all references
to our Firm) included in or made a part of this prospectus.
/s/ Arthur Andersen LLP
Orange County, California
August 25, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated December 18, 1997, relating to the
financial statements of Ballard Designs, Inc., which are not included
separately herein.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Atlanta, Georgia
August 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-30-1999
<PERIOD-START> JAN-26-1997 FEB-01-1998
<PERIOD-END> JAN-31-1998 AUG-01-1998
<CASH> 4,870 2,014
<SECURITIES> 4,096 2,403
<RECEIVABLES> 3,787 4,682
<ALLOWANCES> 0 0
<INVENTORY> 30,563 35,224
<CURRENT-ASSETS> 51,890 58,424
<PP&E> 12,481 19,799
<DEPRECIATION> 5,542 6,663
<TOTAL-ASSETS> 133,646 149,314
<CURRENT-LIABILITIES> 42,276 57,236
<BONDS> 332 313
58,815 60,332
0 0
<COMMON> 15 15
<OTHER-SE> 30,953 30,407
<TOTAL-LIABILITY-AND-EQUITY> 133,646 149,314
<SALES> 216,335 139,269
<TOTAL-REVENUES> 216,335 139,269
<CGS> 112,251 71,016
<TOTAL-COSTS> 187,686 121,099
<OTHER-EXPENSES> 17,916 14,445
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 208 199
<INCOME-PRETAX> 12,609 5,977
<INCOME-TAX> 3,103 324
<INCOME-CONTINUING> 9,506 5,653
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,506 5,653
<EPS-PRIMARY> 0.56 0.29
<EPS-DILUTED> 0.38 0.19
</TABLE>
